-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IAZYPEGyhEKTva9Yucyg6rBC6CM/iLe9JLrJUOODCge32+R6bqLA1w7V8DPNx/2X avyeOEYKiOo5zXmpo+3evg== 0000950144-97-012440.txt : 19971117 0000950144-97-012440.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950144-97-012440 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MIDDLE BAY OIL CO INC CENTRAL INDEX KEY: 0000903267 STANDARD INDUSTRIAL CLASSIFICATION: OIL AND GAS FIELD EXPLORATION SERVICES [1382] IRS NUMBER: 631081013 STATE OF INCORPORATION: AL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-21702 FILM NUMBER: 97722093 BUSINESS ADDRESS: STREET 1: 115 S DEARBORNE ST CITY: MOBILE STATE: AL ZIP: 36602 BUSINESS PHONE: 3344327540 MAIL ADDRESS: STREET 1: PO BOX 390 CITY: MOBILE STATE: AL ZIP: 36602 10QSB 1 MIDDLE BAY OIL COMPANY INC 1 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 September 30, 1997 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.) 115 SOUTH DEARBORN STREET MOBILE, ALABAMA 36602 (Address of principal executive offices) (334) 432-7540 (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 4,471,420 shares as of October 31, 1997 Transitional Small Business Disclosure Format (check one) Yes [ ] No [X] 2 MIDDLE BAY OIL COMPANY, INC. INDEX
Page No. ---- PART I. CONSOLIDATED FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets- September 30, 1997 and December 31, 1996 ........................... 1 Consolidated Statements of Operations- Nine months ended September 30, 1997 and 1996 ...................... 2 Consolidated Statements of Cash Flows- Nine months ended September 30, 1997 and 1996 ...................... 3 Notes to Consolidated Financial Statements ............................ 4 Item 2. Management's Discussion and Analysis or Plan of Operation ....................................... 19 PART II. Item 1. Legal Proceedings None Item 2 Changes in Securities None Item 3 Defaults in Senior Securities None Item 4 Submission of Matters for a vote of Security Holders None Item 5 Other Information None Item 6 Exhibits & Reports on Form 8-K (a) exhibits Exhibit 27 - Financial (Data Schedule for SEC use only) (b) Reports on Form 8-K
As previously reported on the Company's 10-QSB for the quarter ended June 30, 1997, the Company, on July 3, 1997, filed a report on form 8-K under Items 2 and 7 describing the Company's Agreement and Plan of Merger with Shore Oil Company whereby Shore Oil Company would become a wholly-owned subsidiary of the Company for company stock and cash effective June 30th, 1997. The Company filed an amendment to this form 8-K on September 3, 1997, whereby the Company submitted audited financial statements, unaudited Pro-forma financial information and certain exhibits under Item 7. 3 PART I- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MIDDLE BAY OIL COMPANY, INC. CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (AUDITED) SEPT 30 DECEMBER 31 1997 1996 ------------- ------------ ASSETS CURRENT ASSETS CASH $ 2,491,754 $ 556,026 NOTES AND ACCOUNTS RECEIVABLE- TRADE 2,201,971 1,129,417 OTHER CURRENT ASSETS 347,902 58,137 ------------ ------------ TOTAL CURRENT ASSETS 5,041,627 1,743,580 NON-CURRENT ASSETS NOTES RECEIVABLE- STOCKHOLDER 164,186 159,215 ------------ ------------ 164,186 159,215 PROPERTY (AT COST) OIL AND GAS (SUCCESSFUL EFFORTS METHOD) 57,104,073 16,252,576 FURNITURE, FIXTURES AND OTHER 772,921 354,603 ------------ ------------ 57,876,994 16,607,179 ACCUMULATED DEPRECIATION AND DEPLETION (7,923,438) (5,332,517) ------------ ------------ 49,953,556 11,274,662 OTHER ASSETS 17,962 7,523 TOTAL ASSETS $ 55,177,330 $ 13,184,980 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES CURRENT MATURITY OF LONG-TERM DEBT $ 920,825 $ 554,601 ACCOUNTS PAYABLE AND ACCRUED EXPENSES 1,209,603 402,796 OTHER CURRENT LIABILITIES 55,382 - ------------ ------------ TOTAL CURRENT LIABILITIES 2,185,810 957,397 LONG-TERM DEBT 10,171,318 5,158,477 DEFERRED INCOME TAXES 7,469,443 610,785 REDEEMABLE COMMON STOCK - 421,179 STOCKHOLDERS' EQUITY PREFERRED STOCK, $0.02 PAR, 5,000,000 AUTHORIZED WITH 1,666,667 DESIGNATED SERIES A, NONE OTHER ISSUED CUMULATIVE CONVERTIBLE SERIES A 8% PREFERRED STOCK, $6.00 STATED VALUE, 1,666,667 - - DESIGNATED, 1,666,667 AND 166,667 SHARES ISSUED AND OUTSTANDING AT SEPTEMBER 30, 1997 AND DECEMBER 31, 1996, RESPECTIVELY. $10,000,000 AGGREGATE LIQUIDATION PREFERENCE 10,000,000 1,000,000 CONVERTIBLE PREFERRED STOCK SERIES B, $7.50 STATED VALUE, 266,667 SHARES ISSUED AND OUTSTANDING AT SEPTEMBER 30, 1997, $2,000,000 AGGREGATE LIQUIDATION PREFERENCE 3,627,000 - COMMON STOCK, $.02 PAR VALUE, 10,000,000 AUTHORIZED, 4,493,193+A85 AND 1,880,917 SHARES ISSUED AND OUTSTANDING AT SEPTEMBER 30, 1997 AND DECEMBER 31, 1996, RESPECTIVELY 89,871 37,618 PAID-IN-CAPITAL 22,769,689 6,049,442 LESS REDEEMABLE COMMON STOCK - (421,179) UNEARNED STOCK COMPENSATION (168,750) - DEFICIT (899,011) (560,699) LESS COST OF TREASURY STOCK; 21,773 SHARES AT SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 (68,040) (68,040) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 35,350,759 6,037,142 COMMITMENTS AND CONTINGENCIES TOTAL LIABILITIES AND EQUITY $ 55,177,330 $ 13,184,980 ============ ============
See accompanying notes. 1 4 MIDDLE BAY OIL COMPANY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED
THREE MONTHS ENDED NINE MONTHS ENDED SEPT 30 SEPT 30 SEPT 30 SEPT 30 1997 1996 1997 1996 ------------- ----------- ------------ ----------- REVENUE OIL AND GAS PRODUCTION AND PLANT INCOME $3,219,377 $ 1,103,117 $ 6,913,475 $3,186,255 INTEREST 37,464 4,145 45,054 10,335 OTHER 1,738 19,617 48,969 351,734 WELL OPERATING INCOME 135,584 - 335,586 - LEASE BONUS AND DELAY RENTAL INCOME 890,010 - 890,010 - GAIN ON SALE OF PROPERTY - - 3,867 37,814 ---------- ----------- ----------- ---------- TOTAL REVENUE 4,284,172 1,126,879 8,236,960 3,586,138 ---------- ----------- ----------- ---------- COSTS AND EXPENSES WELL OPERATING $1,280,213 $ 332,496 $ 2,796,896 $1,104,066 EXPLORATION EXPENSES 16,254 - 131,445 - DEPRECIATION, DEPLETION AND AMORTIZATION 1,552,642 362,365 2,607,459 901,995 ABANDONMENT 210,414 158,033 446,133 249,568 INTEREST 218,553 128,809 478,296 375,799 STOCK COMPENSATION EXPENSE 101,250 101,250 - GENERAL AND ADMINISTRATIVE 651,202 170,161 1,604,902 511,048 ---------- ----------- ----------- ---------- TOTAL EXPENSES 4,030,528 1,151,864 8,166,381 3,142,476 INCOME (LOSS) BEFORE INCOME TAXES 253,644 (24,985) 70,579 443,662 INCOME TAXES - - - - ---------- ----------- ----------- ---------- NET INCOME (LOSS) 253,644 (24,985) 70,579 443,662 DIVIDENDS TO PREFERRED STOCKHOLDERS 204,444 - 408,889 - ---------- ----------- ----------- ---------- NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 49,200 $ (24,985) $ (338,310) $ 443,662 ========== =========== =========== ========== AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 4,457,531 1,310,638 3,033,236 1,318,917 ========== =========== =========== ========== NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE $ 0.01 $ (0.02) $ (0.11) $ 0.34 ========== =========== =========== ==========
See accompanying notes. 2 5 MIDDLE BAY OIL COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED UNAUDITED
