<PAGE>
As filed with the Securities and Exchange Commission on April 28, 2000
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------
3TEC Energy Corporation
(Exact name of registrant as specified in its charter)
Delaware 76-0624573
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Two Shell Plaza, Suite 2400
777 Walker Street
Houston, Texas 77002
(713) 821-7100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
Floyd C. Wilson
Two Shell Plaza, Suite 2400
777 Walker Street
Houston, Texas 77002
(713) 821-7100
(Name, address, including zip code, and telephone number, including area code
of agent for service)
With copies to:
Thompson Knight Vinson & Elkins L.L.P.
Brown Parker & Leahy, L.L.P. 2300 First City Tower
1200 Smith Street, Suite 3600 1001 Fannin
Houston, Texas 77002 Houston, Texas 77002-6760
(713) 654-8111 (713) 758-2222
Attn: Dallas Parker Attn: T. Mark Kelly
William T. Heller IV
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If the Registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item
11(a)(1) of the Form, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title of Each Class of Proposed Maximum Amount of
Securities to be Registered Aggregate Offering Price Registration Fee(1)
- ------------------------------------------------------------------------------
<S> <C> <C>
Common stock, par value $.02
per share..................... $57,500,000 $15,180
- ------------------------------------------------------------------------------
</TABLE>
(1) Calculated pursuant to Rule 457(o).
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
********************************************************************************
The date of this prospectus is , 2000.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
********************************************************************************
SUBJECT TO COMPLETION, DATED APRIL 28, 2000
PROSPECTUS
6,250,000 Shares
[Logo of 3TEC Energy Corporation]
Common Stock
We are offering for sale 6,250,000 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 SmallCap Market under the symbol
"TTEN." The last reported sale price of our common stock on April 28, 2000, was
$8.00 per share. We expect our common stock to trade on the Nasdaq National
Market on or before the completion of this offering.
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.................................... $ $
Underwriting discounts and commissions................... $ $
Proceeds, before expenses, to us......................... $ $
</TABLE>
------------
The underwriters may also purchase up to an additional 937,500 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 , 2000.
------------
Bear, Stearns & Co. Inc.
CIBC World Markets
Prudential Securities
First Union Securities, Inc.
<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............................................................... 25
Business and Properties................................................... 30
Management................................................................ 44
Security Ownership of Principal Stockholders.............................. 45
Description of Capital Stock.............................................. 47
Description of Credit Facility............................................ 52
Underwriting.............................................................. 53
Legal Matters............................................................. 54
Experts................................................................... 55
Where You Can Find More Information....................................... 56
Incorporation of Certain Documents by Reference........................... 56
Glossary of Certain Oil and Gas Terms..................................... 57
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 57.
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.
NOTE: This prospectus has been prepared in a format which contemplates the
addition of certain first quarter financial information. This March 31, 2000,
information is not yet available and thus is not included in this document, but
this information will be included by amendment prior to any general
distribution 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 acquisition of Magellan Exploration LLC
("Magellan") and the pending acquisition of properties in East Texas operated
by C.W. Resources, Inc. (the "CWR Properties"), discussed below, we had
estimated total net proved reserves of 309 Bcfe, of which approximately 76%
were natural gas and approximately 70% were classified as proved developed,
with an estimated PV-10 value of $293.6 million. As of March 31, 2000, on a pro
forma basis including the CWR Properties, our net daily production was
approximately 51.6 Mmcf of natural gas and 3.4 MBbls of oil or 72.0 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 192.1 Bcfe with an associated PV-10 value of $186.2 million
and have entered into an agreement to purchase the CWR Properties with net
proved reserves of 63.9 Bcfe and an estimated PV-10 value of $54.9 million, in
both cases calculated as of December 31, 1999. In addition, we have raised or
issued $23.0 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 or that
are currently pending 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 Exploration.... 18.6 Gulf Coast 26.6 Bcfe 0.70
CWR Properties
(pending).............. 52.0 E. Texas 63.9 Bcfe 0.81
------ ----------
TOTAL................. $160.8 256.0 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 13% of our outstanding common stock, or approximately 26%
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 and, as of
December 31, 1999, net daily
5
<PAGE>
production was approximately 41.6 Mmcfe. We plan to actively exploit
these properties and have budgeted approximately $5 million for
development drilling and exploitation activity in 2000. Floyd Oil Company
is not affiliated with Floyd C. Wilson.
. 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 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, has
been initially set at $95.0 million with $83.5 million outstanding as of
March 31, 2000. In connection with the pending CWR Properties
acquisition, we have begun negotiations with the lenders participating in
our credit facility to increase the availability under our borrowing base
to an amount which would enable us to borrow substantially all of the
purchase price. The negotiations are ongoing and the lenders have
indicated their preliminary willingness to accommodate this increase. 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 $18.6 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) 617,008
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 (10,748
net) acres in three prospective areas. As of December 31, 1999, Ryder
Scott Company ("Ryder Scott"), estimated that Magellan's net proved
reserves were 26.6 Bcfe with an associated PV-10 value of $40.1 million.
These proved reserves are approximately 66% natural gas and 81% 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.
. Pending Acquisition of CWR Properties. On April 14, 2000, we entered into
a definitive agreement to acquire the CWR Properties for cash
consideration of approximately $52 million, assuming we do not acquire
operations of these properties. We paid a deposit of $5.2 million at the
time we executed the definitive agreement. The purchase of the CWR
Properties will be financed under our existing credit facility, which we
propose to modify prior to closing this acquisition. The closing of the
CWR Properties is contingent upon satisfaction of customary closing
conditions and is expected to close on or before May 31, 2000. This
offering is contingent upon the closing of the purchase of the CWR
Properties. The effective date of the acquisition will be January 1,
2000.
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 36,000 gross acres (8,900 net acres). As of
December 31, 1999, Ryder Scott estimated that the net proved reserves of
the CWR Properties were 63.9 Bcfe with an associated PV-10 value of $54.9
million. The CWR Properties produce from the Cotton Valley formation and
the reserves are approximately 92% natural gas and 50% are classified as
proved developed. As of March 31, 2000, net daily production from the CWR
Properties was approximately 10.5 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--
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.. 6,250,000 shares(1)
Common stock to be outstanding
after the offering........... 12,672,181 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 SmallCap Market symbol. TTEN
</TABLE>
- --------
(1) Excludes a 30-day option granted to the underwriters to purchase up to
937,500 additional shares of common stock to cover over-allotments, if any.
(2) The number of shares shown above to be outstanding after this offering does
not include: (a) 308,255 shares of common stock that may be issued upon
exercise of outstanding stock options 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 and 724,943 shares
of common stock reserved for issuance upon conversion of our Series C
Preferred Stock, of which 431,174 shares are reserved for our 80% owned
subsidiary, or 617,008 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 December 31, 1999 pro forma as adjusted and the March 31, 2000 pro
forma as adjusted and historical balance sheet data, the following table does
not include historical or 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................ $ $ $ 64,759 $ 19,952 $ 15,011
Gain on sale of
properties............ 1,048 1,048 1,953
Other.................. 1,020 1,020 738
---------- --------- ---------
Total revenues....... 66,827 22,020 17,702
---------- --------- ---------
Costs and expenses:
Lease operating and
production taxes...... 21,501 6,728 7,801
Geological and
geophysical........... 200 200 878
Dry hole............... 625 625 503
Depreciation,
depletion and
amortization.......... 15,894 6,691 7,116
Impairments............ 2,478 2,478 4,164
Interest............... 8,106 3,205 1,972
General and
administrative........ 6,966 4,736 4,267
Other.................. 2,230 2,230 405
---------- --------- ---------
Total costs and
expenses............ 58,000 26,893 27,106
---------- --------- ---------
Income (loss) before
income taxes and
minority interest...... 8,827 (4,873) (9,404)
Minority interest....... 2 2 15
Income tax expense
(benefit).............. 3,215 (1,443) (2,830)
---------- --------- ---------
Net income (loss)....... 5,610 (3,432) (6,589)
Dividends to preferred
stockholders........... 574 574 68
---------- --------- ---------
Net income (loss)
attributable to common
stockholders........... $ 5,036 $ (4,006) $ (6,657)
========== ========= =========
Net income (loss) per
share (diluted)........ $ 0.40 $ (1.14) $ (2.48)
========== ========= =========
Weighted average common
shares outstanding
(diluted).............. 14,071,467 3,519,532 2,683,369
========== ========= =========
Other Financial Data:
EBITDAX (b)............ $ $ $ 36,390 $ 8,586 $ 3,439
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
------------------------- -------------------------
Pro Forma Pro Forma
As Adjusted(c) Historical As Adjusted(c) Historical
-------------- ---------- -------------- ----------
(unaudited) (unaudited)
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Working capital........... $ $ $ 7,001 $ 7,001
Oil and natural gas
properties, net.......... 201,579 130,979
Total assets.............. 219,837 149,243
Long-term debt, including
convertible subordinated
notes.................... 106,724 100,724
Stockholders' equity...... 102,138 38,112
</TABLE>
- --------
(a) Assumes the acquisition of the Floyd Oil Properties and the CWR Properties
and the debt and equity financing transactions relating to these
transactions had 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 As Adjusted" Balance Sheet Data:
. assumes the sale of 6,250,000 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;
. gives effect to the acquisition of Magellan and the related equity
transactions; and
. gives effect to the completion of the pending 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 $293.6 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
$2.30 per Mcf for natural gas and $24.02 per barrel for oil.
<TABLE>
<CAPTION>
As of December 31, 1999
--------------------------------------
Historical Pro Forma
---------------------------- ---------
CWR
3TEC Magellan Properties
-------- -------- ----------
<S> <C> <C> <C> <C>
Estimated Proved Reserves:
Natural gas (Mmcf)...................... 159,699 17,633 58,602 235,934
Oil (MBbls)............................. 9,835 1,503 879 12,217
Natural gas equivalents (Mmcfe)......... 218,712 26,653 63,876 309,241
Percentage proved developed reserves.... 82% 19% 50% 70%
Estimated future net cash flows before
income taxes (in thousands)............ $370,258 $57,231 $107,383 $534,872
PV-10 value (in thousands).............. $198,615 $40,092 $ 54,850 $293,557
</TABLE>
Summary Operating Data
The following table sets forth historical and pro forma information with
respect to our production volumes, average sale prices and average costs for
the periods indicated. The pro forma information gives effect to the
acquisition of the Floyd Oil Properties and the CWR Properties, as if each had
been acquired on January 1, 1999.
<TABLE>
<CAPTION>
Three Months Ended
March 31, 2000 Year Ended December 31,
-------------------- -------------------------------
1999 1998
-------------------- ----------
Pro Forma Historical Pro Forma Historical Historical
--------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Production Volumes:
Natural gas (Mmcf)...... 17,928 4,737 3,847
Oil (MBbls)............. 1,347 532 581
Natural gas equivalents
(Mmcfe)................ 26,010 7,928 7,333
Average Sale Prices:
Natural gas ($ per Mcf). $2.28 $2.18 $2.00
Oil ($ per Bbl)......... 16.13 16.88 11.52
Natural gas equivalents
($ per Mcfe)........... 2.41 2.43 1.96
Average Costs ($ per
Mcfe):
Lease operating and
production taxes....... $0.82 $0.85 $1.06
General and
administrative......... 0.27 0.60 0.58
Depreciation, depletion
and amortization....... 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 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, the acquisition of
Magellan and the pending acquisition of 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 was $89.5 million. At March 31, 2000, our
borrowing base was $95.0 million. In connection with the pending acquisition of
the CWR Properties, we have begun negotiations with the lenders participating
in our credit facility to increase the amount of availability under our
borrowing base. The lenders have indicated their preliminary willingness to
accommodate this increase. 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 May 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;
and
. any debt that we incur under our credit facility will be at variable
rates which makes us vulnerable to increases in interest rates.
12
<PAGE>
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 $5.0 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 $20 million, including an
estimated $3.4 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 sure 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 level of borrowings may
materially affect 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
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
13
<PAGE>
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 acquisition of Magellan
and the pending acquisition of the CWR Properties, approximately 30% of our
estimated proved reserves were undeveloped. The percentage of proved
undeveloped properties were increased as a result of the addition of the
Magellan properties. Undeveloped reserves, by their nature, are less certain
than developed reserves. 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 79% 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 13% of our common stock
outstanding after this offering, assuming that the over-allotment option is not
exercised by the underwriters, and would own approximately 26% 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 pursuant to which they have agreed to vote all their
shares to elect three members of the board of directors designated by W/E LLC
and two members of the board of directors designated collectively by Kaiser-
Francis Oil Company, C.J. Lett III, Weskids, L.P. and Alvin V. Shoemaker. As a
result, these entities will have a significant voice in the outcome of
stockholder votes, including votes concerning the election of directors, the
adoption or amendment of provisions in our charter or bylaws and the approval
of mergers and other significant corporate transactions.
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 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.
15
<PAGE>
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
66% 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 $3.05 per Mcf. This agreement covers approximately 9% 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
three 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.
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.
16
<PAGE>
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 6,250,000 shares to be issued in this offering approximately 12,672,181
shares of common stock will be outstanding, assuming the underwriters' over-
allotment option is not exercised. In addition, options and other warrants to
purchase 2,149,636 shares are outstanding, of which 1,559,084 are currently
exercisable. These options and warrants are exercisable at prices ranging from
$9.00 to $30.00 per share. We also have preferred stock outstanding which is
currently convertible into 1,430,840 additional shares of common stock.
Approximately 6.8 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 an aggregate of 6,011,452 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;
. the assessment of our Year 2000 compliance;
. our outlook on oil and natural gas prices;
. estimates of our oil and natural gas reserves;
. our future financial condition or results of operations;
. our pending acquisition of the CWR Properties; 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 6,250,000
shares of common stock in this offering will be approximately $46.0 million
(approximately $53.5 million if the underwriters' over-allotment option is
exercised in full), after deducting underwriting discounts and commissions and
estimated offering expenses of $4.0 million.
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 7.8%. We expect the amount
outstanding under our credit facility to increase by $52.0 million as a result
of additional borrowings to fund the acquisition of the CWR Properties. The
credit facility matures on November 30, 2002. 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
Our common stock is currently quoted on the Nasdaq SmallCap Market under the
market symbol "TTEN." The following table sets forth the high and low closing
bid prices per share of our common stock for the periods indicated on the
Nasdaq SmallCap Market through April 28, 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 April 28, 2000).................... 8.06 7.00
</TABLE>
On April 28, 2000, the last reported sale price of our common stock on the
Nasdaq SmallCap Market was $8.00 per share.
On April 28, 2000, there were 952 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 and 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.
19
<PAGE>
CAPITALIZATION
The following table presents our capitalization as of December 31, 1999, on
the following bases:
. on an historical basis;
. on a pro forma basis giving effect to the acquisition of Magellan and the
pending acquisition of the CWR Properties; 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>
December 31, 1999
---------------------------------
Pro Forma
Historical Pro Forma As Adjusted
---------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Current portion of long-term debt............. $ -- $ -- $ --
Long-term debt................................ 87,500 139,500 93,500
Convertible subordinated notes................ 13,224 13,224 13,224
-------- -------- --------
Total long-term debt and convertible
subordinated notes....................... 100,724 152,724 106,724
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.... 5,198 5,198 5,198
Convertible preferred stock Series D,
617,008 shares issued outstanding.......... -- 7,453 7,453
Common stock, $0.02 par value, 60,000,000
shares authorized, 5,338,771, 6,424,705 and
12,674,705 shares issued actual, pro forma
and pro forma as adjusted, respectively...... 107 129 254
Additional paid-in capital.................... 57,775 68,326 114,201
Accumulated deficit........................... (27,408) (27,408) (27,408)
Treasury stock; 7,258 shares.................. (1,187) (1,187) (1,187)
-------- -------- --------
Total stockholders' equity................ 38,112 56,138 102,138
-------- -------- --------
Total capitalization...................... $138,836 $208,862 $208,862
======== ======== ========
</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
---- ---- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Oil and natural gas sales and plant income... $ 19,952 $ 15,011
Gain on sale of properties................... 1,048 1,953
Other........................................ 1,020 738
--------- ---------
Total revenues............................. 22,020 17,702
--------- ---------
Costs and expenses:
Lease operating and production taxes......... 6,728 7,801
Geological and geophysical................... 200 878
Dry hole..................................... 625 503
Depreciation, depletion and amortization..... 6,691 7,116
Impairments.................................. 2,478 4,164
Interest..................................... 3,205 1,972
General and administrative................... 4,736 4,267
Other........................................ 2,230 405
--------- ---------
Total costs and expenses................... 26,893 27,106
--------- ---------
Loss before income tax benefit and minority
interest...................................... (4,873) (9,404)
Minority interest.............................. 2 15
Income tax benefit............................. (1,443) (2,830)
--------- ---------
Net loss before dividends to preferred
stockholders.................................. (3,432) (6,589)
Dividends to preferred stockholders............ 574 68
--------- ---------
Net loss attributable to common stockholders... $ (4,006) $ (6,657)
========= =========
Net loss per common share (diluted)............ $ (1.14) $ (2.48)
========= =========
Weighted average common shares outstanding
(diluted)..................................... 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 December
31, 1999 gives effect to the purchases of the Floyd Oil Properties and the CWR
Properties (the Purchases) and this Offering as if they occurred on December
31, 1999. Our unaudited pro forma condensed consolidated statements of
operations for the three months ended March 31, 2000 and the year ended
December 31, 1999 gives 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. The 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 period 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 CWR Pro Forma Pro Forma
Consolidated Properties Properties 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 11,048 64,759
Gain on sale of
properties........... 1,048 1,048
Other................. 1,020 1,020
--------- ------- ------- -------- ----------
Total revenues...... 22,020 33,759 11,048 66,827
Costs and expenses:
Lease operating and
production taxes..... 6,728 11,995 3,451 (673)(a) 21,501
Geological and
geophysical.......... 200 200
Dry hole.............. 625 625
Depreciation,
depletion and
amortization......... 6,691 9,203 (b) 15,894
Impairments........... 2,478 2,478
Interest.............. 3,205 4,901 (c) 8,106
General and
administrative....... 4,736 2,230 (d) 6,966
Other................. 2,230 2,230
--------- ------- ------- -------- ----------
Total costs and
expenses........... 26,893 11,995 3,451 15,661 58,000
--------- ------- ------- -------- ----------
Income (loss) before
income taxes and
minority interest...... (4,873) 21,764 7,597 (15,661) 8,827
--------- ------- ------- -------- ----------
Minority interest....... 2 2
Provision for income
taxes (benefit)........ (1,443) 4,658 (e) 3,215
--------- ------- ------- -------- ----------
Net income (loss) before
dividends to preferred
stockholders........... (3,432) 21,764 (20,319) 5,610
Dividends to preferred
stockholders........... 574 574
--------- ------- ------- -------- ----------
Net income (loss)
attributable to common
stockholders........... $ 4,006 $21,764 $ 7,597 $(20,319) $ 5,036
========= ======= ======= ======== ==========
Net income (loss) per
common share (diluted). $ (1.14) $ 0.40
========= ==========
Weighted average common
shares outstanding
(diluted).............. 3,519,532 14,071,467(f)
========= ==========
</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 CWR Pro Forma Pro Forma
Consolidated Properties 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.
Gain on sale of
properties.............
Other...................
Total revenues........
Costs and expenses:
Lease operating and
production taxes.......
Geological and
geophysical............
Dry hole................
Depreciation, depletion
and amortization.......
Impairments.............
Interest................
General and
administrative.........
Other...................
Total costs and
expenses.............
Income (loss) before
income taxes and minority
interest.................
Minority interest.........
Provision for income taxes
(benefit)................
Net income (loss) before
dividends to preferred
stockholders.............
Dividends to preferred
stockholders.............
Net income (loss)
attributable to common
stockholders.............
Net income (loss) per
common share (diluted)...
Weighted average common
shares outstanding
(diluted)................
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
data.
24
<PAGE>
Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of December 31, 1999
<TABLE>
<CAPTION>
Pro Forma
Adjustments
---------------------
Common
3TEC CWR Stock Pro Forma
Consolidated Properties Issuance Consolidated
------------ ---------- -------- ------------
(audited)
<S> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents.. $ 6,141 $ $ $ 6,141
Accounts receivable........ 9,454 9,454
Other current assets....... 176 176
-------- ------- ------- --------
Total current assets..... 15,771 -- -- 15,771
Property (at cost)
Oil and natural gas-
successful efforts method. 168,840 52,000(g) 220,840
Other...................... 1,142 1,142
Accumulated depreciation,
depletion & amortization.... (38,208) (38,208)
Other assets................. 1,698 1,698
-------- ------- ------- --------
Total assets............. $149,243 $52,000 $ -- $201,243
======== ======= ======= ========
Current liabilities
Accounts payable--trade.... $ 5,726 $ $ $ 5,726
Revenue payable............ 1,577 1,577
Accounts payable--
stockholders dissenters... 1,119 1,119
Other current liabilities.. 348 348
-------- ------- ------- --------
Total current
liabilities............. 8,770 -- -- 8,770
Long-term debt............... 87,500 52,000(g) (46,000)(h) 93,500
Senior subordinated notes.... 13,224 13,224
Deferred income taxes........ 291 291
Other liabilities............ 257 257
Minority interest............ 1,089 1,089
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
(historical and pro
forma). $2,000,000
aggregate liquidation
preference................ 3,627 3,627
Convertible preferred stock
Series C, $5.00 stated
value, 1,139,506 shares
issued and outstanding
(historical and pro
forma). $5,697,530
aggregate liquidation
preference................ 5,198 5,198
Common stock, $.02 par
value, 60,000,000 shares
authorized, 5,338,771
shares issued (historical)
and 11,588,771 shares
issued (pro forma)........ 107 125 (h) 232
Additional paid-in capital. 57,775 45,875 (h) 103,650
Accumulated deficit........ (27,408) (27,408)
Treasury stock; 7,258
shares.................... (1,187) (1,187)
-------- ------- ------- --------
Total stockholders'
equity.................. 38,112 -- 46,000 84,112
-------- ------- ------- --------
Total liabilities and
stockholders' equity........ $149,243 $52,000 $ -- $201,243
======== ======= ======= ========
</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 6,250,000 shares of our common stock. The column headed "Floyd Oil
Properties" and "CWR Properties" in the Unaudited Pro Forma Condensed
Consolidated Statements of Operations gives 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 eliminate operator overhead charges 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.
(b) 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.
(c) To record the net increase in interest expense (at 7.27% and %, 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.
(d) 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.
(e) To record income tax expense on the pro forma adjustments.
(f) 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 6,250,000 shares of common stock issued in this offering. Diluted
weighted average common shares outstanding reflect the effect of our common
stock equivalents when dilutive.
(g) To record the pending acquisition of the CWR properties and related
borrowings anticipated under our credit facility.
(h) To record the issuance of 6,250,000 shares of our common stock 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 they had occurred
on January 1, 1999. 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................... 3,342 848 4,190 43,483 56,711 100,194
Extensions and
discoveries............ 12 83 95 1,226 5,436 6,662
Purchase of reserves in
place.................. 6,866 -- 6,866 126,556 -- 126,556
Revision of previous
estimates.............. 502 -- 502 (5,135) -- (5,135)
Production.............. (532) (52) (584) (4,738) (3,545) (8,283)
Sales of reserves in
place.................. (355) -- (355) (1,693) -- (1,693)
----- --- ------ ------- ------ -------
Balance at December 31,
1999................... 9,835 879 10,714 159,699 58,602 218,301
===== === ====== ======= ====== =======
Proved developed
reserves............... 9,358 440 9,798 122,914 29,350 152,264
===== === ====== ======= ====== =======
</TABLE>
Standard Measure of Discounted Future Net Cash Flows Relating to Proved Oil &
Natural Gas Reserves:
<TABLE>
<CAPTION>
3TEC CWR Properties Pro Forma
-------- -------------- ---------
(In thousands)
<S> <C> <C> <C>
Future cash inflows........................ $594,023 $162,532 $ 756,555
Future production and development costs.... (223,765) (55,149) (278,914)
Future income tax expenses................. (92,975) -- (92,975)
-------- -------- ---------
Future net cash flows...................... 277,283 107,383 384,666
10% discount factor........................ (128,542) (52,533) (181,075)
-------- -------- ---------
Standardized measure of discounted future
net cash flows............................ $148,741 $ 54,850 $ 203,591
======== ======== =========
</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 $51,864 $ 90,758
Sales, net of production costs.................. (13,224) (8,900) (22,124)
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 5,186 9,075
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 $54,850 $203,591
======== ======= ========
</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, not
including Magellan or the CWR Properties, we had estimated total net proved
reserves of 218.7 Bcfe, of which approximately 73% were natural gas and
approximately 82% were proved developed, with an estimated PV-10 value of
$198.6 million. As of March 31, 2000, our net daily production was
approximately 42 Mmcf of natural gas and 3.3 MBbls of oil or 62 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 Energy Company, LLC (formerly 3TEC Energy Company, LLC) invested $21.4
million in cash and oil and natural gas properties for common stock, warrants
and 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 and Mid-Continent regions.
