-----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, I8k5+tpsDHoyQPQADU4eyGKVI08FK9js+3w4U8Kh8hddnMmO5RBD0eTnwmm/neVf JC+ODCbC0/bIqGB16NwRbg== 0001047469-99-032290.txt : 19990817 0001047469-99-032290.hdr.sgml : 19990817 ACCESSION NUMBER: 0001047469-99-032290 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 001-14745 FILM NUMBER: 99691207 BUSINESS ADDRESS: STREET 1: 1221 LAMAR ST STREET 2: SUITE 1020 CITY: HOUSTON STATE: TX ZIP: 77010 BUSINESS PHONE: 7137596808 MAIL ADDRESS: STREET 1: PO BOX 390 CITY: MOBILE STATE: AL ZIP: 36602 10QSB 1 10QSB U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ______ to _______ Commission File No. 0-21702 MIDDLE BAY OIL COMPANY, INC. (Exact name of small business issuer as specified in its charter) ALABAMA 63-1081013 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1221 LAMAR STREET, SUITE 1020 HOUSTON, TX 77010 (Address of principal executive offices) (713) 759-6808 (Issuer's telephone number) N/A (Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: Common stock, $.02 par value 8,534,428 shares as of July 30, 1999 Transitional Small Business Disclosure Format (check one) Yes [ ] No [X] MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES INDEX
Page No. ----- PART I. CONSOLIDATED FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets - June 30, 1999 (Unaudited) and December 31, 1998........................ 1 Consolidated Statements of Operations (Unaudited)- Three and six months ended June 30, 1999 and 1998 ..................... 2 Consolidated Statements of Cash Flows (Unaudited)- Six months ended June 30, 1999 and 1998 ............................... 3 Notes to Consolidated Financial Statements (Unaudited).................... 4 Item 2. Management's Discussion and Analysis Of Financial Condition and Results of Operations................ 14 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K ................................... 27
4 PART I- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (AUDITED) JUNE DECEMBER 31 1999 1998 -------------- --------------- ASSETS CURRENT ASSETS CASH AND CASH EQUIVALENTS $1,259,462 $1,040,096 ACCOUNTS RECEIVABLE 2,823,514 3,309,043 ACCOUNTS RECEIVABLE-INSURANCE CLAIM - 448,083 OTHER CURRENT ASSETS 115,263 141,364 -------------- --------------- TOTAL CURRENT ASSETS 4,198,239 4,938,586 NON-CURRENT ASSETS NOTES RECEIVABLE- STOCKHOLDER 176,590 173,115 PROPERTY (AT COST) OIL AND GAS (SUCCESSFUL EFFORTS METHOD) 89,706,235 90,849,439 OTHER 831,720 795,323 -------------- --------------- 90,537,955 91,644,762 ACCUMULATED DEPLETION, DEPRECIATION AND AMORTIZATION (40,254,411) (39,073,584) -------------- --------------- 50,283,544 52,571,178 OTHER ASSETS 238,516 257,938 -------------- --------------- TOTAL ASSETS $54,896,889 $57,940,817 ============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES CURRENT MATURITY OF LONG-TERM DEBT $1,541,000 $ - ACCOUNTS PAYABLE-TRADE 2,216,494 3,643,241 ACCOUNTS PAYABLE-ENEX LP LIMITED PARTNERS - 538,750 ACCOUNTS PAYABLE-REVENUE 368,607 342,931 OTHER CURRENT LIABILITIES 326,628 275,010 -------------- --------------- TOTAL CURRENT LIABILITIES 4,452,729 4,799,932 LONG-TERM DEBT 26,949,567 27,454,567 DEFERRED INCOME TAXES 1,172,696 1,733,167 OTHER LIABILITIES 350,031 437,949 MINORITY INTEREST 893,596 957,369 STOCKHOLDERS' EQUITY PREFERRED STOCK, $0.02 PAR, 10,000,000 SHARES AUTHORIZED AT JUNE 30, 1999 AND DECEMBER 31, 1998 WITH 266,667 SHARES DESIGNATED SERIES B AND 2,177,481 SHARES DESIGNATED SERIES C, NONE OTHER ISSUED - - CONVERTIBLE PREFERRED STOCK SERIES B, $7.50 STATED VALUE, 266,667 SHARES ISSUED AND OUTSTANDING AT JUNE 30, 1999 AND DECEMBER 31, 1998. $2,000,000 AGGREGATE LIQUIDATION PREFERENCE 3,627,000 3,627,000 CONVERTIBLE PREFERRED STOCK SERIES C, $5.00 STATED VALUE, 1,138,827 AND 1,142,663 SHARES ISSUED AND OUTSTANDING AT JUNE 30, 1999 AND DECEMBER 31, 1998, RESPECTIVELY. $5,694,135 AGGREGATE LIQUIDATION PREFERENCE 5,214,238 5,281,937 COMMON STOCK, $.02 PAR VALUE, 20,000,000 SHARES AUTHORIZED, 8,556,201 AND 8,552,364 SHARES ISSUED AND OUTSTANDING AT JUNE 30, 1999 AND DECEMBER 31, 1998, RESPECTIVELY 171,131 171,055 PAID-IN-CAPITAL 36,966,689 36,947,588 ACCUMULATED DEFICIT (24,832,748) (23,401,707) LESS COST OF TREASURY STOCK; 21,773 SHARES (68,040) (68,040) -------------- --------------- TOTAL STOCKHOLDERS' EQUITY 21,078,270 22,557,833 COMMITMENTS AND CONTINGENCIES -------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $54,896,889 $57,940,817 ============== =============== See accompanying notes to consolidated financial statements.
MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 JUNE 30 1999 1998 1999 1998 ------------- ------------- ------------- ------------ REVENUE OIL AND GAS SALES AND PLANT INCOME $ 3,600,282 $ 4,484,670 $ 6,672,346 $ 7,116,918 GAIN ON SALE OF PROPERTIES 232,892 9,068 307,190 9,068 DELAY RENTAL AND LEASE BONUS INCOME -- 197,071 3,000 197,071 OTHER 122,157 117,295 221,934 241,937 ------------ ------------ ------------ ------------ TOTAL REVENUE 3,955,331 4,808,104 7,204,470 7,564,994 ------------ ------------ ------------ ------------ COSTS AND EXPENSES LEASE OPERATING, PRODUCTION TAXES AND PLANT COSTS 1,556,117 2,420,967 3,016,658 3,605,015 GEOLOGICAL AND GEOPHYSICAL 72,159 42,402 141,716 788,115 DEPRECIATION, DEPLETION AND AMORTIZATION 1,230,910 1,906,806 2,580,540 3,024,942 DRYHOLE 1,442 (161,687) 63,631 307,264 INTEREST 509,689 557,388 1,021,445 812,841 STOCK COMPENSATION -- 33,750 -- 67,500 GENERAL AND ADMINISTRATIVE 819,787 1,148,791 1,936,249 2,232,206 OTHER 205,534 18,359 209,389 28,347 ------------ ------------ ------------ ------------ TOTAL COSTS AND EXPENSES 4,395,638 5,966,776 8,969,628 10,866,230 LOSS BEFORE INCOME TAX BENEFIT AND MINORITY INTEREST (440,307) (1,158,672) (1,765,158) (3,301,236) MINORITY INTEREST (54,003) (148,686) (63,773) (148,686) ------------ ------------ ------------ ------------ LOSS BEFORE INCOME TAX BENEFIT (386,304) (1,009,986) (1,701,385) (3,152,550) INCOME TAX BENEFIT (146,516) (343,395) (556,010) (1,071,867) ------------ ------------ ------------ ------------ NET LOSS (239,788) (666,591) (1,145,375) (2,080,683) DIVIDENDS TO PREFERRED STOCKHOLDERS 142,833 -- 285,666 67,945 ------------ ------------ ------------ ------------ NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS ($ 382,621) ($ 666,591) ($ 1,431,041) ($ 2,148,628) ============ ============ ============ ============ NET LOSS PER SHARE Basic ($ 0.04) ($ 0.08) ($ 0.17) ($ 0.28) ============ ============ ============ ============ Diluted ($ 0.04) ($ 0.08) ($ 0.17) ($ 0.28) ============ ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 8,531,567 8,530,592 8,531,080 7,625,124 ============ ============ ============ ============ Diluted 8,531,567 8,530,592 8,531,080 7,625,124 ============ ============ ============ ============
See accompanying notes to consolidated financial statements. MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED (UNAUDITED)
JUNE 30 JUNE 30 1999 1998 ---------------- --------------- OPERATING ACTIVITIES NET LOSS ($1,145,375) ($2,080,683) ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES DEPLETION, DEPRECIATION AND AMORTIZATION 2,580,540 3,024,942 DRYHOLE COSTS 63,631 307,264 STOCK COMPENSATION EXPENSE - 67,500 GAIN ON SALE OF PROPERTIES (307,190) (9,068) DEFERRED INCOME TAX BENEFIT (560,471) (1,071,867) MINORITY INTEREST (63,773) (148,686) OTHER CHARGES 100,000 - CHANGES IN CURRENT ASSETS AND LIABILITIES, NET OF ACQUISITION EFFECTS: ACCOUNTS RECEIVABLE AND OTHER CURRENT ASSETS 1,108,599 349,860 ACCOUNTS PAYABLE, REVENUE PAYABLE, AND OTHER CURRENT LIABILITIES (1,536,610) 693,861 ---------------- --------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 239,351 1,133,123 INVESTING ACTIVITIES PROCEEDS FROM SALES OF PROPERTIES 321,890 508,963 ADDITIONS TO OIL AND GAS PROPERTIES (1,242,641) (2,198,350) ACQUISITION OF ENEX RESOURCES CORPORATION, NET OF CASH ACQUIRED OF $4,698,211 - (11,329,203) ACQUISITION OF ASSETS OF SERVICE DRILLING CO. - (6,313,373) OTHER ASSETS (10,677) (332,749) ADVANCES TO STOCKHOLDER (3,475) (3,474) ---------------- --------------- NET CASH USED IN INVESTING ACTIVITIES (934,903) (19,668,186) FINANCING ACTIVITIES PROCEEDS FROM DEBT ISSUED 1,036,000 32,469,604 PRINCIPAL PAYMENTS ON DEBT - (12,839,713) PREFERRED STOCK DIVIDENDS (72,564) (67,945) REGISTRATION COSTS ON SERIES C PREFERRED STOCK (48,518) (416,736) OTHER - (135,719) ---------------- --------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 914,918 19,009,491 NET INCREASE IN CASH AND CASH EQUIVALENTS 219,366 474,428 CASH AND CASH EQUIVALENTS- BEGINNING 1,040,096 1,587,184 ---------------- --------------- CASH AND CASH EQUIVALENTS- ENDING $1,259,462 $2,061,612 ================ =============== SUPPLEMENTAL CASH FLOW INFORMATION: INTEREST PAID IN CASH $1,050,158 $835,658 ================ =============== PREFERRED DIVIDENDS INCURRED BUT NOT PAID $213,100 - ================ =============== CONVERSION OF SERIES A PREFERRED STOCK - $10,000,000 ================ =============== COMMON STOCK ISSUED AS FINDERS' FEE IN ENEX RESOURCES CORP. TENDER OFFER - $245,231 ================ =============== COMMON STOCK ISSUED IN ACQUISITION OF ASSETS FROM SERVICE DRILLING CO., LLC - $5,078,250 ================ ===============
See accompanying notes to consolidated financial statements. 3 MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1999 (Unaudited) (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Middle Bay Oil Company, Inc., was incorporated under the laws of the State of Alabama on November 30, 1992. Effective March 27, 1998, the Company acquired 79.2% of Enex Resources Corporation ("Enex") and effective April 16, 1998, the Company acquired the assets of Service Drilling Co., LLC ("Service Drilling"). Effective October 1, 1998, the Company acquired 100% of Enex Consolidated Partners, L.P. ("Enex Partnership"), a limited partnership of which Enex owned greater than a 50% interest. The Company and its subsidiaries are engaged in the acquisition, development and production of oil and gas in the contiguous United States. BASIS OF PRESENTATION In management's opinion, the accompanying consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the consolidated financial position of the Company as of June 30, 1999 and December 31, 1998 and the consolidated results of operations and consolidated cash flows for the periods ended June 30, 1999 and 1998. The consolidated financial statements were prepared pursuant to the rules and regulations of the Securities and Exchange Commission. An independent accountant has not audited the accompanying consolidated financial statements. Certain information and disclosures normally included in annual audited financial statements prepared in accordance with generally accepted accounting principles have been omitted, although the Company believes that the disclosures made are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the Company's financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1998. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary and Enex, an 80% owned subsidiary. The equity of minority interest in Enex is shown in the consolidated statements as "minority interest". Significant intercompany accounts and transactions are eliminated in consolidation. 4 MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1999 (Unaudited) (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) EARNINGS PER SHARE Basic earnings per share is based on the weighted average shares outstanding without any dilutive effects considered. Diluted earnings per share reflects dilution from all potential common shares, including options, warrants and convertible preferred stock. A weighted average of 1,437,414 and 1,462,112 common stock equivalents in 1999 and 392,108 and 393,677 common stock equivalents in 1998, are not considered in the calculation of diluted earnings per share for the six and three month periods ending June 30, respectively, due to the net loss recorded during these periods. RECLASSIFICATIONS Certain reclassifications of prior period amounts have been made to conform to the current presentation. (2) ACQUISITIONS On March 27, 1998, the Company acquired 1,064,432 common shares, approximately 79.2%, of Enex for $15,966,480. The Company purchased the common shares of Enex through a cash tender offer that commenced February 19, 1998 (the "Enex Acquisition"). The Company also incurred approximately $60,934 in legal, accounting and printing expenses and issued 33,825 shares of Company common stock for finders fees to unrelated third parties. At the time, Enex was general partner of Enex Consolidated Partners, L.P., (the "Enex Partnership"), a New Jersey limited partnership whose principal business was oil and gas exploration and production. Enex's general partner interest was 4.1%. Enex also owned an approximate 56.2% limited partner interest in Enex Partnership. The cost of acquiring 79.2% of Enex was allocated using the purchase method of accounting to the consolidated assets and liabilities of Enex based on estimates of the fair values with the remaining purchase price allocated to proved oil and gas properties. The allocation of the purchase price is summarized as follows: (in thousands) 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 