<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from ______ to _______
Commission File No. 001-14745
3TEC ENERGY CORPORATION
(Exact name of small business issuer as specified in its charter)
DELAWARE 63-1081013
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
777 WALKER STREET
TWO SHELL PLAZA, SUITE 2400
HOUSTON, TX 77002
(Address of principal executive offices)
(713) 821-7100
(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, $0.02 par value
14,510,069 shares as of October 18, 2000
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
INDEX
PAGE
NO.
----
PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets-
September 30, 2000 (Unaudited) and December 31, 1999 (Audited).... 1
Consolidated Statements of Operations (Unaudited)-
Three and nine months ended September 30, 2000 and 1999............ 2
Consolidated Statements of Cash Flows (Unaudited)-
Nine months ended September 30, 2000 and 1999...................... 3
Notes to Consolidated Financial Statements (Unaudited).............. 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ...................... 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................. 14
<PAGE>
PART I. CONSOLIDATED FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
3TEC ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
2000 1999
------------ -----------
ASSETS (Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,010,886 $ 6,141,153
Accounts receivable 20,522,881 9,453,551
Other current assets 2,499,603 176,226
------------ ------------
Total current assets 24,033,370 15,770,930
PROPERTY (AT COST)
Oil and gas-successful efforts method 249,935,680 168,840,499
Other 1,630,047 1,141,879
------------ ------------
251,565,727 169,982,378
Accumulated depreciation, depletion and amortization (49,637,167) (38,208,298)
------------ ------------
201,928,560 131,774,080
OTHER ASSETS 2,452,367 1,698,496
------------ ------------
TOTAL ASSETS $228,414,297 $149,243,506
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 8,517,020 $ 5,726,569
Accrued liabilities 1,480,390 1,576,731
Series C Preferred stock redemption payable 4,786,766 -
Income taxes payable 702,057 -
Accounts payable-Stockholder Dissenters - 1,118,678
Other current liabilities - 347,733
------------ ------------
Total current liabilities 15,486,233 8,769,711
LONG-TERM DEBT 55,000,000 87,500,000
SENIOR SUBORDINATED CONVERTIBLE NOTES 13,223,844 13,223,844
DEFERRED INCOME TAXES 8,405,797 290,643
OTHER LIABILITIES 350,099 257,627
MINORITY INTEREST 1,374,630 1,089,044
STOCKHOLDERS' EQUITY
Preferred stock, $0.02 par, 20,000,000 shares authorized,
266,667 designated Series B, 2,300,000 shares designated Series C and
725,167 shares designated Series D, none other designated - -
Convertible preferred stock Series B, $7.50 stated value,
266,667 shares issued and outstanding. $2,000,000 aggregate
liquidation preference 3,627,000 3,627,000
Convertible preferred stock Series C, $5.00 stated value, 0 and
1,139,506 shares issued and outstanding at September 30, 2000
and December 31, 1999, respectively. - 5,198,440
Convertible preferred stock Series D, $24.00 stated value,
621,930 shares issued and outstanding at September 30, 2000.
$14,926,320 aggregate liquidation preference 7,571,553 -
Common stock, $.02 par value, 60,000,000 shares authorized,
14,577,050 and 5,338,771 shares issued at September 30, 2000
and December 31, 1999, respectively 291,757 106,778
Additional paid-in capital 135,770,414 57,775,199
Accumulated deficit (11,638,190) (27,408,062)
Treasury stock; 69,807 and 7,258 shares at September 30, 2000
and December 31, 1999, respectively (1,048,840) (1,186,718)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 134,573,694 38,112,637
------------ ------------
COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $228,414,297 $149,243,506
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Oil, natural gas and plant income $26,740,844 $ 4,656,156 $66,001,245 $11,328,502
Gain on sale of properties 315,175 575,287 341,856 882,477
Other 251,545 531,419 703,987 756,353
----------- ----------- ----------- -----------
TOTAL REVENUES 27,307,564 5,762,862 67,047,088 12,967,332
----------- ----------- ----------- -----------
EXPENSES
Production
Lease Operations 3,483,393 1,177,232 11,305,417 3,856,818
Production, severance and ad valorem tax 1,627,371 241,954 4,446,304 556,828
Gathering, transportation and other 651,690 14,999 1,406,591 37,197
Geological and geophysical 38,482 46,768 201,898 188,484
Dry hole - 391,477 29,261 455,108
General and administrative 1,402,038 1,112,181 4,466,659 3,048,430
Interest 1,683,960 717,917 5,953,385 1,739,362
Depreciation, depletion and amortization 4,568,645 1,466,006 13,116,023 4,046,546
Impairment - 1,688,443 - 1,688,443
Stock compensation - 729,938 - 729,938
Severance and compensation plan payments - 576,587 - 576,587
Other - 272,233 - 481,622
----------- ----------- ----------- -----------
TOTAL EXPENSES 13,455,579 8,435,735 40,925,539 17,405,363
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT),
MINORITY INTEREST DIVIDENDS TO PREFERRED STOCKHOLDERS 13,851,985 (2,672,873) 26,121,550 (4,438,031)
Minority Interest 86,171 (23,545) 188,572 (40,228)
Income tax expense (benefit) 4,680,377 (686,314) 8,817,212 (1,242,324)
----------- ----------- ----------- -----------
NET INCOME (LOSS) 9,085,437 (2,010,104) 17,115,766 (3,155,479)
Dividends to preferred stockholders 763,326 142,843 1,345,894 428,509
----------- ----------- ----------- -----------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ 8,322,111 $(2,152,947) $15,769,872 $(3,583,988)
=========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE
BASIC $0.58 $(0.21) $1.76 $(0.39)
