<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-QSB/A
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended September 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
3TEC ENERGY CORPORATION
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 76-0624573
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
------------------------
TWO SHELL PLAZA, 777 WALKER STREET
SUITE 2400
HOUSTON, TX 77002
(Address of principal executive offices)
------------------------
(713) 222-6275
(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
14,439,631 shares as of November 4, 1999
Transitional Small Business Disclosure Format (check one)
Yes / / No /X/
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<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C>
PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets--
September 30, 1999 (Unaudited) and December 31,
1998................................................... 1
Consolidated Statements of Operations (Unaudited)--
Three and nine months ended September 30, 1999 and
1998................................................... 2
Consolidated Statements of Cash Flows (Unaudited)--
Nine months ended September 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..................... 13
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 26
Item 6. Exhibits and Reports on Form 8-K................... 26
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3TEC ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER 31
1999 1998
----------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
CASH AND CASH EQUIVALENTS................................. $25,076,465 $ 1,040,096
ACCOUNTS RECEIVABLE....................................... 2,716,165 3,309,043
ACCOUNTS RECEIVABLE-INSURANCE CLAIM....................... -- 448,083
OTHER CURRENT ASSETS...................................... 90,567 141,364
----------- -----------
TOTAL CURRENT ASSETS.................................... 27,883,197 4,938,586
NON-CURRENT ASSETS
NOTES RECEIVABLE--STOCKHOLDER............................. -- 173,115
PROPERTY (AT COST)
OIL AND GAS (SUCCESSFUL EFFORTS METHOD)................... 80,659,521 90,849,439
OTHER..................................................... 988,579 795,323
----------- -----------
81,648,100 91,644,762
ACCUMULATED DEPLETION, DEPRECIATION AND AMORTIZATION........ (35,425,362) (39,073,584)
----------- -----------
46,222,738 52,571,178
OTHER ASSETS................................................ 637,875 257,938
----------- -----------
TOTAL ASSETS................................................ $74,743,810 $57,940,817
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
CURRENT MATURITY OF LONG-TERM DEBT........................ $ 4,314,318 $ --
ACCOUNTS PAYABLE-TRADE.................................... 2,822,415 3,643,241
ACCOUNTS PAYABLE-ENEX LP LIMITED PARTNERS................. -- 538,750
ACCOUNTS PAYABLE-REVENUE.................................. 362,065 342,931
OTHER CURRENT LIABILITIES................................. 200,806 275,010
----------- -----------
TOTAL CURRENT LIABILITIES................................... 7,699,604 4,799,932
LONG-TERM DEBT.............................................. 24,176,249 27,454,567
CONVERTIBLE SUBORDINATED NOTES.............................. 10,850,000 --
DEFERRED INCOME TAXES....................................... 486,353 1,733,167
OTHER LIABILITIES........................................... 304,404 437,949
MINORITY INTEREST........................................... 1,014,155 957,369
STOCKHOLDERS' EQUITY
PREFERRED STOCK, $0.02 PAR, 20,000,000 SHARES AUTHORIZED,
266,667 DESIGNATED SERIES B AND 2,177,481 SHARES
DESIGNATED SERIES C, NONE OTHER DESIGNATED................ -- --
CONVERTIBLE PREFERRED STOCK SERIES B, $7.50 STATED VALUE,
266,667 SHARES ISSUED AND OUTSTANDING AT SEPTEMBER 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,
1,142,996 AND 1,142,663 SHARES ISSUED AND OUTSTANDING AT
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998, RESPECTIVELY.
$5,714,980 AGGREGATE LIQUIDATION PREFERENCE............... 5,235,083 5,281,937
COMMON STOCK, $.02 PAR VALUE, 40,000,000 SHARES AUTHORIZED,
13,383,005 AND 8,552,365 SHARES ISSUED AND OUTSTANDING AT
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998, RESPECTIVELY.... 267,692 171,055
PAID-IN-CAPITAL............................................. 48,137,005 36,947,588
ACCUMULATED DEFICIT......................................... (26,985,695) (23,401,707)
LESS COST OF TREASURY STOCK; 21,773 SHARES.................. (68,040) (68,040)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY.................................. 30,213,045 22,557,833
COMMITMENTS AND CONTINGENCIES
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $74,743,810 $57,940,817
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------ -------------------------
1999 1998 1999 1998
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE
OIL AND GAS SALES AND PLANT INCOME........................ $ 4,656,156 $3,961,442 $11,328,502 $11,078,360
GAIN ON SALE OF PROPERTIES................................ 575,287 1,518,139 882,477 1,527,207
DELAY RENTAL AND LEASE BONUS INCOME....................... 61,911 20,333 64,911 217,404
OTHER..................................................... 469,508 194,846 691,442 436,783
----------- ---------- ----------- -----------
TOTAL REVENUE............................................... 5,762,862 5,694,760 12,967,332 13,259,754
----------- ---------- ----------- -----------
COSTS AND EXPENSES
LEASE OPERATING, PRODUCTION TAXES AND PLANT COSTS......... 1,434,185 1,934,203 4,450,843 5,539,218
GEOLOGICAL AND GEOPHYSICAL................................ 46,768 139,303 188,484 927,418
DEPRECIATION, DEPLETION AND AMORTIZATION.................. 1,466,006 1,945,110 4,046,546 4,970,052
IMPAIRMENTS............................................... 1,688,443 492,000 1,688,443 492,000
DRYHOLE................................................... 391,477 24,141 455,108 331,405
INTEREST.................................................. 717,917 615,792 1,739,362 1,428,633
STOCK COMPENSATION........................................ 729,938 -- 729,938 67,500
SEVERANCE PAYMENT......................................... 284,060 -- 284,060 --
COMPENSATION PLAN PAYMENT................................. 292,527 -- 292,527 --
GENERAL AND ADMINISTRATIVE................................ 1,112,181 975,435 3,048,430 3,231,349
OTHER..................................................... 272,233 -- 481,622 4,639
----------- ---------- ----------- -----------
TOTAL COSTS AND EXPENSES.................................... 8,435,735 6,125,984 17,405,363 16,992,214
LOSS BEFORE INCOME TAX BENEFIT AND MINORITY INTEREST........ (2,672,873) (431,224) (4,438,031) (3,732,460)
MINORITY INTEREST........................................... 23,545 154,209 (40,228) 5,523
----------- ---------- ----------- -----------
LOSS BEFORE INCOME TAX BENEFIT.............................. (2,696,418) (585,433) (4,397,803) (3,737,983)
INCOME TAX BENEFIT.......................................... (686,314) (199,047) (1,242,324) (1,270,914)
----------- ---------- ----------- -----------
NET LOSS.................................................... (2,010,104) (386,386) (3,155,479) (2,467,069)
DIVIDENDS TO PREFERRED STOCKHOLDERS......................... 142,843 -- 428,509 67,945
----------- ---------- ----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS................ ($2,152,947) ($ 386,386) ($3,583,988) ($2,535,014)
=========== ========== =========== ===========
NET LOSS PER SHARE
Basic..................................................... ($ 0.21) ($ 0.05) ($ 0.39) ($ 0.32)
=========== ========== =========== ===========
Diluted................................................... ($ 0.21) ($ 0.05) ($ 0.39) ($ 0.32)
=========== ========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic..................................................... 10,351,990 8,530,592 9,137,784 7,889,947
=========== ========== =========== ===========
Diluted................................................... 10,351,990 8,530,592 9,137,784 7,889,947
=========== ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
NET LOSS.................................................... ($ 3,155,479) ($ 2,467,069)
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
DEPLETION, DEPRECIATION AND AMORTIZATION.................. 4,046,546 4,970,052
IMPAIRMENTS............................................... 1,688,443 492,000
DRYHOLE COSTS............................................. 455,108 331,405
STOCK COMPENSATION EXPENSE................................ 729,938 67,500
GAIN ON SALE OF PROPERTIES................................ (882,477) (1,527,207)
DEFERRED INCOME TAX BENEFIT............................... (1,242,324) (1,270,914)
MINORITY INTEREST......................................... (40,228) 5,523
OTHER CHARGES............................................. 345,533 (34,680)
