<PAGE>
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-35914
PROSPECTUS
7,000,000 Shares
[3TEC ENERGY CORPORATION LOGO]
Common Stock
We are offering for sale 7,000,000 shares of common stock of 3TEC Energy
Corporation. All of the shares are being sold by us.
Our common stock is quoted on the Nasdaq National Market under the symbol
"TTEN." The last reported sale price of our common stock on June 26, 2000, was
$9.56 per share.
We are an independent energy company 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.
Investing in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 11 to read about risks that you should consider
before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any regulatory body has
approved or disapproved these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Public offering price.................................... $9.00 $63,000,000
Underwriting discounts and commissions................... $0.54 $ 3,780,000
Proceeds, before expenses, to us......................... $8.46 $59,220,000
</TABLE>
----------------
The underwriters may also purchase up to an additional 1,050,000 shares of our
common stock from us at the public offering price less the underwriting
discount, solely to cover over-allotments.
The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares to purchasers on June 30, 2000.
----------------
Bear, Stearns & Co. Inc.
CIBC World Markets
Prudential Securities
First Union Securities, Inc.
The date of this prospectus is June 26, 2000.
<PAGE>
MAP OF GULF COAST REGION OF U.S.
WITH LOCATIONS OF MAJOR PROPERTIES NOTED
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 11
Forward-Looking Statements................................................ 18
Use of Proceeds........................................................... 18
Price Range of Common Stock and Dividend Policy........................... 19
Capitalization............................................................ 20
Selected Historical Financial Data........................................ 21
Selected Unaudited Pro Forma Financial Data............................... 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 28
Business and Properties................................................... 35
Management................................................................ 47
Security Ownership of Principal Stockholders.............................. 50
Description of Capital Stock.............................................. 52
Description of Credit Facility............................................ 57
Underwriting.............................................................. 58
Legal Matters............................................................. 60
Experts................................................................... 60
Where You Can Find More Information....................................... 62
Incorporation of Certain Documents by Reference........................... 62
Glossary of Certain Oil and Gas Terms..................................... 63
Index to Financial Statements............................................. F-1
</TABLE>
----------------
In this prospectus, the terms "3TEC," "we," "our," and "us" refer to 3TEC
Energy Corporation and its subsidiaries and, where appropriate, to our
predecessor, Middle Bay Oil Company, Inc. The term "you" refers to a
prospective investor. We have included definitions of technical terms important
to an understanding of our business under "Glossary of Certain Oil and Gas
Terms" on page 63.
You should rely only on the information contained in this prospectus or to
which we have referred you in this prospectus. We have not authorized anyone to
provide you with information that is different. This document may be used only
where it is legal to sell these securities. The information in this prospectus
may only be accurate on the date of this prospectus.
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all of the information that
you should consider before investing in the common stock offered through this
prospectus. You should read this entire prospectus carefully, especially the
risks of investing in our common stock discussed under "Risk Factors" beginning
on page 11.
About 3TEC
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 recent acquisitions of Magellan Exploration LLC
("Magellan") and properties in East Texas operated by C.W. Resources, Inc. (the
"CWR Properties"), discussed below, we had estimated total net proved reserves
of 312 Bcfe, of which approximately 77% were natural gas and approximately 71%
were classified as proved developed, with an estimated PV-10 value of $296.7
million. As of April 30, 2000, on a pro forma basis including the CWR
Properties, our net daily production was approximately 49.0 Mmcf of natural gas
and 3.5 MBbls of oil or 70.0 Mmcfe.
We have increased our reserves and production principally through
acquisitions. We focus on properties that have a substantial proved reserve
component and which management believes have additional exploitation
opportunities. Through the recently completed acquisition of Magellan, we have
also acquired a number of drilling prospects covered by an extensive 3-D
seismic database that we believe have exploration potential. We have assembled
an experienced management team and technical staff with expertise in property
acquisitions and development, reservoir engineering, exploration and financial
management. After this offering, we believe that our cash flow from operations
and our financial resources will provide us with the ability to fully develop
our current properties, to finance our current exploration projects and to
pursue new acquisition opportunities.
As further discussed below, in August 1999, W/E Energy Company L.L.C. ("W/E
LLC") purchased a controlling interest in us, and Floyd C. Wilson was named our
Chairman and Chief Executive Officer. Since that time, we have acquired net
proved reserves of 258.6 Bcfe with an associated PV-10 value of $244.2 million,
including the recently acquired CWR Properties, calculated as of December 31,
1999. In addition, we have raised or issued $25.0 million of private equity and
equity linked financing and have entered into a new $250 million revolving
credit facility.
Our Strategy
Our business strategy is focused on the following:
. Pursuit of Strategic Acquisitions. We continually review opportunities to
acquire producing properties, leasehold acreage and drilling prospects.
We seek to acquire operational control of properties that we believe have
significant exploitation and exploration potential. We are especially
focused on increasing our holdings in fields and basins in which we
already own an interest.
. Further Development of Existing Properties. We intend to further develop
our properties that have proved reserves. We seek to add proved reserves
and increase production through the use of advanced technologies,
including detailed technical analysis of our properties, and by drilling
infill locations and selectively recompleting existing wells. We also
plan to drill step-out wells to expand known field limits. We intend to
enhance the efficiency and quality control of these activities by
operating the majority of our properties.
4
<PAGE>
. Growth Through Exploration. We conduct an active technology-driven
exploration program that is designed to complement our property
acquisition and development drilling efforts with moderate to high risk
exploration projects that have greater reserve potential. We generate
exploration prospects through the analysis of geological and geophysical
data and the interpretation of 3-D seismic data. We intend to manage our
exploration expenditures through the optimal scheduling of our drilling
program and by selectively reducing our participation in certain
exploratory prospects through sales of interests to industry partners.
. Rationalization of Property Portfolio. We intend to actively pursue
opportunities to reduce and control operating costs of our existing
properties and properties we may acquire in the future through the
consolidation of overlapping operations, the sale of marginal properties
and by increasing the number of fields we operate as a percentage of our
total properties.
. Maintenance of Financial Flexibility. We intend to maintain substantial
unused borrowing capacity under our bank credit facility by periodically
refinancing our bank debt in the capital markets when conditions are
favorable. We believe our expanded base of internally generated cash flow
and other financial resources, including our existing financial partners,
provide us with the financial flexibility to pursue additional
acquisitions of producing properties and leasehold acreage and to develop
our project inventory in an optimal fashion.
Recent Developments
Set forth below is a summary of the transactions we have completed following
the acquisition by W/E LLC of a controlling interest in us:
<TABLE>
<CAPTION>
Proved
Reserves
Added (as Purchase
Cost of Price per
Acquisition (in millions) Property Location 12/31/99) Unit (Mcfe)
----------- ------------- ------------------- ---------- -----------
<S> <C> <C> <C> <C>
Floyd Oil Properties.. $ 90.2 Gulf Coast/E. Texas 165.5 Bcfe $0.55
Magellan.............. 21.0 Gulf Coast 25.3 Bcfe 0.83
CWR Properties........ 55.2 E. Texas 67.8 Bcfe 0.81
------ ----------
TOTAL............... $166.4 258.6 Bcfe
====== ==========
</TABLE>
. Acquisition of Control by W/E LLC. In August 1999, W/E LLC, formerly
known as 3TEC Energy Company L.L.C., which is owned by affiliates of
EnCap Investments L.L.C. ("EnCap") and Floyd C. Wilson, purchased a
controlling interest in us for approximately $20.5 million in cash and
$875,000 in producing properties. As of March 31, 2000, W/E LLC owned
approximately 25% of our outstanding common stock, or approximately 45%
assuming the exercise and conversion of all securities purchased by them
in August 1999. After giving effect to this offering, W/E LLC will own
approximately 12% of our outstanding common stock, or approximately 25%
assuming the exercise and conversion of all securities purchased by them
in August 1999. Concurrent with the investment by W/E LLC, Mr. Wilson was
named our Chairman and Chief Executive Officer.
. Acquisition of Floyd Oil Properties. In November 1999, we completed the
acquisition of properties and interests managed by Floyd Oil Company (the
"Floyd Oil Properties") for $90.2 million, consisting of $86.8 million in
cash and 503,426 shares of our common stock. The majority of these
properties are located in Texas and Louisiana and, as of December 31,
1999, had estimated proved reserves of 165.5 Bcfe with an associated PV-
10 value of $146.1 million. Additionally, 76% of the acquired reserves
are natural gas and 77% are classified as proved developed. We operate
approximately 53% of these properties on a PV-10 value basis. Floyd Oil
Company is not affiliated with Floyd C. Wilson.
5
<PAGE>
. Credit Facility. Concurrently with our acquisition of the Floyd Oil
Properties, we entered into a new $250 million credit facility with Bank
One, Texas, N.A., as administrative agent, and Union Bank of California,
N.A., Wells Fargo Bank, CIBC, Inc. and The Bank of Nova Scotia as
participating lenders. Our borrowing base, which is redetermined semi-
annually, was initially set at $95 million with $83.5 million outstanding
as of March 31, 2000. In connection with the CWR Properties acquisition,
we amended our credit facility to increase the availability under our
borrowing base to $145 million enabling us to borrow all of the purchase
price of the CWR Properties. In addition, Bank of Montreal became a
participant in and syndication agent for this facility. The net proceeds
of this offering will be used primarily to repay indebtedness outstanding
under this facility.
. Acquisition of Magellan. On February 3, 2000, we completed the
acquisition of Magellan from certain affiliates of EnCap and other third
parties for consideration of approximately $18.7 million 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 which have a redemption
value of $24.00 per share and are each convertible into one share of
common stock and (d) the assignment of a performance based "back-in"
working interest of 5% of Magellan's interest in 12 exploration
prospects. Magellan's properties are located both onshore and in the
shallow waters of south Louisiana and consist of 20,243 gross (11,244
net) acres in three prospective areas. As of December 31, 1999, Ryder
Scott Company ("Ryder Scott"), estimated that Magellan's net proved
reserves were 25.3 Bcfe with an associated PV-10 value of $39.8 million.
These proved reserves are approximately 67% natural gas and 69% are
classified as proved undeveloped. Magellan operates approximately 80% of
its properties on a PV-10 value basis. In addition to the proved
reserves, the Magellan properties contain several exploratory drilling
locations that have been identified using 3-D seismic data. In April
2000, we purchased additional interests in certain of these properties
from an unrelated party, bringing our total net purchase price for the
Magellan properties to approximately $21 million.
. Acquisition of CWR Properties. On May 31, 2000, we acquired the CWR
Properties for cash consideration of approximately $55 million. The
purchase of the CWR Properties was financed under our existing credit
facility, which we amended prior to closing this acquisition. The CWR
Properties are located in Upshur and Gregg Counties, Texas, in strategic
proximity to our core East Texas properties. The CWR Properties encompass
approximately 38,000 gross acres (10,100 net acres). As of December 31,
1999, Ryder Scott estimated that the net proved reserves of the CWR
Properties were 67.8 Bcfe with an associated PV-10 value of $58.3
million. The CWR Properties produce from the Cotton Valley formation and
the reserves are approximately 92% natural gas and 51% are classified as
proved developed. As of April 30, 2000, net daily production from the CWR
Properties was approximately 10.9 Mmcfe.
. Changes in Management. Since Mr. Wilson was named our Chairman and Chief
Executive Officer in August 1999, we have assembled a management team
with individuals who we believe have the skills necessary to execute our
business strategy, including a new President and Chief Financial Officer,
Vice President--Exploration, Vice President--Land, Vice President--Field
Operations and Production and Controller. We have also added new members
of the board of directors as well as key employees from the companies we
have acquired.
6
<PAGE>
Our Executive Offices
Our principal executive offices are located at Two Shell Plaza, 777 Walker
Street, Suite 2400, in Houston, Texas 77002, and our telephone number is (713)
821-7100.
The Offering
<TABLE>
<S> <C>
Common stock offered by 3TEC.. 7,000,000 shares(1)
Common stock to be outstanding
after the offering........... 13,422,181 shares(1)(2)
Use of proceeds............... Pending application of the net proceeds to fund
our future development, acquisition and
exploration activities, we intend to use the net
proceeds to repay a portion of our outstanding
debt under our revolving credit facility.
Nasdaq National Market symbol. TTEN
</TABLE>
--------
(1) Excludes a 30-day option granted to the underwriters to purchase up to
1,050,000 additional shares of common stock to cover over-allotments, if
any.
(2) The number of shares shown above to be outstanding after this offering is
based upon 6,422,181 shares of common stock outstanding as of March 31,
2000 and does not include: (a) 1,338,255 shares of common stock that may be
issued upon exercise of stock options outstanding under our existing
employee stock option plans; (b) up to 444,444 shares of common stock
reserved for issuance upon conversion of our Series B Preferred Stock;
722,385 shares of common stock reserved for issuance upon conversion of our
Series C Preferred Stock, (of which 431,174 shares are issuable to our 80%
owned subsidiary, and accordingly, only 377,446 shares are issuable to
third parties); or 621,930 shares of common stock reserved for issuance
upon conversion of our Series D Preferred Stock (for a description of our
outstanding series of Preferred Stock, see "Description of Capital Stock--
Preferred Stock"); (c) 1,469,316 shares of common stock reserved for
issuance upon conversion of our subordinated notes; or (d) 1,841,381 shares
of common stock reserved for issuance upon exercise of outstanding
warrants.
7
<PAGE>
Summary Historical and Pro Forma Consolidated Financial Data
The following table sets forth our summary historical and pro forma
financial data as of the dates and for the periods indicated. The historical
financial data for the years ended December 31, 1999 and 1998 is derived from
financial statements which have been audited by KPMG LLP, independent certified
public accountants. The historical financial data for the three months ended
March 31, 2000 is derived from unaudited financial statements. The unaudited
pro forma financial data for the year ended December 31, 1999 is derived in
part from the 3TEC and CWR Properties historical financial statements audited
by KPMG LLP. The unaudited pro forma financial data for the three months ended
March 31, 2000 is derived in part from the unaudited historical financial
statements of 3TEC and the CWR Properties. The unaudited pro forma statement of
operations and other financial data give effect to the purchase of the Floyd
Oil Properties and the purchase of the CWR Properties as if they had occurred
on January 1, 1999. Pro forma data are based on assumptions and include
adjustments as explained in the notes to the unaudited pro forma consolidated
financial data included herein. The unaudited pro forma consolidated financial
data are not necessarily indicative of the results of our future operations and
should be read in conjunction with the financial statements included herein.
For a description of the acquisitions of the Floyd Oil Properties and the CWR
Properties, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview." The following financial information
should be read in conjunction with "Capitalization," "Selected Historical
Financial Data," "Selected Unaudited Pro Forma Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the 3TEC, Floyd Oil Properties and CWR Properties financial statements. Except
as to the March 31, 2000 pro forma as adjusted and historical balance sheet
data, the following table does not include pro forma financial data for
Magellan, which is not material with respect to the operations of 3TEC for the
periods presented.
<TABLE>
<CAPTION>
Year Ended
Three Months Ended Year Ended December 31,
March 31, 2000 December 31, 1999 1998
----------------------- ----------------------- ------------
Pro Forma(a) Historical Pro Forma(a) Historical Historical
------------ ---------- ------------ ---------- ------------
(unaudited) (unaudited)
(in thousands, except share and per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Oil and natural gas
sales and plant
income................ $ 19,806 $ 16,915 $ 64,099 $ 19,952 $ 15,011
Gain on sale of
properties............ 9 9 1,048 1,048 1,953
Other.................. 329 329 1,020 1,020 738
---------- --------- ---------- --------- ---------
Total revenues....... 20,144 17,253 66,167 22,020 17,702
---------- --------- ---------- --------- ---------
Costs and expenses:
Lease operating and
production taxes...... 5,123 4,581 20,379 6,728 7,801
Geological and
geophysical........... 125 125 200 200 878
Dry hole............... 12 12 625 625 503
Depreciation,
depletion and
amortization.......... 4,704 3,920 16,069 6,691 7,116
Impairments............ -- -- 2,478 2,478 4,164
Interest............... 2,022 2,085 7,437 3,205 1,972
General and
administrative........ 1,811 1,697 6,966 4,736 4,267
Other.................. 68 68 2,230 2,230 405
---------- --------- ---------- --------- ---------
Total costs and
expenses............ 13,865 12,488 56,384 26,893 27,106
---------- --------- ---------- --------- ---------
Income (loss) before
income taxes and
minority interest...... 6,279 4,765 9,783 (4,873) (9,404)
Minority interest....... 42 42 2 2 15
Income tax expense
(benefit).............. 2,121 1,606 3,540 (1,443) (2,830)
---------- --------- ---------- --------- ---------
Net income (loss)....... 4,116 3,117 6,241 (3,432) (6,589)
Dividends to preferred
stockholders........... 260 260 574 574 68
---------- --------- ---------- --------- ---------
Net income (loss)
attributable to common
stockholders........... $ 3,856 $ 2,857 $ 5,667 $ (4,006) $ (6,657)
========== ========= ========== ========= =========
Net income (loss) per
share (diluted)........ $ 0.26 $ 0.35 $ 0.45 $ (1.14) $ (2.48)
========== ========= ========== ========= =========
Weighted average common
shares outstanding
(diluted).............. 16,342,722 9,342,722 14,821,467 3,519,532 2,683,369
========== ========= ========== ========= =========
Other Financial Data:
EBITDAX (b)............ $ 12,918 $ 10,683 $ 36,852 $ 8,586 $ 3,439
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
March 31, 2000
--------------------------------------
Pro Forma
Historical Pro Forma(c) As Adjusted(d)
---------- ------------ --------------
(unaudited)
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.............. $ 3,917 $ 3,917 $ 3,917
Oil and natural gas properties, net.... 150,487 205,687 205,687
Total assets........................... 167,861 223,061 223,061
Long-term debt, including convertible
subordinated notes.................... 96,724 131,924 93,524
Stockholders' equity................... 59,118 59,118 117,518
</TABLE>
--------
(a) Assumes (1) the acquisition of the Floyd Oil Properties and the CWR
Properties; (2) the debt and equity financing transactions relating to
these transactions; and (3) this offering had all taken place on January 1,
1999, for the purposes of Statement of Operations Data and Other Financial
Data.
(b) EBITDAX represents earnings before interest expense, income taxes,
depreciation, depletion and amortization, impairment expense, dry hole
expense, geological and geophysical expense, gains (losses) on property
sales, minority interest, other non-recurring items and other non-cash
charges. We believe that EBITDAX may provide additional information about
our ability to meet our future requirements for debt service, capital
expenditures and working capital. EBITDAX is a financial measure commonly
used in the oil and gas industry and should not be considered in isolation
or as a substitute for net income, operating income, cash flows from
operating activities or any other measure of financial performance
presented in accordance with generally accepted accounting principles or as
a measure of a company's profitability or liquidity. Because EBITDAX
excludes some, but not all, items that affect net income and this measure
may vary among companies, the EBITDAX data presented above may not be
comparable to similarly titled measures of other companies.
(c) The "Pro Forma" Balance Sheet Data gives effect to the acquisition of the
CWR Properties and the related financing transactions.
(d) The "Pro Forma As Adjusted" Balance Sheet Data:
. assumes the sale of 7,000,000 shares of our common stock in this offering
and that the underwriters do not elect to exercise their over-allotment
option;
. gives effect to the application of the estimated net proceeds from the
sale of common stock in this offering to repay a portion of our debt; and
. gives effect to the acquisition of the CWR Properties and the related
financing transactions.
9
<PAGE>
Summary Reserve Information
The table below presents our summary historical and pro forma reserve
information as of December 31, 1999. Estimates of proved reserves are based on
the December 31, 1999 reserve report prepared by Ryder Scott, our independent
petroleum engineering consultants. The pro forma reserve information gives
effect to the acquisition of Magellan and the CWR Properties as if each had
been acquired on December 31, 1999. For additional information relating to our
oil and natural gas reserves, please read "Business and Properties--Description
of Our Properties," note 15 of the notes to our December 31, 1999, consolidated
financial statements, note 6 of the notes to the Floyd Oil Properties September
30, 1999, statements of revenues and direct operating expenses and note 6 of
the notes to the CWR Properties December 31, 1999 statements of revenues and
direct operating expenses.
As of December 31, 1999, on a pro forma basis including Magellan and the CWR
Properties, our PV-10 value was $296.7 million. For purposes of this
calculation, NYMEX prices of $2.33 per Mmbtu of natural gas and $25.60 per
barrel of oil were used. These NYMEX prices were then adjusted for volumes
subject to long-term contracts and financial hedges and all applicable basis
and quality differentials. After taking into account such adjustments, the
weighted average actual prices used to calculate our pro forma PV-10 value were
$2.29 per Mcf for natural gas and $23.87 per barrel for oil.
<TABLE>
<CAPTION>
As of December 31, 1999
--------------------------------------
Historical
----------------------------
CWR Pro Forma
3TEC Magellan Properties Combined
-------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Estimated Proved Reserves:
Natural gas (Mmcf)...................... 159,699 16,990 62,209 238,898
Oil (MBbls)............................. 9,835 1,383 933 12,151
Natural gas equivalents (Mmcfe)......... 218,712 25,286 67,808 311,806
Percentage proved developed reserves.... 82% 31% 51% 71%
Estimated future net cash flows before
income taxes (in thousands)............ $370,258 $55,699 $114,077 $540,034
PV-10 value (in thousands).............. $198,615 $39,782 $ 58,275 $296,672
</TABLE>
Summary Operating Data
The following table sets forth historical and pro forma information with
respect to our production volumes, average sale prices and average costs for
the periods indicated. The pro forma information gives effect to the
acquisition of the Floyd Oil Properties and the CWR Properties, as if each had
been acquired on January 1, 1999.
<TABLE>
<CAPTION>
Three Months Ended
March 31, 2000 Year Ended December 31,
-------------------- -------------------------------
1999 1998
-------------------- ----------
Pro Forma Historical Pro Forma Historical Historical
--------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Production Volumes:
Natural gas (Mmcf)...... 4,429 3,578 18,162 4,737 3,847
Oil (MBbls)............. 322 308 1,350 532 581
Natural gas equivalents
(Mmcfe)................ 6,361 5,426 26,262 7,928 7,333
Average Sale Prices:
Natural gas ($ per Mcf). $ 2.59 $ 2.56 $ 2.25 $ 2.18 $ 2.00
Oil ($ per Bbl)......... 25.02 24.94 16.09 16.88 11.52
Natural gas equivalents
($ per Mcfe)........... 3.07 3.11 2.39 2.43 1.96
Average Costs ($ per
Mcfe):
Lease operating and
production taxes....... $ 0.81 $ 0.84 $ 0.78 $ 0.85 $ 1.06
General and
administrative......... 0.29 0.31 0.27 0.60 0.58
Depreciation, depletion
and amortization....... 0.74 0.72 0.61 0.84 0.97
</TABLE>
10
<PAGE>
RISK FACTORS
Investing in our common stock will provide you with an equity ownership in
3TEC Energy Corporation. As one of our stockholders, you will be subject to
various risks inherent in our business. The trading price of your shares will
be affected by the performance of our business relative to, among other things,
competition, market conditions and general economic and industry conditions.
The value of your investment may decrease, resulting in a loss. You should
carefully consider the following factors as well as other information contained
in this prospectus before deciding to invest in shares of our common stock.
This prospectus contains forward-looking statements. Our actual results may
differ materially from those projected in the forward-looking statements as a
result of any number of factors, including the risk factors set forth below.
Oil and natural gas prices are volatile, and low prices have in the past and
could in the future have a material adverse impact on our business.
Our revenues, profitability and future growth and the carrying value of our
properties depend substantially on prevailing oil and natural gas prices.
Prices also affect the amount of cash flow available for capital expenditures
and our ability to borrow and raise additional capital. The amount we will be
able to borrow under our credit facility will be subject to periodic
redetermination based in part on changing expectations of future prices. Lower
prices may also reduce the amount of oil and natural gas that we can
economically produce.
Historically, the markets for oil and natural gas have been volatile, and
they are likely to continue to be volatile in the future. For example, oil and
natural gas prices declined significantly in late 1997 and 1998. These declines
had a significant negative impact on our financial results for 1997, 1998 and
the first two quarters of 1999, contributing to our losses for those periods.
Among the factors that can cause volatility are:
. the domestic and foreign supply of oil and natural gas;
. the ability of members of the Organization of Petroleum Exporting
Countries to agree upon and maintain oil prices and production levels;
. political instability or armed conflict in oil or natural gas producing
regions;
. the level of consumer product demand;
. weather conditions;
. the price and availability of alternative fuels;
. the price of foreign imports; and
. worldwide economic conditions.
These external factors and the volatile nature of the energy markets make it
difficult to estimate future prices of oil and natural gas.
We may not successfully integrate the operations of the properties we have
acquired or may acquire or achieve the benefits we are seeking.
Our success will partially depend upon the integration of the operations and
selected personnel relating to the Floyd Oil Properties, Magellan and the CWR
Properties. Our management team does not have experience with the combined
activities of 3TEC, the Floyd Oil Properties, Magellan and the CWR Properties.
In addition, our new management team, including personnel formerly with
Magellan and Floyd Oil Company, has not previously worked together as a single
team and thus is subject to personnel and other risks experienced by newly
combined operations. We may not be able to integrate these operations without
loss of important employees, loss of revenues, increases in operating or other
costs, or other difficulties. In addition, we may not be able to realize the
operating efficiencies and other benefits sought from our acquisitions.
11
<PAGE>
We may not be able to replace production with new reserves through our drilling
or acquisition activities.
In general, the volume of production from oil and natural gas properties
declines as reserves are depleted. Our reserves will decline as they are
produced unless we acquire properties with proved reserves or conduct
successful development and exploration activities. Our future oil and natural
gas production is highly dependent upon our level of success in finding or
acquiring additional reserves. However, we cannot assure you that our future
acquisition, development and exploration activities will result in additional
proved reserves or that we will be able to drill productive wells at acceptable
costs.
Our recent growth is due largely to acquisitions of producing properties.
The successful acquisition of producing properties requires an assessment of a
number of factors. These factors include recoverable reserves, future oil and
natural gas prices, operating costs and potential environmental and other
liabilities, title issues and other factors. Such assessments are inexact and
their accuracy is inherently uncertain. In connection with such assessments, we
perform a review of the subject properties that we believe is generally
consistent with industry practices. However, such a review will not reveal all
existing or potential problems. In addition, the review will not permit a buyer
to become sufficiently familiar with the properties to fully assess their
deficiencies and capabilities. Although the increased availability of
properties has caused a decrease in the prices paid for these properties, we
cannot assure you that we will be able to acquire properties at acceptable
prices because the competition for producing oil and natural gas properties is
intense and many of our competitors have financial and other resources which
are substantially greater than those available to us.
Our bank lenders can limit our borrowing capabilities, which may materially
impact our operations.
As of March 31, 2000, after giving pro forma effect to the application of
the estimated net proceeds of this offering and the acquisition of the CWR
Properties, our long-term bank debt would be $80.3 million. At March 31, 2000,
our borrowing base was $95 million. In connection with the acquisition of the
CWR Properties, we increased the amount of availability under our borrowing
base to $145 million. The borrowing base limitation under our credit facility
is semi-annually redetermined. Redeterminations are based upon a number of
factors, including commodity prices and reserve levels. The next
redetermination date is November 1, 2000. Upon a redetermination, we could be
forced to repay a portion of our bank debt. We may not have sufficient funds to
make such repayments, which could result in a default under the terms of the
loan agreement and an acceleration of the loan. We intend to finance our
development, acquisition and exploration activities with cash flow from
operations, bank borrowings and other financing activities. In addition, we may
significantly alter our capitalization in order to make future acquisitions or
develop our properties. These changes in capitalization may significantly
increase our level of debt. We may also be able to incur substantial additional
indebtedness in the future. If we incur additional debt for these or other
purposes, the related risks that we now face could intensify. A higher level of
debt also increases the risk that we may default on our debt obligations. Our
ability to meet our debt obligations and to reduce our level of debt depends on
our future performance. General economic conditions and financial, business and
other factors affect our operations and our future performance. Many of these
factors are beyond our control. Our level of debt affects our operations in
several important ways, including the following:
. a portion of our cash flow from operations is used to pay interest on
borrowings;
. the covenants contained in the agreements governing our debt limit our
ability to borrow additional funds, pay dividends, dispose of assets or
issue shares of preferred stock and otherwise may affect our flexibility
in planning for, and reacting to, changes in business conditions;
. a high level of debt may impair our ability to obtain additional
financing in the future for working capital, capital expenditures,
acquisitions, general corporate or other purposes;
. a leveraged financial position would make us more vulnerable to economic
downturns and could limit our ability to withstand competitive pressures;
. any debt that we incur under our credit facility will be at variable
rates which makes us vulnerable to increases in interest rates; and
12
<PAGE>
. the level of our debt could impact our ability to develop our proved
undeveloped reserves in a timely manner, if at all. Our failure to
develop our proved undeveloped reserves would have a negative impact on
our future cash flow.
We have incurred losses from operations in the past, and our failure to achieve
or sustain profitability in the future could adversely affect the market price
of our common stock.
We incurred net losses of $6.7 million in 1998 and $4.0 million in 1999. On
a pro forma basis, giving effect to the acquisition of the Floyd Oil
Properties, the CWR Properties and this offering, we would have earned a profit
of $5.7 million in 1999, but the pro forma results may not be indicative of
actual operating results had we acquired the Floyd Oil Properties and the CWR
Properties at January 1, 1999. We cannot assure you that we will achieve or
sustain profitability in the future. Our failure to achieve or sustain
profitability in the future could adversely affect the market price of our
common stock.
Prices of our common stock may be volatile.
The market price of our common stock may be subject to significant
fluctuations in response to events beyond our control. Normal fluctuations in
the prices of our stock may be increased by our trading volumes, which have
been historically low. Our trading volumes may be further reduced by the 1-for-
3 reverse split of our common stock effected on January 18, 2000. There can be
no assurance that the market price of our common stock will not decline below
the price at which shares are sold in this offering.
Our ability to finance our business activities will require us to generate
substantial cash flow.
Our business activities require substantial capital. We have budgeted total
capital expenditures for 2000 of approximately $24 million, including an
estimated $3.7 million with respect to the CWR Properties. We intend to finance
our capital expenditures in the future through cash flow from operations, the
incurrence of additional indebtedness and/or the issuance of additional equity
securities. We cannot be certain that our business will continue to generate
cash flow at or above current levels. Future cash flows and the availability of
financing will be subject to a number of variables, such as:
. the level of production from existing wells;
. prices of oil and natural gas;
. our results in locating and producing new reserves; and
. general economic, financial, competitive, legislative, regulatory and
other factors beyond our control.
If we are unable to generate sufficient cash flow from operations to service
our debt, we may have to obtain additional financing. We cannot be sure that
any additional financing will be available to us on acceptable terms. Issuing
equity securities to satisfy our financing requirements could cause substantial
dilution to our existing stockholders. The level of our debt financing could
also materially affect our operations. See "Our bank lenders can limit our
borrowing capabilities, which may materially impact our operations."
If our revenues were to decrease due to lower oil and natural gas prices,
decreased production or other reasons, and if we could not obtain capital
through our credit facility or otherwise, our ability to execute our
development and acquisition plans, replace our reserves or maintain production
levels could be greatly limited.
Drilling wells is speculative, often involves significant costs and may not
result in additions to our production or reserves.