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 quarter 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 April 14, 2000, we entered into a definitive agreement to acquire the CWR
Properties for cash consideration consisting of approximately $52 million. The
acquisition is subject to satisfaction of customary closing conditions, and is
expected to close on or before May 31, 2000. This offering is contingent on the
closing of the purchase of the CWR Properties. The CWR Properties are located
in Upshur and Gregg Counties in East Texas and consist of 178 gross wells (46
net wells) and cover 35,706 gross acres (8,926 net acres). According to Ryder
Scott, at December 31, 1999, the CWR Properties had net proved reserves of 63.9
Bcfe with an associated PV-10 value of $54.9 million. These proved reserves are
approximately 92% natural gas and 50% of the volumes are classified as proved
developed. On a pro forma basis, the CWR Properties contributed an additional
EBITDAX of $7.5 million and $ million, and additional revenues of $11
million and $ million for the year ended December 31, 1999, and the three
months ended March 31, 2000, 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, and the three months ended March 31, 2000, declined
from 1999 historical amounts 27% and % to $0.61 and $ , respectively.
Pro forma general and administrative costs per Mcfe for the same periods
declined from 1999 historical amounts 55% and % to $.27 and $ ,
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 $36.4 million and $ million, respectively. For the
year 2000, we have budgeted approximately $20 million for development and
exploration capital expenditures, including an estimated $3.4 million with
respect to the CWR Properties. We are obligated to pay dividends of
approximately $570,000 per year on the Series C Preferred Stock in cash and
dividends of $740,000 per year on the Series D Preferred Stock which we may pay
in either cash or in additional shares of Series D Preferred Stock during the
three years ending February 2, 2003. We are obligated to pay interest on the
convertible subordinated notes of approximately $1.2 million per year.
29
<PAGE>
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 coming 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. The credit facility
currently provides for a $95 million borrowing base. The borrowing base will be
redetermined semi-annually on May 1 and November 1 of each year. Interest under
the facility accrues at our option at a rate calculated 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. At March 31, 2000 we were paying 7.8% per annum interest on
the entire principal balance of the facility of $83.5 million. 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 our properties. At March 31,
2000, the amount available to be borrowed under the credit facility was
approximately $11.5 million.
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, require the maintenance of a minimum current ratio interest coverage
ratio.
In connection with our pending acquisition of the CWR Properties we have
begun negotiations with the lenders participating in our credit facility to
increase the amount of availability under the borrowing base by an amount which
would enable us to borrow substantially all of the purchase price of the CWR
Properties. These negotiations are ongoing and the lenders have indicated a
preliminary willingness to increase our available borrowing capacity by an
amount which would enable us to borrow substantially all of the purchase price
of the CWR Properties. As indicated elsewhere in this prospectus, the net
proceeds of this offering will be used principally to repay indebtedness
outstanding under this credit 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
66% 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 $3.05 per
Mcf. This agreement covers approximately 9% 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 natural gas and crude oil prices. Our
ability to maintain current borrowing capacity and to obtain additional capital
on attractive terms is also substantially dependent on natural gas and crude
oil prices. These prices are subject to significant seasonal and other
fluctuations that are beyond our ability to control or predict. During
30
<PAGE>
1999, we received an average of $16.88 per barrel of crude 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.
Three Months Ended March 31, 2000, compared with Three Months Ended March 31,
1999.
[Text to be provided by amendment.]
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 properties
acquired in the Floyd Oil Acquisition. 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 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 properties acquired in
the Floyd Oil Company Acquisition 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
31
<PAGE>
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
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 payment of $624,000, compensation
plan payment 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.
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<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,
including the recent acquisition of Magellan and the pending acquisition of the
CWR Properties, discussed below, on a pro forma basis we had estimated total
net proved reserves of 309 Bcfe, of which approximately 76% were natural gas,
and approximately 70% were proved developed with an estimated PV-10 value of
$293.6 million. As of March 31, 2000, on a pro forma basis including the CWR
Properties, our actual net daily production was approximately 51.6 Mmcf of
natural gas and 3.4 MBbls of oil or 72.0 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.
As further discussed below, 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 192.1 Bcfe
with an associated PV-10 value of $186.2 million at December 31, 1999, and have
entered into an agreement to purchase the CWR Properties with net proved
reserves of 63.9 Bcfe and an estimated PV-10 value of $54.9 million at December
31, 1999, have raised or issued $23.0 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.
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<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 acquisition of the Floyd Oil Properties, Magellan and
the pending acquisition of the CWR Properties, we have added
approximately 256 Bcfe of proved reserves with a PV-10 value of $281
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 200 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.
Recent 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
$18.6 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) 617,008 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 (10,748 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 26.6 Bcfe with an associated PV-10 value of
$40.1 million. These proved reserves are approximately 66% natural gas and 81%
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. See "Description of Magellan
Properties."
If requested by the holders of the securities we issued in the Magellan
transaction, we will be obligated to file no more than two registration
statements to register their common stock received in the transaction or in
conversion of the Series D Preferred Stock or 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
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<PAGE>
securities if we propose to file a registration statement. These persons or
entities have the right to include their common stock in any resulting
registration statement.
Pending Acquisition of CWR Properties
On April 14, 2000, we entered into a definitive agreement to acquire the CWR
Properties for cash consideration consisting of approximately $52 million. The
acquisition is subject to satisfaction of customary closing conditions, and is
expected to close on or before May 31, 2000. This offering is contingent upon
the closing of the purchase of the CWR Properties. The CWR Properties are
located in Upshur and Gregg Counties in East Texas and consist of 178 gross
wells (46 net wells) and cover 35,706 gross acres (8,926 net acres). As of
December 31, 1999, Ryder Scott estimated that the net proved reserves of the
CWR Properties were 63.9 Bcfe with an associated PV-10 value of $54.9 million.
These proved reserves are approximately 92% natural gas and 50% are classified
as proved producing. See "Description of CWR Properties."
The definitive agreement provides that if we acquire the right to operate
the CWR Properties, which are currently operated by unrelated third parties,
the purchase price would increase by approximately $3.0 million. We will
endeavor to acquire these operating rights but are not assured of success. In
the event we do acquire the operating rights, the PV-10 value of our interest
in the reserves underlying the CWR Properties would increase because the
effective costs to us of operating the properties would be reduced.
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 recently acquired Floyd Oil Properties
and Magellan, as well as information relating to the pending acquisition of the
CWR Properties. Information relating to volumes, prices, and operating
expenses, set forth below are presented on a pro forma basis as if we acquired
the Floyd Oil Properties, the CWR Properties and Magellan on December 31, 1999.
We acquired the Floyd Oil Properties in November 1999, Magellan in February
2000, and intend to acquire the CWR Properties on or before May 31, 2000.
<TABLE>
<CAPTION>
As of December 31, 1999
---------------------------------------
Pro Forma(a)
---------------------------------------------------------------
Estimated Net Proved
Reserves Percent Budgeted
----------------------- PV-10 Total Identified 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......... 120,197 1,548 129,485 99,039 33.7% 162 7,100
Gulf Coast Area......... 68,294 3,048 86,582 99,863 34.0% 41 11,500
Permian/San Juan Area... 20,766 4,793 49,524 55,021 18.8% 3 400
Mid-Continent Area...... 26,590 2,398 40,978 36,163 12.3% 16 900
Other Areas............. 87 431 2,673 3,471 1.2% 0 100
------- ------ ------- ------- ------ --- ------
Total................. 235,934 12,218 309,242 293,557 100.0% 222 20,000
======= ====== ======= ======= ====== === ======
</TABLE>
- --------
(a) Includes 17,633 Mmcf of natural gas, 1,503 MBbls of oil, 26,653 Mmcfe
total, and $40.1 million PV-10 value associated with properties owned by
Magellan, and includes 58,602 Mmcf of natural gas, 879 MBbls of oil, 63,876
Mmcfe total, and $54.9 million PV-10 value associated with the CWR
Properties.
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<PAGE>
We describe our properties by operating area in the paragraphs which follow.
We separately describe the Magellan and CWR Properties under the captions
"Description of the Magellan Properties" 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 December 31 1999, our estimated
net daily production from this area was 10.6 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, 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 December 31, 1999, our estimated net daily
production from this area was 17.8 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 and our estimated net daily production
as of December 31, 1999, was 28.3 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 the Magellan Properties
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
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<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 December 31, 1999, this
field was producing 0.8 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 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 $4.5 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, Western Geophysical 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 December 31, 1999, this field was
producing 1.0 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. 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. As of
December 31, 1999, the properties being acquired had estimated total net proved
reserves of 63.9 Bcfe with a PV-10 value of $54.9 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. Current net daily
production from the properties is approximately 9.6 Mmcf of natural gas and 144
Bbls of oil. Approximately 50% of the reserves are classified as proved
producing. We have identified over 100 proved undeveloped locations and plan an
active drilling program on the properties. The transaction has an effective
date of January 1, 2000 and closing is expected to be on or before May 31,
2000. On a pro-forma basis, this acquisition will increase our total proved
reserves as of December 31, 1999 to 309 Bcfe and increase our net daily
production to approximately 52 Mmcf of gas and 3,400 Bbls of oil. In 2000, we
have budgeted approximately $3.4 million for development drilling 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 $24.02 and $9.50 per barrel of oil and $2.30 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
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<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 intend to acquire on or before May 31, 2000, as though we owned Magellan and
the CWR Properties at December 31, 1999.
<TABLE>
<CAPTION>
3TEC
December 31,
December 31, 1999 1998
-------------------- ------------
Pro Forma Historical Historical
--------- ---------- ------------
<S> <C> <C> <C>
Proved reserves:
Natural gas (Mmcf)......................... 235,934 159,699 43,483
Oil (MBbls)................................ 12,218 9,835 3,342
Natural gas equivalents (Mmcfe)............ 309,242 218,711 63,535
Proved developed reserves:
Natural gas (Mmcf)......................... 155,440 122,914 36,731
Oil (MBbls)................................ 10,130 9,358 3,118
Natural gas equivalents (Mmcfe)............ 216,220 179,062 55,439
Estimated future net cash flows before income
taxes (in thousands)........................ $534,872 $370,258 $71,464
PV-10 value (in thousands)................... $293,557 $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.
38
<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)....... 17,928 4,737 3,847 1,929
Oil (MBbls).............. 1,347 532 581 254
Natural gas equivalents
(Mmcfe)................. 26,010 7,928 7,333 3,453
Average sale prices:
Natural gas ($ per Mcf).. $ 2.28 $ 2.18 $ 2.00 $ 2.39
Oil ($ per Bbl).......... 16.13 16.88 11.52 18.06
Natural gas equivalents
($ per Mcfe)............ 2.41 2.43 1.96 2.82
Average costs ($ per Mcfe):
Lease operating and
production taxes........ $ 0.82 $ 0.85 $ 1.06 $ 1.11
General and
administrative.......... 0.27 0.60 0.58 0.68
Depreciation, depletion
and amortization........ 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 Year Ended December 31,
Ended -----------------------
March 31, 1999 1998 1997
--------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Acquisition................................... $91,424 $29,215 $44,294
Exploration................................... 824 1,802 1,912
Development................................... 2,154 3,041 1,862
------- ------- -------
Total costs incurred........................ $94,402 $34,058 $48,068
======= ======= =======
</TABLE>
39
<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 1 0.125 8 0.452
Non-Productive............... 5 0.900 8 0.793 11 1.280
--- ----- --- ----- --- -----
Total...................... 5 0.900 9 0.918 19 1.732
=== ===== === ===== === =====
Development Wells:
Productive................... 21 5.667 12 1.508 17 5.627
Non-Productive............... 0 0.000 2 1.100 6 4.150
--- ----- --- ----- --- -----
Total...................... 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 the Magellan and 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>
Natural Gas............................................ 857 298 677 252
Oil.................................................... 1,479 395 1,478 395
----- --- ------ ----
Total................................................ 2,336 693 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
December 31, 1999, we operated approximately 425 wells, located primarily in
Texas.
40
<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............................. 205,630 62,171 6,575 1,315 212,205 63,486
Oklahoma.......................... 79,256 22,846 205 205 79,461 23,051
Louisiana......................... 40,080 11,533 5,761 2,889 45,841 14,422
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........................... 510,402 169,979 19,608 11,406 530,010 181,385
======= ======= ====== ====== ======= =======
</TABLE>
At December 31, 1999, Magellan owned 17,049 gross developed acres, or 8,842
net developed acres, and 3,193 gross undeveloped acres, or 1,906 net
undeveloped acres. The CWR Properties information included in the table above
consists of 35,706 gross developed acres, or 8,926 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 such 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
41
<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,
42
<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.
43
<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 March 31, 2000, we had 40 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.
44
<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 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--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*
</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 24, 2000.
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 and Chief Financial Officer, 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 and Secretary 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.
45
<PAGE>
EARL W. RINGEISEN joined us in August 1999 and became Vice President--
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.
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 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
46
<PAGE>
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.
47
<PAGE>
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% 23.86%
777 Walker Street
Suite 2400
Houston, TX 77002
EnCap Investments L.L.C. (b), (d), (e).... 4,859,627 54.58% 32.07%
1100 Louisiana
Suite 3150
Houston, TX 77002
Kaiser-Francis Oil Company (f)............ 1,112,578 17.32% 8.78%
6733 South Yale
Tulsa, OK 74136
The Prudential Insurance Company of
America (g).............................. 775,344 11.33% 5.92%
751 Broad Street
Newark, NJ 07102
C. J. Lett, III (h)....................... 411,519 6.41% 3.25%
9320 East Central
Wichita, KS 67206
Pel-Tex Partners, L.L.C. (i).............. 444,423 6.72% 3.46%
277 Park Avenue
New York, NY 10172
Weskids, L.P. (j)......................... 320,385 4.96% 2.52%
310 South Street
Morristown, NJ 07960
Alvin V. Shoemaker (k).................... 321,211 4.95% 2.52%
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.
(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.
48
<PAGE>
(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) This figure includes options immediately exercisable for 15,667 shares of
common stock.
(i) 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.
(j) 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.
(k) 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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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
617,008 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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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.
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, 617,008 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, 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 35% 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, three members of the
board of directors designated by W/E LLC and two members of the board of
directors designated by the remaining stockholders, Kaiser-Francis Oil Company,
C. J. Lett, III, Weskids, L.P. and Alvin V. Shoemaker (the "Remaining
Stockholders"). 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. 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.
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
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<PAGE>
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 agreed to waive 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
SmallCap Market.
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 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 has been initially set at
$95 million with $83.5 million outstanding as of March 31, 2000. The borrowing
base will be redetermined semi-annually on May 1 and November 1 of each year.
Interest under the facility accrues at a rate calculated at our 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 March 31, 2000, we are 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 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 our properties.
In connection with our pending acquisition of the CWR Properties we have
begun negotiations with the lenders participating in our credit facility to
increase the amount of availability under the borrowing base by an amount which
would enable us to borrow substantially all of the purchase price of the CWR
Properties. These negotiations are ongoing and the lenders have indicated a
preliminary willingness to increase our available borrowing capacity by an
amount which would enable us to borrow substantially all of the purchase price
of the CWR Properties. 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 existing 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 defined current
liabilities to be less than 1:1 at the end of any fiscal quarter.
. We may not allow the defined minimum interest coverage ratio to be less
than 2.5:1 at the end of any fiscal quarter prior to the quarter ending
September 30, 2000, and each four quarter period thereafter.
. 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 $1 million, a change of control of 3TEC or Floyd C. Wilson
ceasing to act as our Chief Executive Officer.
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UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated
, 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............................................
CIBC World Markets Corp............................................
Prudential Securities Incorporated.................................
First Union Securities, Inc. ......................................
---------
Total............................................................ 6,250,000
=========
</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 937,500 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 $ per share. The underwriters may allow, and
such dealers may re-allow, a concession not in excess of $ 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.
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:
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. 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.
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......... $ $ $ $
Expenses payable by us.. $ $ $ $
</TABLE>
Our shares of common stock are listed on the Nasdaq SmallCap Market under
the symbol "TTEN."
Prudential Securities Incorporated facilitates the marketing of new issues
online through its website at PrudentialSecurities.com division. Clients of
Prudential AdvisorSM, a full service brokerage firm program, may view the
offering terms and a prospectus online and place orders through their financial
advisor. Other than the prospectus in electronic format, any other information
that references us, the information on Prudential'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.
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.
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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.
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.
58
<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; and
. Form 8-K filed April 26, 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.
59
<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.
60
<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.
61
<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 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
PENDING ACQUISITION OF CWR PROPERTIES FOR THE YEAR ENDED DECEMBER 31,
1999
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
3TEC ENERGY CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL DATA
Unaudited Pro Forma Condensed Consolidated Balance Sheet at September 30,
1999..................................................................... F-34
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
year ended
December 31, 1998........................................................ F-35
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.. F-36
</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). On
F-19
<PAGE>
3TEC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
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 617,008
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. In addition, there are
significant uncertainties inherent in estimating quantities of proved reserves
and in projecting rates of production that impair the usefulness of the data.
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............................................ 1,597,780
-----------
11,047,772
-----------
Direct operating expenses:
Lease operating expenses.......................................... 3,277,284
Production taxes.................................................. 173,353
-----------
3,450,637
-----------
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>
3TEC ENERGY CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The unaudited pro forma condensed consolidated balance sheet of the Company
as of September 30, 1999 gives effect to the purchase of the Floyd Oil
Properties (the Purchase) as if it occurred on September 30, 1999. The
unaudited pro forma condensed consolidated statements of operations of the
Company for the nine months ended September 30, 1999 and the year ended
December 31, 1998 give effect to the Purchase as if it had occurred at the
beginning of the periods presented. The unaudited pro forma condensed
consolidated financial statements have 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 periods
presented. These unaudited pro forma condensed consolidated statements of
operations also give 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 periods presented. The Prudential and 3TEC 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 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 dates indicated and should not be viewed as
indicative of operations in future periods.
F-33
<PAGE>
3TEC ENERGY CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 1999
<TABLE>
<CAPTION>
3TEC Pro forma Pro forma
Consolidated Adjustments Consolidated
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents........ $25,076,465 $ 4,747,688 (A)
(27,032,778)(C) $ 2,791,375
Accounts receivables and other... 2,806,732 -- 2,806,732
----------- ------------ ------------
Total current assets........... 27,883,197 (22,285,090) 5,598,107
Property and equipment (at cost),
net............................... 46,222,738 94,918,548 (B)
85,000 (B) 141,226,286
Other assets....................... 637,875 531,250 (B)
(87,045)(C) 1,082,080
----------- ------------ ------------
Total Assets................... $74,743,810 $ 73,162,663 $147,906,473
=========== ============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Current maturity of long-term
debt............................ $ 4,314,318 $ (4,314,318)(C) $ --
Accounts payable--trade.......... 2,822,415 -- 2,822,415
Other current liabilities........ 562,871 -- 562,871
----------- ------------ ------------
Total current liabilities...... 7,699,604 (4,314,318) 3,385,286
Long-term debt..................... 24,176,249 65,823,751 (C) 90,000,000
Convertible senior subordinated
notes............................. 10,850,000 2,373,844 (A) 13,223,844
Deferred income taxes.............. 486,353 (30,466)(C) 455,887
Other liabilities and minority
interest.......................... 1,318,559 -- 1,318,559
Stockholders' equity
Convertible preferred stock...... 8,862,083 -- 8,862,083
Common stock, $.02 par value,
issued 4,461,001 shares
(historical) and 5,316,108 (pro
forma).......................... 89,221 7,034 (A)
10,069 (C) 106,324
Additional paid-in-capital....... 48,315,476 6,982,518 (C)
2,366,810 (A) 57,664,804
Accumulated deficit.............. (26,985,695) (56,579)(C) (27,042,274)
Less cost of treasury stock...... (68,040) -- (68,040)
----------- ------------ ------------
Total stockholders' equity..... 30,213,045 9,309,852 39,522,897
----------- ------------ ------------
Total Liabilities and
Stockholders' Equity.......... $74,743,810 $ 73,162,663 $147,906,473
=========== ============ ============
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F-34
<PAGE>
3 TEC 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
statements.
F-35
<PAGE>
3TEC ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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-36
<PAGE>
3TEC ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--(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-37
<PAGE>
3TEC ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--(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-38
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6,250,000 Shares
[3TEC Logo]
Common Stock
----------------
PROSPECTUS
----------------
Bear, Stearns & Co. Inc.
CIBC World Markets
Prudential Securities
First Union Securities, Inc.
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance And Distribution
The expenses of the offering are estimated to be as follows:
<TABLE>
<CAPTION>
Description Amount
----------- -------
<S> <C>
Securities and Exchange Commission filing fee....................... $15,180
NASD filing fee..................................................... $ *
Blue Sky filing fees and expenses................................... $ *
Legal fees and expenses............................................. $ *
Accounting fees and expenses........................................ $ *
Printing, postage, and mailing expenses............................. $ *
Miscellaneous....................................................... $ *
-------
Total............................................................. $ *
=======
</TABLE>
- --------
* To be completed by amendment.
Item 15. Indemnification of Officers And Directors
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
or our stockholders to the fullest extent permitted by Delaware law.
Specifically, our directors will not be personally liable for monetary damages
for breach of a director's fiduciary duty in their capacity as directors,
except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- 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.
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 that 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.
II-1
<PAGE>
These provisions in our certificate of incorporation and our 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 benefitted
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.
Item 16. Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
------- ----------------------------------------------------------------------
<C> <S>
1.1 Underwriting Agreement, dated , 2000, by and between the
Company, Bear, Stearns & Co. Inc. and the underwriters named therein.*
2.1 Agreement and Plan of Merger, dated December 21, 1999, by and between
3TEC Energy Corporation, 3TM Acquisition L.L.C., Magellan Exploration,
LLC and ECIC Corporation, EnCap Energy Capital Fund III, L.P., EnCap
Energy Acquisition III-B, Inc., BOCP Energy Partners, L.P., and Pel-
Tex Partners, L.L.C. (1)
2.2 Form of Purchase Agreement between Middle Bay Oil Company, Inc., and
private sellers of the properties managed by Floyd Oil Company. (2)
2.3 Real Estate Exchange Agreement, dated November 23, 1999, by and
between the Middle Bay Oil Company, Inc. and Floyd Oil Company, a
Texas corporation. (3)
2.4 Agreement and Plan of Merger, dated November 24, 1999, by and between
3TEC Energy Corporation and Middle Bay Oil Company, Inc. (4)
2.5 Agreement and Plan of Merger, dated February 10, 1997, among the
Company, Bison Energy Corporation and C.J. Lett. (5)
2.6 Agreement and Plan of Merger, dated June 20, 1997, among the Company,
Shore Oil Company and its Shareholders. (6)
4.1 Certificate of Incorporation of 3TEC Energy Corporation. (7)
4.2 Certificate of Amendment of Certificate of Incorporation of 3TEC
Energy Corporation, reflecting reverse split. (8)
4.3 Bylaws of 3TEC Energy Corporation. (9)
4.4 Certificate of Designation of Series B Preferred Stock of 3TEC Energy
Corporation. (10)
4.5 Certificate of Designation of Series C Preferred Stock of 3TEC Energy
Corporation. (11)
4.6 Certificate of Designation of Series D Preferred Stock of 3TEC Energy
Corporation.*
5.1 Legal opinion of Thompson Knight Brown Parker & Leahy, L.L.P. as to
the legality of the securities being offered.*
10.1 Securities Purchase Agreement, dated July 1, 1999, by and between the
Company and 3TEC Energy Corporation. (12)
10.2 Securities Purchase Agreement, dated August 27, 1999, by and between
the Company and Shoemaker Family Partners, LP. (13)
10.3 Securities Purchase Agreement, dated August 27, 1999, by and between
the Company and Shoeinvest II, LP. (14)
10.4 Securities Purchase Agreement, dated October 19, 1999, between The
Prudential Insurance Company of America and the Company. (15)
10.5 Shareholders Agreement, dated August 27, 1999, by and among the
Company, 3TEC Energy Corporation and the Major Shareholders. (16)
10.6 Registration Rights Agreement, dated August 27, 1999, by and among the
Company, 3TEC Energy Corporation, the Major Shareholders, Shoemaker
Family Partners, LP and Shoeinvest II, LP. (17)
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.7 Amendment to Registration Rights Agreement, dated October 19, 1999, by
and among the Company, 3TEC Energy Company L.L.C., f/k/a 3TEC Energy
Corporation, Shoemaker Family Partners, LP, Shoeinvest II, LP, and The
Prudential Insurance Company of America. (18)
10.8 Participation Rights Agreement, dated October 19, 1999, by and among
the Company, The Prudential Insurance Company of America and 3TEC
Energy Company L.L.C. (19)
10.9 Employment Agreement, dated April 15, 2000, by and between Floyd C.
Wilson and the Company.