------------ ------------
CASH FLOW FROM OPERATIONS BEFORE CHANGES IN CURRENT ASSETS
AND LIABILITIES........................................... 1,945,060 566,610
CHANGES IN CURRENT ASSETS AND LIABILITIES, NET OF
ACQUISITION EFFECTS:
ACCOUNTS RECEIVABLE AND OTHER CURRENT ASSETS.............. 827,906 (588,159)
ACCOUNTS PAYABLE, REVENUE PAYABLE, AND OTHER CURRENT
LIABILITIES............................................. (1,330,626) 2,080,921
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 1,442,340 2,059,372
INVESTING ACTIVITIES
PROCEEDS FROM SALES OF PROPERTIES........................... 3,614,453 4,707,497
ADDITIONS TO OIL AND GAS PROPERTIES......................... (1,827,614) (3,305,635)
ACQUISITION OF ENEX RESOURCES CORPORATION, NET OF
CASH ACQUIRED OF $4,698,211................................. -- (11,329,203)
ACQUISITION OF ASSETS OF SERVICE DRILLING CO................ -- (6,337,689)
OTHER ASSETS................................................ (251,680) (492,129)
PAYMENTS FROM (ADVANCES TO) STOCKHOLDER..................... 173,115 (5,211)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES......... 1,708,274 (16,762,370)
FINANCING ACTIVITIES
PROCEEDS FROM DEBT ISSUED................................. 1,036,000 32,469,604
PROCEEDS FROM SUBORDINATED NOTES ISSUED................... 10,850,000 --
PROCEEDS FROM COMMON STOCK ISSUED......................... 9,975,000 --
PRINCIPAL PAYMENTS ON DEBT................................ -- (15,976,432)
PREFERRED STOCK DIVIDENDS PAID............................ (242,293) (67,945)
REGISTRATION COSTS ON SERIES C PREFERRED STOCK............ (48,518) (778,501)
OTHER..................................................... (684,434) (242,375)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 20,885,755 15,404,351
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 24,036,369 701,353
CASH AND CASH EQUIVALENTS- BEGINNING........................ 1,040,096 1,587,184
------------ ------------
CASH AND CASH EQUIVALENTS- ENDING........................... $ 25,076,465 $ 2,288,537
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
INTEREST PAID IN CASH..................................... $ 1,446,736 $ 1,322,038
============ ============
PREFERRED DIVIDENDS INCURRED BUT NOT PAID................. $ 186,216 --
============ ============
ACQUISITION OF OIL AND GAS PROPERTIES FROM 3TEC........... $ 875,000 --
============ ============
DRYHOLE COST ACCRUED BUT NOT PAID......................... $ 345,841 --
============ ============
CONVERSION OF SERIES A PREFERRED STOCK.................... -- $ 10,000,000
============ ============
COMMON STOCK ISSUED AS FINDERS' FEE
IN ENEX RESOURCES CORP. TENDER OFFER.................... -- $ 245,231
============ ============
COMMON STOCK ISSUED IN ACQUISITION OF ASSETS FROM SERVICE
DRILLING CO., LLC....................................... -- $ 5,078,250
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
3TEC Energy Corporation (the Company)(Formerly Middle Bay Oil Company,
Inc.), was incorporated under the laws of the State of Alabama on November
30, 1992. The Company was reincorporated in Delaware on December 7, 1999 and
changed its name to 3TEC Energy Corporation. Effective March 27, 1998, the
Company acquired 79.2% of Enex Resources Corporation ("Enex") and over a
three-week period ending December 23, 1998, the Company acquired an
additional 0.80% of Enex for a total of 80% of Enex. 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 September 30, 1999 and December 31, 1998 and the consolidated results of
operations and consolidated cash flows for the periods ended September 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.
RESTATEMENT OF CURRENT PERIOD FINANCIAL INFORMATION
The Company has amended the financial information included in its Form
10-QSB filed November 14, 1999, for its financial results as of, and for the
periods ended September 30, 1999. On December 16, 1999 the Company obtained
from Ryder Scott Company, an independent reserve engineer, a reserve
valuation of its oil and gas properties as of October 1, 1999. Based upon the
reserve valuation the Company has recorded an additional impairment of its
oil and gas properties of $939,000 ($620,000, net of tax). The effect of the
additional impairment increased the net loss per share attributable to common
stockholders by $0.07 to $0.39 for the nine month period ended September 30,
1999 and by $0.06 to $0.21 for the three month period ended September 30,
1999.
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 the
minority interest in Enex is shown in the consolidated statements as "minority
interest". Significant intercompany accounts and transactions are eliminated in
consolidation.
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 2,041,751 and 3,285,751
common stock equivalents in 1999 and 330,297 and 288,535 common stock
equivalents in 1998, are not considered in the calculation of diluted earnings
per share for the nine and three month periods ending September 30,
respectively, due to the net loss recorded during these periods.
4
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications of prior period amounts have been made to conform
to the current presentation.
(2) ACQUISITIONS
On March 27, 1998, the Company acquired 1,064,432 common shares,
approximately 79.2%, of Enex for $15,966,480. The Company purchased the common
shares of Enex through a cash tender offer that commenced February 19, 1998 (the
"Enex Acquisition"). The Company also incurred approximately $60,934 in legal,
accounting and printing expenses and issued 33,825 shares of Company common
stock for finders fees to unrelated third parties. At the time, Enex was general
partner of Enex Consolidated Partners, L.P., (the "Enex Partnership"), a New
Jersey limited partnership whose principal business was oil and gas exploration
and production. Enex's general partner interest was 4.1%. Enex also owned an
approximate 56.2% limited partner interest in Enex Partnership.
The cost of acquiring 79.2% of Enex was allocated using the purchase method
of accounting to the consolidated assets and liabilities of Enex based on
estimates of the fair values with the remaining purchase price allocated to
proved oil and gas properties.
The allocation of the purchase price is summarized as follows: (in
thousands)
<TABLE>
<S> <C>
Working capital............................................. $ 5,640
Oil and gas properties (proved and unproved)................ 19,090
Minority interest........................................... (7,669)
-------
Total....................................................... $17,061
=======
</TABLE>
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 30, 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
5
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
(2) ACQUISITIONS (CONTINUED)
Enex Partnership. The Exchange Offer was approved on December 30, 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. In January 1999, certain dissenting limited partners were paid $516,000
and other unitholders were paid $23,000 in lieu of fractional shares. 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.
The Series C accrues dividends at an annual rate of $0.50 per share which are
paid on March 31 and September 30 and has a $5.00 per share liquidation value.
The cost of acquiring 100% of the outstanding limited partner units was
approximately $11.9 million, consisting of the following (in thousands):
<TABLE>
<S> <C>
Estimated fair value of 2,177,481 shares of Company Series C
preferred stock........................................... $10,887
Cash consideration.......................................... 539
Legal, accounting and other expenses........................ 431
-------
Total....................................................... $11,857
=======
</TABLE>
As Enex is consolidated into the Company's financial statements, the number
of shares outstanding and the value of the shares outstanding attributable to
the 43.8% of the Enex Partnership not owned by Enex and the minority interest
owners of Enex (20%) is 1,142,663 and $5,713,317, respectively. The cost of
acquiring the outstanding limited partner units that were not owned by Enex was
approximately $6.7 million, consisting of the following (in thousands):
<TABLE>
<S> <C>
Estimated fair value of 1,142,663 shares of Company Series C
preferred stock........................................... $5,713
Cash consideration.......................................... 539
Legal, accounting and other expenses........................ 431
------
Total....................................................... $6,683
======
</TABLE>
The Company's purchase price was allocated to the assets and liabilities of
the Enex Partnership based on estimates of the fair values with the remaining
purchase price allocated to proved oil and gas properties. The registration
costs of approximately $431,000 reduced the value of the Series C shares issued.