Developing and exploring for oil and natural gas reserves involves a high
degree of operating and financial risk. The budgeted costs of drilling,
completing and operating wells are often exceeded and can increase
significantly when drilling costs rise due to a tightening in the supply of
various types of oilfield equipment and related services. Drilling may be
unsuccessful for many reasons, including title problems, weather, cost
13
<PAGE>
overruns, equipment shortages and mechanical difficulties. Moreover, the
successful drilling of an oil or natural gas well does not ensure a profit on
investment. Exploratory wells bear a much greater risk of loss than development
wells. A variety of factors, both geological and market-related, can cause a
well to become uneconomical or only marginally economic. In addition to their
cost, unsuccessful wells can hurt our efforts to replace reserves.
We do not insure against all potential losses and could be seriously harmed by
unexpected liabilities.
Exploration for and production of oil and natural gas can be hazardous,
involving natural disasters and other unforeseen occurrences such as blowouts,
cratering, fires and loss of well control, which can damage or destroy wells or
production facilities, injure or kill people, and damage property and the
environment. Because third party drilling contractors are used to drill our
wells, we may not realize the full benefit of workmen's compensation laws in
dealing with their employees. We maintain insurance against many potential
losses and liabilities arising from our operations in accordance with customary
industry practices and in amounts that we believe to be prudent. However, our
insurance does not protect us against all operational risks.
Estimates of oil and natural gas reserves are uncertain and inherently
imprecise and any material inaccuracies in these reserve estimates will
materially affect the quantities and PV-10 value of our reserves.
This prospectus contains estimates of our proved oil and natural gas
reserves and the estimated future net revenues from such reserves. These
estimates are based upon various assumptions, including assumptions required by
the Securities and Exchange Commission relating to oil and natural gas prices,
drilling and operating expenses, capital expenditures, taxes and availability
of funds. The process of estimating oil and natural gas reserves is complex.
This process requires significant decisions and assumptions in the evaluation
of available geological, geophysical, engineering and economic data for each
reservoir. Therefore, these estimates are inherently imprecise.
Actual future production, oil and natural gas prices, revenues, taxes,
development expenditures, operating expenses and quantities of recoverable oil
and natural gas reserves will most likely vary from those estimated. Any
significant variance could materially affect the estimated quantities and PV-10
value of reserves set forth in this prospectus and the information incorporated
by reference. Our properties may also be susceptible to hydrocarbon drainage
from production by other operators on adjacent properties. In addition, we may
adjust estimates of proved reserves to reflect production history, results of
exploration and development, prevailing oil and natural gas prices and other
factors, many of which are beyond our control. Actual production, revenues,
taxes, development expenditures and operating expenses with respect to our
reserves will likely vary from the estimates used. These variances may be
material.
At December 31, 1999, on a pro forma basis for the acquisitions of Magellan
and the CWR Properties, approximately 29% of our estimated proved reserves were
undeveloped. The percentage of proved undeveloped properties were increased as
a result of the addition of Magellan and the CWR Properties. Recovery of
undeveloped reserves requires significant capital expenditures and successful
drilling operations. The reserve data assumes that we will make significant
capital expenditures to develop our reserves. Although we have prepared
estimates of our oil and natural gas reserves and the costs associated with
these reserves in accordance with industry standards, we cannot assure you that
the estimated costs are accurate, that development will occur as scheduled or
that the actual results will be as estimated.
In addition, you should not construe PV-10 value as the current market value
of the estimated oil and natural gas reserves attributable to our properties.
We have based the estimated discounted future net cash flows from proved
reserves on prices and costs as of the date of the estimate, in accordance with
applicable regulations, whereas actual future prices and costs may be
materially higher or lower. Many factors will affect actual future net cash
flow, including:
. prices for oil and natural gas;
. the amount and timing of actual production;
14
<PAGE>
. supply and demand for oil and natural gas;
. curtailments or increases in consumption by oil and natural gas
purchasers; and
. changes in governmental regulations or taxation.
The timing of the production of oil and natural gas properties and of the
related expenses affect the timing of actual future net cash flow from proved
reserves and, thus, their actual PV-10 value. In addition, the 10% discount
factor, which we are required to calculate PV-10 value for reporting purposes,
is not necessarily the most appropriate discount factor given actual interest
rates and risks to which our business or the oil and natural gas industry in
general are subject.
We cannot control the activities on properties we do not operate.
Other companies operate some of the properties in which we have an interest.
As a result, we have a limited ability to exercise influence over operations
for these properties or their associated costs. The success and timing of our
drilling and development activities on properties operated by others therefore
depend upon a number of factors outside of our control, including:
. timing and amount of capital expenditures;
. the operator's expertise and financial resources;
. approval of other participants in drilling wells; and
. use of technology.
A small number of existing stockholders control our company, which could limit
your ability to influence the outcome of stockholder votes.
W/E LLC, an affiliate of EnCap and Floyd C. Wilson, our Chairman and Chief
Executive Officer, Kaiser-Francis Oil Company, C. J. Lett, III, Weskids, L.P.,
Alvin V. Shoemaker and EnCap and its affiliates collectively own approximately
69% of our outstanding common stock as of March 31, 2000, and would own
approximately 78% of our then outstanding common stock as of March 31, 2000, if
all convertible subordinated notes and related warrants owned by them are
converted and exercised. W/E LLC will own approximately 12% of our common stock
outstanding after this offering, assuming that the over-allotment option is not
exercised by the underwriters, and would own approximately 25% of our then
outstanding common stock, if the convertible subordinated notes and related
warrants owned by them were converted and exercised. These stockholders have
entered into an agreement to vote the shares they own to elect the seven
members of our board of directors, at least two of whom shall qualify as
independent directors, as follows: (i) three members of the board of directors
designated by W/E LLC; (ii) two members of the board of directors designated by
Kaiser-Francis Oil Company, C.J. Lett, III, Weskids, L.P. and Alvin V.
Shoemaker; and (iii) two members of the board of directors designated by a
majority of the board of directors, at least one of which must be an
independent director whose designation is acceptable to W/E LLC. As a result of
this agreement, these individuals and entities have a significant voice in the
outcome of stockholder voting concerning the election of directors, the
adoption or amendment of provisions in our charter and bylaws, the approval of
mergers and other significant corporate transactions. Following the completion
of this offering, however, any stockholder who has entered into the agreement
but no longer beneficially owns at least 3.5% of our common stock shall no
longer be subject to the rights and obligations under the agreement.
Competition in our industry is intense, and we are smaller and have a more
limited operating history than many of our competitors.
We compete with major integrated oil and natural gas companies and
independent oil and natural gas companies in all areas of operation. In
particular, we compete for property acquisitions and for the equipment and
labor required to operate and develop these properties. Most of our competitors
have substantially greater
15
<PAGE>
financial and other resources than we have. In addition, larger competitors may
be able to absorb the burden of any changes in federal, state and local laws
and regulations more easily than we can, which would adversely affect our
competitive position. These competitors may be able to pay more for exploratory
prospects and may be able to define, evaluate, bid for and purchase a greater
number of properties and prospects than we can. Our ability to explore for oil
and natural gas prospects and to acquire additional properties in the future
will depend on our ability to conduct operations, to evaluate and select
suitable properties and to consummate transactions in this highly competitive
environment. In addition, most of our competitors have operated for a much
longer time than we have and have demonstrated the ability to operate through
industry cycles.
Hedging transactions may limit our potential gains.
In order to manage our exposure to price risks in the marketing of our oil
and natural gas production, we have in the past and may in the future enter
into oil and natural gas price hedging arrangements with respect to a portion
of our expected production. Our hedging arrangements may include futures
contracts on the New York Mercantile Exchange. While intended to reduce the
effects of volatile oil and natural gas prices, such transactions may limit our
potential gains if oil and natural gas prices were to rise substantially over
the price established by the hedge. In addition, such transactions may expose
us to the risk of loss in certain circumstances, including instances in which:
. our production is less than expected;
. there is a widening of price differentials between delivery points for
our production and the delivery point assumed in the hedge arrangement;
. the counterparties to our future contracts fail to perform the contracts;
or
. a sudden, unexpected event materially impacts oil or natural gas prices.
We have recently 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. These agreements cover approximately
62% of our current daily oil production. The price used to determine the
settlement amount is the average of the near month contract on the NYMEX.
Settlement is on the 23rd of each month for the preceding month. The hedging
agreements are with financial institutions that participate in our credit
facility.
We have also recently entered into a forward sale agreement for 3,750 Mcf of
natural gas per day for the period May through August 2000 at an average price
of $3.07 per Mcf. This agreement covers approximately 8% of our current daily
natural gas production.
The loss of key personnel could adversely affect our ability to operate.
Our management changed significantly with W/E LLC's investment. We have five
new directors, a new chief executive officer and a number of other new
management and professional personnel. Our operations will be dependent upon
retaining this group of key management and technical personnel. Recognizing
their importance, we have entered into employment agreements with Floyd C.
Wilson, R. A. Walker and Stephen W. Herod. We cannot assure you that such
individuals will remain with us for the immediate or foreseeable future. If we
cannot retain our current personnel or attract additional experienced
personnel, our ability to compete could be adversely affected.
16
<PAGE>
We are subject to complex laws and regulations, including environmental
regulations, that can adversely affect the cost, manner or feasibility of doing
business.
Our operations are subject to numerous laws and regulations governing the
operation and maintenance of our facilities and the discharge of materials into
the environment or otherwise relating to environmental protection. These laws
and regulations may:
. require that we acquire permits before commencing drilling;
. restrict the substances that can be released into the environment in
connection with drilling and production activities;
. limit or prohibit drilling activities on protected areas such as wetlands
or wilderness areas; or
. require remedial measures to mitigate pollution from former operations,
such as plugging abandoned wells.
Under these laws and regulations, we could be liable for personal injury and
clean-up costs and other environmental and property damages, as well as
administrative, civil and criminal penalties. We maintain limited insurance
coverage for some but not all of the environmental damages for which we could
be liable. Moreover, we do not believe that insurance coverage for the full
potential liability that could be caused by sudden and accidental environmental
damages is available at a reasonable cost. Accordingly, we may be subject to
liability or we may be required to cease production from properties in the
event of environmental damages.
These laws and regulations have been changed frequently in the past. In
general, these changes have imposed more stringent requirements that increase
operating costs or require capital expenditures in order to remain in
compliance. It is also possible that unanticipated developments could cause us
to make environmental expenditures that are significantly different from those
we currently expect. Existing laws and regulations could be changed, and any
changes could have an adverse effect on our business.
Shares eligible for future sale by our current stockholders could adversely
affect the market price of our common stock.
Sales of a substantial number of shares of our common stock in the market
may have an adverse affect on the price of our stock. After giving effect to
the 7,000,000 shares to be issued in this offering approximately 13,422,181
shares of common stock will be outstanding, assuming the underwriters' over-
allotment option is not exercised. In addition, options and other warrants to
purchase 3,179,636 shares are outstanding, of which 2,071,417 are currently
exercisable. These options and warrants are exercisable at prices ranging from
$3.00 to $30.00 per share. We also have preferred stock outstanding which is
currently convertible into 1,430,840 additional shares of common stock.
Subsequent to this offering, approximately 7.6 million shares of our common
stock, assuming that the over-allotment option is not exercised by the
underwriters, will be freely tradable without substantial restrictions or the
requirement of future registration under the Securities Act of 1933, as
amended. In addition, upon demand, and assuming exercise of the options,
warrants and convertible securities, we are obligated under certain
registration rights agreements to file registration statements to register for
resale up to approximately 6 million shares of common stock. Our officers and
directors who are stockholders and a number of other stockholders, including
W/E LLC, Kaiser-Francis Oil Company and certain other significant stockholders
have entered into lock-up agreements under which they have agreed not to offer
or sell any shares of common stock or similar securities for a period of up to
180 days from the date of this prospectus without the prior written consent of
Bear, Stearns & Co. Inc. ("Bear Stearns") on behalf of the underwriters;
however, Bear Stearns may at any time waive the terms of these lock-up
agreements as specified in the underwriting agreement. Sales of substantial
amounts of common stock, or a perception that such sales could occur, and the
existence of options or warrants to purchase shares of common stock at prices
that may be below the then current market price of the common stock could
adversely affect the market price of our common stock and could impair our
ability to raise capital through the sale of our equity securities.
17
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus and the information incorporated by reference contain
statements that constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements appear in a
number of places and include statements regarding our plans, beliefs,
intentions or current expectations, including those plans, beliefs, intentions
and expectations of our officers and directors with respect to, among other
things:
. budgeted capital expenditures;
. increases in oil and natural gas production;
. our outlook on oil and natural gas prices;
. estimates of our oil and natural gas reserves;
. our future financial condition or results of operations; and
. our business strategy and other plans and objectives for future
operations.
More specifically, some of the statements contained in this prospectus under
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business and Properties"
that relate to our business and the industry in which we operate are forward-
looking. Statements or assumptions related to or underlying these forward-
looking statements include, without limitation, statements regarding:
. the quality or value of our properties with regard to, among other
things, the existence of reserves in economic quantities;
. our ability to increase our reserves through exploration and development
activities;
. the number of locations to be drilled and the time frame within which
they will be drilled;
. future prices of oil and natural gas;
. anticipated domestic demand for oil and natural gas; and
. the adequacy of our capital resources and liquidity.
Actual results may differ materially from those suggested by the forward-
looking statements for various reasons, including those discussed under "Risk
Factors."
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the 7,000,000
shares of common stock in this offering will be approximately $58.4 million
(approximately $67.2 million if the underwriters' over-allotment option is
exercised in full), after deducting underwriting discounts and commissions and
estimated offering expenses.
Pending application of the net proceeds to fund further acquisition,
development, and exploration activities, we intend to use all of the net
proceeds from this offering to repay a portion of our outstanding debt under
our credit facility.
At March 31, 2000, we had $83.5 million outstanding under our credit
facility bearing interest at an average rate of 7.9%. The amount outstanding
under our credit facility increased by approximately $55 million as of May 31,
2000, as a result of additional borrowings to fund the acquisition of the CWR
Properties. The credit facility matures on May 31, 2003. We have used
borrowings under the credit facility to fund a portion of our acquisitions and
for other corporate purposes.
18
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Effective June 6, 2000, our common stock began trading on the Nasdaq
National Market under the symbol "TTEN." Prior to June 6, 2000, our common
stock traded on the Nasdaq SmallCap Market. The following table sets forth the
high and low closing bid prices per share of our common stock for the periods
indicated through June 26, 2000, as reported by the National Quotation Bureau,
LLC. The high and low bid amounts for periods prior to January 18, 2000, have
been adjusted to reflect the 1-for-3 reverse split of our common stock
effective on that date. The bid information below reflects inter-dealer prices,
without retail mark-ups, mark-downs or commissions and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
Period High Low
------ ---- ------
<C> <S> <C> <C>
1998 First Quarter.............................................. $30.00 $17.25
Second Quarter............................................. 23.25 15.19
Third Quarter.............................................. 15.38 9.00
Fourth Quarter............................................. 9.75 5.25
1999 First Quarter.............................................. 8.63 4.13
Second Quarter............................................. 8.06 5.25
Third Quarter.............................................. 14.44 7.50
Fourth Quarter............................................. 13.59 7.13
2000 First Quarter.............................................. 10.69 7.44
Second Quarter (through June 26, 2000)..................... 12.50 7.00
</TABLE>
On June 26, 2000, the last reported sale price of our common stock on the
Nasdaq National Market was $9.56 per share.
On June 26, 2000, there were 1,004 holders of record of our common stock.
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain future earnings, if any, for the operation and
development of our business and do not anticipate paying any cash dividends on
our common stock in the foreseeable future. In addition, our credit facility
prohibits us from paying cash dividends on our common stock. Any future
dividends are also restricted by the terms of our outstanding preferred stock
and may be restricted by any loan agreements which we may enter into from time
to time.
We are obligated to pay net cash dividends in the amounts of approximately
$570,000 per year on our Series C Preferred Stock. Additionally, we are
obligated to pay dividends of $740,000 per year on our Series D Preferred
Stock, which may be paid, at our option, in cash or in additional shares of
Series D Preferred Stock during the three years ending February 2, 2003. Our
credit facility permits the payment of cash dividends on our Series C Preferred
Stock and the payment of dividends on the Series D Preferred Stock in
additional shares of Series D Preferred Stock.
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<PAGE>
CAPITALIZATION
The following table presents our capitalization as of March 31, 2000, on the
following bases:
. on an historical basis;
. on a pro forma basis giving effect to the acquisition of the CWR
Properties and the related financing transactions; and
. on a pro forma basis as adjusted to reflect our anticipated use of the
estimated net proceeds of this offering, assuming that the underwriters'
over-allotment option is not exercised.
You should read the table in conjunction with "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our audited consolidated financial statements and our unaudited
condensed consolidated pro forma financial data included in this prospectus.
<TABLE>
<CAPTION>
March 31, 2000
---------------------------------
Pro Forma
Historical Pro Forma As Adjusted
---------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Current portion of long-term debt............. $ -- $ 20,000 $ --
Long-term debt................................ 83,500 118,700 80,300
Convertible subordinated notes................ 13,224 13,224 13,224
-------- -------- --------
Total long-term debt and convertible
subordinated notes....................... 96,724 151,924 93,524
Preferred stock, $0.02 par value, 20,000,000
shares authorized;
Convertible preferred stock Series B,
266,667 shares issued and outstanding...... 3,627 3,627 3,627
Convertible preferred stock Series C,
1,139,506 shares issued and outstanding.... 5,163 5,163 5,163
Convertible preferred stock Series D,
621,930 shares issued outstanding.......... 7,572 7,572 7,572
Common stock, $0.02 par value, 60,000,000
shares authorized, 6,429,439 and 13,429,439
shares issued actual and pro forma and pro
forma as adjusted, respectively.............. 129 129 269
Additional paid-in capital.................... 68,366 68,366 126,626
Accumulated deficit........................... (24,552) (24,552) (24,552)
Treasury stock; 7,258 shares.................. (1,187) (1,187) (1,187)
-------- -------- --------
Total stockholders' equity................ 59,118 59,118 117,518
-------- -------- --------
Total capitalization...................... $155,842 $211,042 $211,042
======== ======== ========
</TABLE>
20
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data for 3TEC as of and for the
years ended December 31, 1999 and 1998 have been derived from our audited
consolidated financial statements included in this prospectus. The following
selected historical financial data for 3TEC as of and for the three months
ended March 31, 1999 and 2000 have been derived from our unaudited consolidated
financial statements included in this prospectus.
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
--------------------- ----------------------
2000 1999 1999 1998
---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Revenues:
Oil and natural gas sales and
plant income................. $ 16,915 $ 3,072 $ 19,952 $ 15,011
Gain on sale of properties.... 9 74 1,048 1,953
Other......................... 329 103 1,020 738
---------- ---------- ---------- ----------
Total revenues.............. 17,253 3,249 22,020 17,702
---------- ---------- ---------- ----------
Costs and expenses:
Lease operating and production
taxes........................ 4,581 1,559 6,728 7,801
Geological and geophysical.... 125 70 200 878
Dry hole...................... 12 62 625 503
Depreciation, depletion and
amortization................. 3,920 1,350 6,691 7,116
Impairments................... -- -- 2,478 4,164
Interest...................... 2,085 512 3,205 1,972
General and administrative.... 1,697 1,021 4,736 4,267
Other......................... 68 -- 2,230 405
---------- ---------- ---------- ----------
Total costs and expenses.... 12,488 4,574 26,893 27,106
---------- ---------- ---------- ----------
Income (loss) before income tax
expense (benefit) and minority
interest....................... 4,765 (1,325) (4,873) (9,404)
Minority interest............... 42 (10) 2 15
Income tax expense (benefit).... 1,606 (409) (1,443) (2,830)
---------- ---------- ---------- ----------
Net income (loss) before
dividends to preferred
stockholders................... 3,117 (906) (3,432) (6,589)
Dividends to preferred
stockholders................... 260 143 574 68
---------- ---------- ---------- ----------
Net income (loss) attributable
to common stockholders......... $ 2,857 $ (1,049) $ (4,006) $ (6,657)
========== ========== ========== ==========
Net income (loss) per common
share (diluted)................ $ 0.35 $ (0.37) $ (1.14) $ (2.48)
========== ========== ========== ==========
Weighted average common shares
outstanding (diluted).......... 9,342,722 2,843,531 3,519,532 2,683,369
========== ========== ========== ==========
</TABLE>
21
<PAGE>
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
Our unaudited pro forma condensed consolidated balance sheet as of March 31,
2000 gives effect to the purchases of the Floyd Oil Properties and the CWR
Properties (the "Purchases") and this offering as if they occurred on March 31,
2000. Our unaudited pro forma condensed consolidated statements of operations
for the three months ended March 31, 2000 and the year ended December 31, 1999
give effect to the Purchases and this offering as if they had occurred at the
beginning of the periods presented. The unaudited pro forma condensed
consolidated statement of operations for the year ended December 31, 1999 has
also been prepared to give effect to the issuance of 351,681 shares of common
stock and warrants to purchase 266,226 shares of common stock for an aggregate
purchase price of $2,373,844 and the issuance of a senior convertible
subordinated note for $2,373,844 under a securities purchase agreement between
The Prudential Insurance Company of America ("Prudential") and 3TEC on October
19, 1999, as if it had occurred at the beginning of the year presented. The
unaudited pro forma condensed consolidated statement of operations for the year
ended December 31, 1999 also gives effect to the August 27, 1999 issuance of
1,585,185 shares of common stock and warrants to purchase 1,200,000 shares of
common stock for an aggregate purchase price of $10,700,000 and the issuance of
a senior convertible subordinated notes for $10,700,000 under the securities
purchase agreement with W/E LLC, as if it had occurred at the beginning of the
year presented. Prudential and W/E LLC transactions are included in the pro
forma condensed consolidated financial statements as the transactions provided
a significant portion of the financing for the purchase of the Floyd Oil
Properties. The pro forma financial data does not include financial information
for Magellan, which is not significant with respect to the operations of 3TEC
as of and for the periods presented.
The following unaudited pro forma financial data have been included as
required by the rules of the SEC and are provided for comparative purposes
only. The unaudited pro forma financial data presented are based upon the
historical consolidated financial statements of 3TEC and the historical
statements of revenues and direct operating expenses of the Floyd Oil
Properties and the CWR Properties and should be read in conjunction with such
financial statements and the related notes thereto included elsewhere in this
registration statement.
The pro forma financial data are based upon assumptions and include
adjustments as explained in the notes to the unaudited pro forma condensed
consolidated financial statements, and the actual recording of the transactions
could differ. The unaudited pro forma financial data are not necessarily
indicative of the financial results that would have occurred had the Purchases
and the offering been effective on and as of the dates indicated and should not
be viewed as indicative of operations in future periods.
22
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
3TEC Floyd Oil Properties Pro Forma Pro Forma
Consolidated Properties of CWR Adjustments Consolidated
------------ ---------- ---------- ----------- ------------
(in thousands, except share and per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and natural gas
sales and plant
income............... $ 19,952 $ 33,759 $ 9,745 $ 643 (a) $ 64,099
Gain on sale of
properties........... 1,048 1,048
Other................. 1,020 1,020
--------- -------- ------- -------- ----------
Total revenues...... 22,020 33,759 9,745 643 66,167
Costs and expenses:
Lease operating and
production taxes..... 6,728 11,995 2,148 (492)(a)(b) 20,379
Geological and
geophysical.......... 200 200
Dry hole.............. 625 625
Depreciation,
depletion and
amortization......... 6,691 9,378 (c) 16,069
Impairments........... 2,478 2,478
Interest.............. 3,205 4,232 (d) 7,437
General and
administrative....... 4,736 2,230 (e) 6,966
Other................. 2,230 2,230
--------- -------- ------- -------- ----------
Total costs and
expenses........... 26,893 11,995 2,148 15,348 56,384
--------- -------- ------- -------- ----------
Income (loss) before
income tax (benefit)
and minority interest
expense................ (4,873) 21,764 7,597 (14,705) 9,783
--------- -------- ------- -------- ----------
Minority interest....... 2 2
Provision for income tax
expense (benefit)...... (1,443) 4,983 (f) 3,540
--------- -------- ------- -------- ----------
Net income (loss) before
dividends to preferred
stockholders........... (3,432) 21,764 7,597 (19,688) 6,241
Dividends to preferred
stockholders........... 574 574
--------- -------- ------- -------- ----------
Net income (loss)
attributable to common
stockholders........... $ (4,006) $ 21,764 $ 7,597 $(19,688) $ 5,667
========= ======== ======= ======== ==========
Net income (loss) per
common share (diluted). $ (1.14) $ 0.45
========= ==========
Weighted average common
shares outstanding
(diluted).............. 3,519,532 14,821,467(g)
========= ==========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
data.
23
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Three Months Ended March 31, 2000
(unaudited)
<TABLE>
<CAPTION>
3TEC Properties Pro Forma Pro Forma
Consolidated of CWR Adjustments Consolidated
------------ ---------- ----------- ------------
(in thousands, except share and per share
amounts)
<S> <C> <C> <C> <C>
Revenues:
Oil and natural gas
sales and plant income. $ 16,915 $2,712 $ 179 (a) $ 19,806
Gain on sale of
properties............. 9 9
Other................... 329 329
---------- ------ ------- -----------
Total revenues........ 17,253 2,712 179 20,144
---------- ------ ------- -----------
Costs and expenses:
Lease operating and
production taxes....... 4,581 508 34 (b) 5,123
Geological and
geophysical............ 125 125
Dry hole................ 12 12
Depreciation, depletion
and amortization....... 3,920 784 (c) 4,704
Impairments............. -- --
Interest................ 2,085 (63)(d) 2,022
General and
administrative......... 1,697 114 (e) 1,811
Other................... 68 68
---------- ------ ------- -----------
Total costs and
expenses............. 12,488 508 869 13,865
---------- ------ ------- -----------
Income (loss) before
income tax expense
(benefit) and minority
interest expense......... 4,765 2,204 (690) 6,279
Minority interest......... 42 42
Provision for income tax
expense.................. 1,606 515 (f) 2,121
---------- ------ ------- -----------
Net income (loss) before
dividends to preferred
stockholders............. 3,117 2,204 (1,205) 4,116
Dividends to preferred
stockholders............. 260 260
---------- ------ ------- -----------
Net income (loss)
attributable to common
stockholders............. $ 2,857 $2,204 $(1,205) $ 3,856
========== ====== ======= ===========
Net income per common
share (diluted).......... $ 0.35 $ 0.26
========== ===========
Weighted average common
shares outstanding
(diluted)................ 9,342,722 16,342,722(g)
========== ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
data.
24
<PAGE>
Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of March 31, 2000
<TABLE>
<CAPTION>
Pro Forma
Adjustments
---------------------
Common
3TEC Properties Stock Pro Forma
Consolidated of CWR Issuance Consolidated
------------ ---------- -------- ------------
<S> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents.. $ 3,917 $ $ $ 3,917
Accounts receivable........ 9,824 9,824
Other current assets....... 875 875
-------- ------- ------- --------
Total current assets..... 14,616 -- -- 14,616
Property (at cost)
Oil and natural gas-
successful efforts method. 191,945 55,200(h) 247,145
Other...................... 1,567 1,567
Accumulated depreciation,
depletion & amortization.... (42,001) (42,001)
Other assets................. 1,734 1,734
-------- ------- ------- --------
Total assets............. $167,861 $55,200 $ -- $223,061
======== ======= ======= ========
Current liabilities
Current portion of long-
term debt................. -- 20,000(h) (20,000)(i) --
Accounts payable--trade.... $ 5,404 $ $ $ 5,404
Revenue payable............ 1,431 1,431
Accounts payable--
stockholders dissenters... 1,119 1,119
Other current liabilities.. 796 796
-------- ------- ------- --------
Total current
liabilities............. 8,750 20,000 (20,000) 8,750
Long-term debt, excluding
current portion............. 83,500 35,200(h) (38,400)(i) 80,300
Senior subordinated notes.... 13,224 13,224
Deferred income taxes........ 1,896 1,896
Other liabilities............ 209 209
Minority interest............ 1,164 1,164
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
(historical and pro
forma). $2,000,000
aggregate liquidation
preference................ 3,627 3,627
Convertible preferred stock
Series C, $5.00 stated
value, 1,132,338 shares
issued and outstanding
(historical and pro
forma). $5,661,690
aggregate liquidation
preference................ 5,163 5,163
Convertible preferred stock
Series D, $24.00 stated
value, 621,930 shares
issued and outstanding
(historical and pro
forma). $14,926,320
aggregate liquidation
preference................ 7,572 7,572
Common stock, $.02 par
value, 60,000,000 shares
authorized, 6,429,439
shares issued (historical)
and 13,429,439 shares
issued (pro forma)........ 129 140 (i) 269
Additional paid-in capital. 68,366 58,260 (i) 126,626
Accumulated deficit........ (24,552) (24,552)
Treasury stock; 7,258
shares.................... (1,187) (1,187)
-------- ------- ------- --------
Total stockholders'
equity.................. 59,118 -- 58,400 117,518
-------- ------- ------- --------
Total liabilities and
stockholders' equity........ $167,861 $55,200 $ -- $223,061
======== ======= ======= ========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
data.
25
<PAGE>
Notes to Unaudited Pro Forma Condensed Consolidated Financial Data
The unaudited pro forma financial data has been prepared to give effect to
the acquisition by 3TEC of the Floyd Oil Properties, the CWR Properties and the
Offering of 7,000,000 shares of our common stock. The columns headed "Floyd Oil
Properties" and "Properties of CWR" and the "Pro Forma Adjustments" in the
Unaudited Pro Forma Condensed Consolidated Statements of Operations give effect
to the revenues and direct operating expenses of the respective acquisitions
for the periods they were not included in our historical financial statements.
The unaudited pro forma condensed consolidated statements are not necessarily
indicative of the results of our future operations.
(a) To record additional revenues and direct operating expenses related to the
purchase of additional third party interests in the properties also
acquired from C.W. Resources, Inc.
(b) To eliminate operator overhead charges of $634,000 for the year ended
December 31, 1999, that will no longer be incurred on a portion of the
Floyd Oil Properties, as these properties will be operated by us and our
subsidiaries.
(c) To adjust depreciation, depletion and amortization expense to give effect
to the purchase price allocated to the Floyd Oil Properties and the CWR
Properties using the unit of production method under the successful efforts
method of accounting.
(d) To record the net change in interest expense (at 7.27% and 7.93%, for the
year ended December 31, 1999, and the three months ended March 31, 2000,
respectively) and amortization of deferred financing costs relating to the
borrowings under our credit facility and to record interest expense on
convertible subordinated notes issued to W/E LLC, Prudential, and Alvin V.
Shoemaker of $1.2 million for the year ended December 31, 1999.
(e) To record additional general and administrative expenses relating to
additional costs anticipated to be incurred due to contractual obligations
incurred in completing the purchase of the Floyd Oil Properties and the CWR
Properties.
(f) To record income tax expense on the pro forma adjustments.
(g) To reflect the impact on diluted weighted average common shares outstanding
of 503,426 shares of our common stock issued for the Floyd Oil Properties,
351,681 shares of our common stock issued to Prudential under the
securities purchase agreement, 1,607,407 shares of our common stock issued
to W/E LLC and Alvin V. Shoemaker, for the year ended December 31, 1999,
and 7,000,000 shares of common stock issued in this offering. Diluted
weighted average common shares outstanding reflect the effect of our common
stock equivalents when dilutive.
(h) To record the acquisition of the CWR properties and related borrowings
under our credit facility.
(i) To record the issuance of 7,000,000 shares of our common stock at $9.00 per
share, net of $4.6 million of issuance costs, and retirement of outstanding
debt under our credit facility.