=========== =========== =========== ===========
DILUTED $0.50 $(0.21) $1.39 $(0.39)
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
BASIC 14,439,232 10,351,990 8,980,318 9,137,784
=========== =========== =========== ===========
DILUTED 18,749,552 10,351,990 12,696,971 9,137,784
=========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
(Unaudited) (Unaudited)
2000 1999
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 17,115,766 $(3,155,479)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation, depletion and amortization 13,116,023 4,046,546
Dry hole costs 29,261 455,108
Impairments - 1,688,443
Stock compensation expense - 729,938
Gain on sale of properties (341,856) (882,477)
Deferred income taxes 8,115,155 (1,242,324)
Minority interest 188,572 (40,228)
Other charges 498,706 345,533
------------ -----------
Cash flow from operations before changes in current assets and liabilities 38,721,627 1,945,060
Changes in current assets and liabilities net of acquisition effects:
Accounts receivable and other current assets (12,601,526) 827,906
Accounts payable, accrued liabilities
and other current liabilities 1,018,601 (1,330,626)
------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 27,138,702 1,442,340
INVESTING ACTIVITIES
Proceeds from sales of properties 5,024,612 3,614,453
Acquisition of Magellan Exploration LLC, net of cash acquired (269,937) -
Additions to oil and gas properties - acquisitions (55,442,670) -
Additions to oil and gas properties - drilling and other (14,106,303) (1,827,614)
Additions to other assets (568,730) (251,680)
Advances from stockholder - 173,115
------------ -----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (65,363,028) 1,708,274
FINANCING ACTIVITIES
Proceeds from long term debt 58,100,000 1,036,000
Principal payments on long term debt (90,600,000) -
Proceeds from issuance of common stock 68,115,052 9,975,000
Proceeds from subordinated notes issued - 10,850,000
Preferred stock dividends (1,249,068) (242,293)
Treasury stock purchase - Alabama dissenters 137,878 -
Debt, common stock and preferred stock issue and registration costs (1,409,803) (48,518)
Other - (684,434)
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 33,094,059 20,885,755
Net (decrease) increase in cash and cash equivalents (5,130,267) 24,036,369
Cash and cash equivalents-Beginning 6,141,153 1,040,096
------------ -----------
Cash and cash equivalents-Ending $ 1,010,886 $25,076,465
============ ===========
See accompanying notes to unaudited consolidated financial statements.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 6,153,687 $ 1,446,736
============ ===========
Income taxes $ - $ -
============ ===========
Non-cash investing and financing activities:
Preferred dividends paid-in-kind $ 118,095 $ -
============ ===========
Preferred dividends incurred but not paid $ 97,014 $ 186,216
============ ===========
Common stock and warrants issued in acquisition of Magellan Exploration LLC $ 10,572,935 $ -
============ ===========
Preferred stock issued in acquisition of Magellan Exploration LLC $ 7,453,457 $ -
============ ===========
Acquisition of oil and gas properties from W/E Energy, LLC $ - $ 875,000
============ ===========
Dryhole costs accrued but not paid $ - $ 345,841
============ ===========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) INTERIM FINANCIAL STATEMENTS
Organization
3TEC Energy Corporation, formerly Middle Bay Oil Company, Inc. (the
"Company"), was incorporated under the laws of the State of Alabama on November
20, 1992. The Company was reincorporated in Delaware on December 7, 1999 and
changed its name to 3TEC Energy Corporation.
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, 2000 and December 31, 1999 and the consolidated results of
operations and consolidated cash flows for the periods ended September 30, 2000
and 1999.
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, 1999. The results
of operations for the nine months ended September 30, 2000, are not necessarily
indicative of the results which may be expected for any other interim period or
for the entire fiscal year ending December 31, 2000.
Reclassifications
Certain reclassifications of prior period amounts have been made to conform to
the current presentation.
(2) EARNINGS PER SHARE
Basic earnings and loss per common share are based on the weighted average
shares outstanding without any dilutive effects considered. Diluted earnings
and loss per share reflect dilution from all potential common shares, including
options, warrants and convertible preferred stock and convertible notes. Diluted
loss per share does not include the effect of any potential common shares if the
effect would decrease the loss per share.
For the three and nine months ended September 30, 1999, the Company had a
weighted average of 1,095,250 and 680,584 combined stock options, warrants and
convertible preferred stock and notes outstanding, respectively, which were not
included in the computation of diluted loss per share, because the effect of the
assumed exercise of these stock options, warrants and convertible securities
would have an antidilutive effect on the computation of diluted loss per share.
At September 30, 1999, the Company had outstanding convertible preferred stock
that was convertible into 380,999 shares of common stock. The convertible
preferred stock and dividends of $142,843 and $428,509 were not reflected in the
computation of diluted loss per share for the three and nine months ended
September 30, 1999 because the effect of the assumed conversion and dividends of
these preferred shares would have an antidilutive effect on the computation of
diluted loss per share.
