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 March 31, 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
8,530,589 shares as of April 30, 1999
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES
INDEX
Page
No.
------
Part I. Consolidated Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets (Unaudited)-
March 31, 1999 and December 31, 1998 ........................................... 1
Consolidated Statements of Operations (Unaudited)-
Three months ended March 31, 1999 and 1998 ..................................... 2
Consolidated Statements of Cash Flows (Unaudited)-
Three months ended March 31, 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....................... 12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K ............................................ 21
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (AUDITED)
MARCH DECEMBER 31
1999 1998
------------- ------------
ASSETS
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 1,220,228 $ 1,040,096
ACCOUNTS RECEIVABLE 2,723,179 3,309,043
ACCOUNTS RECEIVABLE-INSURANCE CLAIM 388,083 448,083
OTHER CURRENT ASSETS 62,121 141,364
------------- ------------
TOTAL CURRENT ASSETS 4,393,611 4,938,586
NON-CURRENT ASSETS
NOTES RECEIVABLE- STOCKHOLDER 174,853 173,115
PROPERTY (AT COST)
OIL AND GAS (SUCCESSFUL EFFORTS METHOD) 90,439,359 90,849,439
OTHER 830,620 795,323
------------- ------------
91,269,979 91,644,762
ACCUMULATED DEPLETION, DEPRECIATION AND AMORTIZATION (40,015,555) (39,073,584)
------------- ------------
51,254,424 52,571,178
OTHER ASSETS 243,431 257,938
------------- ------------
TOTAL ASSETS $ 56,066,319 $ 57,940,817
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
CURRENT MATURITY OF LONG-TERM DEBT $ 964,215 $ --
ACCOUNTS PAYABLE-TRADE 3,218,496 3,643,241
ACCOUNTS PAYABLE-ENEX LP LIMITED PARTNERS 22,914 538,750
ACCOUNTS PAYABLE-REVENUE 461,536 342,931
OTHER CURRENT LIABILITIES 278,734 275,010
------------- ------------
TOTAL CURRENT LIABILITIES 4,945,895 4,799,932
LONG-TERM DEBT 27,006,352 27,454,567
DEFERRED INCOME TAXES 1,311,040 1,733,167
OTHER LIABILITIES 394,537 437,949
MINORITY INTEREST 947,599 957,369
STOCKHOLDERS' EQUITY
PREFERRED STOCK, $0.02 PAR, 10,000,000 SHARES AUTHORIZED AT MARCH 31, 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 MARCH 31, 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,
1,142,663 SHARES ISSUED AND OUTSTANDING AT MARCH 31, 1999 AND
DECEMBER 31, 1998. $5,713,317 AGGREGATE LIQUIDATION PREFERENCE 5,233,418 5,281,937
COMMON STOCK, $.02 PAR VALUE, 20,000,000 SHARES AUTHORIZED,
8,552,364 SHARES ISSUED AND OUTSTANDING AT
MARCH 31, 1999 AND DECEMBER 31, 1998 171,055 171,055
PAID-IN-CAPITAL 36,947,588 36,947,588
ACCUMULATED DEFICIT (24,450,124) (23,401,707)
LESS COST OF TREASURY STOCK; 21,773 SHARES (68,040) (68,040)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 21,460,897 22,557,833
COMMITMENTS AND CONTINGENCIES
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 56,066,319 $ 57,940,817
------------- ------------
------------- ------------
See accompanying notes to consolidated financial statements.
1
MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
THREE MONTHS ENDED
MARCH 31 MARCH 31
1999 1998
------------ -----------
REVENUE
OIL AND GAS SALES AND PLANT INCOME $ 3,072,064 $ 2,632,248
GAIN ON SALE OF PROPERTIES 74,298 --
DELAY RENTAL AND LEASE BONUS INCOME 3,000 --
OTHER 99,777 124,642
------------ -----------
TOTAL REVENUE 3,249,139 2,756,890
----------- -----------
COSTS AND EXPENSES
LEASE OPERATING, PRODUCTION TAXES AND PLANT COSTS 1,460,541 1,184,048
GEOLOGICAL AND GEOPHYSICAL 69,557 745,713
DEPRECIATION, DEPLETION AND AMORTIZATION 1,349,630 1,118,136
DRYHOLE 62,189 468,951
INTEREST 511,756 255,453
GENERAL AND ADMINISTRATIVE 1,120,317 1,093,403
----------- -----------
TOTAL COSTS AND EXPENSES 4,573,990 4,865,704
LOSS BEFORE INCOME TAX BENEFIT AND MINORITY INTEREST (1,324,851) (2,108,814)
MINORITY INTEREST (9,770) --
----------- -----------
LOSS BEFORE INCOME TAX BENEFIT (1,315,081) (2,108,814)
INCOME TAX BENEFIT (409,494) (728,472)
----------- -----------
NET LOSS (905,587) (1,380,342)
DIVIDENDS TO PREFERRED STOCKHOLDERS 142,833 67,945
----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS ($1,048,420) ($1,448,287)
------------ -----------
------------ -----------
NET LOSS PER SHARE
Basic ($ 0.12) ($ 0.22)
------------ -----------
------------ -----------
Diluted ($ 0.12) ($ 0.22)
------------ -----------
------------ -----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 8,530,592 6,719,656
------------ -----------
------------ -----------
Diluted 8,530,592 6,719,656
------------ -----------
------------ -----------
See accompanying notes to consolidated financial statements.