June 30, 1999 (Unaudited) (2) ACQUISITIONS (continued) Over a three-week period ending December 23, 1998, the Company acquired an additional 0.80% (9,747 common shares) of Enex common stock for approximately $68,000. On April 16, 1998, the Company acquired substantially all of the oil and gas assets of Service Drilling Co., LLC and certain affiliates ("Service Drilling"), in exchange for 666,000 shares of Company common stock and $6,500,000 in cash for a total acquisition cost of $10,054,774, before post-closing adjustments (the "Service Acquisition"). The fair value of the securities issued in connection with the Service Acquisition was calculated using the price of the Company's common stock at the time the Service Acquisition was announced to the public and further adjusted for tradability restrictions. An independent valuation firm determined the tradability discount for the Company's common stock. The effective date of the acquisition was March 1, 1998 and the cost was allocated using the purchase method of accounting. On December 29, 1998, the Company completed the acquisition of the Enex Partnership (the "Enex Partnership Acquisition"). The transaction consisted of an exchange offer whereby the Company offered to exchange 2.086 shares of Series C Preferred stock ("Series C") for each Enex Partnership unit (the "Exchange Offer"). In connection with the Exchange Offer, the Company submitted a proposal to investors in the Enex Partnership to amend the partnership agreement to provide for the transfer of all of the assets and liabilities of the Enex Partnership to the Company as of October 1, 1998 and dissolve the Enex Partnership. The Exchange Offer was approved on December 29, 1998 and the Company issued 2,177,481 Series C shares for 100% of the outstanding limited partner units. At the close of the Exchange Offer, the Enex Partnership had 1,102,631 units outstanding. Enex was issued 1,293,521 Series C shares for its 56.2% ownership of the Enex Partnership. The remaining 883,959 Series C shares were issued to the limited partners that elected to take Series C shares in lieu of cash. Certain dissenting limited partners were paid $516,000 in January 1999. Because of the dissenting limited partners, Enex owns 59.4% of the Series C shares, of which 20% (258,704 shares) are considered outstanding and held by third parties. 6 MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1999 (Unaudited) (2) ACQUISITIONS (continued) The cost of acquiring 100% of the outstanding limited partner units was approximately $11.9 million, consisting of the following (in thousands): 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 June 30, 1999 (Unaudited) (2) ACQUISITIONS (continued) The following pro forma data presents the results of the Company for the six months ended June 30, 1998, as if the acquisitions of Service, Enex and the Enex Partnership had occurred on January 1, 1998. The pro forma results are presented for comparative purposes only and are not necessarily indicative of the results which would have been obtained had the acquisitions been consummated as presented. The following data reflect pro forma adjustments for oil and gas revenues, production costs, depreciation and depletion related to the properties and businesses acquired, preferred stock dividends on preferred stock issued, and the related income tax effects (in thousands, except per share amounts):
ProForma Six Months Ended June 30, 1998 (Unaudited) Total revenues $12,743 Net loss available to stockholders (3,192) Net loss per share available to stockholders (0.40)
(3) ACCOUNTS RECEIVABLE-INSURANCE CLAIM The Company owns a 100% working interest in the Louis Mayard #1 well (the "Well") located in the Esther Field in Vermillion Parish, Louisiana. Due to a failed recompletion attempt and the inability of the Company to shut in the Well using normal operating methods, the Company incurred approximately $1,856,000 during 1998 to gain control of the Well using special crews. On November 4, 1998, the insurance company made a partial payment to the Company under its well control insurance policy of approximately $1,408,000. In April, 1999 the Company was paid $388,000 in final settlement of all claims related to the Well. The Company had recorded the estimated remaining amount due from the insurance company in current assets as Accounts Receivable-Insurance Claim. 8 MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1999 (Unaudited) (4) LONG-TERM DEBT
June 30 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 $250,000 effective May 1, 1999 and monthly payments of interest at Libor plus 2.00% and prime. At June 30, 1999 the Libor and prime rates were 5.30% and 7.75%, respectively 28,490,567 27,454,567 Less current maturities (1,541,000) --- ----------- ----------- Long-term debt excluding current maturities $26,949,567 $27,454,567 =========== ===========
In connection with the Enex Acquisition the Company entered into a new reducing revolving line of credit agreement (the "$100 million Revolver"). The $100 million Revolver is subject to semi-annual borrowing base redeterminations which are affected by acquisitions and dispositions of assets. The borrowing base at June 30, 1999 was $30.5 million and monthly borrowing base reduction requirements are $250,000. The principal is due at maturity, April 1, 2001. Monthly principal payments are made as required in order that the outstanding principal balance plus outstanding letters of credit does not exceed the borrowing base. Interest is payable monthly and is calculated at the prime rate. The Company may also elect to calculate interest under the Libor rate, as defined in the agreement. The Libor rate increases by (a) 2.00% if the outstanding loan balance and letters of credit are equal to or greater than 75% of the borrowing base, (b) 1.75% if the outstanding loan balance and letters of credit are less than 75% or greater than 50% of the borrowing base or (c) 1.50% if the outstanding loan balance and letters of credit are equal to or less than 50% of the borrowing base. Libor interest is payable at maturity of the Libor loan which cannot be less than thirty days. At June 30, 1999, the Company had borrowed $28,490,567 and had $550,432 of outstanding letters of credit. As of June 30, 1999, the Company is paying Libor plus 2.00% on a ninety day Libor loan for $26,505,605 and prime on $1,984,962. 9 MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1999 (Unaudited) (4) LONG-TERM DEBT (continued) Effective May 1, 1999, the borrowing base was redetermined to be $31 million with monthly borrowing base reductions of $250,000. The amount available under the borrowing base, less outstanding letters of credit, at June 30, 1999, was $1.4 million. The next redetermination is expected to be October 1, 1999. Pursuant to the terms of the $100 million Revolver, if the borrowing base is less than the outstanding principal balance plus outstanding letters of credit, the Company has sixty days, after receipt of notice from the Banks, to cure the excess by prepayment, providing additional collateral or a combination of both. Amounts spent on debt retirement due to reductions in the borrowing base reduce the cash available to spend on acquisition, development and exploration activities, and accordingly, oil and natural gas revenues and operating results may be adversely affected. The Company paid a facility fee equal to 3/8% of the initial borrowing base and is required to pay 3/8% on any future increase in the borrowing base within five days of written notice. The Company is required to pay a quarterly commitment fee on the unused portion of the borrowing base of 1/2% if the outstanding loan balance plus letters of credit are greater than 50% of the borrowing base or 3/8% if the outstanding loan balance plus letters of credit are less than or equal to 50% of the borrowing base. The Company is required to pay a letter of credit fee on the date of issuance or renewal of each letter of credit equal to the greater of $500 or 1 1/2% of the face amount of the letter of credit. The Company has granted to the Banks liens on substantially all of the Company's oil and natural gas properties, whether currently owned or hereafter acquired, and a negative pledge on all other oil and gas properties. The $100 million Revolver requires, among other things, a cash flow coverage ratio of 1.25 to 1.00 and a current ratio, excluding current maturities of the $100 million Revolver, of 0.9 to 1.00, determined on a quarterly basis. 