<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from ______ to _______
Commission File No. 0-21702
MIDDLE BAY OIL COMPANY, INC.
(Exact name of small business issuer as specified in its charter)
ALABAMA 63-1081013
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1221 LAMAR STREET, SUITE 1020
HOUSTON, TX 77010
(Address of principal executive offices)
(713) 759-6808
(Issuer's telephone number)
N/A
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of each of the Registrant's classes of common
stock, as of the latest practicable date:
Common stock, $.02 par value
8,534,428 shares as of July 30, 1999
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
<PAGE>
MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
No.
-----
<S> <C>
PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -
June 30, 1999 (Unaudited) and December 31, 1998........................ 1
Consolidated Statements of Operations (Unaudited)-
Three and six months ended June 30, 1999 and 1998 ..................... 2
Consolidated Statements of Cash Flows (Unaudited)-
Six months ended June 30, 1999 and 1998 ............................... 3
Notes to Consolidated Financial Statements (Unaudited).................... 4
Item 2. Management's Discussion and Analysis
Of Financial Condition and Results of Operations................ 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................... 27
</TABLE>
4
<PAGE>
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED) (AUDITED)
JUNE DECEMBER 31
1999 1998
-------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $1,259,462 $1,040,096
ACCOUNTS RECEIVABLE 2,823,514 3,309,043
ACCOUNTS RECEIVABLE-INSURANCE CLAIM - 448,083
OTHER CURRENT ASSETS 115,263 141,364
-------------- ---------------
TOTAL CURRENT ASSETS 4,198,239 4,938,586
NON-CURRENT ASSETS
NOTES RECEIVABLE- STOCKHOLDER 176,590 173,115
PROPERTY (AT COST)
OIL AND GAS (SUCCESSFUL EFFORTS METHOD) 89,706,235 90,849,439
OTHER 831,720 795,323
-------------- ---------------
90,537,955 91,644,762
ACCUMULATED DEPLETION, DEPRECIATION AND AMORTIZATION (40,254,411) (39,073,584)
-------------- ---------------
50,283,544 52,571,178
OTHER ASSETS 238,516 257,938
-------------- ---------------
TOTAL ASSETS $54,896,889 $57,940,817
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
CURRENT MATURITY OF LONG-TERM DEBT $1,541,000 $ -
ACCOUNTS PAYABLE-TRADE 2,216,494 3,643,241
ACCOUNTS PAYABLE-ENEX LP LIMITED PARTNERS - 538,750
ACCOUNTS PAYABLE-REVENUE 368,607 342,931
OTHER CURRENT LIABILITIES 326,628 275,010
-------------- ---------------
TOTAL CURRENT LIABILITIES 4,452,729 4,799,932
LONG-TERM DEBT 26,949,567 27,454,567
DEFERRED INCOME TAXES 1,172,696 1,733,167
OTHER LIABILITIES 350,031 437,949
MINORITY INTEREST 893,596 957,369
STOCKHOLDERS' EQUITY
PREFERRED STOCK, $0.02 PAR, 10,000,000 SHARES AUTHORIZED AT JUNE 30, 1999 AND
DECEMBER 31, 1998 WITH 266,667 SHARES DESIGNATED SERIES B AND 2,177,481
SHARES DESIGNATED SERIES C, NONE OTHER ISSUED - -
CONVERTIBLE PREFERRED STOCK SERIES B, $7.50 STATED VALUE,
266,667 SHARES ISSUED AND OUTSTANDING AT JUNE 30, 1999 AND
DECEMBER 31, 1998. $2,000,000 AGGREGATE LIQUIDATION PREFERENCE 3,627,000 3,627,000
CONVERTIBLE PREFERRED STOCK SERIES C, $5.00 STATED VALUE,
1,138,827 AND 1,142,663 SHARES ISSUED AND OUTSTANDING AT
JUNE 30, 1999 AND DECEMBER 31, 1998, RESPECTIVELY.
$5,694,135 AGGREGATE LIQUIDATION PREFERENCE 5,214,238 5,281,937
COMMON STOCK, $.02 PAR VALUE, 20,000,000 SHARES AUTHORIZED,
8,556,201 AND 8,552,364 SHARES ISSUED AND OUTSTANDING AT
JUNE 30, 1999 AND DECEMBER 31, 1998, RESPECTIVELY 171,131 171,055
PAID-IN-CAPITAL 36,966,689 36,947,588
ACCUMULATED DEFICIT (24,832,748) (23,401,707)
LESS COST OF TREASURY STOCK; 21,773 SHARES (68,040) (68,040)
-------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 21,078,270 22,557,833
COMMITMENTS AND CONTINGENCIES
-------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $54,896,889 $57,940,817
============== ===============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30 JUNE 30 JUNE 30
1999 1998 1999 1998
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
REVENUE
OIL AND GAS SALES AND PLANT INCOME $ 3,600,282 $ 4,484,670 $ 6,672,346 $ 7,116,918
GAIN ON SALE OF PROPERTIES 232,892 9,068 307,190 9,068
DELAY RENTAL AND LEASE BONUS INCOME -- 197,071 3,000 197,071
OTHER 122,157 117,295 221,934 241,937
------------ ------------ ------------ ------------
TOTAL REVENUE 3,955,331 4,808,104 7,204,470 7,564,994
------------ ------------ ------------ ------------
COSTS AND EXPENSES
LEASE OPERATING, PRODUCTION TAXES AND PLANT COSTS 1,556,117 2,420,967 3,016,658 3,605,015
GEOLOGICAL AND GEOPHYSICAL 72,159 42,402 141,716 788,115
DEPRECIATION, DEPLETION AND AMORTIZATION 1,230,910 1,906,806 2,580,540 3,024,942
DRYHOLE 1,442 (161,687) 63,631 307,264
INTEREST 509,689 557,388 1,021,445 812,841
STOCK COMPENSATION -- 33,750 -- 67,500
GENERAL AND ADMINISTRATIVE 819,787 1,148,791 1,936,249 2,232,206
OTHER 205,534 18,359 209,389 28,347
------------ ------------ ------------ ------------
TOTAL COSTS AND EXPENSES 4,395,638 5,966,776 8,969,628 10,866,230
LOSS BEFORE INCOME TAX BENEFIT AND MINORITY INTEREST (440,307) (1,158,672) (1,765,158) (3,301,236)
MINORITY INTEREST (54,003) (148,686) (63,773) (148,686)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAX BENEFIT (386,304) (1,009,986) (1,701,385) (3,152,550)
INCOME TAX BENEFIT (146,516) (343,395) (556,010) (1,071,867)
------------ ------------ ------------ ------------
NET LOSS (239,788) (666,591) (1,145,375) (2,080,683)
DIVIDENDS TO PREFERRED STOCKHOLDERS 142,833 -- 285,666 67,945
------------ ------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS ($ 382,621) ($ 666,591) ($ 1,431,041) ($ 2,148,628)
============ ============ ============ ============
NET LOSS PER SHARE
Basic ($ 0.04) ($ 0.08) ($ 0.17) ($ 0.28)
============ ============ ============ ============
Diluted ($ 0.04) ($ 0.08) ($ 0.17) ($ 0.28)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 8,531,567 8,530,592 8,531,080 7,625,124
============ ============ ============ ============
Diluted 8,531,567 8,530,592 8,531,080 7,625,124
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30 JUNE 30
1999 1998
---------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
NET LOSS ($1,145,375) ($2,080,683)
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
DEPLETION, DEPRECIATION AND AMORTIZATION 2,580,540 3,024,942
DRYHOLE COSTS 63,631 307,264
STOCK COMPENSATION EXPENSE - 67,500
GAIN ON SALE OF PROPERTIES (307,190) (9,068)
DEFERRED INCOME TAX BENEFIT (560,471) (1,071,867)
MINORITY INTEREST (63,773) (148,686)
OTHER CHARGES 100,000 -
CHANGES IN CURRENT ASSETS AND LIABILITIES, NET
OF ACQUISITION EFFECTS:
ACCOUNTS RECEIVABLE AND OTHER CURRENT ASSETS 1,108,599 349,860
ACCOUNTS PAYABLE, REVENUE PAYABLE,
AND OTHER CURRENT LIABILITIES (1,536,610) 693,861