4
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2) EARNINGS PER SHARE (CONTINUED)
Basic and diluted earnings per share for the three and nine month periods
ended September 30, 2000 was determined as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, 2000 September 30, 2000
------------------ ------------------
<S> <C> <C>
Basic net income attributable to common stockholders $ 8,322 $15,770
Plus preferred stock dividends 763 1,346
Plus interest expense (net of tax) on subordinated convertible notes 197 588
------------------ -------
Fully diluted net income attributable to common stockholders $ 9,282 $17,704
================== =======
Outstanding Outstanding
Shares Shares
-------------- -----------
Basic shares outstanding (weighted average shares) 14,439 8,980
Plus potentially dilutive securities:
Dilutive options and warrants applying treasury stock method 1,767 1,242
Shares from conversion of subordinated convertible notes 1,469 1,469
Shares from conversion of Series B preferred stock 91 91
Shares from conversion of Series C preferred stock 361 370
Shares from conversion of Series D preferred stock 622 544
------------------ -------
Fully diluted shares outstanding (weighted average shares) 18,749 12,696
================== =======
</TABLE>
All share and per share amounts have been retroactively adjusted for a one-for-
three reverse split that was approved by the Company's shareholders on January
14, 2000.
(3) ACQUISITIONS
On May 31, 2000, we completed the acquisition of the CWR Properties located in
East Texas for cash consideration of approximately $51.9 million. The effective
date of the acquisition was January 1, 2000 and the operations are included in
the Company's consolidated financial statements beginning June 1, 2000. The CWR
Properties acquisition was financed under our existing credit facility, which we
amended prior to closing the acquisition. The total purchase price was allocated
principally to oil and natural gas properties.
On February 3, 2000, we completed the acquisition of Magellan Exploration LLC
(the "Magellan Acquisition"), from certain affiliates of EnCap Investments
L.L.C., a Delaware limited liability company and an investor in W/E LLC ("EnCap
Investments"), and other third parties for consideration consisting of (a)
1,085,934 shares of common stock, (b) four year warrants to purchase up to
333,333 shares of common stock at $30.00 per share, (c) 617,009 shares of 5%
Series D Convertible Preferred Stock with a redemption value of $24.00 per share
and (d) the assignment of a performance based "back-in" working interest of 5%
of Magellan's interest in 12 exploration prospects. The total purchase price of
approximately $19 million was allocated principally to proved undeveloped oil
and natural gas properties.
5
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3) ACQUISITIONS (CONTINUED)
On November 23, 1999, the Company completed the acquisition of oil and natural
gas properties and interests, managed by Floyd Oil Company, owned by a group of
private sellers (the "Floyd Oil Acquisition") for $86.8 million in cash and
503,426 shares of Company common stock. Floyd Oil Company is not affiliated
with Floyd C. Wilson, Chief Executive Officer of the Company. The effective
date of the acquisition was January 1, 1999 and the cost was allocated using the
purchase method of accounting. The total purchase price of $90.2 million,
considering post-closing adjustments and transaction costs, was allocated
principally to oil and natural gas properties.
The following pro forma data presents the results of the Company for the nine
months ended September 30, 1999, as if the Floyd Oil Acquisition and the CWR
Acquisition had occurred on January 1, 1999, and the results of the Company for
the nine months ended September 30, 2000 as if the CWR Acquisition had occurred
on January 1, 2000. The pro forma data assumes the acquisition of the respective
properties and the debt and equity financing transactions related to these
acquisitions. 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 pro forma financial
data does not include the financial information for Magellan, which is not
significant with respect to the operations of the Company for the period
presented (in thousands, except per share amounts):
w<TABLE>
<CAPTION>
Pro Forma Pro Forma
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
(Unaudited) (Unaudited)
------------------- ------------------
<S> <C> <C>
Total revenues $71,938 $47,221
Net income (loss) attributable to common stockholders 18,053 2,565
Net income (loss) per basic share attributable to common stockholders 1.26 0.19
</TABLE>
(4) RELATED PARTY TRANSACTIONS
The Company paid EnCap Investments a fee of $500,000 in connection with a
private equity shelf facility related to the CWR Properties acquisition. As
required by the Company's Credit Facility, the private equity shelf
facility would have allowed the Company to require EnCap Investments to purchase
up to $20 million of a new class of exchangeable preferred stock from the
Company. Upon completion of the Company's public offering of common stock on
June 30, 2000, the shelf facility expired.
6
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(5) STOCKHOLDERS' EQUITY
Common Stock
On June 30, 2000, the Company completed its public offering of 7 million
shares of the Company's common stock (priced at $9.00 per share), plus an
additional 1,050,000 shares subject to an option granted to the underwriters to
cover over allotments. The net proceeds, approximately $66.8 million, were used
primarily to repay a portion of the outstanding debt under the amended credit
facility.