10 MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1999 (Unaudited) (5) COMMON STOCK On February 10, 1999 and January 13, 1998, the Board of Directors granted to certain employees and directors, options with exercise prices of $1.50 and $5.75 per share, respectively, to acquire 200,000 and 232,000 shares of Company common stock, respectively. All of the options were granted under the 1995 Stock Option and Stock Appreciation Rights Plan at fair market value and will expire five years from date of grant if not exercised. (6) COMMITMENTS AND CONTINGENCIES In March 1995, the Board of Directors adopted an employee incentive compensation plan (the "Plan") for the benefit of Company employees. The Plan benefits are equal to one percent (1%) of the annual net profit from oil and gas properties acquired or discovered on or after January 1, 1994 and one percent (1%) of the annual sales proceeds from any oil and gas properties sold on or after January 1, 1994. The Compensation Committee of the Board of Directors has sole authority regarding the amount and timing of payment of any Plan benefits to eligible employees. The Plan benefits are not accrued as an expense in the financial statements because the likelihood that the Compensation Committee would determine that the benefits would be payable to eligible employees is less than probable. Effective June 30, 1999 and December 31, 1998, the Plan benefits were approximately $226,000 and $186,000. On July 26, 1999, the Compensation Committee authorized, contingent on the closing of the securities purchase agreement with 3TEC (See Footnote 9-Subsequent Events), the payment of all of the Plan benefits to eligible employees. If the securities purchase agreement does not close, the Plan will continue and the date of payment and amount of payment, if any, will be determined by the Compensation Committee. The Company is a defendant in various legal proceedings which are considered routine litigation incidental to the Company's business, the disposition of which management believes will not have a material effect on the financial position or results of operations of the Company. 11 MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1999 (Unaudited) (7) HEDGING ACTIVITIES In April, the Company entered into costless collar hedges for approximately 3,650 Mcf per day with a weighted average floor and ceiling of $2.06 and $2.20, for the months of May through October. During the current period, the Company incurred a hedging loss of $13,000. (8) SUBSEQUENT EVENTS On July 1, 1999, the Company entered into a Securities Purchase Agreement(the "Agreement') with 3TEC Energy Corporation, a privately-held company ("3TEC"), whereby, for $10,700,000, the Company would issue 4,755,556 shares of common stock and 3,600,000 warrants (the "Warrants") and a 5-year senior subordinated convertible note with a face value of $10,700,000 (the "Note"). The Warrants may be exercised for up to 3,600,000 shares of common stock at an exercise price of $1 per share. Sixty percent of the Warrants may be exercised immediately. The remaining 40% will be exercisable over a 4-year period commencing 12 months from the closing date of the Agreement. The Note will bear interest at a rate of 9% per annum and is convertible into 3,566,667 shares of common stock. The closing of the transaction is expected to occur in August, 1999. At closing, 3TEC will become the Company's largest shareholder with ownership of approximately 36% of the then outstanding common stock. If 3TEC chooses to fully exercise the Warrants and fully convert the Note to common shares, 3TEC would control approximately 58% of the then issued and outstanding shares of common stock of the Company. 12 MIDDLE BAY OIL COMPANY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1999 (Unaudited) (8) SUBSEQUENT EVENTS (continued) Under the terms of a shareholders agreement to be executed at closing, 3TEC will have the right to designate three members of a new five-person Board of Directors. Certain other major shareholders of the Company will have the right to designate the other two board members. At closing, the President of 3TEC will become Chairman, President and Chief Executive Officer of the Company and the former president of the Company will become Executive Vice-President. Upon the closing of the Agreement with 3TEC, the Company expects to add eight full-time employees. The Company also expects to assume the rent and administrative costs of office space in Dallas, Texas where these employees will be working. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations LIQUIDITY AND CAPITAL RESOURCES Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 Cash flow from operating activities for the current period of $239,000 decreased $894,000 from the comparable period. The decrease in cash flow was due primarily to working capital changes offset partially by lower geological and geophysical expenses and general and administrative expenses. Cash flow from oil and gas properties (oil and gas revenues and plant income less lease operating expenses, production taxes and plant costs) increased $144,000 over the comparable period. Oil prices increased 3%, while oil production decreased 5%. Gas prices decreased 14%, while gas production increased 7%. The change in working capital was caused principally by timing differences in the payment of expenses and receipt of revenues. Cash additions to oil and gas properties were lower than the comparable period due primarily to less exploratory and developmental drilling in the current period. The amount spent on acquisitions is lower due to no acquisitions in the current period versus the Enex and Service Acquisitions that closed in the comparable period. The Company acquired approximately 79% of Enex common stock for cash in a tender offer that closed March 27, 1998 and acquired the oil and gas assets of Service Drilling Co., LLC and certain affiliates for cash and stock in a transaction that closed April 16, 1998. During the current period, the Company was advanced $516,000 on the $100 million Revolver to pay the dissenting limited partners in the Enex Partnership Acquisition and $520,000 to pay for developmental drilling projects on several of its major properties. In the comparable period, the Company refinanced its existing debt and financed the Enex and Service Acquisitions with proceeds from the $100 million Revolver. The Company made no principal payments on the $100 million Revolver during the current period. In the comparable period, the Company made principal payments of $1,881,000. In the current period, the Company paid approximately $72,000 in dividends on the Series C preferred stock issued in the Enex Acquisition. The amount paid represents a portion of the total $143,000 of dividends accrued for the three months ended March 31, 1999. An additional $143,000 was accrued in the current period. All of the dividends accrued were not immediately paid in cash because of unknown addresses and non-receipt of preferred stock issuance forms. The Company's operating activities provided net cash of $239,000 for the current period. During this period, net cash from operations, property sales, $100 million Revolver advances and cash on hand was used principally for leasehold acquisitions, exploratory and developmental drilling and geological and geophysical expenses. Approximately $167,000 was spent on leasehold and legal costs on the Hawkins Ranch Prospect. Approximately 14 $908,000 was spent on exploratory and developmental drilling and approximately $167,000 was spent on abandonment costs on a field in Florida. The principal exploratory well in the current period was the Hawkins 60 #1, a $36,000 dry hole drilled on the Hawkins Ranch Prospect. The principal developmental expenditure in the current period was a recompletion in the Murphy Lake Field for approximately $351,000. The remaining exploratory and developmental work was throughout several fields. The Company had current assets of $4,198,000 and current liabilities of $4,453,000, which resulted in a working capital deficit of $255,000 as of June 30, 1999. The current period deficit was a decrease in working capital of $394,000 from working capital of $139,000 as of December 31, 1998. Working capital decreased primarily due to the higher current maturity of long-term debt and lower accounts receivable. The current maturity of long-term debt increased from December 31, 1998 because the amount of debt outstanding increased and the borrowing base decreased since December 31, 1998. The Company's current ratio of 1.44, calculated under the terms of the $100 million Revolver agreement, which excludes current maturities of debt due under the $100 million Revolver, was in excess of the 0.90 to 1.00 required. $100 MILLION LINE OF CREDIT In conjunction with the Enex Acquisition on