SEPT 30 SEPT 30 1997 1996 ------------- ----------- OPERATING ACTIVITIES NET INCOME $ 70,579 $ 443,661 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES DEPLETION, DEPRECIATION AND AMORTIZATION 2,607,459 901,995 STOCK COMPENSATION EXPENSE 101,250 - CHANGES IN CURRENT ASSETS AND LIABILITIES EXCLUDING EFFECTS OF BUSINESS ACQUISITIONS: ACCOUNTS RECEIVABLE 471,535 335,456 ACCOUNTS PAYABLE AND ACCRUED EXPENSES (665,497) (585,819) GAIN ON SALE OF PROPERTIES - (37,814) OTHER CHARGES (CREDITS) (163,659) (2,288) ------------ ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,421,668 1,055,191 INVESTING ACTIVITIES PROCEEDS FROM SALES OF PROPERTIES 1,445,890 40,000 ADDITIONS TO OIL AND GAS PROPERTIES (6,215,345) (1,116,566) PURCHASE OF EQUIPMENT (47,963) (1,827) ACQUISITION OF BISON ENERGY CORPORATION, NET OF CASH ACQUIRED OF $994,367 (7,139,914) - ACQUISITION OF SHORE OIL COMPANY, NET OF CASH ACQUIRED OF $2,057,467 (514,299) - FURNITURE, FIXTURES AND OTHER ASSETS (70,288) (10,229) PROCEEDS FROM SALE OF REAL ESTATE - 75,000 ADVANCES TO+A110 STOCKHOLDER (4,971) (4,971) ------------ ----------- NET CASH USED IN INVESTING ACTIVITIES (12,546,890) (1,018,593) FINANCING ACTIVITIES PROCEEDS FROM COMMON STOCK ISSUED 195,775 - PROCEEDS FROM PREFERRED STOCK ISSUED 9,000,000 - PROCEEDS FROM DEBT ISSUED 5,769,702 483,766 PRINCIPAL PAYMENTS ON DEBT (2,495,638) (206,109) PURCHASE OF STOCK FOR TREASURY - (68,040) PREFERRED STOCK DIVIDENDS (408,889) - ------------ ----------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 12,060,950 209,617 NET INCREASE (DECREASE) IN CASH 1,935,728 246,215 CASH- BEGINNING 556,026 80,791 ------------ ----------- CASH- ENDING $ 2,491,754 $ 327,006 ============ =========== SUPPLEMENTAL CASH FLOW INFORMATION: INTEREST PAID IN CASH $ 478,296 $ 375,799 ============ =========== COMMON STOCK ISSUED IN ACQUISITION OF BISON ENERGY CORPORATION $ 3,330,559 - ============ =========== COMMON STOCK ISSUED IN ACQUISITION OF SHORE OIL COMPANY $ 12,976,164 - ============ =========== PREFERRED STOCK-SERIES B ISSUED IN ACQUISITION OF SHORE OIL COMPANY $ 3,627,000 - ============ =========== DEBT ASSUMED IN ACQUISITION OF SHORE OIL COMPANY $ 2,105,000 - ============ ===========
See accompanying notes. 3 6 MIDDLE BAY OIL COMPANY, INC. Notes to Consolidated Financial Statements September 30, 1997 and 1996 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Middle Bay Oil Company, Inc. (the Company), was incorporated under the laws of the State of Alabama on November 30, 1992. The Company and its wholly-owned subsidiaries (collectively referred to as the Company) 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 September 30, 1997 and the consolidated results of operations and consolidated cash flows for the nine months ended September 30, 1997 and 1996. The accompanying consolidated financial statements have not been audited by an independent accountant. 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, 1996. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. 4 7 MIDDLE BAY OIL COMPANY, INC. Notes to Consolidated Financial Statements September 30, 1997 and 1996 Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Significant intercompany accounts and transactions are eliminated in consolidation. Statements of Cash Flows For purposes of the statements of cash flows, the Company classifies all cash investments with original maturities of three months or less as cash. Accounts Receivable The Company sells crude oil and natural gas to various customers. In addition, the Company participates with other parties in the operation of crude oil and natural gas wells. Substantially all of the Company's accounts receivable are due from either purchasers of crude oil and natural gas or participants in crude oil and natural gas wells for which the Company serves as the operator. Generally, operators of crude oil and natural gas properties have the right to offset future revenues against unpaid charges related to operated wells. Crude oil and natural gas sales are generally unsecured. Properties The Company follows the "successful efforts" method of accounting for its oil and gas properties. Under the successful efforts method, costs of acquiring undeveloped oil and gas leasehold acreage, including lease bonuses, brokers' fees and other related costs are capitalized. Provisions for impairment of undeveloped oil and gas leases are based on periodic evaluations. Annual lease rentals and exploration expenses, including geological and geophysical expenses and exploratory dry hole costs, are charged against income as incurred. Costs of drilling and equipping productive wells, including developmental dry holes and related production facilities are capitalized. 5 8 MIDDLE BAY OIL COMPANY, INC. Notes to Consolidated Financial Statements September 30, 1997 and 1996 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Properties (continued) Depletion, depreciation and amortization of capitalized costs are computed separately for each property based on the unit-of-production method using only proved oil and gas reserves. In arriving at such rates, commercially recoverable reserves have been estimated by an independent petroleum engineering firm. If the capitalized costs of total proved properties exceed the sum of undiscounted estimated future net revenues before income taxes from total proved reserves (determined on a field-by-field basis), such excess is charged to expense in the period in which it occurs and is not reinstated. With respect to normal dispositions, the cost of properties retired or otherwise disposed of, and the applicable accumulated depreciation, depletion and amortization are removed from the accounts, and the resulting profit or loss, if any, is reflected in current operations. Site Restoration, Dismantlement & Abandonment Costs Site restoration, dismantlement and abandonment costs (P&A costs) include costs associated with dismantling and disposing of the facilities and equipment required to operate a well and restoring the well site to specified conditions. The Company develops specific estimates of its P&A costs based on consultations with its engineers and reevaluates such estimates annually. Estimated future P&A costs are accrued on a unit-of-production method based on proved reserves. As of September 30, 1997 and December 31, 1996, the P&A costs accrued were immaterial. Impairment of Long-Lived Assets Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS #121) was issued in March 1995 and was adopted by the Company in the fourth quarter of 1996. This statement requires that long-lived assets be reviewed for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. This review consists of a comparison of the carrying value of the asset 6 9 MIDDLE BAY OIL COMPANY, INC. Notes to Consolidated Financial Statements September 30, 1997 and 1996 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Impairment of Long-Lived Assets (continued) with the asset's expected future undiscounted cash flows without interest costs. The asset's expected future undiscounted cash flows are determined by Lee Keeling & Associates (Keeling), an independent engineering firm. To determine the expected future cash flows of each property, Keeling estimated each property's oil and gas reserves, relied on certain information supplied by the Company regarding the oil and gas reserves, applied certain assumptions regarding price and cost escalations, and applied certain discount factors for risk, location, type of ownership interest, category of reserves, operational characteristics, and other factors. Estimates of expected future cash flows are to represent management's best estimate based on reasonable and supportable assumptions and projections. If the expected future cash flows exceed the carrying value of the asset, no impairment is recognized. If the carrying value of the asset exceeds the expected future cash flows, an impairment exists and is measured by the excess of the carrying value over the estimated fair value of the asset. Any impairment provisions recognized in accordance with SFAS #121 are permanent and may not be restored in the future. Property and Equipment Property and equipment are stated at cost and depreciated on the accelerated method over the appropriate life of the property. Income Taxes The Company provides for income taxes using the asset and liability method under which deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax laws or tax rates is recognized in income in the period that includes the enactment date. 7 10 MIDDLE BAY OIL COMPANY, INC. Notes to Consolidated Financial Statements September 30, 1997 and 1996 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Stock-based Compensation In October 1996, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which establishes financial accounting and reporting standards for stock-based compensation plans. Effective for