Series C Preferred Stock Redemption
On August 31, 2000, the Company sent notices to the holders of its Series C
Preferred Stock (the "Series C") advising that the Series C would be redeemed on
September 30, 2000. The Series C had a redemption price of $5.00 per share and
the holders had the right to convert their Series C shares into Company common
stock at a ratio of one share of common for three shares of Series C prior to
September 30, 2000. A total of 2,115,930 shares of the Series C were outstanding
on August 31, 2000, with 1,293,521 shares (61%) held by the Company's 80% owned
subsidiary, Enex Resources Corporation. Approximately 125,000 Series C shares
were converted to 41,666 shares of common stock and approximately 1,990,930
Series C shares were redeemed. On a consolidated basis, the Company's liability
for the Series C redemption is approximately $4.8 million. As a result of the
Series C redemption, the Company incurred a non-cash charge to dividend expense
of $498,706.
Series D Preferred Stock
In connection with the Magellan Acquisition, the Company issued 617,009 shares
of Series D Preferred Stock, par value $0.02 per share, with a redemption value
of $24.00 per share. While the per share redemption and dividend amounts vary,
the rights as to dividends and liquidation payments of all outstanding issues of
our different series of Preferred Stock are equal. Shares of Series D Preferred
Stock earn dividends at 5% per annum cumulative, payable semi-annually on March
31 and September 30 of each year, when, as and if authorized and declared by the
board of directors. For a period of three years from the closing date of the
Magellan transaction, the Company may pay the dividends at its option in cash or
in additional shares of Series D Preferred Stock. Dividends were paid on the
outstanding shares of Series D Preferred Stock as of March 31, 2000 in the form
of additional shares of Series D Preferred Stock, and as of September 30, 2000
in cash payment.
Holders of Series D Preferred Stock have the right to convert one share of
Series D Preferred Stock into one share of common stock. Upon thirty days
written notice, the Company has the right to redeem any or all shares of Series
D Preferred Stock for $24.00 per share plus any accrued and unpaid dividends.
Holders of the Series D Preferred Stock
7
<PAGE>
have no right to require the Company to redeem the Series D Preferred Stock.
In the event of liquidation, dissolution, winding-up or merger of the Company,
the holders of Series D Preferred Stock are entitled to receive distributions of
$24.00 per share of Series D Preferred Stock plus any accrued but unpaid
dividends before any holders of common stock or junior preferred stock receive
any distributions.
A majority of the holders of Series D Preferred Stock must consent to certain
actions by the Company, which would adversely affect any holder's rights and
preferences.
(6) COMMITMENTS AND CONTINGENCIES
On November 18, 1999, the Company's shareholders approved a reincorporation of
the Company from Alabama to Delaware (See Note 1). The Alabama Code has a
shareholder dissent provision that allows a shareholder to dissent from the
reincorporation and demand cash payment equal to the fair value of the common
stock owned at the date of the reincorporation. Before the November 18, 1999
shareholders meeting, the Company received shareholder dissents representing
ownership of 99,438 shares of common stock. Over the period December 15, 1999 to
January 25, 2000, the Company received formal demands for payment from the
dissenting shareholders (the "dissenters"). The Company made an offer to the
dissenters on March 14, 2000 and the dissenters made a counteroffer in late
March. On May 26, 2000, the Company agreed to a settlement with the dissenters
to purchase 62,549 shares of common stock for a total of $980,800, including
interest. The settlement closed on June 30, 2000 and the shares are held by the
Company as treasury stock. A shareholder holding 36,979 shares of common stock
agreed to withdraw his dissent.
(7) HEDGING ACTIVITIES
In February 2000, the Company entered into fixed price swap agreements
covering 2,000 barrels of oil per day for the period March through October 2000
at a weighted average NYMEX West Texas Intermediate price of $25.96 per barrel.
During the three and nine month period ending September 30, 2000, the Company's
oil revenues were reduced by the effect of our hedging activities by $1,176,749
and $1,584,289 respectively. The fair market value of the open position at
September 30, 2000 was an unrealized loss of approximately $565,000.
(8) PROPERTY SALE
In July 2000, the Company sold certain non-core properties to various third
parties for net proceeds of approximately $4.7 million. The effective date of
the sale was July 1, 2000. The proceeds from the sale were used to repay a
portion of the outstanding debt under the Company's credit facility.
(9) ACCOUNTING PRONOUNCEMENTS
In September 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended, standardizes the
accounting for and disclosures of derivative instruments, including certain
derivative instruments embedded in other contracts. The statement is effective
for the Company's financial statements on January 1, 2001. As of September 30,
2000, the Company does not have any derivative instruments or hedging activities
that will impact 2001 operations and therefore does not expect any income
statement or balance sheet impact for 2001. However, the Company cannot assure
that such instruments or activities will not be put into place in the future.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This quarterly report on Form 10-QSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Such forward-looking statements involve
risks and uncertainties and other factors beyond the control of the Company.
Readers are cautioned that any such forward-looking statements are not
guarantees of future performance and that actual results or developments may
differ materially from those projected in the forward-looking statements.
OVERVIEW
We are engaged in the acquisition, development, production and exploration of
oil and natural gas reserves. Our properties are concentrated in East Texas and
the Gulf Coast region, both onshore and in the shallow waters of the Gulf of
Mexico. We also own significant properties in the Permian and San Juan basins
and in the Mid-continent region. Our management and technical staff have
substantial experience in each of these areas. As of December 31, 1999, on a pro
forma basis including the subsequent acquisition of Magellan Exploration LLC
("Magellan") and the properties in East Texas operated by C.W. Resources, Inc.