---------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 239,351 1,133,123
INVESTING ACTIVITIES
PROCEEDS FROM SALES OF PROPERTIES 321,890 508,963
ADDITIONS TO OIL AND GAS PROPERTIES (1,242,641) (2,198,350)
ACQUISITION OF ENEX RESOURCES CORPORATION, NET OF
CASH ACQUIRED OF $4,698,211 - (11,329,203)
ACQUISITION OF ASSETS OF SERVICE DRILLING CO. - (6,313,373)
OTHER ASSETS (10,677) (332,749)
ADVANCES TO STOCKHOLDER (3,475) (3,474)
---------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (934,903) (19,668,186)
FINANCING ACTIVITIES
PROCEEDS FROM DEBT ISSUED 1,036,000 32,469,604
PRINCIPAL PAYMENTS ON DEBT - (12,839,713)
PREFERRED STOCK DIVIDENDS (72,564) (67,945)
REGISTRATION COSTS ON SERIES C PREFERRED STOCK (48,518) (416,736)
OTHER - (135,719)
---------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 914,918 19,009,491
NET INCREASE IN CASH AND CASH EQUIVALENTS 219,366 474,428
CASH AND CASH EQUIVALENTS- BEGINNING 1,040,096 1,587,184
---------------- ---------------
CASH AND CASH EQUIVALENTS- ENDING $1,259,462 $2,061,612
================ ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
INTEREST PAID IN CASH $1,050,158 $835,658
================ ===============
PREFERRED DIVIDENDS INCURRED BUT NOT PAID $213,100 -
================ ===============
CONVERSION OF SERIES A PREFERRED STOCK - $10,000,000
================ ===============
COMMON STOCK ISSUED AS FINDERS' FEE
IN ENEX RESOURCES CORP. TENDER OFFER - $245,231
================ ===============
COMMON STOCK ISSUED IN ACQUISITION OF ASSETS
FROM SERVICE DRILLING CO., LLC - $5,078,250
================ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Middle Bay Oil Company, Inc., was incorporated under the laws of
the State of Alabama on November 30, 1992. Effective March 27, 1998, the Company
acquired 79.2% of Enex Resources Corporation ("Enex") and effective April 16,
1998, the Company acquired the assets of Service Drilling Co., LLC ("Service
Drilling"). Effective October 1, 1998, the Company acquired 100% of Enex
Consolidated Partners, L.P. ("Enex Partnership"), a limited partnership of which
Enex owned greater than a 50% interest. The Company and its subsidiaries are
engaged in the acquisition, development and production of oil and gas in the
contiguous United States.
BASIS OF PRESENTATION
In management's opinion, the accompanying consolidated financial
statements contain all adjustments (consisting solely of normal recurring
adjustments) necessary to present fairly the consolidated financial position of
the Company as of June 30, 1999 and December 31, 1998 and the consolidated
results of operations and consolidated cash flows for the periods ended June 30,
1999 and 1998.
The consolidated financial statements were prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. An independent
accountant has not audited the accompanying consolidated financial statements.
Certain information and disclosures normally included in annual audited
financial statements prepared in accordance with generally accepted accounting
principles have been omitted, although the Company believes that the disclosures
made are adequate to make the information presented not misleading. These
consolidated financial statements should be read in conjunction with the
Company's financial statements and notes thereto included in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1998.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiary and Enex, an 80% owned subsidiary. The
equity of minority interest in Enex is shown in the consolidated statements as
"minority interest". Significant intercompany accounts and transactions are
eliminated in consolidation.
4
<PAGE>
MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
EARNINGS PER SHARE
Basic earnings per share is based on the weighted average shares
outstanding without any dilutive effects considered. Diluted earnings per share
reflects dilution from all potential common shares, including options, warrants
and convertible preferred stock. A weighted average of 1,437,414 and 1,462,112
common stock equivalents in 1999 and 392,108 and 393,677 common stock
equivalents in 1998, are not considered in the calculation of diluted earnings
per share for the six and three month periods ending June 30, respectively, due
to the net loss recorded during these periods.
RECLASSIFICATIONS
Certain reclassifications of prior period amounts have been made to
conform to the current presentation.
(2) ACQUISITIONS
On March 27, 1998, the Company acquired 1,064,432 common shares,
approximately 79.2%, of Enex for $15,966,480. The Company purchased the common
shares of Enex through a cash tender offer that commenced February 19, 1998 (the
"Enex Acquisition"). The Company also incurred approximately $60,934 in legal,
accounting and printing expenses and issued 33,825 shares of Company common
stock for finders fees to unrelated third parties. At the time, Enex was general
partner of Enex Consolidated Partners, L.P., (the "Enex Partnership"), a New
Jersey limited partnership whose principal business was oil and gas exploration
and production. Enex's general partner interest was 4.1%. Enex also owned an
approximate 56.2% limited partner interest in Enex Partnership.
The cost of acquiring 79.2% of Enex was allocated using the purchase
method of accounting to the consolidated assets and liabilities of Enex based on
estimates of the fair values with the remaining purchase price allocated to
proved oil and gas properties.
The allocation of the purchase price is summarized as follows: (in
thousands)
<TABLE>
<S> <C>
Working capital $ 5,640
Oil and gas properties (proved and unproved) 19,090
Minority interest (7,669)
-------
Total $17,061
=======
</TABLE>
5
<PAGE>
MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
(2) ACQUISITIONS (continued)
Over a three-week period ending December 23, 1998, the Company
acquired an additional 0.80% (9,747 common shares) of Enex common stock for
approximately $68,000.
On April 16, 1998, the Company acquired substantially all of the oil
and gas assets of Service Drilling Co., LLC and certain affiliates ("Service
Drilling"), in exchange for 666,000 shares of Company common stock and
$6,500,000 in cash for a total acquisition cost of $10,054,774, before
post-closing adjustments (the "Service Acquisition"). The fair value of the
securities issued in connection with the Service Acquisition was calculated
using the price of the Company's common stock at the time the Service
Acquisition was announced to the public and further adjusted for tradability
restrictions. An independent valuation firm determined the tradability discount
for the Company's common stock. The effective date of the acquisition was March
1, 1998 and the cost was allocated using the purchase method of accounting.