fiscal years beginning after December 15, 1996, the statement provides the option to continue under the accounting provisions of APB Opinion 25, while requiring pro forma footnote disclosures of the effects on net income and earnings per share, calculated as if the new method had been implemented. The Company has adopted the financial reporting provisions of SFAS No. 123 for 1996, but will continue under the accounting provisions of APB Opinion 25. Under APB 25, if the exercise price of an employee's stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized. Earnings (Loss) Per Share Primary earnings (loss) per share equals net earnings (loss) divided by the weighted average number of common shares outstanding during the period. Shares issuable upon exercise of options are included in the computation of earnings per common and common equivalent share to the extent that they are dilutive. For the nine months ended September 30, 1997, neither the common equivalent shares nor the assumed conversion of the preferred stock had a dilutive effect on the loss per share calculations. Accordingly, the loss per share calculation for such period is based on the weighted average number of common shares outstanding. For the nine months ended September 30, 1996 and the third quarter of 1996, the dilution from the common stock equivalents was immaterial. Accordingly, the earnings per share calculations for such periods are based on the weighted average number of common shares outstanding. 8 11 MIDDLE BAY OIL COMPANY, INC. Notes to Consolidated Financial Statements September 30, 1997 and 1996 (2) ACQUISITIONS On December 31, 1996, the Company completed the acquisition of NPC Energy Corporation ("NPC"). The transaction consisted of a merger (the "NPC Merger") of NPC into the Company and its separate corporate existence ceased. The NPC Merger was accounted for as a purchase of NPC by MBOC and as a result of the purchase method of accounting, MBOC's cost of acquiring NPC was allocated to the assets and liabilities acquired based on estimated fair values. The cost of acquiring NPC was approximately $3.20 million, consisting of the following (in thousands): Estimated fair value of 562,000 shares of MBOC Common Stock issued ................ $1,967 Estimated fair value of 166,667 shares of MBOC Series A Preferred Stock ........... 1,000 Cash on hand ................................ 226 Legal and accounting expenses ............... 35 ----- $3,228 =====
The fair value of the securities issued in connection with the NPC Merger was calculated assuming the price of the Company's common stock was $3.50 per share. The Company's purchase price has been allocated to the assets and liabilities of NPC based on preliminary estimates of the fair values with the remaining purchase price allocated to proved oil and gas properties. No goodwill has been recorded in this transaction. The preliminary allocation of the purchase price is summarized as follows: (in thousands) Working capital ..................... $ 785 Oil and gas properties: Proved ............................ 4,029 Debt assumed ........................ (468) Deferred income taxes ............... (1,118) ------ $ 3,228 ======
9 12 MIDDLE BAY OIL COMPANY, INC. Notes to Consolidated Financial Statements September 30, 1997 and 1996 (2) ACQUISITIONS (continued) On February 28, 1997, the Company completed the acquisition of Bison Energy Corporation ("BEC"). The transaction consisted of a merger (the "Bison Merger") of BEC into Bison Energy Corporation-Alabama, a wholly-owned subsidiary of the Company. On February 28, 1997, Bison Energy Corporation-Alabama merged into BEC and its separate corporate existence ceased. BEC continues as a wholly-owned subsidiary of the Company. The Bison Merger was accounted for as a purchase of BEC by MBOC and as a result of the purchase method of accounting, MBOC's cost of acquiring BEC was allocated to the assets and liabilities acquired based on estimated fair values. The cost of acquiring BEC was approximately $10 million, consisting of the following (in thousands): Estimated fair value of 605,556 shares of MBOC Common Stock issued ................... $ 3,330 Estimated fair value of 1,000,000 shares of MBOC Series A Preferred Stock .............. 6,000 Cash on hand ................................... 654 Other legal and accounting expenses ............ 35 ------ $10,019 ======
The fair value of the securities issued in connection with the merger was calculated using the price of the Company's common stock at the time the Bison Merger was announced to the public of $5.50 per share. The Company's purchase price has been allocated to the consolidated assets and liabilities of BEC based on preliminary estimates of the fair values with the remaining purchase price allocated to proved oil and gas properties. No goodwill has been recorded in this transaction. The preliminary allocation of the purchase price is summarized as follows: (in thousands) Working capital .......................... $ 694 Oil and gas properties: Proved ................................. 10,954 Yard Inventory and equipment ............. 525 Deferred income taxes .................... (2,154) ------- $ 10,019 =======
10 13 MIDDLE BAY OIL COMPANY, INC. Notes to Consolidated Financial Statements September 30, 1997 and 1996 (2) ACQUISITIONS (continued) The price paid for BEC and the allocation of the purchase price, both detailed above, excludes the $1,445,890 allocated to non-oil and gas assets that were purchased in the merger and sold on March 3, 1997 for $1,445,890. On June 30, 1997, the Company completed the acquisition of Shore Oil Company("Shore"). The transaction consisted of a merger (the "Shore Merger") of Shore into Shore Acquisition Company Inc., a wholly-owned subsidiary of the Company. On June 30, 1997, Shore Acquisition Company merged into Shore and its separate corporate existence ceased. Shore continues as a wholly-owned subsidiary of the Company. The merger was accounted for as a purchase of Shore by MBOC and as a result of the purchase method of accounting, MBOC's cost of acquiring Shore was allocated to the assets and liabilities acquired based on estimated fair values. The cost of acquiring Shore was approximately $19 million, consisting of the following (in thousands): Estimated fair value of 1,883,333 shares of MBOC Common Stock issued ................... $12,976 Estimated fair value of 266,667 shares of MBOC Series B Preferred Stock .............. 3,627 Estimated fair value of 388,833 shares of Series A Preferred Stock ................... 2,333 Cash consideration ............................. 200 Other legal and accounting expenses ............ 38 ------- $19,174 =======
The fair value of the securities issued in connection with the merger was calculated using the average price of the Company's common stock at the time the Shore Merger 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 Company's purchase price has been allocated to the consolidated assets and liabilities of Shore based on preliminary estimates of the fair values with the remaining purchase price allocated to proved oil and gas properties. No goodwill has been recorded in this transaction. 11 14 MIDDLE BAY OIL COMPANY, INC. Notes to Consolidated Financial Statements September 30, 1997 and 1996 The preliminary allocation of the purchase price is summarized as follows: (in thousands) Working capital .......................... $ 2,288 Oil and gas properties: Proved ................................. 18,004 Unproved ............................... 864 Fee minerals ............................. 4,796 Other assets ............................. 36 Debt assumed ............................. (2,105) Deferred income taxes .................... (4,709) ------ $ 19,174 ======
The following pro forma data presents the results of the Company for the nine months ended September 30, 1996 and 1997, as if the acquisitions of NPC, BEC and Shore had occurred on January 1, 1996. 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).