(the "CWR Properties"), we had estimated at that date total net proved reserves
of 312 Bcfe, of which approximately 77% were natural gas and approximately 71%
were proved developed, with an estimated PV-10 value of $296.7 million.
LIQUIDITY AND CAPITAL RESOURCES
We believe that our cash flows from operations are adequate to meet the
requirements of operating our business. However, future cash flows are subject
to a number of variables, including our level of production and prices, and we
cannot assure that operations and other capital resources will provide cash in
sufficient amounts to maintain planned levels of capital expenditures. Our
principal operating sources of cash include sales of natural gas and oil
production.
For the year 2000, we have budgeted approximately $23 million for development
and exploration capital expenditures. Through September 30, 2000, the Company
has expended approximately $15 million of its capital budget.
We are obligated to pay dividends of approximately $570,000 per year on the
Series C Preferred Stock in cash and dividends of $740,000 per year on the
Series D Preferred Stock, which we may pay in either cash or in additional
shares of Series D Preferred Stock during the three years ending February 1,
2003. On September 30, 2000, the Company redeemed the Series C Preferred Stock
(See Note 5). We are obligated to pay interest on the convertible subordinated
notes of approximately $1.2 million per year.
Our primary source of financing for acquisitions has been borrowings under our
credit facility (the "Facility"), discussed below. We believe we will have
sufficient cash flow from operations and borrowings under our credit facility to
meet our obligations and
9
<PAGE>
operating needs for the current year. We also believe that we have the ability
to raise additional equity or debt financing and otherwise access the capital
markets should those sources of capital prove insufficient to execute our
strategic objectives. However, future cash flows are subject to a number of
variables, including our level of production and prices, and we cannot assure
you that operations and other capital resources will provide cash of sufficient
amounts to maintain planned levels of capital expenditures.
The Facility provides for a borrowing base which is redetermined on a semi-
annual basis, and as of November 2000, was set at $140 million. Interest under
the Facility is based upon either the bank's prime rate plus a low of zero to a
high of 50 basis points or LIBOR plus basis points increasing from a low of 150
to a high of 212.5 as amounts outstanding increase as a percentage of the
borrowing base. At September 30, 2000, we were paying an average of
approximately 8.36% per annum interest on the entire principal balance of the
Facility of $55 million. The Facility matures on May 31, 2003. The borrowings
under the Facility are secured by substantially all of our properties.
In connection with this Facility, we are required to adhere to certain
affirmative and negative covenants. The loan agreement contains a number of
dividend restrictions and restrictive covenants which, among other things,
require the maintenance of a minimum current ratio and interest coverage ratio.
At September 30, 2000, the Company was in compliance with the terms of the
Facility.
We generally sell our oil at local field prices paid by the principal
purchasers of oil. The majority of our natural gas production is sold at spot
prices. Accordingly, we are generally subject to the commodity prices for these
resources as they vary from time to time. We have entered into fixed price swap
agreements covering 2,000 barrels per day of our oil production for the period
March through October 2000 at an average price of $25.96 per barrel. As of
September 30, 2000, the Company does not have any derivative instruments or
hedging activities that will impact 2001 operations and therefore does not
expect any income statement or balance sheet impact for 2001. However, the
Company cannot assure that such instruments or activities will not be put into
place in the future.
Due to our significant property and corporate acquisitions in 1999 and 2000,
our 1999 change of control and our current capital structure, comparisons of our
results of operations for interim periods in 2000 may not be meaningful. You
should read the following discussion and analysis together with our audited
consolidated financial statements and the related notes for the fiscal year
ended December 31, 1999, filed in our 1999 Form 10-KSB.
10
<PAGE>
The following table reflects certain summary operating data for the periods
presented:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Production Data :
---------------------
Oil and Liquids (MBbls) 267 116 867 367
Natural Gas (MMcf) 4,642 982 12,273 2,778
Equivalent Production (MMcfe) 6,244 1,680 17,475 4,980
Average Sales Price: (1)
------------------------
Oil and Liquids (per Bbl) $24.22 $19.10 $ 24.69 $14.66
Natural Gas (per Mcf) 4.26 2.35 3.56 2.01
Equivalent price (per Mcfe) 4.28 2.69 3.78 2.20
Expenses ($ per Mcfe):
----------------------
Lease operations $ 0.56 $ 0.70 $ 0.65 $ 0.77
Production, severance and ad valorem 0.26 0.14 0.25 0.11
Gathering, transportation and other 0.10 0.01 0.08 0.01
General and administrative 0.22 0.66 0.26 0.61
Depreciation and depletion (2) 0.73 0.87 0.75 0.81
</TABLE>
(1) Includes effect of our hedging activities.
(2) Represents depreciation, depletion and amortization, excluding impairments.
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Oil and Gas Revenues. Revenues from oil and gas operations increased by
474% to $26.7 million for the three months ended September 30, 2000, compared to
$4.7 million for the same period during 1999. The increase is attributable to
the Company's significant revenue growth via acquisitions and drilling as well
as higher commodity prices received by the Company during the period.