Because the Enex Partnership was consolidated in the financial statements of the
Company as of the effective date
6
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
(2) ACQUISITIONS (CONTINUED)
of October 1, 1998, the purchase price allocation below shows the effect of the
acquisition on the consolidated financial statements (in thousands):
<TABLE>
<S> <C>
Working capital............................................. $ (539)
Oil and gas properties...................................... (23)
Minority interest........................................... 5,844
------
Series C Preferred Stock.................................... $5,282
======
</TABLE>
The following pro forma data presents the results of the Company for the
nine months ended September 30, 1998, as if the acquisitions of Service, Enex
and the Enex Partnership had occurred on January 1, 1998. The pro forma results
are presented for comparative purposes only and are not necessarily indicative
of the results which would have been obtained had the acquisitions been
consummated as presented. The following data reflect pro forma adjustments for
oil and gas revenues, production costs, depreciation and depletion related to
the properties and businesses acquired, preferred stock dividends on preferred
stock issued, and the related income tax effects (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
PROFORMA
NINE MONTHS
ENDED
SEPTEMBER 30, 1998
------------------
(UNAUDITED)
<S> <C>
Total revenues.............................................. $20,765
Net loss available to stockholders.......................... (3,346)
Net loss per share available to stockholders................ (0.41)
</TABLE>
(3) COMMON STOCK, WARRANT AND SENIOR SUBORDINATED NOTE SALE TO 3TEC ENERGY
COMPANY, L.L.C. ("3TEC")
On August 27, 1999, the Company closed a Securities Purchase Agreement(the
"Agreement') for a total of $21,400,000 with 3TEC Energy Corporation, a
privately-held company ("Old 3TEC"). Contemporaneously with the closing of the
transactions contemplated by the Securities Purchase Agreement, Old 3TEC was
merged with and into 3TEC with 3TEC as the surviving entity. As a result of the
merger, all of the properties, rights, privileges, powers and franchises of Old
3TEC, including without limitation, the rights, obligations and duties of Old
3TEC under the Securities Purchase Agreement became vested in 3TEC as the
surviving entity. The Securities Purchase Agreement and contemplated
transactions were approved by the stockholders at the Company's annual meeting
on August 10, 1999.
The controlling person of 3TEC is EnCap Investments L.L.C., a Delaware
limited liability company ("EnCap Investments"). The sole member of EnCap
Investments is El Paso Field Services Company, a Delaware corporation ("El Paso
Field Services"). The controlling person of El Paso Field Services is El Paso
Energy Corporation, a Delaware corporation. The Company received $9,825,000 in
cash and oil and gas properties valued at $875,000 for 4,755,556 shares of
common stock and 3,600,000 warrants (the
7
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
(3) COMMON STOCK, WARRANT AND SENIOR SUBORDINATED NOTE SALE TO 3TEC ENERGY
COMPANY, L.L.C. ("3TEC") (CONTINUED)
"Warrants")(See Note 7) and $10,700,000 for a 5-year senior subordinated
convertible note with a face value of $10,700,000 (the "Note").
At closing, 3TEC became the Company's largest shareholder with ownership of
approximately 36% of the 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.
As part of the Agreement, at closing, five of the seven directors resigned
and all of the executive officers, except Stephen W. Herod and Robert W.
Hammons, resigned from their executive positions. A new five-member board was
formed. John J. Bassett, former president, chief executive officer and chairman
of the Company and Gary C. Christopher, continued as directors and 3TEC
appointed three new board members, Floyd C. Wilson, David B. Miller and D.
Martin Phillips. Floyd C. Wilson is Managing Director and a member of 3TEC.
David B. Miller and D. Martin Phillips are Managing Directors of EnCap
Investments. The Company appointed Mr. Wilson Chairman of the Board, President,
Chief Executive Officer, Secretary and Treasurer, Mr. Bassett Executive
Vice-President and Frank C. Turner II acting Chief Financial Officer.
Subsequently, Mr. Bassett resigned and Mr. Herod was named to the Board
effective September 30, 1999.
(4) 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 $383,000 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.
(5) LONG-TERM DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1999 1998
------------ -----------
<S> <C> <C>
Reducing revolving line of credit of up to $100,000,000 due
April 1, 2001, secured by oil and gas properties, monthly
borrowing base reductions of $250,000 effective May 1,
1999 and monthly payments of interest at Libor plus 2.00%
and prime. At September 30, 1999 the Libor and prime rates
were 5.30% and 8.25%, respectively........................ 28,490,567 27,454,567
Less current maturities..................................... (4,314,318) --
----------- -----------
Long-term debt excluding current maturities................. $24,176,249 $27,454,567
=========== ===========
</TABLE>
8
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
(5) LONG-TERM DEBT (CONTINUED)
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 September 30, 1999 was $27,600,000 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 September 30, 1999, the Company had borrowed $28,490,567 and had $373,750
of outstanding letters of credit. As of September 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.
Effective May 1, 1999, the borrowing base was redetermined to be $31,000,000
with monthly borrowing base reductions of $250,000. Effective September 1, 1999,
the Company sold mortgaged properties for $2,741,000 with a borrowing base of
$2,200,000. Considering the monthly reductions and the September property sale,
the outstanding principal balance and letters of credit exceed the borrowing
base by $1,314,000 as of September 30. The property sale closed on September 30
and the Company made a $1,900,000 principal payment on October 1. The terms of
the October 1, 1999 redetermination for the Company's $100 million Revolver have
been deferred pending execution of a definitive agreement with Bank One (See
Note 10). 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.
9
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
(5) LONG-TERM DEBT (CONTINUED)
The Company has granted to the Banks liens on substantially all of the
Company's oil and natural gas properties, whether currently owned or hereafter
acquired, and a negative pledge on all other oil and gas properties.
The $100 million Revolver requires, among other things, a cash flow coverage
ratio of 1.25 to 1.00 and a current ratio, excluding current maturities of the
$100 million Revolver, of 0.9 to 1.00, determined on a quarterly basis.
(6) SENIOR SUBORDINATED NOTES
On August 27, 1999, senior subordinated promissory notes (the "Senior
Notes") were sold to 3TEC and affiliates of Alvin V. Shoemaker ("Shoemaker"), a
former director and significant shareholder, for $10,700,000 and $150,000,
respectively. The Senior Notes bear interest at an annual rate of 9%. Interest
is payable on December 31, 1999 and on every March 31, June 30, September 30 and
December 31, thereafter until maturity. The Company may defer payment of fifty
percent (50%) of the first eight quarterly interest payments. The Senior Notes
may be prepaid, without premium or penalty, in whole or in part, at any time
after August 27, 2001. 3TEC and Shoemaker may convert all or any portion of
outstanding principal and accrued interest at any time into shares of Company
common stock at a conversion price of $3.00 per common share, a total of
3,616,667 common shares. The conversion price may be adjusted from time to time
based on the occurrence of certain events. In the event of a change in control
(as defined in the Agreement), the entire outstanding principal balance and all
accrued but unpaid interest shall be immediately due and payable.
The Senior Notes rank senior in right of payment to all Company notes and
indebtedness other than the $100 Million Revolver.
(7) COMMON STOCK, OPTIONS AND WARRANTS
On August 27, 1999, the Company sold 3TEC 4,755,556 shares of common stock
and five-year warrants to purchase 3,600,000 shares of common stock for
$9,825,000 in cash and oil and gas properties valued at $875,000. On the same
date, the Company sold 66,666 shares of common stock and five-year warrants to
purchase 50,466 shares of common stock to Shoemaker for $150,000.
The warrants issued to 3TEC and Shoemaker are exercisable for $1.00 per
share and expire five years from the issue date. Sixty percent of the warrants
are immediately exercisable, in whole or in part at any time until the
expiration date. An additional 10% of the warrants may be exercised at each
anniversary of the grant date until expiration. On the occurrence of either a
change of control, payment in full of the Senior Notes or conversion of the
entire principal balance of the Senior Notes, all of the warrants become
immediately exercisable. If less than the entire principal balance of the Senior
Notes are converted, a pro-rata portion of the warrants will be convertible
based on the portion of the Senior Notes that are converted.
On August 24, 1999, the Company amended the 1995 Stock Option and Stock
Appreciation Rights Plan due to the change in control that resulted from the
sale of securities to 3TEC. The Plan was amended to extend the exercise date for
all options issued prior to July 1, 1999 to one year from the following dates:
(1) the termination date of employees if the termination date is without cause
and occurred during the
10
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
(7) COMMON STOCK, OPTIONS AND WARRANTS (CONTINUED)
six-month period commencing with the closing of the Purchase Agreement; (2) the
date of termination for employees terminated for "Good Reason" as defined in
such employee's employment agreement; and (3) the date of resignation of a
holder who is also a director who resigns at closing of the Purchase Agreement.
According to APB Opinion 25, the extension of the exercise period results in
a new measurement date and compensation expense, equal to the intrinsic value of
all of the Plan's outstanding options, is recognized. A one-time charge of
$730,000 due to the Plan amendment was recorded as Compensation Expense during
the three-month period ending September 30, 1999.
