1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
Commission file number 0-18836
MIDLAND RESOURCES, INC.
(Exact name of small business issuer as specified in its charter)
Texas 75-2286814
(State or other jurisdiction (IRS Employer
of incorporation) Identification Number)
16701 Greenspoint Park Drive, Suite 200, Houston, Texas 77060
(Address of principal executive offices)
(713) 873-4828
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, $.001 par value: 4,386,231 shares outstanding at March 31, 1996
2
Table of Contents
Page
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PART I. FINANCIAL INFORMATION
- - ------------------------------
Consolidated Balance Sheets as of March 31, 1996 (Unaudited)
and December 31, 1995 3
Unaudited Consolidated Statements of Operations for the three
month periods ended March 31, 1996 and March 31, 1995 5
Unaudited Consolidated Statements of Cash Flows for the three
month periods ended March 31, 1996 and March 31, 1995 6
Notes to Unaudited Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operation 8
PART II. OTHER INFORMATION
- - ---------------------------
Notes Concerning Other Information 11
SIGNATURES 12
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PART I - FINANCIAL INFORMATION
MIDLAND RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1996 1995
----------------- ------------------
Unaudited
ASSETS
- - ------
Current assets:
Cash $ 58,511 $ 514,610
Accounts receivable:
Oil and gas sales, net of allowance of $29,674 747,779 545,910
Related parties 179,735 97,681
Other 145,247 178,804
Marketable equitable securities held for sale 297,383 -
Property held for sale 255,073 255,073
Other current assets 77,188 106,865
Deferred tax asset 339,509 339,509
----------------- ------------------
Total current assets 2,100,425 2,038,452
Property and equipment, at cost, partially pledged:
Oil and gas properties and equipment,
using successful efforts method 21,955,298 21,505,685
Transportation equipment 255,140 264,565
Computer equipment and software 218,726 214,809
Office furniture and equipment 90,465 90,465
Land, building and leasehold improvements 101,983 100,612
Less accumulated depreciation, depletion
and amortization (12,032,391) (11,816,754)
----------------- ------------------
Property and equipment, net 10,589,221 10,359,382
Other assets:
Deferred tax asset 264,137 262,554
Goodwill, net of amortization 767,289 773,961
Contracts and leases, net of amortization 276,468 287,690
Note receivable 328,451 331,857
Other 41,330 69,456
----------------- ------------------
Total assets $ 14,367,321 $ 14,123,352
================= ==================
THE ACCOMPANYING NOTE IS AN INTEGRAL PART
OF THE FINANCIAL STATEMENTS.
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MIDLAND RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1996 1995
----------------- ------------------
Unaudited
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
Current liabilities:
Note payable to bank $ 70,000 $ -
Current portion of long-term debt 1,220,128 1,224,401
Accounts payable and accrued expenses:
Trade 873,672 726,302
Related parties 13,128 -
----------------- ------------------
Total current liabilities 2,176,928 1,950,703
Long-term debt, net of discount 4,551,072 4,524,617
Stockholders' equity:
Preferred stock, par value $0.01 per share; 20,000,000
shares authorized; none issued - -
Common stock, par value $0.001 per share; 80,000,000
shares authorized; 4,393,531 shares issued 4,394 4,394
Additional paid in capital 7,869,026 7,859,794
Treasury stock, at cost (7,300 shares) (15,053) (15,053)
Note receivable from officer/director (453,641) (453,641)
Retained earnings 249,461 252,538
Unrealized loss on marketable equity securities (14,866) -
----------------- ------------------
Total stockholders' equity 7,639,321 7,648,032
----------------- ------------------
Total liabilities and equity $ 14,367,321 $ 14,123,352
================= ==================
THE ACCOMPANYING NOTE IS AN INTEGRAL PART
OF THE FINANCIAL STATEMENTS.