Production Expense. Production expense for the three months ended
September 30, 2000, increased by 302% to $5.8 million compared to $1.4 million
during the same period of 1999. Lease operating expenses on an $/MCFE basis
decreased to $0.56/MCFE from $0.70/MCFE, while production, severance and ad
valorem taxes increased to $0.26/MCFE from $0.14/MCFE. Lower per unit operating
costs added with the Company's acquired properties and higher per unit
operating costs of properties sold by the Company in 2000 are attributed to the
current period decrease. Higher realized commodity prices during the three
months ended September 30, 2000 of $4.28/MCFE vs. $2.69/MCFE in 1999 is the
principal reason for the increase in taxes.
Dry Hole Expense. Dry hole expense for the three months ended September
30, 2000, decreased to zero compared to $0.4 million during the same period in
1999.
General and Administrative Expense. General and administrative expense
(excluding stock compensation, severance, compensation plan payments and other
during 1999) for the three months ended September 30, 2000 increased by $0.3
million compared to the same period in 1999. The increase is attributable to
increased staffing levels as a result of the Company's significant growth from
acquisitions.
11
<PAGE>
Depreciation, Depletion and Amortization Expense. Depreciation, depletion
and amortization expense ("DD&A") for the three months ended September 30, 2000
was $4.6 million compared to $1.5 million for the same period of 1999. The
additional DD&A recorded is again attributed the Company's significant growth
from acquisitions. DD&A on a $/MCFE basis decrease for during 2000 to $.73/MCFE
from $.87/MCFE due to lower DD&A rates associated with the Company's acquisition
and development activities.
Income Taxes. For the three months ended September 30, 2000, the Company
recorded a tax provision of $4.7 million compared to a tax benefit of $0.7
during the same period in 1999. The provision recorded in 2000 represents the
Company's net income for the three months ended at its expected effective tax
rate for 2000 of 34%.
Dividends to Preferred Stockholders. Dividends to preferred stockholders of
approximately $0.8 million in the three months ended September 30, 2000
increased from $0.1 million for the three months ended September 30, 1999. The
increase in dividends was due to the issuance of the shares Series D Convertible
Preferred Stock in connection with the acquisition of Magellan, which began
accruing dividends on February 3, 2000 and the charge to dividend expense of
$0.5 million in connection with the Series C Preferred Stock redemption at
September 30, 2000.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Oil and Gas Revenues. Revenues from oil and gas operations increased by
483% to $66.0 million for the nine months ended September 30, 2000, compared to
$11.3 million for the same period during 1999. The increase is attributable to
the Company's significant growth through acquisitions and drilling as well as
higher commodity prices received by the Company.
Production Expense. Production expense for the nine months ended September
30, 2000, increased by 286% to $17.2 million compared to $4.5 million during the
same period of 1999. Lease operating expenses on an $/MCFE basis decreased to
$0.65/MCFE from $0.77/MCFE, while production, severance and ad valorem taxes
increased to $0.25/MCFE from $0.11/MCFE. Lower per unit oprating costs added
with the Company's acquired properties and higher per unit operating costs of
properties sold by the Company in 2000 are attributed to the current period
decrease. Higher realized commodity prices during the nine months ended
September 30, 2000 of $3.78/MCFE vs. $2.20/MCFE in 1999 is the principal reason
for the increase in taxes.
Dry Hole Expense. Dry hole expense for the nine months ended September 30,
2000, decreased to zero compared to $0.5 million during the same period in 1999.
General and Administrative Expense. General and administrative expense
(excluding stock compensation, severance, compensation plan payments and other
during 1999) for the nine months ended September 30, 2000 increased by $1.4
million from the same period in 1999. The increase is attributable to increased
staffing levels as result of the Company's significant growth from acquisitions.
12
<PAGE>
Depreciation, Depletion and Amortization Expense. Depreciation, depletion
and amortization ("DD&A") for the nine months ended September 30, 2000 was $13.1
million compared to $4.0 million for the same period of 1999. The additional
DD&A recorded is again attributed the Company's significant growth from
acquisitions. DD&A on a $/MCFE basis decrease for during 2000 to $.75/MCFE from
$.81/MCFE due to lower DD&A rates associated with the Company's acquisition and
development activities.
Income Taxes. For the nine months ended September 30, 2000, the Company
recorded a tax provision of $8.8 million compared to a tax benefit of $1.2
during the same period in 1999. The provision recorded in 2000 represents the
Company's net income for the nine months ended at its expected effective tax
rate for 2000 of 34%.
Dividends to Preferred Stockholders. Dividends to preferred stockholders of
approximately $1.3 million in the nine months ended September 30, 2000 increased
from $0.4 million for the nine months ended September 30, 1999. The increase in
dividends was due to the issuance of the shares Series D Convertible Preferred
Stock in connection with the acquisition of Magellan, which began accruing
dividends on February 3, 2000 and the charge to dividend expense of $0.5 million
in connection with the Series C Preferred Stock redemption at September 30,
2000.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following documents are filed as exhibits to this report:
2.1 Agreement and Plan of Merger, dated December 21, 1999, by and between 3TEC
Energy Corporation 3TM Acquisition L.L.C., Magellan Exploration, LLC and ECIC
Corporation, EnCap Energy Capital Fund III, L.P., EnCap Energy Acquisition III-
B, Inc., BOCP Energy Partners, L.P., and Pel-Tex Partners, L.L.C. (Incorporated
by reference to Exhibit C to Form DEF14A, filed January 11, 2000.)