On February 9, 1999 and January 13, 1998, the Board of Directors granted to
certain employees and directors, options with exercise prices of $1.50 and $5.75
per share, respectively, to acquire 200,000 and 232,000 shares of Company common
stock, respectively. All of the options were granted under the 1995 Stock Option
and Stock Appreciation Rights Plan at fair market value on date of grant and
will expire five years from date of grant if not exercised. On September 15,
1998, warrants to acquire 75,000 shares of Company common stock at an exercise
price of $5.00 were granted to a consultant as compensation. The warrants vested
over the period September 15, 1998 to January 1, 1999. The estimated fair value
of the warrants of $198,946 was determined at the date of grant and charged to
stock compensation expense over the vesting period. The agreement was amended on
August 9, 1999 to include issuing the consultant 10,000 shares of Series C
Preferred Stock as additional compensation for services performed to date.
General and administrative expense was charged $50,000 during the three-month
period ending September 30, 1999 for the issuance of the 10,000 Series C shares.
(8) COMMITMENTS AND CONTINGENCIES
Effective September 30, 1999, John J. Bassett, resigned as executive
vice-president and board member and ceased employment with the Company. Under
the terms of Mr. Bassett's employment agreement, the Company is obligated to
make a lump-sum payment of $280,000 to Mr. Bassett within ten days of his
resignation. The severance payment, and associated taxes of $4,060, was
recognized as severance payment expense during the quarter ending September 30.
Mr. Bassett was paid on October 10. Stephen W. Herod, Vice-President Corporate
Development, was appointed to the Board to replace Mr. Bassett.
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.
On August 27, 1999, the Compensation Committee authorized the payment of
$274,625 to the eligible participants in the Plan. The authorized amount, equal
to 100% of the Plan benefits through August 27, 1999, was paid to the Plan
participants and the Plan was terminated pursuant to the terms of the 3TEC
Agreement. The entire amount of the payment, including associated taxes of
$17,902, was recognized as compensation expense during the quarter ending
September 30, 1999. Prior to the Compensation Committee's authorization, the
Plan benefits were not accrued as an expense in the financial statements because
11
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
(8) COMMITMENTS AND CONTINGENCIES (CONTINUED)
the likelihood that the Compensation Committee would determine that the benefits
would be payable to eligible employees was less than probable.
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.
(9) 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 of 1999. During the three month and nine
month periods ending September 30, 1999, the Company incurred hedging losses of
approximately $118,000 and $131,000, respectively.
(10) SUBSEQUENT EVENTS
On October 1, 1999 the Company executed, and subsequently amended on October
22, a commitment letter with Bank One Texas, N.A. and Banc One Capital
Markets, Inc. ("Bank One") for a $250 million credit facility (the "Facility")
to finance the potential Floyd Oil Acquisition, subject to an initial borrowing
base of $95 million. Unless a definitive agreement is executed on or before
November 30, 1999 the $95 million commitment with Bank One will terminate. The
terms of the October 1, 1999 redetermination for the Company's $100 million
Revolver have been deferred pending execution of a definitive agreement with
Bank One.
On October 7, 1999, the Company announced that it had entered into an
agreement for the acquisition of properties and interests owned by a group of
private sellers and managed by Floyd Oil Company. There is no relationship
between Floyd C. Wilson, President of the Company, and Floyd Oil Company. The
transaction has an adjusted purchase price of approximately $96 million with an
effective date of January 1, 1999. The majority of the properties are located in
Texas and Louisiana. The properties being acquired have estimated proved
reserves at August 1, 1999 of 186,000 Mmcfe with 73% of the reserves classified
as proved developed producing. The reserves being acquired are 76% natural gas.
The Company will operate the majority of the properties. Closing is expected to
be on or before November 30, 1999 and is subject to execution of definitive
agreements and completion of due diligence. The transaction is expected to be
financed through the Bank One Facility and from working capital.
On October 19, 1999, the Company closed a private placement of securities to
The Prudential Insurance Company of America ("Prudential"). The economic terms
and conditions of the private placement are similar to those of the Agreement
with 3TEC entered into on July 1, 1999. The private placement consisted of the
sale of 1,055,042 shares of common stock and five-year warrants to purchase
798,677 shares at $1.00 per share of common stock for $2,373,844 and a five-year
senior subordinated convertible note for $2,373,844. The subordinated note will
bear interest at a rate of 9% per annum and is convertible into 791,281 shares
of common stock.
On November 2, 1999, the operator authorized the plugging and abandonment of
the Cornelius #1 well on the Hawkins Ranch Prospect which was spudded on
September 3, 1999. The Company incurred approximately $363,000 in costs, which
were charged to dryhole expense in the current period.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table reflects certain summary operating data for the periods
presented:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
SEPTEMBER 30 SEPTEMBER 30
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Production Data:
Oil and Liquids (MBbls)................................. 116 163 367 427
Natural Gas (MMcf)...................................... 982 1,031 2,778 2,713
Equivalent Production (Mcfe)............................ 1,680 2,009 4,980 5,277
Average Sales Price (1)
Oil and Liquids (per Bbl)............................... $19.10 11.35 14.66 11.91
Natural Gas (per Mcf)................................... 2.35 1.90 2.01 2.04
Average equivalent price (per Mcfe)......................... 2.69 1.90 2.20 2.02
Expenses ($ per Mcfe)
Oil and gas operating (2)............................... 0.78 0.92 0.82 0.99
General and administrative.............................. 0.66 0.49 0.61 0.61
Depreciation and depletion (3).......................... 0.85 0.95 0.79 0.93
Cash Margin ($ per Mcfe) (4)................................ 1.25 0.49 0.77 0.42
</TABLE>
- ------------------------
(1) Excludes revenue from Spivey Field gas plant.
(2) Includes lease operating costs, production and ad valorem taxes and excludes
Spivey Field plant costs.
(3) Represents depreciation and depletion, excluding impairments, of oil and gas
properties only.
(4) Represents average equivalent price per Mcfe less oil and gas operating
expenses per Mcfe and general and administrative expenses per Mcfe.
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
For the three months ended September 30, 1998, the revenues and expenses
include the Enex Acquisition and the Service Acquisition but do not include the
Enex Partnership Acquisition.
REVENUES--
Total revenues for the current period of $5,763,000 were $68,000 higher than
the comparable period. The increase in total revenues was due principally to
increases in oil and gas revenues of $695,000 and other income of $275,000,
offset partially by a $943,000 decrease in gains on sales of properties.
Oil and gas revenues increased $695,000. The increase in oil and gas
revenues consisted of a $371,000 increase in oil revenues, a $348,000 increase
in gas revenues and a $24,000 decrease in other revenues. The increase in gas
revenues included a loss on hedging of $118,000. The increase in oil and gas
revenues was the result of higher oil and gas prices. Production of oil and gas
decreased 29% and 5%, respectively while oil and gas prices increased 68% and
24%, respectively. Normal production decline and property sales contributed to
the declines in oil and gas production.
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 $118,000. In the current period, the realized gas
price would have been $2.47, if the hedging loss was excluded versus a realized
price of $2.35.
The Company recorded gains on the sale of properties in the current and
comparable periods of $575,000 and $1,518,000, respectively. The sale of
approximately 157 wells in 19 fields for approximately $2,741,000 to a private
company accounted for the primary portion of the gain in the current period. The
13
<PAGE>
effective date of the private sale was September 1. In the prior period, the
Company also sold several hundred properties at auction and in private sales for
approximately $4,140,000. In the current and comparable periods a significant
portion of the proceeds was credited against the original acquisition cost.
Other income in the current period of $469,000 includes $256,000 from a
lawsuit settlement. Other income in the comparable period includes a lawsuit
settlement of $123,000.
COSTS AND EXPENSES--
Total expenses increased $2,310,000 over the comparable period. The
primary reasons for the total expense increase were non-recurring charges of
$1,307,000 associated with the sale of securities to 3TEC and the resulting
change in management control, increased impairments of $1,196,000 and
increased dryhole costs of $367,000. The non-recurring charges were stock
compensation expense of $730,000, severance payment of $284,000 and employee
incentive compensation plan payment of $293,000. The stock compensation
charge resulted from an amendment to the Company's stock option plan, prior
to the sale of securities to 3TEC, which increased the length of time
employees and directors could exercise their options if they were terminated
or resigned, in the case of directors, for a certain period of time after the
sale of securities to 3TEC. The severance payment was the amount payable to
John J. Bassett upon his resignation on September 30, 1999, according to the
terms of his employment agreement. The employee incentive compensation plan
payment was the result of an agreement between 3TEC and the Company to pay
the benefits due under the plan as a condition precedent to the closing of
the securities sale to 3TEC.
Lease operating expense decreased $500,000. Property sales that have closed
throughout the twelve month period ending September 30, 1999 contributed to the
lower lease operating expenses.