2
MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED (UNAUDITED)
MARCH 31 MARCH 31
1999 1998
------------ ------------
OPERATING ACTIVITIES
NET LOSS $ (905,587) $ (1,414,092)
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
DEPLETION, DEPRECIATION AND AMORTIZATION 1,349,630 1,118,136
DRYHOLE COSTS 62,189 468,951
STOCK COMPENSATION EXPENSE -- 33,750
GAIN ON SALE OF PROPERTIES (74,298) --
DEFERRED INCOME TAX BENEFIT (422,127) (728,472)
MINORITY INTEREST (9,770) --
OTHER CHARGES 60,000 --
CHANGES IN CURRENT ASSETS AND LIABILITIES, NET
OF ACQUISITION EFFECTS:
ACCOUNTS RECEIVABLE AND OTHER CURRENT ASSETS 754,736 630,631
ACCOUNTS PAYABLE, REVENUE PAYABLE,
AND OTHER CURRENT LIABILITIES (703,183) 1,455,187
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 111,590 1,564,091
INVESTING ACTIVITIES
PROCEEDS FROM SALES OF PROPERTIES 73,321 --
ADDITIONS TO OIL AND GAS PROPERTIES (468,037) (1,669,971)
ACQUISITION OF ENEX RESOURCES CORPORATION, NET OF
CASH ACQUIRED OF $4,698,211 -- (11,268,268)
OTHER ASSETS (2,486) (99,779)
ADVANCES TO STOCKHOLDER (1,738) (1,737)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (398,940) (13,039,755)
FINANCING ACTIVITIES
PROCEEDS FROM DEBT ISSUED 516,000 26,969,604
PRINCIPAL PAYMENTS ON DEBT -- (10,957,396)
PREFERRED STOCK DIVIDENDS -- (67,945)
REGISTRATION COSTS ON SERIES C PREFERRED STOCK (48,518) --
OTHER -- (108,750)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 467,482 15,835,513
NET INCREASE IN CASH AND CASH EQUIVALENTS 180,132 4,359,849
CASH AND CASH EQUIVALENTS- BEGINNING 1,040,096 1,587,184
------------ ------------
------------ ------------
CASH AND CASH EQUIVALENTS- ENDING $ 1,220,228 $ 5,947,033
------------ ------------
------------ ------------
SUPPLEMENTAL CASH FLOW INFORMATION:
INTEREST PAID IN CASH $ 363,864 $ 255,453
------------ ------------
------------ ------------
CONVERSION OF SERIES A PREFERRED STOCK -- $ 10,000,000
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
3
MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 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 March 31, 1999 and December 31, 1998 and the consolidated
results of operations and consolidated cash flows for the periods ended March
31, 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
MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 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 1,417,709 and 390,501
common stock equivalents are not considered in the 1999 and 1998 calculation of
diluted earnings per share for the three month periods ending March 31,
respectively, due to the net loss recorded during these periods.
(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)
Working capital $ 5,640
Oil and gas properties (proved and unproved) 19,090
Minority interest (7,669)
--------
Total $17,061
========
5
MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 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 1,293,522 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
MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 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):
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
-------
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):
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
======
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):
Working capital $ (539)
Oil and gas properties (23)
Minority interest 5,844
-------
Series C Preferred Stock $5,282
=======
7
MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999
(Unaudited)
(2) ACQUISITIONS (continued)
The following pro forma data presents the results of the Company for
the three months ended March 31, 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):
ProForma
Three Months Ended
March 31, 1998
(Unaudited)
Total revenues $6,141
Net loss available to stockholders (2,158)
Net loss per share available to stockholders (0.29)
(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 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. At March 31, 1999, the
Company had recorded the estimated remaining amount due from the insurance
company in current assets as Accounts Receivable-Insurance Claim.