2.2 Agreement and Plan of Merger, dated November 24, 1999, by and between 3TEC
Energy Corporation, a Delaware corporation, and Middle Bay Oil Company, Inc., an
Alabama corporation. (Incorporated by reference to Exhibit A to Form DEF14A,
filed October 25, 1999.)
2.3 Form of Purchase Agreement between and among Middle Bay Oil Company, Inc.
and private sellers of the properties managed by Floyd Oil Company.
(Incorporated by reference to Exhibit 2.1 to Form 8-K filed December 7, 1999.)
2.4 Real Estate Exchange Agreement by and between Middle Bay Oil Company, Inc.
and Floyd Oil Company. (Incorporated by reference to Exhibit 2.1 to Form 8-K/A
filed December 17, 1999.)
2.5 First Amendment to Agreement and Plan of Merger, effective as of January
14, 2000, by and among 3TEC Energy Corporation, 3TM Acquisition L.L.C., Magellan
Exploration, LLC, ECIC Corporation, EnCap Energy Capital Fund III, L.P., EnCap
Energy Acquisition III-B, Inc., BOCP Energy Partners, L.P., and Pel-Tex
Partners, L.L.C. (Incorporated by reference to Exhibit 2.1 to Form 8-K filed
February 4, 2000.)
2.6 Second Amendment to Agreement and Plan of Merger, effective as of February
2, 2000, by and among 3TEC Energy Corporation, 3TM Acquisition L.L.C., Magellan
Exploration, LLC, ECIC Corporation, EnCap Energy Capital Fund III, L.P., EnCap
Energy Acquisition III-B, Inc., BOCP Energy Partners, L.P., and Pel-Tex
Partners, L.L.C. (Incorporated by reference to Exhibit 2.2 to Form 8-K filed
February 4, 2000.)
2.7 Form of Agreement of Sale and Purchase by and between C.W. Resources, Inc.,
Westerman Royalty, Inc., and Carl A. Westerman and 3TEC Energy Corporation.
(Incorporated by Reference to Exhibit 10.32 to Form S-2 filed April 28, 2000.)
3.1 Certificate of Incorporation of 3TEC Energy Corporation. (Incorporated by
reference to Exhibit 3.1 Form 8-K/A filed December 6, 1999.)
3.2 Certificate of Amendment to the Certificate of Incorporation of 3TEC Energy
Corporation. (Incorporated by reference to Form 3.3 10-KSB filed March 30,
2000.)
14
<PAGE>
3.3 Certificate of Merger of Middle Bay Oil Company, Inc. into 3TEC Energy
Corporation. (Incorporated by reference to Exhibit 3.3 Form 8-K/A filed December
16, 1999.)
3.4 Bylaws of the Company. (Incorporated by reference to Exhibit C of the
Company's definitive proxy statement filed October 25, 1999.)
4.1 Certificate of Designation of Series B Preferred Stock of 3TEC Energy
Corporation. (Incorporated by reference to Exhibit 3.1 to Form 8-K/A filed
December 16, 1999.)
4.2 Certificate of Designation of Series C Preferred Stock of 3TEC Energy
Corporation. (Incorporated by reference to Exhibit 3.2 Form 8-K/A filed December
16, 1999.)
4.3 Certificate of Designation of Series D Preferred Stock of 3TEC Energy
Corporation. (Incorporated by reference to Exhibit 4.3 to Form 10-QSB filed May
15, 2000.)
10.1 Securities Purchase Agreement, dated July 1, 1999 by and between the
Company and 3TEC Energy Corporation. (Incorporated by reference to Exhibit C to
the 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. (Incorporated by reference to Exhibit
10.2 to Form 10-QSB filed November 15, 1999.)
10.3 Securities Purchase Agreement, dated August 27, 1999 by and between the
Company and Shoeinvest II, LP. (Incorporated by reference to Exhibits to Exhibit
10.3 to Form 10-QSB filed November 15, 1999.)
10.4 Securities Purchase Agreement, dated October 19, 1999 between The
Prudential Insurance Company of America and the Company. (Incorporated by
reference to Exhibit 10.1 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. (Incorporated by reference
to Exhibit 10.5 to Form 10-QSB filed November 15, 1999.)
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. (Incorporated by reference to Exhibit 10.6
to Form 10-QSB filed November 15, 1999.)
10.7 Amendment to Registration Rights Agreement, dated October 19, 1999 by
and among the Company, W/E Energy Company, L.L.C. f/k/a 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 Exhibit 10.2 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 W/E
15
<PAGE>
Energy Company L.L.C. (Incorporated by reference to Exhibit 10.3 to Form 8-K
filed November 2, 1999.)
10.9 Employment Agreement, dated April 15, 2000 by and between Floyd C.
Wilson and the Company. (Incorporated by reference to Exhibit 10.9 to Form S-2
filed April 28, 2000.)
10.10 Employment Agreement, dated May 1, 2000, by and between R.A. Walker and
the Company. (Incorporated by reference to Exhibit 10.9 to Form S-2 filed April
28, 2000.)