Geological and geophysical expenses ("G&G expenses") decreased $92,000. In
the current and comparable periods, the Company incurred approximately $47,000
and $139,000, respectively, of G&G expenses. The principal G&G expenses in the
current and comparable periods were attributable to the Cedartown Prospect and
the Sherburne Prospect, respectively.
Depletion, depreciation and amortization expenses decreased $479,000.
Reserve write-downs, property sales and lower production contributed to the
lower depletion, depreciation and amortization expenses.
Impairment expense in the current period of $1,688,000 consists of a
$472,000 impairment on the fee mineral acreage situated in Louisiana, a
$27,000 impairment of various non-producing leases and a $1,189,000
impairment on various oil and gas properties. The fee mineral impairment was
the result of 6,227 unleased acres in Terrebonne Parish that are expected to
revert to the surface owners by December 1, 1999. Impairments on oil and gas
properties were incurred primarily as a result of reserve reclassifications
and estimations by new reserve engineers engaged by the Company to evaluate
the Company's reserves as of October 1, 1999. Impairment expense in the
comparable period was due to the writedown of reserves resulting from an
unsuccessful recompletion attempt.
During the current period, dryhole expense increased by $367,000. In the
current and comparable periods, the Company incurred approximately $391,000 and
$24,000, respectively, of dryhole expenses. Dryhole expense attributable to the
Cornelius #1 of $363,000 was the primary dryhole expense in the current period.
The Cornelius #1 was declared a dryhole subsequent to September 30 and the
estimated costs to complete the drilling and plug and abandon the well were
accrued at September 30.
Interest expense increased $102,000. Accrued interest on the subordinated
notes since August 27, 1999 resulted in slightly higher interest expense.
Interest rates and the loan balance did not vary significantly between the
current and comparable periods.
General and administrative expenses ("G&A") increased $137,000. Increases in
salary, legal and consulting expenses in the current period offset decreases in
salary, office and rent expenses in the comparable period. The increase in
salary expense was due to employees hired subsequent to the sale of securities
to 3TEC. Legal and consulting expenses increased for various reasons. The
decrease in salary,
14
<PAGE>
office and rent expenses in the comparable period was due to the staff
reductions at Enex and the closing of the Enex offices in Kingwood, Texas.
Other expenses increased $272,000. Bad debt expense of $70,000 and various
other charges accounted for the increase.
OPERATING LOSS AND NET LOSS--
The Company reported an operating loss before minority interest of
$2,673,000 for current period versus an operating loss of $431,000 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 increased the operating loss by $23,000 and
$154,000, 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 an income tax benefit of $686,000 in the current period
versus a $199,000 benefit in the comparable period.
The Company reported a net loss of $2,010,000 for the current period versus
a net loss of $386,000 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 attributable to
common stockholders in the current and comparable periods of $2,153,000 and
$386,000, respectively. The preferred dividends in the current period represent
three months of accrued dividends on the Series C preferred stock.
If the non-recurring charges of $1,307,000 associated with the sale of
securities to 3TEC and the resulting change in management control in the current
period were excluded, the Company would have reported net loss attributable to
common stockholders of $1,060,000 versus the actual net loss attributable to
common stockholders of $2,153,000.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
For the nine months ended September 30, 1998, the revenues and expenses
include the Enex Acquisition for the period April through September and do not
include the Enex Partnership Acquisition. The Service Acquisition is included in
the revenues and expenses for the months of May through September.
REVENUES--
Total revenues for the current period of $12,967,000 were $292,000 lower
than the comparable period. The decrease in total revenues was due principally
to a decrease in gain on sale of properties of $645,000 offset partially by
increases in other income and oil and gas revenues.
Oil and gas revenues increased $250,000. The increase in oil and gas
revenues consisted of a $292,000 increase in oil revenues, a $35,000 increase in
gas revenues and a $77,000 decrease in other revenues. The increase in gas
revenues included a loss on hedging of $131,000. The increase in oil and gas
revenues was primarily the result of higher oil prices. Oil production decreased
14% while oil prices increased 23%. The 2% increase in gas production was almost
entirely offset by the 2% lower gas prices caused by the hedging loss. Normal
production decline and property sales contributed to the reduced oil production
over the comparable period. The Enex, Service and Enex Partnership Acquisitions,
which closed subsequent to March 26, 1998, increased oil and gas production over
the comparable period.
15
<PAGE>
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 $131,000. In the current period, the realized gas
price would have been $2.06, if the hedging loss was excluded versus a realized
price of $2.01.
The Company recorded gains on the sale of properties in the current and
comparable periods of $882,000 and $1,527,000, respectively. The sale of
approximately 157 wells in 19 fields for approximately $2,741,000 to a private
company accounted for the primary portion of the gain in the current period. The
effective date of the private sale was September 1. In the comparable period,
the Company also sold several hundred properties at auction and in private sales
for approximately $4,495,000. In the current and comparable periods a
significant portion of the proceeds was credited against the original
acquisition cost.
Other income in the current period of $691,000 includes $256,000 from a
lawsuit settlement and $135,000 in interest income. Other income in the
comparable period includes a lawsuit settlement of $123,000.
COSTS AND EXPENSES--
Total expenses increased $413,000 over the comparable period. The primary
reason for the total expense increase was an increase in impairments, offset
by lower lease operating expenses, production taxes and plant costs ("lease
operating expenses"), geological and geophysical expenses and depletion.
Certain non-recurring charges associated with the sale of securities to 3TEC
and the resulting change in management control increased total expenses by
$1,307,000. The non-recurring charges were stock compensation expense of
$730,000, severance payment of $284,000 and employee incentive compensation
plan payment of $293,000. The stock compensation charge resulted from an
amendment to the Company's stock option plan, prior to the sale of securities
to 3TEC, which increased the length of time employees and directors could
exercise their options if they were terminated or resigned, in the case of
directors, for a certain period of time after the sale of securities to 3TEC.
The severance payment was the amount payable to John J. Bassett upon his
resignation on September 30, 1999, according to the terms of his employment
agreement. The employee incentive compensation plan payment was the result of
an agreement between 3TEC and the Company to pay the benefits under the plan
as a condition precedent to the closing of the securities sale to 3TEC.
Lease operating expense decreased $1,088,000. Property sales that have
closed throughout the twelve month period ending September 30, 1999 contributed
to the lower lease operating expenses.
Geological and geophysical expenses ("G&G expenses") decreased $739,000. In
the current and comparable periods, the Company incurred approximately $188,000
and $927,000, respectively, of G&G expenses. The principal G&G expenses in the
current and comparable periods were attributable to the Cedartown Prospect and
Hawkins Ranch Prospect, respectively.
Depletion, depreciation and amortization expenses decreased $923,000.
Reserve write-downs, property sales and lower production contributed to the
lower depletion, depreciation and amortization expenses.
Impairment expense in the current period of $1,688,000 consists of a
$472,000 impairment on the fee mineral acreage situated in Louisiana, a
$27,000 impairment of various non-producing leases and a $1,189,000
impairment on various oil and gas properties. The fee mineral impairment was
the result of 6,227 unleased acres in Terrebonne Parish that are expected to
revert to the surface owners by December 1, 1999. Impairments on oil and gas
properties were incurred primarily as a result of reserve reclassifications
and estimations by new reserve engineers engaged by the Company to evaluate
the Company's reserves as of October 1, 1999. Impairment expense in the
comparable period was due to the writedown of reserves resulting from an
unsuccessful recompletion attempt.
During the current period, dryhole expense increased by $124,000. The
dryhole expense in the current period of $455,000 was due primarily to expenses
on the Hawkins 60 #1 of $39,000 and Cornelius #1 of $363,000. Both wells are
part of the Hawkins Ranch Prospect. The dryhole expense in the prior period of
16
<PAGE>
$331,000 consisted principally of a $199,000 dryhole on the S. Highbaugh
Prospect and additional dryhole expense of $102,000 on two dryholes in the
Reflection Ridge Prospect.
Interest expense increased $311,000 due to a lower average loan balance in
the first quarter of the comparable period and higher interest expense in the
current period due to the interest on the subordinated notes issued on
August 27, 1999. 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 Acquisition 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 $183,000. Decreases in
several expense categories contributed to the decrease. The primary expense
decrease was due to decreases in salary, contract labor, office and rent
expenses. The staff reductions at Enex and the closing of the Enex offices in
Kingwood, Texas contributed largely to these expense reductions. Increases in
salary, legal, accounting and consulting expenses in the current period
partially offset the expense reductions. An increase in salary expense was due
to employees hired subsequent to the sale of securities to 3TEC. Legal,
accounting and consulting expenses increased for various reasons.