March 27, 1998 the Company entered into a $100 million reducing, revolving line of credit (the "$100 million Revolver") with current borrowings under a term note maturing April 1, 2001. The entire principal balance of the Company's $50 million Convertible Loan was replaced with the $100 million Revolver. The amount the Company can borrow is based upon the borrowing base. The borrowing base and the monthly borrowing base reduction amounts are redetermined semi-annually by unanimous consent of the lenders. The principal is due at maturity, April 1, 2001. Monthly principal payments are made as required in order that the outstanding principal balance plus outstanding letters of credit does not exceed the borrowing base. Interest is payable monthly and is calculated at the prime rate. The Company may elect to calculate interest under the Libor rate, as defined in the agreement. The Libor rate increases by (a) 2.00% if the outstanding loan balance and letters of credit are equal to or greater than 75% of the borrowing base, (b) 1.75% if the outstanding loan balance and letters of credit are less than 75% or greater than 50% of the borrowing base or (c) 1.50% if the outstanding loan balance and letters of credit are equal to or less than 50% of the borrowing base. The borrowing base at June 30, 1999 was $30.5 million. Effective May 1, the borrowing base was redetermined to be $31 million with monthly borrowing base reductions of $250,000. At June 30, 1999 the Company had borrowed $28,491,000 and had $550,000 of outstanding letters of credit. During the current period, the Company did not make any payments and was advanced $1,036,000 under the $100 million Revolver. The Company is currently paying Libor plus 2.00% on a ninety day Libor loan for $26,506,000 and prime on $1,985,000. 15 At June 30, 1999, the amount available under the borrowing base on the $100 million revolver was approximately $1.4 million. Pursuant to the terms of the $100 million Revolver, if the borrowing base is less than the outstanding principal balance plus outstanding letters of credit the Company has sixty days, after receipt of notice from the Banks, to cure the excess by prepayment, providing additional collateral or a combination of both. The next redetermination is expected to be October 1, 1999. The Company paid a facility fee equal to 3/8% of the initial borrowing base and is required to pay 3/8% on any future increase in the borrowing base within five days of written notice. The Company is required to pay a quarterly commitment fee on the unused portion of the borrowing base of 1/2 % if the outstanding loan balance plus letters of credit are greater than 50% of the borrowing base or 3/8 % if the outstanding loan balance plus letters of credit are less than or equal to 50% of the borrowing base. The Company is required to pay a letter of credit fee on the date of issuance or renewal of each letter of credit equal to the greater of $500 or 1 1/2 % of the face amount of the letter of credit. The Company has granted to the Banks liens on substantially all of the Company's oil and natural gas properties, whether currently owned or hereafter acquired, and a negative pledge on all other oil and gas properties. The $100 million Revolver requires, among other things, a cash flow coverage ratio of 1.25 to 1.00 and a current ratio, excluding the current maturity of the $100 million Revolver, of 0.9 to 1.00, determined on a quarterly basis. As of June 30, 1999 the Company was in compliance with the cash flow and current ratio covenants. Because the borrowing base was higher than the debt and letters of credit outstanding during the current period, no debt payments were required. Under the terms of the $100 million Revolver, when mortgaged properties are sold the borrowing base shall be reduced, and if necessary, proceeds from the sales of properties shall be applied to the debt outstanding in an amount equal to the loan value attributable to such properties sold. The $100 million Revolver includes other covenants prohibiting cash dividends, distributions, loans, advances to third parties in excess of $100,000, or sales of assets greater than 10% of the aggregate net present value of the oil and gas properties in the borrowing base. Compass Bank has granted the Company a waiver allowing the Company to pay the dividends to holders of Series C as long as no default or event of default exists or would exist as a result of any Series C dividend payment. COMMON STOCK AND CONVERTIBLE NOTE SALE TO 3TEC ENERGY CORPORATION On July 1, 1999, the Company entered into a Securities Purchase Agreement(the "Agreement') with 3TEC Energy Corporation, a privately-held company ("3TEC"), whereby, for $10,700,000, the Company would issue 16 4,755,556 shares of common stock and 3,600,000 warrants (the "Warrants") and a 5-year senior subordinated convertible note with a face value of $10,700,000 (the "Note"). The Warrants may be exercised for up to 3,600,000 shares of common stock at an exercise price of $1 per share. Sixty percent of the Warrants may be exercised immediately. The remaining 40% will be exercisable over a 4-year period commencing 12 months from the closing date of the Agreement. The Note will bear interest at a rate of 9% per annum and is convertible into 3,566,667 shares of common stock. The closing of the transaction is expected to occur in August, 1999. At closing, 3TEC will become the Company's largest shareholder with ownership of approximately 36% of the then outstanding common stock. If 3TEC chooses to fully exercise the Warrants and fully convert the Note to common shares, 3TEC would control approximately 58% of the then issued and outstanding shares of common stock of the Company. Under the terms of a shareholders agreement to be executed at closing, 3TEC will have the right to designate three members of a new five-person Board of Directors. Certain other major shareholders of the Company will have the right to designate the other two board members. At closing, the President of 3TEC will become Chairman, President and Chief Executive Officer of the Company and the former president of the Company will become Executive Vice-President. ADDITIONAL COSTS AND EMPLOYEES ASSOCIATED WITH THE SECURITIES SALE TO 3TEC ENERGY CORPORATION Upon the closing of the Agreement with 3TEC, the Company expects to add eight full-time employees. The Company also expects to assume the rent and administrative costs of office space in Dallas, Texas where these employees will be working. PROPERTY SALES During the six month period ending June 30, 1999, the Company received approximately $309,000 in cash from the sales of non-strategic oil and gas properties. The Company accrued an additional $225,000 from the sale of an oil and gas property that closed subsequent to June 30, 1999. The Company recorded a gain of $295,000 on the sale of the oil and gas properties. Subsequent to the May 1 borrowing base redetermination, the loan value of the sold properties was insignificant and did not reduce the borrowing base. FUTURE CAPITAL REQUIREMENTS 17 The Company has made and will continue to make, substantial capital expenditures for acquisition, development and exploration of oil and natural gas reserves. In fact, because the Company's principal natural gas and oil reserves are depleted by production, its success is dependent upon the results of its acquisition, development and exploration activities. The Company expects to incur a minimum of approximately $1,000,000 in capital expenditures over the next twelve months. The Company expects that available cash, cash flows from operations and cash proceeds from asset sales of certain non-core properties will be sufficient to fund the planned capital expenditures through June 2000 in addition to funding interest and principal requirements on the $100 million Revolver. However, the Company may require additional borrowings under the $100 million Revolver or additional equity funding to raise additional capital to fund any acquisitions. The Company expects to participate in two exploratory wells on the Hawkins Ranch Prospect in addition to the dry hole drilled in the first quarter of 1999. The next two wells are expected to be spudded in August and November. The estimated drilling and completion cost on these two wells is expected to be $723,000. Because future cash flows and the availability of financing are subject to a number of variables, such as the level of production and prices received for gas and oil, there can be no assurance that the Company's capital resources will be sufficient to maintain planned levels of capital expenditures and accordingly, oil and natural gas revenues and operating results may be adversely affected. At June 30, 1999, the amount available under the borrowing base on the $100 million revolver was approximately $1.4 million. Assuming no other changes, the amount available to be borrowed at October 1, the next borrowing base redetermination date, will be approximately $0.4 million. Amounts spent on debt retirement due to reductions in the borrowing base reduce the cash available to spend on acquisition, development and exploration activities and, accordingly, oil and natural gas revenues and operating results may be adversely affected. CURRENT ACTIVITIES As of August 15, 1999, there were four developmental wells drilling. YEAR 2000 COMPLIANCE Readers are cautioned that the forward-looking statements contained in the following Year 2000 discussion should be read in conjunction with the Company's disclosures under the heading "Forward-Looking Statements." The disclosures also constitute a "Year 2000 Readiness Disclosure" and "Year 2000 Statement" within the meaning of the Year 2000 Information and Readiness Disclosure Act of 1998. 