8
MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999
(Unaudited)
(5) LONG-TERM DEBT
March 31 December 31
1999 1998
----------- -------------
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 $290,000 effective November 1, 1998
and monthly payments of interest at Libor plus 2.00% and prime.
At March 31, 1999 the Libor and prime rates were 5.00% and 7.75%,
respectively 27,970,567 27,454,567
Less current maturities 964,215 ---
----------- -----------
Long-term debt excluding current
maturities $27,006,352 $27,454,567
=========== ===========
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 March 31, 1999 was $31 million and monthly borrowing base reduction
requirements are $290,000.
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 March 31, 1999, the Company had borrowed $27,970,567 and had
$1,163,647 of outstanding letters of credit. As of March 31, 1999, the Company
is paying Libor plus 2.00% on a sixty day Libor loan for $25,985,605 and prime
on $1,984,962.
9
MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999
(Unaudited)
(5) LONG-TERM DEBT (continued)
At March 31, 1999, the amount available under the borrowing base on
the $100 million revolver was approximately $2.5 million. The April 1st
borrowing base redetermination is expected to be completed by May 31st.
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.
(6) COMMON STOCK
On February 9, 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
ten years from date of grant if not exercised.
10
MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999
(Unaudited)
(7) COMMITMENTS AND CONTINGENCIES
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.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
- -------------------------------
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Cash flow from operating activities for the current period of $112,000
decreased $1,452,000 from the comparable period. The decrease in cash flow was
due primarily to working capital changes offset partially by lower geological
and geophysical expenses. Cash flow from oil and gas properties (oil and gas
revenues and plant income less lease operating expenses, production taxes and
plant costs) increased $164,000 over the comparable period. Oil and gas prices
decreased 29% and 29%, respectively, while oil and gas production increased 55%
and 78%, respectively. 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 Acquisition 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. The Company made no principal
payments on the $100 million Revolver during the current period. In the
comparable period, the Company refinanced its existing debt with the $100
million Revolver. 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. In the comparable period, the Company refinanced its
existing debt and financed the Enex Acquisition with proceeds from the $100
million Revolver.
The Company's operating activities provided net cash of $112,000 for the
current period. During this period, net cash from operations, cash from property
sales and cash on hand was used principally for leasehold acquisitions and
exploratory and developmental drilling. Approximately $167,000 was spent on
leasehold and legal costs on the Hawkins Ranch Prospect. Approximately $253,000
was spent on exploratory and developmental drilling. The principal exploratory
well in the current period was the Hawkins 60 #1 ($36,000), drilled on the
Hawkins Ranch Prospect, which was a dry hole. The developmental work was
throughout several fields.
The Company had current assets of $4,394,000 and current liabilities of
$4,946,000, which resulted in working capital deficit of $552,000 as of March
31, 1999. This was a decrease in working capital of $691,000 from the 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 1.10,
calculated under the terms of the $100 million Revolver
12
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 March 31, 1999 was $31.6 million. At March 31,
1999 the Company had borrowed $27,970,000 and had $1,164,000 of outstanding
letters of credit. During the current period, the Company did not make any
payments and was advanced $516,000 under the $100 million Revolver. The Company
is currently paying Libor plus 2.00% on a sixty day Libor loan for $25,985,000
and prime on $1,985,000.
At March 31, 1999, the amount available under the borrowing base on
the $100 million revolver was approximately $2.5 million. The April 1st
borrowing base redetermination is expected to be completed by May 31st.
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 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
13
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 March 31, 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.
Future Capital Requirements
- ---------------------------
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 $500,000 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 1999 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.
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
14
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 March 31, 1999, the amount available under the borrowing base on the
$100 million revolver was approximately $2.5 million. Assuming no other changes,
the amount available to be borrowed at October 1, the next borrowing base
redetermination date, will be approximately $0.5 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.
The Company has fully consolidated the operations of Enex and the Enex
Partnership into its operations at the Company's headquarters in Houston.
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.
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
15
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
systems.
Status: The Company has updated its accounting systems. Testing is
scheduled to be completed by June 30, 1999.
Contingency Plans: The Company is currently considering contingency plans for
processing its accounting data. Depending on the results of
the testing phase, contingency plans will be developed.
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.