10.11 Restated Credit Agreement by and among Middle Bay Oil Company, Inc., Enex
Resources Corporation and Middle Bay Production Company, Inc. as borrowers, and
Bank One, Texas, N.A. and other institutions as lenders. (Incorporated by
reference to Exhibit 10.1 to Form 8-K/A filed December 17, 1999.)
10.12 Subordination Agreement, dated August 27, 1999 by and among Shoemaker
Family Partners, LP, Compass Bank, and Bank of Oklahoma, National Association.
(Incorporated by reference to Exhibit 10.15 to Form 10-QSB filed November 15,
1999.)
10.13 Subordination Agreement, dated August 27, 1999 by and among Shoeinvest
II, LP, Compass Bank, and Bank of Oklahoma, National Association. (Incorporated
by reference to Exhibit 10.16 to Form 10-QSB filed November 15, 1999.)
10.14 Letter Amendment No. 1 to Middle Bay Oil Company, Inc. Securities
Purchase Agreement, dated November 23, 1999, by and between Middle Bay Oil
Company, Inc. (n/k/a 3TEC Energy Corporation) and The Prudential Insurance
Company of America (Incorporated by reference to Exhibit 10.21 to Form S-2 filed
April 28, 2000 and replacing the unexecuted Exhibit 10.17 of Form 10-QSB filed
November 15, 1999.)
10.15 Intercreditor Agreement, dated as of November 23, 1999, among Middle Bay
Oil Company, Inc., Bank One Texas, N.A. and 3TEC Energy Company L.L.C.
(Incorporated by reference to Exhibit 10.18 to Form S-2 filed April 28, 2000.)
10.16 Intercreditor Agreement, dated as of November 23, 1999, among Middle Bay
Oil Company, Inc., Bank One Texas, N.A. and Shoemaker Family Partners, LP.
(Incorporated by reference to Exhibit 10.18 to Form S-2 filed April 28, 2000.)
10.17 Intercreditor Agreement, dated as of November 23, 1999, among Middle Bay
Oil Company, Inc., Bank One Texas, N.A. and Shoeinvest II, LP. (Incorporated by
reference to Exhibit 10.20 to Form S-2 filed April 28, 2000.)
10.18 Amendment to Securities Purchase Agreement, dated as of November 23,
1999, among Middle Bay Oil Company, Inc. and 3TEC Energy Company L.L.C.
(Incorporated by reference to Exhibit 10.22 to Form S-2 filed April 28, 2000.)
10.19 Amendment to Securities Purchase Agreement, dated as of November 23,
1999, among Middle Bay Oil Company, Inc. and Shoemaker Family
16
<PAGE>
Partners, LP. (Incorporated by reference to Exhibit 10.23 to Form S-2 filed
April 28, 2000.)
10.20 Amendment to Securities Purchase Agreement, dated as of November 23,
1999, among Middle Bay Oil Company, Inc. and Shoeinvest II, LP. (Incorporated by
reference to Exhibit 10.24 to Form S-2 filed April 28, 2000.)
10.21 Amended and Restated 1995 Stock Option and Stock Appreciation Rights
Plan. (Incorporated by reference to Exhibit B to Form DEF 14A filed May 5,
1997.)
10.22 Amendment No. 1 to the Amended and Restated 1995 Stock Option and Stock
Appreciation Rights Plan. (Incorporated by reference to Exhibit B to Form DEF
14A filed May 5, 1998.)
10.23 1999 Stock Option Plan. (Incorporated by reference to Exhibit E to Form
DEF 14A filed October 25, 1999.)
10.24 2000 Stock Option Plan (Incorporated by reference to Exhibit A to Form
DEF 14A filed on May 1, 2000.)
10.25 Second Restated Credit Agreement among 3TEC Energy Corporation, Enex
Resources Corporation, Middle Bay Production Company, Inc., and Magellan
Exploration, LLC, as Borrowers, and Bank One, Texas, N.A. and the Institutions
named therein, as Lenders, Bank One, Texas, N.A., as Administrative Agent, Bank
of Montreal as Syndication Agent and Banc One Capital Markets, Inc., as
Arranger, dated May 31, 2000. (Incorporated by reference to Exhibit 10.28 to
Form S-2/A filed September 6, 2000.)
10.26 First Amendment to Shareholders' Agreement by and among 3TEC Energy
Corporation, the W/E Shareholders and the Major Shareholders, dated May 30,2000.
(Incorporated by reference to Exhibit 10.29 to Form S-2/A filed September 6,
2000.)
27.1 Financial Data Schedule *
* Filed herewith
(b) The following reports were filed on Form 8-K during the third quarter of
2000:
None
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed by the
undersigned, thereunto duly authorized, as of November 14, 2000.
3TEC ENERGY CORPORATION
(Registrant)
By: /s/ Floyd C. Wilson
-----------------------
Floyd C. Wilson
Chief Executive Officer
and Chairman
By: /s/ R.A. Walker
-----------------------
R.A. Walker
President and
Chief Financial Officer
By: /s/ Stephen W. Herod
-----------------------
Stephen W. Herod
Executive Vice-President
By: /s/ Shane M. Bayless
-----------------------
Shane M. Bayless
Vice President and
Controller
18