On December 29, 1998, the Company completed the acquisition of the Enex
Partnership (the "Enex Partnership Acquisition"). The transaction consisted of
an exchange offer whereby the Company offered to exchange 2.086 shares of Series
C Preferred stock ("Series C") for each Enex Partnership unit (the "Exchange
Offer"). In connection with the Exchange Offer, the Company submitted a proposal
to investors in the Enex Partnership to amend the partnership agreement to
provide for the transfer of all of the assets and liabilities of the Enex
Partnership to the Company as of October 1, 1998 and dissolve the Enex
Partnership. The Exchange Offer was approved on December 29, 1998 and the
Company issued 2,177,481 Series C shares for 100% of the outstanding limited
partner units. At the close of the Exchange Offer, the Enex Partnership had
1,102,631 units outstanding. Enex was issued 1,293,521 Series C shares for its
56.2% ownership of the Enex Partnership. The remaining 883,959 Series C shares
were issued to the limited partners that elected to take Series C shares in lieu
of cash. Certain dissenting limited partners were paid $516,000 in January 1999.
Because of the dissenting limited partners, Enex owns 59.4% of the Series C
shares, of which 20% (258,704 shares) are considered outstanding and held by
third parties.
6
<PAGE>
MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
(2) ACQUISITIONS (continued)
The cost of acquiring 100% of the outstanding limited partner units was
approximately $11.9 million, consisting of the following (in thousands):
<TABLE>
<S> <C>
Estimated fair value of 2,177,481 shares
of Company Series C preferred stock $10,887
Cash consideration 539
Legal, accounting and other expenses 431
-------
Total $11,857
=======
</TABLE>
As Enex is consolidated into the Company's financial statements, the
number of shares outstanding and the value of the shares outstanding
attributable to the 43.8% of the Enex Partnership not owned by Enex and the
minority interest owners of Enex (20%) is 1,142,663 and $5,713,317,
respectively. The cost of acquiring the outstanding limited partner units that
were not owned by Enex was approximately $6.7 million, consisting of the
following (in thousands):
<TABLE>
<S> <C>
Estimated fair value of 1,142,663 shares
of Company Series C preferred stock $5,713
Cash consideration 539
Legal, accounting and other expenses 431
------
Total $6,683
======
</TABLE>
The Company's purchase price was allocated to the assets and
liabilities of the Enex Partnership based on estimates of the fair values with
the remaining purchase price allocated to proved oil and gas properties. The
registration costs of approximately $431,000 reduced the value of the Series C
shares issued. Because the Enex Partnership was consolidated in the financial
statements of the Company as of the effective date of October 1, 1998, the
purchase price allocation below shows the effect of the acquisition on the
consolidated financial statements (in thousands):
<TABLE>
<S> <C>
Working capital $ (539)
Oil and gas properties (23)
Minority interest 5,844
-------
Series C Preferred Stock $5,282
=======
</TABLE>
7
<PAGE>
MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
(2) ACQUISITIONS (continued)
The following pro forma data presents the results of the Company for
the six months ended June 30, 1998, as if the acquisitions of Service, Enex and
the Enex Partnership had occurred on January 1, 1998. The pro forma results are
presented for comparative purposes only and are not necessarily indicative of
the results which would have been obtained had the acquisitions been consummated
as presented. The following data reflect pro forma adjustments for oil and gas
revenues, production costs, depreciation and depletion related to the properties
and businesses acquired, preferred stock dividends on preferred stock issued,
and the related income tax effects (in thousands, except per share amounts):
<TABLE>
<CAPTION>
ProForma
Six Months Ended
June 30, 1998
(Unaudited)
<S> <C>
Total revenues $12,743
Net loss available to stockholders (3,192)
Net loss per share available to stockholders (0.40)
</TABLE>
(3) ACCOUNTS RECEIVABLE-INSURANCE CLAIM
The Company owns a 100% working interest in the Louis Mayard #1 well
(the "Well") located in the Esther Field in Vermillion Parish, Louisiana. Due to
a failed recompletion attempt and the inability of the Company to shut in the
Well using normal operating methods, the Company incurred approximately
$1,856,000 during 1998 to gain control of the Well using special crews. On
November 4, 1998, the insurance company made a partial payment to the Company
under its well control insurance policy of approximately $1,408,000. In April,
1999 the Company was paid $388,000 in final settlement of all claims related to
the Well. The Company had recorded the estimated remaining amount due from the
insurance company in current assets as Accounts Receivable-Insurance Claim.
8
<PAGE>
MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
(4) LONG-TERM DEBT
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
----------- -----------
<S> <C> <C>
Reducing revolving line of credit of up to $100,000,000
due April 1, 2001, secured by oil and gas properties,
monthly borrowing base reductions of $250,000 effective
May 1, 1999 and monthly payments of interest at Libor plus
2.00% and prime. At June 30, 1999 the Libor and prime
rates were 5.30% and 7.75%, respectively 28,490,567 27,454,567
Less current maturities (1,541,000) ---
----------- -----------
Long-term debt excluding current
maturities $26,949,567 $27,454,567
=========== ===========
</TABLE>
In connection with the Enex Acquisition the Company entered into a new
reducing revolving line of credit agreement (the "$100 million Revolver"). The
$100 million Revolver is subject to semi-annual borrowing base redeterminations
which are affected by acquisitions and dispositions of assets. The borrowing
base at June 30, 1999 was $30.5 million and monthly borrowing base reduction
requirements are $250,000.
The principal is due at maturity, April 1, 2001. Monthly principal
payments are made as required in order that the outstanding principal balance
plus outstanding letters of credit does not exceed the borrowing base. Interest
is payable monthly and is calculated at the prime rate. The Company may also
elect to calculate interest under the Libor rate, as defined in the agreement.
The Libor rate increases by (a) 2.00% if the outstanding loan balance and
letters of credit are equal to or greater than 75% of the borrowing base, (b)
1.75% if the outstanding loan balance and letters of credit are less than 75% or
greater than 50% of the borrowing base or (c) 1.50% if the outstanding loan
balance and letters of credit are equal to or less than 50% of the borrowing
base. Libor interest is payable at maturity of the Libor loan which cannot be
less than thirty days.
At June 30, 1999, the Company had borrowed $28,490,567 and had $550,432
of outstanding letters of credit. As of June 30, 1999, the Company is paying
Libor plus 2.00% on a ninety day Libor loan for $26,505,605 and prime on
$1,984,962.
9
<PAGE>
MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
(4) LONG-TERM DEBT (continued)
Effective May 1, 1999, the borrowing base was redetermined to be $31
million with monthly borrowing base reductions of $250,000. The amount available
under the borrowing base, less outstanding letters of credit, at June 30, 1999,
was $1.4 million. The next redetermination is expected to be October 1, 1999.
Pursuant to the terms of the $100 million Revolver, if the borrowing base is
less than the outstanding principal balance plus outstanding letters of credit,
the Company has sixty days, after receipt of notice from the Banks, to cure the
excess by prepayment, providing additional collateral or a combination of both.
Amounts spent on debt retirement due to reductions in the borrowing base
reduce the cash available to spend on acquisition, development and exploration
activities, and accordingly, oil and natural gas revenues and operating results
may be adversely affected.