26
<PAGE>
Unaudited Pro Forma Supplemental Oil and Natural Gas Disclosure
The following tables set forth certain unaudited pro forma information
concerning 3TEC's proved oil and natural gas reserves at December 31, 1999,
giving effect to the acquisition of the CWR Properties as if it had occurred on
January 1, 1999. The pro forma reserve data does not include reserve
information for Magellan. There are numerous uncertainties inherent in
estimating the quantities of proved reserves and projecting future rates of
production and timing of development expenditures. The following reserve data
represent estimates only and should not be construed as being exact. The proved
oil and natural gas reserve information is as of December 31, 1999 and reflects
prices and costs in effect as of such date.
Reserves:
<TABLE>
<CAPTION>
Oil and Condensate (MBbls) Natural Gas (Mmcf)
------------------------------ --------------------------------
CWR Pro Forma CWR Pro Forma
3TEC Properties Consolidated 3TEC Properties Consolidated
----- ---------- ------------ ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1999................... 3,342 905 4,247 43,483 60,552 104,035
Extensions and
discoveries............ 12 83 95 1,226 5,436 6,662
Purchases of reserves in
place.................. 6,866 -- 6,866 126,556 -- 126,556
Revisions of previous
estimates.............. 502 -- 502 (5,135) -- (5,135)
Production.............. (532) (55) (587) (4,738) (3,779) (8,517)
Sales of reserves in
place.................. (355) -- (355) (1,693) -- (1,693)
----- --- ------ ------- ------ -------
Balance at December 31,
1999................... 9,835 933 10,768 159,699 62,209 221,908
===== === ====== ======= ====== =======
Proved developed
reserves............... 9,358 474 9,832 122,914 31,573 154,487
===== === ====== ======= ====== =======
</TABLE>
Standard Measure of Discounted Future Net Cash Flows Relating to Proved Oil and
Natural Gas Reserves:
<TABLE>
<CAPTION>
3TEC CWR Properties Pro Forma
-------- -------------- ---------
(In thousands)
<S> <C> <C> <C>
Future cash inflows........................ $594,023 $172,552 $ 766,575
Future production and development costs.... (223,765) (58,475) (282,240)
Future income tax expenses................. (92,975) -- (92,975)
-------- -------- ---------
Future net cash flows...................... 277,283 114,077 391,360
10% discount factor........................ (128,542) (55,802) (184,344)
-------- -------- ---------
Standardized measure of discounted future
net cash flows............................ $148,741 $ 58,275 $ 207,016
======== ======== =========
</TABLE>
Changes to Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Natural Gas Reserves:
<TABLE>
<CAPTION>
CWR
3TEC Properties Pro Forma
-------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
Standardized measure, January 1, 1999........... $ 38,894 $53,793 $ 92,687
Sales, net of production costs.................. (13,224) (7,597) (20,821)
Purchases of reserves........................... 150,295 -- 150,295
Net changes in prices and production costs...... 18,646 -- 18,646
Net change in income taxes...................... (49,874) -- (49,874)
Extensions and discoveries and improved
recovery, net of future production and
development costs.............................. 1,945 6,700 8,645
Revisions of quantity estimates................. (1,994) -- (1,994)
Accretion of discount........................... 3,889 5,379 9,268
Sales of reserves in place...................... (1,643) -- (1,643)
Changes in production rates and other........... 1,807 -- 1,807
-------- ------- --------
Standardized measure, December 31, 1999......... $148,741 $58,275 $207,016
======== ======= ========
</TABLE>
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
our audited consolidated financial statements and our unaudited consolidated
financial statements included in this prospectus. The following information
contains forward-looking statements. See "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,
including the recent acquisitions of Magellan and the CWR Properties, we had
estimated 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. As of April 30, 2000, on a pro forma basis
including the CWR Properties, our net daily production was approximately 49.0
Mmcf of natural gas and 3.5 MBbls of oil or 70.0 Mmcfe.
We have increased our reserves and production principally through
acquisitions. We focus on properties that have a substantial proved reserve
component and which management believes to have additional exploitation
opportunities. In early 2000, through the acquisition of Magellan, we acquired
a number of drilling prospects covered by an extensive 3-D seismic database
that we believe have exploration potential. We have assembled an experienced
management team and technical staff with expertise in property acquisitions and
development, reservoir engineering, exploration and financial management.
We underwent a change of control in August 1999, in a transaction in which
W/E LLC invested $21.4 million in cash and oil and natural gas properties for
common stock, warrants and convertible subordinated notes representing at that
time approximately 36% of our then outstanding common stock.
Since our formation in 1992, we have grown principally through several
acquisitions of proved properties in the Gulf Coast, East Texas and the Mid-
Continent region. Acquisitions made in 1997 and 1998 significantly increased
our reserves and production but were primarily nonoperated properties with high
per Mcfe lease operating costs. Following the change in control discussed
above, during the second half of 1999 and the first half of 2000, we closed
several transactions that changed our senior management team, capital structure
and our property base. In addition, we added several experienced professionals
to our technical staff. Because of these recent transactions, the historical
results of operations and cash flows will differ materially from, and will not
be representative of, our future results.
We increased our asset base substantially and decreased our operating cost
per Mcfe on a pro forma basis with the acquisition of the Floyd Oil Properties
in November 1999. The Floyd Oil Properties had estimated net proved reserves at
December 31, 1999, of 165.5 Bcfe with a PV-10 value of $146.1 million. On a pro
forma basis, the Floyd Oil Properties resulted in additional EBITDAX of $17.9
million and $20.6 million and additional pro forma revenues of $34.1 million
and $33.8 million for the years ended 1998 and 1999, respectively. Also on a
pro forma basis, after giving effect to the acquisition of the Floyd Oil
Properties, our total operating cost per Mcfe for the years ended 1998 and 1999
declined 10% and 1% to $0.95 and $0.84, respectively. Pro forma general and
administrative cost per Mcfe for the same periods declined 45% and 50% to $0.32
and $0.30, respectively. Revenues and expenses from the Floyd Oil Properties
are included in our historical operating results only for the period from
November 23, 1999, the date of acquisition, through December 31, 1999.
Additionally, in February 2000 we closed the acquisition of Magellan, which
owns primarily proved undeveloped reserves, with significant 3-D seismic data.
We plan to fund a development program of Magellan's
28
<PAGE>
undeveloped properties, which we believe could increase future reserves and
production. In addition, we are continually seeking and reviewing acquisitions
of properties and companies which we believe will be complementary to our
reserves and production. We expect our acquisition program to continue to be a
significant source of growth for us, depending on the market for oil and
natural gas properties, and industry conditions generally.
On May 31, 2000, we acquired the CWR Properties for cash consideration of
approximately $55 million. The CWR Properties are located in Upshur and Gregg
Counties in East Texas and consist of 178 gross wells (48 net wells) and cover
approximately 38,000 gross acres (approximately 10,100 net acres). According to
Ryder Scott, at December 31, 1999, the CWR Properties had net proved reserves
of 67.8 Bcfe with an associated PV-10 value of $58.3 million. These proved
reserves are approximately 92% natural gas and 51% of the volumes are
classified as proved developed. On a pro forma basis, the CWR Properties
contributed additional revenues of $10.4 million and $2.9 million, and
additional EBITDAX of $7.6 million and $2.2 million, for the year ended
December 31, 1999, and the three months ended March 31, 2000, respectively. For
the year ended December 31, 1999 and the three months ended March 31, 2000, on
a pro forma basis, our lease operating expenses declined from historical
amounts by 8% and 4% to $0.78 and $0.81, respectively. Also on a pro forma
basis, after giving effect to the acquisition of the Floyd Oil Properties and
the CWR Properties, our depreciation, depletion and amortization per Mcfe for
the year ended December 31, 1999, declined from 1999 historical amounts 27% to
$0.61 and for the three months ended March 31, 2000, increased 3% from
historical amounts to $0.74. Pro forma general and administrative costs per
Mcfe for the same periods declined from 1999 historical amounts 55% and 7% to
$0.27 and $0.29, respectively. See "Description of the CWR Properties."
Certain Accounting Practices
We use the successful efforts method of accounting for our investments in
oil and natural gas properties. Under this method, we capitalize all direct
costs incurred in connection with the acquisition, drilling and development of
productive oil and natural gas properties. Costs associated with unsuccessful
exploration are expensed as incurred. Geological and geophysical costs and
costs of carrying and retaining unevaluated properties are expensed as
incurred. Depreciation, depletion and amortization of capitalized costs are
computed separately for each field based on the unit of production method using
only proved oil and natural gas reserves.
We review our oil and natural gas properties on a field level for impairment
when circumstances indicate that the capitalized costs less accumulated
depreciation, depletion and amortization (the "Carrying Value") of the property
may not be recoverable. If the Carrying Value of the property exceeds the
expected future undiscounted cash flows, an amount equal to the excess of the
Carrying Value over the fair value of the property is charged to operations. An
impairment results in a non-cash charge to earnings but does not affect cash
flows unless our borrowing base was significantly reduced as a result of the
impairment.
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 you 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 oil and natural gas
production.
Our pro forma EBITDAX, including the Floyd Oil Properties and the CWR
Properties, for the year ended December 31, 1999, and the three months ended
March 31, 2000, was $36.9 million and $12.9 million, respectively. For the year
2000, we have budgeted approximately $24 million for development and
exploration capital expenditures, including an estimated $3.7 million with
respect to the CWR Properties. We are obligated to pay net cash dividends of
approximately $570,000 per year on the Series C Preferred Stock in cash.
Additionally, we are obligated to pay dividends of $740,000 per year on the
Series D Preferred Stock, which
29
<PAGE>
we may pay in either cash or in additional shares of Series D Preferred Stock
during the three years ending February 2, 2003. We are obligated to pay
interest on convertible subordinated notes of approximately $1.2 million per
year.
Our primary source of financing for acquisitions has been borrowing under
our credit facility, discussed below. We have also recently utilized private
equity financing to supplement our capital requirements. We believe we will
have sufficient cash flow from operations and borrowings under our credit
facility to meet our obligations and operating needs for the current year. We
also believe that we have the ability to raise additional private equity or
debt financing and otherwise access the capital markets should such 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 in sufficient amounts to maintain planned
levels of capital expenditures.
In connection with our acquisition of the Floyd Oil Properties on November
23, 1999, we entered into a $250 million credit facility with Bank One, Texas,
N.A. and certain other financial institutions. Our then existing bank debt of
$26.6 million was paid in full with proceeds from the new facility. The credit
facility provides for a borrowing base which is adjusted periodically on the
basis of the discounted present value attributable to our proved producing oil
and natural gas reserves, as determined by our lenders. At March 31, 2000, the
borrowing base under the credit facility was $95 million. The borrowing base is
redetermined semi-annually on May 1 and November 1 of each year. At March 31,
2000 we were paying 7.9% per annum interest on the entire principal balance of
the facility of $83.5 million. As revised as described below, the credit
facility matures on May 31, 2003. Prior to maturity, other than a payment of
$20 million due on or before December 31, 2000, no payments of principal are
required so long as the borrowing base exceeds the loan balance. The borrowings
under the credit facility are secured by substantially all of our properties.
In connection with this credit 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, requires that our consolidated EBITDAX (our consolidated earnings from
ongoing operations before reduction for income tax expense, interest expense
and depreciation, depletion, amortization expense and exploration expense) not
be less than 2.5 times our consolidated interest expense for the quarter ending
June 30, 2000, the quarter ending September 30, 2000, and for each subsequent
four quarter period thereafter. At March 31, 2000, our quarterly consolidated
EBITDAX was 5.16 times our consolidated interest expense.
In connection with our acquisition of the CWR Properties we increased the
amount of availability under the borrowing base to $145 million through
November 1, 2000, to enable us to borrow the purchase price of the CWR
Properties. As revised, interest under the facility accrues at our option at a
rate calculated as 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 150.0 to a
high of 212.5 as amounts outstanding increase as a percentage of the borrowing
base. The credit facility requires a $20 million payment of principal on or
before December 31, 2000, subject to the redetermination of our borrowing base
on November 1, 2000. Following this revision to the credit facility and after
giving effect to our borrowings to fund the acquisition of the CWR Properties
and the application of the proceeds of this offering, on a pro forma basis at
March 31, 2000, the amount available to be borrowed under the credit facility
was approximately $64.7 million, or $44.7 million assuming payment in full of
the $20 million prepayment described in the preceding sentence. As indicated
elsewhere in this prospectus, the net proceeds of this offering will be used
principally to repay indebtedness outstanding under this credit facility.
In connection with our acquisition of the CWR Properties on May 31, 2000,
and the concurrent amendment of our bank credit facility to increase our
borrowing base to $145 million, we also entered into a private equity shelf
facility with EnCap. Pursuant to the shelf facility, at any time through
December 31, 2000, we may require EnCap to purchase from us up to $20 million
(800,000 shares having a redemption price of $25 per share) of a new class of
exchangeable preferred stock with a dividend rate of 8% per annum. The new
class of preferred, which would be designated as our Series E preferred if it
is ever issued, would be
30
<PAGE>
convertible into our common stock at a conversion price equal to 130% of the
trading price of our common stock at the time of any takedown by us under the
shelf facility. If we take down over $10 million under this facility, no
conversion feature will apply. Under the terms of the shelf facility, we would
be required to redeem the Series E preferred in three equal annual payments
beginning five years after issuance. In addition, in the event of a takedown
under the facility, we would be required to issue warrants to EnCap to purchase
three shares of our common stock for each share of Series E preferred which may
be issued, at an exercise price of $0.02 per share. We entered into this shelf
facility to provide us with the financial assurance that our debt levels can be
appropriately reduced without reliance on this offering. Upon completion of
this offering the shelf facility expires according to its terms and neither we
nor EnCap will have any further rights or obligations under the shelf facility.
We paid EnCap a fee of 2.5% of the amount of the commitment as consideration
for this shelf 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. Prices since mid-1999 have generally
followed an increasing trend, but the market continues to have considerable
volatility. 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. These agreements cover approximately
62% of our current daily oil production. The price used to determine the
settlement amount is the average of the near month contract on the NYMEX.
Settlement is on the 23rd of each month for the preceding month. The hedging
agreements are with financial institutions that participate in our credit
facility.
We have entered into a forward sale agreement for 3,750 Mcf of natural gas
per day for the period May through August 2000 at an average price of $3.07 per
Mcf. This agreement covers approximately 8% of our current daily natural gas
production.
Our revenues and the value of our oil and natural gas properties have been
and will be affected by changes in oil and natural gas prices. Our ability to
maintain current borrowing capacity and to obtain additional capital on
attractive terms is also substantially dependent on oil and natural gas prices.
These prices are subject to significant seasonal and other fluctuations that
are beyond our ability to control or predict. During 1999, we received an
average of $16.88 per barrel of oil and $2.18 per Mcf of natural gas. Although
some costs and expenses are affected by the level of inflation, inflation has
not had a significant effect in recent years. Should conditions in the industry
continue to improve, causing an increase in competition resulting in a relative
shortage of oilfield supplies and/or services, inflationary cost pressures may
resume.
Results of Operations
Our revenue, profitability, and future rate of growth are dependent upon
prevailing prices for oil and natural gas, which, in turn, depend upon numerous
factors such as economic, political, and regulatory developments as well as
competition from other sources of energy. The energy markets historically have
been highly volatile, and future decreases in prices could have an adverse
effect on our financial position, results of operations, quantities of reserves
that may be economically produced, and access to capital.
Due to our significant property and corporate acquisitions in 1999, our 1999
change of control and our current capitalization structure, comparisons of our
results of operations from year to year 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 years ended December
31, 1999 and 1998.
31
<PAGE>
Three Months Ended March 31, 2000, Compared With Three Months Ended March 31,
1999
The following table reflects certain summary operating data for the periods
presented:
<TABLE>
<CAPTION>
Three Months
Ended March
31,
-------------
2000 1999
------ ------
<S> <C> <C>
Net Production Data:
Natural gas (Mmcf).......................................... 3,578 930
Oil (MBbls)................................................. 308 144
Natural gas equivalents (Mmcfe)............................. 5,426 1,794
Average Sales Price: (a)
Natural gas (per Mcf)....................................... $ 2.56 $ 1.61
Oil (per Bbl)............................................... 24.94 9.87
Natural gas equivalents (per Mcfe).......................... 3.11 1.63
Expenses ($ per Mcfe):
Oil and gas operating (b)................................... $ 0.84 $ 0.87
General and administrative.................................. 0.31 0.57
Depreciation and depletion (c).............................. 0.72 0.75
Cash margin (d)............................................. 1.96 0.19
</TABLE>
--------
(a) Excludes effect of our hedging activities.
(b) Includes lease operating costs, production taxes and ad valorem taxes.
(c) Represents depreciation, depletion and amortization, excluding
impairments.
(d) Represents average equivalent price per Mcfe less oil and gas operating
expenses per Mcfe and general and administrative expenses per Mcfe.
Revenue. Total revenue for the three months ended March 31, 2000, was $17.2
million, an increase of $14.0 million (431%) over total revenue for the three
months ended March 31, 1999. Natural gas revenues for the three months ended
March 31, 2000 were $9.2 million, approximately 512% higher than the natural
gas revenues of $1.5 million for the three months ended March 31, 1999. Natural
gas production volumes increased 285%, and oil production volumes increased by
approximately 113%, principally as a result of the additional volumes from the
Floyd Oil Properties in the three months ended March 31, 2000. Oil revenues for
the three months ended March 31, 2000 were $7.7 million, approximately 438%
higher than the oil revenues of $1.4 million for the three months ended March
31, 1999. Other oil and gas revenue increased 13%, from $147,000 to $165,000
for the three months ended March 31, 2000. We incurred a hedging loss of
approximately $101,000 during the three months ended March 31, 2000 on our oil
production hedge. Average natural gas sale prices increased 59% for the three
months ended March 31, 2000 compared with the three months ended March 31,
1999, while oil prices, excluding the effects of hedging, increased 153% during
the same period. For the three months ended March 31, 2000, approximately 54%
of the dollar amount of our product sales were natural gas. Production from
Magellan from the date of acquisition (February 3, 2000) to the end of the
period contributed less than 1% to our total revenues in the three months ended
March 31, 2000.
Gain on Property Sales, Interest and Other Income. We did not sell a
significant number of oil and natural gas properties during the periods ended
March 31, 2000 and March 31, 1999. Other income for the three months ended
March 31, 2000 of $329,000, consisted principally of interest income, lease
bonus and delay rentals and approximately $147,000 from a lawsuit settlement.
Expenses. Total expenses for the three months ended March 31, 2000 were
$12.5 million, a $7.9 million increase over the $4.6 million for the three
months ended March 31, 1999. This increase of total expenses was primarily the
result of additional expenses of approximately $5.9 million attributable
principally to the acquisition of the Floyd Oil Properties. Lease operating
expense of $4.6 million, or approximately $0.84 per Mcfe, increased by
approximately $3.0 million from the three months ended March 31, 1999, when it
was approximately $0.87 Mcfe. Depreciation and depletion expense for the three
months ended March 31, 2000 was
32
<PAGE>
$3.9 million, or approximately $0.72 per Mcfe, compared to $1.3 million or
approximately $0.75 per Mcfe for the three months ended March 31, 1999. The
increase in depletion due to the acquisition of the Floyd Oil Properties was
offset to a slight degree by lower depletion due to impairments, property sales
and lower production on properties owned the entire period of 1999. General and
administrative expense was $1.7 million, or approximately $0.31 per Mcfe,
compared to $1.0 million or approximately $0.57 per Mcfe for the three months
ended March 31, 1999. The general and administrative expense increase was
primarily the result of increases in salary, insurance and rent expenses
associated with the Company's growth. Interest expense of $2.1 million,
increased $1.6 million (307%) for the three months ended March 31, 2000, the
increase reflecting increased borrowings under our credit facility for
acquisitions.
Net Income. Our net income for the three months ended March 31, 2000 was
approximately $3.1 million compared to a loss of approximately $900,000 for the
three months ended March 31, 1999. The primary reason for the increased
profitability was net increases in the volumes of and prices received from the
sale of oil and natural gas.
Dividends to Preferred Stockholders. Dividends to preferred stockholders of
approximately $260,000 in the three months ended March 31, 2000 increased 82%
over the three months ended March 31, 1999. The increase of dividends was due
to the issuance of Series D Convertible Preferred Stock in connection with the
acquisition of Magellan, which began accruing dividends on February 3, 2000.
Year Ended December 31, 1999, Compared With Year Ended December 31, 1998
Revenue. Total revenue for the year ended December 31, 1999, was $22.0
million, an increase of $4.3 million (24%) over total revenue for 1998. Natural
gas revenues for the 1999 period were $10.3 million, approximately 34% higher
than 1998 natural gas revenues of $7.7 million. Natural gas production volumes
increased 23% in 1999; oil production volumes decreased by approximately 9%,
principally as a result of property sales during the period. Oil revenues for
the 1999 period were $8.9 million, approximately 33% higher than 1998 oil
revenues of $6.7 million. Natural gas plant and other product sales revenue of
$648,000 increased 2% from $632,000 in 1998. Average natural gas sale prices
increased 9% from the 1998 to the 1999 period, while oil prices increased 46%
during the same period. For 1999, approximately 52% of the dollar amount of our
product sales were natural gas. In addition, production from the Floyd Oil
Properties from the date of acquisition (November 23, 1999) to year-end
contributed approximately $4.5 million (approximately 20%) to our total
revenues in the 1999 period.
Gain On Property Sales, Interest and Other Income. In 1999 and 1998, our
property divestments resulted in gains of $1.0 million and $1.9 million,
respectively. Other income for 1999 of $1.0 million, consisted principally of
interest income and a lawsuit settlement.
Expenses. Total expenses for the year ended December 31, 1999 were $26.9
million, a slight decrease over the $27.1 million in 1998. Comparability of
total expenses was affected by certain non-recurring expenses in 1999 of $1.7
million and additional expenses of $2.3 million attributable to the acquisition
of the Floyd Oil Properties. Lease operating expense of $6.7 million or
approximately $0.85 per Mcfe, decreased by approximately $1.1 million from the
1998 period, when it was approximately $1.06 per Mcfe, reflecting the effect of
property sales. Depreciation and depletion expense was $6.7 million, or
approximately $0.84 per Mcfe, compared to $7.1 million or approximately $0.97
per Mcfe for 1998. An increase in depletion due to the acquisition of the Floyd
Oil Properties was offset by lower depletion due to impairments, property sales
and lower production on properties owned the entire period of 1999. Impairment
expense for 1999 was approximately $2.5 million, relating to impairments on fee
mineral acreage, non-producing leasehold and proved oil and natural gas
properties. More specifically, 1999 impairments were related to certain fee
mineral acreage that reverted to the landowners, management's decision not to
participate in additional exploration on certain prospects and new reserve
engineers employed by us resulted in valuation changes on certain proved
properties. The impairment expense in 1998 was principally attributable to
decreasing oil prices. General and administrative expense was $4.7 million, or
approximately $0.60 per Mcfe, compared to $4.3 million or
33
<PAGE>
approximately $0.58 per Mcfe for 1998. The general and administrative expense
increase was primarily the result of increases in salary, legal and consulting
expenses in 1999 offset partially by declines in certain expenses due to the
closing of subsidiary offices in Kingwood, Texas. Interest expense of $3.2
million, increased $1.23 million (62%) in the 1999 period, the increase
reflecting increased borrowings under our credit facility for acquisitions.
The non-recurring expense of $1.7 million was triggered by the change of
control resulting from the sale of securities to W/E LLC and consists of stock
compensation expense of $730,000, severance payments of $624,000, compensation
plan payments of $292,000 and other expenses of $60,000.
Net Loss. The net loss for 1999 was approximately $3.4 million compared to a
loss of approximately $6.6 million in 1998. The current period net loss
decreased primarily as a result of the increased income from oil and natural
gas and the lower depletion and impairment expenses.
Dividends to Preferred Stockholders. Dividends to preferred stockholders of
approximately $574,000 in 1999 increased 745% over 1998. The increase was due
to the dividends on the Series C Preferred Stock that began to accrue dividends
on December 31, 1998 and the conversion of the Series A Preferred Stock to
common stock on January 31, 1998.
Year 2000 Compliance
We had undertaken various initiatives to ensure that our hardware, software
and equipment functioned properly with the rollover of the date to January 1,
2000. We experienced no problems as a result of the rollover of the dates to
January 1, 2000, and the costs incurred for Year 2000 compliance were
immaterial to our financial position and results of operations. Although we can
provide no assurance, we anticipate any future costs associated with Year 2000
compliance to be immaterial to our financial position and results of
operations.
Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 standardizes the accounting
for and disclosures of derivative instruments, including certain derivative
instruments embedded in other contracts. The Statement is effective for
financial statements for fiscal years beginning after June 15, 2000. We have
not yet determined the impact of the Statement on our financial condition or
results of operations.
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation: An Interpretation of APB Opinion No.
25. Among other issues, Interpretation No. 44 clarifies the application of
Accounting Principles Board Opinion No. 25 (APB No. 25) regarding (a) the
definition of employee for purposes of applying APB No. 25, (b) the criteria
for determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. The provisions of Interpretation
No. 44 which affect us are to be applied on a prospective basis effective July
1, 2000.
34
<PAGE>
BUSINESS AND PROPERTIES
About 3TEC
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 recent acquisitions of Magellan and the CWR
Properties, discussed below, we had estimated 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. As of April
30, 2000, on a pro forma basis including the CWR Properties, our actual net
daily production was approximately 49.0 Mmcf of natural gas and 3.5 MBbls of
oil or 70.0 Mmcfe.
We have increased our reserves and production principally through
acquisitions. We focus on properties that have a substantial proved reserve
component and which management believes to have additional exploitation
opportunities. Through the recently completed acquisition of Magellan, we have
also acquired a number of drilling prospects covered by an extensive 3-D
seismic database that we believe have exploration potential. We have assembled
an experienced management team and technical staff with expertise in property
acquisitions and development, reservoir engineering, exploration and financial
management. After this offering, we believe that our cash flow from operations
and our financial resources will provide us with the ability to fully develop
our current properties, to finance our current exploration projects and to
pursue new acquisition opportunities.
In August 1999, W/E LLC purchased a controlling interest in us, and Floyd C.
Wilson was named our Chairman and Chief Executive Officer. Since that time, we
have acquired net proved reserves of 258.6 Bcfe with an associated PV-10 value
of $244.2 million at December 31, 1999, including the recently acquired CWR
Properties, calculated as of December 31, 1999. In addition, we have raised or
issued $25.0 million of private equity and equity linked financing and have
entered into a new $250 million credit facility.
Our Strategy
Our business strategy is focused on the following:
. Pursuit of Strategic Acquisitions. We continually review opportunities to
acquire producing properties, leasehold acreage and drilling prospects.
We seek to acquire operational control of properties that we believe have
significant exploitation and exploration potential. We are especially
focused on increasing our holdings in fields and basins in which we
already own an interest.
. Further Development of Existing Properties. We intend to further develop
our properties that have proved reserves. We seek to add proved reserves
and increase production through the use of advanced technologies,
including detailed technical analysis of our properties, and by drilling
in-fill locations and selectively recompleting existing wells. We also
plan to drill step-out wells to expand known field limits. We intend to
enhance the efficiency and quality control of these activities by
operating the majority of our properties.
. Growth Through Exploration. We conduct an active technology-driven
exploration program that is designed to complement our property
acquisition and development drilling efforts with moderate to high risk
exploration projects that have greater reserve potential. We generate
exploration prospects through the analysis of geological and geophysical
data and the interpretation of 3-D seismic data. We intend to manage our
exploration expenditures through the optimal scheduling of our drilling
program and by selectively reducing our participation in certain
exploratory prospects through sales of interests to industry partners.
35
<PAGE>
. Rationalization of Property Portfolio. We intend to actively pursue
opportunities to reduce and control operating costs of our existing
properties and properties we may acquire in the future through the
consolidation of overlapping operations, the sale of marginal properties
and by increasing the number of fields we operate as a percentage of our
total properties.
. Maintenance of Financial Flexibility. We intend to maintain a substantial
unused borrowing capacity under our bank credit facility by periodically
refinancing our bank debt in the capital markets when conditions are
favorable. We believe our expanded base of internally generated cash flow
and other financial resources, including our existing financial partners,
provide us with the financial flexibility to pursue additional
acquisitions of producing properties and leasehold acreage and to develop
our project inventory in an optimal fashion.
Our Strengths
We believe our historical success and future performance are, and will be,
directly related to the following combination of strengths:
. Proven Acquisition Experience. Since the investment by W/E LLC in August
1999, through the acquisitions of the Floyd Oil Properties, Magellan and
the CWR Properties, we have added approximately 259 Bcfe of proved
reserves with a PV-10 value of approximately $244 million as of December
31, 1999. Our acquisition efforts are managed by an experienced team of
property aggregators with extensive engineering, operating and financial
skills.
. Experienced Technical Team. Our technical team is comprised of respected
energy industry professionals with an average of over 20 years of
industry experience.
. Substantial Inventory of Development and Exploration Prospects. Including
the CWR Properties, we have assembled an inventory of over 220 drilling
locations balanced between what we believe to be low to moderate risk
development locations and higher risk, higher potential exploratory
locations defined by, and supported with, 3-D seismic data. Our inventory
of drilling locations and degree of operating control provide us
flexibility in project selection and the timing of drilling projects.
. Financial Flexibility. We have access to capital and the financial
flexibility to respond quickly to opportunities for growth and changing
business conditions.
Acquisition of Magellan
On February 3, 2000, we completed the acquisition of Magellan from certain
affiliates of EnCap and other third parties for consideration of approximately
$18.7 million, 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 Preferred Stock and (d) the assignment
of a performance based "back-in" working interest of 5% of Magellan's interest
in 12 exploration prospects. For a more detailed description of the Series D
Preferred Stock, see "Description of Capital Stock." Magellan's properties are
located both onshore and in the shallow waters of south Louisiana and consist
of 20,243 gross (11,244 net) acres in three prospective areas. As of December
31, 1999, Magellan's independent reserve engineers, Ryder Scott, estimated that
Magellan's net proved reserves were 25.3 Bcfe with an associated PV-10 value of
$39.8 million. These proved reserves are approximately 67% natural gas and 69%
of the volumes are classified as proved undeveloped. Magellan operates
approximately 80% of its properties on a PV-10 value basis. In addition to the
proved reserves, we believe the Magellan properties contain several 3-D seismic
defined exploratory drilling locations. In April 2000, we purchased additional
interests in certain of the Magellan properties from unrelated parties,
bringing our total net purchase price for the Magellan properties to
approximately $21 million. See "Description of Magellan."
If requested by the holders of the securities issued in the Magellan
transaction, we will be obligated to file no more than two registration
statements to register the common stock received in the transaction or upon
conversion of the Series D Preferred Stock and upon exercise of the related
warrants and, if necessary, to keep the registration statements effective for
up to two years. We have also agreed to give notice to recipients of the
36
<PAGE>
securities if we propose to file a registration statement. These persons or
entities have waived their right to include their common stock in this
offering.