Pro Forma --------- Nine months ended ----------------- Sept 30 ------- 1996 1997 ---- ---- (Unaudited) Total Revenues ............... $ 11,146 $ 11,555 Loss ......................... $ (390) $ (499) Loss per share ............... $ (0.09) $ (0.16)
(3) RELATED PARTY TRANSACTIONS The Company has a receivable, including accrued interest, from Bay City Energy Group, Inc. (BCEG), a significant stockholder, as of September 30, 1997 and December 31, 1996 in the amount of $164,186 and $159,215, respectively. 75,000 shares of Company common stock secure the note with principal and accrued interest at 5% per annum due in full on January 1, 2001. During the nine months ended September 30, 1997 and 1996, BCEG did not make any payments and was not advanced any funds. Interest of $25,181 was accrued on the note at September 30, 1997. 12 15 MIDDLE BAY OIL COMPANY, INC. Notes to Consolidated Financial Statements September 30, 1997 and 1996 (4) LONG-TERM DEBT
Sept 30 December 31 1997 1996 ---------- ---------- Convertible Loan of $50,000,000 due March 31, 1998, secured by oil and gas properties, monthly payments of interest only at Libor plus 1.75%, convertible into a 72 month term note on March 31, 1998 10,956,298 -- Convertible Loan of $15,000,000 due March 31, 1998, secured by oil and gas properties, monthly payments of interest only at prime, convertible into a 72 month term note on March 31, 1998 -- -- Convertible Loan of $6,000,000 due September 30, 1997, secured by oil and gas properties, monthly payments of interest only at 1.5% over prime, convertible into a 72 month term note on September 30, 1997 -- 5,186,596 Term note due August 31, 1998, secured by oil and gas properties, repayable in monthly installments of $27,590 plus interest at 9.5% -- 385,089 Note, due 1/1/99, secured by office building, repayable in monthly installments of $1,511 including interest at 7 3/4% 135,845 141,393 ----------- ---------- Total $11,092,143 $5,713,078 Less current maturities 920,825 554,601 ----------- ---------- Long-term debt excluding current maturities $10,171,318 $5,158,477 =========== ==========
13 16 MIDDLE BAY OIL COMPANY, INC. Notes to Consolidated Financial Statements September 30, 1997 and 1996 (4) LONG-TERM DEBT (continued) The $50,000,000 convertible loan contains certain restrictive provisions, the most significant of which restricts additional borrowings, either directly or indirectly, and payment of dividends. At September 30, 1997, the Company was in compliance with all covenants specified in the convertible loan and revolving credit agreements. (5) STOCKHOLDERS' EQUITY In connection with the merger with Shore Oil Company, effective June 30, 1997, the Company issued 266,667 shares of Series B Preferred Stock ("Series B"). The Series B is nonvoting and pays no dividends. The Series B has a liquidation value of $7.50 per share and is junior to the Series A Preferred. For a period of sixty-nine months subsequent to June 30, 1997 any holder of the Series B may convert all or any portion of Series B shares into Company Common Stock ("Common") at a ratio of one share of Common for each Series B share or at any time on or after January 1, 1998, the holders may convert pursuant to the Alternative Conversion Method based on Cumulative Value. Upon expiration of the conversion period, unless the Company has given notice to redeem the Series B, all of the shares of Series B shall be automatically converted. In no event shall the aggregate total number of shares of Common into which the Series B are converted be less than 266,667 shares or exceed 1,333,333 shares, unless further increased for any anti-dilution provisions. The Alternative Conversion Method shall be computed as of December 31 of each year following the merger date of June 30, 1997, by determining the incremental amounts by which the Cumulative Value increases over the prior year's computation. Each incremental increase in the Cumulative Value, when computed, shall be divided by $8,000,000, with the resulting quotient (the "Alternative Conversion Factor") multiplied by 266,667 to determine the number of Series B shares which would be converted. The number of Common shares into which the Series B would be converted shall be determined by multiplying 1,066,666 times the then applicable Alternative Conversion Factor. The procedure shall be repeated as of each December 31, with the applicable number of Series B shares converted into Common shares. If on December 31 of any year during the conversion period the aggregate Cumulative Value equals or exceeds $10,000,000, then the remaining Series B shares will be convertible into a number of Common shares equal to 1,333,333 shares less the aggregate number of Common shares previously issued upon conversion. 14 17 MIDDLE BAY OIL COMPANY, INC. Notes to Consolidated Financial Statements September 30, 1997 and 1996 (5) STOCKHOLDERS' EQUITY (continued) The Cumulative Value means the value attributable to the approximately 40,000 acres of mineral interest owned by Shore in Terrebone, LaFourche and St. Mary Parishes, Louisiana (the "Louisiana Acreage"). The Cumulative Value shall initially be equal to $2,000,000 and shall not exceed $10,000,000. The Cumulative Value shall be recomputed on an incremental basis as of December 31 of each year following the merger date of June 30, 1997 based: (1) on values computed for newly-discovered, reworked or recompleted wells with a minimum of nine months' production history; plus (2) lease bonus payments and delay rental payments, seismic option payments, seismic permit payments, any other payments and proceeds from the sale of properties or oil and gas interests on the Louisiana Acreage received by the Company during the evaluation period if such properties or oil and gas interests have not been previously included in the computation of Cumulative Value. The Cumulative Value shall be reduced on each recomputation date by the amount of any extraordinary claim or liability asserted against or paid by the Company and relating to the Louisiana Acreage during such evaluation period. On September 4, 1996, the Company signed a stock purchase agreement with Kaiser Francis Oil Company ("the Agreement"). Kaiser-Francis has agreed to purchase 1,666,667 shares of Series A Preferred Stock ("Preferred") at $6.00 per share, for a total investment of $10,000,000. The parties have agreed to a five-year purchase period, effective September 4, 1996, with minimum incremental investments of $500,000 each. Each issuance of Preferred is subject to approval by Kaiser-Francis of the use of proceeds. The Preferred is nonvoting and accrues dividends at 8% per annum, payable quarterly in cash. The Preferred is convertible at any time after issuance into shares of common stock at the rate of two shares of common stock for each share of Preferred before January 1, 1998. The conversion rate decreases thereafter at 8% per annum. The Company will pay the costs of registration of the Preferred or the underlying common stock under the Securities Act of 1933 upon request of Kaiser-Francis. The Company may redeem the Preferred in whole or in part, at any time after January 1, 2007 at a price of $6.00 per share. As of September 30, 1997, 1,666,667 shares of the Preferred had been issued. On April 1, 1996, the Board of Directors authorized the repurchase of up to $100,000 of Company common stock at a price per share not to exceed $3.25, exclusive of brokerage costs. As of September 30, 1997 the Company had purchased 21,772.75 shares of common stock at a cost of $68,040. 