The Company paid a facility fee equal to 3/8% of the initial borrowing
base and is required to pay 3/8% on any future increase in the borrowing base
within five days of written notice. The Company is required to pay a quarterly
commitment fee on the unused portion of the borrowing base of 1/2% if the
outstanding loan balance plus letters of credit are greater than 50% of the
borrowing base or 3/8% if the outstanding loan balance plus letters of credit
are less than or equal to 50% of the borrowing base. The Company is required to
pay a letter of credit fee on the date of issuance or renewal of each letter of
credit equal to the greater of $500 or 1 1/2% of the face amount of the letter
of credit.
The Company has granted to the Banks liens on substantially all of the
Company's oil and natural gas properties, whether currently owned or hereafter
acquired, and a negative pledge on all other oil and gas properties.
The $100 million Revolver requires, among other things, a cash flow
coverage ratio of 1.25 to 1.00 and a current ratio, excluding current maturities
of the $100 million Revolver, of 0.9 to 1.00, determined on a quarterly basis.
10
<PAGE>
MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
(5) COMMON STOCK
On February 10, 1999 and January 13, 1998, the Board of Directors
granted to certain employees and directors, options with exercise prices of
$1.50 and $5.75 per share, respectively, to acquire 200,000 and 232,000 shares
of Company common stock, respectively. All of the options were granted under the
1995 Stock Option and Stock Appreciation Rights Plan at fair market value and
will expire five years from date of grant if not exercised.
(6) COMMITMENTS AND CONTINGENCIES
In March 1995, the Board of Directors adopted an employee incentive
compensation plan (the "Plan") for the benefit of Company employees. The Plan
benefits are equal to one percent (1%) of the annual net profit from oil and gas
properties acquired or discovered on or after January 1, 1994 and one percent
(1%) of the annual sales proceeds from any oil and gas properties sold on or
after January 1, 1994. The Compensation Committee of the Board of Directors has
sole authority regarding the amount and timing of payment of any Plan benefits
to eligible employees. The Plan benefits are not accrued as an expense in the
financial statements because the likelihood that the Compensation Committee
would determine that the benefits would be payable to eligible employees is less
than probable. Effective June 30, 1999 and December 31, 1998, the Plan benefits
were approximately $226,000 and $186,000.
On July 26, 1999, the Compensation Committee authorized, contingent on
the closing of the securities purchase agreement with 3TEC (See Footnote
9-Subsequent Events), the payment of all of the Plan benefits to eligible
employees. If the securities purchase agreement does not close, the Plan will
continue and the date of payment and amount of payment, if any, will be
determined by the Compensation Committee.
The Company is a defendant in various legal proceedings which are
considered routine litigation incidental to the Company's business, the
disposition of which management believes will not have a material effect on the
financial position or results of operations of the Company.
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MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
(7) HEDGING ACTIVITIES
In April, the Company entered into costless collar hedges for
approximately 3,650 Mcf per day with a weighted average floor and ceiling of
$2.06 and $2.20, for the months of May through October. During the current
period, the Company incurred a hedging loss of $13,000.
(8) SUBSEQUENT EVENTS
On July 1, 1999, the Company entered into a Securities Purchase
Agreement(the "Agreement') with 3TEC Energy Corporation, a privately-held
company ("3TEC"), whereby, for $10,700,000, the Company would issue 4,755,556
shares of common stock and 3,600,000 warrants (the "Warrants") and a 5-year
senior subordinated convertible note with a face value of $10,700,000 (the
"Note"). The Warrants may be exercised for up to 3,600,000 shares of common
stock at an exercise price of $1 per share. Sixty percent of the Warrants may be
exercised immediately. The remaining 40% will be exercisable over a 4-year
period commencing 12 months from the closing date of the Agreement. The Note
will bear interest at a rate of 9% per annum and is convertible into 3,566,667
shares of common stock.
The closing of the transaction is expected to occur in August, 1999.
At closing, 3TEC will become the Company's largest shareholder with ownership
of approximately 36% of the then outstanding common stock. If 3TEC chooses to
fully exercise the Warrants and fully convert the Note to common shares, 3TEC
would control approximately 58% of the then issued and outstanding shares of
common stock of the Company.
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MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
(8) SUBSEQUENT EVENTS (continued)
Under the terms of a shareholders agreement to be executed at closing,
3TEC will have the right to designate three members of a new five-person Board
of Directors. Certain other major shareholders of the Company will have the
right to designate the other two board members. At closing, the President of
3TEC will become Chairman, President and Chief Executive Officer of the Company
and the former president of the Company will become Executive Vice-President.
Upon the closing of the Agreement with 3TEC, the Company expects to add
eight full-time employees. The Company also expects to assume the rent and
administrative costs of office space in Dallas, Texas where these employees will
be working.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Cash flow from operating activities for the current period of $239,000
decreased $894,000 from the comparable period. The decrease in cash flow was due
primarily to working capital changes offset partially by lower geological and
geophysical expenses and general and administrative expenses. Cash flow from oil
and gas properties (oil and gas revenues and plant income less lease operating
expenses, production taxes and plant costs) increased $144,000 over the
comparable period. Oil prices increased 3%, while oil production decreased 5%.
Gas prices decreased 14%, while gas production increased 7%. The change in
working capital was caused principally by timing differences in the payment of
expenses and receipt of revenues.
Cash additions to oil and gas properties were lower than the comparable
period due primarily to less exploratory and developmental drilling in the
current period. The amount spent on acquisitions is lower due to no acquisitions
in the current period versus the Enex and Service Acquisitions that closed in
the comparable period. The Company acquired approximately 79% of Enex common
stock for cash in a tender offer that closed March 27, 1998 and acquired the oil
and gas assets of Service Drilling Co., LLC and certain affiliates for cash and
stock in a transaction that closed April 16, 1998.
During the current period, the Company was advanced $516,000 on the $100
million Revolver to pay the dissenting limited partners in the Enex Partnership
Acquisition and $520,000 to pay for developmental drilling projects on several
of its major properties. In the comparable period, the Company refinanced its
existing debt and financed the Enex and Service Acquisitions with proceeds from
the $100 million Revolver. The Company made no principal payments on the $100
million Revolver during the current period. In the comparable period, the
Company made principal payments of $1,881,000.
In the current period, the Company paid approximately $72,000 in
dividends on the Series C preferred stock issued in the Enex Acquisition. The
amount paid represents a portion of the total $143,000 of dividends accrued for
the three months ended March 31, 1999. An additional $143,000 was accrued in the
current period. All of the dividends accrued were not immediately paid in cash
because of unknown addresses and non-receipt of preferred stock issuance forms.
The Company's operating activities provided net cash of $239,000 for the
current period. During this period, net cash from operations, property sales,
$100 million Revolver advances and cash on hand was used principally for
leasehold acquisitions, exploratory and developmental drilling and geological
and geophysical expenses. Approximately $167,000 was spent on leasehold and
legal costs on the Hawkins Ranch Prospect. Approximately
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$908,000 was spent on exploratory and developmental drilling and
approximately $167,000 was spent on abandonment costs on a field in Florida.
The principal exploratory well in the current period was the Hawkins 60 #1,
a $36,000 dry hole drilled on the Hawkins Ranch Prospect. The principal
developmental expenditure in the current period was a recompletion in the
Murphy Lake Field for approximately $351,000. The remaining exploratory and
developmental work was throughout several fields.