10.10 Executive Employment Agreement for Steve W. Herod dated July 1, 1997.
(20)
10.11 Restated Credit Agreement, dated November 23, 1999, among Middle Bay
Oil Company, Inc., Enex Resources Corporation and Middle Bay Production
Company, Inc., as Borrowers, and Bank One, Texas, N.A. and the
Institutions named therein as Lenders and Agents. (21)
10.12 Credit Agreement, dated March 27, 1998, by and among the Company,
Compass Bank, and Bank of Oklahoma, National Association. (22)
10.13 First Amendment to Credit Agreement, dated August 27, 1999, by and
among the Company, Compass Bank, and Bank of Oklahoma, National
Association. (23)
10.14 Second Amendment to Credit Agreement, dated October 19, 1999, by and
among the Company, Compass Bank, and Bank of Oklahoma, National
Association. (24)
10.15 Subordination Agreement, dated August 27, 1999, by and between 3TEC
Energy Corporation, Compass Bank, and Bank of Oklahoma, National
Association. (25)
10.16 Subordination Agreement, dated August 27, 1999, by and among Shoemaker
Family Partners, LP, Compass Bank, and Bank of Oklahoma, National
Association. (26)
10.17 Subordination Agreement, dated August 27, 1999, by and among Shoeinvest
II, LP, Compass Bank, and Bank of Oklahoma, National Association. (27)
10.18 Intercreditor Agreement, dated as of November 23, 1999, among Middle
Bay Oil Company, Inc., Bank One Texas, N.A. and 3TEC Energy Company
L.L.C.
10.19 Intercreditor Agreement, dated as of November 23, 1999, among Middle
Bay Oil Company, Inc., Bank One Texas, N.A. and Shoemaker Family
Partners, LP.
10.20 Intercreditor Agreement, dated as of November 23, 1999, among Middle
Bay Oil Company, Inc., Bank One Texas, N.A. and Shoeinvest II, LP.
10.21 Letter Amendment No. 1 to Middle Bay Oil Company, Inc. Securities
Purchase Agreement, dated November 23, 1999, among Middle Bay Oil
Company, Inc., Bank One Texas, N.A. and The Prudential Insurance
Company of America.
10.22 Amendment to Securities Purchase Agreement, dated as of November 23,
1999, among Middle Bay Oil Company, Inc. and 3TEC Energy Company L.L.C.
10.23 Amendment to Securities Purchase Agreement, dated as of November 23,
1999, among Middle Bay Oil Company, Inc. and Shoemaker Family Partners,
LP.
10.24 Amendment to Securities Purchase Agreement, dated as of November 23,
1999, among Middle Bay Oil Company, Inc. and Shoeinvest II, LP.
10.25 1995 Stock Option and Stock Appreciation Rights Plan. (28)
10.26 Amended and Restated 1995 Stock Option and Stock Appreciation Rights
Plan. (29)
10.27 Amendment No. 1 to Amended and Restated 1995 Stock Option and Stock
Appreciation Rights Plan. (30)
10.28 1999 Stock Option Plan. (31)
10.29 Asset Purchase Agreement among the Company, Service Drilling Co.,
L.L.C. and Diamond S Gas Systems, L.L.C. dated April 16, 1998. (32)
10.30 Consulting Agreement between Gerald B. Eckley and the Company dated
April 15, 1998. (33)
10.31 Executive Employment Agreement for R.A. Walker dated May 1, 2000.
10.32 Form of Agreement of Sale and Purchase by and between C.W. Resources,
Inc., Westerman Royalty, Inc., and Carl A. Westerman and 3TEC Energy
Corporation.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
23.01 Consent of KPMG LLP, independent certified public accountants.
23.02 Consent of Arthur Andersen LLP, independent public accountants.
23.03 Consent of Ryder Scott Company, independent petroleum engineers.
23.04 Consent of H.J. Gruy and Associates, Inc., independent petroleum
engineers.
23.05 Consent of Lee Keeling & Associates, Inc., independent petroleum
engineers.
24.1 Powers of Attorney (included on signature pages to the Registration
Statement).
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
(1) Incorporated by reference to Exhibit C to Form PRES14A filed December 28,
1999.
(2) Incorporated by reference to Exhibit 2.1 to Form 8-K filed December 7,
1999.
(3) Incorporated by reference to Exhibit 2.1 to Form 8-K/A filed December 17,
1999.
(4) Incorporated by reference to Exhibit "A" to the Form DEF 14A filed October
25, 1999.
(5) Incorporated by reference to Exhibit 2.1 to Form 8-K filed February 25,
1997.
(6) Incorporated by reference to Exhibit 2.1 to Form 8-K filed July 3, 1997.
(7) Incorporated by reference to Exhibit 3.1 to Form 8-K filed December 6,
1999.
(8) Incorporated by reference to Exhibit A to Form DEF 14A filed on January 3,
2000.
(9) Incorporated by reference to Exhibit "C" to the Form DEF 14A filed October
25, 1999.
(10) Incorporated by reference to Exhibit 3.1 to Form 8-K/A filed December 16,
1999.
(11) Incorporated by reference to Exhibit 2.2 to Form 8-K/A filed December 16,
1999.
(12) Incorporated by reference to Exhibit "C" to the Form DEF 14A filed July
19, 1999.
(13) Incorporated by reference to Exhibit 10.2 to Form 10-QSB filed on
November 15, 1999.
(14) Incorporated by reference to Exhibit 10.3 to Form 10-QSB filed on
November 15, 1999.
(15) Incorporated by reference to Exhibit 10.1 to Form 8-K filed November 2,
1999.
(16) Incorporated by reference to Exhibit 10.5 to Form 10-QSB filed on
November 15, 1999.
(17) Incorporated by reference to Exhibit 10.6 to Form 10-QSB filed on
November 15, 1999.
(18) Incorporated by reference to Exhibit 10.2 to Form 8-K filed on November
2, 1999.
(19) Incorporated by reference to Exhibit 10.3 to Form 8-K filed on November
2, 1999.
(20) Incorporated by reference to Exhibit 10.3 to Form 10-KSB40 filed on March
31, 1998.
(21) Incorporated by reference to Exhibit 10.1 to Form 8-K/A filed December
17, 1999.
(22) Incorporated by reference to Exhibit 10.11 to Form 10-QSB filed on
November 15, 1999.
(23) Incorporated by reference to Exhibit 10.12 to Form 10-QSB filed on
November 15, 1999.
(24) Incorporated by reference to Exhibit 10.13 to Form 10-QSB filed on
November 15, 1999.
(25) Incorporated by reference to Exhibit 10.14 to Form 10-QSB filed on
November 15, 1999.
(26) Incorporated by reference to Exhibit 10.15 to Form 10-QSB filed on
November 15, 1999.
(27) Incorporated by reference to Exhibit 10.16 to Form 10-QSB filed on
November 15, 1999.
(28) Incorporated by reference to Exhibits to definitive Proxy Statement filed
May 11, 1995.
(29) Incorporated by reference to Exhibit "B" to the Form DEF 14A filed May 5,
1997.
(30) Incorporated by reference to Exhibit "B" to the Form DEF 14A filed May
15, 1998.
(31) Incorporated by reference to Exhibit "E" to the Form DEF 14A filed
October 25, 1999.
(32) Incorporated by reference to Exhibit 2.1 to the Form 8-K filed May 6,
1998.
(33) Incorporated by reference to Exhibit 10.9 to the Form S-4 filed June 18,
1998.
II-4
<PAGE>
Item 17. Undertakings
We hereby undertake to:
(1) To file, during any period in which offers or sales are being made
of the securities registered hereby, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933, as amended;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this registration statement
or any material change to such information in this registration
statement;
provided, however, that the undertakings set forth in paragraphs (i) and (ii)
above do not apply if the information required to be included in a post-
effective amendment by those paragraphs is contained in periodic reports filed
by the registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in this Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the Securities
Act, each filing of our annual report pursuant to section 13(a) or section
15(d) of the Exchange Act (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Exchange Act) that is incorporated by reference in this registration
statement shall be deemed to be a new registration statement relating to
the securities offered herein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
SEC such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has duly caused this Registration
Statement on Form S-2 to be signed on its behalf by the undersigned, thereon
duly authorized in the City of Houston, State of Texas on April 28, 2000.
3TEC ENERGY CORPORATION
/s/ Floyd C. Wilson
By: _________________________________
Floyd C. Wilson,
Chairman of the Board,
Chief Executive Officer and
President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Floyd C. Wilson and Stephen W. Herod, or any of
them, his true and lawful attorney-in-fact and agent, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and ratifying and confirming all that said attorney-in-fact and agent
or his substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement on Form S-2 has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<S> <C>
Signature Title
Date
/s/ Floyd C. Wilson Chairman of the April 28, 2000
- ----------------------------------- Board, Chief
Floyd C. Wilson Executive Officer
and President
/s/ Stephen W. Herod Executive Vice April 28, 2000
- ----------------------------------- President, Chief
Stephen W. Herod Financial Officer
and Director
/s/ Terry W. Gautier Controller April 28, 2000
- -----------------------------------
Terry W. Gautier
/s/ David B. Miller Director April 28, 2000
- -----------------------------------
David B. Miller
/s/ D. Martin Phillips Director April 28, 2000
- -----------------------------------
D. Martin Phillips
/s/ Gary R. Christopher Director April 28, 2000
- -----------------------------------
Gary R. Christopher
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- ----------------------------------------------------------------------
<C> <S>
1.1 Underwriting Agreement, dated , 2000, by and between the
Company, Bear, Stearns & Co. Inc. and the underwriters named therein.*
2.1 Agreement and Plan of Merger, dated December 21, 1999, by and between
3TEC Energy Corporation, 3TM Acquisition L.L.C., Magellan Exploration,
LLC and ECIC Corporation, EnCap Energy Capital Fund III, L.P., EnCap
Energy Acquisition III-B, Inc., BOCP Energy Partners, L.P., and Pel-
Tex Partners, L.L.C. (1)
2.2 Form of Purchase Agreement between Middle Bay Oil Company, Inc., and
private sellers of the properties managed by Floyd Oil Company. (2)
2.3 Real Estate Exchange Agreement, dated November 23, 1999, by and
between the Middle Bay Oil Company, Inc. and Floyd Oil Company, a
Texas corporation. (3)
2.4 Agreement and Plan of Merger, dated November 24, 1999, by and between
3TEC Energy Corporation and Middle Bay Oil Company, Inc. (4)
2.5 Agreement and Plan of Merger, dated February 10, 1997, among the
Company, Bison Energy Corporation and C.J. Lett. (5)
2.6 Agreement and Plan of Merger, dated June 20, 1997, among the Company,
Shore Oil Company and its Shareholders. (6)
4.1 Certificate of Incorporation of 3TEC Energy Corporation. (7)
4.2 Certificate of Amendment of Certificate of Incorporation of 3TEC
Energy Corporation, reflecting reverse split. (8)
4.3 Bylaws of 3TEC Energy Corporation. (9)
4.4 Certificate of Designation of Series B Preferred Stock of 3TEC Energy
Corporation. (10)
4.5 Certificate of Designation of Series C Preferred Stock of 3TEC Energy
Corporation. (11)
4.6 Certificate of Designation of Series D Preferred Stock of 3TEC Energy
Corporation.*
5.1 Legal opinion of Thompson Knight Brown Parker & Leahy, L.L.P. as to
the legality of the securities being offered.*
10.1 Securities Purchase Agreement, dated July 1, 1999, by and between the
Company and 3TEC Energy Corporation. (12)
10.2 Securities Purchase Agreement, dated August 27, 1999, by and between
the Company and Shoemaker Family Partners, LP. (13)
10.3 Securities Purchase Agreement, dated August 27, 1999, by and between
the Company and Shoeinvest II, LP. (14)
10.4 Securities Purchase Agreement, dated October 19, 1999, between The
Prudential Insurance Company of America and the Company. (15)
10.5 Shareholders Agreement, dated August 27, 1999, by and among the
Company, 3TEC Energy Corporation and the Major Shareholders. (16)
10.6 Registration Rights Agreement, dated August 27, 1999, by and among the
Company, 3TEC Energy Corporation, the Major Shareholders, Shoemaker
Family Partners, LP and Shoeinvest II, LP. (17)
10.7 Amendment to Registration Rights Agreement, dated October 19, 1999, by
and among the Company, 3TEC Energy Company L.L.C., f/k/a 3TEC Energy
Corporation, Shoemaker Family Partners, LP, Shoeinvest II, LP, and The
Prudential Insurance Company of America. (18)
10.8 Participation Rights Agreement, dated October 19, 1999, by and among
the Company, The Prudential Insurance Company of America and 3TEC
Energy Company L.L.C. (19)
10.9 Employment Agreement, dated April 15, 2000, by and between Floyd C.
Wilson and the Company.
10.10 Executive Employment Agreement for Steve W. Herod dated July 1, 1997.
(20)
</TABLE>
II-7
<PAGE>
<TABLE>
<C> <S>
10.11 Restated Credit Agreement, dated November 23, 1999, among Middle Bay Oil
Company, Inc., Enex Resources Corporation and Middle Bay Production
Company, Inc., as Borrowers, and Bank One, Texas, N.A. and the
Institutions named therein as Lenders and Agents. (21)
10.12 Credit Agreement, dated March 27, 1998, by and among the Company,
Compass Bank, and Bank of Oklahoma, National Association. (22)
10.13 First Amendment to Credit Agreement, dated August 27, 1999, by and among
the Company, Compass Bank, and Bank of Oklahoma, National Association.
(23)
10.14 Second Amendment to Credit Agreement, dated October 19, 1999, by and
among the Company, Compass Bank, and Bank of Oklahoma, National
Association. (24)
10.15 Subordination Agreement, dated August 27, 1999, by and between 3TEC
Energy Corporation, Compass Bank, and Bank of Oklahoma, National
Association. (25)
10.16 Subordination Agreement, dated August 27, 1999, by and among Shoemaker
Family Partners, LP, Compass Bank, and Bank of Oklahoma, National
Association. (26)
10.17 Subordination Agreement, dated August 27, 1999, by and among Shoeinvest
II, LP, Compass Bank, and Bank of Oklahoma, National Association. (27)
10.18 Intercreditor Agreement, dated as of November 23, 1999, among Middle Bay
Oil Company, Inc., Bank One Texas, N.A. and 3TEC Energy Company L.L.C.
10.19 Intercreditor Agreement, dated as of November 23, 1999, among Middle Bay
Oil Company, Inc., Bank One Texas, N.A. and Shoemaker Family Partners,
LP.
10.20 Intercreditor Agreement, dated as of November 23, 1999, among Middle Bay
Oil Company, Inc., Bank One Texas, N.A. and Shoeinvest II, LP.
10.21 Letter Amendment No. 1 to Middle Bay Oil Company, Inc. Securities
Purchase Agreement, dated November 23, 1999, among Middle Bay Oil
Company, Inc., Bank One Texas, N.A. and The Prudential Insurance Company
of America.
10.22 Amendment to Securities Purchase Agreement, dated as of November 23,
1999, among Middle Bay Oil Company, Inc. and 3TEC Energy Company L.L.C.
10.23 Amendment to Securities Purchase Agreement, dated as of November 23,
1999, among Middle Bay Oil Company, Inc. and Shoemaker Family Partners,
LP.
10.24 Amendment to Securities Purchase Agreement, dated as of November 23,
1999, among Middle Bay Oil Company, Inc. and Shoeinvest II, LP.
10.25 1995 Stock Option and Stock Appreciation Rights Plan. (28)
10.26 Amended and Restated 1995 Stock Option and Stock Appreciation Rights
Plan. (29)
10.27 Amendment No. 1 to Amended and Restated 1995 Stock Option and Stock
Appreciation Rights Plan. (30)
10.28 1999 Stock Option Plan. (31)
10.29 Asset Purchase Agreement among the Company, Service Drilling Co., L.L.C.
and Diamond S Gas Systems, L.L.C. dated April 16, 1998. (32)
10.30 Consulting Agreement between Gerald B. Eckley and the Company dated
April 15, 1998. (33)
10.31 Executive Employment Agreement for R.A. Walker dated May 1, 2000.
10.32 Form of Agreement of Sale and Purchase by and between C.W. Resources,
Inc., Westerman Royalty, Inc., and Carl A. Westerman and 3TEC Energy
Corporation.
23.01 Consent of KPMG LLP, independent certified public accountants.
23.02 Consent of Arthur Andersen LLP, independent public accountants.
23.03 Consent of Ryder Scott Company, independent petroleum engineers.
23.04 Consent of H.J. Gruy and Associates, Inc., independent petroleum
engineers.
23.05 Consent of Lee Keeling & Associates, Inc., independent petroleum
engineers.
24.1 Powers of Attorney (included on signature pages to the Registration
Statement).
27.1 Financial Data Schedule
</TABLE>
II-8
<PAGE>
- --------
* To be filed by amendment.
(1) Incorporated by reference to Exhibit C to Form PRES14A filed December 28,
1999.
(2) Incorporated by reference to Exhibit 2.1 to Form 8-K filed December 7,
1999.
(3) Incorporated by reference to Exhibit 2.1 to Form 8-K/A filed December 17,
1999.
(4) Incorporated by reference to Exhibit "A" to the Form DEF 14A filed October
25, 1999.
(5) Incorporated by reference to Exhibit 2.1 to Form 8-K filed February 25,
1997.
(6) Incorporated by reference to Exhibit 2.1 to Form 8-K filed July 3, 1997.
(7) Incorporated by reference to Exhibit 3.1 to Form 8-K filed December 6,
1999.
(8) Incorporated by reference to Exhibit A to Form DEF 14A filed on January 3,
2000.
(9) Incorporated by reference to Exhibit "C" to the Form DEF 14A filed October
25, 1999.
(10) Incorporated by reference to Exhibit 3.1 to Form 8-K/A filed December 16,
1999.
(11) Incorporated by reference to Exhibit 2.2 to Form 8-K/A filed December 16,
1999.
(12) Incorporated by reference to Exhibit "C" to the Form DEF 14A filed July
19, 1999.
(13) Incorporated by reference to Exhibit 10.2 to Form 10-QSB filed on
November 15, 1999.
(14) Incorporated by reference to Exhibit 10.3 to Form 10-QSB filed on
November 15, 1999.
(15) Incorporated by reference to Exhibit 10.1 to Form 8-K filed November 2,
1999.
(16) Incorporated by reference to Exhibit 10.5 to Form 10-QSB filed on
November 15, 1999.
(17) Incorporated by reference to Exhibit 10.6 to Form 10-QSB filed on
November 15, 1999.
(18) Incorporated by reference to Exhibit 10.2 to Form 8-K filed on November
2, 1999.
(19) Incorporated by reference to Exhibit 10.3 to Form 8-K filed on November
2, 1999.
(20) Incorporated by reference to Exhibit 10.3 to Form 10-KSB40 filed on March
31, 1998.
(21) Incorporated by reference to Exhibit 10.1 to Form 8-K/A filed December
17, 1999.
(22) Incorporated by reference to Exhibit 10.11 to Form 10-QSB filed on
November 15, 1999.
(23) Incorporated by reference to Exhibit 10.12 to Form 10-QSB filed on
November 15, 1999.
(24) Incorporated by reference to Exhibit 10.13 to Form 10-QSB filed on
November 15, 1999.
(25) Incorporated by reference to Exhibit 10.14 to Form 10-QSB filed on
November 15, 1999.
(26) Incorporated by reference to Exhibit 10.15 to Form 10-QSB filed on
November 15, 1999.
(27) Incorporated by reference to Exhibit 10.16 to Form 10-QSB filed on
November 15, 1999.
(28) Incorporated by reference to Exhibits to definitive Proxy Statement filed
May 11, 1995.
(29) Incorporated by reference to Exhibit "B" to the Form DEF 14A filed May 5,
1997.
(30) Incorporated by reference to Exhibit "B" to the Form DEF 14A filed May
15, 1998.
(31) Incorporated by reference to Exhibit "E" to the Form DEF 14A filed
October 25, 1999.
(32) Incorporated by reference to Exhibit 2.1 to the Form 8-K filed May 6,
1998.
(33) Incorporated by reference to Exhibit 10.9 to the Form S-4 filed June 18,
1998.
II-9
<PAGE>
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
April 15, 2000, by and between 3TEC Energy Corporation, a Delaware corporation
(the "Company") and Floyd C. Wilson ("Employee").
WITNESSETH:
WHEREAS, the Company is engaged in the oil and gas business;
WHEREAS, Employee is currently employed by the Company as its President and
Chief Executive Officer pursuant to an Employment Agreement between the Company
and Employee dated August 27, 1999; and
WHEREAS, the Company desires to replace that Employment Agreement dated
August 27, 1999 with this Agreement; and
WHEREAS, the Company desires to employ Employee as its Chief Executive
Officer and Employee desires to be so employed;
WHEREAS, the Company and Employee desire to set forth in writing the terms
and conditions of their agreements and understandings;
NOW, THEREFORE, in consideration of the foregoing, of the mutual promises
herein contained, and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound, agree as follows:
1. Term of Employment. The Company shall employ Employee in the capacity
set forth herein for a term of two (2) years and eight and one-half (8-1/2)
months commencing on April 15, 2000, and ending on December 31, 2002 (the
"Employment Period"). On the last day of the Employment Period and on each
anniversary of the last day of the Employment Period thereafter, this Agreement
shall automatically be extended for a one (1) year period unless either party
gives notice to the other of the intent to terminate no less than ninety (90)
days prior to the end of the Employment Period or any anniversary thereof.
2. Responsibilities of Employee.
(a) In accepting employment by the Company, Employee shall undertake and
assume the responsibility of performing for and on behalf of the Company any and
all duties customarily associated with the position of Chief Executive Officer
of the Company.
(b) Employee agrees to devote his full time and effort to his duties as
an employee of the Company. Employee may devote a reasonable amount of his time
to civic and
<PAGE>
community affairs, and subject to the provisions of paragraphs 6 and 7 hereof,
to the business and financial interests described on Exhibit A attached hereto;
provided that such other activities do not materially interfere with the
performance of Employee's responsibility as Chief Executive Officer of the
Company.
3. Compensation. As compensation for the services to be rendered by
Employee for the Company under this Agreement, Employee shall be entitled to the
following (collectively referred to hereinafter as "Total Compensation"):
(a) The Company shall pay Employee during the period in which Employee
is employed by the Company an annual salary of Three Hundred Twenty-Five
Thousand Dollars ($325,000) ("Base Compensation"), payable periodically for
such periods as may be established by the Company for payment of its
employees under its normal payroll practices.
(b) In addition, Employee shall be eligible to receive an annual bonus
to be determined by the Company in its sole discretion based on performance
criteria to be adopted by the Compensation Committee of the Board of
Directors of the Company (the "Board").
4. Stock Options; Incentive, Savings and Retirement Plans and Welfare
Benefit Plans.
(a) Employee shall be eligible for stock option grants as determined
annually by the Board.
(b) During the period in which Employee is employed by the Company,
Employee shall be entitled to participate in all incentive, savings and
retirement plans, practices, policies and programs applicable generally to other
key or senior executive employees of the Company.
(c) During the period in which Employee is employed by the Company,
Employee and/or Employee's family, as the case may be, shall be eligible for
participation and shall receive all benefits under welfare benefit plans,
practices and policies and programs provided by the Company to the extent
applicable generally to other key or senior executive employees of the Company,
including, without limitation, medical and dental insurance coverage under the
Company's medical and dental insurance plans.
5. Expenses. Employee shall be reimbursed for all reasonable business
expenses incurred by him in connection with or incident to the performance of
his duties and responsibilities hereunder upon the Employee's submission to the
Company of vouchers or expense statements evidencing such expenses in such form
or format as the Company may reasonably require.
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<PAGE>
6. Business Opportunities and Intellectual Property.
(a) During the period in which Employee is employed by the Company,
Employee shall promptly disclose to the Company all "Business Opportunities" and
"Intellectual Property" (each as defined below).
(b) Employee hereby assigns and agrees to assign to the Company, its
successors, assigns or designees, all of Employee's right, title and interest in
and to all "Business Opportunities" and "Intellectual Property," and further
acknowledges and agrees that all Business Opportunities and Intellectual
Property constitute the exclusive property of the Company.