15 18 MIDDLE BAY OIL COMPANY, INC. Notes to Consolidated Financial Statements September 30, 1997 and 1996 (5) STOCKHOLDERS' EQUITY (continued) On February 13, 1997, the Company awarded the President, Vice-President Chief Financial Officer and Vice-President Engineering stock options to acquire 100,000, 62,500 and 62,500 shares of common stock, respectively, at an exercise price of $5.50 per share. All of the options vested on the date of grant. The exercise price was equal to the fair market value of common stock on the date of grant. On the same date, the Company awarded to the President, Vice-President Chief Financial Officer and Vice-President Engineering, 25,909, 11,591 and 11,591 shares of restricted stock of the Company, respectively. The restricted stock awards are contingent on the performance of services to the Company in the future with 50% of the restricted shares being earned over the six month period July 1, 1997 to December 31, 1997 and 50% over the six month period January 1, 1998 to June 30, 1998. On May 30, 1997, the Board of Directors granted options to acquire 85,000 shares of Company common stock under the 1995 Stock Option and Stock Appreciation Rights Plan to certain key employees. All of the options vested on the grant date of May 30, 1997 with an exercise price of $7.75 per share, which was equal to the fair market value of common stock on the date of grant. The options expire ten years from the date of grant if not exercised. On February 6, 1997, the Board of Directors granted options to acquire 210,000 shares of Company common stock under the 1995 Stock Option and Stock Appreciation Rights Plan to key employees and non-employee directors. All of the options vested on the grant date of February 6, 1997 with an exercise price of $6.00 per share, which was equal to the fair market value of common stock on the date of grant. The options expire ten years from the date of grant if not exercised. On May 31, 1996, the Board of Directors granted options to acquire 125,000 shares of Company common stock under the 1995 Stock Option and Stock Appreciation Rights Plan to key employees and non-employee directors. All of the options vested on the grant date of May 31, 1996 with an exercise price of $2.50 per share, which was equal to the fair market value of common stock on the date of grant. The options expire ten years from the date of grant if not exercised. 16 19 MIDDLE BAY OIL COMPANY, INC. Notes to Consolidated Financial Statements September 30, 1997 and 1996 (5) STOCKHOLDERS' EQUITY (continued) Under the terms of the Janex Acquisition, the Company has a contingent obligation to repurchase 142,107 common shares issued in the Janex Acquisition, upon written notice delivered to the Company, beginning five years after the closing date and continuing for thirty days thereafter, at a price of $6.00 per share. This obligation shall terminate if the Company's stock trades at a share price of $8.00 or greater for twenty consecutive trading days during the thirty-six month period ending November 1, 1998. At the close of trading on April 7, 1997, the Company's common stock had traded at an ask price that was equal to, or exceeded, $8.00 per share for twenty consecutive trading days. Therefore, the contingent obligation represented by the redeemable common stock balance on the Company's balance sheet in the amount of $421,179 was reclassified to additional paid-in capital effective April 7, 1997. (6) INCOME TAXES The Company's income tax expense (benefit) for continuing operations consists of the following:
Nine months Ended Sept 30 Sept 30 1997 1996 ------- ------- Current $ - $ - Deferred - - ------- ------- Total $ - $ - ======= =======
The Company's net deferred tax liability at September 30, 1997 and December 31, 1996 are as follows:
Sept 30 December 31 1997 1996 ------ ------ Deferred tax liability Oil and gas properties $ 7,676,367 $ 817,079 Deferred tax asset Net operating losses (206,924) (206,924) Valuation allowance - - ---------- -------- Net deferred tax liability $ 7,469,443 $ 610,785 ========== ========
17 20 MIDDLE BAY OIL COMPANY, INC. Notes to Consolidated Financial Statements September 30, 1997 and 1996 (6) INCOME TAXES (continued) As of December 31, 1996, the Company had approximately $1,242,000 of operating loss carryforwards, with $433,000 expiring in 2009 and $404,000 expiring in 2010 and $405,000 in 2011. As of December 31, 1996 the Company had $36,482 of AMT credit carryforwards and $22,000 of Section 29 tax credit carryforwards. (7) COMMITMENTS AND CONTINGENCIES The Company's obligation under the terms of certain operating leases for office equipment is immaterial. The Company is leasing 3,000 square foot of office space for Bison Energy's headquarters in Wichita, Kansas for $3,000 per month for three years. The Company is leasing 5,363 square foot of office space for Shore Oil Company's headquarters in Houston, Texas. The twenty-four month lease requires monthly lease payments of $5,791 through June 30, 1998 and $6,576 through June 30, 1999. On April 3, 1996, the Company entered into a Joint Expense and Participation Agreement with Brigham Oil and Gas, L.P. which allowed the Company to participate in the drilling of eighty-seven (87) onshore wells in Texas and Oklahoma over the twelve month period beginning April 1, 1996. The Company was committed to fund $1,500,000 in drilling costs over this twelve-month period. As of September 30, 1997, the Company had advanced $1,944,499 in drilling and completion costs to Brigham Oil and Gas, L.P. The Company is no longer required to advance Brigham any additional money under the Brigham Agreement. 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. 18 21 Item 2. Management's Discussion and Analysis or Plan of Operations. Liquidity and Capital Resources Cash flow from operating activities for the nine months ended September 30, 1997 of $2,422,000 increased $1,366,000 over the comparable period. The increase was due primarily to an increase in cash flow from oil and gas operations and other income offset partially by working capital changes, increased general and administrative expenses associated with the recent mergers and increased dry-hole expenses and exploration costs. Cash flow from oil and gas sales increased $1,672,000 over the comparable period. Oil prices were flat and gas prices increased 7%, while oil production increased 100% and gas production increased 85%. In addition to income from the sale of oil and natural gas, income from gas processing at the plant located at the Spivey Grabs Field in Kansas generated net income of $362,000. This revenue is derived principally from gas processing and the sale of natural gas liquids (i.e. propane and butane). The change in working capital reduced cash flow by $107,000 over the comparable period. The change in working capital was caused principally by timing differences in the payment of expenses and receipt of revenues. Cash flow from operations before working capital changes of $2,779,000 increased $1,473,000 over the comparable period. Additions to oil and gas properties were higher than the comparable period due to the Bison Energy Corporation Merger (the "Bison Merger") which closed February 28, 1997 and the Shore Oil Company Merger (the "Shore Merger") which closed June 30, 1997 and increased acquisitions and drilling in the current period. The increase in the amount of cash used for debt payments was due primarily to the 2,105,000 refinancing of the term note assumed in the Shore Merger and the $274,729 refinancing of the note assumed in the NPC Merger. No principal payments have been required over the period April 1, 1996 to September 30, 1997 on the Company's $6 million, $15 million and $50 million Convertible Loans. The increase in the proceeds from debt issued was due to the refinancing of the notes assumed in the Shore and NPC Mergers, $3,000,000 issued in the Riceville Acquisition and the financing of the leasehold and seismic costs in the amount of $385,000 associated with the Reflection Ridge Prospect. The increase in proceeds from issuance of preferred stock was due to the preferred stock issued to finance portions of the Bison Merger and the Shore Merger. The Company's operating activities provided net cash of $2,422,000 for the