18 STATEMENT OF READINESS The Company has undertaken various initiatives to ensure that its hardware, software and equipment will function properly with respect to dates before and after January 1, 2000. For this purpose, the phrase "hardware, software and equipment" includes systems that are commonly thought of as Information Technology systems ("IT"), as well as those Non-Information Technology systems ("Non-IT") and equipment which include embedded technology. IT systems include computer hardware and software and other related systems. Non-IT systems include certain oil and gas production and field equipment, gathering systems, office equipment, telephone systems, security systems and other miscellaneous systems. The Non-IT systems present the greatest readiness challenge since identification of embedded technology is difficult and because the Company is, to a great extent, reliant on third parties for Non-IT compliance. The Company has formed a Year 2000 ("Y2K") Project team, which is chaired by its Chief Financial Officer, Frank C. Turner, II. The team includes corporate staff and representatives from the Company's business units. In response to the possible risks posed to the Company, the team has developed a Y2K Plan (the "Plan") which includes guidelines for inventory, assessment, remediation, testing and contingency planning. The following categories represent the mission-critical operational systems of the Company. A "mission-critical system" is a system that is vital to the successful continuation of a core business activity. An application may be mission critical if it interfaces with a designated mission-critical system. Each system has been evaluated by the Company as to (a) the risks to the Company in the event of the most reasonably likely worst case scenario (the "Worst Case Scenario"); (b) the status of the Company's remediation plan, if any ("Status"); and (c) the Company's contingency plans, if any ("Contingency Plans"). ACCOUNTING SOFTWARE SYSTEMS. The Company relies solely on the software accounting packages ("Accounting Packages") to provide management with various reports that allow managers to determine the cash flow and profitability of individual properties and of the Company as a whole. Management also relies on the Accounting Packages to provide financial information necessary to prepare quarterly and annual financial reports that are sent to the Securities and Exchange Commission, NASDAQ Stock Market, banks and stockholders. In addition, the Company relies on the Accounting Packages to process and print checks to be sent to working and royalty interest owners for their share of the monthly oil and gas sales, to process and print checks for payment to vendors and to process and print monthly joint-interest statements to be sent to working interest owners in Company-operated oil and gas properties. Under a Worst Case Scenario, all accounting functions would have to be completed manually, significantly hindering the Company's ability to complete the above-described mission-critical tasks. Status: The Company has updated its accounting systems. Testing was completed on June 30, 1999 and all primary functions utilizing dates functioned properly. 19 Contingency Plans: Based on the results of the independent testing of the Accounting Software System, the Y2K Team believes the risk of the Accounting Software System being adversely affected by Y2K is remote. If the Accounting Software System is adversely affected by Y2K, the Company has developed various contingency plans which include the utilization of support personnel and the performance of manual tasks. CONTROL SYSTEMS AND IMBEDDED TECHNOLOGY. These systems include the equipment used to produce, monitor, control, sell and record hydrocarbon production, including all artificial lift equipment, storage, measurement and control facilities and third-party systems and technology interrelated to the Company's business. Under a Worst Case Scenario, multiple fields of oil and gas would lose the ability to account for the amount of hydrocarbon production, temporarily shutting down the field(s) until the malfunctioning part(s) could be repaired or replaced. This is not expected to materially adversely effect the Company. Status: The only mission-critical field operated by the Company is the Spivey Field, whose production operations are not affected by Y2K issues. The Spivey Field is affected by a third-party operated gas plant that processes the field's natural gas and may be subject to Y2K issues. Refer to "Third Party Systems-Gas Plant" for a discussion of the gas plant at the Spivey Field. The operations of the remaining fields were not materially effected by Y2K issues. Contingency Plans: The Company will continue to monitor the operations at its field locations and develop contingency planning if an exposure becomes apparent. THIRD-PARTY SYSTEMS - OIL AND GAS PURCHASERS. The Company utilizes third-party purchasers to sell the oil and gas produced from the wells in which it has a working or royalty interest. The Company also depends on third-party purchasers to remit to the Company its share of the proceeds from the sales of oil and gas. The Company does not directly sell any oil and gas produced from the wells in which it has a working or royalty interest and does not take any oil or gas in kind as an alternative to cash payment. Under a Worst Case Scenario, multiple major purchasers would be temporarily shut down due to Y2K issues, materially adversely effecting the Company's revenues. Status: Based upon the diversity of purchasers, the Company believes that no single purchaser is a mission-critical purchaser. The Y2K team does not anticipate that a problem with any single purchaser for a reasonable period of time beyond 2000 will force the Company to curtail or shut down its operations. Although no single purchaser is a mission-critical purchaser, the loss of a major purchaser or multiple minor purchasers due to Y2K problems would affect the Company. The Company has obtained information about the top ten purchasers and their Y2K readiness. All but two of the top ten purchasers have formal Y2K Plans and are 20 working to upgrade any mission-critical systems that are affected by Y2K. The other two purchasers acknowledge that certain systems will be affected by Y2K and have been undertaking plans to upgrade these systems. Contingency Plans: The Company continues to monitor the Y2K status of its major purchasers. Should a purchaser not become Y2K compliant, the Company will identify alternative purchasers for its production and, if necessary, temporarily shut-in production. THIRD-PARTY SYSTEMS - GAS PLANT. Over 95% of the gas produced in the Spivey Field, a mission-critical system, is sold to a gas plant under a life of the lease casinghead tailgate gas contract. The Company owns approximately 11.5% of the gas plant and related gathering system. Colt Resources Corporation operates the plant. Under a Worst Case Scenario, the gas plant would be shut down less than one month which would not materially adversely effect the Company. Status: The Company has received a letter from the operator of the Spivey plant stating that the Spivey plant's control systems and embedded technology are not Y2K affected and that its accounting and processing systems are Y2K compliant. Contingency Plans: A short-term interruption of gas sales would not materially affect the Company's operations. If the Spivey plant experiences problems with an expected duration in excess of one month, the Company has identified alternative gas markets it could utilize. THIRD-PARTY SYSTEMS - BANKING. The Company relies on its banks to deposit checks payable to the Company and credit the checks to the appropriate accounts. The Company also relies on its banks to credit third-party accounts for payment. A Worst Case Scenario would occur if the Company's principal bank is unable to provide certain services for an extended period of time due to Y2K, causing the Company to be materially adversely affected. Status: The Company's principal bank currently has a formal Y2K Plan in effect and has substantially remediated and tested all of its non-compliant, in-house and vendor-supported mission-critical systems as of June 30, 1999. Contingency Plans: The Company intends to have cash on hand sufficient to cover short-term emergency payments and payroll. The Company also plans to open accounts with other institutions in the event its principal bank is unable to rectify its problems in a timely manner. The Company has no long-term contingency plans in the event of a system-wide failure of banking institutions. 