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MIDLAND RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 31,
------------------------------------------
1996 1995
---------------- ---------------
Unaudited Unaudited
Operating revenue:
Oil and gas sales $ 1,493,141 $ 1,319,907
Management fees 15,000 25,500
Property operator fees 22,098 18,638
Other 1,153 16,967
---------------- ---------------
Total operating revenue 1,531,392 1,381,012
Operating costs and expenses:
Oil and gas production 681,785 608,520
Exploration costs 176,656 -
Abandonment loss - 1,267
Depreciation, depletion and amortization 234,102 299,206
General and administrative 305,846 304,183
---------------- ---------------
Total operating costs and expenses 1,398,389 1,213,176
---------------- ---------------
133,003 167,836
Other income and (expenses):
Loss on sale of property and equipment (1,889) -
Interest and other income 16,434 4,574
Interest expense (152,207) (146,699)
---------------- ---------------
Total other income and expenses (137,662) (142,125)
---------------- ---------------
Income (loss) before income taxes (4,659) 25,711
Deferred federal income tax expense (benefit) (1,582) 8,645
---------------- ---------------
Net income (loss) $ (3,077) $ 17,066
================ ===============
Net income (loss) per common share $ (0.001) $ 0.005
---------------- ---------------
Average shares outstanding 4,386,231 3,362,222
================ ===============
THE ACCOMPANYING NOTE IS AN INTEGRAL PART
OF THE FINANCIAL STATEMENTS.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31,
------------------------------------------
1996 1995
---------------- ---------------
Unaudited Unaudited
Cash flows from operating activities:
Net income (loss) $ (3,077) $ 17,066
Deferred federal income tax expense (benefit) (1,582) 8,645
Depreciation, depletion and amortization 234,102 299,206
Loss on sale of property and equipment 1,889 203
(Increase) decrease in accrued oil and gas sales (201,869) 87,985
Increase in receivable from related parties (82,054) (4,427)
Increase in due to related parties 13,128 5,279
Increase in accounts payable relating
to operations 147,370 83,889
(Increase) decrease in other current assets 63,234 (973)
Decrease in note receivable 3,406 -
Other 53,779 46,369
---------------- ---------------
Net cash provided by operating activities 228,326 543,242
Cash flows from investing activities:
Sales of property and equipment 1,000 250
Additions to property and equipment (466,831) (232,408)
Investment in marketable equity securities (312,249) -
---------------- ---------------
Net cash used in investing activities (778,080) (232,158)
Cash flows from financing activities:
Exercise of warrants 9,232 -
Short-term borrowing from bank 70,000 (5,000)
Long-term borrowing 600,000 -
Principal payments on long-term debt (585,577) (515,854)
---------------- ---------------
Net cash provided by financing activities 93,655 (520,854)
---------------- ---------------
Net increase (decrease) in cash (456,099) (209,770)
Cash, beginning of the period 514,610 326,955
---------------- ---------------
Cash, end of period $ 58,511 $ 117,185
================ ===============
THE ACCOMPANYING NOTE IS AN INTEGRAL PART
OF THE FINANCIAL STATEMENTS.
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MIDLAND RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
Note A. Organization and Significant Accounting Policies
Organization and Basis of Presentation
In July 1990, the Company acquired the interests of the seven Morgan
Energy Oil and Gas Income Programs ("Partnerships") pursuant to the
Partnerships' Consolidated Plan of Reorganization. This transaction was
accounted for under a method similar to the pooling of interest method.
On December 31, 1993, the Company acquired Midland Resources Operating
Company, Inc. (formerly Miresco, Inc.). The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary. Upon
consolidation, all intercompany accounts, transactions and profits are
eliminated.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company and its wholly owned subsidiary as of March
31, 1996, the results of operations for the three month periods ended March 31,
1996 and 1995 and cash flows for the three month periods ended March 31, 1996
and 1995. The results of operations for the periods presented are not
necessarily indicative of the results to be expected for a full year. The
accounting policies followed by the Company are set forth in more detail in
Note A of the "Notes to Financial Statements" in the Company's annual report on
Form 10-KSB filed with the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted in this Form 10-QSB pursuant to the rules and regulations
of the Securities and Exchange Commission. However, the disclosures herein are
adequate to make the information presented not misleading. It is suggested
that these financial statements be read in conjunction with the financial
statements and notes thereto included in the Form 10-KSB.
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MIDLAND RESOURCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Capital Resources and Liquidity.