nine-month period ended September 30, 1997. During this period, net cash from operations was used principally for exploratory and developmental drilling of $1,531,000, workovers of $413,000, prospects of $307,000 and proved property acquisitions of $685,000. The Riceville Acquisition accounted for $500,000 of the cash spent on proved property acquisitions. Debt was used to finance $285,000 of prospects and $3,000,000 in proved property acquisitions. Of the total amount spent on exploratory and developmental drilling, approximately $420,000 was spent in the Brigham Agreement and $700,000 was spent in the Spivey Grabs Field in Kansas. The Company incurred $446,000 in dry hole costs consisting principally of $373,000 for wells drilled in the Brigham Agreement and $54,000 on the Harrison well in the Spivey Grabs Field. Of the $413,000 spent on workovers, approximately $78,000 was spent at Wild Fork Creek Field in Alabama, approximately $49,000 was spent in the Spivey Grabs Field in Kansas, $55,000 at Custer City Field in Oklahoma, $48,000 at Lake Trammel Field in Texas and $44,000 at the Wright Field in Louisiana. The remaining amount was spent on several different properties. The $592,000 spent on prospects consisted of $285,000 on Reflection Ridge in Kansas, $225,000 on Hawkins Ranch in Texas, $27,000 on the Quarry Prospect in New Mexico and $55,000 on S. Highbaugh in Texas. The Company spent $7,139,914 on the Bison Merger. This includes the 19 22 $1,445,890 in non-oil and gas assets, which were subsequently sold for the amount paid. The Company spent $514,299 on the Shore Merger. Amounts spent on debt retirement consisted principally of the payment in full of the note assumed in the Shore Merger of $2,105,000, monthly principal payments on the $385,089 term note assumed in the NPC Merger and the refinancing of the NPC term note of $274,000. The principal payments on the $6 million Convertible Loan were suspended when the Company converted the $5.6 million term note to a $6 million Convertible Loan on April 3, 1996. In conjunction with the Shore Merger on June 30, 1997, the Company assumed a term note in the principal amount of $2,105,000, which accrues interest at prime plus three-fourths of a percent. Interest is paid quarterly with the entire principal balance to be paid in full on April 1, 1999. The entire principal balance was paid in August 1997 with proceeds from the Company's $50 million Convertible Loan at the Bank of Oklahoma. On April 3, 1996, the Bank converted its $5.6 million term note into a $6.0 million, one-year, revolving line-of-credit (the "$6 million Convertible Loan"), effective April 1, 1996. The $6 million Convertible Loan required monthly payments of interest only at prime plus 1.5% and converted into a term note payable in seventy-one consecutive equal monthly principal and interest payments at prime plus 1.5%, with the remaining principal and interest payment due on March 31, 2003. Effective, March 31, 1997, the Company refinanced the $6 million Convertible Loan at its current principal balance of $5,186,596 with a $15 million Convertible Loan. The $15 million Convertible Loan requires monthly payments of interest only at prime for one year and converts into a term note payable in seventy-one consecutive equal monthly principal and interest payments at prime, with the remaining principal and interest payment due on March 31, 2004. The $15 million Convertible Loan also requires payment of a commitment fee equal to an annual rate of three-eighths percent of the excess of the Borrowing Base over the principal balance of the convertible note. Effective, September 1, 1997, the Company refinanced the $15 million Convertible Loan at its current principal balance of $5,851,298 with a $50 million Convertible Loan. The $50 million Convertible Loan requires monthly payments of interest only at a fixed rate of Libor plus 1.75% as long as the principal amount of the loan is less than 75% of the current borrowing base of $15 million. If the principal amount of the loan is greater than or equal to 75% of the borrowing base the rate increases to Libor plus 2.75%. The Company has the option of switching to a floating prime rate. The $50 million Convertible Loan converts into a term note payable in seventy-one consecutive equal monthly principal and interest payments at prime, with the remaining principal and interest payment due on March 31, 2004. The $50 million Convertible Loan also requires payment of a commitment fee equal to an annual rate of three-eighths percent of the excess of the Borrowing Base over the principal balance of the convertible note. Under the terms of the $50 million Convertible Loan, the Company can be advanced a maximum of $15 million, which is the current Borrowing Base. Depending upon the value of reserves purchased and discovered the Company can borrow a maximum of $50 million. The Borrowing Base is based on the Bank's engineer's or any other independent engineer's calculation of the value of the Company's oil and gas reserves, using the Bank's pricing and discount factors and the future net revenue expected to be produced from the Company's oil and gas reserves. The Borrowing Base is redetermined on September 30 and March 31 of each year. In August, 1997 the Bank advanced the Company $2,105,000 to retire the principal balance of the term note assumed in the Shore Merger and $3,000,000 for the proved property acquisition in the Riceville Field in Louisiana. 20 23 Under the previous $15 million Convertible Loan, on May 9, 1997 the Bank advanced the Company $385,000 for lease acquisition, and 3-D seismic shooting and analysis on the Reflection Ridge prospect in Kansas and $275,775 to retire the principal and accrued interest on the note assumed in the NPC Merger. The Company had current assets of $5,041,627 and current liabilities of $2,185,810, which resulted in working capital of $2,855,817 as of September 30, 1997. This was an increase of $2,069,634 from the working capital of $786,183 as of December 31, 1996. Working capital increased primarily due to cash and receivables acquired in the Bison Merger and the Shore Merger and no monthly principal payments on the Revolver offset partially by amounts spent on exploratory and developmental drilling and proved property acquisitions. The Company's current ratio of 3.96, calculated under the terms of the Credit Agreement, which excludes stockholder receivables and debt due under the Credit Agreement, was in excess of the 0.90 to 1.00 required. At March 31, 1997, based on the final reconciliation on August 1, 1997, a total of sixty-one wells were spudded under the Brigham Agreement. Of these sixty-one, forty-three were completed and eighteen were dry holes. The total funds advanced to Brigham for the twelve-month period ending March 31, 1997 and the final reconciliation was $1,944,499. The Company is no longer required to advance Brigham any additional money under the Brigham Agreement. In general, because the Company's principal natural gas and oil reserves are depleted by production, its success is dependent upon the results of its development, acquisition and exploration activities. The Company's strategy is to enhance and exploit its existing properties for reserves, to invest in exploratory and developmental drilling prospects and to acquire reserves. The Company expects to incur a minimum of approximately $3,000,000 in capital expenditures over the next twelve months: $850,000 for developmental drilling, $1,700,000 for exploratory drilling and $450,000 for 3-D seismic and leasehold acquisitions. These capital expenditures will be funded by internally generated cash flows, proceeds from property sales and bank debt. As of March 31, 1997, the Company had a contingent obligation to repurchase 70,196 common shares issued in the Janex Acquisition, upon written notice delivered to the Company, beginning five years after the closing