(c) For purposes hereof, "Business Opportunities" shall mean all business
ideas, prospects, proposals or other opportunities pertaining to the lease,
acquisition, exploration, production, gathering or marketing of hydrocarbons and
related products and the exploration potential of geographical areas on which
hydrocarbon exploration prospects are located, which are:
(i) developed by Employee (A) during the period in which Employee is
employed by the Company, or (B) before the period in which Employee is
employed by the Company, but only to the extent of Employee's rights
thereto during such period, or
(ii) originated by any third party and brought to the attention of
Employee (A) during the period in which Employee is employed by the
Company, or (B) before the period in which Employee is employed by the
Company, but only to the extent of Employee's rights thereto during such
period,
together with information relating thereto, including, without limitation, any
"Business Records" (as defined below).
(d) For purposes hereof "Intellectual Property" shall mean all ideas,
inventions, discoveries, processes, designs, methods, substances, articles,
computer programs and improvements (including, without limitation, enhancements
to, or further interpretation or processing of, information that was in the
possession of Employee prior to the date of this Agreement), whether or not
patentable or copyrightable, which do not fall within the definition of Business
Opportunities, which are discovered, conceived, invented, created or developed
by Employee, alone or with others: (i) during the period in which Employee is
employed by the Company if such discovery, conception, invention, creation, or
development (A) occurs in the course of the Employee's employment with the
Company, or (B) occurs with the use of any of the Company's time, materials or
facilities, or (C) in the opinion of the Board of Directors of the Company,
relates or pertains in any way to the Company's purposes, activities or affairs,
or (ii) before the period in which Employee is employed by the Company, but only
to the extent of Employee's rights thereto during such period.
3
<PAGE>
7. Non-Competition and Non-Disclosure; Injunctive Relief. Employee
acknowledges that the services he is to render in the course of his employment
by the Company are of a special and unusual character with unique value to the
Company. In view of the value to the Company of the services of Employee during
the course of his employment by the Company, because of the Business
Opportunities, Intellectual Property and "Confidential Information" (as defined
below) to be obtained by or disclosed to Employee, and as a inducement to the
Company to enter into this Agreement and to pay to Employee the compensation
stated herein, Employee covenants and agrees as follows:
(a) During the period in which Employee is employed by the Company,
Employee shall not directly or indirectly be employed by 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.
(b) During the period in which Employee is employed by the Company,
Employee shall not, directly or indirectly, in any capacity (including, without
limitation, as a proprietor, investor, director or officer or in any other
individual or representative capacity), be financially interested in or engage
in any business that is engaged in leasing, acquiring, exploring, producing,
gathering or marketing hydrocarbons and related products (the "E & P Business");
however, it is specifically agreed between the parties that Employee may
continue to be financially interested in and engage in any E & P Business that
is described on Exhibit A attached hereto, provided, that such activities do not
materially detract from the Employee's performance of his responsibilities as
Chief Executive Officer, provided, further that, nothing contained in this
paragraph 7(b) shall relieve the Employee of his obligations contained in
paragraph 7(a) above. In addition, Employee may make investments in publicly
traded companies that engage in the E & P Business, provided such investments
represent less than one percent (1%) of the issued and outstanding shares of
such company.
(c) During the period in which Employee is employed by the Company, all
investments made by Employee (whether in his own name or in the name of any
family members), which relate to the lease, acquisition, exploration,
production, gathering or marketing or hydrocarbons and related products shall be
made solely through the Company; and Employee will not (directly or indirectly
through any family members), (i) invest or otherwise participate alongside the
Company in any Business Opportunities, or (ii) invest or otherwise participate
in any business or activity relating to a Business Opportunity, regardless of
whether the Company ultimately participates in such business or activity.
(d) During the period in which Employee is employed by the Company and
thereafter, Employee will not disclose to any third party or directly or
indirectly make use of, in a way materially detrimental to the Company, any and
all trade secrets and confidential or proprietary information pertaining to the
Company (collectively referred to as "Confidential
4
<PAGE>
Information"). For purposes of this Section 7, it is agreed that Confidential
Information includes, without limitation, any information heretofore or
hereafter acquired, developed or used by the Company relating to Business
Opportunities or Intellectual Property or other geological, geophysical,
economic, financial or management aspects of the business, operations,
properties or prospects of the Company whether oral or in written form in a
"Business Records" (as defined in paragraph 7(g) below). Notwithstanding the
foregoing, no information of the Company will be deemed confidential for the
purposes of this paragraph 7(d) if such information is or becomes public
knowledge through no act of Employee or was previously known by Employee prior
to entering into this Agreement.
(e) During the Employment Period or the period in which Employee is
employed by the Company, whichever is longer, and for a six-month period
commencing upon the termination of such longer period, Employee may not solicit,
raid, entice or induce, directly or indirectly, any employee (or person who
within the preceding ninety (90) days was an employee) of the Company or any
other person who is under contract with or rendering services to the Company, to
(i) terminate his employment by, or contractual relationship with, the Company,
(ii) refrain from extending or renewing the same (upon the same or new terms),
(iii) refrain from rendering services to or for the Company, or (iv) become
employed by or to enter into contractual relations with any persons other than
the Company.
(f) Employee acknowledges and agrees that the services to be rendered by
him are of a special, unique and extraordinary character and, in connection with
such services, he will have access to Business Opportunities, Intellectual
Property and Confidential Information vital to the Company's businesses. By
reason of this, the Employee consents and agrees that if he violates any of the
provisions of this Section 7, the Company would sustain irreparable harm and,
therefore, in addition to any other remedies which the Company may have under
this Agreement or otherwise, the Company shall be entitled to an injunction
restraining the Employee from committing or continuing any such violation of
this Agreement. Such right to an injunction shall be cumulative and in addition
to, and not in lieu of, any other remedies to which the Company may show itself
justly entitled. Further, during any period in which the Employee is in breach
of the covenants set forth in this Section 7, the time period of this covenant
shall be extended for an amount of time that the Employee is in breach.
(g) The Employee agrees to promptly deliver to the Company, upon
termination of Employee's employment with the Company, or at any other time when
the Company so requests, all documents relating to the business of the Company,
including, without limitation: all geological and geophysical reports and
related data such as maps, charts, logs, seismographs, seismic records and other
reports and related data, calculations, summaries, memoranda and opinions
relating to the foregoing, production records, electric logs, core data,
pressure data, lease files, well files and records, land files, abstracts, title
opinions, title or curative matters, contract files, notes, records, drawings,
manuals, correspondence, financial and accounting information, customer lists,
statistical data and compilations, patents, copyrights,
5
<PAGE>
trademarks, trade names, inventions, formulae, methods, processes, agreements,
contracts, manuals or any other documents relating to the business of the
Company (collectively, the "Business Records"), and all copies thereof and
therefrom. The Employee confirms that all of the Business Records (and all
copies thereof and therefrom) that are required to be delivered to the Company
pursuant to this paragraph 7(g) constitute the exclusive property of the
Company. The obligation of confidentiality set forth in this Section 7 shall
continue notwithstanding the Employee's delivery of any such documents to the
Company. Notwithstanding the foregoing provisions of this Section 7 or any other
provision of this Agreement, the Employee shall be entitled to retain any
written materials which, as shown by the Employee's records, were in Employee's
possession on or prior to the date hereof, subject to the Company's right to
receive a copy of all such materials.
(h) The representations and covenants contained in this Section 7 on the
part of the Employee will be construed as ancillary to and independent of any
other provision of this Agreement, and the existence of any claim or cause of
action of the Employee against the Company or any officer, director, or
shareholder of the Company, whether predicated on this Agreement or otherwise,
shall not constitute a defense to the enforcement by the Company of the
covenants of the Employee contained in this Section 7. In addition, the
provisions of this Section 7 shall continue to be binding upon the Employee in
accordance with their terms, notwithstanding the termination of the Employee's
employment hereunder for any reason.
(i) The parties to this Agreement agree that the limitations contained in
this Section 7 with respect to time, geographical area, and scope of activity
are reasonable. However, if any court shall determine that the time,
geographical area, or scope of activity of any restriction contained in this
Section 7 is unenforceable, it is the intention of the parties that such
restrictive covenants set forth herein shall not thereby be terminated but shall
be deemed amended to the extent required to render it valid and enforceable.
8. Termination of Employment
(a) Death. Employee's employment shall terminate automatically upon
Employee's death.
(b) Termination of Employment By the Company For Cause. The Company may
terminate Employee's employment under this Agreement for Cause. For purposes
hereof, the term "Cause" shall mean (i) the inability of Employee, despite any
reasonable accommodation required by law, due to bodily injury or disease or any
other physical or mental incapacity, to perform the services provided for
hereunder for a period of 120 days in the aggregate, within any given period of
180 consecutive days during the term of this Agreement, in addition to any
statutorily required leave of absence, (ii) conduct of the Employee that
constitutes fraud, 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 the
6
<PAGE>
Company, (iii) commission of a material act of fraud against the Company, (iv)
embezzlement of funds or misappropriation of other property by the Employee from
the Company; (v) failure of Employee to observe or perform his material duties
and obligations as an employee of the Company or a material breach of this
Agreement, after thirty (30) days advance written notice of such failure or
breach which has not been cured; (vi) Employee's habitual use of illegal
controlled substances, or intoxication during normal business hours while
conducting the Company's business, which, in the reasonable judgment of the
Board, so impairs Employee's credibility and reputation that Employee can no
longer perform his duties; or (vii) Employee has been found civilly liable for
sexual harassment or related offenses (or the Company has been found civilly
liable for such actions by Employee).
(c) Termination By the Company Without Cause. The Company may also
terminate Employee's employment under this Agreement without Cause.
(d) Termination By Employee for Good Reason. If a Change of Control (as
defined hereafter) in the Company has occurred, Employee may terminate his
employment during the Employment Period for Good Reason (defined hereafter) upon
thirty (30) days' notice to the Company. For purposes of this Agreement, the
term "Good Reason" shall mean the occurrence, without Employee's express written
consent, of any one or more of the following events:
(i) A material change in Employee's duties (without the consent of
Employee) or a change in the title or offices held by Employee, or any
occurrence which causes Employee to have his principal place of employment
somewhere other than Houston, Texas.
(ii) A reduction in Employee's compensation or the failure by the
Company to continue to provide prompt payment (or reimbursement to
Employee) of all reasonable expenses incurred by Employee in connection
with Employee's professional and business activities.
(iii) A failure by the Company to waive any and all restrictions that
might exist on the exercise of any stock options held by Employee under the
Company's stock option plans as of the date of a Change of Control.
(iv) The failure of the Company to obtain the assumption of this
Agreement, without limitation or reduction, by any successor to the
Company.
(e) Change of Control. A "Change of Control" shall have occurred if:
(i) fifty percent (50%) or more of the outstanding common stock of the
Company has been acquired by any person or persons (as defined in Section
3(a)(9) of the Securities Exchange Act of 1934 (the "Act")), provided such
person(s) is not a
7
<PAGE>
stockholder(s) of the Company currently holding ten percent (10%) or more
of the outstanding common stock of the Company at the time of the execution
of this Agreement. For purposes of this paragraph 8, such person shall
include affiliated persons (as defined in the Act));
(ii) there has been a merger or equivalent combination involving the
Company after which fifty percent (50%) or more of the voting stock of the
surviving corporation is held by persons other than those persons who were
stockholders holding ten percent (10%) or more of the outstanding stock of
the Company immediately prior to the date of such merger or equivalent
combination; or
(iii) there has been a merger or equivalent combination or stock sale
involving the Company and after such transaction fifty percent (50%) or
more of the members of the surviving company's Board of Directors elected
by stockholders are persons who were not directors immediately prior to
such transaction; or
(f) Voluntary Termination By Employee. Employee shall have the right at
any time after the date hereof to voluntarily terminate his employment with the
Company (a "Voluntary Termination") for any reason in the sole discretion of
Employee by not less than thirty (30) days' prior written notice to the Company;
provided however, a termination without Cause or a termination for Good Reason
shall not be treated for any purpose hereunder as a Voluntary Termination.
9. Termination Procedures and Certain Definitions.
(a) Notice of Termination. Any termination by the Company for Cause,
without Cause or by Employee for Good Reason or in a Voluntary Termination,
shall be communicated by Notice of Termination to the other party hereto given
in accordance with paragraph 13 of this Agreement. For purposes of this
Agreement, a "Notice of Termination" means a written notice which (i) indicates
the specific termination provision in this Agreement relied upon, (ii) to the
extent applicable, sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Employee's employment under the
provision so indicated and (iii) if the Date of Termination (as defined below)
is other than the date of receipt of such notice, specifies the termination
date. The failure by Employee or the Company to set forth in the Notice of
Termination any fact or circumstance which contributes to a showing of Good
Reason or Cause shall not waive any right of Employee or the Company,
respectively, hereunder or preclude Employee or the Company, respectively, from
asserting such fact or circumstance in enforcing Employee's or the Company's
rights hereunder. Employee's continued employment with the Company, after a
Notice of Termination is provided, shall not constitute consent to, or a waiver
of any rights with respect to, any circumstance constituting Good Reason
hereunder.
8
<PAGE>
(b) Date of Termination. "Date of Termination" means (i) if Employee's
employment is terminated by the Company for Cause, the date of Employee's
receipt of the Notice of Termination or any later date specified therein, as the
case may be, (ii) if Employee's employment is terminated by the Company other
than for Cause, the Date of Termination shall be the date not less than thirty
(30) days after the date on which the Company notifies Employee of such
termination, and (iii) if Employee terminates his employment for Good Reason or
in a Voluntary Termination, the Date of Termination shall be the date, not less
than thirty (30) days after the date on which Employee notifies the Company of
such termination.
10. Obligations of the Company on Termination.
(a) If during the Employment Period, Employee's employment is terminated
with Cause, upon Employee's death or upon a Voluntary Termination, the Company
shall immediately pay Employee in cash the portion of his Base Compensation
previously earned but not yet paid.
(b) If during the Employment Period, Employee's employment is terminated by
the Company without Cause or by Employee for Good Reason:
(i) In General. The Company shall immediately pay Employee in
cash the amount of his Total Compensation previously earned but not
yet paid.
(ii) Severance Benefits.
(a) All stock options granted to Employee under the
Company's stock option plans, which have not already vested,
shall immediately vest and be exercisable.
(b) Employee shall continue to participate in all of the
Company's welfare benefit plans, including health and medical
plans, for six (6) months after termination and shall be entitled
to reimbursement of COBRA payments to maintain medical and dental
insurance up to twelve (12) additional months for said coverage.
(c) The Company shall pay Employee in a lump sum a
"Severance Benefit" in cash equal to two (2) times Employee's
Base Compensation as of the date of such termination.
Such payment shall be made within thirty (30) days following said
termination.
9
<PAGE>
11. Burden and Benefit. This Agreement shall be binding upon, and shall
inure to the benefit of, the Company and Employee, and their respective heirs,
personal and legal representatives, successors and permitted assigns.
Employee's rights and obligations may not be assigned without the proper written
consent of the Company.
12. Governing Law. It is understood and agreed that the construction and
interpretation of this Agreement shall at all times and in all respects be
governed by the laws of the State of Texas. The parties hereto hereby
irrevocably submit to the exclusive jurisdiction of the courts of the State of
Texas and the federal courts of the United States of America located in Texas,
and appropriate appellate courts therefrom, over any dispute arising out of or
relating to this Agreement or any of the transactions contemplated hereby, and
each party hereby irrevocably agrees that all claims in respect of such dispute
or proceeding may be heard and determined in such courts. The parties hereby
irrevocably waive, to the fullest extent permitted by applicable law, any
objection which they may now or hereafter have to the laying of venue of any
dispute arising out of or relating to this Agreement or any of the transactions
contemplated hereby brought in such court or any defense of inconvenient forum
for the maintenance of such dispute. Each of the parties hereto agrees that a
judgment in any such dispute may be enforced in other jurisdictions by suit on
the judgment or in any other manner provided by law. This consent to
jurisdiction is being given solely for purposes of this Agreement and is not
intended to, and shall not, confer consent to jurisdiction with respect to any
other dispute in which a party to this Agreement may become involved. Each of
the parties hereto hereby consents to process being served by any party to this
Agreement in any suit, action, or proceeding of the nature specified above by
the mailing of a copy thereof in the manner specified by the provisions of
Section 13.
13. Notice. Any notice required to be given shall be sufficient if it is
in writing and sent by certified or registered mail, return receipt requested,
first-class postage prepaid, to his last known residence in the case of
Employee, and to its principal office in the State of Texas in the case of the
Company.
14. Severability. The provisions of this Agreement shall be deemed
severable, and the invalidity or unenforceability of any one or more of the
provisions of this Agreement shall not affect the validity and enforceability of
the other provisions.
15. Entire Agreement. This Agreement contains the entire agreement and
understanding by and between the Company and Employee with respect to the
employment of Employee, and no representations, promises, agreements, or
understandings, written or oral, not contained herein shall be of any force or
effect. No waiver of any provision of this Agreement shall be valid unless it
is in writing and signed by the party against whom the waiver is sought to be
enforced. No valid waiver of any provision of this Agreement at any time shall
be deemed a waiver of any other provision of this Agreement at such time or any
other time.
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<PAGE>
16. Modification. No amendment, alteration or modification to any of the
provisions of this Agreement shall be valid unless made in writing and signed by
both parties.
17. Paragraph Headings. The paragraph headings have been inserted for
convenience only and are not to be considered when construing the provisions of
this Agreement.
18. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the Company and Employee have executed this Agreement
on the day and year first above written.
"COMPANY" "EMPLOYEE"
3TEC ENERGY CORPORATION
--------------------------------
FLOYD C. WILSON
By:
------------------------------
Stephen W. Herod
Executive Vice President
11
<PAGE>
EXHIBIT 10.18
INTERCREDITOR AGREEMENT
THIS INTERCREDITOR AGREEMENT (the "Agreement") dated as of ___________,
---------
1999 is entered into among MIDDLE BAY OIL COMPANY, INC. ("Borrower"), BANK ONE,
--------
TEXAS, N.A., as agent for any holder of a Note under the Senior Loan Agreement
("Senior Lender") and 3TEC ENERGY CORPORATION ("Subordinated Lender").
------------- -------------------
W I T N E S S E T H:
WHEREAS, Borrower, the Lenders under the Senior Loan Agreement (the
"Lenders") and Senior Lender entered into that certain Restated Credit Agreement
-------
dated of even date herewith (the "Senior Loan Agreement") pursuant to which the
---------------------
Lenders agreed to provide Borrower with a $250,000,000 revolving credit
facility; and
WHEREAS, Borrower and Subordinated Lender entered into a Securities
Purchase Agreement dated July 1, 1999 (the "Subordinated Loan Agreement"),
---------------------------
pursuant to which Borrower issued and Subordinated Lender purchased a certain
$10,700,000 Senior Subordinated Note dated August 27, 1999 (the "Subordinated
------------
Note"); and
- ----
WHEREAS, the indebtedness evidenced by the Subordinated Note and all
obligations of Borrower under the Subordinated Loan Agreement are herein called
the "Subordinated Debt;" and
-----------------
WHEREAS, to induce the Lenders and the Senior Lender to enter into the
Senior Loan Agreement, the Borrower and the Subordinated Lender have agreed to
enter into this Agreement with the Senior Lender to subordinate the rights of
the Subordinated Lender to the rights of the Lenders and the Senior Lender as
provided herein.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
1. Subordination of Subordinated Debt. The payment of the Subordinated
-----------------------------------
Debt is expressly subordinated to the prior payment in full in cash of the
Senior Debt to the extent and in the manner set forth in this Agreement. Except
as provided in Section 3 and Section 4 of this Agreement, the Borrower and
Subordinated Lender hereby postpone and subordinate the Subordinated Debt to all
Senior Debt. The Borrower and Subordinated Lender agree that so long as the
Senior Loan Agreement is in effect and thereafter until the Senior Debt is paid
in full in cash and, except as provided in Section 3 and Section 4 of this
Agreement, Subordinated Lender will not demand, take or receive from the
Borrower, in cash or property or by set-off or in any other manner, payment of
or on account of, and the Borrower will not pay, the whole or any part of the
INTERCREDITOR AGREEMENT - Page 1
<PAGE>
Subordinated Debt. As used herein, the term "Senior Debt" shall include any and
-----------
all obligations owed to the Lenders and the Senior Lender by Borrower pursuant
to the Senior Loan Agreement and the Notes issued in connection therewith,
including principal, interest, post-petition interest during any bankruptcy
proceeding (whether or not allowed or allowable by a court), fees, expenses,
obligations on letters of credit, obligations relating to derivatives and any
other amount due or to become due under the Senior Loan Agreement and Notes.
Subordinated Lender expressly acknowledging that such Senior Debt includes
indebtedness between the Borrower and the Lenders or the Senior Lender hereafter
created or arising under the Senior Loan Agreement, and any and all renewals and
extensions of all or any part of such indebtedness and liabilities.
2. Security for Subordinated Debt. The parties agree that the
-------------------------------
Subordinated Debt shall be unsecured.
3. Payment of Credit Interest on Subordinated Debt. The provisions of
------------------------------------------------
Section 1 hereof notwithstanding, the Borrower may pay and Subordinated Lender
may receive the interest (the "Credit Interest") which is due and payable on
---------------
the Subordinated Debt if (a) the full payment of all amounts then due and
payable on the Senior Debt have been made or duly provided for in accordance
with the Senior Loan Agreement, and (b) a Subordination Event (as defined below)
has not occurred or would not occur as a result of such payment. Upon the
occurrence of a Subordination Event, all claims of Subordinated Lender to the
Credit Interest shall be subordinated to the prior payment in full of the Senior
Debt, and all further payments of Credit Interest to Subordinated Lender shall
immediately cease. After the occurrence of a Subordination Event, the payment
of Credit Interest by the Borrower to Subordinated Lender may resume only if the
Subordination Event has been cured to the satisfaction of the Senior Lender or
waived in writing by Senior Lender (which waiver includes an express permission
to pay such Credit Interest). "Subordination Event" means the occurrence of
-------------------
either (a) a Default or Event of Default for which Senior Lender has sent
written notice of such Default or Event of Default (other than an Event of
Default specified in Section 14(f) or (g) of the Senior Credit Agreement for
which no such notice need be sent) to Borrower (a "Default Notice") or (b) a
--------------
Borrowing Base deficiency under the Senior Loan Agreement. Notwithstanding the
above, if within one hundred eight (180) days after the sending of such Default
Notice by Senior Lender such Default or Event of Default has not become the
subject of (a) judicial proceedings or (b) an acceleration notice by Senior
Lender, then Borrower (unless in such interval the provisions of this Section 3
have come into effect on account of any other Default or Event of Default that
did not exist on the date of any prior Default Notice) shall resume paying, and
Subordinated Lender shall be entitled to receive, Credit Interest until such
time (if any) that such judicial proceedings are instituted, such acceleration
notice is given or a Default Notice (on account of any other Default or Event of
Default) is given and a period of one hundred eighty (180) days shall not have
elapsed since the giving of such Default Notice as contemplated above.
4. Prepayment of Principal on the Subordinated Debt. The provisions of
-------------------------------------------------
Section 1 hereof notwithstanding, a part or all of the principal balance of the
Subordinated Debt may be paid (the "Note Payment"), (a) if the Senior Debt has
been paid in full in cash and all commitments of the
INTERCREDITOR AGREEMENT - Page 2
<PAGE>
Banks under the Senior Loan Agreement to make advances or lend money have
terminated, or (b) with the prior written consent of the Lenders.
5. Restriction on Other Actions. Prior to the payment in full in cash of
----------------------------
the Senior Debt and the termination of all commitments of the Lenders under the
Senior Loan Agreement, Subordinated Lender shall not take any action to declare
the Subordinated Note due or in default, collect or accelerate the Subordinated
Debt or exercise any remedies in respect of the Subordinated Debt set forth in
the Subordinated Loan Agreement or that may otherwise be available to
Subordinated Lender, either at law or in equity, including but not limited to
initiating any plan or proceeding pursuant to any bankruptcy, insolvency, or
receivership proceeding, or seeking an assignment for the benefit of creditors
or the marshalling of the assets and liability of the Borrower.
6. Proof of Claim/Power of Attorney. In the event of any liquidation,
---------------------------------
conservatorship, bankruptcy, reorganization, rearrangement, debtor's relief, or
other insolvency proceedings affecting the Borrower, the Subordinated Lender
will at the Senior Lender's request and at Subordinated Lender's expense file
any claims, proofs of claim, or other instruments of similar character necessary
to enforce the obligations of the Borrower in respect of the Subordinated Debt
and will hold in trust for the Senior Lender and pay over to the Senior Lender,
in the form received, to be applied on the Senior Debt, any and all moneys,
dividends, or other assets received in any such proceedings on account of the
Subordinated Debt, unless and until the Senior Debt shall be paid in full.