Midland Resources, Inc., a Texas corporation, is an independent oil and
gas company engaged primarily in the acquisition, operation, production,
exploration and development of domestic oil and natural gas. The Company's
initial capitalization was through the acquisition of the interests of seven
public oil and gas income limited partnerships in exchange for common stock and
warrants of the Company. There were 2,264,522 shares of common stock issued
and, for each share of common stock issued, two warrants were issued entitling
the holder to purchase one share of common stock at $2.50 and one share at
$4.00 during the period November 1990 to November 2002. Outstanding warrants
may be redeemed by the Company, at its option, if the average market price (as
determined in the Warrant Agreement) of common stock exceeds the warrant
exercise price by 50 percent for a period of 90 consecutive calendar days. On
October 6, 1995, this requirement was met for the $2.50 warrant and the Company
called the $2.50 warrants. As of March 31, 1996, none of the $4.00 warrants
had been exercised.
On December 31, 1993, the Company acquired all of the issued and
outstanding common stock of Midland Resources Operating Company, Inc. ("MRO"),
an affiliate, through an agreement of acquisition under which the Company
issued 1,110,000 shares of common stock to Deas H. Warley III and Sal J.
Pagano, the former shareholders of MRO. The acquisition of MRO creates the
opportunity for the Company to expand its revenue base through property
operations.
The Company emphasizes the application of advanced technology to explore
for, develop and produce natural gas and oil. The Company's historical growth
has been primarily through the acquisition and subsequent development of oil
and gas properties. In 1995, the Company added three dimensional ("3D")
seismic exploration activities. The Company also emphasizes reducing operating
costs per equivalent barrel and selling marginal properties to increase its
profit margins.
The Company has the capability to conduct 3D numerical simulation for
petroleum reservoir evaluation, analysis, management and optimization. This
capacity should prove valuable in the economic assessment, reservoir
management, and future development of secondary recovery projects. In early
1995, the Company began a joint project with the federal government's Los
Alamos National Laboratory to develop computerized 3D reservoir modeling and
simulation of the Company operated Cope Waterflood Unit. The simulation model,
currently under active development, will be utilized to improve reservoir
management and enhance oil production by locating bypassed oil, determining
new infill drilling locations and designing optimum waterflood injection
patterns for increased oil recovery. Management believes the Company is one of
the few its size to possess this capability.
The Company acquired a 100 percent working interest with an 87.5 percent
net revenue interest in certain oil and gas properties in Ward County, Texas
from Conoco, Inc. on October 15, 1993 effective September 1, 1993. The
purchase price of $925,000 was adjusted for revenues and expenses from
September 1, 1993 through the closing date of October 15, 1993. Effective
January 1, 1994, the Company sold a 10 percent working interest in the Conoco
acquisition discussed above to Summit Petroleum Corporation, an affiliate, for
$85,696 which was 10 percent of $856,960, the Company's cost adjusted for
revenues and expenses through December 31, 1993. The successful drilling of
three additional Cherry Canyon wells during the fourth quarter of 1995 at a
cost to the Company of approximately $924,000, brings the total number of wells
operated by the Company in this field to ten. The three new wells were
completed with combined initial producing rates of 255 barrels of oil per day
("BOPD") and 540 thousand cubic feet of gas per day ("MCFD"). The Company
expects combined average production rates of approximately 100 BOPD and 265
MCFD, subject to normal declines.
Effective August 1, 1994, the Company acquired working interests in oil
and gas properties in Coke and Howard Counties, Texas, from Ricky W. Patterson,
E. W. Patterson and James A. Walton for the purchase price of $1,950,000 which
was adjusted for revenues and expenses from August 1, 1994 through the closing
date of August 15, 1994. The Company transferred ten percent of its interest
in these properties to Summit Petroleum Corporation ("Summit"), an affiliate,
for ten percent of the purchase price adjusted for revenues and expenses and
ten percent of the transaction costs.