date and continuing for thirty days thereafter, at a price of $6.00 per share. This obligation shall terminate if the Company's stock trades at a share price of $8.00 or greater for twenty consecutive trading days during the thirty-six month period ending November 1, 1998. At the close of trading on April 7, 1997, the Company's common stock had traded at an ask price that was equal to, or exceeded, $8.00 per share for twenty consecutive trading days. In accordance with the Janex Acquisition agreement, the redeemable common stock balance of $421,179 was reclassified to additional paid-in capital effective April 7, 1997. On September 4, 1996, the Company signed a stock purchase agreement with Kaiser Francis Oil Company ("the Agreement"). Kaiser-Francis has agreed to purchase 1,666,667 shares of Series A Preferred Stock ("Preferred") at $6.00 per share, for a total investment of $10,000,000. The parties have agreed to a five-year purchase period, effective September 4, 1996, with minimum incremental investments of $500,000 each. Each issuance of Preferred is subject to approval by Kaiser-Francis of the use of proceeds. The Preferred is nonvoting and accrues dividends at 8% per annum, payable quarterly in 21 24 cash. The Preferred is convertible at any time after issuance into shares of common stock at the rate of two shares of common stock for each share of Preferred before January 1, 1998. The conversion rate decreases thereafter at 8% per annum. The Company will pay the costs of registration of the Preferred or the underlying common stock under the Securities Act of 1933 upon request of Kaiser-Francis. The Company may redeem the Preferred in whole or in part, at any time after January 1, 2007 at a price of $6.00 per share. As of September 30, 1997 1,666,667 shares of the Preferred had been issued. In August, 1997 the Company executed an exploration agreement with Brigham Exploration Company for a 3-D seismic exploration project on the Hawkins Ranch in Matagorda County, Texas. The ranch has been lease optioned for a 54 square mile 3-D seismic survey. MBOC will have a 22.5% working interest through the selection phase of the project. Field operations are scheduled to begin in early 1998 and processed data should be available during the third quarter of 1998. The initial well is projected to spud in the first quarter of 1999. MBOC paid approximately $225,000 for its share of the lease option. In August, 1997 the Company acquired a 5.74% working interest in proved producing reserves in the Riceville Field in Vermillion Parish, Louisiana for approximately $3,500,000. The acquisition was financed with $3,000,000 in loan proceeds and the remainder from cash on hand. The Company's liquidity position and current and anticipated cash flows from operations remain adequate for its general requirements. However, 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. For the nine months ended September 1997, the Company had invested approximately $610,000 in two 3-D seismic exploration projects (Reflection Ridge and Hawkins Ranch). In the past, the Company has generally invested in exploration projects where 3-D seismic and 3-D seismic interpretation had already been completed or was not necessary. In addition, the Company has never invested this much capital on any two exploration projects at this stage. The two seismic exploration projects that the Company has invested in are high-risk projects where the entire capital investment may be lost. The Company financed the 3-D projects with $385,000 in debt and $225,000 in cash. It is expected that multiple wells will be drilled on both projects after the seismic is interpreted. If these wells are dry holes and it is determined that there is no economically recoverable oil and gas on the leasehold, all of the cost of the wells and the leasehold will be expensed. Conversely, if either of these two projects is successful, it could materially increase the oil and gas reserves and the value of the Company. Current Activities At November 5, 1997, one exploratory well was being drilled in Louisiana. 22 25 Results of Operations Three Months September 30, 1997 and 1996 Total revenues for the three months ended September 30, 1997 of $4,284,000 were $3,157,000 higher than the comparable period. The increase in total revenues was due principally to higher oil and gas revenues of $2,116,000 and $890,000 in lease bonus and delay rental income. The increase in oil and gas revenues consisted primarily of a $957,000 increase in oil revenues and a $916,000 increase in gas revenues. Also contributing to the revenue increase was $260,000 in revenue from gas processing at the gas plant located at the Spivey Grabs Field in Harper County, Kansas. The gas processing plant was acquired in the Bison Merger, which was effective February 28, 1997. The increase in oil and gas revenues was the result of higher oil and gas production. Production of oil increased 219% and production of gas increased 162%, over the comparable period. The oil production increase of 56,328 barrels consisted principally of a 20,557 barrel increase from the NPC and Bison mergers and a 34,189 increase from the Shore Merger. The gas production increase of 412,695 Mcf consisted principally of a 191,531 Mcf increase from the NPC and Bison mergers and a 180,068 Mcf increase from the Shore Merger. During the three month period ended September 30, 1997, the Company sold 82,063 barrels of oil and 667,773 Mcf of gas, as compared to 25,735 barrels and 255,078 Mcf for the comparable period. The price received on the gas sold in 1997 of $2.17 per Mcf was slightly higher than the $2.09 per Mcf received in the comparable period. Oil prices in 1997 of $18.42 per barrel were lower than the $21.28 per barrel received in 1996. Total expenses increased by $2,879,000 over the comparable period. Due to the growth of the Company over the last twelve months, all categories of expenses increased. Lease operating expenses increased $948,000. The increase was due principally to a $493,000 increase in operating expenses associated with the Bison and NPC mergers and $452,000 increase associated with the Shore Merger. Depletion and depreciation expense increased by $1,190,000. Depletion was higher due to depletion on properties acquired in the NPC and Bison mergers and the Shore Merger. Depletion on the properties acquired in the Shore Merger amounted to $874,000. Depreciation increased due to computer and software equipment acquired in the current period. General and administrative expenses ("G&A") increased by $481,000. The increase in the G&A from the Bison Merger was reduced effective August 1, 1997 due to the expiration of the six month transition period on August 1, 1997 which was part of the Bison Merger. The increase in G&A consists primarily of a $207,000 increase in salaries, an increase of $72,000 in geological, accounting and legal expenses and a $29,000 increase in office supplies and expense. The increase in salary expense is due to increases in salaries of existing employees and salaries associated with employees added in the Bison and Shore Mergers. At the time of the Bison Merger seven employees occupied the Wichita, Kansas office. Effective August 1, 1997, only four employees, the president of Bison, an engineer, geologist, and secretary will be occupying the Wichita, Kansas office. The president of Shore, an engineer, and a secretary were added in the Shore Merger. In addition, the Company hired a land manager in July to manage the Company's land and mineral records. The Company has paid moving allowances to its Alabama employees that have moved to Houston. Abandonment expenses increased by $52,000. The increase in dry hole costs was due to higher dry hole costs associated with the Brigham Agreement. Stock compensation expense increased by $101,250 due to the July, 1997 start of the vesting period of the restricted stock granted to certain