Other expenses increased $477,000. Bad debt expense of $170,000 and other
miscellaneous adjustments resulted in the expense increase.
OPERATING LOSS AND NET LOSS--
The Company reported an operating loss before minority interest of
$4,438,000 for current period versus an operating loss of $3,732,000 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 $40,000 and
increased the operating loss by $6,000, 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 an income tax benefit of $1,242,000 in the current
period versus a $1,271,000 benefit in the comparable period.
The Company reported a net loss of $3,155,000 for the current period versus
a net loss of $2,467,000 for the comparable period. After considering the
preferred stock dividend requirement of $428,000 in the current period versus
$68,000 in the comparable period, the Company reported a net loss attributable
to common stockholders in the current and comparable periods of $3,584,000 and
$2,535,000, respectively. The preferred dividends in the current period
represent nine 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.
If the non-recurring charges of $1,307,000 associated with the sale of
securities to 3TEC and the resulting change in management control in the current
period were excluded, the Company would have reported net loss attributable to
common stockholders of $2,469,000 versus the actual net loss attributable to
common stockholders of $3,584,000.
LIQUIDITY AND CAPITAL RESOURCES
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Cash flow from operating activities for the current period of $1,442,000
decreased $617,000 from the comparable period. The decrease in cash flow was due
primarily to working capital changes offset partially by lower lease operating
and geological and geophysical expenses. Cash flow from oil and gas properties
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(oil and gas revenues and plant income less lease operating expenses, production
taxes and plant costs) increased $1,338,000 over the comparable period. Lower
lease operating expense was the primary reason for the increased cash flow from
oil and gas properties. Increases in oil prices and gas production resulted in
higher oil and gas revenues. Oil prices increased 23%, while oil production
decreased 14%. Gas prices decreased 1%, while gas production increased 2%. 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 was 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, excluding refinancings, of
$5,015,000.
During the current period, the Company sold $10,850,000 of common stock,
receiving $9,975,000 in cash and $875,000 in oil and gas properties, and
$10,850,000 of subordinated notes to 3TEC and Shoemaker. No common stock or note
sales were made in the comparable period. Cash costs of $684,000 were incurred
in the sale of the securities to 3TEC and classified as Other Financing
Activities.
In the current period, the Company paid approximately $242,000 in dividends
on the Series C preferred stock issued in the Enex Partnership Acquisition. The
amount paid represents a portion of the $428,000 of dividends accrued for the
nine months ended September 30, 1999. Of the $428,000, $97,000 is attributable
to the 20% minority interest ownership in Enex. The remaining dividends were not
immediately paid in cash because of unknown addresses and non-receipt of
preferred stock issuance forms.
Net cash from operations, property sales, $100 million Revolver advances and
cash on hand were used during the period ending September 30, 1999 principally
for proved property and leasehold acquisitions, exploratory and developmental
drilling and geological and geophysical expenses. Approximately $134,000 and
$198,000 was spent on leasehold and legal costs on the Cedartown and Hawkins
Ranch Prospects, respectively. Approximately $1,329,000 was spent on exploratory
and developmental drilling and recompletions. Approximately $167,000 was spent
on abandonment costs on a field in Florida. The principal exploratory well
drilled in the current period was the Hawkins 60 #1 on the Hawkins Ranch
Prospect which was unsuccessful. 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 $27,883,000 and current liabilities of
$7,700,000, which resulted in working capital of $20,183,000 as of
September 30, 1999. Current period working capital increased $20,044,000 from
working capital of $139,000 as of December 31, 1998. Cash received from the sale
of securities to 3TEC and Shoemaker of $20,825,000 caused the increase in
working capital. 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
8.24, 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.
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COMMON STOCK, WARRANT AND SENIOR SUBORDINATED NOTE SALE TO 3TEC ENERGY COMPANY,
L.L.C. ("3TEC")
On August 27, 1999, the Company closed a Securities Purchase Agreement(the
"Agreement') for a total of $21,400,000 with 3TEC Energy Corporation, a
privately-held company ("Old 3TEC"). Contemporaneously with the closing of the
transactions contemplated by the Securities Purchase Agreement, Old 3TEC was
merged with and into 3TEC with 3TEC as the surviving entity. As a result of the
merger, all of the properties, rights, privileges, powers and franchises of Old
3TEC, including without limitation, the rights, obligations and duties of Old
3TEC under the Securities Purchase Agreement became vested in 3TEC as the
surviving entity. The Securities Purchase Agreement and contemplated
transactions were approved by the stockholders at the Company's annual meeting
on August 10, 1999. The controlling person of 3TEC is EnCap Investments L.L.C.,
a Delaware limited liability company ("EnCap Investments"). The sole member of
EnCap Investments is El Paso Field Services Company, a Delaware corporation ("El
Paso Field Services"). The controlling person of El Paso Field Services is El
Paso Energy Corporation, a Delaware corporation. The Company received $9,825,000
in cash and oil and gas properties valued at $875,000 for 4,755,556 shares of
common stock and 3,600,000 warrants (the "Warrants") and $10,700,000 for 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.
Simultaneous with the close of the Agreement with 3TEC, the Company sold
66,666 shares of Company common stock for $150,000 and $150,000 of 5-year senior
subordinated convertible notes to affiliates of Alvin V. Shoemaker, a former
director and significant shareholder of the Company ("Shoemaker").
At closing, 3TEC became the Company's largest shareholder with ownership of
approximately 36% of the 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.
As part of the Agreement, at closing, five of the seven directors resigned
and a new five-member board was formed. John J. Bassett, former president, chief
executive officer and chairman of the Company and Gary C. Christopher, continued
as directors and 3TEC appointed three new board members, Floyd C. Wilson, David
B. Miller and D. Martin Phillips. Floyd C. Wilson is Managing Director and a
member of 3TEC. David B. Miller and D. Martin Phillips are Directors of EnCap
Investments. Subsequently, Mr. Bassett resigned and Mr. Herod was named to the
Board effective September 30, 1999.
As part of the Agreement, at closing, all of the officers of the Company,
except Stephen W. Herod and Robert W. Hammons, resigned from their executive
positions. The Company appointed Mr. Wilson Chairman of the Board, President,
Chief Executive Officer, Secretary and Treasurer, Mr. Bassett Executive
Vice-President and Frank C. Turner II acting Chief Financial Officer.
COMMITMENT FOR A $250 MILLION CREDIT FACILITY
On October 1, 1999 the Company executed, and subsequently amended on October
22, a commitment letter with Bank One Texas, N.A. and Banc One Capital
Markets, Inc. ("Bank One") for a $250 million credit facility (the "Facility")
to finance the potential Floyd Oil Acquisition, subject to an initial borrowing
base of $95 million. Unless a definitive agreement is executed on or before
November 30, 1999 the $95 million commitment with Bank One will terminate. The
terms of the October 1, 1999 redetermination for the Company's $100 million
Revolver have been deferred pending execution of a definitive agreement with
Bank One.
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$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 September 30, 1999 was $27,600,000. Effective May 1,
the borrowing base was redetermined to be $31,000,000 with monthly borrowing
base reductions of $250,000. The borrowing base was reduced by $2,200,000 due to
the sale of mortgaged properties for $2,741,000 effective September 1, 1999. At
September 30, 1999 the Company had borrowed $28,491,000 and had $374,000 of
outstanding letters of credit. During the current period, the Company did not
make any principal 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.
At September 30, 1999, the outstanding principal balance and letters of
credit exceed the borrowing base by $1,314,000. The property sale closed on
September 30 and the Company made a $1,900,000 principal payment on October 1.
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 terms of the October 1, 1999 redetermination have been deferred pending
execution of a definitive agreement on the $250 million credit facility with
Bank One.
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
September 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
outstanding letters of credit during the current period, excluding the effects
of the property sale that closed on September 30, no debt payments were
required.
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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. The 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.
SENIOR SUBORDINATED NOTES
On August 27, 1999, as part of the Agreement with 3TEC, senior subordinated
promissory notes (the "Senior Notes") were sold to 3TEC and Shoemaker for
$10,700,000 and $150,000, respectively. The Senior Notes bear interest at an
annual rate of 9%. Interest is payable on December 31, 1999 and on every
March 31, June 30, September 30 and December 31, thereafter until maturity. The
Company may defer payment of fifty percent (50%) of the first eight quarterly
interest payments. The Senior Notes may be redeemed, in whole or in part, at any
time after August 27, 2001. 3TEC and Shoemaker may convert all or any portion of
outstanding principal and accrued interest at any time into shares of Company
common stock at a conversion price of $3.00 per common share, for a total of
3,616,667 common shares. The conversion price may be adjusted from time to time
based on the occurrence of certain events. In the event of a change in control,
the entire outstanding principal balance and all accrued but unpaid interest
shall be immediately due and payable.