The Company had current assets of $4,198,000 and current liabilities of
$4,453,000, which resulted in a working capital deficit of $255,000 as of June
30, 1999. The current period deficit was a decrease in working capital of
$394,000 from working capital of $139,000 as of December 31, 1998. Working
capital decreased primarily due to the higher current maturity of long-term debt
and lower accounts receivable. The current maturity of long-term debt increased
from December 31, 1998 because the amount of debt outstanding increased and the
borrowing base decreased since December 31, 1998. The Company's current ratio of
1.44, calculated under the terms of the $100 million Revolver agreement, which
excludes current maturities of debt due under the $100 million Revolver, was in
excess of the 0.90 to 1.00 required.
$100 MILLION LINE OF CREDIT
In conjunction with the Enex Acquisition on March 27, 1998 the Company
entered into a $100 million reducing, revolving line of credit (the "$100
million Revolver") with current borrowings under a term note maturing April 1,
2001. The entire principal balance of the Company's $50 million Convertible Loan
was replaced with the $100 million Revolver.
The amount the Company can borrow is based upon the borrowing base.
The borrowing base and the monthly borrowing base reduction amounts are
redetermined semi-annually by unanimous consent of the lenders. The principal is
due at maturity, April 1, 2001. Monthly principal payments are made as required
in order that the outstanding principal balance plus outstanding letters of
credit does not exceed the borrowing base. Interest is payable monthly and is
calculated at the prime rate. The Company may elect to calculate interest under
the Libor rate, as defined in the agreement. The Libor rate increases by (a)
2.00% if the outstanding loan balance and letters of credit are equal to or
greater than 75% of the borrowing base, (b) 1.75% if the outstanding loan
balance and letters of credit are less than 75% or greater than 50% of the
borrowing base or (c) 1.50% if the outstanding loan balance and letters of
credit are equal to or less than 50% of the borrowing base.
The borrowing base at June 30, 1999 was $30.5 million. Effective May 1,
the borrowing base was redetermined to be $31 million with monthly borrowing
base reductions of $250,000. At June 30, 1999 the Company had borrowed
$28,491,000 and had $550,000 of outstanding letters of credit. During the
current period, the Company did not make any payments and was advanced
$1,036,000 under the $100 million Revolver. The Company is currently paying
Libor plus 2.00% on a ninety day Libor loan for $26,506,000 and prime on
$1,985,000.
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At June 30, 1999, the amount available under the borrowing base on the
$100 million revolver was approximately $1.4 million. Pursuant to the terms of
the $100 million Revolver, if the borrowing base is less than the outstanding
principal balance plus outstanding letters of credit the Company has sixty days,
after receipt of notice from the Banks, to cure the excess by prepayment,
providing additional collateral or a combination of both. The next
redetermination is expected to be October 1, 1999.
The Company paid a facility fee equal to 3/8% of the initial borrowing
base and is required to pay 3/8% on any future increase in the borrowing base
within five days of written notice. The Company is required to pay a quarterly
commitment fee on the unused portion of the borrowing base of 1/2 % if the
outstanding loan balance plus letters of credit are greater than 50% of the
borrowing base or 3/8 % if the outstanding loan balance plus letters of credit
are less than or equal to 50% of the borrowing base. The Company is required to
pay a letter of credit fee on the date of issuance or renewal of each letter of
credit equal to the greater of $500 or 1 1/2 % of the face amount of the letter
of credit.
The Company has granted to the Banks liens on substantially all of the
Company's oil and natural gas properties, whether currently owned or hereafter
acquired, and a negative pledge on all other oil and gas properties.
The $100 million Revolver requires, among other things, a cash flow
coverage ratio of 1.25 to 1.00 and a current ratio, excluding the current
maturity of the $100 million Revolver, of 0.9 to 1.00, determined on a quarterly
basis. As of June 30, 1999 the Company was in compliance with the cash flow and
current ratio covenants. Because the borrowing base was higher than the debt and
letters of credit outstanding during the current period, no debt payments were
required.
Under the terms of the $100 million Revolver, when mortgaged properties
are sold the borrowing base shall be reduced, and if necessary, proceeds from
the sales of properties shall be applied to the debt outstanding in an amount
equal to the loan value attributable to such properties sold.
The $100 million Revolver includes other covenants prohibiting cash
dividends, distributions, loans, advances to third parties in excess of
$100,000, or sales of assets greater than 10% of the aggregate net present value
of the oil and gas properties in the borrowing base. Compass Bank has granted
the Company a waiver allowing the Company to pay the dividends to holders of
Series C as long as no default or event of default exists or would exist as a
result of any Series C dividend payment.
COMMON STOCK AND CONVERTIBLE NOTE SALE TO 3TEC ENERGY CORPORATION
On July 1, 1999, the Company entered into a Securities Purchase
Agreement(the "Agreement') with 3TEC Energy Corporation, a privately-held
company ("3TEC"), whereby, for $10,700,000, the Company would issue
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4,755,556 shares of common stock and 3,600,000 warrants (the "Warrants") and
a 5-year senior subordinated convertible note with a face value of
$10,700,000 (the "Note"). The Warrants may be exercised for up to 3,600,000
shares of common stock at an exercise price of $1 per share. Sixty percent of
the Warrants may be exercised immediately. The remaining 40% will be
exercisable over a 4-year period commencing 12 months from the closing date
of the Agreement. The Note will bear interest at a rate of 9% per annum and
is convertible into 3,566,667 shares of common stock.
The closing of the transaction is expected to occur in August, 1999.
At closing, 3TEC will become the Company's largest shareholder with
ownership of approximately 36% of the then outstanding common stock. If 3TEC
chooses to fully exercise the Warrants and fully convert the Note to common
shares, 3TEC would control approximately 58% of the then issued and outstanding
shares of common stock of the Company.
Under the terms of a shareholders agreement to be executed at closing,
3TEC will have the right to designate three members of a new five-person Board
of Directors. Certain other major shareholders of the Company will have the
right to designate the other two board members. At closing, the President of
3TEC will become Chairman, President and Chief Executive Officer of the Company
and the former president of the Company will become Executive Vice-President.
ADDITIONAL COSTS AND EMPLOYEES ASSOCIATED WITH THE SECURITIES SALE TO 3TEC
ENERGY CORPORATION
Upon the closing of the Agreement with 3TEC, the Company expects to add
eight full-time employees. The Company also expects to assume the rent and
administrative costs of office space in Dallas, Texas where these employees will
be working.
PROPERTY SALES
During the six month period ending June 30, 1999, the Company received
approximately $309,000 in cash from the sales of non-strategic oil and gas
properties. The Company accrued an additional $225,000 from the sale of an oil
and gas property that closed subsequent to June 30, 1999. The Company recorded a
gain of $295,000 on the sale of the oil and gas properties.
Subsequent to the May 1 borrowing base redetermination, the loan value
of the sold properties was insignificant and did not reduce the borrowing base.
FUTURE CAPITAL REQUIREMENTS
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The Company has made and will continue to make, substantial capital
expenditures for acquisition, development and exploration of oil and natural gas
reserves. In fact, because the Company's principal natural gas and oil reserves
are depleted by production, its success is dependent upon the results of its
acquisition, development and exploration activities.