Company employees in February, 1997. All 23 26 of the stock will be vested by June 30, 1998. Interest expense increased by $90,000, due primarily to a higher loan balance. The Company reported operating income of $253,000 for the three months ended September 30, 1997 versus an operating loss of $25,000 for the comparable period. The Company reported net income of $253,000 for the three months ended September 30, 1997 versus a net loss of $25,000 for the comparable period. After considering the preferred stock dividend requirement of $204,000, the Company reported net income available to common stockholders of $49,000. There was no preferred stock dividend requirement in the comparable period. Nine months September 30, 1997 and 1996 Total revenues for the nine months ended September 30, 1997 of $8,237,000 were $4,651,000 higher than the comparable period. The increase in total revenues was due principally to higher oil and gas revenues of $3,727,000 and lease bonus and delay rental income of $890,000. The increase in oil and gas revenues consisted primarily of a $1,625,000 increase in oil revenues and a $1,504,000 increase in gas revenues. Also contributing to the revenue increase was $647,000 in revenue from gas processing at the gas plant located at the Spivey Grabs Field in Harper County, Kansas. The gas processing plant was acquired in the Bison Merger, which was effective February 28, 1997. The increase in oil and gas revenues was primarily the result of higher oil and gas production. Production of oil increased 100% and production of gas increased 85%, over the comparable period. The oil production increase of 83,776 barrels consisted principally of a 48,803 barrel increase from the NPC and Bison mergers and a 34,189 barrel increase from the Shore Merger. The gas production increase of 615,391 Mcf consisted principally of a 393,002 Mcf increase from the NPC and Bison mergers and a 180,068 Mcf increase from the Shore Merger. During the nine month period ended September 30, 1997, the Company sold 166,737 barrels of oil and 1,343,429 Mcf of gas, as compared to 82,961 barrels and 728,038 Mcf for the comparable period. The price received on the gas sold in 1997 of $2.26 per Mcf was slightly higher than the $2.11 per Mcf received in the comparable period. Oil prices in 1997 of $19.35 per barrel were slightly higher than the $19.29 per barrel received in 1996. Total expenses increased by $5,024,000 over the comparable period. Due to the growth of the Company over the last twelve months, all categories of expenses increased. Lease operating expenses increased $1,693,000. The increase was due principally to a $1,176,000 increase in operating expenses associated with the Bison and NPC mergers and a $452,000 increase associated with the Shore Merger. Depletion and depreciation expense increased by $1,705,000. Depletion was higher due to depletion on properties acquired in the NPC and Bison mergers and the Shore Merger. Depreciation was higher due to additional depreciation on properties acquired in the Bison and Shore Mergers and computer equipment and software acquired in the third quarter. General and administrative expenses ("G&A") increased by $1,094,000, consisting principally of increases due to the Bison and Shore Mergers. The increase in the G&A from the Bison Merger was reduced since August 1, 1997 due to the expiration of the six month transition period on August 1, 1997 which was part of the Bison Merger. The increase in G&A consists primarily of a $462,000 increase in salaries, an increase of $171,000 in geological, accounting and legal expenses, an increase of $95,000 in the Company's SEP contribution and cash bonuses and a $69,000 increase in office supplies and 24 27 expense. The increase in salary expense is due to increases in salaries of existing employees and salaries associated with employees added in the Bison and Shore Mergers. At the time of the Bison Merger seven employees occupied the Wichita, Kansas office. Effective August 1, 1997, only four employees, the president of Bison, an engineer, geologist, and secretary will be occupying the Wichita, Kansas office. The president of Shore, an engineer, and a secretary were added in the Shore Merger. In addition, the Company hired a land manager in July to manage the Company's land and mineral records. The increases in professional fees and office expenses are associated with the increase in the general activity of the company as its oil and gas reserve base increases. There was only a $5,000 SEP contribution and no cash bonuses in the comparable period versus $100,000 in SEP contribution and bonuses in the current period. The Company has paid moving allowances to its Alabama employees that have moved to Houston. Exploration expenses ("G&G Costs") increased $131,000. The Company paid approximately $100,000 in G&G Costs on the Reflection Ridge Project in Kansas in the second quarter. Abandonment expenses increased by $196,000. The increase in dry hole costs was due principally to dry hole costs associated with the Brigham Agreement and a $54,000 Harrison well dry hole in the Spivey Grabs Field in 1997. Stock compensation expense increased by $101,250 due to the July, 1997 start of the vesting of the restricted stock granted to certain Company employees in February, 1997. All of the stock will be vested by June 30, 1998. Interest expense increased by $102,000, due primarily to a higher loan balance. The Company reported operating income of $70,000 for the nine months ended September 30, 1997 versus operating income of $444,000 for the comparable period. The Company reported net income of $70,000 for the nine months ended September 30, 1997 versus net income of $444,000 for the comparable period. After considering the preferred stock dividend requirement of $409,000, the Company, reported a net loss available to common stockholders of $338,000. There was no preferred stock dividend requirement in the comparable period. Approximately $131,000 in G&G costs was expensed in the current nine-month period as required under the successful efforts method of accounting. The successful efforts method of accounting, versus the full cost method, requires the company to expense all G&G costs as incurred. G&G Costs include costs of topographical, geological and geophysical studies, rights of access to conduct those studies, and salaries and expenses of geologists, geophysical crews, or others conducting those studies. Under the full cost method, all G&G Costs are capitalized when incurred and are expensed only when the well or wells drilled on the prospect are abandoned and the entire prospect is determined not to have any economically recoverable oil or gas. Due to the differences in accounting for G&G Costs, two companies could invest in the same drilling prospect and report substantially different net income or loss for a particular reporting period. In the future, the Company intends to invest in additional prospects where G&G costs are incurred. Currently, the Company does not intend to change its method of accounting and as a result of this the Company will continue to report exploration expenses which will reduce net income or increase net losses in the future. 25 28 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: November 14, 1997 By:/s/ Frank C. Turner II ---------------------- Frank C. Turner II Vice-President and Chief Financial Officer 26 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS - BALANCE SHEETS AT SEPTEMBER 30, 1997 (UNAUDITED) AND THE STATEMENTS OF OPERATIONS AT SEPTEMBER 30, 1997 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1997 SEP-30-1997 2,491,754 0 2,201,971 0 0 5,041,627 57,876,994 (7,923,438) 55,177,330 2,185,810 10,171,318 13,627,000 0 89,871 22,769,689 55,177,330 6,913,475 8,236,960 2,796,896 2,796,896 4,891,189 0 478,296 70,579 0 70,579 0 0 0 (338,310) (.11) (.11)
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