The Senior Notes rank senior in right of payment to all Company notes and
indebtedness other than the $100 Million Revolver.
PRIVATE PLACEMENT OF SECURITIES TO THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
On October 19, 1999, the Company closed a private placement of securities to
The Prudential Insurance Company of America ("Prudential"). The economic terms
and conditions of the private placement are similar to those of the Agreement
with 3TEC entered into on July 1, 1999. The private placement consisted of the
sale of 1,055,042 shares of common stock and five-year warrants to purchase
798,677 shares of common stock at $1.00 per share for $2,373,844 and a five-year
senior subordinated convertible note for $2,373,844. The subordinated note will
bear interest at a rate of 9% per annum and is convertible into 791,281 shares
of common stock. Prudential owns approximately 7% of the Company's currently
outstanding common stock.
PROPERTY SALES
During the nine-month period ending September 30, 1999, the Company received
approximately $3,600,000 in cash from the sales of non-strategic oil and gas
properties. The Company recorded a gain of $869,000 on the sales of the oil and
gas properties.
Subsequent to the May 1 borrowing base redetermination, the borrowing base
on the $100 Million Revolver was reduced by $2,200,000 for the loan value of the
sold properties.
FUTURE CAPITAL REQUIREMENTS AND AVAILABLE FINANCING
The Company has made and will continue to make, substantial capital
expenditures for acquisition, development and exploration of oil and natural gas
reserves. The timing of most of the Company's capital expenditures is
discretionary with no material long-term commitments. Consequently, the Company
has a significant degree of flexibility to adjust the level of such expenditures
as conditions warrant.
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The Company expects to spend approximately $3,400,000 on development and
exploration projects over the next twelve months, which excludes any exploration
and development projects associated with any future significant acquisitions.
The Company intends to use available cash, cash flows from operations and cash
proceeds from asset sales of certain non-core properties to fund capital
expenditures other than significant acquisitions and expects such funds to be
adequate for such purposes.
On October 7, 1999, the Company announced that it had entered into an
agreement for the acquisition of properties and interests owned by a group of
private sellers and managed by Floyd Oil Company. There is no relationship
between Floyd C. Wilson, President of the Company, and Floyd Oil Company. The
transaction has an adjusted purchase price of approximately $96 million with an
effective date of January 1, 1999. The majority of the properties are located in
Texas and Louisiana. The properties being acquired have estimated proved
reserves at August 1, 1999 of 186,000 Mmcfe with 73% of the reserves classified
as proved developed producing. The reserves being acquired are 76% natural gas.
The Company will operate the majority of the properties. Closing is expected to
be on or before November 30, 1999 and is subject to execution of definitive
agreements and completion of due diligence. The transaction is expected to be
financed through the Bank One Facility and from working capital.
Other than the Floyd Oil Acquisition, the Company does not have a specific
acquisition budget as a result of the unpredictability of the timing and size of
potential acquisition activities. The Company intends to use borrowings under
its bank credit facility, or other debt or equity financings, to the extent
available, to finance significant acquisitions. The availability and
attractiveness of these sources of financing will depend upon a number of
factors, some of which will relate to the financial condition and performance of
the Company, and some of which will be beyond the Company's control, such as
prevailing interest rates, oil and gas prices and other market conditions.
On October 17, 1999 the Company spudded a well in the Cedartown Prospect.
The Company's share of the dryhole cost is $187,000.
On November 2, 1999, the operator agreed to plug and abandon the second
exploratory well drilled on the Hawkins Ranch Prospect, the Cornelius #1, which
was spudded on September 3. The first well drilled on the Hawkins Ranch Prospect
in the first quarter of 1999 was also unsuccessful. The operator is currently
evaluating the future drilling plans on the Hawkins Ranch Prospect in light of
the results of the Cornelius #1. Prior to the results of the Cornelius #1, the
operator had scheduled the drilling of three additional exploratory wells
through February 1, 2000 with total estimated dryhole costs, net to the Company,
of approximately $885,000. The Company expects to pay approximately $300,000 in
the fourth quarter of 1999 to fund the remaining Cornelius #1 dryhole costs. As
of November 12, 1999 the Company had not committed to drill any additional wells
on the Hawkins Ranch Prospect.
At September 30, 1999, the outstanding principal balance and letters of
credit on the $100 million revolver exceeded the borrowing base by $1,314,000.
The Company paid $1,900,000 on the outstanding principal balance on October 1,
1999. The terms of the October 1, 1999 redetermination have been deferred
pending execution of a definitive agreement on the $250 million credit facility
with Bank One. If a definitive agreement on the Bank One credit facility is
executed, the outstanding principal balance on the $100 million Revolver will be
paid in full.
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 believes that cash flow from operations, cash on hand and
available borrowings will be sufficient to fund its operations and future growth
as contemplated under its current business plan. However, if the Company's plans
or assumptions change or if its assumptions prove to be inaccurate, the Company
may be required to seek additional capital. Management cannot be assured that
the Company will be able to obtain such capital or, if such capital is
available, that the Company will be able to obtain it on acceptable terms.
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CURRENT ACTIVITIES
As of November 12, 1999, there was one exploratory well drilling on the
Cedartown Prospect in Lincoln Parish, Louisiana.
YEAR 2000 COMPLIANCE
Readers are cautioned that the forward-looking statements contained in the
following Year 2000 discussion should be read in conjunction with the Company's
disclosures under the heading "Forward-Looking Statements." The disclosures also
constitute a "Year 2000 Readiness Disclosure" and "Year 2000 Statement" within
the meaning of the Year 2000 Information and Readiness Disclosure Act of 1998.
STATEMENT OF READINESS
The Company has undertaken various initiatives to ensure that its hardware,
software and equipment will function properly with respect to dates before and
after January 1, 2000. For this purpose, the phrase "hardware, software and
equipment" includes systems that are commonly thought of as Information
Technology systems ("IT"), as well as those Non-Information Technology systems
("Non-IT") and equipment which include embedded technology. IT systems include
computer hardware and software and other related systems. Non-IT systems include
certain oil and gas production and field equipment, gathering systems, office
equipment, telephone systems, security systems and other miscellaneous systems.
The Non-IT systems present the greatest readiness challenge since identification
of embedded technology is difficult and because the Company is, to a great
extent, reliant on third parties for Non-IT compliance.
The Company has formed a Year 2000 ("Y2K") Project team, which is chaired by
its Chief Financial Officer, Frank C. Turner, II. The team includes corporate
staff and representatives from the Company's business units. In response to the
possible risks posed to the Company, the team has developed a Y2K Plan (the
"Plan") which includes guidelines for inventory, assessment, remediation,
testing and contingency planning.
The following categories represent the mission-critical operational systems
of the Company. A "mission-critical system" is a system that is vital to the
successful continuation of a core business activity. An application may be
mission critical if it interfaces with a designated mission-critical 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 certain 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.
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
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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 or produce 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 affect 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 affected 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 affecting the Company's revenues.
Status: Based upon the diversity of purchasers, the Company believes that no
single purchaser is a mission-critical purchaser. The Y2K team does not
anticipate that a problem with any single purchaser for a reasonable
period of time beyond 2000 will force the Company to curtail or shut
down its operations. Although no single purchaser is a mission-critical
purchaser, the loss of a major purchaser or multiple minor purchasers
due to Y2K problems would affect the Company. The Company has obtained
information about the top ten purchasers and their Y2K readiness. All
but two of the top ten purchasers have formal Y2K Plans and are working
to upgrade any mission-critical systems that are affected by Y2K. The
other two purchasers acknowledge that certain systems will be affected
by Y2K and have been undertaking plans to upgrade these systems.
Contingency Plans: The Company continues to monitor the Y2K status of its major
purchasers. Should a purchaser not become Y2K compliant, the Company
will identify alternative purchasers for its production and, if
necessary, temporarily shut-in production.