21 THIRD-PARTY SYSTEMS - SUPPORT FUNCTIONS. The primary material support functions provided by third parties are electrical service, communication service and office space. Under a Worst Case Scenario, all primary support functions would be hindered in the short term. Status: All vendors of these services have reported that formal Y2K remediation plans are in effect and will be substantially complete by September 30, 1999. Contingency Plans: Short-term (less than two weeks) interruptions of services will not materially adversely effect the Company. The Company will be able to conduct business on a reduced scale using alternative business methods. Longer-term interruptions may materially adversely effect the Company. The Company has no plans sufficient to fully offset the effect of long-term interruptions. COMPUTER OPERATING SYSTEMS AND APPLICATION SOFTWARE SYSTEMS. The Company relies solely on its personal computer systems to access the accounting software package through the Company's computer network. In addition, certain schedules and databases that are used for critical functions rely on spreadsheet and work-processing applications that are run on the Company's personal computer systems. Status: All systems appear to be Y2K ready. Contingency Plans: Operations could be performed manually until non-functioning equipment or software is repaired or replaced COSTS OF Y2K COMPLIANCE The costs incurred by the Company to implement the Plan were not material to the Company's financial condition or results of operations. The Company does not expect any future costs related to the Plan to be material to the Company's financial condition or results of operations. The Risks of Y2K Issues The Company presently believes that Y2K issues will not pose significant operational problems. However, if all significant Y2K issues are not properly identified or assessed, remediation and testing are not effected timely, the Y2K issues, either individually or in combination, may materially and adversely impact the Company's results of operations, liquidity and financial condition or materially and adversely affect its relationships with its business partners. Additionally, the misrepresentation of compliance by other entities or the persistent, universal failure of financial, transportation or other economic systems will likely have a material and adverse impact on the Company's operations or financial condition for which it cannot adequately prepare. 22 RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1999 AND 1998 For the three months ended June 30, 1998, the revenues and expenses include the Enex Acquisition and do not include the Enex Partnership Acquisition. The Service Acquisition is included in the revenues and expenses for the months of May and June. Total revenues for the current period of $3,955,000 were $853,000 lower than the comparable period. The decrease in total revenues was due principally to decreases in oil and gas revenues of $884,000. The decrease in oil and gas revenues consisted of a $205,000 decrease in oil revenues, a $624,000 decrease in gas revenues and a $55,000 decrease in other revenues. The decrease in oil and gas revenues was the result of lower oil and gas production. Production of oil and gas decreased 38% and 25%, respectively, over the comparable period. Normal production decline and the property sales in the second half of 1998 contributed to the declines in oil and gas production. During the current period, the Company sold 106,000 barrels of oil and 865,000 Mcf of gas, as compared to 171,000 barrels and 1,160,000 Mcf for the comparable period. The average price received on the gas sold in the current period of $2.07 per Mcf was approximately equal to the price received in the comparable period. The average price received on the oil sold in the current period of $16.32 per barrel was 44% higher than the $11.34 per barrel received in the comparable period. In April, the Company entered into costless collar hedges for approximately 3,650 Mcf per day with a weighted average floor and ceiling of $2.06 and $2.20, for the months of May through October. During the current period, the Company incurred a hedging loss of $13,000. Total expenses decreased $1,571,000 over the comparable period. The primary reason for the total expense decrease was lower lease operating expenses, production taxes and plant costs ("lease operating expenses") and depletion. Lease operating expense decreased $865,000. Property sales in the second half of 1998 contributed to the lower lease operating expenses. Geological and geophysical expenses ("G&G expenses") increased $30,000. In the current and comparable periods, the Company incurred approximately $72,000 and $42,000, respectively, of G&G expenses. The principal G&G expenses in the current and prior periods were attributable to the Hawkins Ranch Prospect. No material, additional G&G expenses are expected to be incurred in the near future on the Hawkins Ranch Prospect. Depletion, depreciation and amortization expenses decreased $676,000. Reserve write-downs and property sales in the second half of 1998 contributed to the lower depletion, depreciation and amortization expenses. During the current period, dryhole expense increased by $163,000 due to a dryhole credit of $166,000 in the comparable period. The dryhole expense 23 in the current period of $1,000 was due to additional charges incurred on previous dryholes. No dryholes were drilled in the current period. Interest expense decreased $48,000. A lower loan balance and lower interest rates resulted in lower interest expense. The loan balance decreased as a result of principal payments from property sales proceeds and required principal payments. Stock compensation decreased $34,000. No stock compensation expense was incurred in the current period. The stock compensation expense in the prior period was due to the vesting of restricted stock granted to certain executive officers of the Company in February 1997. The stock became fully vested on June 30, 1998. General and administrative expenses ("G&A") decreased $329,000. Decreases in several expense categories contributed to the decrease. The primary expense decrease was due to decreases in salary expense, office expense, rent expense and legal fees. The staff reductions at Enex and the closing of the Enex offices at Kingwood contributed largely to the salary, office and rent expense decreases. Other expenses increased $187,000. Bad debt expense of $100,000 and other miscellaneous account adjustments resulted in the expense increase. The Company reported an operating loss before minority interest of $440,000 for current period versus an operating loss of $1,159,000 for the comparable period. Due to the Enex Acquisition, the Company records a minority interest on its income statement to remove the net income or loss attributable to the minority interest holders of Enex (20%). In the current and comparable periods, the minority interest decreased the operating loss by $54,000 and $149,000, respectively. The minority interest in the current period accounted only for the Enex operations while the minority interest in the comparable period accounted for the operations of Enex and the Enex Partnership. The Enex Partnership was acquired by the Company effective October 1, 1998. The Company reported a deferred income tax benefit of $146,000 in the current period versus a $344,000 benefit in the comparable period. The Company reported a net loss of $240,000 for the current period versus a net loss of $666,000 for the comparable period. After considering the preferred stock dividend requirement of $143,000 in the current period versus