The Company operated Jameson (Strawn) Field is located in the southwest
end of the Jameson feature in Coke and Sterling Counties approximately 80 miles
east of Midland, Texas. At the time the Company acquired the Jameson
properties,
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there were 21 gross wells which were shut-in for various reasons by the former
operator. Over a three year period the Company has returned 15 of these wells
to production and converted nearly 40 percent of the 54 currently producing
wells to a less expensive plunger lift method of artificial lift. The Jameson
properties also provide opportunities for reentries, infill drilling, and field
extension development drilling. In April, 1996 the Company completed a field
extension development well at a cost of approximately $319,000 and additional
wells are contemplated for the future. The new well was completed with initial
producing rates of 36 BOPD and 118 MCFD. The Company expects average
production rates of approximately 30 BOPD and 100 MCFD, subject to normal
declines.
In May, 1995, the Company acquired a 50 percent working interest and
operations in three state tracts in Redfish Bay field, Nueces County, Texas.
At the time of the acquisition there was marginal production from these tracts.
Under the acquisition agreement, the Company is required to expend certain
funds in the development of these tracts. The Company's performance is secured
by an $850,000 letter of credit issued by its bank in favor of the seller. The
Company began a rework program immediately and established a gas well at a cost
of the Company of approximately $41,000, which produced at initial rates of
1,550 MCFD of gas and 16 barrels of condensate per day. After six months of
production, the zone was depleted, and, in the first quarter of 1996, the
Company recompleted this wellbore to another zone at a cost to the Company of
approximately $53,000 with initial rates of 240 BOPD and 100 MCFD and expected
average production rates of approximately 150 BOPD and 60 MCFD, subject to
normal declines. Remaining development obligations under this agreement were
approximately $365,000 as of March 31, 1996. The Company's present credit
facility is expected to provide the funds needed.
A replacement well was drilled in the Company owned and operated Ackerly
(Dean) Field in Dawson County, Texas, at a cost to the Company of approximately
$402,000. This new flowing well, which was upstructure from an advancing
adjacent waterflood operated by a major oil company has initial producing rates
of 152 BOPD and 106 MCFD. The Company expects average production rates of
approximately 98 BOPD and 100 MCFD, subject to normal declines.
In 1995, the Company acquired three 3D seismic exploration projects in the
Permian Basin Northwestern Shelf located in Terry and Hockley Counties, Texas.
The Company has a 50 percent working interest in two of the projects and a 25
percent working interest in one. Summit will participate with the Company for
a 5 percent working interest in all three projects. MRO will operate the
projects. On May 8, 1996, the first of at least six exploration wells to be
drilled was spudded. The cost to the Company as of March 31, 1996 was
approximately $593,000, and the Company is committed to additional capital
costs of approximately $700,000 over the next nine months. The Company's
present credit facility is expected to provide the funds needed.
The Company's financing was obtained from First Union National Bank of
North Carolina ("First Union") under a $20,000,000 credit facility. Effective
June 1, 1995, this note was amended to provide 25 percent of the borrowing base
as working capital and to lower the interest rate from prime rate plus 1.5
percent to prime rate plus .75 percent. In exchange the bank received 150,000
warrants to purchase common stock at $4.00 per share. Amounts outstanding
under this loan agreement bear interest of nine percent at March 31, 1996
(prime rate plus .75 percent). Interest is payable monthly as it accrues.
Principal on this note is paid in monthly payments of $100,000 with the final
maturity in October, 1997. The principal balance outstanding on this loan was
$5,680,000 at March 31, 1996. This note is secured by the majority of the
Company's oil and gas properties. Cash flow from operations will be used to
retire this debt.
In the first three months of 1996, cash flow from operations was $228,326,
as compared to $543,242 for the same period of 1995. The increase in accrued
oil and gas sales accounts for the majority of this difference. The net loss was
$4,659 in 1996 and net income was $25,711 in 1995. Included in net income is
depletion, depreciation and amortization of $234,102 and $299,206 for 1996 and
1995, respectively. In 1996, the net loss also included exploration costs of
$176,656 of which there were none in 1995.
The Company's investing activities used cash flow of $778,080 in 1996 as
compared to $232,158 in 1995. The Company's investing activities in 1996 were
primarily related to the drilling, completion and recompletion of development
wells and open market purchases of readily marketable equity securities of
approximately $312,000. The Company has initiated activities to pursue
potential acquisitions of other oil and gas related companies and in connection
with such activities may acquire securities of such companies and engage
advisors for that purpose.