THIRD-PARTY SYSTEMS--GAS PLANT. Over 95% of the gas produced in the Spivey
Field, a mission-critical system, is sold to a gas plant under a life of the
lease casinghead tailgate gas contract. The Company owns approximately 11.5% of
the gas plant and related gathering system. Colt Resources Corporation operates
the plant. Under a Worst Case Scenario, the gas plant would be shut down less
than one month which would not materially adversely affect 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.
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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 has represented that it 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.
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 are substantially complete as of September 30,
1999.
Contingency Plans: Short-term (less than two weeks) interruptions of services
will not materially adversely affect the Company. The Company will be
able to conduct business on a reduced scale using alternative business
methods. Longer-term interruptions may materially adversely affect 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
word-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.
25
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 19, 1999 a proxy was mailed to shareholders of record on July 12,
1999 soliciting their vote at the Annual Meeting of Shareholders of the Company
on August 10, 1999. The following matters were submitted to a vote of
shareholders (Shares Eligible to Vote on All Matters: 8,534,057):
1. Election of Directors
Messrs. Edward P. Turner, Jr., John J. Bassett, Frank E. Bolling, Jr., C.J.
Lett, III, Stephen W. Herod, Alvin V. Shoemaker and Gary R. Christopher were
elected to serve on the Board of Directors until the next Annual Meeting of
Shareholders.
<TABLE>
<CAPTION>
WITHHELD
FOR AUTHORITY
--------- ---------
<S> <C> <C>
John J. Bassett......................................... 7,289,621 5,031
C. J. Lett, III......................................... 7,289,521 5,131
Stephen W. Herod........................................ 7,289,621 5,031
Edward P. Turner, Jr.................................... 7,289,521 5,131
Frank E. Bolling, Jr.................................... 7,289,521 5,131
Alvin V. Shoemaker...................................... 7,289,521 5,131
Gary R. Christopher..................................... 7,289,621 5,031
</TABLE>
2. Amendment to increase the authorized capital stock of the Company from
20,000,000 to 40,000,000 shares of common stock and from 10,000,000 to
20,000,000 shares preferred stock.
The increase in the authorized capital stock of the Company to 40,000,000
common shares and 20,000,000 preferred shares was approved.
<TABLE>
<S> <C> <C>
For Against Abstain
7,094,278 11,123 1,954
</TABLE>
3. Ratification of issuance of Series C Preferred Stock in connection with the
acquisition by the Company of the oil and gas properties of Enex
Consolidated Partners, L.P.
The ratification of the issuance of the Series C Preferred Stock was
approved.
<TABLE>
<S> <C> <C>
For Against Abstain
7,098,597 5,785 2,973
</TABLE>
4. Consideration of and voting upon the approval of a Securities Purchase
Agreement with 3TEC Energy Corporation and the issuance of 4,755,556 shares
of common stock, 5-year warrants to purchase 3,600,000 shares of common
stock and a 5-year $10,700,000 subordinated convertible promissory note.
The issuance of the common stock, warrants and convertible note was
approved.
<TABLE>
<S> <C> <C>
For Against Abstain
7,101,576 2,826 2,973
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as exhibits to this report:
<TABLE>
<C> <S>
3.1 Articles of Incorporation (Incorporated by reference to
Exhibits to Registration Statement on Form S-4 filed
October 4, 1993.)
</TABLE>
26
<PAGE>
<TABLE>
<C> <S>
3.2 Articles of Amendment to Articles of Incorporation
reflecting reverse split (Incorporated by reference to
Exhibits to definitive Proxy Statement filed February 15,
1995.)
3.3 Articles of Amendment to Articles of Incorporation
designating preferences and rights of Series A Preferred
Stock (Incorporated by reference to Exhibits to Form 8-K
filed July 3, 1997.)
3.4 Articles of Amendment to Articles of Incorporation
designating preferences and rights of Series B Preferred
Stock (Incorporated by reference to Form 8-K filed July 3,
1997.)
3.5 Articles of Amendment to Amended Articles of Incorporation
increasing the number of authorized shares (Incorporated by
reference to Exhibits to definitive Proxy Statement filed
July 19, 1999.)
3.6 Bylaws of the Company (Incorporated by reference to Exhibits
to Registration Statement on Form S-4 filed October 4,
1993.)
3.7 Articles of Amendment to Articles of Incorporation
designating preferences and rights of Series C Preferred
Stock (Incorporated by reference to Exhibits to Amendment
No. 1 to Form S-4 filed October 19, 1998.)
10.1 Securities Purchase Agreement, dated July 1, 1999 by and
between the Company and 3TEC Energy Corporation
(Incorporated by reference to Exhibits to definitive Proxy
Statement filed July 19, 1999.)
10.2 Securities Purchase Agreement, dated August 27, 1999 by and
between the Company and Shoemaker Family Partners, LP
10.3 Securities Purchase Agreement, dated August 27, 1999 by and
between the Company and Shoeinvest II, LP
10.4 Securities Purchase Agreement, dated October 19, 1999
between The Prudential Insurance Company of America and the
Company (Incorporated by reference to Exhibits to Form 8-K
filed November 2, 1999.)
10.5 Shareholders Agreement, dated August 27, 1999 by and among
the Company, 3TEC Energy Corporation and the Major
Shareholders
10.6 Registration Rights Agreement, dated August 27, 1999 by and
among the Company, 3TEC Energy Corporation, the Major
Shareholders, Shoemaker Family Partners, LP and Shoeinvest
II, LP
10.7 Amendment to Registration Rights Agreement, dated
October 19, 1999 by and among the Company, 3TEC Energy
Company L.L.C., f/k/a 3TEC Energy Corporation, Shoemaker
Family Partners, LP, Shoeinvest II, LP, and The Prudential
Insurance Company of America (Incorporated by reference to
Exhibits to Form 8-K filed November 2, 1999.)
10.8 Participation Rights Agreement, dated October 19, 1999 by
and among the Company, The Prudential Insurance Company of
America and 3TEC Energy Company L.L.C. (Incorporated by
reference to Exhibits to Form 8-K filed November 2, 1999.)
10.9 Employment Agreement, dated August 27, 1999 by and between
Floyd C. Wilson and the Company
10.10 Employment Agreement, dated August 27, 1999 by and between
John J. Bassett and the Company
10.11 Credit Agreement, dated March 27, 1998 by and among the
Company, Compass Bank, and Bank of Oklahoma, National
Association
</TABLE>
27
<PAGE>
<TABLE>
<C> <S>
10.12 First Amendment to Credit Agreement, dated August 27, 1999
by and among the Company, Compass Bank, and Bank of
Oklahoma, National Association
10.13 Second Amendment to Credit Agreement, dated October 19, 1999
by and among the Company, Compass Bank, and Bank of
Oklahoma, National Association
10.14 Subordination Agreement, dated August 27, 1999 by and
between 3TEC Energy Corporation, Compass Bank, and Bank of
Oklahoma, National Association
10.15 Subordination Agreement, dated August 27, 1999 by and among
Shoemaker Family Partners, LP, Compass Bank, and Bank of
Oklahoma, National Association
10.16 Subordination Agreement, dated August 27, 1999 by and among
Shoeinvest II, LP, Compass Bank, and Bank of Oklahoma,
National Association
27.1* Financial Data Schedule
</TABLE>
- ------------------------
* Filed herewith
(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 that was executed on July 1, 1999.
On September 8, 1999, the Company filed a Form 8-K under Item 1 describing
the final securities purchase agreement and the closing of the transaction on
August 27, 1999.
28
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
<TABLE>
<S> <C> <C>
3TEC ENERGY CORPORATION
(Registrant)
By: /s/ FRANK C. TURNER II
-----------------------------------------
Frank C. Turner II
Date: December 28, 1999 CHIEF FINANCIAL OFFICER
</TABLE>
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 25,076,465
<SECURITIES> 0
<RECEIVABLES> 2,716,165
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,883,197
<PP&E> 81,648,100
<DEPRECIATION> (35,425,362)
<TOTAL-ASSETS> 74,743,810
<CURRENT-LIABILITIES> 7,699,604
<BONDS> 35,026,249
0
8,862,083
<COMMON> 48,404,967
<OTHER-SE> (26,433,735)
<TOTAL-LIABILITY-AND-EQUITY> 74,743,810
<SALES> 11,328,502
<TOTAL-REVENUES> 12,967,332
<CGS> 4,450,843
<TOTAL-COSTS> 17,405,363
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,739,362
<INCOME-PRETAX> (4,397,803)
<INCOME-TAX> (1,242,324)
<INCOME-CONTINUING> (3,583,988)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,583,988)
<EPS-BASIC> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