The Company expects to incur a minimum of approximately $1,000,000 in
capital expenditures over the next twelve months. The Company expects that
available cash, cash flows from operations and cash proceeds from asset sales of
certain non-core properties will be sufficient to fund the planned capital
expenditures through June 2000 in addition to funding interest and principal
requirements on the $100 million Revolver. However, the Company may require
additional borrowings under the $100 million Revolver or additional equity
funding to raise additional capital to fund any acquisitions.
The Company expects to participate in two exploratory wells on the
Hawkins Ranch Prospect in addition to the dry hole drilled in the first quarter
of 1999. The next two wells are expected to be spudded in August and November.
The estimated drilling and completion cost on these two wells is expected to be
$723,000.
Because future cash flows and the availability of financing are subject
to a number of variables, such as the level of production and prices received
for gas and oil, there can be no assurance that the Company's capital resources
will be sufficient to maintain planned levels of capital expenditures and
accordingly, oil and natural gas revenues and operating results may be adversely
affected.
At June 30, 1999, the amount available under the borrowing base on the
$100 million revolver was approximately $1.4 million. Assuming no other changes,
the amount available to be borrowed at October 1, the next borrowing base
redetermination date, will be approximately $0.4 million.
Amounts spent on debt retirement due to reductions in the borrowing
base reduce the cash available to spend on acquisition, development and
exploration activities and, accordingly, oil and natural gas revenues and
operating results may be adversely affected.
CURRENT ACTIVITIES
As of August 15, 1999, there were four developmental wells drilling.
YEAR 2000 COMPLIANCE
Readers are cautioned that the forward-looking statements contained in the
following Year 2000 discussion should be read in conjunction with the Company's
disclosures under the heading "Forward-Looking Statements." The disclosures also
constitute a "Year 2000 Readiness Disclosure" and "Year 2000 Statement" within
the meaning of the Year 2000 Information and Readiness Disclosure Act of 1998.
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STATEMENT OF READINESS
The Company has undertaken various initiatives to ensure that its hardware,
software and equipment will function properly with respect to dates before and
after January 1, 2000. For this purpose, the phrase "hardware, software and
equipment" includes systems that are commonly thought of as Information
Technology systems ("IT"), as well as those Non-Information Technology systems
("Non-IT") and equipment which include embedded technology. IT systems include
computer hardware and software and other related systems. Non-IT systems include
certain oil and gas production and field equipment, gathering systems, office
equipment, telephone systems, security systems and other miscellaneous systems.
The Non-IT systems present the greatest readiness challenge since identification
of embedded technology is difficult and because the Company is, to a great
extent, reliant on third parties for Non-IT compliance.
The Company has formed a Year 2000 ("Y2K") Project team, which is chaired by its
Chief Financial Officer, Frank C. Turner, II. The team includes corporate staff
and representatives from the Company's business units. In response to the
possible risks posed to the Company, the team has developed a Y2K Plan (the
"Plan") which includes guidelines for inventory, assessment, remediation,
testing and contingency planning.
The following categories represent the mission-critical operational systems of
the Company. A "mission-critical system" is a system that is vital to the
successful continuation of a core business activity. An application may be
mission critical if it interfaces with a designated mission-critical system.
Each system has been evaluated by the Company as to (a) the risks to the Company
in the event of the most reasonably likely worst case scenario (the "Worst Case
Scenario"); (b) the status of the Company's remediation plan, if any ("Status");
and (c) the Company's contingency plans, if any ("Contingency Plans").
ACCOUNTING SOFTWARE SYSTEMS. The Company relies solely on the software
accounting packages ("Accounting Packages") to provide management with various
reports that allow managers to determine the cash flow and profitability of
individual properties and of the Company as a whole. Management also relies on
the Accounting Packages to provide financial information necessary to prepare
quarterly and annual financial reports that are sent to the Securities and
Exchange Commission, NASDAQ Stock Market, banks and stockholders. In addition,
the Company relies on the Accounting Packages to process and print checks to be
sent to working and royalty interest owners for their share of the monthly oil
and gas sales, to process and print checks for payment to vendors and to process
and print monthly joint-interest statements to be sent to working interest
owners in Company-operated oil and gas properties. Under a Worst Case Scenario,
all accounting functions would have to be completed manually, significantly
hindering the Company's ability to complete the above-described mission-critical
tasks.
Status: The Company has updated its accounting systems. Testing
was completed on June 30, 1999 and all primary functions
utilizing dates functioned properly.
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Contingency Plans: Based on the results of the independent testing of the
Accounting Software System, the Y2K Team believes the
risk of the Accounting Software System being adversely
affected by Y2K is remote. If the Accounting Software
System is adversely affected by Y2K, the Company has
developed various contingency plans which include the
utilization of support personnel and the performance of
manual tasks.
CONTROL SYSTEMS AND IMBEDDED TECHNOLOGY. These systems include the
equipment used to produce, monitor, control, sell and record hydrocarbon
production, including all artificial lift equipment, storage, measurement and
control facilities and third-party systems and technology interrelated to the
Company's business. Under a Worst Case Scenario, multiple fields of oil and gas
would lose the ability to account for the amount of hydrocarbon production,
temporarily shutting down the field(s) until the malfunctioning part(s) could be
repaired or replaced. This is not expected to materially adversely effect the
Company.
Status: The only mission-critical field operated by the Company is
the Spivey Field, whose production operations are not
affected by Y2K issues. The Spivey Field is affected by a
third-party operated gas plant that processes the field's
natural gas and may be subject to Y2K issues. Refer to
"Third Party Systems-Gas Plant" for a discussion of the
gas plant at the Spivey Field. The operations of the
remaining fields were not materially effected by Y2K
issues.
Contingency Plans: The Company will continue to monitor the operations at
its field locations and develop contingency planning if
an exposure becomes apparent.
THIRD-PARTY SYSTEMS - OIL AND GAS PURCHASERS. The Company utilizes
third-party purchasers to sell the oil and gas produced from the wells in which
it has a working or royalty interest. The Company also depends on third-party
purchasers to remit to the Company its share of the proceeds from the sales of
oil and gas. The Company does not directly sell any oil and gas produced from
the wells in which it has a working or royalty interest and does not take any
oil or gas in kind as an alternative to cash payment. Under a Worst Case
Scenario, multiple major purchasers would be temporarily shut down due to Y2K
issues, materially adversely effecting the Company's revenues.
Status: Based upon the diversity of purchasers, the Company
believes that no single purchaser is a mission-critical
purchaser. The Y2K team does not anticipate that a
problem with any single purchaser for a reasonable period
of time beyond 2000 will force the Company to curtail or
shut down its operations. Although no single purchaser is
a mission-critical purchaser, the loss of a major
purchaser or multiple minor purchasers due to Y2K
problems would affect the Company. The Company has
obtained information about the top ten purchasers and
their Y2K readiness. All but two of the top ten
purchasers have formal Y2K Plans and are
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working to upgrade any mission-critical systems that are
affected by Y2K. The other two purchasers acknowledge
that certain systems will be affected by Y2K and have
been undertaking plans to upgrade these systems.
Contingency Plans: The Company continues to monitor the Y2K status of its
major purchasers. Should a purchaser not become Y2K
compliant, the Company will identify alternative
purchasers for its production and, if necessary,
temporarily shut-in production.