Acquisition of the CWR Properties
On April 14, 2000, we entered into a definitive agreement to acquire certain
properties operated by C.W. Resources, Inc. for cash consideration of
approximately $52 million. In addition to the interests included under the
April 14, 2000 agreement, we acquired certain other interests in the same
fields from unrelated parties for approximately $3.5 million in cash. The
purchase of these properties closed May 31, 2000, with an effective date of
January 1, 2000. These purchases are subject to customary post-closing
adjustments. We estimate that the total net purchase price after giving effect
to the post-closing adjustments will be approximately $55.2 million. The
properties are collectively referred to as the CWR Properties. The purchase of
the CWR Properties was financed under our bank credit facility which we amended
prior to closing on these transactions. The CWR Properties are located in
Upshur and Gregg Counties in East Texas and consist of 178 gross wells (48 net
wells) and cover approximately 38,000 gross acres (approximately 10,100 net
acres). As of December 31, 1999, Ryder Scott estimated that the net proved
reserves of the CWR Properties were 67.8 Bcfe with an associated PV-10 value of
$58.3 million. These proved reserves are approximately 92% natural gas and 51%
are classified as proved producing. As of April 30, 2000, net daily production
from the CWR Properties was approximately 10.9 Mcfe. See "Description of the
CWR Properties."
Our Formation
3TEC is the successor to Middle Bay Oil Company, Inc. ("Middle Bay"), an
Alabama corporation formed on November 30, 1992. 3TEC was incorporated in
Delaware on November 24, 1999, as a wholly owned subsidiary of Middle Bay for
the sole purpose of merging with Middle Bay to effect a change in domicile to
Delaware and to change our name to 3TEC Energy Corporation. Effective December
7, 1999, Middle Bay was merged into us and each share of common stock of Middle
Bay was converted into one share of our common stock.
Description of Our Properties
We present information regarding our oil and natural gas reserves,
properties, and operating results below. The information below relating to oil
and natural gas reserves, volumes, prices, operating expenses, productive
wells, and acreage data, includes the Floyd Oil Properties, Magellan, and the
recently acquired CWR Properties. Information relating to volumes, prices, and
operating expenses, set forth below is presented on a pro forma basis as if we
acquired the Floyd Oil Properties, Magellan, and the CWR Properties on December
31, 1999. We acquired the Floyd Oil Properties in November 1999, Magellan in
February 2000, and the CWR Properties on May 31, 2000.
<TABLE>
<CAPTION>
As of December 31, 1999
---------------------------------------
Pro Forma(a)
----------------------------------------------------------------
Estimated Net Proved
Reserves Percent Proved Budgeted
----------------------- PV-10 Total Undeveloped 2000 Capital
Gas Oil Total Value PV-10 Drilling Expenditures
(Mmcf) (MBbls) (Mmcfe) ($000) Value Locations ($000)
------- ------- ------- ------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
East Texas Area......... 123,804 1,602 133,417 102,464 34.5% 162 7,300
Gulf Coast Area......... 67,651 2,927 85,214 99,553 33.6% 41 15,500
Permian/San Juan Area... 20,766 4,793 49,524 55,021 18.5% 3 400
Mid-Continent Area...... 26,590 2,398 40,978 36,163 12.2% 16 900
Other Areas............. 87 431 2,673 3,471 1.2% 0 100
------- ------ ------- ------- ------ --- ------
Total................. 238,898 12,151 311,806 296,672 100.0% 222 24,200
======= ====== ======= ======= ====== === ======
</TABLE>
--------
(a) Includes 16,990 Mmcf of natural gas, 1,383 MBbls of oil, 25,286 Mmcfe
total, and $39.8 million PV-10 value associated with properties owned by
Magellan, and includes 62,209 Mmcf of natural gas, 933 MBbls of oil, 67,808
Mmcfe total, and $58.3 million PV-10 value associated with the CWR
Properties.
37
<PAGE>
We describe our properties by operating area in the following paragraphs.
We separately describe the Magellan and CWR Properties under the captions
"Description of Magellan" and "Description of the CWR Properties," below.
East Texas Area. Our properties in the East Texas region produce primarily
from the Cotton Valley and Travis Peak formations which range in depth from
approximately 7,000 feet to 10,500 feet. As of April 30, 2000, our estimated
net daily production from this area was 14.0 Mmcfe per day. The producing
formations of this area tend to contain multiple producing horizons and are
typically low permeability sands that require fracture stimulation to achieve
optimal producing rates. This type of fracture stimulation usually results in
relatively high initial production rates that decline rapidly during the first
year of production and subsequently stabilize at fairly low, more easily
predictable annual decline rates. Much of our production in this area is from
wells that have been producing for several years and are in their latter, more
stable stage of production, resulting in a relatively long reserves to
production ratio. Additionally, reservoirs with multiple producing horizons
typically provide numerous recompletion and workover opportunities to enhance
proved reserves and production. We have identified 53 proved undeveloped
drilling locations in this area. Many of these development drilling locations
are based on a change in regulatory field rules that now permit wells to be
drilled on 80 acre spacing as opposed to 160 acre spacing. This type of infill
drilling is generally effective in low permeability sands, such as the Cotton
Valley formation, where one wellbore is only capable of draining an area less
than the permitted spacing. Drilling infill wells on 80 acre spacing has been
successful throughout the area in such notable Cotton Valley fields as
Carthage, Oak Hill and Willow Springs. For 2000, we have budgeted approximately
$3.7 million for the drilling of development wells and various exploitation
activities.
Gulf Coast Area. We have established a substantial base of proved reserves
and undeveloped acreage with significant exploration potential along the Gulf
Coast of Texas and Louisiana. As of April 30, 2000, our estimated net daily
production from this area was 18.2 Mmcfe per day. Onshore in southern Louisiana
and southeast Texas our production is mainly from the Hackberry, Miogyp and
Vicksburg formations which range from approximately 13,000 feet to 17,000 feet
in depth. Along the central and southern Texas coast we are active in two main
areas, the Stuart City field in the Edwards Reef trend and the Segundo Olmos
field in Webb County, Texas. The Edwards Reef trend extends from the Mexican
border through the Texas Gulf Coast into southern Louisiana and has been
extensively drilled since the late 1950's. The Edwards Reef trend formation is
a very thick section of low permeability limestone that requires fracture
stimulation to achieve optimal production rates and even then will only drain a
limited area. Our acreage has seven producing wells that were drilled on 320
acre spacing and we have identified seven additional proved undeveloped
locations on this acreage based on drilling infill locations on 120 acre
spacing. Infill drilling has been successful throughout this trend. We are also
evaluating the drilling of new horizontal legs in existing wells and conducting
additional fracture stimulations, both of which have been successful in the
Edwards Reef trend. The Segundo Olmos field produces from the Olmos formation,
a relatively low permeability sandstone, at a depth of approximately 7,000
feet. This field was originally drilled on 160 acre spacing and has been
successfully drilled on 80 acre spacing throughout the trend. We have
identified an additional five proved undeveloped locations in this field. In
2000, we have budgeted approximately $2.9 million for the drilling of
development wells and associated exploitation activity in these areas.
Permian, San Juan and Mid-Continent Areas. We own interests in numerous
fields in the Anadarko, Arkoma, Permian and San Juan basins in the states of
Kansas, Oklahoma, Texas and New Mexico where our estimated net daily production
as of April 30, 2000, was 25.6 Mmcfe per day. These fields are generally
characterized as mature producing fields that have very stable, low rates of
decline and a relatively small amount of development drilling and exploitation
potential. In 2000, we have budgeted approximately $1.3 million for the
drilling of wells and associated exploitation projects in these areas.
Description of Magellan
Through the acquisition of Magellan, we acquired interests in Breton Sound
Block 34 in Louisiana state waters and the Bay De Chene and Garden City fields
in south Louisiana. While there is a relatively small
38
<PAGE>
amount of existing production, all three fields have had 3-D seismic surveys
and in the aggregate have substantial proved undeveloped and proved developed
non-producing reserves. Management believes these properties also have
additional exploration potential. Several experienced engineers and
geoscientists at Magellan, who developed many of the exploration prospects and
have extensive experience in south Louisiana, have joined our technical staff.
Breton Sound Block 34 is located in 12 feet to 15 feet of water east of the
Main Pass area of the Mississippi River delta. As of April 30, 2000, this field
was producing 0.7 Mmcfe per day net to our interest and has significant proved
developed nonproducing and proved undeveloped reserves in the Krumbar and
Hollywood formations at approximately 15,000 feet to 17,000 feet in depth.
Additionally, we have identified and are currently drilling a well on a proved
undeveloped location supported by 3-D seismic data in Breton Sound Block 34
(our "Alpha Prospect") that is structurally high to an offsetting well drilled
by Conoco. In addition to our Alpha Prospect, we have identified four
additional untested fault blocks that have similar characteristics to our Alpha
Prospect based on the interpretation of the 3-D seismic data. In 2000, we have
budgeted approximately $8.5 million for development drilling and recompletions.
The Bay De Chene field and the Garden City field are older fields that have
produced substantial amounts of oil and natural gas which we believe to have
further development and exploration potential. The Bay De Chene field is a
highly faulted, geologically complex salt dome based structure that has
produced over 100 MBbls of oil and 230 Bcf of natural gas from over 67
different reservoirs. In 1997, Magellan conducted a 72 square mile 3-D seismic
survey resulting in the identification of numerous potential development
drilling locations and exploitation projects and several exploration drilling
prospects. The majority of these opportunities are between 7,000 feet and
10,000 feet in depth and are in reservoirs that have been productive throughout
the field. As of April 30, 2000, this field was producing 0.6 Mmcfe per day net
to our interest. The Garden City field has produced over 2 Tcfe since its
discovery and contains one proved undeveloped drilling location and several
exploration prospects. All of these drilling opportunities have been evaluated
with 3-D seismic and subsurface data, and we are currently drilling a well in
the Garden City field. In 2000, we have budgeted approximately $4.1 million for
the Bay De Chene and Garden City fields for development and exploration
drilling and recompletions. We will continue to evaluate our exploration
projects in these fields.
Description of the CWR Properties
The CWR Properties are located in the Glenwood and White Oak fields in Gregg
and Upshur Counties, Texas, and produce from the Cotton Valley formation at a
depth of approximately 10,500 feet. As of December 31, 1999, the acquired
properties had estimated total net proved reserves of 67.8 Bcfe with a PV-10
value of $58.3 million, using constant pricing of $2.39 per Mcf for gas and
$25.60 per barrel for oil. The estimated reserves are 92% natural gas on an
equivalent basis. As of April 30, 2000, the net daily production from the CWR
Properties was approximately 10.0 Mmcf of natural gas and 150 Bbls of oil.
Approximately 51% of the reserves are classified as proved developed. We have
identified over 100 proved undeveloped locations and plan an active drilling
program on the properties. On a pro-forma basis, this acquisition increased our
total proved reserves as of December 31, 1999 to 312 Bcfe and increased our net
daily production to approximately 49.0 Mmcf of gas and 3,500 Bbls of oil as of
April 30, 2000. In 2000, we have budgeted approximately $3.7 million for
development drilling of our interests in approximately 24 wells on these
properties.
Oil and Natural Gas Reserves
The following table presents our estimated net proved oil and natural gas
reserves and the PV-10 value of our reserves as of December 31, 1999 and 1998.
The period end prices of oil and natural gas at December 31, 1999 and 1998, in
the PV-10 calculations were $23.87 and $9.50 per barrel of oil and $2.29 and
$2.10 per Mcf of natural gas, respectively. Our estimated net proved oil and
natural gas reserves and the PV-10 value of our reserves as of December 31,
1999 are based on a reserve report prepared by Ryder Scott for our properties.
In 1998 such estimates for our properties were prepared by Lee Keeling and
Associates, Inc. and H.J. Gruy and Associates, Inc. The PV-10 values shown in
the table are not intended to represent the current market value of
39
<PAGE>
the estimated oil and natural gas reserves we own. For further information
concerning the PV-10 values of these proved reserves, please read note 15 of
the notes to our December 31, 1999 consolidated financial statements. The pro
forma reserve information set forth below includes reserve information for
Magellan, which we acquired in February 2000, and for the CWR Properties, which
we acquired on May 31, 2000, as though we owned Magellan and the CWR Properties
at December 31, 1999.
<TABLE>
<CAPTION>
December 31,
December 31, 1999 1998
-------------------- ------------
Pro Forma Historical Historical
--------- ---------- ------------
<S> <C> <C> <C>
Proved reserves:
Natural gas (Mmcf)......................... 238,898 159,699 43,483
Oil (MBbls)................................ 12,151 9,835 3,342
Natural gas equivalents (Mmcfe)............ 311,806 218,712 63,535
Proved developed reserves:
Natural gas (Mmcf)......................... 159,669 122,914 36,731
Oil (MBbls)................................ 10,264 9,358 3,118
Natural gas equivalents (Mmcfe)............ 221,252 179,062 55,439
Estimated future net cash flows before income
taxes (in thousands)........................ $540,034 $370,258 $71,464
PV-10 value (in thousands)................... $296,672 $198,615 $38,894
</TABLE>
There are numerous uncertainties in estimating quantities of proved reserves
and in projecting future rates of production and the timing of development
expenditures, including many factors beyond our control. The reserve data set
forth in this prospectus are only estimates. Although we believe these
estimates to be reasonable, reserve estimates are imprecise and may be expected
to change as additional information becomes available. Estimates of oil and
natural gas reserves, of necessity, are projections based on engineering data,
and there are uncertainties inherent in the interpretation of this data, as
well as the projection of future rates of production and the timing of
development expenditures. Reservoir engineering is a subjective process of
estimating underground accumulations of oil and natural gas that cannot be
exactly measured. Therefore, estimates of the economically recoverable
quantities of oil and natural gas attributable to any particular group of
properties, classifications of the reserves based on risk of recovery and the
estimates are a function of the quality of available data and of engineering
and geological interpretation and judgment and the future net cash flows
expected therefrom, prepared by different engineers or by the same engineers at
different times may vary substantially. There also can be no assurance that the
reserves set forth herein will ultimately be produced or that the proved
undeveloped reserves will be developed within the periods anticipated. Actual
production, revenues and expenditures with respect to our reserves will likely
vary from estimates, and the variances may be material. In addition, the
estimates of future net revenues from our proved reserves and the present value
thereof are based upon certain assumptions about future production levels,
prices and costs that may not be correct. We emphasize with respect to the
estimates prepared by independent petroleum engineers that PV-10 value should
not be construed as representative of the fair market value of our proved oil
and natural gas properties since discounted future net cash flows are based
upon projected cash flows which do not provide for changes in oil and natural
gas prices or for the escalation of expenses and capital costs. The
meaningfulness of such estimates is highly dependent upon the accuracy of the
assumptions upon which they are based. Actual future prices and costs may
differ materially from those estimated. Prospective purchasers of the common
stock are cautioned not to place undue reliance on the reserve data included in
this prospectus.
40
<PAGE>
Volumes, Prices and Operating Expenses
The following table presents information regarding the production volumes
of, average sales prices received for, and average production costs associated
with, our sales of oil and natural gas for the periods indicated. The oil and
natural gas production from the Floyd Oil Properties, during the period from
acquisition on November 23, 1999, to December 31, 1999, was 87 MBbls of oil and
1,112 Mmcf of natural gas. Pro forma adjustments give effect to the
acquisitions of the Floyd Oil Properties and the CWR Properties, as if the
acquisitions had occurred at January 1, 1999.
<TABLE>
<CAPTION>
Three Months Ended
March 31, 2000 Year Ended December 31,
-------------------- ------------------------------
Historical
Pro Forma --------------------
Pro Forma Historical 1999 1999 1998 1997
--------- ---------- --------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Production volumes:
Natural gas (Mmcf)....... 4,429 3,578 18,162 4,737 3,847 1,929
Oil (MBbls).............. 322 308 1,350 532 581 254
Natural gas equivalents
(Mmcfe)................. 6,361 5,426 26,262 7,928 7,333 3,453
Average sale prices:
Natural gas ($ per Mcf).. $ 2.59 $ 2.56 $ 2.25 $ 2.18 $ 2.00 $ 2.39
Oil ($ per Bbl).......... 25.02 24.94 16.09 16.88 11.52 18.06
Natural gas equivalents
($ per Mcfe)............ 3.07 3.11 2.39 2.43 1.96 2.82
Average costs ($ per Mcfe):
Lease operating and
production taxes........ $ 0.81 $ 0.84 $ 0.78 $ 0.85 $ 1.06 $ 1.11
General and
administrative.......... 0.29 0.31 0.27 0.60 0.58 0.68
Depreciation, depletion
and amortization........ 0.74 0.72 0.61 0.84 0.97 1.32
</TABLE>
Development, Exploration and Acquisition Capital Expenditures
The following table presents unaudited information regarding our net costs
incurred in the purchase of properties and in exploration and development
activities.
<TABLE>
<CAPTION>
Three
Months
Ended Year Ended December 31,
March 31, -----------------------
2000 1999 1998 1997
--------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Acquisition................................... $19,987 $91,424 $29,215 $44,294
Exploration................................... 138 824 1,802 1,912
Development................................... 3,535 2,154 3,041 1,862
------- ------- ------- -------
Total costs incurred........................ $23,660 $94,402 $34,058 $48,068
======= ======= ======= =======
</TABLE>
41
<PAGE>
Drilling Activity
The following table shows our drilling activity for the three months ended
March 31, 2000, and the years ended December 31, 1999, 1998 and 1997. In the
table, "gross" refers to the total wells in which we have a working interest
and "net" refers to gross wells multiplied by our working interest in these
wells.
<TABLE>
<CAPTION>
Three
Months
Ended
March 31, Year Ended December 31,
----------- -----------------------------------
2000 1999 1998 1997
----------- ----------- ----------- -----------
Gross Net Gross Net Gross Net Gross Net
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exploration Wells:
Productive................. 0 0.000 0 0.000 1 0.125 8 0.452
Non-Productive............. 0 0.000 5 0.900 8 0.793 11 1.280
--- ----- --- ----- --- ----- --- -----
Total.................... 0 0.000 5 0.900 9 0.918 19 1.732
=== ===== === ===== === ===== === =====
Development Wells:
Productive................. 15 5.261 21 5.667 12 1.508 17 5.627
Non-Productive............. 0 0.000 0 0.000 2 1.100 6 4.150
--- ----- --- ----- --- ----- --- -----
Total.................... 15 5.261 21 5.667 14 2.608 23 9.777
=== ===== === ===== === ===== === =====
</TABLE>
Productive Wells
The following table sets forth the actual number of productive oil and
natural gas wells in which we owned an interest as of December 31, 1999, and on
a pro forma basis to include Magellan and the CWR Properties as if we owned the
interests as of December 31, 1999.
<TABLE>
<CAPTION>
Total Productive
Wells
---------------------
Pro Forma Historical
--------- -----------
Gross Net Gross Net
----- --- ------ ----
<S> <C> <C> <C> <C>
Oil.................................................... 1,479 395 1,478 395
Natural gas............................................ 857 300 677 252
----- --- ------ ----
Total................................................ 2,336 695 2,155 647
===== === ====== ====
</TABLE>
Productive wells consist of producing wells and wells capable of production,
including natural gas wells awaiting pipeline connections to commence
deliveries and oil wells awaiting connection to production facilities. At April
30, 2000, we operated approximately 475 wells, located primarily in Texas.
42
<PAGE>
Pro Forma Acreage Data
The following table presents pro forma information regarding our developed
and undeveloped lease acreage as of December 31, 1999, including acreage data
on a pro forma basis for Magellan and the CWR Properties. Developed acreage
refers to acreage within producing units and undeveloped acreage refers to
acreage that has not been placed in producing units.
<TABLE>
<CAPTION>
Developed Undeveloped
Acreage Acreage Total
--------------- ------------- ---------------
Gross Net Gross Net Gross Net
------- ------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Texas............................. 208,404 63,377 6,575 1,315 214,979 64,692
Oklahoma.......................... 79,256 22,846 205 205 79,461 23,051
Louisiana......................... 40,080 12,253 5,761 2,665 45,841 14,918
Kansas............................ 20,579 13,171 6,507 6,507 27,086 19,678
Other............................. 164,857 60,258 560 490 165,417 60,748
------- ------- ------ ------ ------- -------
Total........................... 513,176 171,905 19,608 11,182 532,784 183,087
======= ======= ====== ====== ======= =======
</TABLE>
At December 31, 1999, Magellan owned 17,049 gross developed acres, or 9,562
net developed acres, and 3,193 gross undeveloped acres, or 1,682 net
undeveloped acres. The CWR Properties information included in the table above
consists of 38,480 gross developed acres, or 10,132 net developed acres, and no
gross undeveloped acres or net undeveloped acres. Excluded from the acreage
data are approximately 35,214 net mineral acres owned by us, primarily in
LaFourche, St. Mary and Terrebonne parishes of Louisiana, all of which we
believe have potential for oil and natural gas exploration.
Marketing
We have marketed the oil and natural gas produced from our properties
through typical channels for these products. 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.
Both oil and natural gas are purchased by marketing companies, pipelines,
major oil companies, public utilities, industrial customers and other users and
processors of petroleum products. We are not confined to, or dependent upon,
any one purchaser or small group of purchasers. Accordingly, the loss of a
single purchaser, or a few purchasers, would not have a long-term material
effect on our business because there are numerous purchasers in the areas in
which we sell our production.
Competition
We face competition from other oil and natural gas companies in all aspects
of our business, including acquisition of producing properties and oil and
natural gas leases, marketing of oil and natural gas, and obtaining goods,
services and labor. Many of our competitors have substantially larger financial
and other resources. Factors that affect our ability to acquire producing
properties include available funds, available information about the property
and our standards established for minimum projected return on investment.
Competition is also presented by alternative fuel sources, including heating
oil and other fossil fuels. We believe that we are competing and will compete
effectively as a result of our expertise in the acquisition, exploration, and
development of oil and natural gas reserves and our financial ability to take
advantage of opportunities.
Regulation
Federal Regulation of Transportation of Natural Gas. Historically, the
transportation and sale for resale of natural gas in interstate commerce have
been regulated by the Natural Gas Act of 1938, the Natural Gas Policy Act of
1978, and the regulations promulgated by the Federal Energy Regulatory
Commission. In the past, the
43
<PAGE>
federal government has regulated the prices at which natural gas could be sold.
Deregulation of natural gas sales by producers began with the enactment of the
Natural Gas Policy Act. In 1989, Congress enacted the Natural Gas Wellhead
Decontrol Act, which removed all remaining Natural Gas Act and Natural Gas
Policy Act price and non-price controls affecting producer sales of natural gas
effective January 1, 1993. Congress could, however, reenact price controls in
the future.
Our sales of natural gas are affected by the availability, terms and cost of
pipeline transportation. The price and terms for access to pipeline
transportation remain subject to extensive federal regulation. Beginning in
April 1992, the Federal Energy Regulatory Commission issued Order No. 636 and a
series of related orders, which required interstate pipelines to provide open-
access transportation on a basis that is equal for all natural gas suppliers.
The Federal Energy Regulatory Commission has stated that it intends for Order
No. 636 to foster increased competition within all phases of the natural gas
industry. Although Order No. 636 does not directly regulate our production and
marketing activities, it does affect how buyers and sellers gain access to the
necessary transportation facilities and how we and our competitors sell natural
gas in the marketplace. The courts have largely affirmed the significant
features of Order No. 636 and the numerous related orders, although some
appeals remain pending and the Federal Energy Regulatory Commission continues
to review and modify its regulations regarding the transportation of natural
gas. One broad and significant pending review involves examination of several
questions, including whether the transportation regulations should be changed
to better operate together with changes in state law that are introducing
competition in retail natural gas markets, whether the historical method of
setting transportation rates based on cost should be changed for certain
transportation, whether short term transportation capacity should be allocated
based only on auctions, and whether additional changes need to be made to long
term transportation policies to prevent a market bias in favor of short term
transportation. We cannot predict what action the Federal Energy Regulatory
Commission will take on these matters, nor can we accurately predict whether
the Federal Energy Regulatory Commission's actions will achieve the goal of
increasing competition in markets in which our natural gas is sold. However, we
do not believe that any action taken will affect us in a way that materially
differs from the way it affects other oil and natural gas producers.
Additional proposals and proceedings that might affect the natural gas
industry are pending before Congress, the Federal Energy Regulatory Commission
and the courts. The natural gas industry historically has been very heavily
regulated; therefore, we cannot assure you that the less stringent regulatory
approach recently pursued by the Federal Energy Regulatory Commission and
Congress will continue.
Federal Regulation of Transportation of Oil. Oil and sales of oil,
condensate and natural gas liquids by us are not currently regulated and are
made at market prices. Effective as of January 1, 1995, the Federal Energy
Regulatory Commission implemented regulations establishing an indexing system
for transportation rates for interstate common carrier oil pipelines. These
rates are generally indexed to inflation, subject to conditions and
limitations. These regulations may, over time, tend to increase transportation
costs or reduce wellhead prices for oil. However, we do not believe that these
regulations affect us any differently than other oil and natural gas producers,
gatherers and marketers.
State Regulation. Our oil and natural gas operations are subject to various
types of regulation at the state and local levels. These regulations require
drilling permits, regulate the methods for developing new fields and the
spacing and operating of wells and waste prevention, and sometimes impose
production limitations. These regulations may limit our production from wells
and the number of wells or locations we can drill.
Some states have adopted regulations with respect to gathering systems.
These regulations have not had a material effect on the operation of our
gathering systems, but we cannot predict whether any future regulations in this
area may have a material impact on our gathering systems.
Federal, State and Indian Leases. Our operations on federal, state or Indian
oil and natural gas leases are subject to numerous restrictions, including
nondiscrimination statutes. We must conduct our operations on these leases
pursuant to permits and authorization and other regulations issued by the
Bureau of Land Management,
44
<PAGE>
Minerals Management Service and other agencies. The Minerals Management Service
currently has under consideration a proposal to change the manner in which
crude oil is valued for purposes of calculating royalty due the government. If
adopted, these changes would decrease reliance on historical valuation methods
and instead adopt an indexing method intended to better reflect market value,
but which may not reflect the proceeds actually received in the sale of the
oil. We cannot predict what action the Minerals Management Service may
ultimately take or how it will affect royalty payable on our production from
federal leases, however, if adopted the changes may tend to increase costs of
royalty payments.
Environmental Regulations. Our operations are subject to numerous laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. Our exploration and production
operations and facilities for gathering, treating, processing and handling
hydrocarbons and related exploration and production wastes are subject to
stringent environmental regulation. These laws and regulations sometimes
require government approvals before activities occur, limit or prohibit
activities because of protected areas or species, impose substantial
liabilities for pollution and provide penalties for noncompliance. As with the
industry generally, compliance with existing and anticipated regulations
increases our overall cost of business. These regulations, however, generally
affect us and our competitors similarly. Environmental laws and regulations are
subject to frequent change, and we are not able to predict the costs or other
impacts of environmental regulation on our future operations.
The Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on some classes of
persons that are considered to have contributed to the release or threat of
release of a "hazardous substance" into the environment. These persons include
the owner or operator of the disposal site or sites where the release occurred
and companies that disposed or arranged for the disposal of the hazardous
substances found at the site. Persons who are or were responsible for releases
of hazardous substances under CERCLA may be subject to joint and several
liability for the costs of cleaning up the hazardous substances that have been
released into the environment and for damages to natural resources, and it is
not uncommon for neighboring landowners and other third parties to file claims
for personal injury and property damage allegedly caused by the hazardous
substances released into the environment.
Our operations are also subject to regulation of air emissions under the
Clean Air Act and comparable state and local requirements. Implementation of
these laws could lead to the gradual imposition of new air pollution control
requirements on our operations. As a result, we may incur capital expenditures
over the next several years to upgrade our air pollution control equipment. We
do not believe that our operations would be materially affected by any such
requirements, nor do we expect such requirements to be any more burdensome to
us than to other companies our size involved in oil and natural gas exploration
and production activities.
In addition, legislation has been proposed in Congress from time to time
that would reclassify some oil and natural gas exploration and production
wastes as "hazardous wastes," which would make the reclassified wastes subject
to much more stringent handling, disposal and clean-up requirements. If
Congress were to enact this legislation, it could increase our operating costs,
as well as those of the oil and natural gas industry in general. Initiatives to
further regulate the disposal of oil and natural gas wastes are also pending in
some states, and these various initiatives could have a similar impact on us.
The Clean Water Act imposes restrictions and controls on the discharge of
oil and natural gas wastes and other forms of pollutants into waters of the
United States. Federal law also imposes strict liability on owners of
facilities for consequences of an oil spill where the spill is in navigable
waters or along shorelines. These laws impose penalties for unauthorized
discharges and substantial liability for costs of removal and damages resulting
from an unauthorized discharge. State laws for the control of water pollution
provide similar penalties and liabilities. The cost of compliance with water
pollution laws has not historically been material to our operations. There can
be no assurance that changes in federal, state or local water pollution laws
and programs will not materially adversely affect our operations in the future.
45
<PAGE>
Our management believes that we are in substantial compliance with current
environmental laws and regulations that affect us and that continued compliance
with these requirements will not have a material adverse impact on us.
Legal Proceedings
From time to time, we may be a party to various legal proceedings. We
currently are not a party to any material litigation.
Employees
At May 31, 2000, we had 41 full-time employees. We believe that our
relationships with our employees are satisfactory. None of our employees is
covered by a collective bargaining agreement. From time to time, we use the
services of independent consultants and contractors to perform various
professional services, particularly in the areas of construction, design, well-
site surveillance, permitting and environmental assessment.
46
<PAGE>
MANAGEMENT
<TABLE>
<CAPTION>
Name Age Position(s) Held Since
---- --- ---------------- -----
<S> <C> <C> <C>
Floyd C. Wilson......... 52 Chairman, Chief Executive Officer 1999*
R. A. Walker............ 43 President, Chief Financial Officer and Director 2000*
Stephen W. Herod........ 41 Executive Vice President-Corporate Development, 1997*
Treasurer and Director
Richard K. Stoneburner.. 46 Vice President--Exploration 1999
Mark S. Holt............ 44 Vice President--Land 1999
Earl W. Ringeisen....... 65 Vice President--Field Operations and Production 1999
Terry W. Gautier........ 43 Controller 1999
David S. Elkouri........ 46 Secretary 2000
David B. Miller......... 50 Director 1999*
D. Martin Phillips...... 46 Director 1999*
Gary R. Christopher..... 49 Director 1997*
Larry L. Helm........... 52 Director 2000*
</TABLE>
--------
* Each of our directors is elected for a term ending on the date of our next
annual meeting of stockholders. Our next annual meeting of stockholders is
scheduled for May 2001.
FLOYD C. WILSON, Chairman and Chief Executive Officer, joined us on August
27, 1999, concurrent with the investment by W/E LLC. Mr. Wilson founded W/E LLC
in 1998. Mr. Wilson began his career in the energy business in Houston in 1970
as a completion engineer. He moved to Wichita in 1976 to start an oil and
natural gas operating company, one of several private energy ventures which
preceded the formation of W/E LLC. Mr. Wilson founded Hugoton Energy
Corporation ("Hugoton") in 1987, and served as its Chairman, President and
Chief Executive Officer. In 1994, Mr. Wilson took Hugoton public, and sold the
company in 1998 to Chesapeake Energy Corporation.
R. A. WALKER, President, Chief Financial Officer and Director, joined 3TEC
effective May 1, 2000. Prior to joining us, he was a Senior Managing Director
and Co-head of Prudential Capital Group, a $32 billion asset management and
merchant banking affiliate of The Prudential Insurance Company of America
investing in privately-placed debt and equity securities. From 1990 to 1998,
Mr. Walker was the Managing Director of the Dallas office of Prudential Capital
Group where he was responsible for the firm's global energy investments, as
well as general corporate finance for the Southwestern United States. He joined
Prudential in 1987, holding various responsibilities in its Boston, Dallas and
Newark offices, after spending approximately six years in commercial banking
and two years with an independent oil and gas company.
STEPHEN W. HEROD has served as our Executive Vice President-Corporate
Development since December 1999 and as a director since July 1997. From July
1997 to December 1999, Mr. Herod was our Vice President--Corporate Development.