Net cash provided by financing activities was $93,655 in 1996 as compared
to cash used of $520,854 in 1995, an increase of $614,509, primarily a result
of increased borrowings.
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As of December 31, 1995, the Company had working capital of approximately
$88,000. As March 31, 1996, the Company had current assets of $2,100,425 and
current liabilities of $2,176,928 which resulted in negative working capital of
approximately $77,000. The Company believes cash flow from operations will be
sufficient to fund its existing operating needs. In addition, the Company has
under its present credit facility the ability to fund its capital needs.
As of March 31, 1996, the Company had total assets of approximately
$14,367,000 with approximately $2,177,000 in current liabilities and long-term
debt of approximately $4,551,000. This compares to December 31, 1995 when the
Company had total assets of approximately $14,123,000 with approximately
$1,951,000 in current liabilities and long-term debt of approximately
$4,525,000. Current assets were approximately 15 and 14 percent of total
assets at March 31, 1996 and December 31, 1995, respectively.
The prices of crude oil have fluctuated significantly in recent years as
well as in recent months. As of January 1, 1996, the posted price was $18.00
per barrel for West Texas Intermediate crude. As of April 1, 1996, the posted
price was $20.75 per bbl. These fluctuations have a significant impact on the
Company's financial condition and liquidity. However, management believes it
can maintain adequate liquidity for future needs.
Results of Operations - Three Months Ended March 31, 1996 and 1995
Net income decreased from $17,066 for the three months ended March 31,
1995 to a net loss of $3,077 for the same period in 1996, a decrease of
$20,143. Included in net income for 1996 was exploration costs of $176,656 for
which there was no similar item in 1995. Individual categories of income and
expense are discussed below.
Oil and gas sales increased from $1,319,907 in the first quarter of 1995
to $1,493,141 in the same period of 1996. This increase of $173,234 or 13
percent resulted from increased oil and gas prices and oil production offset in
part by decreased gas production. Oil and gas sales included a $4,709 gain in
1995 and a $25,860 loss in 1996 from gas swap contracts. Oil and gas
production quantities were 44,136 bbls and 305,767 mcf in 1995 and 52,876 bbls
and 250,233 mcf in 1996, an increase of 8,740 bbls or 19 percent and a decrease
of 55,534 mcf or 18 percent. Average gas prices increased from $1.81 per mcf
in 1995 to $2.16 per mcf in 1996, while average oil prices increased from
$17.26 per bbl in 1995 to $18.49 per bbl in 1996.
Production costs increased from $608,520 in the first quarter of 1995 to
$681,785 for the same period of 1996, an increase of $73,265 or 12 percent.
This increase was primarily attributable to major repairs, including bottom
hole pump repairs.
General and administrative expenses (G&A) remained relatively constant
between 1995 and 1996.
Depreciation, depletion and amortization ("DD&A") based on production and
other methods decreased from $299,206 in the first quarter of 1995 to $234,102
in the same period of 1996, a decrease of $65,104 or 22 percent, due primarily
to increased reserve quantities.
Interest expense increased from $146,699 for the first quarter of 1995 to
$152,207 for the same period of 1996, an increase of $5,508.
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PART II - OTHER INFORMATION
Item 1. Legal proceedings
None.
Item 2. Changes in securities
None.
Item 3. Defaults upon senior securities
None.
Item 4. Submission of matters to a vote of security holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and reports on Form 8-K
a. Exhibits: 27 Art. 5 FDS for 1st QTR 10-QSB
b. Reports on Form 8-K - None
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, hereunto duly
authorized.
MIDLAND RESOURCES, INC.
(Registrant)
Date: May 15, 1996 By: /s/ Deas H. Warley III
-------------------------------------
Deas H. Warley III, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the
Registrant and in the capacity and on the date Indicated:
Dated: May 15, 1996 By: /s/ Darrell M. Dillard
-------------------------------------
Darrell M. Dillard, Chief Financial Officer
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EXHIBIT INDEX
Exhibit
Number Description
- - ------- -----------
27 Article 5 Financial Data Schedule
for first quarter 10-QSB