THIRD-PARTY SYSTEMS - GAS PLANT. Over 95% of the gas produced in the
Spivey Field, a mission-critical system, is sold to a gas plant under a life of
the lease casinghead tailgate gas contract. The Company owns approximately 11.5%
of the gas plant and related gathering system. Colt Resources Corporation
operates the plant. Under a Worst Case Scenario, the gas plant would be shut
down less than one month which would not materially adversely effect the
Company.
Status: The Company has received a letter from the operator of
the Spivey plant stating that the Spivey plant's control
systems and embedded technology are not Y2K affected and
that its accounting and processing systems are Y2K
compliant.
Contingency Plans: A short-term interruption of gas sales would not
materially affect the Company's operations. If the Spivey
plant experiences problems with an expected duration in
excess of one month, the Company has identified
alternative gas markets it could utilize.
THIRD-PARTY SYSTEMS - BANKING. The Company relies on its banks to
deposit checks payable to the Company and credit the checks to the appropriate
accounts. The Company also relies on its banks to credit third-party accounts
for payment. A Worst Case Scenario would occur if the Company's principal bank
is unable to provide certain services for an extended period of time due to Y2K,
causing the Company to be materially adversely affected.
Status: The Company's principal bank currently has a formal Y2K
Plan in effect and has substantially remediated and
tested all of its non-compliant, in-house and
vendor-supported mission-critical systems as of June 30,
1999.
Contingency Plans: The Company intends to have cash on hand sufficient to
cover short-term emergency payments and payroll. The
Company also plans to open accounts with other
institutions in the event its principal bank is unable to
rectify its problems in a timely manner. The Company has
no long-term contingency plans in the event of a
system-wide failure of banking institutions.
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THIRD-PARTY SYSTEMS - SUPPORT FUNCTIONS. The primary material support
functions provided by third parties are electrical service, communication
service and office space. Under a Worst Case Scenario, all primary support
functions would be hindered in the short term.
Status: All vendors of these services have reported that formal
Y2K remediation plans are in effect and will be
substantially complete by September 30, 1999.
Contingency Plans: Short-term (less than two weeks) interruptions of
services will not materially adversely effect the
Company. The Company will be able to conduct business on
a reduced scale using alternative business methods.
Longer-term interruptions may materially adversely effect
the Company. The Company has no plans sufficient to fully
offset the effect of long-term interruptions.
COMPUTER OPERATING SYSTEMS AND APPLICATION SOFTWARE SYSTEMS. The
Company relies solely on its personal computer systems to access the accounting
software package through the Company's computer network. In addition, certain
schedules and databases that are used for critical functions rely on spreadsheet
and work-processing applications that are run on the Company's personal computer
systems.
Status: All systems appear to be Y2K ready.
Contingency Plans: Operations could be performed manually until
non-functioning equipment or software is repaired or
replaced
COSTS OF Y2K COMPLIANCE
The costs incurred by the Company to implement the Plan were not material to the
Company's financial condition or results of operations. The Company does not
expect any future costs related to the Plan to be material to the Company's
financial condition or results of operations.
The Risks of Y2K Issues
The Company presently believes that Y2K issues will not pose significant
operational problems. However, if all significant Y2K issues are not properly
identified or assessed, remediation and testing are not effected timely, the Y2K
issues, either individually or in combination, may materially and adversely
impact the Company's results of operations, liquidity and financial condition or
materially and adversely affect its relationships with its business partners.
Additionally, the misrepresentation of compliance by other entities or the
persistent, universal failure of financial, transportation or other economic
systems will likely have a material and adverse impact on the Company's
operations or financial condition for which it cannot adequately prepare.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
For the three months ended June 30, 1998, the revenues and expenses
include the Enex Acquisition and do not include the Enex Partnership
Acquisition. The Service Acquisition is included in the revenues and expenses
for the months of May and June.
Total revenues for the current period of $3,955,000 were $853,000 lower
than the comparable period. The decrease in total revenues was due principally
to decreases in oil and gas revenues of $884,000.
The decrease in oil and gas revenues consisted of a $205,000 decrease in
oil revenues, a $624,000 decrease in gas revenues and a $55,000 decrease in
other revenues. The decrease in oil and gas revenues was the result of lower oil
and gas production. Production of oil and gas decreased 38% and 25%,
respectively, over the comparable period. Normal production decline and the
property sales in the second half of 1998 contributed to the declines in oil and
gas production. During the current period, the Company sold 106,000 barrels of
oil and 865,000 Mcf of gas, as compared to 171,000 barrels and 1,160,000 Mcf for
the comparable period. The average price received on the gas sold in the current
period of $2.07 per Mcf was approximately equal to the price received in the
comparable period. The average price received on the oil sold in the current
period of $16.32 per barrel was 44% higher than the $11.34 per barrel received
in the comparable period.
In April, the Company entered into costless collar hedges for
approximately 3,650 Mcf per day with a weighted average floor and ceiling of
$2.06 and $2.20, for the months of May through October. During the current
period, the Company incurred a hedging loss of $13,000.
Total expenses decreased $1,571,000 over the comparable period. The
primary reason for the total expense decrease was lower lease operating
expenses, production taxes and plant costs ("lease operating expenses") and
depletion.
Lease operating expense decreased $865,000. Property sales in the
second half of 1998 contributed to the lower lease operating expenses.
Geological and geophysical expenses ("G&G expenses") increased $30,000.
In the current and comparable periods, the Company incurred approximately
$72,000 and $42,000, respectively, of G&G expenses. The principal G&G expenses
in the current and prior periods were attributable to the Hawkins Ranch
Prospect. No material, additional G&G expenses are expected to be incurred in
the near future on the Hawkins Ranch Prospect.
Depletion, depreciation and amortization expenses decreased $676,000.
Reserve write-downs and property sales in the second half of 1998 contributed to
the lower depletion, depreciation and amortization expenses.
During the current period, dryhole expense increased by $163,000 due to
a dryhole credit of $166,000 in the comparable period. The dryhole expense
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in the current period of $1,000 was due to additional charges incurred on
previous dryholes. No dryholes were drilled in the current period.
Interest expense decreased $48,000. A lower loan balance and lower
interest rates resulted in lower interest expense. The loan balance decreased as
a result of principal payments from property sales proceeds and required
principal payments.
Stock compensation decreased $34,000. No stock compensation expense was
incurred in the current period. The stock compensation expense in the prior
period was due to the vesting of restricted stock granted to certain executive
officers of the Company in February 1997. The stock became fully vested on June
30, 1998.
General and administrative expenses ("G&A") decreased $329,000.
Decreases in several expense categories contributed to the decrease. The primary
expense decrease was due to decreases in salary expense, office expense, rent
expense and legal fees. The staff reductions at Enex and the closing of the Enex
offices at Kingwood contributed largely to the salary, office and rent expense
decreases.
Other expenses increased $187,000. Bad debt expense of $100,000 and
other miscellaneous account adjustments resulted in the expense increase.
The Company reported an operating loss before minority interest of
$440,000 for current period versus an operating loss of $1,159,000 for the
comparable period. Due to the Enex Acquisition, the Company records a minority
interest on its income statement to remove the net income or loss attributable
to the minority interest holders of Enex (20%). In the current and comparable
periods, the minority interest decreased the operating loss by $54,000 and
$149,000, respectively. The minority interest in the current period accounted
only for the Enex operations while the minority interest in the comparable
period accounted for the operations of Enex and the Enex Partnership. The Enex
Partnership was acquired by the Company effective October 1, 1998.