Mr. Herod served as President and a director of Shore Oil Company from April
1992 until the merger of Shore with us on June 30, 1997. He joined Shore's
predecessor as Controller in February 1991. Mr. Herod was employed by Conquest
Exploration Company from 1984 until 1991 in various financial management
positions, including Operations Accounting Manager. From 1981 to 1984, Superior
Oil Company employed Mr. Herod as a financial analyst.
RICHARD K. STONEBURNER joined us in August 1999 and became Vice President--
Exploration in December 1999. Mr. Stoneburner was employed by W/E LLC as
District Geologist from 1998 to 1999. Prior to joining us, Mr. Stoneburner
worked as a geologist for Texas Oil & Gas, The Reach Group, Weber Energy
Corporation, Hugoton Energy Corporation and, independently through his own
company, Stoneburner Exploration, Inc. Mr. Stoneburner has over 20 years of
experience in the energy field.
MARK S. HOLT joined us in August 1999 and became Vice President--Land in
December 1999. W/E LLC employed Mr. Holt as District Landman from 1998 to 1999.
From 1985 to 1998, Mr. Holt was the owner of Holt Resources, which provided
land consulting services to various oil and natural gas companies and
operators. From 1979 to 1985, Mr. Holt was a Senior Landman for Sun Oil
Company.
47
<PAGE>
EARL W. RINGEISEN joined us in August 1999 and became Vice President--Field
Operations and Production in December 1999. From 1998 to 1999, Chesapeake
Energy Corporation employed Mr. Ringeisen as their Kansas District Manager. Mr.
Ringeisen served as Hugoton's Vice President of Operations from 1993 to 1998.
From 1987 to 1993, Mr. Ringeisen served as Production Superintendent for
Hugoton.
TERRY W. GAUTIER joined us as Controller in December 1999. From July 1990 to
November 1999, Mr. Gautier was employed by Floyd Oil Company as Vice President,
Chief Accounting Officer and Controller. Prior to joining Floyd Oil Company,
Mr. Gautier was employed by Pelto Oil Company for six years, serving the last
two as Controller. From 1978 to 1983, Mr. Gautier was an Audit Senior with
Touche Ross and Co. He is a certified public accountant.
DAVID S. ELKOURI became Secretary in April 2000. Mr. Elkouri has been a
member of the Wichita, Kansas law firm, Hinkle Elkouri Law Firm L.L.C., since
1986 and is currently its Co-Managing Director. He is currently a member of the
Board of Directors of Rand Graphics, Inc. and previously served as a director
of Hugoton Energy Corporation. He is an Adjunct Professor of Law at the
University of Kansas School of Law and teaches business planning.
DAVID B. MILLER has served as a director since 1999. Mr. Miller is a
Managing Director and co-founder of EnCap. EnCap is an investment management
and merchant banking firm focused on the upstream and midstream sectors of the
oil and natural gas industry that was founded in 1988. EnCap is the general
partner and controlling person of certain members of W/E LLC. From 1988 to
1996, Mr. Miller also served as President of PMC Reserve Acquisition Company, a
partnership jointly owned by EnCap and Pitts Energy Group. Prior to the
establishment of EnCap, Mr. Miller served as Co-Chief Executive Officer of MAZE
Exploration Inc., a Denver, Colorado, based oil and natural gas company he co-
founded in 1981.
D. MARTIN PHILLIPS has served as a director since 1999. Mr. Phillips is a
Managing Director and principal of EnCap. EnCap is an investment management and
merchant banking firm focused on the upstream and midstream sectors of the oil
and natural gas industry that was founded in 1988. EnCap is the general partner
and controlling person of certain members of W/E LLC. Prior to joining EnCap in
1989, from 1978 to 1989, Mr. Phillips served in various management capacities
with NCNB Texas National Bank, including as Senior Vice President in the Energy
Banking Group. Mr. Phillips is also a director of Bargo Energy Company, a
public oil and natural gas company.
GARY R. CHRISTOPHER has served as a director since 1997. Mr. Christopher is
Acquisitions Coordinator of Kaiser-Francis Oil Company, a position he has held
since February 1996. From 1991 to 1996, Mr. Christopher served as Senior Vice
President and Manager of Energy Lending for the Bank of Oklahoma. He continues
to serve as a consultant to the Bank of Oklahoma. Mr. Christopher is also
President, Chief Executive Officer and a director of PetroCorp Inc., a public
oil and natural gas company controlled by Kaiser-Francis Oil Company. Kaiser-
Francis Oil Company owns 1,112,578 of our shares of common stock.
LARRY L. HELM was elected a director and a member of our Audit Committee on
May 30, 2000. Mr. Helm is responsible for the nationwide Energy and Utilities
Banking Group of Bank One Corporation, a position he assumed in 1998. Mr. Helm
joined Bank One in 1989 and has held increasingly more responsible positions
with Bank One, including, most recently, Chairman and Chief Executive Officer
of Bank One's Dallas Region. Mr. Helm is a former director of the Independent
Petroleum Association of America.
Employment Contracts
Floyd C. Wilson and 3TEC entered into an employment agreement commencing on
April 15, 2000, and terminating on December 31, 2002, pursuant to which Mr.
Wilson will serve as our Chief Executive Officer with an annual base salary of
$325,000. Our board of directors may terminate Mr. Wilson's employment under
the employment agreement with or without Cause. "Cause" is defined as (a) the
inability, despite any reasonable accommodation required by law, due to bodily
injury or disease or any other physical or mental
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incapacity, to perform the services provided for under the employment agreement
for a period of 120 days in the aggregate, within any given period of 180
consecutive days during the term of the employment agreement, in addition to
any statutorily required leave of absence, (b) conduct that constitutes fraud,
dishonesty, theft, or a criminal act involving moral turpitude, in each case
only if it materially affects his ability to perform the duties and
responsibilities of his position or has a material adverse effect on us, (c)
commission of a material act of fraud against us, (d) embezzlement of funds or
misappropriation of other property from us, or (e) failure to observe or
perform his material duties and obligations as our employee or a material
breach of the employment agreement, after 30 days advance written notice of
such failure or breach which has not been cured. If Mr. Wilson is terminated by
us without Cause, we are required to pay him a severance payment equal to the
salary payable to him over the remaining term of his agreement.
The employment agreement contains certain noncompete, confidentiality and
noninterference provisions. For example, during the term of the employment
agreement Mr. Wilson may not be employed or render advisory, consulting or
other services in connection with any business enterprise or person that is
engaged in leasing, acquiring, exploring, producing, gathering or marketing
hydrocarbons and related products. Further, during the term of the employment
agreement Mr. Wilson may not be financially interested, invest or engage in any
business that is engaged in leasing, acquiring, exploring, producing, gathering
or marketing hydrocarbons and related products, with certain limited
exceptions. The agreement also provides that Mr. Wilson will not disclose or
make use of any trade secrets or confidential or proprietary information
pertaining to us in a way that is materially detrimental to us. Mr. Wilson is
also prohibited during the two-year period of his employment agreement or the
period for which Mr. Wilson is employed by us, whichever is longer, and for a
six-month period commencing upon the termination of such longer period from
soliciting any of our employees or any other person who is under contract with
or rendering services to us to (a) terminate his or her employment with us, (b)
refrain from extending or renewing his or her employment with us, (c) refrain
from rendering services to or for us, (d) become employed by or to enter into
contractual relations with any persons other than us, or (e) enter into a
relationship with any of our competitors.
R. A. Walker and 3TEC entered into an employment agreement commencing on May
1, 2000, and terminating on December 31, 2002, pursuant to which Mr. Walker
will serve as our President and Chief Financial Officer with an annual base
salary of $300,000. The agreement also provides that Mr. Walker will be granted
options giving him the right to purchase 500,000 shares of our common stock,
one-half of which shall be immediately vested with the remaining portion to
vest equally on each of the next three anniversary dates of his employment. The
exercise price under the option granted to Mr. Walker is the fair market value
of shares of our common stock on the date of grant. We may terminate Mr.
Walker's employment under the employment agreement with or without Cause.
"Cause" is defined similarly to the definition of "Cause" contained in Mr.
Wilson's employment agreement. If Mr. Walker is terminated by 3TEC without
Cause, the Company is required to pay him a severance payment equal to two
times his base salary. Mr. Walker's employment agreement also contains
noncompete, confidentiality and noninterference provisions that are similar in
scope and term to the noncompete, confidentiality and noninterference
provisions in Mr. Wilson's employment agreement, described above.
Stephen W. Herod executed an employment agreement with us with an effective
date of July 1, 1997, and extending through June 30, 2000, with automatic one-
year extensions upon each anniversary date of the employment agreement
thereafter unless either party gives at least 30 days notice of termination.
The employment agreement is terminable by us before expiration of the term if
such termination is for cause (as specified in the employment agreement). The
executive employment agreement provides for an annual salary of not less than
the base salary of $100,000, which amount may be adjusted from time to time by
the board of directors upon the recommendation of the compensation committee of
the board of directors. It also provides for fringe benefits in accordance with
our policies adopted from time to time for salaried executive employees holding
comparable positions.
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SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS
The following table sets forth the shares of our common stock beneficially
owned by those persons known by us to beneficially own more than five percent
of our outstanding common stock as of March 31, 2000, and as adjusted to
reflect the sale of common stock in this offering, assuming there is no
exercise of the over-allotment option by the underwriters. All percentages are
based on 6,422,181 shares of common stock issued and outstanding on March 31,
2000.
<TABLE>
<CAPTION>
Shares
Beneficially
Owned Before the
Offering Percent of Shares
----------------- Beneficially Owned
Name and Address of 5% Shareholder Number Percent After the Offering
---------------------------------- --------- ------- ------------------
<S> <C> <C> <C>
W/E Energy Company, L.L.C. (a), (b), (c).. 3,474,074 41.80% 22.69%
777 Walker Street
Suite 2400
Houston, TX 77002
EnCap Investments L.L.C. (b), (d), (e).... 4,859,627 54.58% 30.56%
1100 Louisiana
Suite 3150
Houston, TX 77002
Kaiser-Francis Oil Company (f)............ 1,112,578 17.32% 8.29%
6733 South Yale
Tulsa, OK 74136
The Prudential Insurance Company of
America (g).............................. 775,344 11.33% 5.60%
751 Broad Street
Newark, NJ 07102
Pel-Tex Partners, L.L.C. (h).............. 444,423 6.72% 3.27%
277 Park Avenue
New York, NY 10172
C. J. Lett, III (i)....................... 411,519 6.41% 3.07%
9320 East Central
Wichita, KS 67206
Trustees of Dartmouth College (j)......... 394,161 6.14% 2.94%
P.O. Box 31
Hanover, NH 03755
Weskids, L.P. (k)......................... 320,385 4.96% 2.38%
310 South Street
Morristown, NJ 07960
Alvin V. Shoemaker (l).................... 321,211 4.95% 2.38%
8800 First Avenue
Stone Harbor, NJ 08247
</TABLE>
--------
(a) Based on disclosures in a joint filing on Schedule 13D filed with the
Securities and Exchange Commission and recent transactions, W/E LLC is the
beneficial owner and has sole voting and dispositive power with respect to
3,474,074 shares of common stock. W/E LLC's members include Floyd C.
Wilson, EnCap Energy Capital Fund III, L.P. ("Fund III"), EnCap Energy
Capital Fund III-B, L.P. ("Fund III-B"), Energy Capital Investment Company
PLC ("ECIC"), and BOCP Energy Partners, L.P. ("BOCP"). As general partner
of the funds, EnCap has voting power and dispositive power for Fund III and
Fund III-B, and as investment advisor for ECIC, EnCap has voting power and
dispositive power for ECIC. EnCap has voting power and dispositive power
for BOCP by being its manager as appointed by Banc One Capital Partners
VIII, Ltd., the general partner. El Paso Field Services Company ("El Paso
Field Services"), a wholly owned subsidiary of El Paso Energy Corporation
("El Paso Energy"), is the sole owner of EnCap. El Paso Field Services and
El Paso Energy disclaim any beneficial ownership of these shares.
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(b) Includes 1,188,889 shares of common stock issuable on conversion of
subordinated notes and 700,000 shares issuable on exercise of warrants to
purchase common stock exercisable within 60 days.
(c) W/E LLC owns none of the securities issued in the Magellan transaction.
(d) EnCap may be deemed to share voting and dispositive power with respect to
the shares of common stock owned by W/E LLC; however, EnCap disclaims any
beneficial ownership of these shares. As disclosed in Note (a) above, El
Paso Field Services is the sole owner of EnCap, and El Paso Energy controls
El Paso Field Services; however, both El Paso Field Services and El Paso
Energy disclaim any beneficial ownership of our shares of common stock.
David B. Miller and D. Martin Phillips, managing directors of EnCap, are
also managers of W/E LLC and, as such, may be deemed beneficial owners of
the shares of our common stock owned by W/E LLC and the shares of our
common stock which are owned by EnCap.
(e) This figure includes the 3,474,074 shares described in Note (a) above.
Additionally, this figure includes 792,683 shares of common stock, 450,388
shares of Series D Preferred Stock convertible into 450,388 shares of
common stock, and warrants to purchase 142,482 shares of common stock,
received by Fund III, Fund III-B, ECIC, and BOCP in connection with the
acquisition of Magellan.
(f) Kaiser-Francis Oil Company is a wholly owned subsidiary of GBK Corporation,
which is owned 78.22% directly by George B. Kaiser and 21.78% indirectly by
Mr. Kaiser through affiliates.
(g) As disclosed on Schedule 13G filed with the Securities and Exchange
Commission on November 12, 1999, this figure includes convertible
subordinated notes convertible into 263,760 shares of common stock and
warrants which are immediately exercisable for 159,735 shares of common
stock, plus 167 shares of common stock over which Prudential shares voting
and dispositive power.
(h) As disclosed in a joint filing on Schedule 13G filed with the Securities
and Exchange Commission on March 7, 2000; includes 144,464 shares of Series
D Preferred Stock convertible into 144,464 shares of common stock and
45,702 warrants to acquire common stock. Pel-Tex Partners, L.L.C. may be
deemed to share voting and dispositive power with respect to the shares
with AXA, AXA Financial Inc., AXA Assurances I.A.R.D. Mutuelle, AXA
Assurances Vie Mutuelle, AXA Conseil Vie Assurance Mutuelle, AXA Courtage
Assurance Mutuelle, Donaldson, Lufkin & Jenrette, Inc. ("DLJ"), DLJ Capital
Investors, Inc., ("DLJ Capital"), DLJ Fund Investment Partners II L.P ("DLJ
Fund"), DLJ LBO Plans Management Corporation ("DLJ LBO Plans"), and Townes
G. Pressler, Jr. Each of the AXA entities, DLJ and DLJ Capital disclaim any
beneficial ownership of the shares. DLJ Fund is the controlling member of
Pel-Tex Partners, L.L.C.; however, DLJ Fund disclaims any beneficial
ownership of these shares. DLJ LBO Plans and Townes G. Pressler, Jr. are
the managers of Pel-Tex Partners, L.L.C. and, as such, may be deemed
beneficial owners of the shares, however, DLJ LBO Plans and Townes G.
Pressler, Jr. disclaim any beneficial ownership of these shares.
(i) This figure includes options immediately exercisable for 15,667 shares of
common stock.
(j) As disclosed in a filing on Schedule 13G filed with the Securities and
Exchange Commission on June 26, 2000, the Trustees of Dartmouth College are
presently the beneficial owners and have sole voting and dispositive power
of 394,161 shares of common stock.
(k) As disclosed in a filing on Schedule 13D filed with the Securities and
Exchange Commission on November 7, 1997, Weskids, L.P. is presently the
beneficial owner and has sole voting and dispositive power of 281,229
shares of common stock and 117,467 shares of Series B Preferred Stock
immediately convertible into not less than 39,156 shares of 3TEC's common
stock. Weskids, Inc. is the general partner of Weskids, L.P. and
effectively controls Weskids, L.P. J. Peter Simon and Michael B. Lenard are
the directors of Weskids, Inc.
(l) As disclosed in a filing on Schedule 13D filed with the Securities and
Exchange Commission on December 23, 1997, this figure includes 117,466
shares of Series B Preferred Stock immediately convertible into not less
than 39,156 shares of 3TEC's common stock. This figure also includes 22,222
shares of common stock, convertible subordinated notes into 16,667 shares
of common stock, and warrants immediately exercisable for 10,093 shares of
common stock, all of which Mr. Shoemaker may be deemed to share the power
to vote or direct the vote and dispose or direct the disposition of with
Shoemaker Family Partners, L.P. and Shoeinvest II, L.P. In addition, this
figure includes options granted to Mr. Shoemaker immediately exercisable
for 5,000 shares of common stock.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The description of our capital stock below is only a summary and is not
intended to be complete. For a complete description, please read our
certificate of incorporation and bylaws, which have been filed with the
Securities and Exchange Commission.
Our authorized capital stock consists of 60,000,000 shares of common stock,
par value $0.02 per share, and 20,000,000 shares of preferred stock, par value
$0.02 per share. Pursuant to Certificates of Designations which have been filed
with the Secretary of State of the State of Delaware, 266,667 shares of our
Series B Preferred Stock, 2,300,000 shares of Series C Preferred Stock and
725,167 shares of our Series D Preferred Stock have been designated.
As of March 31, 2000, 6,422,181 shares of common stock, 266,667 shares of
Series B Preferred Stock, 2,167,156 shares of Series C Preferred Stock and
621,930 shares of Series D Preferred Stock were outstanding.
Common Stock
Subject to the preferential rights of any outstanding series of preferred
stock, the holders of our common stock are entitled to one vote per share on
all matters voted on by stockholders, including in the election of directors.
Our certificate of incorporation does not provide for cumulative voting in the
election of directors or grant preemptive rights with respect to future
issuances of our common stock. We may in the future, however, enter into
contracts with stockholders to grant holders preemptive rights.
Subject to any preferential rights of any series of preferred stock
outstanding, the holders of our common stock are entitled to dividends, if any,
as may be declared from time to time by our board from funds legally available
to pay dividends and, upon liquidation, are entitled to receive a pro rata
share of all of our assets that are available for distribution to stockholders.
All our common stock is fully paid and nonassessable.
Transfer Agent
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company. The phone number for American Stock Transfer & Trust
Company is (718) 921-8200.
Preferred Stock
Series B Convertible Preferred Stock. The Series B Preferred Stock has a
redemption value of $7.50 per share. Dividends are payable when, as and if
authorized and declared by the board of directors, and we are not restricted
from declaring and paying dividends on any shares of preferred stock.
Until December 31, 2002, holders of Series B Preferred Stock have the right,
at any time, to convert one share of Series B Preferred Stock into one third of
a share of common stock or into as many as a total of 444,444 shares of common
stock, contingent upon the results of drilling and leasing activity on 3TEC's
mineral acreage in south Louisiana. At any time after December 31, 2002, we
have the right, upon not less than 30 days nor more than 90 days written
notice, to redeem any or all shares of Series B Preferred Stock for $7.50 per
share plus any accrued and unpaid dividends. The holders of the Series B
Preferred Stock do not have the right to require us to redeem the Series B
Preferred Stock and do not have voting rights except those required by law. In
the event of our liquidation, dissolution or winding-up, the holders of Series
B Preferred Stock are entitled to receive distributions of $7.50 per share plus
any accrued but unpaid dividends before any holders of common stock or junior
preferred stock receive any distributions.
In the event of any stock split, reverse stock split, stock dividend,
recapitalization or similar transaction, appropriate adjustments will be made
to the Series B Preferred Stock to maintain the rate of conversion, redemption,
or distributions upon liquidation.
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<PAGE>
Series C Convertible Preferred Stock. The Series C Preferred Stock has a
redemption value of $5.00 per share and pays dividends at an amount per share
of $0.50 per annum, payable semi-annually on March 31 and September 30 of each
year. Of the 2,167,156 outstanding shares of Series C Preferred Stock, we
beneficially own 1,034,818 shares, as 1,293,522 shares of Series C Preferred
Stock are held by our 80% owned subsidiary.
Holders of Series C Preferred Stock have the right, at any time, to convert
one share of Series C Preferred Stock into one third of a share of common
stock. We have the right, upon not less than 30 nor more than 90 days written
notice, to redeem any or all shares of Series C Preferred Stock for $5.00 per
share plus any accrued and unpaid dividends. The holders of the Series C
Preferred Stock do not have the right to require us to redeem the Series C
Preferred Stock. In the event of our liquidation, dissolution or winding-up,
the holders of Series C Preferred Stock are entitled to receive distributions
of $5.00 per share plus any accrued but unpaid dividends before any holders of
common stock or junior preferred stock receive any distributions.
In the event of any stock split, reverse stock split, stock dividend,
recapitalization or similar transaction, appropriate adjustments will be made
to the Series C Preferred Stock to maintain the rate of conversion, redemption,
or distributions upon liquidation.
Except as required by law, the holders of the Series C Preferred Stock are
only entitled to vote upon those amendments, alterations or repeals of
provisions of our Certificate of Incorporation that adversely affect their
rights and preferences as preferred stockholders. The Series C Preferred Stock
ranks in parity with the Series B and Series D Preferred Stock with regard to
preferences upon our liquidation, dissolution or winding up.
No dividends may be authorized or paid or set apart for payment or other
distribution of cash or other property authorized or made directly or
indirectly by us with respect to any shares of our common stock or any junior
preferred stock unless the full cumulative dividends on all outstanding shares
of Series C Preferred Stock shall have been paid or such dividends have been
authorized and set apart for payment with respect to the Series C Preferred
Stock.
We have made application requesting that the Series C Preferred Stock be
approved for listing on the Nasdaq SmallCap Stock Market.
Series D Convertible Preferred Stock. In connection with the acquisition of
Magellan, 617,009 shares of Series D Preferred Stock, par value $0.02 per
share, were issued with a redemption value of $24.00 per share. While the per
share redemption and dividends amounts vary, the rights as to dividends and
liquidation payments of all outstanding issues 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, we may pay the
dividends at our option in cash or in additional shares of Series D Preferred
Stock.
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, we have 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 have no right to require us to redeem
the Series D Preferred Stock.
In the event of our liquidation, dissolution, winding-up or merger, 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.
In the event of any stock split, reverse stock split, stock dividend,
recapitalization or similar transaction, appropriate adjustments will be made
to the Series D Preferred Stock to maintain the rate of conversion, redemption,
or distributions upon liquidation existing at the date of any such event.
A majority of the holders of Series D Preferred Stock must consent to
certain actions by us, including any which (a) adversely alters or changes the
rights, preferences or privileges of the Series D Preferred Stock
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<PAGE>
holders by merger, consolidation or otherwise, (b) increases the authorized
number of shares of Series D Preferred Stock, or (c) authorizes or issues any
securities with rights senior to the Series D Preferred Stock. Other than these
described consents or as required by law or any provision of our Certificate of
Incorporation, the holders of Series D Preferred Stock have no voting rights.
Additional shares of preferred stock may be issued from time to time in one
or more series without shareholder approval. With regard to the preferred
stock, the board of directors may determine:
. the preferences;
. conversion or other rights;
. voting powers;
. restrictions;
. limitations on dividends; and
. qualifications and terms and conditions of redemption.
As a result, without shareholder approval, our board of directors could
authorize the issuance of additional shares of preferred stock with voting,
conversion and other rights that could dilute the voting power and other rights
of the holders of common stock.
Shareholders Agreement
Pursuant to a Shareholders Agreement, dated August 27, 1999, and a First
Amendment to the Shareholders Agreement, dated May 30, 2000, among us and
certain of our stockholders collectively owning approximately 69% of our
outstanding common stock as of March 31, 2000, before giving effect to this
offering (or approximately 33% after giving effect) and before the conversion
of our convertible subordinated notes and the exercise of the related warrants,
these stockholders have agreed to vote in favor of the election of, and cause
their affiliates to vote in favor of the election of, the seven members of our
board of directors, at least two of whom shall qualify as independent
directors, as follows: (i) three members of the board of directors designated
by W/E LLC; (ii) two members of the board of directors designated by Kaiser-
Francis Oil Company, C.J. Lett, III, Weskids, L.P. and Alvin V. Shoemaker (the
"Remaining Stockholders"); and (iii) two members of the board of directors
designated by a majority of the board of directors, at least one of which must
be an independent director whose designation is approved by W/E LLC.
Accordingly, the parties to the agreement currently have the ability to control
the election of all of the members of our board of directors. As the ownership
percentage of W/E LLC and the Remaining Stockholders decreases, the number of
directors they may designate declines and ultimately, when that percentage
falls below 5%, their right to designate board members pursuant to this
agreement shall terminate. When the ownership percentage of both W/E LLC and
the Remaining Stockholders falls below 5%, the agreement automatically
terminates. Following the completion of this offering, if W/E LLC or one of the
Remaining Shareholders, individually, no longer beneficially owns at least 3.5%
of our common stock, then that stockholder's rights and obligations under the
Shareholders Agreement, as amended, shall terminate. As of March 31, 2000, W/E
LLC and its affiliates, including EnCap, own approximately 37% of our
outstanding common stock.
Registration Rights
Pursuant to a Registration Rights Agreement dated August 27, 1999, as
amended, we granted demand registration rights to W/E LLC, Shoemaker Family
Partners, LP, Shoeinvest II, LP, and Prudential, providing these stockholders
with the right to require us to use our best efforts to cause registration and
sale in a public offering of all or a portion of the shares held by the
stockholder or stockholders demanding the registration. In addition, subject to
the underwriters discretion to limit the number of shares of selling
stockholders to be included in an offering, we granted piggy-back registration
rights to these stockholders and to Kaiser-Francis Oil Company, C.J. Lett, III,
Weskids, L.P., and Alvin V. Shoemaker in the event that we propose to file, on
our own behalf, a registration statement on Form S-1, S-2, S-3 or other similar
forms available. All of these stockholders have agreed to waive their right to
sell shares in this offering.
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Pursuant to a Registration Rights Agreements dated February 2, 2000, we
granted demand registration rights to Pel-Tex Partners, L.L.C. and EnCap and
certain of EnCap's affiliates providing these stockholders with the right to
use our best efforts to cause registration and sale in a public offering of all
or a portion of the shares held by the stockholder or stockholders demanding
the registration. In addition, subject to the underwriters' discretion to limit
the number of shares of selling stockholders to be included in an offering, we
granted piggy-back registration rights to these stockholders and to Earl P.
Burke, Jr. Family Limited Partnership and Joint Energy Department Investments
Limited Partnership in the event we propose to file, on our own behalf, a
registration statement on Form S-1, S-2, S-3 or other similar forms available.
All of these stockholders have waived their right to sell shares in this
offering.
Business Combinations under Delaware Law
We are a Delaware corporation and are governed by Section 203 of the
Delaware General Corporation Law. Section 203 prevents an interested
shareholder, which is a person who owns 15% or more of our outstanding voting
stock, from engaging in business combinations with us for three years following
the time the person becomes an interested shareholder. These restrictions do
not apply if:
. before the person becomes an interested shareholder, our board of
directors approves the transaction in which the person becomes an
interested shareholder or the business combination;
. upon completion of the transaction that results in the person becoming an
interested shareholder, the interested shareholder owns at least 85% of
our outstanding voting stock at the time the transaction began, excluding
for purposes of determining the number of shares outstanding those shares
owned by persons who are directors and also officers and employee stock
plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered
in a tender or exchange offer; or
. following the transaction in which the person became an interested
shareholder, the business combination is approved by our board of
directors and authorized at an annual or special meeting of our
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of our outstanding voting stock not owned by the
interested shareholder.
In addition, the law does not apply to interested stockholders who became
interested stockholders before the common stock was listed on the Nasdaq.
Delaware law defines the term "business combination" to encompass a wide
variety of transactions with, or caused by, an interested shareholder,
including mergers, asset sales and other transactions in which the interested
shareholder receives or could receive a benefit on other than a pro rata basis
with other stockholders. This law could have an anti-takeover effect with
respect to transactions not approved in advance by our board of directors,
including discouraging takeover attempts that might result in a premium over
the market price for the shares of the common stock.
Limitation of Liability and Indemnification of Officers and Directors
Limitation of Liability. Delaware law authorizes corporations to limit or
eliminate the personal liability of their officers and directors to them and
their stockholders for monetary damages for breach of officers' and directors'
fiduciary duty of care. The duty of care requires that, when acting on behalf
of the corporation, officers and directors must exercise an informed business
judgment based on all material information reasonably available to them. Absent
the limitations authorized by Delaware law, officers and directors are
accountable to corporations and their stockholders for monetary damages for
conduct constituting gross negligence in the exercise of their duty of care.
Delaware law enables corporations to limit available relief to equitable
remedies such as injunction or rescission.
Our Certificate of Incorporation limits the liability of our directors to us
and to our stockholders to the fullest extent permitted by Delaware law.
Specifically, our directors will not be personally liable for monetary damages
for breach of their fiduciary duty in such capacity, except for liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
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. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
. for any transaction from which the director derived an improper personal
benefit.
Indemnification. Delaware law also authorizes corporations to indemnify its
officers, directors, employees and agents for liabilities, other than
liabilities to the corporation, arising because that individual was an officer,
director, employee or agent of the corporation so long as the individual acted
in good faith and in a manner he or she reasonably believed to be in the best
interests of the corporation and not unlawful.
Our bylaws provide that our officers and directors will be indemnified by us
for liabilities arising because such individual was one of our officers or
directors to the fullest extent permitted by Delaware law. Our bylaws also
provide that we may, by action of our board of directors, provide similar
indemnification to our employees and agents.
These provisions in our Certificate of Incorporation and bylaws may reduce
the likelihood of derivative litigation against our officers and directors and
may discourage or deter our stockholders or management from bringing a lawsuit
against our officers and directors for breach of their duty of care, even
though the action, if successful, might otherwise have benefited us and our
stockholders.
These provisions in our Certificate of Incorporation and bylaws do not alter
the liability of our officers and directors under federal securities laws and
do not affect the right to sue under federal securities laws for violations
thereof.
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DESCRIPTION OF CREDIT FACILITY
Concurrent with the acquisition of the Floyd Oil Properties, we entered into
a $250 million credit facility with Bank One, Texas, N.A., as administrative
agent, and Union Bank of California, N.A., Wells Fargo Bank, CIBC, Inc., and
The Bank of Nova Scotia as participating lenders. Our borrowing base was
initially set at $95 million with $83.5 million outstanding as of March 31,
2000. The borrowing base is redetermined semi-annually on May 1 and November 1
of each year. As of March 31, 2000, we were paying 7.875% per annum interest on
$82.5 million and 7.88% per annum interest on $1.0 million of the principal
balance of this facility. The credit facility matures on May 31, 2003. Prior to
maturity other than a payment of $20 million due on or before December 31,
2000, no payments of principal are required so long as the borrowing base
exceeds the credit facility balance. The borrowings under the facility are
secured by substantially all our properties.
In connection with the acquisition of the CWR Properties, we increased the
amount of availability under the borrowing base to $145 million to enable us to
borrow the $55 million purchase price of the CWR Properties. As revised,
interest under the facility accrues at a rate calculated at our option as
either the bank's prime rate plus from a low of zero to a high of 50 basis
points or LIBOR plus basis points increasing from a low of 150.0 to a high of
212.5 as loans outstanding increase as a percentage of the borrowing base. At
the same time Bank of Montreal became a participant in and syndication agent
for our facility. As indicated elsewhere in this prospectus, the net proceeds
of this offering will be used principally to repay indebtedness outstanding
under this credit facility.
In connection with our credit facility, we are required to adhere to certain
affirmative and negative covenants including but not limited to:
. Use of all proceeds from sales of oil and natural gas properties for the
repayment of the outstanding debt.