7. Payments Held in Trust. Except to the extent that Credit Interest is
-----------------------
permitted to be paid to Subordinated Lender pursuant to the terms of Section 3
hereof or a Note Payment is permitted to be paid to Subordinated Lender pursuant
to the terms of Section 4 hereof, should Subordinated Lender receive any payment
or distribution from the Borrower upon or with respect to the Subordinated Debt,
Subordinated Lender will forthwith deliver the same to the Senior Lender, in
precisely the form received (except for endorsement or assignment of
Subordinated Lender where necessary), for application on the Senior Debt and,
until so delivered, the same shall be held in trust by Subordinated Lender as
the Senior Lender's property. In the event of the failure of Subordinated
Lender to make any such endorsement or assignment, the Agent is hereby
irrevocably authorized to make the same.
8. No Modification of Subordinated Debt. The Borrower and Subordinated
-------------------------------------
Lender agree not to renew, extend, modify or amend in any material respect the
Subordinated Debt or any instrument or agreement documenting or securing the
Subordinated Debt without the prior written consent of the Senior Lender.
Notwithstanding the foregoing, Borrower may, without the consent of Senior
Lender, (a) extend the date on which payments are required under the
Subordinated Note, (b) reduce the interest rate applicable to the Subordinated
Note, (c) waive compliance with the terms of the Subordinated Note or loan
documents associated therewith or any default arising from non-compliance or (d)
relax or make less restrictive any covenant in the Subordinated Note or loan
documents associated therewith. Notwithstanding any provision of this Agreement
to the contrary,
INTERCREDITOR AGREEMENT - Page 3
<PAGE>
(i) Subordinated Lender may convert the Subordinated Note or a portion of such
note into shares of common stock of Borrower at any time in accordance with the
terms of such note, and (ii) the holder of a stock purchase warrant issued
pursuant to the Subordinated Loan Agreement may exercise any such warrant, in
whole or in part, for shares of common stock of Borrower in accordance with the
terms of such warranty (provided such exercise shall not involve the payment of
any cash by Borrower).
9. Waivers and Consents. The Senior Lender, the Lenders and Borrower may
---------------------
at any time and from time to time extend, renew or otherwise alter, as the
Senior Lender and Borrower may deem proper, the terms of any or all of the
Senior Debt or of any security therefor or of any agreement providing therefor
or relating to the Senior Debt or to such security, or accelerate the maturity
of any or all of the Senior Debt in accordance with the terms thereof or of any
agreement among the Senior Lender, the Lenders and Borrower, and the Senior
Lender may exchange, sell, surrender, release, fail to resort to or realize upon
or otherwise deal with any or all security for the Senior Debt, or release or
fail to resort to or enforce guaranties or endorsements of, or of the
liabilities of any obligors liable upon, the Senior Debt or release or fail to
set-off any balance of funds of the Borrower with the Senior Lender or under the
Senior Lender's control, and generally deal with the Borrower and all guarantors
and endorsers of, and all obligors liable upon, the Senior Debt, as the Senior
Lender sees fit, all without notice to or consent of Subordinated Lender and
without affecting to any extent any obligation or liability of Subordinated
Lender, or any of the Senior Lenders' or any Lender's rights, hereunder.
Without in any way limiting the foregoing, Subordinated Lender understands and
agrees that the Senior Lender shall have uncontrolled power and discretion,
without notice to Subordinated Lender, to deal in any manner with any
indebtedness, interest, cost and expenses payable by or liability of the
Borrower to the Lenders or the Senior Lender and any security or guaranties
therefor. Subordinated Lender hereby waives and agrees not to assert against
the Senior Lender or any Lender any rights which a guarantor or surety could
exercise, and nothing in this Agreement shall be deemed to constitute
Subordinated Lender as a guarantor or a surety. Subordinated Lender further
consents and agrees to any action taken or omitted to be taken with respect to
the Senior Loan Agreement, the Senior Loan Documents, the Senior Debt, and the
security and collateral therefor, whether or not such action or omission
prejudices Subordinated Lender or increases the likelihood that the Subordinated
Debt will not be paid, and whether or not such circumstance might otherwise
constitute a defense available to, or a discharge of, the Borrower or
Subordinated Lender.
10. Subrogation. No payment or distribution to the Senior Lender pursuant
-----------
to the provisions of this Agreement shall entitle Subordinated Lender to
exercise any rights of subrogation in respect hereof until all of the Senior
Debt shall have been irrevocably and unconditionally paid in full in cash.
11. Further Assurances. The Borrower and Subordinated Lender agree that
-------------------
any note representing the Subordinated Debt shall be stamped with a statement
referring to the existence of this Agreement. The Borrower and Subordinated
Lender each will, at its expense and from time to
INTERCREDITOR AGREEMENT - Page 4
<PAGE>
time, promptly execute and deliver all further instruments and documents, and
take all further action that may be necessary or desirable, or that the Senior
Lender may reasonably request, in order to protect any right or interest granted
or purported to be granted hereby or to enable the Senior Lender to exercise and
enforce its rights and remedies hereunder.
12. Representations. Subordinated Lender warrants and represents to the
----------------
Senior Lender that (a) it has the power and authority to execute, deliver and
carry out the terms of this Agreement, (b) it has taken all necessary action to
authorize the execution and delivery of this Agreement, (c) this Agreement has
been duly executed and delivered by Subordinated Lender and constitutes the
legal, valid and binding obligation of Subordinated Lender enforceable in
accordance with its terms except to the extent that the enforcement thereof may
be limited by applicable bankruptcy, insolvency, reorganization or other similar
laws affecting the enforcement of creditors' rights generally, and (d) attached
hereto as Exhibit "A" is a true and correct copy of the Subordinated Note.
-----------
13. Costs and Expenses. Borrower agrees to pay, on demand, to the Senior
-------------------
Lender all costs and expenses (including court costs and reasonable attorneys'
fees) incurred by any Lenders or the Senior Lender in the enforcement of this
Agreement.
14. Binding Effect. This Agreement shall be immediately binding on the
---------------
Senior Lender, Borrower and Subordinated Lender and the successors and assigns
of the Senior Lender, the Lenders, Borrower and Subordinated Lender, and the
covenants of Subordinated Lender and the Borrower in favor of the Senior Lender
and the Lenders contained herein shall extend to, include, and be enforceable
by, any transferee, assignee, or endorsee of the Senior Lender or the Lenders of
any of the Senior Debt.
15. Governing Law. This Agreement shall be governed by, and construed in
--------------
accordance with, the laws of the State of Texas and is performable in Dallas
County, Texas.
16. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed to be an original for all purposes.
17. Defined Terms. Unless otherwise defined herein, terms used herein are
-------------
used as defined in the Senior Loan Agreement.
18. THIS INTERCREDITOR AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
INTERCREDITOR AGREEMENT - Page 5
<PAGE>
EXECUTED as of the date first above written.
SUBORDINATED LENDER:
-------------------
3TEC ENERGY CORPORATION,
a Delaware limited liability company
By:_______________________________________________
Name:_____________________________________________
Title:____________________________________________
BORROWER:
--------
MIDDLE BAY OIL COMPANY, INC.,
an Alabama corporation
By:_______________________________________________
Name:_____________________________________________
Title:____________________________________________
SENIOR LENDER:
-------------
BANK ONE, TEXAS, N.A.,
a national banking association
By:_______________________________________________
Name:_____________________________________________
Title:____________________________________________
INTERCREDITOR AGREEMENT - Page 6
<PAGE>
EXHIBIT 10.19
INTERCREDITOR AGREEMENT
THIS INTERCREDITOR AGREEMENT (the "Agreement") dated as of ___________,
---------
1999 is entered into among MIDDLE BAY OIL COMPANY, INC. ("Borrower"), BANK ONE,
--------
TEXAS, N.A., as agent for any holder of a Note under the Senior Loan Agreement
("Senior Lender") and SHOEMAKER FAMILY PARTNERS, LP ("Subordinated Lender").
------------- -------------------
W I T N E S S E T H:
WHEREAS, Borrower, the Lenders under the Senior Loan Agreement (the
"Lenders") and Senior Lender entered into that certain Restated Credit Agreement
-------
dated of even date herewith (the "Senior Loan Agreement") pursuant to which the
---------------------
Lenders agreed to provide Borrower with a $250,000,000 revolving credit
facility; and
WHEREAS, Borrower and Subordinated Lender entered into a Securities
Purchase Agreement dated July 1, 1999 (the "Subordinated Loan Agreement"),
---------------------------
pursuant to which Borrower issued and Subordinated Lender purchased a certain
$10,700,000 Senior Subordinated Note dated August 27, 1999 (the "Subordinated
------------
Note"); and
- ----
WHEREAS, the indebtedness evidenced by the Subordinated Note and all
obligations of Borrower under the Subordinated Loan Agreement are herein called
the "Subordinated Debt;" and
-----------------
WHEREAS, to induce the Lenders and the Senior Lender to enter into the
Senior Loan Agreement, the Borrower and the Subordinated Lender have agreed to
enter into this Agreement with the Senior Lender to subordinate the rights of
the Subordinated Lender to the rights of the Lenders and the Senior Lender as
provided herein.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
1. Subordination of Subordinated Debt. The payment of the Subordinated
-----------------------------------
Debt is expressly subordinated to the prior payment in full in cash of the
Senior Debt to the extent and in the manner set forth in this Agreement. Except
as provided in Section 3 and Section 4 of this Agreement, the Borrower and
Subordinated Lender hereby postpone and subordinate the Subordinated Debt to all
Senior Debt. The Borrower and Subordinated Lender agree that so long as the
Senior Loan Agreement is in effect and thereafter until the Senior Debt is paid
in full in cash and, except as provided in Section 3 and Section 4 of this
Agreement, Subordinated Lender will not demand, take or receive from the
Borrower, in cash or property or by set-off or in any other manner, payment of
or on account of, and the Borrower will not pay, the whole or any part of the
INTERCREDITOR AGREEMENT - Page 1
<PAGE>
Subordinated Debt. As used herein, the term "Senior Debt" shall include any and
-----------
all obligations owed to the Lenders and the Senior Lender by Borrower pursuant
to the Senior Loan Agreement and the Notes issued in connection therewith,
including principal, interest, post-petition interest during any bankruptcy
proceeding (whether or not allowed or allowable by a court), fees, expenses,
obligations on letters of credit, obligations relating to derivatives and any
other amount due or to become due under the Senior Loan Agreement and Notes.
Subordinated Lender expressly acknowledging that such Senior Debt includes
indebtedness between the Borrower and the Lenders or the Senior Lender hereafter
created or arising under the Senior Loan Agreement, and any and all renewals and
extensions of all or any part of such indebtedness and liabilities.
2. Security for Subordinated Debt. The parties agree that the
-------------------------------
Subordinated Debt shall be unsecured.
3. Payment of Credit Interest on Subordinated Debt. The provisions of
------------------------------------------------
Section 1 hereof notwithstanding, the Borrower may pay and Subordinated Lender
may receive the interest (the "Credit Interest") which is due and payable on
---------------
the Subordinated Debt if (a) the full payment of all amounts then due and
payable on the Senior Debt have been made or duly provided for in accordance
with the Senior Loan Agreement, and (b) a Subordination Event (as defined below)
has not occurred or would not occur as a result of such payment. Upon the
occurrence of a Subordination Event, all claims of Subordinated Lender to the
Credit Interest shall be subordinated to the prior payment in full of the Senior
Debt, and all further payments of Credit Interest to Subordinated Lender shall
immediately cease. After the occurrence of a Subordination Event, the payment
of Credit Interest by the Borrower to Subordinated Lender may resume only if the
Subordination Event has been cured to the satisfaction of the Senior Lender or
waived in writing by Senior Lender (which waiver includes an express permission
to pay such Credit Interest). "Subordination Event" means the occurrence of
-------------------
either (a) a Default or Event of Default for which Senior Lender has sent
written notice of such Default or Event of Default (other than an Event of
Default specified in Section 14(f) or (g) of the Senior Credit Agreement for
which no such notice need be sent) to Borrower (a "Default Notice") or (b) a
--------------
Borrowing Base deficiency under the Senior Loan Agreement. Notwithstanding the
above, if within one hundred eight (180) days after the sending of such Default
Notice by Senior Lender such Default or Event of Default has not become the
subject of (a) judicial proceedings or (b) an acceleration notice by Senior
Lender, then Borrower (unless in such interval the provisions of this Section 3
have come into effect on account of any other Default or Event of Default that
did not exist on the date of any prior Default Notice) shall resume paying, and
Subordinated Lender shall be entitled to receive, Credit Interest until such
time (if any) that such judicial proceedings are instituted, such acceleration
notice is given or a Default Notice (on account of any other Default or Event of
Default) is given and a period of one hundred eighty (180) days shall not have
elapsed since the giving of such Default Notice as contemplated above.
4. Prepayment of Principal on the Subordinated Debt. The provisions of
-------------------------------------------------
Section 1 hereof notwithstanding, a part or all of the principal balance of the
Subordinated Debt may be paid (the "Note Payment"), (a) if the Senior Debt has
been paid in full in cash and all commitments of the
INTERCREDITOR AGREEMENT - Page 2
<PAGE>
Banks under the Senior Loan Agreement to make advances or lend money have
terminated, or (b) with the prior written consent of the Lenders.
5. Restriction on Other Actions. Prior to the payment in full in cash of
-----------------------------
the Senior Debt and the termination of all commitments of the Lenders under the
Senior Loan Agreement, Subordinated Lender shall not take any action to declare
the Subordinated Note due or in default, collect or accelerate the Subordinated
Debt or exercise any remedies in respect of the Subordinated Debt set forth in
the Subordinated Loan Agreement or that may otherwise be available to
Subordinated Lender, either at law or in equity, including but not limited to
initiating any plan or proceeding pursuant to any bankruptcy, insolvency, or
receivership proceeding, or seeking an assignment for the benefit of creditors
or the marshalling of the assets and liability of the Borrower.
6. Proof of Claim/Power of Attorney. In the event of any liquidation,
---------------------------------
conservatorship, bankruptcy, reorganization, rearrangement, debtor's relief, or
other insolvency proceedings affecting the Borrower, the Subordinated Lender
will at the Senior Lender's request and at Subordinated Lender's expense file
any claims, proofs of claim, or other instruments of similar character necessary
to enforce the obligations of the Borrower in respect of the Subordinated Debt
and will hold in trust for the Senior Lender and pay over to the Senior Lender,
in the form received, to be applied on the Senior Debt, any and all moneys,
dividends, or other assets received in any such proceedings on account of the
Subordinated Debt, unless and until the Senior Debt shall be paid in full.
7. Payments Held in Trust. Except to the extent that Credit Interest is
-----------------------
permitted to be paid to Subordinated Lender pursuant to the terms of Section 3
hereof or a Note Payment is permitted to be paid to Subordinated Lender pursuant
to the terms of Section 4 hereof, should Subordinated Lender receive any payment
or distribution from the Borrower upon or with respect to the Subordinated Debt,
Subordinated Lender will forthwith deliver the same to the Senior Lender, in
precisely the form received (except for endorsement or assignment of
Subordinated Lender where necessary), for application on the Senior Debt and,
until so delivered, the same shall be held in trust by Subordinated Lender as
the Senior Lender's property. In the event of the failure of Subordinated
Lender to make any such endorsement or assignment, the Agent is hereby
irrevocably authorized to make the same.
8. No Modification of Subordinated Debt. The Borrower and Subordinated
-------------------------------------
Lender agree not to renew, extend, modify or amend in any material respect the
Subordinated Debt or any instrument or agreement documenting or securing the
Subordinated Debt without the prior written consent of the Senior Lender.
Notwithstanding the foregoing, Borrower may, without the consent of Senior
Lender, (a) extend the date on which payments are required under the
Subordinated Note, (b) reduce the interest rate applicable to the Subordinated
Note, (c) waive compliance with the terms of the Subordinated Note or loan
documents associated therewith or any default arising from non-compliance or (d)
relax or make less restrictive any covenant in the Subordinated Note or loan
documents associated therewith. Notwithstanding any provision of this Agreement
to the contrary,
INTERCREDITOR AGREEMENT - Page 3
<PAGE>
(i) Subordinated Lender may convert the Subordinated Note or a portion of such
note into shares of common stock of Borrower at any time in accordance with the
terms of such note, and (ii) the holder of a stock purchase warrant issued
pursuant to the Subordinated Loan Agreement may exercise any such warrant, in
whole or in part, for shares of common stock of Borrower in accordance with the
terms of such warranty (provided such exercise shall not involve the payment of
any cash by Borrower).
9. Waivers and Consents. The Senior Lender, the Lenders and Borrower may
---------------------
at any time and from time to time extend, renew or otherwise alter, as the
Senior Lender and Borrower may deem proper, the terms of any or all of the
Senior Debt or of any security therefor or of any agreement providing therefor
or relating to the Senior Debt or to such security, or accelerate the maturity
of any or all of the Senior Debt in accordance with the terms thereof or of any
agreement among the Senior Lender, the Lenders and Borrower, and the Senior
Lender may exchange, sell, surrender, release, fail to resort to or realize upon
or otherwise deal with any or all security for the Senior Debt, or release or
fail to resort to or enforce guaranties or endorsements of, or of the
liabilities of any obligors liable upon, the Senior Debt or release or fail to
set-off any balance of funds of the Borrower with the Senior Lender or under the
Senior Lender's control, and generally deal with the Borrower and all guarantors
and endorsers of, and all obligors liable upon, the Senior Debt, as the Senior
Lender sees fit, all without notice to or consent of Subordinated Lender and
without affecting to any extent any obligation or liability of Subordinated
Lender, or any of the Senior Lenders' or any Lender's rights, hereunder.
Without in any way limiting the foregoing, Subordinated Lender understands and
agrees that the Senior Lender shall have uncontrolled power and discretion,
without notice to Subordinated Lender, to deal in any manner with any
indebtedness, interest, cost and expenses payable by or liability of the
Borrower to the Lenders or the Senior Lender and any security or guaranties
therefor. Subordinated Lender hereby waives and agrees not to assert against
the Senior Lender or any Lender any rights which a guarantor or surety could
exercise, and nothing in this Agreement shall be deemed to constitute
Subordinated Lender as a guarantor or a surety. Subordinated Lender further
consents and agrees to any action taken or omitted to be taken with respect to
the Senior Loan Agreement, the Senior Loan Documents, the Senior Debt, and the
security and collateral therefor, whether or not such action or omission
prejudices Subordinated Lender or increases the likelihood that the Subordinated
Debt will not be paid, and whether or not such circumstance might otherwise
constitute a defense available to, or a discharge of, the Borrower or
Subordinated Lender.
10. Subrogation. No payment or distribution to the Senior Lender pursuant
------------
to the provisions of this Agreement shall entitle Subordinated Lender to
exercise any rights of subrogation in respect hereof until all of the Senior
Debt shall have been irrevocably and unconditionally paid in full in cash.
11. Further Assurances. The Borrower and Subordinated Lender agree that
-------------------
any note representing the Subordinated Debt shall be stamped with a statement
referring to the existence of this Agreement. The Borrower and Subordinated
Lender each will, at its expense and from time to
INTERCREDITOR AGREEMENT - Page 4
<PAGE>
time, promptly execute and deliver all further instruments and documents, and
take all further action that may be necessary or desirable, or that the Senior
Lender may reasonably request, in order to protect any right or interest granted
or purported to be granted hereby or to enable the Senior Lender to exercise and
enforce its rights and remedies hereunder.
12. Representations. Subordinated Lender warrants and represents to the
----------------
Senior Lender that (a) it has the power and authority to execute, deliver and
carry out the terms of this Agreement, (b) it has taken all necessary action to
authorize the execution and delivery of this Agreement, (c) this Agreement has
been duly executed and delivered by Subordinated Lender and constitutes the
legal, valid and binding obligation of Subordinated Lender enforceable in
accordance with its terms except to the extent that the enforcement thereof may
be limited by applicable bankruptcy, insolvency, reorganization or other similar
laws affecting the enforcement of creditors' rights generally, and (d) attached
hereto as Exhibit "A" is a true and correct copy of the Subordinated Note.
-----------
13. Costs and Expenses. Borrower agrees to pay, on demand, to the Senior
-------------------
Lender all costs and expenses (including court costs and reasonable attorneys'
fees) incurred by any Lenders or the Senior Lender in the enforcement of this
Agreement.
14. Binding Effect. This Agreement shall be immediately binding on the
---------------
Senior Lender, Borrower and Subordinated Lender and the successors and assigns
of the Senior Lender, the Lenders, Borrower and Subordinated Lender, and the
covenants of Subordinated Lender and the Borrower in favor of the Senior Lender
and the Lenders contained herein shall extend to, include, and be enforceable
by, any transferee, assignee, or endorsee of the Senior Lender or the Lenders of
any of the Senior Debt.
15. Governing Law. This Agreement shall be governed by, and construed in
--------------
accordance with, the laws of the State of Texas and is performable in Dallas
County, Texas.
16. Counterparts. This Agreement may be executed in counterparts, each of
-------------
which shall be deemed to be an original for all purposes.
17. Defined Terms. Unless otherwise defined herein, terms used herein are
--------------
used as defined in the Senior Loan Agreement.
18. THIS INTERCREDITOR AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
INTERCREDITOR AGREEMENT - Page 5
<PAGE>
EXECUTED as of the date first above written.
SUBORDINATED LENDER:
-------------------
SHOEMAKER PARTNERS, LP,
a New Jersey limited partnership
By:__________________________________________
Name:________________________________________
Title:_______________________________________
BORROWER:
--------
MIDDLE BAY OIL COMPANY, INC.,
an Alabama corporation
By:__________________________________________
Name:________________________________________
Title:_______________________________________
SENIOR LENDER:
-------------
BANK ONE, TEXAS, N.A.,
a national banking association
By:__________________________________________
Name:________________________________________
Title:_______________________________________
INTERCREDITOR AGREEMENT - Page 6
<PAGE>
EXHIBIT 10.20
INTERCREDITOR AGREEMENT
THIS INTERCREDITOR AGREEMENT (the "Agreement") dated as of ___________,
---------
1999 is entered into among MIDDLE BAY OIL COMPANY, INC. ("Borrower"), BANK ONE,
--------
TEXAS, N.A., as agent for any holder of a Note under the Senior Loan Agreement
("Senior Lender") and SHOEINVEST II, LP ("Subordinated Lender").
------------- -------------------
W I T N E S S E T H:
WHEREAS, Borrower, the Lenders under the Senior Loan Agreement (the
"Lenders") and Senior Lender entered into that certain Restated Credit Agreement
-------
dated of even date herewith (the "Senior Loan Agreement") pursuant to which the
---------------------
Lenders agreed to provide Borrower with a $250,000,000 revolving credit
facility; and
WHEREAS, Borrower and Subordinated Lender entered into a Securities
Purchase Agreement dated July 1, 1999 (the "Subordinated Loan Agreement"),
---------------------------
pursuant to which Borrower issued and Subordinated Lender purchased a certain
$10,700,000 Senior Subordinated Note dated August 27, 1999 (the "Subordinated
------------
Note"); and
- ----
WHEREAS, the indebtedness evidenced by the Subordinated Note and all
obligations of Borrower under the Subordinated Loan Agreement are herein called
the "Subordinated Debt;" and
-----------------
WHEREAS, to induce the Lenders and the Senior Lender to enter into the
Senior Loan Agreement, the Borrower and the Subordinated Lender have agreed to
enter into this Agreement with the Senior Lender to subordinate the rights of
the Subordinated Lender to the rights of the Lenders and the Senior Lender as
provided herein.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
1. Subordination of Subordinated Debt. The payment of the Subordinated
-----------------------------------
Debt is expressly subordinated to the prior payment in full in cash of the
Senior Debt to the extent and in the manner set forth in this Agreement. Except
as provided in Section 3 and Section 4 of this Agreement, the Borrower and
Subordinated Lender hereby postpone and subordinate the Subordinated Debt to all
Senior Debt. The Borrower and Subordinated Lender agree that so long as the
Senior Loan Agreement is in effect and thereafter until the Senior Debt is paid
in full in cash and, except as provided in Section 3 and Section 4 of this
Agreement, Subordinated Lender will not demand, take or receive from the
Borrower, in cash or property or by set-off or in any other manner, payment of
or on account of, and the Borrower will not pay, the whole or any part of the
INTERCREDITOR AGREEMENT - Page 1
<PAGE>
Subordinated Debt. As used herein, the term "Senior Debt" shall include any and
-----------
all obligations owed to the Lenders and the Senior Lender by Borrower pursuant
to the Senior Loan Agreement and the Notes issued in connection therewith,
including principal, interest, post-petition interest during any bankruptcy
proceeding (whether or not allowed or allowable by a court), fees, expenses,
obligations on letters of credit, obligations relating to derivatives and any
other amount due or to become due under the Senior Loan Agreement and Notes.