The Company reported a deferred income tax benefit of $146,000 in the
current period versus a $344,000 benefit in the comparable period.
The Company reported a net loss of $240,000 for the current period
versus a net loss of $666,000 for the comparable period. After considering the
preferred stock dividend requirement of $143,000 in the current period versus
none in the comparable period, the Company reported a net loss available to
common stockholders in the current and comparable periods of $383,000 and
$666,000, respectively. The preferred dividends in the current period represent
three months of accrued dividends on the Series C preferred stock.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
For the six months ended June 30, 1998, the revenues and expenses
include the Enex Acquisition for the period April through June and do not
24
<PAGE>
include the Enex Partnership Acquisition. The Service Acquisition is included in
the revenues and expenses for the months of May and June.
Total revenues for the current period of $7,204,000 were $360,000 lower
than the comparable period. The decrease in total revenues was due principally
to decreases in oil and gas revenues of $444,000.
The decrease in oil and gas revenues consisted of a $79,000 decrease in
oil revenues, a $312,000 decrease in gas revenues and a $53,000 decrease in
other revenues. The decrease in oil revenues was the result of lower oil
production. The decrease in gas revenues was the result of lower gas prices. Oil
production decreased 5% and gas production increased 7%, over the comparable
period. Normal production decline and property sales in the second half of 1998
reduced oil and gas production over the comparable period. The Enex, Service and
Enex Partnership Acquisitions, which closed subsequent to the March 26, 1998,
increased oil and gas production over the comparable period. During the current
period, the Company sold 251,000 barrels of oil and 1,795,000 Mcf of gas, as
compared to 264,000 barrels and 1,681,000 Mcf for the comparable period. The
average price received on the gas sold in the current period of $1.83 per Mcf
was 14% lower than the $2.13 per Mcf received in the comparable period. The
average price received on the oil sold in the current period of $12.61 per
barrel was 3% higher than the $12.26 per barrel received in the comparable
period.
In April, the Company entered into costless collar hedges for
approximately 3,650 Mcf per day with a weighted average floor and ceiling of
$2.06 and $2.20, for the months of May through October. During the current
period, the Company incurred a hedging loss of $13,000.
Total expenses decreased $1,897,000 over the comparable period. The
primary reason for the total expense decrease was lower lease operating
expenses, production taxes and plant costs ("lease operating expenses"),
geological and geophysical expenses and depletion.
Lease operating expense decreased $588,000. Property sales in the
second half of 1998 contributed to the lower lease operating expenses.
Geological and geophysical expenses ("G&G expenses") decreased $646,000.
In the current and comparable periods, the Company incurred approximately
$142,000 and $788,000, respectively, of G&G expenses. The principal G&G expenses
in the current and prior periods were attributable to the Hawkins Ranch
Prospect. No material, additional G&G expenses are expected to be incurred in
the near future on the Hawkins Ranch Prospect.
Depletion, depreciation and amortization expenses decreased $444,000.
Reserve write-downs and property sales in the second half of 1998 contributed to
the lower depletion, depreciation and amortization expenses.
During the current period, dryhole expense decreased by $244,000. The
dryhole expense in the current period of $64,000 was due primarily to the
$36,000 Hawkins 60 #1 dryhole drilled in the first quarter. The dryhole expense
in the prior period of $307,000 consisted principally of a $199,000
25
<PAGE>
dryhole on the S. Highbaugh Prospect and additional dryhole expense of
$102,000 on two dryholes in the Reflection Ridge Prospect.
Interest expense increased $209,000 due to a higher average loan
balance. The loan balance was lower in the first quarter of the comparable
period compared to the second quarter of the comparable period because the Enex
Acqusition closed on March 27, 1998 and the Service Acquisition closed on April
16, 1998. In addition, advances on the $100 Million Revolver occurred in
February and April of the current period.
General and administrative expenses ("G&A") decreased $296,000.
Decreases in several expense categories contributed to the decrease. The primary
expense decrease was due to decreases in salary expense, office expense and
legal fees. The staff reductions at Enex and the closing of the Enex offices at
Kingwood contributed largely to the salary and office expense decreases.
Stock compensation decreased $67,000. No stock compensation expense was
incurred in the current period. The stock compensation expense in the prior
period was due to the vesting of restricted stock granted to certain executive
officers of the Company in February 1997. The stock became fully vested on June
30, 1998.
Other expenses increased $181,000. Bad debt expense of $100,000 and
other miscellaneous account adjustments resulted in the expense increase.
The Company reported an operating loss before minority interest of
$1,765,000 for current period versus an operating loss of $3,301,000 for the
comparable period. Due to the Enex Acquisition, the Company records a minority
interest on its income statement to remove the net income or loss attributable
to the minority interest holders of Enex (20%). In the current and comparable
periods, the minority interest decreased the operating loss by $64,000 and
$149,000, respectively. The minority interest in the current period accounted
only for the Enex operations while the minority interest in the comparable
period accounted for the operations of Enex and the Enex Partnership. The Enex
Partnership was acquired by the Company effective October 1, 1998.
The Company reported a deferred income tax benefit of $556,000 in the
current period versus a $1,072,000 benefit in the comparable period.
The Company reported a net loss of $1,145,000 for the current period
versus a net loss of $2,081,000 for the comparable period. After considering the
preferred stock dividend requirement of $286,000 in the current period versus
$67,000 in the comparable period, the Company reported a net loss available to
common stockholders in the current and comparable periods of $1,431,000 and
$2,149,000, respectively. The preferred dividends in the current period
represent six months of accrued dividends on the Series C preferred stock. The
preferred dividend in the comparable period represents accrued dividends on the
Series A preferred stock.
26
<PAGE>
ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (the "Statement"). The Statement establishes
standards of accounting for and disclosures of derivative instruments and
hedging activities. The Statement, as amended by SFAS No. 137, is effective for
fiscal years beginning after June 15, 2000. The Company has not yet determined
the impact of the Statement on the Company's financial condition or results of
operations.
FORWARD-LOOKING STATEMENTS
The Company may make forward looking statements, oral or written,
including statements in this report, press releases and other filings with the
SEC, relating to the Company's drilling plans, capital expenditures, the ability
of expected sources of liquidity to support working capital and capital
expenditure requirements, and the Company's financial position, business
strategy and other plans and objectives for future operations. Such statements
involve risks and uncertainties, including those relating to the Company's
dependence on acquisitions and exploratory drilling, the volatility of oil and
gas prices, the substantial capital requirements of the Company's business and
other factors detailed in filings with the SEC. All subsequent oral and written
forward looking statements attributable to the Company are expressly qualified
in their entirety by these factors. The Company assumes no obligation to update
these statements.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) There are no exhibits filed with this report
(b) On July 16, 1999, the Company filed a Form 8-K under Item 1
describing the securities purchase agreement between the Company and 3TEC Energy
Corporation.
27
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MIDDLE BAY OIL COMPANY, INC.
(Registrant)
Date: August 16, 1999 By: /s/ Frank C. Turner II
------------------------
Frank C. Turner II
Vice-President and
Chief Financial Officer
28
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,259,462
<SECURITIES> 0
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