. We may not allow the ratio of our current assets to our current
liabilities to be less than 1:1 at the end of any fiscal quarter.
. We may not allow our consolidated EBITDAX (our consolidated earnings from
ongoing operations before reduction for income tax expense, interest
expense, depreciation, depletion and amortization expense and exploration
expense) to be less that 2.5 times our consolidated interest expense for
the quarter ending September 30, 2000, and for each subsequent four
quarter period thereafter. At March 31, 2000, our consolidated EBITDAX
was 5.16 times our quarterly consolidated interest expense, thus well in
excess of the requirements of the facility.
. We may not declare or pay any cash dividend; purchase, redeem or
otherwise acquire for value any of our outstanding stock; return capital
to stockholders; or make any distribution of our assets to stockholders;
except for dividends on and redemption of Series C Preferred Stock under
certain circumstances.
. We have agreed that we will not enter into any hedging transactions
except with the lenders' consent and for certain pre-approved hedging
activities in connection with oil and natural gas prices.
Events of default under the facility include a final judgment or order in
the excess of $2 million, a change of control of 3TEC or Floyd C. Wilson
ceasing to act as our Chairman and Chief Executive Officer.
57
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated June
26, 2000, between us and the underwriters, the underwriters named below, who
are represented by Bear, Stearns & Co. Inc., CIBC World Markets Corp.,
Prudential Securities Incorporated and First Union Securities, Inc. have
severally agreed to purchase from us the respective numbers of shares of common
stock at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Bear, Stearns & Co. Inc............................................ 1,932,000
CIBC World Markets Corp............................................ 1,932,000
Prudential Securities Incorporated................................. 1,529,500
First Union Securities, Inc. ...................................... 1,046,500
Dain Rauscher Incorporated......................................... 80,000
Friedman, Billings, Ramsey & Co., Inc. ............................ 80,000
Frost Securities, Inc. ............................................ 80,000
Gaines, Berland Inc. .............................................. 80,000
McDonald Investments Inc., a KeyCorp Company....................... 80,000
Raymond James & Associates, Inc. .................................. 80,000
Sanders Morris Harris Inc. ........................................ 80,000
---------
Total............................................................ 7,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of legal matters by their counsel and to
customary conditions, including the effectiveness of the registration
statement, the continuing correctness of our representations to them, the
receipt of "comfort letters" from our accountants and no occurrence of an event
that would have a material adverse effect on our business. The underwriters are
obligated to purchase all the shares, other than those covered by the over-
allotment option described below, if they purchase any of the shares.
We have granted to the underwriters an option, exercisable for 30 days from
the date of the underwriting agreement, to purchase up to 1,050,000 additional
shares at the public offering price less the underwriting fees. The
underwriters may exercise this option solely to cover over-allotments, if any,
made in connection with this offering. To the extent that the underwriters
exercise the option, each underwriter will become obligated, subject to
conditions, to purchase a number of additional shares approximately
proportionate to such underwriter's initial purchase commitment.
The underwriters propose initially to offer some of the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the shares to dealers at the public offering price less
a concession not in excess of $0.32 per share. The underwriters may allow, and
such dealers may re-allow, a concession not in excess of $0.10 per share on
sales to other dealers. After the offering of the shares to the public, the
representatives of the underwriters may change the public offering price and
such concessions.
We and certain of our stockholders, directors and executive officers have
each agreed, without the prior written consent of Bear, Stearns & Co. Inc.
during the period ending 180 days after the date of this prospectus, not to,
directly or indirectly offer, pledge, sell, contract to sell, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend or otherwise transfer or dispose of,
any shares of common stock or any securities convertible into or exercisable or
exchangeable for common stock, or enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of common stock, whether any such transaction described above is
settled by delivery of common stock or other securities, in cash or otherwise.
The foregoing restrictions shall not apply to:
. transactions by any person of common stock or other securities acquired
in open market transactions after the date of this prospectus;
58
<PAGE>
. any conversion of convertible securities into common stock provided the
holder agrees to be bound by the restrictions above;
. common stock issued by us upon exercise of stock options under existing
employee benefit plans;
. private transfers of common stock or securities convertible into common
stock, provided the transferee agrees to be bound by the restrictions
above; or
. any transfer to a family member, trust or affiliate of a security holder
who agrees to be bound by the restrictions above.
In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of our common stock. Specifically, the underwriters may over-allot
shares of our common stock in connection with this offering, thereby creating a
short position in our common stock for their own account. In addition, to cover
over-allotments or to stabilize the market price of our common stock, the
underwriters may bid for, and purchase, shares of our common stock in the open
market. The representatives, on behalf of the underwriters, also may reclaim
selling concessions allowed to an underwriter or dealer if the underwriting
syndicate repurchases shares distributed by that underwriter or dealer. Any of
these activities may maintain the market price of our common stock at a level
above that which might otherwise prevail in the open market. These transactions
may be made in the over-the-counter market or otherwise. The underwriters are
not required to engage in these activities and, if begun, may end any of these
activities at any time.
Rules of the SEC may limit the ability of the underwriters to bid for or
purchase shares before the distribution of the shares is completed. However,
the underwriters may engage in the following activities in accordance with the
rules:
. Stabilizing transactions--The representatives may make bids or purchases
for the purpose of pegging, fixing or maintaining the price of the
shares, so long as stabilizing bids do not exceed a specified maximum.
. Over-allotments and syndicate covering transactions--The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is
created in connection with the offering, the representatives may engage
in syndicate covering transactions by purchasing shares in the open
market. The representatives may also elect to reduce any short position
by exercising all or part of the over-allotment option.
. Penalty bids--If the representatives purchase shares in the open market
in a stabilizing transaction or syndicate covering transaction, they may
reclaim a selling concession from the underwriters and selling group
members who sold those shares as part of the offering.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than they would be in the absence of such transactions. The
imposition of a penalty bid might also have an effect on the price of the
shares if it discourages resales of the shares.
Prior to the pricing of the common stock subject to this offering and until
the time when a stabilizing bid may have been made, some or all of the
underwriters may make bids for or purchases of shares of our common stock,
subject to certain restrictions, known as passive market making activity.
Neither we nor the underwriters make any representation or prediction as to
the effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq or otherwise. If such
transactions are commenced, they may be discontinued without notice at any
time.
We have agreed to indemnify the underwriters against a number of
liabilities, including liabilities under the Securities Act, or to contribute
to payments the underwriters may be required to make as a result of these
liabilities.
59
<PAGE>
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions
Payable by us......... $0.54 $0.54 $3,780,000 $4,347,000
Expenses payable by us.. $0.12 $0.10 $ 827,000 $ 827,000
</TABLE>
Our shares of common stock are listed on the Nasdaq National Market under
the symbol "TTEN."
Prudential Securities Incorporated facilitates the marketing of new issues
online through PrudentialSecurities.com division. Clients of Prudential
Advisor(SM), a full service brokerage firm program, may view the offering terms
and a prospectus online and place orders through their financial advisors.
Other than the prospectus in electronic format, any other information that
references us, the information on Prudential Securities Incorporated's website
and any other information maintained by Prudential Securities Incorporated is
not a part of this prospectus and has not been approved or endorsed by us and
should not be relied upon by prospective investors.
CIBC Inc. currently is a participant in the bank group under our $250
million credit facility. In connection with this offering, we expect that
approximately 14% of the net offering proceeds will be paid to CIBC Inc. as
part of the repayment of a portion of the outstanding amounts under the credit
facility. CIBC Inc. is affiliated with CIBC World Markets Corp., one of the co-
managers of this offering.
Prudential is an affiliate of Prudential Securities Incorporated, one of the
co-managers of this offering. As described under "Security Ownership of
Principal Stockholders," Prudential beneficially owns 775,344 shares of our
common stock, which represent approximately 11% of our outstanding common
stock. After this offering, Prudential will beneficially own approximately 6%
of our outstanding common stock.
This offering is being conducted in accordance with Rules 2710 and 2720 of
the Conduct Rules of the National Association of Securities Dealers, Inc. Bear,
Stearns & Co. Inc., the lead manager of this offering, will assume the
responsibilities of acting as qualified independent underwriter and will
recommend a price in compliance with the requirements of Rule 2720, which
provides that the public offering price of an equity security be no higher than
that recommended by a "qualified independent underwriting" meeting certain
standards.
R. A. Walker, prior to joining us as President and Chief Financial Officer
on May 1, 2000, was a Senior Managing Director and Co-head of Prudential
Capital Group, a division of Prudential. Mr. Walker no longer has any
affiliation with Prudential Capital Group.
LEGAL MATTERS
Certain legal matters in connection with the common stock offered hereby are
being passed upon for us by Thompson Knight Brown Parker & Leahy LLP, Houston,
Texas, and for the underwriters by Vinson & Elkins L.L.P., Houston, Texas.
EXPERTS
Our consolidated financial statements as of December 31, 1999 and 1998, and
for each of the years in the two-year period ended December 31, 1999, have been
included herein and in the registration statement in reliance upon the report
of KPMG LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
60
<PAGE>
The statements of revenues and direct operating expenses of the Floyd Oil
Properties for the nine months ended September 30, 1999 and the year ended
December 31, 1998, included in this registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as reflected in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
The statement of revenues and direct operating expenses of the CWR
Properties for the year ended December 31, 1999 has been included herein and in
the registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
Certain information set forth in this prospectus relating to the estimated
proved oil and natural gas reserves of 3TEC, Magellan, the Floyd Oil Properties
and the CWR Properties at December 31, 1999, the related calculations of future
net revenues and the related discounted future net income have been derived
from independent petroleum engineering reports prepared by Ryder Scott. That
information has been included herein in reliance on such firm as an expert in
petroleum engineering.
Certain information set forth in this prospectus relating to our estimated
proved oil and natural gas reserves at December 31, 1998, the related
calculations of future net revenues and the related discounted future net
income have been derived from independent petroleum engineering reports
prepared by Lee Keeling and Associates, Inc., and H.J. Gruy and Associates,
Inc. That information has been included herein in reliance on such firms as
experts in petroleum engineering.
61
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934, and in accordance therewith will file reports and other
information with the SEC. The reports and other information filed by us with
the SEC can be inspected and copies can be obtained at the public reference
facilities maintained by the SEC at Judiciary Plaza, Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Regional Offices of the SEC at
7 World Trade Center, New York, New York 10048 and Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of these
materials also can be obtained from the Public Reference Section of the SEC,
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. In
addition, the SEC maintains a site on the World Wide Web at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC.
This prospectus constitutes a part of a registration statement on Form S-2
filed by us with the SEC under the Securities Act. This prospectus omits
certain of the information contained in the registration statement, and
reference is hereby made to the registration statement for further information
with respect to us and the securities offered under this prospectus. Any
statements contained in this prospectus concerning the provisions of any
document filed as an exhibit to the registration statement or otherwise filed
with the SEC is not necessarily complete, and in each instance, reference is
made to the copy of the documents so filed. Each such statement is qualified in
its entirety by such reference.
We intend to furnish our stockholders with annual reports containing audited
financial statements and an opinion expressed by independent auditors and with
quarterly reports for the first three quarters of each fiscal year containing
unaudited summary financial information.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following reports have been filed by us with the Securities and Exchange
Commission and are incorporated by reference into this prospectus:
. Form 10-KSB for the year ended December 31, 1999;
. Form 8-K filed February 4, 2000;
. Form 8-K filed April 3, 2000;
. Form 8-K filed April 25, 2000; and
. Form 10-QSB for the quarter ended March 31, 2000.
We will provide without charge to each person to whom a copy of this
prospectus is delivered, upon request, a copy of the foregoing documents
(without exhibits). Written or telephone requests for such copies should be
directed to Stephen W. Herod, 3TEC Energy Corporation, Two Shell Plaza, Suite
2400, 777 Walker Street, Houston, Texas 77002, telephone (713) 821-7100.
62
<PAGE>
GLOSSARY OF CERTAIN OIL AND GAS TERMS
The following are abbreviations and definitions of certain terms commonly
used in the oil and gas industry and this prospectus:
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used in this
prospectus in reference to oil or other liquid hydrocarbons.
Bcf. One billion cubic feet of natural gas.
Bcfe. One billion cubic feet of natural gas equivalent, determined using the
ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas
liquids.
Btu or British Thermal Unit. The quantity of heat required to raise the
temperature of one pound of water by one degree Fahrenheit.
Completion. The installation of permanent equipment for the production of
natural gas or oil, or in the case of a dry hole, the reporting of abandonment
to the appropriate agency.
Condensate. Liquid hydrocarbons associated with the production of a
primarily natural gas reserve.
Developed acreage. The number of acres that are allocated or assignable to
productive wells or wells capable of production.
Development well. A well drilled into a proved natural gas or oil reservoir
to the depth of a stratigraphic horizon known to be productive.
Exploratory well. A well drilled to find and produce natural gas or oil
reserves that are not proved, to find a new reservoir in a field previously
found to be productive of natural gas or oil in another reservoir or to extend
a known reservoir.
Field. An area consisting of a single reservoir or multiple reservoirs all
grouped on or related to the same individual geological structural feature
and/or stratigraphic level.
MBbls. One thousand barrels of oil or other liquid hydrocarbons.
Mcf. One thousand cubic feet of natural gas.
Mcfe. One thousand cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids.
Mmbtu. One million British Thermal Units.
Mmcf. One million cubic feet of natural gas.
Mmcfe. One million cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids.
Productive well. A well that is found to be capable of producing sufficient
quantities of oil and natural gas so that proceeds from the sale of the
production are greater than production expenses and taxes.
Prospect. A specific geographic area which, based on supporting geological,
geophysical or other data and also preliminary economic analysis using
reasonably anticipated prices and costs, is deemed to have potential for the
discovery of oil and natural gas.
63
<PAGE>
Proved developed reserves. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
Proved reserves. The estimated quantities of oil, natural gas and natural
gas liquids that geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under
existing economic and operating conditions.
Proved undeveloped reserves. Reserves that are expected to be recovered from
new wells on developed acreage where the subject reserves cannot be recovered
without drilling additional wells.
PV-10 value. The estimated future net revenue to be generated from the
production of proved reserves discounted to present value using an annual
discount rate of 10%. These amounts are calculated net of estimated production
costs and future development costs, using prices and costs in effect as of a
certain date, without escalation and without giving effect to non-property
related expenses, such as general and administrative expenses, debt service,
future income tax expense, or depreciation, depletion, and amortization.
Recompletion. The completion of an existing well for production from a
formation that exists behind the casing of the well.
Reservoir. A porous and permeable underground formation containing a natural
accumulation of producible natural gas and/or oil that is confined by
impermeable rock or water barriers and is individual and separate from other
reservoirs.
Royalty interest. An interest in a natural gas and oil property entitling
the owner to a share of natural gas and oil production free of costs of
production.
Standardized measure. The estimated future net cash flows from proved
natural gas and oil reserves computed using prices and costs, at a specific
date, after income taxes and discounted at 10%.
Tcfe. One trillion cubic feet of natural gas equivalent, determined using
the ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural
gas liquids.
Undeveloped acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of natural gas and oil regardless of whether such acreage contains proved
reserves.
Working interest. The operating interest that gives the owner the right to
drill, produce and conduct operating activities on the property and receive a
share of production.
64
<PAGE>
3TEC ENERGY CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998............. F-3
Consolidated Statements of Operations for the years ended December 31,
1999 and 1998........................................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31,
1999 and 1998........................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1999 and 1998.................................. F-6
Notes to Consolidated Financial Statements............................... F-7
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES WITH RESPECT TO THE
FLOYD OIL PROPERTIES FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE PERIOD
ENDED SEPTEMBER 30, 1999
Report of Independent Public Accountants................................. F-25
Statements of Revenues and Direct Operating Expenses for the year ended
December 31, 1998 and the period ended September 30, 1999, with respect
to the Floyd Oil Properties............................................. F-26
Notes to Statements of Revenues and Direct Operating Expenses............ F-27
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES WITH RESPECT TO THE
ACQUISITION OF CWR PROPERTIES
Independent Auditors' Report............................................. F-29
Statement of Revenues and Direct Operating Expenses for the year ended
December 31, 1999, with respect to the CWR Properties................... F-30
Notes to Statement of Revenues and Direct Operating Expenses............. F-31
Unaudited Statements of Revenues and Direct Operating Expenses for the
periods ended March 31, 2000 and 1999, with respect to the CWR
Properties.............................................................. F-33
Notes to Unaudited Statements of Revenues and Direct Operating Expenses.. F-34
3TEC ENERGY CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL DATA
Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the year ended
December 31, 1998....................................................... F-36
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statement.. F-37
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
3TEC Energy Corporation:
We have audited the accompanying consolidated balance sheets of 3TEC Energy
Corporation (formerly Middle Bay Oil Company, Inc.) and subsidiaries as of
December 31, 1999 and December 31, 1998 and the related consolidated statements
of operations, changes in stockholders' equity, and cash flows for each of the
years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of 3TEC Energy
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years then ended in
conformity with generally accepted accounting principles.
KPMG LLP
Houston, Texas
February 25, 2000
F-2
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents........................ $ 6,141,153 $ 1,040,096
Accounts receivable.............................. 9,453,551 3,309,043
Accounts receivable-Insurance Claim.............. -- 448,083
Other current assets............................. 176,226 141,364
------------ -----------
Total current assets............................ 15,770,930 4,938,586
PROPERTY (AT COST)
Oil and gas-successful efforts method............ 168,840,499 90,849,439
Other............................................ 1,141,879 795,323
------------ -----------
169,982,378 91,644,762
Accumulated depreciation, depletion and
amortization...................................... (38,208,298) (39,073,584)
------------ -----------
131,774,080 52,571,178
OTHER ASSETS....................................... 1,698,496 431,053
------------ -----------
TOTAL ASSETS....................................... $149,243,506 $57,940,817
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable-trade........................... $ 5,726,569 $ 3,643,241
Accounts payable-Enex LP Dissenters and
Fractional Shares............................... -- 538,750
Revenue payable.................................. 1,576,731 342,931
Accounts payable-Stockholder Dissenters.......... 1,118,678 --
Other current liabilities........................ 347,733 275,010
------------ -----------
Total current liabilities....................... 8,769,711 4,799,932
LONG-TERM DEBT..................................... 87,500,000 27,454,567
SENIOR SUBORDINATED CONVERTIBLE NOTES.............. 13,223,844 --
DEFERRED INCOME TAXES.............................. 290,643 1,733,167
OTHER LIABILITIES.................................. 257,627 437,949
MINORITY INTEREST.................................. 1,089,044 957,369
STOCKHOLDERS' EQUITY
Preferred stock, $0.02 par, 20,000,000 shares
authorized, 266,667 designated Series B and
2,300,000 shares designated Series C, 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, 1,139,506 and 1,142,663 shares
issued and outstanding at December 31, 1999 and
December 31, 1998, respectively. $5,697,530
aggregate liquidation preference................ 5,198,440 5,281,937
Common stock, $.02 par value, 60,000,000 shares
authorized, 5,338,771 and 2,850,655 shares
issued at December 31, 1999 and December 31,
1998, respectively.............................. 106,778 57,016
Additional paid-in capital....................... 57,775,199 37,061,627
Accumulated deficit.............................. (27,408,062) (23,401,707)
Treasury stock; 7,258 shares..................... (1,186,718) (68,040)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY...................... 38,112,637 22,557,833
COMMITMENTS AND CONTINGENCIES
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $149,243,506 $57,940,817
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December
31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
REVENUE
Oil and gas sales and plant income................. $19,951,750 $15,011,354
Gain on sale of properties......................... 1,047,860 1,953,362
Delay rental and lease bonus income................ 64,911 217,404
Other.............................................. 955,545 520,458
----------- -----------
TOTAL REVENUE.................................... 22,020,066 17,702,578
----------- -----------
COSTS AND EXPENSES
Lease operating, production taxes and plant costs.. 6,727,948 7,801,249
Geological and geophysical......................... 199,499 877,643
Dry hole costs..................................... 624,780 503,444
Depreciation, depletion and amortization........... 6,690,961 7,116,116
Impairments........................................ 2,477,980 4,164,184
Interest........................................... 3,204,768 1,971,595
Stock compensation................................. 729,938 266,445
Severance payment.................................. 624,420 --
Compensation plan payment.......................... 292,527 --
General and administrative......................... 4,735,723 4,266,727
Other.............................................. 583,998 138,855
----------- -----------
TOTAL COSTS AND EXPENSES......................... 26,892,542 27,106,258
LOSS BEFORE INCOME TAX BENEFIT, MINORITY INTEREST AND
DIVIDENDS TO PREFERRED STOCKHOLDERS................. (4,872,476) (9,403,680)
Minority Interest.................................... 2,323 15,089
Income tax benefit................................... (1,442,524) (2,829,762)
----------- -----------
NET LOSS............................................. (3,432,275) (6,589,007)
Dividends to preferred stockholders.................. 574,080 67,945
----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS......... $(4,006,355) $(6,656,952)
=========== ===========
NET LOSS PER COMMON SHARE, basic and diluted......... $ (1.14) $ (2.48)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, basic and
diluted............................................. 3,519,532 2,683,369
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss........................................... $ (3,432,275) $ (6,589,007)
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation, depletion and amortization.......... 6,690,961 7,116,116
Impairments....................................... 2,477,980 4,164,184
Dry hole costs.................................... 624,780 503,444
Stock compensation expense........................ 729,938 266,445
Gain on sale of properties........................ (1,047,860) (1,953,362)
Deferred income taxes............................. (1,442,524) (2,829,762)
Minority interest................................. 2,323 15,089
Other charges..................................... 377,885 20,000
------------ ------------
Cash flow from operations before changes in current
assets and liabilities............................ 4,981,208 713,147
Changes in current assets and liabilities net of
acquisition effects:
Increase in accounts receivable and other current
assets........................................... (5,852,041) (185,887)
Increase in accounts payable, revenue payable and
other current liabilities........................ 2,272,159 1,541,025
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES....... 1,401,326 2,068,285
INVESTING ACTIVITIES
Payment for acquisition of 80% of Enex Corp., net
of cash acquired of $4,698,211................... -- (11,403,189)
Payment for acquisition of assets of Service
Drilling Co., LLC................................ -- (6,328,208)
Payment for acquisition of assets managed by Floyd
Oil Company...................................... (82,829,903) --
Proceeds from sales of oil and gas properties..... 6,230,420 4,812,326
Proceeds from sales of other assets............... 13,363 390,927
Additions to oil and gas assets................... (3,449,083) (4,100,252)
Additions to other assets......................... (509,773) (322,816)
Payments from (advances to) stockholder........... 173,115 (6,950)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES........... (80,371,861) (16,958,162)
FINANCING ACTIVITIES
Proceeds from issuance of debt.................... 91,036,000 32,469,604
Proceeds from issuance of senior subordinated
convertible notes................................ 13,223,844 --
Proceeds from issuance of common stock............ 12,465,591 --
Principal payments on debt........................ (30,990,568) (16,105,287)
Preferred stock dividends......................... (245,029) (67,945)
Partnership distributions......................... -- (1,348,098)
Debt, common stock and preferred stock issue and
registration costs............................... (1,418,246) (605,485)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES....... 84,071,592 14,342,789
Net increase (decrease) in cash and cash
equivalents....................................... 5,101,057 (547,088)
Cash and cash equivalents-Beginning................ 1,040,096 1,587,184
------------ ------------
Cash and cash equivalents-Ending................... $ 6,141,153 $ 1,040,096
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.......................................... $ 3,269,354 $ 1,657,362
============ ============
Income taxes...................................... -- --
============ ============
Non-cash investing and financing activities:
Preferred dividends incurred but not paid......... $ 329,051 --
============ ============
Common stock issued for acquisition of oil and gas
properties from W/E LLC.......................... $ 875,000 --
============ ============
Common stock repurchase contingency accrual....... $ 1,118,678 --
============ ============
Common stock issued in asset acquisition from
Floyd Oil Company................................ $ 6,992,587 --
============ ============
Common stock issued as finders fee in Enex
Resources Corp. tender offer..................... -- $ 245,232
============ ============
Common stock issued in asset acquisition from
Service Drilling Corp., LLC...................... -- $ 3,554,774
============ ============
Present value of consulting agreement of former
president of Enex Resources Corp................. -- $ 788,563
============ ============
Preferred stock issued in acquisition of Enex
Consolidated Partners, LP........................ -- $ 5,713,317
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Preferred Stock
-----------------------------------------------------------------
Series A Series B Series C Common Stock Unearned
----------------------- ------------------ --------------------- ------------------ Paid-in Stock
Shares Par Shares Par Shares Par Shares Par Capital Compensation
---------- ----------- ------- ---------- --------- ---------- --------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance January
1, 1998......... 1,666,667 10,000,000 266,667 3,627,000 -- -- 1,506,269 30,128 23,089,563 (67,500)
Preferred Series
A conversion.... (1,666,667) (10,000,000) 1,111,111 22,222 9,977,778
Common shares
issued as
finders fee in
Enex Corp.
tender offer.... 11,275 226 245,006
Asset
acquisition of
Service Drilling
Co., LLC........ 222,000 4,440 3,550,334
Restricted stock
awards earned... 67,500
Warrant issued
as
compensation.... 198,946
Preferred Series
C issued in Enex
Consolidated
Partners, LP
acquisition..... 1,142,663 5,713,317
Preferred Series
C registration
costs........... -- (431,380)
Net Loss........
Preferred stock
dividends.......
---------- ----------- ------- ---------- --------- ---------- --------- -------- ----------- -------
Balance January
1, 1999......... -- -- 266,667 3,627,000 1,142,663 5,281,937 2,850,655 57,016 37,061,627 --
Preferred Series
C registration
costs........... (67,711)
Common stock and
warrants issued
to W/E Energy
Company, LLC.... 1,585,185 31,703 10,668,297
Common stock and
warrants issued
to related
party........... 22,222 444 149,556
Common stock and
warrants issued
to The
Prudential
Insurance Co. of
America......... 351,680 7,034 2,366,810
Common stock
issued in asset
acquisition from
Floyd Oil
Company......... 503,426 10,069 6,982,518
Stockholder
dissenters
repurchase
contingency.....
Common stock
registration
costs........... (365,571)
Preferred Series
C conversions... (13,157) (65,786) 4,103 82 65,704
Preferred Series
C issued as
consulting fee.. 10,000 50,000
Employee stock
option plan
expense......... 729,938
Employee stock
option
exercises....... 21,500 430 116,320
Net Loss........
Preferred stock
dividends.......
---------- ----------- ------- ---------- --------- ---------- --------- -------- ----------- -------
Balance December
31, 1999........ -- $ -- 266,667 $3,627,000 1,139,506 $5,198,440 5,338,771 $106,778 $57,775,199 $ --
========== =========== ======= ========== ========= ========== ========= ======== =========== =======
<CAPTION>
Accumulated Treasury Stockholders'
Deficit Stock Equity
------------- ------------ -------------
<S> <C> <C> <C>
Balance January
1, 1998......... (16,744,755) (68,040) 19,866,396
Preferred Series
A conversion.... --
Common shares
issued as
finders fee in
Enex Corp.
tender offer.... 245,232
Asset
acquisition of
Service Drilling
Co., LLC........ 3,554,774
Restricted stock
awards earned... 67,500
Warrant issued
as
compensation.... 198,946
Preferred Series
C issued in Enex
Consolidated
Partners, LP
acquisition..... 5,713,317
Preferred Series
C registration
costs........... (431,380)
Net Loss........ (6,589,007) (6,589,007)
Preferred stock
dividends....... (67,945) (67,945)
------------- ------------ -------------
Balance January
1, 1999......... (23,401,707) (68,040) 22,557,833
Preferred Series
C registration
costs........... (67,711)
Common stock and
warrants issued
to W/E Energy
Company, LLC.... 10,700,000
Common stock and
warrants issued
to related
party........... 150,000
Common stock and
warrants issued
to The
Prudential
Insurance Co. of
America......... 2,373,844
Common stock
issued in asset
acquisition from
Floyd Oil
Company......... 6,992,587
Stockholder
dissenters
repurchase
contingency..... (1,118,678) (1,118,678)
Common stock
registration
costs........... (365,571)
Preferred Series
C conversions... --
Preferred Series
C issued as
consulting fee.. 50,000
Employee stock
option plan
expense......... 729,938
Employee stock
option
exercises....... 116,750
Net Loss........ (3,432,275) (3,432,275)
Preferred stock
dividends....... (574,080) (574,080)
------------- ------------ -------------
Balance December
31, 1999........ $(27,408,062) $(1,186,718) $38,112,637
============= ============ =============
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(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 20,
1992. The Company was reincorporated in Delaware on December 7, 1999 and
changed its name to 3TEC Energy Corporation. The reincorporation and name
change were part of a series of transactions related to a securities purchase
agreement that closed on August 27, 1999 between the Company and W/E Energy
Company, LLC ("W/E LLC") formerly known as 3TEC Energy Company, LLC, whereby
the Company received $21.4 million in cash and oil and natural gas properties
for the sale of common stock, warrants and debt securities (See Note 3).
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 80% of Enex. Effective
April 16, 1998, the Company acquired the oil and gas 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. Effective November
23, 1999, the Company acquired oil and natural gas properties and interests
managed by Floyd Oil Company ("Floyd Oil Company ") from a group of private
sellers. The Company is engaged in the acquisition, development, production and
exploration of oil and natural gas in the contiguous United States. The Company
considers its business to be a single operating segment.
Significant Accounting Policies
The Company's accounting policies reflect industry standards and conform to
generally accepted accounting principles. The more significant of such policies
are described below.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries and Enex, an 80% owned subsidiary. The equity of
the minority interests in Enex is shown in the consolidated financial
statements as "minority interest". All significant intercompany balances and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company classifies all
cash investments with original maturities of three months or less as cash.
Oil and Gas Property
The Company follows the successful efforts method of accounting for oil and
natural gas properties, and accordingly, capitalizes all direct costs incurred
in connection with the acquisition, drilling and development of productive oil
and natural gas properties. Costs associated with unsuccessful exploration are
charged to expense currently. Geological and geophysical costs and costs of
carrying and retaining unevaluated properties are charged to expense.
Depreciation, depletion and amortization of capitalized costs are computed
separately for each field based on the unit-of-production method using only
proved oil and natural gas reserves. In arriving at such rates, commercially
recoverable reserves have been estimated by independent petroleum engineering
firms. The Company reviews its undeveloped properties continually and charges
them to expense on a property by
F-7
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
property basis when it is determined that they have been condemned by dry
holes, or have otherwise diminished in value. The Company recorded impairments
of $1.5 million on its undeveloped properties, principally fee minerals and
non-producing leasehold costs, for the year ended December 31, 1999. Gains and
losses are recorded on sales of interests in proved properties and on sales of
entire interests in unproved properties. For the years ended December 31, 1999
and 1998, the Company realized gains on sales of properties of $1.0 million
and $2.0 million, respectively.
Proved oil and natural gas reserves are the estimated quantities of oil,
natural gas and natural gas liquids which are expected to be recoverable in
future years from known reservoirs under existing economic and operating
conditions. Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation tests.
The Company reviews long-lived assets for impairment when events or changes
in circumstances indicate that the carrying value of such an asset may not be
recoverable. This review consists of a comparison of the carrying value of the
asset to the asset's expected future undiscounted cash flows. Estimates of
expected future cash flows represent management's best estimate based on
reasonable and supportable assumptions and projections. If the expected future
cash flows, assuming escalated prices, are less than the carrying value of the
asset, an impairment exists and is measured as the excess of the carrying
value over the estimated fair value of the asset. The Company estimates
discounted future net cash flows to determine fair value. Any impairment
provisions recognized are permanent and may not be restored in the future. For
the years ended December 31, 1999 and 1998, the Company's proved properties
were assessed for impairment on an individual field basis and the Company
recorded impairment provisions on certain producing properties of $1.0 million
and $4.1 million, respectively.