16
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 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.
17
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 anticipates that all non-compliant, in-house
mission-critical systems will be substantially remediated by
December 31, 1998 and substantially completed by March 31,
1999 for vendor-supported systems. The Company's principal
bank expects to have all of its non-compliant,
mission-critical systems Y2K compliant by 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.
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
18
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.
Results of Operations
- ---------------------
Three months ended March 31, 1999 and 1998
- ------------------------------------------
For the three months ended March 31, 1998, the revenues and expenses do
not include the Enex Acquisition, the Service Acquisition or the Enex
Partnership Acquisition.
Total revenues for the current period of $3,249,000 were $492,000 higher
than the comparable period. The increase in total revenues was due principally
to increases in oil and gas revenues of $440,000.
The increase in oil and gas revenues consisted of a $126,000 increase in
oil revenues, a $312,000 increase in gas revenues and a $2,000 increase in other
revenues. The increase in oil and gas revenues was the result of higher oil and
gas production. Production of oil increased 55% and production of gas increased
78%, over the comparable period. The oil production increase of 51,000 barrels
and the gas production increase of 409,000 Mcf, were due primarily to the Enex,
Service and Enex Partnership Acquisitions. During the current period, the
Company sold 144,000 barrels of oil and 930,000 Mcf of gas, as compared to
93,000 barrels and 521,000 Mcf for the comparable period. The average price
received on the gas sold in the current period of $1.61 per Mcf was 29% lower
than the $2.28 per Mcf received in the comparable period. The average price
received on the oil sold in the current period of $9.87 per barrel was 29% lower
than the $13.94 per barrel received in the comparable period.
Total expenses decreased $292,000 over the comparable period. Due to the
growth of the Company, all categories of expenses increased, except dryhole and
geological and geophysical expenses.
19
Lease operating expenses increased $276,000. The increase was due
principally to the additional expenses on the properties acquired in the Enex,
Service and Enex Partnership Acquisitions that closed in 1998.
Geological and geophysical expenses ("G&G expenses") decreased $676,000.
In the comparable period, the Company spent approximately $740,000 on the
Hawkins Ranch Prospect versus only $4,000 in the current period. The Company
began the drilling phase of the Hawkins Ranch Prospect in the current period. No
additional G&G expenses are expected to be incurred in the near future on the
Hawkins Ranch Prospect.
Depletion, depreciation and amortization expense increased $231,000.
Depletion was higher due to depletion on properties acquired in the Enex,
Service and Enex Partnership Acquisitions which closed in 1998.
During the current period, dryhole expenses decreased by $407,000. In
the current period the dryhole expense of $62,000 consisted principally of
$36,000 for the dryhole on the Hawkins Ranch Prospect. Dryhole expenses in the
comparable period consisted of several unsuccessful wells in Texas, Louisiana
and Kansas.
Interest expense increased $256,000, due primarily to a higher loan
balance. The loan balance increased as a result of the funds borrowed to finance
the Enex Acquisition and to partially finance the Service and Enex Partnership
Acquisitions.
General and administrative expenses ("G&A") increased $27,000.
Increases in several expense categories were offset by decreases in several
expense categories. The primary expense increase was due to increases in rent
expense, office expense, accounting fees and tax reporting fees relating to
the Enex Acquisition. The primary expense decrease was due to decreases in
salary expense, legal fees, and bank charges. Salary expense decreased
because of the $132,000 performance bonus paid in the comparable period.
Excluding the effect of the performance bonus, salary expense would have
increased approximately 58% over the comparable period.
The Company reported an operating loss before minority interest of
$1,325,000 for current period versus an operating loss of $2,109,000 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 period the
minority interest decreased the operating loss by $10,000.
The Company reported a deferred income tax benefit of $409,000 in the
current period versus a $728,000 benefit in the comparable period.
The Company reported a net loss of $906,000 for the current period
versus a net loss of $1,380,000 for the comparable period. After considering the
preferred stock dividend requirement of $143,000 in the current period versus
$68,000 in the comparable period, the Company reported a net loss available to
common stockholders in the current and comparable periods of $1,048,000 and
$1,448,000, respectively.
20
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) There are no exhibits filed with this report
(b) On January 14, 1999, the Company filed a Form 8-K under Item 2
describing the acquisition of substantially all of the assets of Enex
Consolidated Partners LLP.
21
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: May 17, 1999 By: /s/ Frank C. Turner II
------------------------------
Frank C. Turner II
Vice-President and
Chief Financial Officer
22