Subordinated Lender expressly acknowledging that such Senior Debt includes
indebtedness between the Borrower and the Lenders or the Senior Lender hereafter
created or arising under the Senior Loan Agreement, and any and all renewals and
extensions of all or any part of such indebtedness and liabilities.
2. Security for Subordinated Debt. The parties agree that the
-------------------------------
Subordinated Debt shall be unsecured.
3. Payment of Credit Interest on Subordinated Debt. The provisions of
------------------------------------------------
Section 1 hereof notwithstanding, the Borrower may pay and Subordinated Lender
may receive the interest (the "Credit Interest") which is due and payable on
---------------
the Subordinated Debt if (a) the full payment of all amounts then due and
payable on the Senior Debt have been made or duly provided for in accordance
with the Senior Loan Agreement, and (b) a Subordination Event (as defined below)
has not occurred or would not occur as a result of such payment. Upon the
occurrence of a Subordination Event, all claims of Subordinated Lender to the
Credit Interest shall be subordinated to the prior payment in full of the Senior
Debt, and all further payments of Credit Interest to Subordinated Lender shall
immediately cease. After the occurrence of a Subordination Event, the payment
of Credit Interest by the Borrower to Subordinated Lender may resume only if the
Subordination Event has been cured to the satisfaction of the Senior Lender or
waived in writing by Senior Lender (which waiver includes an express permission
to pay such Credit Interest). "Subordination Event" means the occurrence of
-------------------
either (a) a Default or Event of Default for which Senior Lender has sent
written notice of such Default or Event of Default (other than an Event of
Default specified in Section 14(f) or (g) of the Senior Credit Agreement for
which no such notice need be sent) to Borrower (a "Default Notice") or (b) a
--------------
Borrowing Base deficiency under the Senior Loan Agreement. Notwithstanding the
above, if within one hundred eight (180) days after the sending of such Default
Notice by Senior Lender such Default or Event of Default has not become the
subject of (a) judicial proceedings or (b) an acceleration notice by Senior
Lender, then Borrower (unless in such interval the provisions of this Section 3
have come into effect on account of any other Default or Event of Default that
did not exist on the date of any prior Default Notice) shall resume paying, and
Subordinated Lender shall be entitled to receive, Credit Interest until such
time (if any) that such judicial proceedings are instituted, such acceleration
notice is given or a Default Notice (on account of any other Default or Event of
Default) is given and a period of one hundred eighty (180) days shall not have
elapsed since the giving of such Default Notice as contemplated above.
4. Prepayment of Principal on the Subordinated Debt. The provisions of
-------------------------------------------------
Section 1 hereof notwithstanding, a part or all of the principal balance of the
Subordinated Debt may be paid (the "Note Payment"), (a) if the Senior Debt has
been paid in full in cash and all commitments of the
INTERCREDITOR AGREEMENT - Page 2
<PAGE>
Banks under the Senior Loan Agreement to make advances or lend money have
terminated, or (b) with the prior written consent of the Lenders.
5. Restriction on Other Actions. Prior to the payment in full in cash of
----------------------------
the Senior Debt and the termination of all commitments of the Lenders under the
Senior Loan Agreement, Subordinated Lender shall not take any action to declare
the Subordinated Note due or in default, collect or accelerate the Subordinated
Debt or exercise any remedies in respect of the Subordinated Debt set forth in
the Subordinated Loan Agreement or that may otherwise be available to
Subordinated Lender, either at law or in equity, including but not limited to
initiating any plan or proceeding pursuant to any bankruptcy, insolvency, or
receivership proceeding, or seeking an assignment for the benefit of creditors
or the marshalling of the assets and liability of the Borrower.
6. Proof of Claim/Power of Attorney. In the event of any liquidation,
---------------------------------
conservatorship, bankruptcy, reorganization, rearrangement, debtor's relief, or
other insolvency proceedings affecting the Borrower, the Subordinated Lender
will at the Senior Lender's request and at Subordinated Lender's expense file
any claims, proofs of claim, or other instruments of similar character necessary
to enforce the obligations of the Borrower in respect of the Subordinated Debt
and will hold in trust for the Senior Lender and pay over to the Senior Lender,
in the form received, to be applied on the Senior Debt, any and all moneys,
dividends, or other assets received in any such proceedings on account of the
Subordinated Debt, unless and until the Senior Debt shall be paid in full.
7. Payments Held in Trust. Except to the extent that Credit Interest is
-----------------------
permitted to be paid to Subordinated Lender pursuant to the terms of Section 3
hereof or a Note Payment is permitted to be paid to Subordinated Lender pursuant
to the terms of Section 4 hereof, should Subordinated Lender receive any payment
or distribution from the Borrower upon or with respect to the Subordinated Debt,
Subordinated Lender will forthwith deliver the same to the Senior Lender, in
precisely the form received (except for endorsement or assignment of
Subordinated Lender where necessary), for application on the Senior Debt and,
until so delivered, the same shall be held in trust by Subordinated Lender as
the Senior Lender's property. In the event of the failure of Subordinated
Lender to make any such endorsement or assignment, the Agent is hereby
irrevocably authorized to make the same.
8. No Modification of Subordinated Debt. The Borrower and Subordinated
-------------------------------------
Lender agree not to renew, extend, modify or amend in any material respect the
Subordinated Debt or any instrument or agreement documenting or securing the
Subordinated Debt without the prior written consent of the Senior Lender.
Notwithstanding the foregoing, Borrower may, without the consent of Senior
Lender, (a) extend the date on which payments are required under the
Subordinated Note, (b) reduce the interest rate applicable to the Subordinated
Note, (c) waive compliance with the terms of the Subordinated Note or loan
documents associated therewith or any default arising from non-compliance or (d)
relax or make less restrictive any covenant in the Subordinated Note or loan
documents associated therewith. Notwithstanding any provision of this Agreement
to the contrary,
INTERCREDITOR AGREEMENT - Page 3
<PAGE>
(i) Subordinated Lender may convert the Subordinated Note or a portion of such
note into shares of common stock of Borrower at any time in accordance with the
terms of such note, and (ii) the holder of a stock purchase warrant issued
pursuant to the Subordinated Loan Agreement may exercise any such warrant, in
whole or in part, for shares of common stock of Borrower in accordance with the
terms of such warranty (provided such exercise shall not involve the payment of
any cash by Borrower).
9. Waivers and Consents. The Senior Lender, the Lenders and Borrower may
---------------------
at any time and from time to time extend, renew or otherwise alter, as the
Senior Lender and Borrower may deem proper, the terms of any or all of the
Senior Debt or of any security therefor or of any agreement providing therefor
or relating to the Senior Debt or to such security, or accelerate the maturity
of any or all of the Senior Debt in accordance with the terms thereof or of any
agreement among the Senior Lender, the Lenders and Borrower, and the Senior
Lender may exchange, sell, surrender, release, fail to resort to or realize upon
or otherwise deal with any or all security for the Senior Debt, or release or
fail to resort to or enforce guaranties or endorsements of, or of the
liabilities of any obligors liable upon, the Senior Debt or release or fail to
set-off any balance of funds of the Borrower with the Senior Lender or under the
Senior Lender's control, and generally deal with the Borrower and all guarantors
and endorsers of, and all obligors liable upon, the Senior Debt, as the Senior
Lender sees fit, all without notice to or consent of Subordinated Lender and
without affecting to any extent any obligation or liability of Subordinated
Lender, or any of the Senior Lenders' or any Lender's rights, hereunder.
Without in any way limiting the foregoing, Subordinated Lender understands and
agrees that the Senior Lender shall have uncontrolled power and discretion,
without notice to Subordinated Lender, to deal in any manner with any
indebtedness, interest, cost and expenses payable by or liability of the
Borrower to the Lenders or the Senior Lender and any security or guaranties
therefor. Subordinated Lender hereby waives and agrees not to assert against
the Senior Lender or any Lender any rights which a guarantor or surety could
exercise, and nothing in this Agreement shall be deemed to constitute
Subordinated Lender as a guarantor or a surety. Subordinated Lender further
consents and agrees to any action taken or omitted to be taken with respect to
the Senior Loan Agreement, the Senior Loan Documents, the Senior Debt, and the
security and collateral therefor, whether or not such action or omission
prejudices Subordinated Lender or increases the likelihood that the Subordinated
Debt will not be paid, and whether or not such circumstance might otherwise
constitute a defense available to, or a discharge of, the Borrower or
Subordinated Lender.
10. Subrogation. No payment or distribution to the Senior Lender pursuant
-----------
to the provisions of this Agreement shall entitle Subordinated Lender to
exercise any rights of subrogation in respect hereof until all of the Senior
Debt shall have been irrevocably and unconditionally paid in full in cash.
11. Further Assurances. The Borrower and Subordinated Lender agree that
-------------------
any note representing the Subordinated Debt shall be stamped with a statement
referring to the existence of this Agreement. The Borrower and Subordinated
Lender each will, at its expense and from time to
INTERCREDITOR AGREEMENT - Page 4
<PAGE>
time, promptly execute and deliver all further instruments and documents, and
take all further action that may be necessary or desirable, or that the Senior
Lender may reasonably request, in order to protect any right or interest granted
or purported to be granted hereby or to enable the Senior Lender to exercise and
enforce its rights and remedies hereunder.
12. Representations. Subordinated Lender warrants and represents to the
----------------
Senior Lender that (a) it has the power and authority to execute, deliver and
carry out the terms of this Agreement, (b) it has taken all necessary action to
authorize the execution and delivery of this Agreement, (c) this Agreement has
been duly executed and delivered by Subordinated Lender and constitutes the
legal, valid and binding obligation of Subordinated Lender enforceable in
accordance with its terms except to the extent that the enforcement thereof may
be limited by applicable bankruptcy, insolvency, reorganization or other similar
laws affecting the enforcement of creditors' rights generally, and (d) attached
hereto as Exhibit "A" is a true and correct copy of the Subordinated Note.
-----------
13. Costs and Expenses. Borrower agrees to pay, on demand, to the Senior
-------------------
Lender all costs and expenses (including court costs and reasonable attorneys'
fees) incurred by any Lenders or the Senior Lender in the enforcement of this
Agreement.
14. Binding Effect. This Agreement shall be immediately binding on the
---------------
Senior Lender, Borrower and Subordinated Lender and the successors and assigns
of the Senior Lender, the Lenders, Borrower and Subordinated Lender, and the
covenants of Subordinated Lender and the Borrower in favor of the Senior Lender
and the Lenders contained herein shall extend to, include, and be enforceable
by, any transferee, assignee, or endorsee of the Senior Lender or the Lenders of
any of the Senior Debt.
15. Governing Law. This Agreement shall be governed by, and construed in
--------------
accordance with, the laws of the State of Texas and is performable in Dallas
County, Texas.
16. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed to be an original for all purposes.
17. Defined Terms. Unless otherwise defined herein, terms used herein are
-------------
used as defined in the Senior Loan Agreement.
18. THIS INTERCREDITOR AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
INTERCREDITOR AGREEMENT - Page 5
<PAGE>
EXECUTED as of the date first above written.
SUBORDINATED LENDER:
-------------------
SHOEINVEST II, LP,
a New Jersey limited partnership
By:_______________________________________________
Name:_____________________________________________
Title:____________________________________________
BORROWER:
--------
MIDDLE BAY OIL COMPANY, INC.,
an Alabama corporation
By:_______________________________________________
Name:_____________________________________________
Title:____________________________________________
SENIOR LENDER:
-------------
BANK ONE, TEXAS, N.A.,
a national banking association
By:_______________________________________________
Name:_____________________________________________
Title:____________________________________________
INTERCREDITOR AGREEMENT - Page 6
<PAGE>
EXHIBIT 10.21
LETTER AMENDMENT NO. 1
to
Middle Bay Oil Company, Inc. Securities Purchase Agreement
November 23, 1999
The Prudential Insurance Company
of America
c/o Prudential Capital Group
2200 Ross Avenue, Suite 4200E
Dallas, Texas 75201
Ladies and Gentlemen:
We refer to the Securities Purchase Agreement dated October 19, 1999 (the
"Agreement") among the undersigned, Middle Bay Oil Company, Inc. (the "Company")
and you. Unless otherwise defined herein, the terms defined in the Agreement
shall be used herein as therein defined.
The Company is entering into a Restated Credit Agreement dated November 23,
1999 together with its subsidiaries Enex Resources Corporation and Middle Bay
Production Company, Inc., as borrowers, and Bank One, Texas, N.A., as agent and
a lender, and each other lender or agent now or hereafter a party thereto. As a
condition to entering into the new Credit Agreement, Bank One has requested that
certain provisions of the Securities Purchase Agreement be amended. You have
indicated your willingness to so agree. Accordingly, it is hereby agreed by you
and us as follows: The Agreement is, effective the date first above written,
hereby amended as follows:
I. Amendments to Agreement.
(a) Section 1.1. Definitions. Section 1.1. of the Agreement is amended (1)
by deleting the definitions of "Compass Senior Credit Agreement," "Compass
Senior Debt" and "Compass Senior Documents"; (2) by amending the definition of
"Permitted Encumbrances" by amending clause (j) thereof in its entirety to read
as follows:
"(j) Liens arising under or created pursuant to the Senior Debt
Documents;"
(3) by amending the definitions of "Permitted Senior Debt" and "Senior Lenders"
in full to read as follows:
1
<PAGE>
"Permitted Senior Debt" means the Senior Debt or other debt or credit
facility of the Company which replaces the Senior Debt."
"Senior Lenders" means any holder of any Senior Debt."
and (4) by adding thereto the following definitions in alphabetical order:
"Default Notice" has the meaning set forth in Section 12.1.
"Reorganization Securities" has the meaning set forth in Section 12.2.
"Senior Credit Agreement" means that certain Restated Credit Agreement
dated November 23, 1999, by and among Middle Bay Oil Company, Inc., Enex
Resources Corporation and Middle Bay Production Company, Inc., as borrowers, and
Bank One, Texas N.A., as agent and a lender, and each other lender or agent now
or hereafter a party thereto and their successors and assigns, and any
replacements, refinancings, amendments, renewals or extensions thereof, whether
with the existing agent and lenders or other agents and lenders.
"Senior Debt" means all Debt of the Company or any of its Subsidiaries
outstanding under the Senior Debt Documents, including all renewals, extensions,
increases, refinancings, restatements and replacements thereof.
"Senior Debt Documents" means the Senior Credit Agreement and all
promissory notes, security agreements, mortgages, deeds of trust, assignments,
guaranties and other documents, instruments and agreements executed and
delivered pursuant to the Senior Credit Agreement evidencing, securing,
guaranteeing or otherwise pertaining to the Senior Debt and all other
obligations arising under the Senior Credit Agreement, as the foregoing may be
amended, renewed, extended, supplemented, increased or otherwise modified from
time to time."
(b) Section 9.9. Negative Covenants. Section 9.9. of the Agreement is
amended by amending subsection (b) thereof to delete the phrase "or the Compass
Senior Debt Documents".
(c) ARTICLE XII SUBORDINATION. ARTICLE XII of the Agreement is
amended in its entirety to read as follows:
2
<PAGE>
"ARTICLE XII
SUBORDINATION
SECTION 12.1. Subordination of Payment. The payment of the Debt
------------------------
represented by the Notes is hereby expressly subordinated in right of payment to
the prior payment in full of the Senior Debt; provided, however, so long as no
-------- -------
Event of Default has occurred and is continuing for which (other than an event
specified in Subsections 14(f) or (g) of the Senior Credit Agreement as in
effect on November 23, 1999, or any similar provision in any amended, restated
or replaced Senior Credit Agreement) the Company or the Agent under the Senior
Credit Agreement has (or all Senior Lenders thereunder have) given written
notice of such Event of Default to the Noteholders (a "Default Notice"), the
Company may pay only interest due on the Notes according to their terms. At any
time following the occurrence and during the continuance of any Event of Default
and provided that the Agent under the Senior Credit Agreement has (or all Senior
Lenders thereunder have) given a Default Notice to the Noteholders, the
Noteholders will not accept or receive, any payments in cash, on or with respect
to the Notes unless and until (a) such Event of Default shall have been cured or
waived or shall have ceased to exist or (b) such time as all Senior Debt shall
have been fully paid and performed and the obligation of the Senior Lenders to
make loans under the Senior Credit Agreement shall have terminated.
Notwithstanding the above, if within 180 days after the giving of such Default
Notice by the Company or the Agent under the Senior Credit Agreement (or all
Senior Lenders thereunder) such Event of Default has not become the subject of
an acceleration notice by the Senior Lenders, then the Company may, at its
option (unless in such interval the provision of this Section 12.1 have again
------------
come into effect on account of any other Event of Default that did not exist on
the date of any prior Default Notice), resume making any and all required
payments in respect of the Notes in any manner authorized under the terms
governing the Notes until such time (if any) that , such an acceleration notice
is given or a Default Notice is given and a period of 180 days shall not have
elapsed since the giving of such Default Notice as contemplated above. (If more
than one Default Notice is given, e.g. by the Company and the Agent, such period
----
shall run from the giving of the first Default Notice.) In the event any direct
or indirect payment or distribution in cash, shall be received by the
Noteholders in contravention of the provisions hereof, such payment or
distribution shall be held in trust for, and shall be immediately paid over or
delivered to, the Agent under the Senior Credit Agreement.
SECTION 12.2. Notes Subordinated to Prior Payment of Senior Debt on
-----------------------------------------------------
Dissolution, Liquidation or Reorganization of the Company. Upon any
- ---------------------------------------------------------
distribution of assets of the Company upon any voluntary or involuntary
dissolution, winding up, liquidation or reorganization of the Company (whether
in bankruptcy, insolvency or receivership proceedings or upon an assignment for
the benefit of creditors or otherwise):
3
<PAGE>
(a) the Senior Lenders shall first be entitled to receive payment in
full in cash (or to have such payment duly provided for to their
satisfaction) of the principal thereof and interest due on the Senior Debt
and other amounts due in connection therewith before the Noteholders are
entitled to receive any payment on account of the Notes;
(b) any payment or distribution of assets of the Company of any kind
or character, whether in cash, property or securities, to which the
Noteholders would be entitled except for the provisions of this Article
-------
XII, shall be paid by the liquidating trustee or agent or other person
---
making such payment or distribution directly to the Senior Lenders or their
representative, to the extent necessary to make payment in full of all
Senior Debt remaining unpaid, after giving effect to any concurrent payment
or distribution or provision therefor to the Senior Lenders; and
(c) in the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company of any kind or character, whether in
cash, property or securities, shall be received by the Noteholders on
account of principal of or interest on the Notes before the Senior Debt is
paid in full or provision made for its payment, such payment or
distribution (subject to the further provisions of this Article XII) shall
-----------
be paid over to the Senior Lenders or their representative for application
to the payment of all Senior Debt remaining unpaid or unprovided for until
all Senior Debt shall have been paid in full, after giving effect to any
concurrent payment or distribution or provision therefor to the Senior
Lenders.
Notwithstanding the forgoing, the Noteholders may retain stock or
obligations which are issued pursuant to reorganization proceedings in respect
of the Notes (such stock or obligations being "Reorganization Securities") if
such Reorganization Securities are subordinate and junior (whether by law or
agreement) at least to the extent provided in this Article XII to the payment of
all Senior Debt and to the payment of any stock or obligations which are issued
in exchange or substitution for any Senior Debt. The Noteholders may retain any
cash proceeds of the Reorganization Securities subject to compliance with the
subordination provisions thereof.
SECTION 12.3. Subordination of Liens. So long as the Senior Debt remains
----------------------
outstanding or any obligation of the Senior Lenders exists to make loans under
the Senior Credit Agreement, the Noteholders hereby subordinate all Liens, now
existing or hereafter created or arising, securing all or any portion of the
Notes to all Liens, now existing or hereafter created or arising, securing all
or any portion of the Senior Debt, notwithstanding any defect, deficiency, error
or omission which may be contained in any document creating or perfecting any
such Lien securing all or any portion of the Senior Debt. All Liens, now
existing or hereafter created or
4
<PAGE>
arising, securing all or any portion of the Notes shall at all times remain
subordinate, secondary and inferior to all Liens, now existing or hereafter
created or arising, securing all or any portion of the Senior Debt.
SECTION 12.4. Subordination of Remedies. So long as the Senior Debt
-------------------------
remains outstanding or any obligation of the Senior Lenders exists to make loans
under the Senior Credit Agreement, the Noteholders shall not, without the prior
written consent of the Senior Lenders, declare the Notes due or in default
(other than to accelerate the Notes after the maturity of the Senior Debt,
whether by acceleration or otherwise, and take such other actions as reasonably
required to protect the Noteholders's claims upon any bankruptcy, insolvency, or
receivership proceeding with respect to the Company) or foreclose upon or
exercise any power of sale with respect to any security for all or any portion
of the Notes or exercise any other right, power or remedy of the Noteholders
provided for in any document or instrument executed in connection with the Notes
or by law or initiate or join with any other creditor of the Company in
initiating any plan or proceeding pursuant to any bankruptcy, insolvency or
receivership proceedings or seeking an assignment for the benefit of creditors
or the marshalling of the assets and liabilities of the Company. Upon any
distribution of assets of the Company or the dissolution, winding up,
liquidation or reorganization (whether in bankruptcy, insolvency or receivership
proceedings or upon an assignment for the benefit of creditors or the
marshalling of the assets and liabilities of the Company or otherwise), any
payment to which the Noteholders would otherwise be entitled with respect to the
Notes shall be held in trust for, and shall be immediately paid over or
delivered to, the Senior Lenders for application to the Senior Debt until all
Senior Debt shall have been paid in full in cash. Notwithstanding any provision
of this Article XII, (i) the Noteholders may receive payments of interest on the
-----------
Notes in kind through the Company's election to accrue and add such interest
payment to the principal of the Notes pursuant to the provisions of the Notes;
(ii) the Noteholders may convert the Notes to shares of common stock of the
Company at any time in accordance with the terms of the Notes; (iii) the
Noteholders may exercise any warrants for shares of common stock of the Company
in accordance with the terms of any such warrants and (iv) the Senior Lenders
shall have no rights to the shares of Common Stock obtained by the Noteholders
through conversion of the Notes and exercise of the Warrants.
SECTION 12.5. Continuing Agreement. This Agreement shall continue in full
--------------------
force and effect and the liabilities and obligations of the Company and the
Noteholders hereunder shall not be affected or impaired by any amendment,
modification or alteration of any Loan Document, except as may be expressly
provided in any such amendment, modification or alteration. This Agreement
shall continue to be effective or shall be reinstated, as the case may be, if at
any time any payment of any of the Senior Debt is rescinded or must otherwise be
returned by the Senior Lenders upon the insolvency, bankruptcy or reorganization
of the Company or otherwise, all as though such payment had not been made.
SECTION 12.6. Liability Not Impaired. The provisions of this Article XII
---------------------- -----------
shall
5
<PAGE>
be deemed a continuing offer to all holders of Senior Debt to act in reliance on
such provisions (but no such reliance shall be required to be proven to receive
the benefits hereof) and may be enforced by such holders and no right of any
present or future holder of any Senior Debt to enforce subordination as provided
in this Article XII shall be affected or impaired by (a) the failure of the
-----------
Agent under the Senior Credit Agreement or the Senior Lenders or any other
Person to exercise diligence or reasonable care in the preservation, protection
or other handling or treatment of all or any part of any Collateral for all or
any portion of the Senior Debt, (b) the failure of any Lien intended to be
granted or created to secure all or any part of the Senior Debt to be properly
perfected or created or the unenforceability of any such Lien for any other
reason, or (c) the subordination of any such Lien to any other Lien. The Senior
Lenders may at any time and from time to time, without the consent of or notice
to the Noteholders, and without incurring any responsibility to the Noteholders,
and without impairing or releasing or otherwise affecting any of the obligations
or agreements of the Noteholders hereunder, (a) change the manner, place or
terms of payment, or change or extend the time of payment of, renew, or alter
all or any portion of the Senior Debt, (b) exchange, release, surrender, realize
upon or otherwise deal with, in any manner and any order, any Property at any
time subject to any Lien in favor of the Senior Lenders, (c) exercise or refrain
from exercising any rights against the Company or others, and (d) sell,
transfer, assign or grant participations in the Senior Debt or any portion
thereof.
SECTION 12.7. Waivers. The Noteholders waive any right to require the
-------
Senior Lenders to (a) proceed against the Company or make any effort at the
collection of the Senior Debt from the Company or any other Person liable for
all or any portion of the Senior Debt, (b) proceed against or exhaust any
Collateral securing all or any portion of the Senior Debt, or (c) pursue any
other remedy in the power of the Senior Lenders.