Site Restoration, Dismantlement and Abandonment Costs
Site restoration, dismantlement and abandonment costs (P&A costs) are
common in the oil and natural gas industry. P&A costs are costs associated
with removing the facilities and equipment required to operate a well and
restoring the well site to specified conditions. P&A costs are incurred when
the oil and natural gas reserves of a well or wells are depleted or when
production drops to the point that it is no longer economically feasible to
produce.
The Company, in conjunction with its independent engineers and the
operators of the wells, continually reviews its working interests with respect
to potential P&A costs. Estimated P&A costs (net of estimated salvage value)
are amortized through depletion using the unit-of-production method.
As of December 31, 1999 and 1998, the Company's estimated P&A costs were
approximately $495,000.
Other Property and Equipment
Other property and equipment are stated at cost and depreciation is
computed on the straight line method over estimated lives ranging from five to
seven years. Additions and betterments which provide benefits to several
periods are capitalized.
Environmental Liabilities
Environmental expenditures that relate to current or future revenues are
expensed or capitalized as appropriate. Expenditures that relate to an
existing condition caused by past operations, and do not contribute to current
or future revenue generation, are expensed. Liabilities are recorded when
environmental assessments
F-8
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
and/or clean-ups are probable, and the costs can be reasonably estimated.
Generally, the timing of these accruals coincides with the Company's commitment
to a formal plan of action.
As of December 31, 1999, the Company had accrued estimated environmental
costs of approximately $250,000.
Revenue
Oil and natural gas revenues are recorded using the sales method, whereby
the Company recognizes revenues based on the amount of oil and natural gas sold
to purchasers on its behalf. At December 31, 1999 and 1998, the Company's net
imbalance position was immaterial.
Hedging
The Company periodically enters into derivative contracts to hedge the risk
of future oil and natural gas price fluctuations. Such contracts may either fix
or support oil and natural gas prices or limit the impact of price fluctuations
with respect to the Company's sales of oil and natural gas.
The Company uses the hedge or deferral method of accounting for derivative
contracts and, as a result, gains and losses on commodity derivative financial
instruments are generally offset by similar changes in realized prices of
commodities. In order to qualify as hedges, price movements in the underlying
commodity derivative must be highly correlated with the hedged commodity. Gains
and losses on such hedging activities are recognized in oil and natural gas
production revenues when hedged production is sold. If a derivative ceases to
qualify as a hedge, changes in fair value of the derivative instrument are
recognized in earnings currently.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes under which deferred tax assets and liabilities are determined by
applying enacted statutory tax rates applicable to future years to the
difference between the financial statement and tax basis of assets and
liabilities. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized as part of the provision for income taxes in the period
that includes the enactment date.
Stock Based Compensation
The Company accounts for stock-based compensation under the intrinsic value
method. Under this method, the Company records no compensation expense for
stock options granted when the exercise price of options granted is equal to or
greater than the fair market value of the Company's common stock on the date of
grant.
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 reflects dilution from all potential common shares,
including options, warrants and convertible preferred stock and notes. Diluted
loss per share does not include the effect of any potential common shares if
the effect would be to decrease the loss per share.
All share and per share amounts have been retroactively adjusted for a one-
for-three reverse split that was approved on January 14, 2000 (See Note 14).
F-9
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
Concentrations of Market Risk
The future results of the Company will be affected by the market prices of
oil and natural gas. The availability of a ready market for oil and natural
gas in the future will depend on numerous factors beyond the control of the
Company, including weather, production of other oil and natural gas, imports,
marketing of competitive fuels, proximity and capacity of oil and natural gas
pipelines and other transportation facilities, any oversupply or undersupply
of oil and natural gas, the regulatory environment, and other regional and
political events, none of which can be predicted with certainty.
Concentrations of Credit Risk
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of cash and accounts receivable. The Company places its
cash investments with high credit qualified financial institutions. Risk with
respect to receivables is concentrated primarily in the current production
revenue receivable from multiple oil and natural gas producers, both major and
independent, and is typical in the industry. No single customer accounted for
greater than 10% of the Company's total oil and natural gas sales for the
years ended December 31, 1999 and 1998.
Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 standardizes the accounting
for and disclosures of derivative instruments, including certain derivative
instruments embedded in other contracts. The statement is effective for
financial statements for periods beginning after June 15, 2000. The Company
has not yet determined the impact of the Statement on its financial condition
or results of operations.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities to prepare the financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
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 $15.9 million. 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 11,275 shares of Company
common stock for finders fees to unrelated third parties. At the time, Enex
was general partner of the Enex Partnership, a New Jersey limited partnership
whose principal business is oil and natural gas exploration and production.
Enex's general partner interest in the Enex Partnership was 4.1%. Enex also
owned an approximate 56.2% limited partner interest in the Enex Partnership.
As part of the Enex Acquisition, the Company entered into a consulting
agreement, effective April 15, 1998, with the former president of Enex that
provides for monthly payments of $20,000 until expiration of the
F-10
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
agreement on May 18, 2002. The monthly payments serve as consideration for
consulting, a covenant not to compete and a preferential right to purchase
certain oil and natural gas acquisitions which the former president controls or
proposes to acquire during the term of the agreement. The Company will
reimburse the former president each month for reasonable and necessary business
expenses incurred in connection with the performance of consulting services.
The agreement survives the former president and his spouse and is
nonassignable. At December 31, 1999 and 1998, the present value of the
agreement, applying a 10% discount, was approximately $497,627 and $677,949,
respectively. The long-term portion of the agreement is classified as other
liabilities in the financial statements.
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 natural gas properties.
The allocation of the purchase price is summarized as follows: (in
thousands)
<TABLE>
<S> <C>
Working capital.................................................. $ 5,640
Oil and natural 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
natural gas assets of Service Drilling, in exchange for 222,000 shares of
Company common stock and $6.5 million in cash for a total acquisition cost of
$10.0 million, 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 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 1,293,522 Series C shares for its
56.2% ownership of the Enex Partnership. The remaining 883,959 Series C shares
were issued to the limited partners that elected to take Series C shares in
lieu of cash. 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 in the consolidated financial statements at December 31, 1999 and
1998.
F-11
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
The intent of the Exchange Offer was to acquire the 43.8% of the outstanding
limited partner units that the Company did not currently own. The tables below
present the consideration paid for 100% of the Enex Partnership and for the
43.8% of the Enex Partnership not owned by Enex.
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>
Since 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 $5.7 million,
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
attributable to the 43.8% of the Enex Partnership based on estimates of the
fair values with the remaining purchase price allocated to proved oil and
natural gas properties. The registration costs of approximately $431,000
reduced the value of the Series C shares issued. Because the Enex Partnership
was consolidated in the financial statements of the Company as of the effective
date of October 1, 1998, the preliminary 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 natural gas properties...................................... (23)
Minority interest................................................... 5,844
------
Series C Preferred Stock.......................................... $5,282
======
</TABLE>
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. Prior to the acquisition,
there was no relationship between Floyd C. Wilson, President of the Company and
Floyd Oil 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.
F-12
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
The following pro forma data presents the results of the Company for the
years ended December 31, 1999 and 1998, as if the acquisitions of Enex,
Service, Enex Partnership and Floyd Oil 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 natural gas revenues, production costs,
depreciation and depletion related to the properties and businesses acquired,
preferred stock dividends on preferred stock issued, interest expense on debt
issued and the related income tax effects (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Pro Forma
---------------
1999 1998
------- -------
(Unaudited)
<S> <C> <C>
Total revenues............................................ $55,735 $55,299
Net income (loss) attributable to common stockholders..... 2,413 (4,725)
Net income (loss) per share attributable to common
stockholders
Basic................................................... 0.45 (0.89)
Diluted................................................. 0.41 (0.89)
</TABLE>
(3) COMMON STOCK, WARRANT AND SENIOR SUBORDINATED CONVERTIBLE NOTE SALE TO W/E
ENERGY COMPANY, L.L.C. ("W/E LLC")
On August 27, 1999, the Company closed a Securities Purchase Agreement (the
"Agreement") for a total of $21.4 million with W/E Energy Company, LLC ("W/E
LLC"). 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 W/E LLC 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 $9.8 million
in cash and properties valued at $875,000 for 1,585,185 shares of common stock
and 1,200,000 warrants (the "Warrants") and $10.7 million for a 5-year senior
subordinated convertible note with a face value of $10.7 million (See Note 7).
At closing, W/E LLC became the Company's largest shareholder with current
ownership of approximately 30% of the current outstanding shares of common
stock.
(4) RELATED PARTY TRANSACTIONS
The Company had a note receivable from Bay City Energy Group, Inc., a
shareholder of the Company, as of December 31, 1998 in the amount of $173,115.
In conjunction with the sale of securities to W/E LLC (See Note 3) in August,
1999, the note and all accrued interest was paid in full. The principal balance
of the note accrued interest at 5% annually and was due January 1, 2001. The
note was secured by 25,000 shares of Company common stock. Interest of $34,110
was accrued on the note as of December 31, 1998.
The Company rents office space from C.J. Lett III, a shareholder and former
officer and director of the Company. The rent is $3,000 per month for three
years through February, 2000. Mr. Lett has common stock ownership in two oil
service companies that provide services to the Company. The Company paid
approximately $117,000 and $203,000 to these companies for the years ended
December 31, 1999 and 1998, respectively.
F-13
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
David B. Miller and D. Martin Phillips, directors of the Company, are
managing directors of EnCap Investments, which is the controlling person of
W/E LLC which owns approximately 30% of the common stock of the Company,
excluding shares attributable to the warrants and convertible notes, as of
December 31, 1999. Gary R. Christopher, a shareholder and director of the
Company, is employed by Kaiser-Francis Oil Co., which owns approximately 21%
of the common stock of the Company as of December 31, 1999.
(5) 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 $1.9
million 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 $1.4 million. 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 at December 31, 1998.
(6) LONG-TERM DEBT
Long-term debt at December 31, 1999 and 1998, consisted of the following
(in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
$250 million Credit Facility................................ $87,500 $ --
$100 million Revolver....................................... -- 27,455
------- -------
Total....................................................... 87,500 27,455
Less current maturities..................................... -- --
------- -------
Long term debt excluding current maturities............... $87,500 $27,455
======= =======
</TABLE>
Concurrent with the Floyd Oil Acquisition, the Company entered into a $250
million credit facility (the "Facility") with Bank One, Texas, NA as agent and
four other banks. The Company's borrowing base has been initially set at $95
million with $87.5 million outstanding at December 31, 1999. The borrowing
base will be redetermined semi-annually on May 1 and November 1. Interest
under the Facility accrues at a rate calculated at the Company's option as
either the bank's prime rate plus 25 basis points or LIBOR plus basis points
increasing from a low of 125 to a high of 187.5 as loans outstanding increase
as a percentage of the borrowing base. As of December 31, 1999, the Company
was paying 8.08% per annum interest on $82.5 million and 8.36% per annum
interest on $5 million of the principal balance of the Facility. The loan
matures on November 30, 2002. Prior to maturity, no payments of principal are
required so long as the borrowing base exceeds the loan balance. The
borrowings under the Facility are secured by substantially all of the
Company's oil and natural gas properties.
The Facility requires an interest coverage ratio of two and a half to one
(2.5:1) determined on a quarterly basis prior to the quarter ending September
30, 2000 and each four quarter period thereafter, and a current ratio,
excluding current maturities of the Facility, of one to one (1:1) , determined
on a quarterly basis.
The Facility also requires certain other affirmative and negative covenants
including, but not limited to:
. Use of all proceeds from sales of oil and natural gas properties for the
repayment of the outstanding debt.
F-14
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
. Prohibits the declaration or payment of any cash dividend; purchase,
redeem or otherwise acquire for value any outstanding stock; return
capital to stockholders; or make any distribution of assets to
stockholders, except for dividends on Series C Preferred Stock and
redemption of Series C Preferred Stock under certain circumstances.
. Agree not to enter into any hedge transactions except with the bank's
consent and for certain pre-approved hedging activities in connection
with oil and natural gas properties.
Events of default under the Facility include a final judgement or order in
excess of $1 million, a change of control of the Company or Floyd C. Wilson
ceasing to act as President and Chief Executive Officer.
Aggregate amounts of expected required repayments of long term debt at
December 31 are as follows (in thousands):
<TABLE>
<S> <C>
2000.............................................................. $ --
2001.............................................................. --
2002.............................................................. 87,500
Thereafter........................................................ --
-------
Total........................................................... $87,500
=======
</TABLE>
(7) SENIOR SUBORDINATED CONVERTIBLE NOTES
On August 27, 1999, senior subordinated convertible promissory notes (the
"Senior Notes") were sold to W/E LLC and affiliates of Alvin V. Shoemaker
("Shoemaker"), a former director and significant shareholder, for $10.7 million
and $150,000, respectively. On October 19, 1999, $2.4 million of Senior Notes
were sold to The Prudential Insurance Company of America ("Prudential"). The
Senior Notes bear interest at an annual rate of 9%. Interest is payable
beginning on December 31, 1999, every March 31, June 30, September 30 and
December 31, until maturity on August 27, 2004. 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. The holders of the Senior Notes 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 $9.00 per common
share, a total of 1,469,316 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 is immediately due and payable.
The Senior Notes rank senior in right of payment to all Company notes and
indebtedness other than the Facility.
(8) INCOME TAXES
Income tax benefit for the years ended December 31, 1999 and 1998 consisted
of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
------- -------
<S> <C> <C>
Current................................................. $ -- $ --
Deferred................................................ (1,443) (2,830)
------- -------
Total................................................. $(1,443) $(2,830)
======= =======
</TABLE>
F-15
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to the provision for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
------- -------
<S> <C> <C>
Income tax benefit at statutory rate................... $(1,656) $(3,202)
Increase (decrease) in valuation allowance............. (151) 860
Increase due to non-deductible stock compensation...... 248 --
Purchase price adjustment ............................. -- (508)
Other.................................................. 116 20
------- -------
Total................................................ $(1,443) $(2,830)
======= =======
</TABLE>
The Company's net deferred tax liability at December 31, 1999 and 1998 is as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Deferred tax liability
Oil and natural gas properties........................ $ 1,428 $ --
------- -------
Deferred tax asset
NOL carryforward...................................... (6,643) (4,057)
AMT tax credit carryforward........................... (36) (36)
Oil and natural gas properties........................ -- (19)
Other................................................. (547) ( 395)
------- -------
(7,226) (4,507)
Valuation allowance..................................... 6,089 6,240
------- -------
Net deferred tax liability.............................. $ 291 $ 1,733
======= =======
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
asset will not be realized. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Based upon projections for future taxable
income over the periods in which the deferred tax assets are deductible and the
Section 382 limitation discussed below, management believes it is more likely
than not that the Company will realize the benefits of these deductible
differences, net of the existing valuation allowances at December 31, 1999 and
1998.
The Enex Acquisition caused an ownership change pursuant to Section 382 in
March 1998. As a result of this ownership change, the Company's use of its net
operating loss carryforwards subsequent to that date will be limited. The Floyd
Oil Acquisition in November 1999 also caused an ownership change pursuant to
Section 382. As a result of this ownership change, the Company's use of its net
operating loss carryforwards subsequent to that date will be limited to
approximately $1.5 million per year.
As of December 31, 1999, the Company had net operating loss carryforwards of
approximately $20 million, expiring beginning in 2009 through 2019.
(9) RETIREMENT PLAN AND EMPLOYEE INCENTIVE PLAN
All of the employees of the Company are eligible to participate in a defined
contribution plan that provides for maximum discretionary employee
contributions of 15% of total wages paid to employees for the year and Company
contributions. No Company contributions were made to the plan for the years
ending December 31, 1999 and 1998.
F-16
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
In March 1995, the Board of Directors adopted an employee incentive
compensation plan (the "Plan") for the benefit of Company employees. The Plan
benefits were equal to one percent (1%) of the annual net profit from oil and
natural gas properties acquired or discovered on or after January 1, 1994 and
one percent (1%) of the annual sales proceeds from any oil and natural gas
properties sold on or after January 1, 1994. The Compensation Committee of the
Board of Directors had sole authority regarding the amount and timing of
payment of any Plan benefits to eligible employees.
On August 27, 1999, the Company paid $274,625 to the eligible participants
in the Plan and terminated the Plan pursuant to the terms of the W/E LLC
agreement. The payment was equal to 100% of the Plan benefits through August
27, 1999. The entire amount of the payment, including associated taxes of
$17,902, was recognized during the year ended December 31, 1999. Prior to the
Compensation Committee's authorization, the Plan benefits were not accrued as
an expense in the financial statements because the likelihood that the
Compensation Committee would determine that the benefits would be payable to
eligible employees was less than probable.
(10) STOCK OPTION PLANS
At December 31, 1999, the Company had two fixed stock option plans, the 1995
Stock Option and Stock Appreciation Rights Plan (the "1995 Plan") and the 1999
Stock Option Plan (the "1999 Plan"). As discussed in Note 1, for the years
ended December 31, 1999 and 1998, no compensation cost has been recognized,
relating to stock options issued, as the exercise price of each option equals
the market price of the Company's common stock on the date of grant. Had
compensation cost for the Company's 1995 Plan been determined based on the fair
value at the grant date for stock options granted for the years ending December
31, 1999 and 1998, the Company's net loss and loss per share would have been
increased to the pro forma amounts listed below (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
------- -------
<S> <C> <C>
Net loss
As Reported.......................................... $(4,006) $(6,657)
Pro Forma............................................ (4,110) (7,120)
Net loss per common share, basic and diluted
As Reported.......................................... $ (1.14) $ (2.48)
Pro Forma............................................ (1.17) (2.65)
</TABLE>
The weighted average fair value of stock options granted during 1999 and
1998 was $2.40 and $8.91 per share, respectively. The fair value of each option
is estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions used for the grants in 1999 and 1998; no
dividend yield; expected volatility of 77%; weighted average risk-free interest
rate of 4.78% and 4.93%, respectively; and an expected life of 3 years. At
December 31, 1999, the range of exercise prices and weighted average remaining
contractual life of options outstanding was $4.50 to $23.25 and 2.81 years,
respectively.
At December 31, 1999 there were 157,300 and 500,000 shares of common stock
available for grant under the 1995 and 1999 Plans, respectively. All of the
options granted under the 1995 Plan expire five (5) years from the date of
grant if not exercised and are 100% vested. As of December 31, 1999, no options
have been issued under the 1999 Plan. The 1995 and 1999 Plans are administered
by the Compensation Committee of the Board of Directors.
F-17
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
On August 24, 1999, the Company amended the 1995 Plan due to the change in
control that resulted from the Agreement (See Note 3). The 1995 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 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 Agreement.
The extension of the exercise period of the employee stock options resulted
in a new measurement date and compensation expense, equal to the intrinsic
value of all of the outstanding options, of approximately $730,000, was
recognized as stock compensation.
Information relating to stock options and certain warrants is summarized
below:
<TABLE>
<CAPTION>
Average Exercise
Shares Price Per Share
------- ----------------
<S> <C> <C>
Options and warrants outstanding at January 1,
1998............................................. 201,389 $16.71
Granted........................................... 102,333 $16.71
-------
Options and warrants outstanding at December 31,
1998............................................. 303,722 $16.71
Granted........................................... 66,667 $ 4.50
Exercised......................................... (21,500) $ 5.43
Forfeited......................................... (12,967) $17.40
-------
Options and warrants outstanding at December 31,
1999............................................. 335,922 $15.00
=======
Options and warrants exercisable at December 31,
1999............................................. 335,922 $15.00
=======
</TABLE>
Options to acquire 75,000 shares of the Company common stock at an exercise
price of $16.50 were granted outside of the 1995 Plan on February 13, 1997 to
certain officers of the Company. Warrants to acquire 25,000 shares of the
Company common stock at an exercise price of $15.00 were granted outside of the
1995 Plan on September 15, 1998 to a consultant (See Note 11). Both grants are
included in the table above. Warrants to purchase 1,216,822 shares and 266,226
shares of common stock at $3.00 per share were issued on August 27, 1999 and
October 19, 1999, respectively, and are excluded from the table above because
the warrants were issued in conjunction with the sales of stock and are not
stock-based compensation.
(11) STOCKHOLDERS' EQUITY
Preferred Stock-Series A
On September 4, 1996, the Company signed a stock purchase agreement with
Kaiser Francis Oil Company ("Kaiser-Francis"). Kaiser-Francis agreed to
purchase 1,666,667 shares of Series A Preferred Stock ("Series A") at $6.00 per
share, for a total investment of $10 million. The parties agreed to a five-year
purchase period, effective September 4, 1996, with minimum incremental
investments of $500,000 each. Each issuance of Series A was subject to approval
by Kaiser-Francis of the use of proceeds. The Series A was nonvoting and
accrued dividends at 8% per annum, payable quarterly in cash. The Series A was
convertible at any time after issuance into shares of common stock at the rate
of 0.66 shares of common stock for each share of Series A before January 1,
1998. The conversion rate decreases for every full year (excluding partial
years) thereafter at 8% per annum. As of December 31, 1997, 1,666,667 shares of
the Series A had been issued. On January 31, 1998 Kaiser-Francis converted 100%
of the Series A into 1,111,111 common shares of the Company.
F-18
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
Preferred Stock--Series B
In connection with the merger of Shore Oil Company , effective June 30,
1997, the Company issued 266,667 shares of Series B Preferred Stock ("Series
B"). The Series B is nonvoting and pays no dividends. The Series B has a
liquidation value of $7.50 per share. Until December 31, 2002, any holder of
the Series B may convert all or any portion of Series B shares into Company
Common Stock ("Common") at the greater ratio of (i) three shares of Series B
for one share of Common or (ii) at a ratio based upon the "Alternative
Conversion Factor." The Alternative Conversion Factor is determined by dividing
the net increase in value of approximately 40,000 net mineral acres owned by
the Company in South Louisiana by $8,000,000 and multiplying the product by
355,333 to arrive at the potential number of total Common shares all holders
would receive upon conversion. In no event shall the aggregate total number of
shares of Common into which the Series B are converted be less than 88,889
shares or exceed 444,444 shares, unless further increased for any anti-dilution
provisions. Upon expiration of the conversion period, unless the Company has
given notice to redeem the Series B, all of the shares of the Series B shall be
automatically converted.
At December 31, 1999, the value of the fee minerals had increased to a level
that resulted in the Series B shares being convertible into an additional 1,891
common shares applying the Alternative Conversion Factor. At December 31, 1999,
none of the Series B had been converted.
Preferred Stock--Series C
In connection with the Enex Partnership Acquisition, on December 30, 1998,
the Company issued 2,177,481 shares of Series C Preferred Stock ("Series C") in
exchange for 100% of the Enex Partnership units. The holders of Series C are
entitled to receive cumulative cash dividends in an amount per share of $0.50
per year (10% annual rate), payable semi-annually on March 31 and September 30
of each year. These dividends are payable in preference to and prior to the
payment of any dividend or distribution to any holder of Company common stock
or other junior security. The Series C dividends began to accrue on December
30, 1998. The banks have granted the Company a waiver allowing the Company to
pay the dividends on the Series C as long as no default or event of default
exists or would exist as a result of any Series C dividend payment. The Series
C has a liquidation preference of $5.00 per share plus an amount equal to all
accumulated, accrued and unpaid dividends. The liquidation preference of Series
C ranks on parity with the Series B.
Each share of Series C is convertible into one-third share of Company common
stock. On or after January 1, 2000, the Company may redeem all or a portion of
the Series C, at its option, at a purchase price of $5.00 per share, plus an
amount equal to all accumulated, accrued and unpaid dividends.
The Series C is generally nonvoting; however, holders of Series C are
entitled to vote on any amendment, alteration or appeal of any provision of the
Company's Articles of Incorporation which would adversely affect any holder's
rights and preferences.
As a result of its limited partnership interest in the Enex Partnership,
Enex owns 1,293,522 shares of the Series C of which the Company owns 80%, or
1,034,818 shares through its 80% ownership of Enex.
Common Stock and Warrants
On August 27, 1999, the Company sold W/E LLC 1,585,185 shares of common
stock and five-year warrants to purchase 1,200,000 shares of common stock for
$9.8 million in cash and oil and natural gas properties valued at $875,000. On
the same date, the Company sold 22,222 shares of common stock and five-year
warrants to purchase 16,822 shares of common stock to Shoemaker for $150,000
(See Notes 3 and 7).
F-19
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
On October 19, 1999, the Company closed a private placement of securities to
Prudential. The economic terms and conditions of the private placement are
similar to those of the securities purchase agreement with W/E LLC and
Shoemaker entered into on July 1, 1999. The private placement consisted of the
sale of 351,681 shares of common stock and five-year warrants to purchase
266,226 shares at $3.00 per share of common stock for $2.4 million and a five-
year senior subordinated convertible note for $2.4 million (See Note 7).
The warrants issued to W/E LLC, Shoemaker and Prudential are exercisable for
$3.00 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 September 15, 1998 the Company entered into a consulting agreement with
Edward K. Andrew ("Andrew") for a term of five years beginning January 1, 1999.
As compensation, the Company granted to Andrew a warrant to purchase 25,000
shares of Company common stock at a price of $15.00. The warrants vested over
the period September 15, 1998 to January 1, 1999. The estimated fair value of
the warrants was determined at the date of grant and charged to stock
compensation expense over the vesting period.
On February 13, 1997, the Company awarded to certain officers 16,364 shares
of restricted stock of the Company. The restricted stock awards were contingent
on the performance of services to the Company in the future with 50% of the
restricted shares being earned over the six month period July 1, 1997 to
December 31, 1997 and 50% over the six month period January 1, 1998 to June 30,
1998. All restricted shares were earned and issued as of December 31, 1998.
Earnings Per Share
At December 31, 1999 and 1998, the Company had a weighted average of
1,149,476 and 283,297, combined stock options, warrants and convertible
preferred stock and notes outstanding, respectively, which were not included in
the computation of diluted earnings 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 December 31, 1999 and 1998, the Company had outstanding convertible
preferred stock that was convertible into 469,744 and 469,778 shares of common
stock, and dividends of $574,080 and $67,945, respectively, which were not
reflected in the computation of diluted earnings per share, because the effect
of the assumed conversion of these preferred shares would have an antidilutive
effect on the computation of diluted loss per share. At December 31, 1999, the
Company had $4,154,292 weighted average face value of convertible subordinated
notes that were convertible into 461,588 shares of common stock and interest
expense of $376,367, which were not reflected in the computation of diluted
earnings per share, because the effect of the assumed conversion of these
subordinated notes would have an antidilutive effect on the computation of
diluted loss per share.
(12) COMMITMENTS AND CONTINGENCIES
The Company is obligated under the terms of certain operating leases for
office space that continue through January 31, 2005. Total rent expense was
$267,337 and $268,477 for the years ended December 31, 1999 and 1998,
respectively. Future minimum rental payments under the Company's leases total
$309,372, $248,694, $194,016, $194,016 and $194,016 for the years ending
December 31, 2000 through 2004, respectively.
F-20
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
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
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 expects to make an offer to the
dissenters before March 10, 2000. Once the offer is made, the dissenters have
30 days to accept the offer or make a counteroffer. If the Company and the
dissenters cannot reach agreement on the fair value of the common shares
within 60 days of the dissenters' counteroffer, if any, the matter is then
moved to the Circuit Court of Washington County, Alabama for resolution. The
exact amount to be paid to the dissenters for their common shares cannot be
determined at this time. Based on the Company's closing stock price on
November 23, 1999 of $11.25 per share and accrued interest from November 23,
1999, the Company accrued the estimated cash payment to the dissenters of
approximately $1.1 million.
As of December 31, 1999, the Company had $55,000 of irrevocable standby
letters of credit outstanding.
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.
(13) FINANCIAL INSTRUMENTS
In April 1999, 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, respectively, for the months of May through October of 1999.
During the year ending December 31, 1999, the Company incurred hedging losses
of approximately $164,000. At December 31, 1999, the Company had no open
derivative instruments.
Fair value of cash, receivables and payables approximates carrying value.
Fair value of long-term debt also approximates carrying value due to the
nature of the Facility, whereby the interest rates are floating rates which
reflect market rates.
At December 31, 1999, the fair value of the $13.2 million senior
subordinated convertible notes was $13.1 million.
(14) SUBSEQUENT EVENTS
On January 14, 2000, the Company's stockholders voted to effect a one-for-
three reverse split of the Company's common stock for the stockholders of
record on December 9, 1999. The reverse stock split resulted in a decrease of
10,677,542 in the number of shares issued at December 31, 1999, 14,515 of
which are held in treasury. The par value of these shares was transferred to
additional paid-in capital. All common share and earnings per common share
amounts as of December 31, 1999 and 1998 have been retroactively restated in
the accompanying consolidated financial statements to reflect the reverse
stock split.
On February 3, 2000, the Company closed the acquisition of Magellan
Exploration, LLC ("Magellan"), a privately held Delaware limited liability
company, for an estimated purchase price of $18.3 million. In connection with
the acquisition, the Company issued 1,085,934 common shares and warrants to
purchase 333,333 shares of common stock with an exercise price of $30.00 per
share, which are exercisable for four years. The Company also issued 617,009
shares of Series D convertible preferred stock with a stated value of
F-21
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
$24.00 per share, dividend rate of 5% per annum with an option for three years
for the Company to pay the dividends in additional Series D shares and with
each Series D share convertible at any time into Company common stock on a one-
for-one basis. The Company may redeem the Series D shares upon 30 days written
notice and there are no rights of holders to "put" the Series D shares to the
Company. The owners of Magellan also received a 5% "Back-In" working interest
in twelve (12) exploration prospects.
(15) SUPPLEMENTAL OIL AND NATURAL GAS INFORMATION (UNAUDITED)
Capitalized Costs and Costs Incurred
The following tables present the capitalized costs related to oil and
natural gas producing activities and the related depreciation, depletion,
amortization and impairment as of December 31, 1999 and 1998 and costs incurred
in oil and natural gas property acquisition, exploration and development
activities (in thousands) for the years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Capitalized Costs
Proved properties...................................... $162,455 $84,325
Nonproducing leasehold................................. 6,385 6,524
Accumulated depreciation, depletion, amortization and
impairment............................................ (37,861) (38,810)
-------- -------
Net capitalized costs................................ $130,979 $52,039
======== =======
Costs Incurred
Proved properties...................................... $ 91,081 $28,878
Unproved properties.................................... 343 337
Exploration costs...................................... 824 1,802
Development costs...................................... 2,154 3,041
-------- -------
Total................................................ $ 94,402 $34,058
======== =======
Depletion, depreciation, amortization and impairment..... $ 9,067 $11,013
======== =======
</TABLE>
Estimated Quantities of Reserves
The Company has interests in oil and natural gas properties that are located
principally in Texas, Louisiana, Kansas, Oklahoma and New Mexico. The Company
does not own or lease any oil and natural gas properties outside the United
States. There are no quantities of oil and natural gas subject to long-term
supply or similar agreements with any governmental agencies.
The Company retains independent engineering firms to provide year-end
estimates of the Company's future net recoverable oil, natural gas and natural
gas liquids reserves. In 1999, such estimates were prepared by Ryder Scott
Company. In 1998, such estimates were prepared by Lee Keeling and Associates,
Inc. and H.J. Gruy & Associates, Inc.. The reserve information was prepared in
accordance with guidelines established by the Securities and Exchange
Commission.