none in the comparable period, the Company reported a net loss available to common stockholders in the current and comparable periods of $383,000 and $666,000, respectively. The preferred dividends in the current period represent three months of accrued dividends on the Series C preferred stock. SIX MONTHS ENDED JUNE 30, 1999 AND 1998 For the six months ended June 30, 1998, the revenues and expenses include the Enex Acquisition for the period April through June and do not 24 include the Enex Partnership Acquisition. The Service Acquisition is included in the revenues and expenses for the months of May and June. Total revenues for the current period of $7,204,000 were $360,000 lower than the comparable period. The decrease in total revenues was due principally to decreases in oil and gas revenues of $444,000. The decrease in oil and gas revenues consisted of a $79,000 decrease in oil revenues, a $312,000 decrease in gas revenues and a $53,000 decrease in other revenues. The decrease in oil revenues was the result of lower oil production. The decrease in gas revenues was the result of lower gas prices. Oil production decreased 5% and gas production increased 7%, over the comparable period. Normal production decline and property sales in the second half of 1998 reduced oil and gas production over the comparable period. The Enex, Service and Enex Partnership Acquisitions, which closed subsequent to the March 26, 1998, increased oil and gas production over the comparable period. During the current period, the Company sold 251,000 barrels of oil and 1,795,000 Mcf of gas, as compared to 264,000 barrels and 1,681,000 Mcf for the comparable period. The average price received on the gas sold in the current period of $1.83 per Mcf was 14% lower than the $2.13 per Mcf received in the comparable period. The average price received on the oil sold in the current period of $12.61 per barrel was 3% higher than the $12.26 per barrel received in the comparable period. In April, the Company entered into costless collar hedges for approximately 3,650 Mcf per day with a weighted average floor and ceiling of $2.06 and $2.20, for the months of May through October. During the current period, the Company incurred a hedging loss of $13,000. Total expenses decreased $1,897,000 over the comparable period. The primary reason for the total expense decrease was lower lease operating expenses, production taxes and plant costs ("lease operating expenses"), geological and geophysical expenses and depletion. Lease operating expense decreased $588,000. Property sales in the second half of 1998 contributed to the lower lease operating expenses. Geological and geophysical expenses ("G&G expenses") decreased $646,000. In the current and comparable periods, the Company incurred approximately $142,000 and $788,000, respectively, of G&G expenses. The principal G&G expenses in the current and prior periods were attributable to the Hawkins Ranch Prospect. No material, additional G&G expenses are expected to be incurred in the near future on the Hawkins Ranch Prospect. Depletion, depreciation and amortization expenses decreased $444,000. Reserve write-downs and property sales in the second half of 1998 contributed to the lower depletion, depreciation and amortization expenses. During the current period, dryhole expense decreased by $244,000. The dryhole expense in the current period of $64,000 was due primarily to the $36,000 Hawkins 60 #1 dryhole drilled in the first quarter. The dryhole expense in the prior period of $307,000 consisted principally of a $199,000 25 dryhole on the S. Highbaugh Prospect and additional dryhole expense of $102,000 on two dryholes in the Reflection Ridge Prospect. Interest expense increased $209,000 due to a higher average loan balance. The loan balance was lower in the first quarter of the comparable period compared to the second quarter of the comparable period because the Enex Acqusition closed on March 27, 1998 and the Service Acquisition closed on April 16, 1998. In addition, advances on the $100 Million Revolver occurred in February and April of the current period. General and administrative expenses ("G&A") decreased $296,000. Decreases in several expense categories contributed to the decrease. The primary expense decrease was due to decreases in salary expense, office expense and legal fees. The staff reductions at Enex and the closing of the Enex offices at Kingwood contributed largely to the salary and office expense decreases. Stock compensation decreased $67,000. No stock compensation expense was incurred in the current period. The stock compensation expense in the prior period was due to the vesting of restricted stock granted to certain executive officers of the Company in February 1997. The stock became fully vested on June 30, 1998. Other expenses increased $181,000. Bad debt expense of $100,000 and other miscellaneous account adjustments resulted in the expense increase. The Company reported an operating loss before minority interest of $1,765,000 for current period versus an operating loss of $3,301,000 for the comparable period. Due to the Enex Acquisition, the Company records a minority interest on its income statement to remove the net income or loss attributable to the minority interest holders of Enex (20%). In the current and comparable periods, the minority interest decreased the operating loss by $64,000 and $149,000, respectively. The minority interest in the current period accounted only for the Enex operations while the minority interest in the comparable period accounted for the operations of Enex and the Enex Partnership. The Enex Partnership was acquired by the Company effective October 1, 1998. The Company reported a deferred income tax benefit of $556,000 in the current period versus a $1,072,000 benefit in the comparable period. The Company reported a net loss of $1,145,000 for the current period versus a net loss of $2,081,000 for the comparable period. After considering the preferred stock dividend requirement of $286,000 in the current period versus $67,000 in the comparable period, the Company reported a net loss available to common stockholders in the current and comparable periods of $1,431,000 and $2,149,000, respectively. The preferred dividends in the current period represent six months of accrued dividends on the Series C preferred stock. The preferred dividend in the comparable period represents accrued dividends on the Series A preferred stock. 26 ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (the "Statement"). The Statement establishes standards of accounting for and disclosures of derivative instruments and hedging activities. The Statement, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000. The Company has not yet determined the impact of the Statement on the Company's financial condition or results of operations. FORWARD-LOOKING STATEMENTS The Company may make forward looking statements, oral or written, including statements in this report, press releases and other filings with the SEC, relating to the Company's drilling plans, capital expenditures, the ability of expected sources of liquidity to support working capital and capital expenditure requirements, and the Company's financial position, business strategy and other plans and objectives for future operations. Such statements involve risks and uncertainties, including those relating to the Company's dependence on acquisitions and exploratory drilling, the volatility of oil and gas prices, the substantial capital requirements of the Company's business and other factors detailed in filings with the SEC. All subsequent oral and written forward looking statements attributable to the Company are expressly qualified in their entirety by these factors. The Company assumes no obligation to update these statements. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) There are no exhibits filed with this report (b) On July 16, 1999, the Company filed a Form 8-K under Item 1 describing the securities purchase agreement between the Company and 3TEC Energy Corporation. 27 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MIDDLE BAY OIL COMPANY, INC. (Registrant) Date: August 16, 1999 By: /s/ Frank C. Turner II ------------------------ Frank C. Turner II Vice-President and Chief Financial Officer 28 EX-27 2 EXHIBIT 27
5 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1,259,462 0 2,823,514 0 0 4,198,239 90,537,955 (40,254,411) 54,896,889 4,452,729 26,949,567 0 8,841,238 37,137,820 (24,900,788) 54,896,889 6,672,346 7,204,470 3,016,658 8,969,628 0 0 1,021,445 (1,701,385) (556,010) (1,145,375) 0 0 0 (1,431,041) (0.17) (0.17)
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