SECTION 12.8. Knowledge of the Noteholders. The Noteholders shall not at
----------------------------
any time be charged with knowledge of the existence of any facts which would
prohibit the making of any payment to the Noteholders under the Notes or the
taking of any action under the Notes by the Noteholders unless and until the
Noteholders shall have received written notice thereof from the Agent under the
Senior Credit Agreement or the Company and, prior to the receipt of any such
written notice, shall be entitled in all respects conclusively to assume that no
such facts exist.
SECTION 12.9. Obligation of the Company. Nothing contained in this
-------------------------
Article XII shall affect the obligation of the Company to make, or prevent the
- -----------
Company from making, payment of the principal of or interest on the Notes,
except as otherwise provided in this Article XII and the Notes.
-----------
SECTION 12.10. Subrogation. Upon payment in full of the Senior Debt, the
-----------
Noteholders shall be subrogated to the rights of the holders of Senior Debt to
receive payments or
6
<PAGE>
distributions of assets of the Company made on the Senior Debt until the
principal of and interest on the Notes shall be paid in full, and, for the
purposes of such subrogation, no payments to the holders of Senior Debt of any
cash, property, stock or obligations to which the Noteholders would be entitled
(except for the provisions of this Article XII) shall, as between the Company,
-----------
its creditors (other than the holders of Senior Debt) and the Noteholders, be
deemed to be a payment by the Company to or on account of the Senior Debt."
II. Miscellaneous
On and after the effective date of this letter amendment, each reference in
the Agreement to "this Agreement", "hereunder", "hereof", or words of like
import referring to the Agreement, and each reference in the Notes to "the
Agreement", "thereunder", "thereof", or words of like import referring to the
Agreement, shall mean the Agreement as amended by this letter amendment. The
Agreement, as amended by this letter amendment, is and shall continue to be in
full force and effect and is hereby in all respects ratified and confirmed. The
execution, delivery and effectiveness of this letter amendment shall not, except
as expressly provided herein, operate as a waiver of any right, power or remedy
under the Agreement nor constitute a waiver of any provision of the Agreement.
This letter amendment may be executed in any number of counterparts and by
any combination of the parties hereto in separate counterparts, each of which
counterparts shall be an original and all of which taken together shall
constitute one and the same letter amendment.
If you agree to the terms and provisions hereof, please evidence your
agreement by executing and returning at least a counterpart of this letter
amendment to the Company at its address at 1221 Lamar Street, Suite 1020,
Houston, Texas, 77010, Attention of Floyd Wilson, President. This letter
amendment shall become effective as of the date first above written when and if
(i) counterparts of this letter amendment shall have been executed by us
7
<PAGE>
and you and (ii) the Other Securities Purchase Agreements have been amended to
the same extent as set forth in this letter amendment.
Very truly yours,
MIDDLE BAY OIL COMPANY, INC.
By:_________________________
Title:
Agreed as of the date first above written:
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA
By:______________________________
Vice President
8
<PAGE>
EXHIBIT 10.22
AMENDMENT TO SECURITIES PURCHASE AGREEMENT
This Amendment to Securities Purchase Agreement (the "Amendment")
dated as of November ___, 1999, is entered into by and between MIDDLE BAY OIL
COMPANY, INC., an Alabama corporation ("Corporation") and 3TEC Energy Company
L.L.C., a Delaware limited liability company f/k/a 3TEC Energy Corporation
("3TEC").
RECITALS
WHEREAS, on July 1, 1999, the Corporation and 3TEC entered into a certain
Securities Purchase Agreement (the "Agreement"); and
WHEREAS, the parties hereto wish to amend the Agreement.
NOW, THEREFORE, in consideration of the mutual promises contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. All references to "Compass Senior Credit Agreement", "Compass Senior
Debt", and "Compass Senior Debt Documents" in the Agreement and all related
documents (including the Note and Warrants) are hereby replaced with the terms
"Senior Credit Agreement", "Senior Debt", and "Senior Debt Documents"
respectively.
2. Section 1.1 is hereby amended to include the following terms:
"Senior Credit Agreement" means that certain Restated Credit Agreement
dated November ___, 1999, by and among Middle Bay Oil Company, Inc., Enex
Resources Corporation and Middle Bay Production Company, Inc., as borrowers, and
Bank One, Texas, N.A., as agent and a lender, and each other lender or agent now
or hereafter a party thereto and their successors and assigns, and any
replacements, refinancings, amendments, renewals or extensions thereof, whether
with the existing agent and lenders or other agents and lenders."
"Senior Debt" means all Debt of the Company or any of its Subsidiaries
outstanding under the Senior Debt Documents, including all renewals, extensions,
increases, refinancings, restatements and replacements thereof."
"Senior Debt Documents" means the Senior Credit Agreement and all
promissory notes, security agreements, mortgages, deeds of trust, assignments,
guaranties and other documents, instruments and agreements executed and
delivered pursuant to the Senior Credit Agreement evidencing, securing,
guaranteeing or otherwise pertaining to the Senior Debt and all other
1
<PAGE>
obligations arising under the Senior Credit Agreement, as the foregoing may be
amended, renewed, extended, supplemented, increased or otherwise modified from
time to time."
3. The following definition in Section 1.1 is hereby deleted in its
entirety and replaced with the following:
"Senior Lender" means any holder of any Senior Debt."
4. Section 9.10 (b) is hereby deleted in its entirety and replaced with
the following:
"(b) The Company will not, nor will it permit any of its Subsidiaries to,
enter into any amendment or modification of its Charter Documents or waive or
fail to enforce any material right of the Company or any of its Subsidiaries
thereunder."
5. Exhibit H. Exhibit H of the Agreement is hereby deleted in its
----------
entirety and replaced with Exhibit H attached hereto.
6. Terms Defined in Agreement. As used herein, each term defined in the
---------------------------
Agreement shall have the meaning assigned thereto in the Agreement, unless
expressly provided herein to the contrary.
7. Full Force and Effect. Except with respect to the changes made in
----------------------
this Amendment, the terms and provisions of the Agreement are in full force and
effect.
8. Notices. Any notice to be given by any party hereunder to any other
--------
shall be in writing, mailed by certified or registered mail, return receipt
requested, and shall be addressed to the other parties at the addresses listed
on the signature pages hereof. All such notices shall be deemed to be given
three (3) days after the date of mailing thereof.
9. Binding Effect. This Amendment shall be binding upon the parties
---------------
hereto and their respective successors, personal representatives and permitted
assigns.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
"CORPORATION"
MIDDLE BAY OIL COMPANY, INC.
By:
-----------------------------
Name: Floyd C. Wilson
Title: President and Chief Executive Officer
2
<PAGE>
Address for Notice:
Middle Bay Oil Company, Inc.
1221 Lamar Street, Suite 1020
Houston, TX 77010
Fax: (713) 650-0352
"3TEC"
3TEC ENERGY COMPANY L.L.C
By:__________________________
Name: Floyd C. Wilson
Title: Managing Director
Address for Notice:
3TEC Energy Company L.L.C.
5910 N. Central Expressway
Suite 1150
Dallas, TX 75206
Fax: (214) 373-9731
3
<PAGE>
EXHIBIT H
OTHER SECURITIES PURCHASE AGREEMENTS
Securities Purchase Agreement by and between Shoemaker Family Partners, LP
and Middle Bay Oil Company, Inc., dated August 27, 1999
Securities Purchase Agreement by and between Shoeinvest II, LP and Middle
Bay Oil Company, Inc., dated August 27, 1999
Securities Purchase Agreement by and between The Prudential Insurance
Company of America and Middle Bay Oil Company, Inc., dated October 19, 1999
4
<PAGE>
EXHIBIT 10.23
AMENDMENT TO SECURITIES PURCHASE AGREEMENT
This Amendment to Securities Purchase Agreement (the "Amendment")
dated as of November ___, 1999, is entered into by and between MIDDLE BAY OIL
COMPANY, INC., an Alabama corporation ("Corporation") and Shoemaker Family
Partners, LP, a New Jersey limited partnership ("SFP").
RECITALS
WHEREAS, on August 27, 1999, the Corporation and SFP entered into a certain
Securities Purchase Agreement (the "Agreement"); and
WHEREAS, the parties hereto wish to amend the Agreement.
NOW, THEREFORE, in consideration of the mutual promises contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. All references to "Compass Senior Credit Agreement", "Compass Senior
Debt", and "Compass Senior Debt Documents" in the Agreement and all related
documents (including the Note and Warrants) are hereby replaced with the terms
"Senior Credit Agreement", "Senior Debt", and "Senior Debt Documents"
respectively.
2. Section 1.1 is hereby amended to include the following terms:
"Senior Credit Agreement" means that certain Restated Credit Agreement
dated November ___, 1999, by and among Middle Bay Oil Company, Inc., Enex
Resources Corporation and Middle Bay Production Company, Inc., as borrowers, and
Bank One, Texas, N.A., as agent and a lender, and each other lender or agent now
or hereafter a party thereto and their successors and assigns, and any
replacements, refinancings, amendments, renewals or extensions thereof, whether
with the existing agent and lenders or other agents and lenders."
"Senior Debt" means all Debt of the Company or any of its Subsidiaries
outstanding under the Senior Debt Documents, including all renewals, extensions,
increases, refinancings, restatements and replacements thereof."
"Senior Debt Documents" means the Senior Credit Agreement and all
promissory notes, security agreements, mortgages, deeds of trust, assignments,
guaranties and other documents, instruments and agreements executed and
delivered pursuant to the Senior Credit Agreement evidencing, securing,
guaranteeing or otherwise pertaining to the Senior Debt and all other
<PAGE>
obligations arising under the Senior Credit Agreement, as the foregoing may be
amended, renewed, extended, supplemented, increased or otherwise modified from
time to time."
3. The following definition in Section 1.1 is hereby deleted in its
entirety and replaced with the following:
"Senior Lender" means any holder of any Senior Debt."
4. Exhibit H. Exhibit H of the Agreement is hereby deleted in its
----------
entirety and replaced with Exhibit H attached hereto.
5. Terms Defined in Agreement. As used herein, each term defined in the
---------------------------
Agreement shall have the meaning assigned thereto in the Agreement, unless
expressly provided herein to the contrary.
6. Full Force and Effect. Except with respect to the changes made in
----------------------
this Amendment, the terms and provisions of the Agreement are in full force and
effect.
7. Notices. Any notice to be given by any party hereunder to any other
--------
shall be in writing, mailed by certified or registered mail, return receipt
requested, and shall be addressed to the other parties at the addresses listed
on the signature pages hereof. All such notices shall be deemed to be given
three (3) days after the date of mailing thereof.
8. Binding Effect. This Amendment shall be binding upon the parties
---------------
hereto and their respective successors, personal representatives and permitted
assigns.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
"CORPORATION"
MIDDLE BAY OIL COMPANY, INC.
By:___________________________________________
Name: Floyd C. Wilson
Title: President and Chief Executive Officer
Address for Notice:
Middle Bay Oil Company, Inc.
1221 Lamar Street, Suite 1020
Houston, TX 77010
Fax: (713) 650-0352
<PAGE>
"SFP"
SHOEMAKER FAMILY PARTNERS, LP
By:___________________________________________
Name:
Title:
Address for Notice:
Shoemaker Family Partners, LP
60 Brushhill Road
Kinnelon, NJ 07405
Fax: (310) 444-3833
<PAGE>
EXHIBIT H
OTHER SECURITIES PURCHASE AGREEMENTS
Securities Purchase Agreement by and between 3TEC Energy Company L.L.C. and
Middle Bay Oil Company, Inc., dated July 1, 1999
Securities Purchase Agreement by and between Shoeinvest II, LP and Middle
Bay Oil Company, Inc., dated August 27, 1999
Securities Purchase Agreement by and between The Prudential Insurance
Company of America and Middle Bay Oil Company, Inc., dated October 19, 1999
<PAGE>
EXHIBIT 10.24
AMENDMENT TO SECURITIES PURCHASE AGREEMENT
This Amendment to Securities Purchase Agreement (the "Amendment")
dated as of November ___, 1999, is entered into by and between MIDDLE BAY OIL
COMPANY, INC., an Alabama corporation ("Corporation") and Shoeinvest II, LP, a
New Jersey limited partnership ("Shoeinvest").
RECITALS
WHEREAS, on August 27, 1999, the Corporation and Shoeinvest entered into a
certain Securities Purchase Agreement (the "Agreement"); and
WHEREAS, the parties hereto wish to amend the Agreement.
NOW, THEREFORE, in consideration of the mutual promises contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. All references to "Compass Senior Credit Agreement", "Compass Senior
Debt", and "Compass Senior Debt Documents" in the Agreement and all related
documents (including the Note and Warrants) are hereby replaced with the terms
"Senior Credit Agreement", "Senior Debt", and "Senior Debt Documents"
respectively.
2. Section 1.1 is hereby amended to include the following terms:
"Senior Credit Agreement" means that certain Restated Credit Agreement
dated November ___, 1999, by and among Middle Bay Oil Company, Inc., Enex
Resources Corporation and Middle Bay Production Company, Inc., as borrowers, and
Bank One, Texas, N.A., as agent and a lender, and each other lender or agent now
or hereafter a party thereto and their successors and assigns, and any
replacements, refinancings, amendments, renewals or extensions thereof, whether
with the existing agent and lenders or other agents and lenders."
"Senior Debt" means all Debt of the Company or any of its Subsidiaries
outstanding under the Senior Debt Documents, including all renewals, extensions,
increases, refinancings, restatements and replacements thereof."
"Senior Debt Documents" means the Senior Credit Agreement and all
promissory notes, security agreements, mortgages, deeds of trust, assignments,
guaranties and other documents, instruments and agreements executed and
delivered pursuant to the Senior Credit Agreement evidencing, securing,
guaranteeing or otherwise pertaining to the Senior Debt and all other
<PAGE>
obligations arising under the Senior Credit Agreement, as the foregoing may be
amended, renewed, extended, supplemented, increased or otherwise modified from
time to time."
3. The following definition in Section 1.1 is hereby deleted in its
entirety and replaced with the following:
"Senior Lender" means any holder of any Senior Debt."
4. Exhibit H. Exhibit H of the Agreement is hereby deleted in its
----------
entirety and replaced with Exhibit H attached hereto.
5. Terms Defined in Agreement. As used herein, each term defined in the
---------------------------
Agreement shall have the meaning assigned thereto in the Agreement, unless
expressly provided herein to the contrary.
6. Full Force and Effect. Except with respect to the changes made in
----------------------
this Amendment, the terms and provisions of the Agreement are in full force and
effect.
7. Notices. Any notice to be given by any party hereunder to any other
--------
shall be in writing, mailed by certified or registered mail, return receipt
requested, and shall be addressed to the other parties at the addresses listed
on the signature pages hereof. All such notices shall be deemed to be given
three (3) days after the date of mailing thereof.
8. Binding Effect. This Amendment shall be binding upon the parties
---------------
hereto and their respective successors, personal representatives and permitted
assigns.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
"CORPORATION"
MIDDLE BAY OIL COMPANY, INC.
By:___________________________
Name: Floyd C. Wilson
Title: President and Chief Executive Officer
Address for Notice:
Middle Bay Oil Company, Inc.
1221 Lamar Street, Suite 1020
Houston, TX 77010
Fax: (713) 650-0352
<PAGE>
"Shoeinvest"
SHOEINVEST II, LP
By:___________________
Name:
Title:
Address for Notice:
Shoeinvest II, LP
60 Brushhill Road
Kinnelon, NJ 07405
Fax: (310) 444-3833
<PAGE>
EXHIBIT H
OTHER SECURITIES PURCHASE AGREEMENTS
Securities Purchase Agreement by and between 3TEC Energy Company L.L.C. and
Middle Bay Oil Company, Inc., dated July 1, 1999
Securities Purchase Agreement by and between Shoemaker Family Partners, LP
and Middle Bay Oil Company, Inc., dated August 27, 1999
Securities Purchase Agreement by and between The Prudential Insurance
Company of America and Middle Bay Oil Company, Inc., dated October 19, 1999
<PAGE>
EXHIBIT 10.31
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
May 1, 2000, by and between 3TEC Energy Corporation, a Delaware corporation (the
"Company") and R. A. Walker ("Employee").
WITNESSETH:
WHEREAS, the Company is engaged in the oil and gas business;
WHEREAS, the Company desires to employ Employee as its President and Chief
Financial Officer and Employee desires to be so employed;
WHEREAS, the Company and Employee desire to set forth in writing the terms
and conditions of their agreements and understandings;
NOW, THEREFORE, in consideration of the foregoing, of the mutual promises
herein contained, and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound, agree as follows:
1. Term of Employment. The Company shall employ Employee in the capacity
set forth herein for a term of two (2) years and eight (8) months commencing on
May 1, 2000, and ending on December 31, 2002 (the "Employment Period"). On the
last day of the Employment Period and on each anniversary of the last day of the
Employment Period thereafter, this Agreement shall automatically be extended for
a one (1) year period unless either party gives notice to the other of the
intent to terminate no less than ninety (90) days prior to the end of the
Employment Period or any anniversary thereof.
2. Responsibilities of Employee.
(a) In accepting employment by the Company, Employee shall undertake and
assume the responsibility of performing for and on behalf of the Company any and
all duties customarily associated with the position of President and Chief
Financial Officer of the Company.
(b) Employee agrees to devote his full time and effort to his duties as
an employee of the Company. Employee may devote a reasonable amount of his time
to civic and community affairs, and subject to the provisions of paragraphs 6
and 7 hereof, to other business and financial interests; provided that such
other activities do not interfere with the performance of Employee's
responsibility as President and Chief Financial Officer of the Company.
<PAGE>
3. Compensation. As compensation for the services to be rendered by
Employee for the Company under this Agreement, Employee shall be entitled to the
following (collectively referred to hereinafter as "Total Compensation"):
(a) The Company shall pay Employee during the period in which Employee is
employed by the Company an annual salary of Three Hundred Thousand Dollars
($300,000) ("Base Compensation"), payable periodically for such periods as may
be established by the Company for payment of its employees under its normal
payroll practices.
(b) In addition, Employee shall be eligible to receive an annual bonus to
be determined by the Company in its sole discretion based on performance
criteria to be adopted by the Compensation Committee of the Board of Directors
of the Company (the "Board"). Each such annual bonus may be in an amount up to
fifty percent (50%) of the Base Compensation.
4. Stock Options; Incentive, Savings and Retirement Plans and Welfare
Benefit Plans.
(a) On the first day of the Employment Period, Employee shall be granted
stock options giving Employee the right to purchase 500,000 shares of common
stock in the Company, one-half of which shall be vested upon grant with the
remaining one-half to vest equally over a three (3) year period. The option
price shall be the fair market value of the stock on the date of grant. Fair
market value and all other terms of the option grant shall be governed by the
provisions of the 3TEC Energy Corporation 2000 Stock Option Plan (the "Plan").
Employee shall be eligible for additional option grants as determined annually
by the Board.
(b) During the period in which Employee is employed by the Company,
Employee shall be entitled to participate in all incentive, savings and
retirement plans, practices, policies and programs applicable generally to other
key or senior executive employees of the Company.
(c) During the period in which Employee is employed by the Company,
Employee and/or Employee's family, as the case may be, shall be eligible for
participation and shall receive all benefits under welfare benefit plans,
practices and policies and programs provided by the Company to the extent
applicable generally to other key or senior executive employees of the Company,
including, without limitation, medical and dental insurance coverage under the
Company's medical and dental insurance plans.
5. Expenses. Employee shall be reimbursed for all reasonable business
expenses incurred by him in connection with or incident to the performance of
his duties and responsibilities hereunder upon the Employee's submission to the
Company of vouchers or expense statements evidencing such expenses in such form
or format as the Company may reasonably require. Employee shall be reimbursed
by the Company for his reasonable relocation
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<PAGE>
costs from Dallas to Houston and to the extent such reimbursement is considered
taxable income, the Company will gross up the reimbursement to cover the
additional income tax resulting from such reimbursement. Employee shall also be
reimbursed for the costs of an annual stress physical at the Cooper Clinic in
Dallas, Texas.
6. Business Opportunities and Intellectual Property.
(a) During the period in which Employee is employed by the Company,
Employee shall promptly disclose to the Company all "Business Opportunities" and
"Intellectual Property" (each as defined below).
(b) Employee hereby assigns and agrees to assign to the Company, its
successors, assigns or designees, all of Employee's right, title and interest in
and to all "Business Opportunities" and "Intellectual Property," and further
acknowledges and agrees that all Business Opportunities and Intellectual
Property constitute the exclusive property of the Company.
(c) For purposes hereof, "Business Opportunities" shall mean all business
ideas, prospects, proposals or other opportunities pertaining to the lease,
acquisition, exploration, production, gathering or marketing of hydrocarbons and
related products and the exploration potential of geographical areas on which
hydrocarbon exploration prospects are located, which are:
(i) developed by Employee (A) during the period in which Employee is
employed by the Company, or (B) before the period in which Employee is
employed by the Company, but only to the extent of Employee's rights
thereto during such period, or
(ii) originated by any third party and brought to the attention of
Employee (A) during the period in which Employee is employed by the
Company, or (B) before the period in which Employee is employed by the
Company, but only to the extent of Employee's rights thereto during such
period,
together with information relating thereto, including, without limitation, any
"Business Records" (as defined below).
(d) For purposes hereof "Intellectual Property" shall mean all ideas,
inventions, discoveries, processes, designs, methods, substances, articles,
computer programs and improvements (including, without limitation, enhancements
to, or further interpretation or processing of, information that was in the
possession of Employee prior to the date of this Agreement), whether or not
patentable or copyrightable, which do not fall within the definition of Business
Opportunities, which are discovered, conceived, invented, created or developed
by Employee, alone or with others: (i) during the period in which Employee is
employed by the Company if such discovery, conception, invention, creation, or
development (A) occurs in the
3
<PAGE>
course of the Employee's employment with the Company, or (B) occurs with the use
of any of the Company's time, materials or facilities, or (C) in the opinion of
the Board of Directors of the Company, relates or pertains in any way to the
Company's purposes, activities or affairs, or (ii) before the period in which
Employee is employed by the Company, but only to the extent of Employee's rights
thereto during such period.
7. Non-Competition and Non-Disclosure; Injunctive Relief. Employee
acknowledges that the services he is to render in the course of his employment
by the Company are of a special and unusual character with unique value to the
Company. In view of the value to the Company of the services of Employee during
the course of his employment by the Company, because of the Business
Opportunities, Intellectual Property and "Confidential Information" (as defined
below) to be obtained by or disclosed to Employee, and as a inducement to the
Company to enter into this Agreement and to pay to Employee the compensation
stated herein, Employee covenants and agrees as follows:
(a) During the period in which Employee is employed by the Company,
Employee shall not directly or indirectly be employed by 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. Notwithstanding the foregoing, the
Company acknowledges that Employee serves on the board of directors of the
entities set forth on Exhibit A attached hereto. Employee acknowledges and
agrees that in the event a conflict of interests arises between the Company and
any of the entities set forth on Exhibit A attached hereto, Employee shall
immediately notify the Board of such conflict and shall take any and all steps
necessary to protect the Company's best interests.
(b) During the period in which Employee is employed by the Company,
Employee shall not, directly or indirectly, in any capacity (including, without
limitation, as a proprietor, investor, director or officer or in any other
individual or representative capacity), be financially interested in or engage
in any business that is engaged in leasing, acquiring, exploring, producing,
gathering or marketing hydrocarbons and related products (the "E & P Business");
however, it is specifically agreed between the parties that Employee may
continue to be financially interested in and engage in any E & P Business that
is described on Exhibit A attached hereto, provided, that such activities do not
materially detract from the Employee's performance of his responsibilities as
President and Chief Financial Officer, provided, further that, nothing contained
in this paragraph 7(b) shall relieve the Employee of his obligations contained
in paragraph 7(a) above. In addition, Employee may make investments in
publicly traded companies that engage in the E & P Business, provided such
investments represent less than one percent (1%) of the issued and outstanding
shares of such company.
(c) During the period in which Employee is employed by the Company, all
investments made by Employee (whether in his own name or in the name of any
family members), which relate to the lease, acquisition, exploration,
production, gathering or marketing
4
<PAGE>
or hydrocarbons and related products shall be made solely through the Company;
and Employee will not (directly or indirectly through any family members), (i)
invest or otherwise participate alongside the Company in any Business
Opportunities, or (ii) invest or otherwise participate in any business or
activity relating to a Business Opportunity, regardless of whether the Company
ultimately participates in such business or activity.