Estimated proved net recoverable reserves as shown below include only those
quantities that can be expected to be commercially recoverable at prices and
costs in effect at the balance sheet dates under existing regulatory practices
and with conventional equipment and operating methods. Proved developed
reserves represent only those reserves expected to be recovered through
existing wells. Proved undeveloped reserves
F-22
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
include those reserves expected to be recovered from new wells or on undrilled
acreage or from existing wells on which a relatively major expenditure is
required for recompletion.
Net quantities of proved developed and undeveloped reserves of oil,
including condensate and natural gas liquids, for the years ended December 31,
1999 and 1998 are summarized as follows (in barrels):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Proved Reserves
Beginning of year................................. 3,342,048 2,933,000
Revisions of previous estimates................... 502,139 (277,291)
Extensions and discoveries........................ 12,667 103,506
Purchases of reserves in place.................... 6,865,638 1,254,663
Sales of reserves in place........................ (355,190) (90,373)
Production for the year........................... (531,881) (581,457)
--------- ---------
End of year..................................... 9,835,421 3,342,048
========= =========
Proved Developed Reserves
Beginning of year................................. 3,117,839 2,580,000
End of year....................................... 9,358,048 3,117,839
</TABLE>
Net quantities of proved developed and undeveloped reserves of natural gas
for the years ended December 31, 1999 and 1998 are summarized as follows (in
Mcf):
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Proved Reserves
Beginning of year.............................. 43,482,980 18,419,000
Revisions of previous estimates................ (5,135,492) (82,742)
Extensions and discoveries..................... 1,225,665 290,347
Purchases of reserves in place................. 126,556,624 30,997,247
Sales of reserves in place..................... (1,693,121) (2,294,193)
Production for the year........................ (4,737,656) (3,846,679)
----------- ----------
End of year.................................. 159,699,000 43,482,980
=========== ==========
Proved Developed Reserves
Beginning of year.............................. 36,731,365 14,251,000
End of year.................................... 122,914,000 36,731,365
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows From Proved Reserves
The following is a summary of the standardized measure of discounted future
net cash flows related to the Company's proved oil and natural gas reserves.
For these calculations, estimated future cash flows from estimated future
production of proved reserves are computed using oil and natural gas prices as
of the end of each period presented. Future development and production costs
attributable to the proved reserves were estimated assuming that existing
conditions would continue over the economic lives of the individual leases and
costs were not escalated for the future. Estimated future income taxes were
calculated by applying statutory tax rates (based on current law adjusted for
permanent differences and tax credits) to the estimated future pre-tax net
cash flows related to proved oil and natural gas reserves, less the tax basis
of the properties involved.
F-23
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
The Company cautions against using this data to determine the value of its
oil and natural gas properties. To obtain the best estimate of the fair value
of the oil and natural gas properties, forecasts of future economic conditions,
varying discount rates, and consideration of other than proved reserves would
have to be incorporated into the calculation.
The standardized measure of discounted future net cash flows relating to
proved oil and natural gas reserves for the years ended December 31, 1999 and
1998 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Future cash inflows.................................... $ 594,023 $133,549
Future production costs and development costs.......... (223,765) (62,085)
Future income tax expenses............................. (92,975) --
--------- --------
Future net cash flows.................................. 277,283 71,464
10% discount to reflect timing of cash flows........... (128,542) (32,570)
--------- --------
Standardized measure of discounted future net cash
flows................................................. $ 148,741 $ 38,894
========= ========
</TABLE>
The following are the principal sources of changes in the standardized
measure of discounted future net cash flows for the years ended December 31,
1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Sales of oil and natural gas, net of production cost..... $(13,224) $(7,210)
Net changes in prices and production cost................ 18,646 (5,459)
Extensions and discoveries............................... 1,945 732
Purchases of reserves.................................... 150,295 23,092
Sales of reserves........................................ (1,643) (1,528)
Revisions of previous quantity estimates................. (1,994) (1,573)
Net change in income taxes............................... (49,874) 2,712
Accretion of discount.................................... 3,889 3,635
Changes in production rates (timing) and other........... 1,807 --
-------- -------
End of year.............................................. $109,847 $14,401
======== =======
</TABLE>
During recent years, there have been significant fluctuations in the prices
paid for oil in the world markets. The situation has had a destabilizing effect
on posted prices for oil in the United States, including the posted prices paid
by purchasers of the Company's oil. The period end prices of oil and natural
gas at December 31, 1999 and 1998, used in the above table were $23.64 and
$9.50 per barrel of oil and $2.23 and $2.10 per thousand cubic feet of natural
gas, respectively.
F-24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
3TEC Energy Corporation:
We have audited the accompanying statements of revenues and direct operating
expenses for the nine months ended September 30, 1999, and for the year ended
December 31, 1998, for the Floyd Oil Properties (as described in Note 1). These
statements are the responsibility of 3TEC Energy Corporation's management. Our
responsibility is to express an opinion on these statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying statements were prepared as described in Note 2 for the
purpose of complying with certain rules and regulations of the Securities and
Exchange Commission ("SEC") for inclusion in certain SEC regulatory reports and
filings and are not intended to be a complete financial presentation.
In our opinion, the statements referred to above present fairly, in all
material respects, the revenues and direct operating expenses of the Floyd Oil
Properties for the nine months ended September 30, 1999, and for the year ended
December 31, 1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Houston, Texas
December 30, 1999
F-25
<PAGE>
THE FLOYD OIL PROPERTIES
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
(In thousands)
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Revenues:
Oil revenues....................................... $10,520 $ 8,558
Gas revenues....................................... 22,790 17,563
Plant product revenues............................. 757 652
------- -------
34,067 26,773
------- -------
Direct operating expenses:
Lease operating expenses........................... 12,748 8,861
Production taxes................................... 1,869 1,390
------- -------
Direct operating expenses.......................... 14,617 10,251
------- -------
Revenues in excess of direct operating expenses...... $19,450 $16,522
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE>
THE FLOYD OIL PROPERTIES
NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
1. The Properties
On November 23, 1999, 3TEC Energy Corporation ("3TEC Energy"), formerly
known as Middle Bay Oil Company, Inc., acquired certain oil and gas properties
and interests (the "Floyd Oil Properties") from Floyd Oil Company ("Floyd") and
certain partnerships and other entities managed or sponsored by Floyd
(collectively, the "Sellers") for a purchase price of approximately $87 million
in cash and 1.5 million shares (prior to the planned 1 for 3 reverse stock
split) of 3TEC Energy's common stock. The effective date of the transaction was
January 1, 1999. The majority of the Floyd Oil Properties are located in Texas
and Louisiana.
2. Basis of Presentation
During the periods presented, the Floyd Oil Properties were not accounted
for or operated as a separate division by Floyd. Information with respect to
depreciation, depletion and amortization is not available for the Floyd Oil
Properties. General and administrative expenses incurred by Floyd were not
allocated to the Floyd Oil Properties. The Sellers were not taxpaying entities,
and therefore income tax information with respect to the Floyd Oil Properties
is not available. Accordingly, full separate financial statements prepared in
accordance with generally accepted accounting principles do not exist and are
not practicable to obtain in these circumstances.
Revenues and direct operating expenses included in the accompanying
statements represent the Sellers' net working and royalty interests in the
Floyd Oil Properties and are presented on the accrual basis of accounting.
Depreciation, depletion and amortization, allocated general and administrative
expenses and income tax expense have been excluded.
The statements presented are not indicative of the future results of
operations of the Floyd Oil Properties due to anticipated changes in various
operating expenses and the omission of other costs as discussed above.
3. Commitments and Contingencies
The management of 3TEC Energy is not aware of any legal, environmental or
other commitments or contingencies that would be materially important in
relation to the revenues and direct operating expenses of the Floyd Oil
Properties.
4. Related Party Transactions
An affiliate of Floyd operated certain oil and gas wells included in the
Floyd Oil Properties. Fees related to such wells in the amount of $460,000 were
charged to the Floyd Oil Properties during the year ended December 31, 1998,
and $353,700 for the nine month period ended September 30, 1999. These fees are
reflected in direct operating expenses in the accompanying statements.
5. Capital Expenditures (Unaudited)
Direct operating expenses do not include exploration and development
expenditures related to the Floyd Oil Properties which totaled $4.1 million for
the year ended December 31, 1998, and $2.6 million for the nine month period
ended September 30, 1999.
6. Supplemental Oil and Gas Reserve Information (Unaudited)
Total proved and proved developed oil and gas reserves of the Floyd Oil
Properties at December 31, 1998 have been estimated based on reserve estimates
prepared by Ryder Scott Company Petroleum Engineers as of September 30, 1999,
adjusted for production from December 31, 1998 to September 30, 1999.
Comparable
F-27
<PAGE>
THE FLOYD OIL PROPERTIES
NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES--(Concluded)
estimates were not readily available for subsequent or prior periods.
Therefore, reserves for December 31, 1998 have been calculated by adjusting the
September 30, 1999 amounts for the period's activities and, consequently, no
revisions of previous estimates have been reflected. All reserve estimates are
based on economic and operating conditions existing at September 30, 1999. The
future net cash flows from production of these proved reserve quantities were
computed by applying current prices of oil and gas, averaging $22.44 per barrel
of oil and $2.75 per thousand cubic foot of gas (with consideration of price
changes only to the extent provided by contractual arrangements) as of
September 30, 1999 to estimated future production of proved oil and gas
reserves less the estimated future expenditures (based on current costs) as of
September 30, 1999, to be incurred in developing and producing the proved
reserves. As discussed above, income tax information for the Floyd Oil
Properties is not available and therefore is not presented.
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
1998 1999
--------------- ---------------
Oil Gas Oil Gas
(Mbbl) (MMcf) (Mbbl) (MMcf)
------ ------- ------ -------
<S> <C> <C> <C> <C>
Proved reserves:
Beginning of year....................... 8,328 151,761 7,477 140,780
Production.............................. (851) (10,981) (565) (8,078)
----- ------- ----- -------
End of period........................... 7,477 140,780 6,912 132,702
----- ------- ----- -------
Proved developed reserves:
Beginning of year....................... 7,879 114,588 7,028 103,607
----- ------- ----- -------
End of period........................... 7,028 103,607 6,463 95,529
===== ======= ===== =======
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Reserves as of September 30, 1999 (in thousands):
<TABLE>
<S> <C>
Future cash inflows........................................... $ 473,020
Future production costs....................................... (125,021)
Future development costs...................................... (22,519)
---------
Future net inflows before income taxes........................ 325,480
10% discount factor........................................... (154,320)
---------
Standardized measure of discounted future net cash flows
before income taxes.......................................... $ 171,160
=========
</TABLE>
Changes to Standardized Measure of Discounted Future Net Cash Flows Relating
to Proved Reserves for the Nine Month Period Ended September 30, 1999 (in
thousands):
<TABLE>
<S> <C>
Standardized measure, beginning of year......................... $175,970
Sales, net of production costs................................ (16,522)
Net change in future development costs........................ 2,612
Accretion of discount......................................... 9,100
--------
Standardized measure, end of period............................. $171,160
========
</TABLE>
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
C. W. Resources, Inc.:
We have audited the accompanying statement of revenues and direct operating
expenses for the year ended December 31, 1999 for CWR Properties (as described
in note 1). This statement is the responsibility of C. W. Resources, Inc.'s
management. Our responsibility is to express an opinion on this statement based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
The accompanying statement was prepared as described in note 2 for the
purpose of complying with certain rules and regulations of the Securities and
Exchange Commission (SEC) for inclusion in certain SEC regulatory reports and
filings and is not intended to be a complete financial presentation.
In our opinion, the statement referred to above presents fairly, in all
material respects, the revenues and direct operating expenses of CWR Properties
for the year ended December 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
Houston, Texas
April 21, 2000
F-29
<PAGE>
CWR PROPERTIES
STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
For the year ended December 31, 1999
<TABLE>
<S> <C>
Revenues:
Oil revenues....................................................... $ 954,121
Gas revenues....................................................... 8,495,871
Gas gathering revenues............................................. 294,715
----------
9,744,707
----------
Direct operating expenses:
Lease operating expenses........................................... 1,974,219
Production taxes................................................... 173,353
----------
2,147,572
----------
Revenues in excess of direct operating expenses.................. $7,597,135
==========
</TABLE>
See accompanying notes to the statement of revenues and direct operating
expenses.
F-30
<PAGE>
CWR PROPERTIES
NOTES TO STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
December 31, 1999
(1) Basis of Presentation
The accompanying financial statement presents the revenues and direct
operating expenses of oil and gas properties (the CWR Properties) to be
acquired by 3TEC Energy Corporation from C. W. Resources, Inc. and its related
parties, Westerman Royalty, Inc. and Carl A. Westerman. The CWR Properties are
located in East Texas.
The accompanying financial statement was derived from the historical
accounting records of C. W. Resources, Inc. Direct operating expenses include
lease and well repairs, maintenance and other direct operating expenses.
Memorandum adjustments have been made to the financial information in order to
present the accompanying financial statement in accordance with generally
accepted accounting principles.
C. W. Resources, Inc. has made a number of estimates and assumptions
relating to the preparation of the financial statement in conformity with
generally accepted accounting principles. Actual results could differ from
those estimates.
(2) Omitted Historical Financial Information
Full historical financial statements, including general and administrative
expense, income tax expense and interest expense have not been presented
historically because the CWR Properties were not accounted for or operated as a
separate division by C. W. Resources, Inc. or its related parties. Historical
depletion expense, including abandonment provision, also has not been included
as the basis in the properties will be adjusted in the purchase price
allocation when the properties are acquired by 3TEC Energy Corporation;
therefore, historical depletion no longer will be relevant.
(3) Commitments and Contingencies
The management of C. W. Resources, Inc. is not aware of any legal,
environmental or other commitments or contingencies that would be materially
important in relation to the revenues and direct operating expenses of the CWR
Properties.
Substantially all gas production from the CWR Properties is marketed by one
third party. Substantially all oil production is marketed by another third
party.
(4) Related Party Transactions
C. W. Resources, Inc. operated the oil and gas wells included in the CWR
Properties. Fees related to such wells in the amount of approximately $360,000
were charged to the CWR Properties during the year ended December 31, 1999. The
fee is reflected in lease operating expenses in the accompanying statement.
(5) Capital Expenditures
Direct operating expenses do not include exploration and development
expenditures related to the CWR Properties which totaled approximately $3.1
million for the year ended December 31, 1999.
(6) Supplemental Oil and Gas Reserve Information (Unaudited)
Total proved and proved developed oil and gas reserves of the CWR Properties
at December 31, 1999 have been estimated based on reserve estimates prepared by
Ryder Scott Company, independent petroleum engineers as of January 1, 2000. No
comparable estimates were available for prior periods. Therefore, reserves
F-31
<PAGE>
CWR PROPERTIES
NOTES TO STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES--(Continued)
for December 31, 1998 have been calculated by adjusting the December 31, 1999
amounts for the year's activities and, consequently, no revisions of previous
estimates have been reflected. All reserve estimates are based on economic and
operating conditions existing at January 1, 2000. The future net cash flows
from production of these proved reserve quantities were computed by applying
current prices of oil and gas, averaging $25.60 per barrel of oil and $2.39 per
thousand cubic foot of gas (with consideration of price changes only to the
extent provided by contractual arrangements) as of January 1, 2000 to estimated
future production of proved oil and gas reserves less the estimated future
expenditures (based on current costs) as of January 1, 2000 to be incurred in
developing and producing the proved reserves. As discussed above, income tax
information for the Company is not available and therefore is not presented.
<TABLE>
<CAPTION>
Year ended
December 31,
1999
-------------
Oil Gas
(Mbbl) (MMcf)
------ ------
<S> <C> <C>
Proved reserves:
Beginning of year........................................... 848 56,711
Extensions and discoveries.................................. 83 5,436
Production.................................................. (52) (3,545)
--- ------
End of period............................................. 879 58,602
=== ======
Proved developed reserves:
Beginning of year........................................... 492 32,895
--- ------
End of period............................................... 440 29,350
=== ======
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Reserves as of December 31, 1999 (in thousands):
<TABLE>
<S> <C>
Future cash inflows................................................ $162,532
Future production costs............................................ (37,235)
Future development costs........................................... (17,914)
--------
Future net inflows before income taxes............................. 107,383
10% discount factor................................................ (52,533)
--------
Standardized measure of discounted future net cash flows before
income taxes.................................................... $ 54,850
========
</TABLE>
Changes to Standardized Measure of Discounted Future Net Cash Flows Relating
to Proved Reserves for the year ended December 31, 1999 (in thousands):
<TABLE>
<S> <C>
Standardized measure, beginning of year............................. $51,864
Sales, net of production costs...................................... (8,900)
Extensions and discoveries.......................................... 9,792
Net change in future development costs.............................. (3,092)
Accretion of discount............................................... 5,186
-------
Standardized measure, end of period............................... $54,850
=======
</TABLE>
F-32
<PAGE>
CWR PROPERTIES
UNAUDITED STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
For the three months ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------
2000 1999
---------- ----------
<S> <C> <C>
Revenues:
Oil revenues........................................... $ 382,254 $ 180,002
Gas revenues........................................... 2,280,752 1,659,911
Gas gathering revenues................................. 49,344 58,172
---------- ----------
2,712,350 1,898,085
---------- ----------
Direct operating expenses:
Lease operating expenses............................... 446,564 490,058
Production taxes....................................... 61,726 29,308
---------- ----------
508,290 519,366
---------- ----------
Revenues in excess of direct operating expenses.......... $2,204,060 $1,378,719
========== ==========
</TABLE>
See accompanying notes to the unaudited statements of revenues and direct
operating expenses.
F-33
<PAGE>
CWR PROPERTIES
NOTES TO UNAUDITED STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
March 31, 2000 and 1999
(1) Basis of Presentation
The accompanying financial statements present the revenues and direct
operating expenses of oil and gas properties (the CWR Properties) to be
acquired by 3TEC Energy Corporation from C. W. Resources, Inc. and its related
parties, Westerman Royalty, Inc. and Carl A. Westerman. The CWR Properties are
located in East Texas.
The accompanying financial statements were derived from the historical
accounting records of C. W. Resources, Inc. Direct operating expenses include
lease and well repairs, maintenance and other direct operating expenses.
Memorandum adjustments have been made to the financial information in order to
present the accompanying financial statements in accordance with generally
accepted accounting principles.
C. W. Resources, Inc. has made a number of estimates and assumptions
relating to the preparation of the financial statements in conformity with
generally accepted accounting principles. Actual results could differ from
those estimates.
(2) Omitted Historical Financial Information
Full historical financial statements, including general and administrative
expense, income tax expense and interest expense have not been presented
historically because the CWR Properties were not accounted for or operated as a
separate division by C. W. Resources, Inc. or its related parties. Historical
depletion expense, including abandonment provision, also has not been included
as the basis in the properties will be adjusted in the purchase price
allocation when the properties are acquired by 3TEC Energy Corporation;
therefore, historical depletion no longer will be relevant.
(3) Commitments and Contingencies
The management of C. W. Resources, Inc. is not aware of any legal,
environmental or other commitments or contingencies that would be materially
important in relation to the revenues and direct operating expenses of the CWR
Properties.
Substantially all gas production from the CWR Properties is marketed by one
third party. Substantially all oil production is marketed by another third
party.
(4) Related Party Transactions
C. W. Resources, Inc. operated the oil and gas wells included in the CWR
Properties. Fees related to such wells in the amount of approximately $85,000
and $89,000 were charged to the CWR Properties during the three months ended
March 31, 2000 and 1999, respectively. The fee is reflected in lease operating
expenses in the accompanying statements.
(5) Capital Expenditures
Direct operating expenses do not include exploration and development
expenditures related to the CWR Properties which totaled approximately $500,000
and $1 million for the three months ended March 31, 2000 and 1999,
respectively.
F-34
<PAGE>
3TEC ENERGY CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The unaudited pro forma condensed consolidated statement of operations of
the Company for the year ended December 31, 1998 gives effect to the purchase
of the Floyd Oil Properties (the Purchase) as if it had occurred at the
beginning of the year presented. The unaudited pro forma condensed consolidated
financial statement has also been prepared to give effect to the issuance of
351,681 shares of common stock and warrants to purchase 266,226 shares of
Common Stock for an aggregate purchase price of $2,373,844 and the issuance of
a senior convertible subordinated note for $2,373,844 under a securities
purchase agreement between The Prudential Insurance Company of America
(Prudential) and 3TEC Energy Corporation (3TEC) on October 19, 1999, as if it
had occurred on September 30, 1999 and at the beginning of the year presented.
The unaudited pro forma condensed consolidated statement of operations also
gives effect to the August 27, 1999 issuance of 1,585,185 shares of common
stock and warrants to purchase 1,200,000 shares of Common Stock for an
aggregate purchase price of $10,700,000 and the issuance of a senior
convertible subordinated notes for $10,700,000 under the securities purchase
agreement with 3TEC Energy Company LLC (3TEC LLC) as if it had occurred at the
beginning of the year presented. The Prudential and 3TEC LLC transactions are
included in the pro forma condensed consolidated financial statement as the
transactions provided a significant portion of the financing for the purchase
of the Floyd Oil Properties.
The following unaudited pro forma financial data have been included as
required by the rules of the SEC and are provided for comparative purposes
only. The unaudited pro forma financial data presented are based upon the
historical consolidated financial statements of 3TEC and the historical
statements of revenues and direct operating expenses of the Floyd Oil
Properties and should be read in conjunction with such financial statements and
the related notes thereto which are incorporated herein by reference.
The pro forma financial data are based upon assumptions and include
adjustments as explained in the notes to the unaudited pro forma condensed
consolidated financial statements, and the actual recording of the transactions
could differ. The unaudited pro forma financial data are not necessarily
indicative of the financial results that would have occurred had the Purchase
been effective on and as of the date indicated and should not be viewed as
indicative of operations in future periods.
F-35
<PAGE>
3TEC ENERGY CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<TABLE>
<CAPTION>
3TEC Floyd Oil Pro Forma Pro forma
Consolidated Properties Adjustments Consolidated
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Oil and gas sales and
plant income......... $15,011,354 $34,067,434(D) $ -- $49,078,788
Gain on sale of
properties........... 1,953,362 -- -- 1,953,362
Other................. 737,862 -- -- 737,862
----------- ----------- ------------ -----------
Total Revenues...... 17,702,578 34,067,434 -- 51,770,012
Costs and Expenses
Lease operating,
production taxes and
plant costs.......... 7,801,249 14,617,417(D) (681,000)(E) 21,737,666
Geological and
geophysical.......... 877,643 -- -- 877,643
Dryhole............... 503,444 -- -- 503,444
Depreciation,
depletion and
amortization......... 7,116,116 -- 7,908,630 (F) 15,024,746
Impairments........... 4,164,184 -- -- 4,164,184
Interest.............. 1,971,595 -- 6,580,420 (G) 8,552,015
General and
administrative....... 4,266,727 -- 2,135,613 (H) 6,402,340
Stock compensation.... 266,445 -- -- 266,445
Other................. 138,855 -- -- 138,855
----------- ----------- ------------ -----------
Total Costs and
Expenses........... 27,106,258 14,617,417 15,943,663 57,667,338
Income (loss) before
income taxes and
minority interest...... (9,403,680) 19,450,017 (15,943,663) (5,897,326)
Minority interest....... 15,089 -- -- 15,089
Provision for income
taxes (benefit)........ (2,829,762) -- 1,192,160 (I) (1,637,602)
----------- ----------- ------------ -----------
Net income (loss)....... (6,589,007) 19,450,017 (17,135,823) (4,274,813)
Dividends to Preferred
Stockholders........... 67,945 -- -- 67,945
----------- ----------- ------------ -----------
Net income (loss)
attributable to common
stockholders........... $(6,656,952) $19,450,017 $(17,135,823) $(4,342,758)
=========== =========== ============ ===========
Net income (loss) per
share, basic and
diluted................ $ (2.48) $ (0.84)
Weighted average common
shares outstanding,
basic and diluted...... 2,683,369 2,462,697 (J)(K) 5,146,066
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statement.
F-36
<PAGE>
3TEC ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENT
A. To record the issuance of 351,681 shares of common stock and 266,226
warrants for an aggregate purchase price of $2,373,844 and the issuance of a
senior convertible subordinated note for $2,373,844 under a securities
purchase agreement to Prudential to provide partial financing for the
acquisition.
B. To record the purchase of the Floyd Oil Properties and other assets pursuant
to the transaction. The allocation of the purchase price using the purchase
method of accounting is presented below. The allocation of the purchase
price is preliminary and, therefore subject to change. Any future
adjustments to the allocation of the purchase price are not anticipated to
be material to the unaudited pro forma financial statements.
<TABLE>
<S> <C>
The purchase price entries are as follows:
Purchase price............................................ $96,916,453
Estimated purchase price adjustments, including
distributions of cash flows from the Floyd Oil Properties
from the effective date to the closing date of November
30, 1999................................................. (3,080,905)
Deferred financing costs.................................. 531,250
Transaction costs......................................... 1,168,000
-----------
Total purchase price.................................... $95,534,798
===========
Purchase price allocation:
Acquisition costs allocated to oil and gas properties..... $94,918,548
Deferred debt costs....................................... 531,250
Furniture and fixtures.................................... 85,000
-----------
Total purchase allocation............................... $95,534,798
===========
</TABLE>
C. To record the effect of borrowings of $90,000,000 under 3TEC's $250 million
credit facility, issuance of 503,426 shares of common stock, valued at
$6,992,587, or $13.89 per share, and use of existing cash to finance the
Purchase and repay the outstanding borrowing of $28,490,567 under 3TEC's
former revolving line of credit. In addition, to record the bank facility
fee associated with 3TEC's $250 million credit facility, and eliminate
$87,045 ($56,579, net of $30,466 of tax) of net deferred debt costs
associated with 3TEC's former revolving line of credit.
D. To record the revenues and direct operating expenses related to the Floyd
Oil Properties.
E. To eliminate overhead charges that will no longer be incurred on a portion
of the Floyd Oil properties, as such will be operated by 3TEC and its
subsidiaries.
F. To adjust depletion, depreciation and amortization to give effect to the
purchase price allocated to the Floyd Oil Properties using the unit of
production method under the successful efforts method of accounting.
G. To record the net increase in interest expense (at 9.24% and 7.27% for the
year ended December 31, 1998 and the period ended September 30, 1999,
respectively) and amortization of deferred financing costs relating to the
borrowings under 3TEC's $250 million credit facility, and to record interest
expense on convertible subordinated notes issued to EnCap Investments L.L.C.
(EnCap) and Prudential of $1,190,146 and $800,384 for the year ended
December 31, 1998 and the period ended September 30, 1999, respectively.
H. To record additional general and administrative expenses relating to
additional costs anticipated to be incurred due to contractual obligations
incurred in completing the Purchase.
F-37
<PAGE>
3TEC ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENT--(Continued)
I. To record income tax expense on the pro forma adjustments based on 3TEC's
statutory tax rate of 34%.
J. To reflect the impact on basic weighted average common shares outstanding of
503,426 shares of 3TEC common stock issued for the Floyd Oil Properties,
351,681 shares of 3TEC common stock issued to Prudential under the
securities purchase agreement, and 1,607,407 shares of 3TEC common stock
issued to EnCap and related party.
K. To reflect the impact on diluted weighted average common shares outstanding
of 503,426 shares of 3TEC common stock issued for the Floyd Oil Properties,
351,681 shares of 3TEC common stock issued to Prudential under the
securities purchase agreement, and 1,607,407 shares of 3TEC common stock
issued to EnCap and related party, for the nine months ended September 30,
1999. The weighted average common stock equivalents were not included in
3TEC's diluted weighted average common shares outstanding for the year ended
December 31, 1998, because their effect would have been antidilutive.
Unaudited Pro Forma Supplemental Oil and Gas Disclosure
The following tables set forth certain unaudited pro forma information
concerning 3TEC's proved oil and gas reserves at September 30, 1999, giving
effect to the acquisition of the Floyd Oil Properties as if they had occurred
on January 1, 1998. There are numerous uncertainties inherent in estimating the
quantities of proved reserves and projecting future rates of production and
timing of development expenditures. The following reserve data represent
estimates only and should not be construed as being exact. The proved oil and
gas reserve information is as of September 30, 1999 and reflects prices and
costs in effect as of such date.
Reserves:
<TABLE>
<CAPTION>
Oil and Condensate (MBbls) Natural Gas (MMcf)
------------------------------ -------------------------------
Floyd Oil Pro Forma Floyd Oil Pro Forma
3TEC Properties Consolidated 3TEC Properties Consolidated
----- ---------- ------------ ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1999................... 3,342 7,477 10,819 43,483 140,780 184,263
Extensions and
discoveries............ 13 13 1,286 1,286
Purchase of minerals in-
place.................. 97 97 38 38
Revision of previous
estimates.............. 319 319 (4,981) (4,981)
Production.............. (369) (565) (934) (2,778) (8,078) (10,856)
Sales of minerals in-
place.................. (355) (355) (1,693) (1,693)
----- ----- ------ ------ ------- -------
Balance at September 30,
1999................... 3,047 6,912 9,959 35,355 132,702 168,057
===== ===== ====== ====== ======= =======
Proved developed
reserves............... 3,040 6,463 9,503 31,034 95,529 126,563
===== ===== ====== ====== ======= =======
</TABLE>
F-38
<PAGE>
3TEC ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENT--(Continued)
Standard Measure of Discounted Future Net Cash Flows Relating to Proved Oil &
Gas Reserves:
<TABLE>
<CAPTION>
Floyd Oil
3TEC Properties Pro Forma
-------- -------------- ---------
(In thousands)
<S> <C> <C> <C>
Future cash inflows........................ $163,124 $ 473,020 $ 636,144
Future production costs.................... (60,653) (125,021) (185,674)
Future development costs................... (2,024) (22,519) (24,543)
-------- --------- ---------
Future net inflows before income taxes..... 100,447 325,480 425,927
Income taxes............................... (6,982) -- (6,982)
-------- --------- ---------
Future net cash flows...................... 93,465 325,480 418,945
10% discount factor........................ (40,866) (154,320) (195,186)
-------- --------- ---------
Standardized measure of discounted future
net cash flows............................ $ 52,599 $ 171,160 $ 223,759
======== ========= =========
</TABLE>
Changes to Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves:
<TABLE>
<CAPTION>
Floyd Oil
3TEC Properties Pro Forma
------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
Standardized measure, January 1, 1999............ $38,894 $175,970 $214,864
Sales, net of production costs................... (6,878) (16,522) (23,400)
Purchases of reserves in place................... 749 -- 749
Net changes in prices and production costs....... 21,595 -- 21,595
Net changes in income taxes...................... (3,929) -- (3,929)
Extensions, discoveries and improved recovery,
net of future production and development costs.. 2,268 -- 2,268
Changes in estimated future development costs.... -- 2,612 2,612
Revisions of quantity estimates.................. (3,030) -- (3,030)
Accretion of discount............................ 2,917 9,100 12,017
Sales of reserves in place....................... (1,643) -- (1,643)
Changes in production rates and other............ 1,656 -- 1,656
------- -------- --------
Standardized measure, September 30, 1999......... $52,599 $171,160 $223,759
======= ======== ========
</TABLE>
F-39
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
7,000,000 Shares
[3TEC Logo]
Common Stock
----------------
PROSPECTUS
----------------
Bear, Stearns & Co. Inc.
CIBC World Markets
Prudential Securities
First Union Securities, Inc.
June 26, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