(d) During the period in which Employee is employed by the Company and
thereafter, Employee will not disclose to any third party or directly or
indirectly make use of, in a way materially detrimental to the Company, any and
all trade secrets and confidential or proprietary information pertaining to the
Company (collectively referred to as "Confidential Information"). For purposes
of this Section 7, it is agreed that Confidential Information includes, without
limitation, any information heretofore or hereafter acquired, developed or used
by the Company relating to Business Opportunities or Intellectual Property or
other geological, geophysical, economic, financial or management aspects of the
business, operations, properties or prospects of the Company whether oral or in
written form in a "Business Records" (as defined in paragraph 7(g) below).
Notwithstanding the foregoing, no information of the Company will be deemed
confidential for the purposes of this paragraph 7(d) if such information is or
becomes public knowledge through no act of Employee or was previously known by
Employee prior to entering into this Agreement.
(e) During the Employment Period or the period in which Employee is
employed by the Company, whichever is longer, and for a six-month period
commencing upon the termination of such longer period, Employee may not solicit,
raid, entice or induce, directly or indirectly, any employee (or person who
within the preceding ninety (90) days was an employee) of the Company or any
other person who is under contract with or rendering services to the Company, to
(i) terminate his employment by, or contractual relationship with, the Company,
(ii) refrain from extending or renewing the same (upon the same or new terms),
(iii) refrain from rendering services to or for the Company, or (iv) become
employed by or to enter into contractual relations with any persons other than
the Company.
(f) Employee acknowledges and agrees that the services to be rendered by
him are of a special, unique and extraordinary character and, in connection with
such services, he will have access to Business Opportunities, Intellectual
Property and Confidential Information vital to the Company's businesses. By
reason of this, the Employee consents and agrees that if he violates any of the
provisions of this Section 7, the Company would sustain irreparable harm and,
therefore, in addition to any other remedies which the Company may have under
this Agreement or otherwise, the Company shall be entitled to an injunction
restraining the Employee from committing or continuing any such violation of
this Agreement. Such right to an injunction shall be cumulative and in addition
to, and not in lieu of, any other remedies to which the Company may show itself
justly entitled. Further, during any period in which the Employee is in breach
of the covenants set forth in this Section 7, the time period of this covenant
shall be extended for an amount of time that the Employee is in breach.
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<PAGE>
(g) The Employee agrees to promptly deliver to the Company, upon
termination of Employee's employment with the Company, or at any other time when
the Company so requests, all documents relating to the business of the Company,
including, without limitation: all geological and geophysical reports and
related data such as maps, charts, logs, seismographs, seismic records and other
reports and related data, calculations, summaries, memoranda and opinions
relating to the foregoing, production records, electric logs, core data,
pressure data, lease files, well files and records, land files, abstracts, title
opinions, title or curative matters, contract files, notes, records, drawings,
manuals, correspondence, financial and accounting information, customer lists,
statistical data and compilations, patents, copyrights, trademarks, trade names,
inventions, formulae, methods, processes, agreements, contracts, manuals or any
other documents relating to the business of the Company (collectively, the
"Business Records"), and all copies thereof and therefrom. The Employee
confirms that all of the Business Records (and all copies thereof and therefrom)
that are required to be delivered to the Company pursuant to this paragraph 7(g)
constitute the exclusive property of the Company. The obligation of
confidentiality set forth in this Section 7 shall continue notwithstanding the
Employee's delivery of any such documents to the Company. Notwithstanding the
foregoing provisions of this Section 7 or any other provision of this Agreement,
the Employee shall be entitled to retain any written materials which, as shown
by the Employee's records, were in Employee's possession on or prior to the date
hereof, subject to the Company's right to receive a copy of all such materials.
(h) The representations and covenants contained in this Section 7 on the
part of the Employee will be construed as ancillary to and independent of any
other provision of this Agreement, and the existence of any claim or cause of
action of the Employee against the Company or any officer, director, or
shareholder of the Company, whether predicated on this Agreement or otherwise,
shall not constitute a defense to the enforcement by the Company of the
covenants of the Employee contained in this Section 7. In addition, the
provisions of this Section 7 shall continue to be binding upon the Employee in
accordance with their terms, notwithstanding the termination of the Employee's
employment hereunder for any reason.
(i) The parties to this Agreement agree that the limitations contained in
this Section 7 with respect to time, geographical area, and scope of activity
are reasonable. However, if any court shall determine that the time,
geographical area, or scope of activity of any restriction contained in this
Section 7 is unenforceable, it is the intention of the parties that such
restrictive covenants set forth herein shall not thereby be terminated but shall
be deemed amended to the extent required to render it valid and enforceable.
8. Termination of Employment
(a) Death. Employee's employment shall terminate automatically upon
Employee's death.
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<PAGE>
(b) Termination of Employment By the Company For Cause. The Company may
terminate Employee's employment under this Agreement for Cause. For purposes
hereof, the term "Cause" shall mean (i) the inability of Employee, despite any
reasonable accommodation required by law, due to bodily injury or disease or any
other physical or mental incapacity, to perform the services provided for
hereunder for a period of 120 days in the aggregate, within any given period of
180 consecutive days during the term of this Agreement, in addition to any
statutorily required leave of absence, (ii) conduct of the Employee that
constitutes fraud, 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 the
Company, (iii) commission of a material act of fraud against the Company, (iv)
embezzlement of funds or misappropriation of other property by the Employee from
the Company; (v) failure of Employee to observe or perform his material duties
and obligations as an employee of the Company or a material breach of this
Agreement, after thirty (30) days advance written notice of such failure or
breach which has not been cured; (vi) Employee's habitual use of illegal
controlled substances, or intoxication during normal business hours while
conducting the Company's business, which, in the reasonable judgment of the
Board, so impairs Employee's credibility and reputation that Employee can no
longer perform his duties; or (vii) Employee has been found civilly liable for
sexual harassment or related offenses (or the Company has been found civilly
liable for such actions by Employee).
(c) Termination By the Company Without Cause. The Company may also
terminate Employee's employment under this Agreement without Cause.
(d) Termination By Employee for Good Reason. If a Change of Control (as
defined hereafter) in the Company has occurred, Employee may terminate his
employment during the Employment Period for Good Reason (defined hereafter) upon
thirty (30) days' notice to the Company. For purposes of this Agreement, the
term "Good Reason" shall mean the occurrence, without Employee's express written
consent, of any one or more of the following events:
(i) A material change in Employee's duties (without the consent of
Employee) or a change in the title or offices held by Employee, or any
occurrence which causes Employee to have his principal place of employment
somewhere other than Houston, Texas.
(ii) A reduction in Employee's compensation or the failure by the
Company to continue to provide prompt payment (or reimbursement to
Employee) of all reasonable expenses incurred by Employee in connection
with Employee's professional and business activities.
7
<PAGE>
(iii) A failure by the Company to waive any and all restrictions that
might exist on the exercise of any stock options held by Employee under the
Company's stock option plans as of the date of a Change of Control.
(iv) The failure of the Company to obtain the assumption of this
Agreement, without limitation or reduction, by any successor to the
Company.
(e) Change of Control. A "Change of Control" shall have occurred if:
(i) fifty percent (50%) or more of the outstanding common stock of the
Company has been acquired by any person or persons (as defined in Section
3(a)(9) of the Securities Exchange Act of 1934 (the "Act")), provided such
person(s) is not a stockholder(s) of the Company currently holding ten
percent (10%) or more of the outstanding common stock of the Company at the
time of the execution of this Agreement. For purposes of this paragraph 8,
such person shall include affiliated persons (as defined in the Act));
(ii) there has been a merger or equivalent combination involving the
Company after which fifty percent (50%) or more of the voting stock of the
surviving corporation is held by persons other than those persons who were
stockholders holding ten percent (10%) or more of the outstanding stock of
the Company immediately prior to the date of such merger or equivalent
combination; or
(iii) there has been a merger or equivalent combination or stock sale
involving the Company and after such transaction fifty percent (50%) or
more of the members of the surviving company's Board of Directors elected
by stockholders are persons who were not directors immediately prior to
such transaction; or
(f) Voluntary Termination By Employee. Employee shall have the right at
any time after the date hereof to voluntarily terminate his employment with the
Company (a "Voluntary Termination") for any reason in the sole discretion of
Employee by not less than thirty (30) days' prior written notice to the Company;
provided however, a termination without Cause or a termination for Good Reason
shall not be treated for any purpose hereunder as a Voluntary Termination.
9. Termination Procedures and Certain Definitions.
(a) Notice of Termination. Any termination by the Company for Cause,
without Cause or by Employee for Good Reason or in a Voluntary Termination,
shall be communicated by Notice of Termination to the other party hereto given
in accordance with paragraph 13 of this Agreement. For purposes of this
Agreement, a "Notice of Termination" means a written notice which (i) indicates
the specific termination provision in this Agreement relied upon, (ii) to the
8
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extent applicable, sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Employee's employment under the
provision so indicated and (iii) if the Date of Termination (as defined below)
is other than the date of receipt of such notice, specifies the termination
date. The failure by Employee or the Company to set forth in the Notice of
Termination any fact or circumstance which contributes to a showing of Good
Reason or Cause shall not waive any right of Employee or the Company,
respectively, hereunder or preclude Employee or the Company, respectively, from
asserting such fact or circumstance in enforcing Employee's or the Company's
rights hereunder. Employee's continued employment with the Company, after a
Notice of Termination is provided, shall not constitute consent to, or a waiver
of any rights with respect to, any circumstance constituting Good Reason
hereunder.
(b) Date of Termination. "Date of Termination" means (i) if Employee's
employment is terminated by the Company for Cause, the date of Employee's
receipt of the Notice of Termination or any later date specified therein, as the
case may be, (ii) if Employee's employment is terminated by the Company other
than for Cause, the Date of Termination shall be the date not less than thirty
(30) days after the date on which the Company notifies Employee of such
termination, and (iii) if Employee terminates his employment for Good Reason or
in a Voluntary Termination, the Date of Termination shall be the date, not less
than thirty (30) days after the date on which Employee notifies the Company of
such termination.
10. Obligations of the Company on Termination.
(a) If during the Employment Period, Employee's employment is terminated
with Cause, upon Employee's death or upon a Voluntary Termination, the Company
shall immediately pay Employee in cash the portion of his Base Compensation
previously earned but not yet paid.
(b) If during the Employment Period, Employee's employment is terminated by
the Company without Cause or by Employee for Good Reason:
(i) In General. The Company shall immediately pay Employee in cash
the amount of his Total Compensation previously earned but not yet paid.
(ii) Severance Benefits.
(a) All stock options granted to Employee under the
Company's stock option plans, which have not already vested,
shall immediately vest and be exercisable.
(b) Employee shall continue to participate in all of the
Company's welfare benefit plans, including health and medical
plans, for six (6) months after termination and shall be entitled
to reimbursement of
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COBRA payments to maintain medical and dental insurance up to
twelve (12) additional months for said coverage.
(c) The Company shall pay Employee in a lump sum a
"Severance Benefit" in cash equal to two (2) times Employee's
Base Compensation as of the date of such termination.
Such payment shall be made within thirty (30) days following said
termination.
11. Burden and Benefit. This Agreement shall be binding upon, and shall
inure to the benefit of, the Company and Employee, and their respective heirs,
personal and legal representatives, successors and permitted assigns.
Employee's rights and obligations may not be assigned without the proper written
consent of the Company.
12. Governing Law. It is understood and agreed that the construction and
interpretation of this Agreement shall at all times and in all respects be
governed by the laws of the State of Texas. The parties hereto hereby
irrevocably submit to the exclusive jurisdiction of the courts of the State of
Texas and the federal courts of the United States of America located in Texas,
and appropriate appellate courts therefrom, over any dispute arising out of or
relating to this Agreement or any of the transactions contemplated hereby, and
each party hereby irrevocably agrees that all claims in respect of such dispute
or proceeding may be heard and determined in such courts. The parties hereby
irrevocably waive, to the fullest extent permitted by applicable law, any
objection which they may now or hereafter have to the laying of venue of any
dispute arising out of or relating to this Agreement or any of the transactions
contemplated hereby brought in such court or any defense of inconvenient forum
for the maintenance of such dispute. Each of the parties hereto agrees that a
judgment in any such dispute may be enforced in other jurisdictions by suit on
the judgment or in any other manner provided by law. This consent to
jurisdiction is being given solely for purposes of this Agreement and is not
intended to, and shall not, confer consent to jurisdiction with respect to any
other dispute in which a party to this Agreement may become involved. Each of
the parties hereto hereby consents to process being served by any party to this
Agreement in any suit, action, or proceeding of the nature specified above by
the mailing of a copy thereof in the manner specified by the provisions of
Section 13.
13. Notice. Any notice required to be given shall be sufficient if it is
in writing and sent by certified or registered mail, return receipt requested,
first-class postage prepaid, to his last known residence in the case of
Employee, and to its principal office in the State of Texas in the case of the
Company.
14. Severability. The provisions of this Agreement shall be deemed
severable, and the invalidity or unenforceability of any one or more of the
provisions of this Agreement shall not affect the validity and enforceability of
the other provisions.
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15. Entire Agreement. This Agreement contains the entire agreement and
understanding by and between the Company and Employee with respect to the
employment of Employee, and no representations, promises, agreements, or
understandings, written or oral, not contained herein shall be of any force or
effect. No waiver of any provision of this Agreement shall be valid unless it
is in writing and signed by the party against whom the waiver is sought to be
enforced. No valid waiver of any provision of this Agreement at any time shall
be deemed a waiver of any other provision of this Agreement at such time or any
other time.
16. Modification. No amendment, alteration or modification to any of the
provisions of this Agreement shall be valid unless made in writing and signed by
both parties.
17. Paragraph Headings. The paragraph headings have been inserted for
convenience only and are not to be considered when construing the provisions of
this Agreement.
18. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the Company and Employee have executed this Agreement
on the day and year first above written.
"COMPANY" "EMPLOYEE"
3TEC ENERGY CORPORATION
---------------------------------
R. A. WALKER
By:
-------------------------------
Floyd C. Wilson
Chief Executive Officer
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EXHIBIT 10.32
AGREEMENT OF SALE AND PURCHASE
This Agreement dated April ______, 2000, by and between C.W. Resources,
Inc., Westerman Royalty, Inc., and Carl A. Westerman (herein collectively called
SELLER) and 3TEC Energy Corporation (herein called BUYER);
W I T N E S S E T H:
1. PROPERTY TO BE SOLD AND PURCHASED. Seller agrees to sell and Buyer
agrees to purchase, for the consideration hereinafter set forth, and subject to
the terms and provisions herein contained, the following described properties,
rights and interests:
(a) All right, title and interest of Seller (i) in and to the oil, gas
and/or mineral leases described on Part One of Exhibit A hereto insofar as
such leases cover depths below the base of the Woodbine Formation
underlying the lands described in such Part One of Exhibit A and (ii) in
and to all of the oil, gas and/or mineral leases described on Part Two or
Part Three of Exhibit A insofar as such leases cover depths between the
base of the Woodbine Formation and the base of the Cotton Valley Sand
Formation underlying the lands described in such Part Two or Part Three of
Exhibit A; SAVE AND EXCEPT all right, title and interest of Seller in and
to the oil, gas and mineral leases described in Part Four of Exhibit A
hereto insofar as such leases cover the lands and depths described in such
Part Four of Exhibit A; and
(b) All rights, titles and interests of Seller in and to, or otherwise
derived from, all presently existing and valid oil, gas and/or mineral
unitization, pooling, and/or communitization agreements, declarations
and/or orders (including, without limitation, all units formed under
orders, rules, regulations, or other official acts of any federal, state,
or other authority having jurisdiction, and voluntary unitization
agreements, designations and/or declarations) relating to the properties
described in subsection (a) above, to the extent and only to the extent
such rights, titles and interests are attributable to the properties
described in subsection (a) above; and
(c) All rights, titles and interests of Seller in and to all presently
existing and valid production sales contracts, operating agreements, right
of way easements, seismic data agreements (to the extent transferable and
subject to the limitations set forth below), and other agreements and
contracts which relate to any of the properties described in subsections
(a) and (b) above, to the extent and only to the extent such rights, titles
and interests are attributable to the properties described in subsections
(a) and (b) above; and
(d) All rights, titles and interests of Seller in and to all wells,
wellhead equipment, flowlines, tanks, injection facilities, saltwater
disposal facilities, compression facilities, gathering systems, and other
equipment located on the properties described in subsections (a) and (b)
above and currently in use in connection with the operation of such
properties; and
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(e) An undivided one-half (2) interest in and to all right, title and
interest of Seller in and to the oil, gas and/or mineral leases described
on Part Two of Exhibit A insofar as such leases cover depths below the base
of the Cotton Valley Sand Formation underlying the lands described in such
Part Two of Exhibit A; and
(f) An undivided one-half (2) interest in and to all rights, titles and
interests of Seller in and to, or otherwise derived from, all presently
existing and valid oil, gas and/or mineral unitization, pooling, and/or
communitization agreements, declarations and/or orders (including, without
limitation, all units formed under orders, rules, regulations, or other
official acts of any federal, state, or other authority having
jurisdiction, and voluntary unitization agreements, designations and/or
declarations) relating to the properties described in subsection (e) above,
to the extent and only to the extent such rights, titles and interests are
attributable to the properties described in subsection (e) above; and
(g) An undivided one-half (2) interest in and to all rights, titles and
interests of Seller in and to all presently existing and valid production
sales contracts, operating agreements, right of way easements, seismic data
agreements (to the extent transferable, and subject to the limitations set
forth below), and other agreements and contracts which relate to any of the
properties described in subsections (e) and (f) above, to the extent and
only to the extent such rights, titles and interests are attributable to
the properties described in subsections (e) and (f) above.
The properties, rights and interests specified in the foregoing subsections
(a), (b), (e) and (f) are herein sometimes collectively called the "OIL AND GAS
PROPERTIES," and the properties, rights and interests specified in the foregoing
subsections (a) through (g), inclusive, are herein sometimes collectively called
the "PROPERTIES." Without limitation, it is understood that the Properties do
not include, and there is retained by Seller, (i) any seismic data covering
lands or depths not covered by the Oil and Gas Properties, any seismic data not
owned by Seller and any seismic data which is not transferable, (ii) any field
inventory and/or warehouse stocks, (iii) any surface owned in fee and (iv) any
buildings and surface rights to the tracts on which such buildings are located.
2. PURCHASE PRICE.
(a) Base Purchase Price. The purchase price for the Properties shall be
Fifty-Five Million Dollars ($55,000,000) (such amount, adjusted as provided
in subsection (b) below, but unadjusted by any other adjustments provided
for in this Agreement or agreed to by the parties, being herein called the
"BASE PURCHASE PRICE"). Such Base Purchase Price may be adjusted as
provided in Sections 8 and 11(b)(ii) hereof (the Base Purchase
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Price, as so adjusted, and as the same may otherwise be adjusted by mutual
agreement of the parties, being herein called the "PURCHASE PRICE"). Except
as may be provided in Sections 11(a)(ii) and 11(b)(ii) with respect to
payment of the Operations Adjustment portion of the Base Purchase Price
under certain circumstances, the Purchase Price shall be paid in readily
available funds at the Closing as hereinafter provided.
(b) ROYALTY AND ORRI ADJUSTMENT. The parties recognize that the Oil and
Gas Properties include royalties and overriding royalties which were not
considered by Buyer in establishing the $55,000,000 amount set forth above.
The parties, therefore, agree that such amount will be adjusted upward as
follows: (i) for each well or PUD location listed on Schedule I that shows
a "RI" or "ORRI" decimal net revenue interest on such schedule, the total
of such "RI" and "ORRI" interests will be divided by the average of the
decimal net revenue interest shown for "BPO NRI" and "APO NRI" for such
well or PUD location on such Schedule (or the "APO NRI" where no "BPO NRI"
is shown) and multiplying such result by the allocated value shown for such
well or PUD location on Schedule I and (ii) adding the total of the amounts
computed under clause (i) to such $55,000,000 amount as set forth above.
3. DEPOSIT. Contemporaneously with the execution of this Agreement, Buyer,
Seller and Bank One Texas, N.A. ("ESCROW AGENT") shall execute an escrow
agreement in the form of Exhibit B attached hereto (the "ESCROW AGREEMENT").
Pursuant to the terms of the Escrow Agreement, Buyer shall deliver to the Escrow
Agent Five Million Two Hundred Thousand Dollars ($5,200,000) (such amount, plus
any interest earned thereon, being herein called the "DEPOSIT"). The costs
associated with such escrow shall be split equally between Buyer and Seller. In
the event the transaction contemplated hereby is consummated in accordance with
the terms hereof, the Deposit shall be applied to the Purchase Price to be paid
by Buyer at the Closing. In the event the transaction contemplated hereby fails
to close on the Closing Date as a result of a material breach of this Agreement
by Seller which occurs in the absence of a material breach of this Agreement by
Buyer, or in the event this Agreement is terminated by Buyer in accordance with
Section 9 below or is terminated by Seller in accordance with any subsection of
Section 10 below other than subsections 10(a) and 10(b), the Deposit shall be
returned to Buyer. If the transaction contemplated hereby otherwise fails to
close on the Closing Date, Seller shall retain the Deposit. THE PARTIES HEREBY
ACKNOWLEDGE THAT THE EXTENT OF DAMAGES TO SELLER OCCASIONED BY THE FAILURE OF
THIS TRANSACTION TO BE CONSUMMATED WOULD BE IMPOSSIBLE OR EXTREMELY DIFFICULT TO
ASCERTAIN AND THAT THE AMOUNT OF THE DEPOSIT IS A FAIR AND REASONABLE ESTIMATE
OF SUCH DAMAGES UNDER THE CIRCUMSTANCES AND DOES NOT CONSTITUTE A PENALTY AND
SHALL BE SELLER'S SOLE AND EXCLUSIVE REMEDY.
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4. REPRESENTATIONS OF SELLER.
(a) REPRESENTATIONS. Each Seller represents and warrants to Buyer
that:
(i) ORGANIZATION AND QUALIFICATION. Each of C.W. Resources, Inc. and
Westerman Royalty, Inc., is a corporation duly organized and legally
existing and in good standing under the laws of the State of Texas.
(ii) DUE AUTHORIZATION. Each Seller has full power to enter into and
perform its obligations under this Agreement and has taken all proper
action to authorize entering into this Agreement and performance of its
obligations hereunder.
(iii) APPROVALS. Other than requirements (if any) that there be
obtained consents to assignment from third parties (any material contracts
containing such consent requirements being disclosed under section 4(a)(x)
below) and except for approvals ("ROUTINE GOVERNMENTAL APPROVALS") required
to be obtained from governmental entities who are lessors under leases
forming a part of the Oil and Gas Properties (or who administer such leases
on behalf of such lessors) which are customarily obtained post-closing, and
except for the requirements of any maintenance of uniform interest
provisions contained in any operating or other agreements, to Seller's
knowledge, neither the execution and delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, nor the compliance
with the terms hereof, will result in any default under any agreement or
instrument to which Seller is a party or by which the Properties are bound,
or violate any order, writ, injunction, decree, statute, rule or regulation
applicable to Seller or to the Properties. Seller's "knowledge," or
"received" by Seller (except as used in connection with payment receipts),
as used in this Agreement, shall mean to the actual knowledge of, or
actually received by, Carl A. Westerman, Paul A. Kopasko, Dawn W. Tadlock,
David Tadlock, Bruce Cook or Michelle Cook.
(iv) VALID, BINDING AND ENFORCEABLE. This Agreement constitutes (and
the Conveyance provided for herein to be delivered at Closing will, when
executed and delivered, constitute) the legal, valid and binding obligation
of Seller, enforceable in accordance with its terms, except as limited by
bankruptcy or other laws applicable generally to creditor's rights and as
limited by general equitable principles.
(v) LITIGATION. Except as disclosed on the Disclosure Schedule (herein
called the "DISCLOSURE SCHEDULE") attached hereto as Schedule II, there are
no pending suits, actions, or other proceedings in which Seller is a party
(or to Seller's knowledge, which have been threatened to be instituted)
which affect the Properties (including, without limitation, any actions
challenging or pertaining to Seller's title to any of the Properties), or
affect the execution and delivery of this Agreement or the consummation of
the transactions contemplated hereby.
(vi) TITLE. Seller is the owner of the Oil and Gas Properties, free and
clear of
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all liens, burdens, encumbrances and defects in title arising by, through
or under Seller. It is expressly understood and agreed that such
representation does not cover matters arising other than by, through or
under Seller, and it is further expressly understood and agreed that,
without limitation, matters arising by, through or under Seller do not
include maintenance of leases in force or pooling and/or unitization
matters.
(vii) ENVIRONMENTAL. Except as disclosed on the Disclosure Schedule,
to Seller's knowledge, there are no pending or threatened actions, suits,
orders, claims, notices or proceedings, made or instituted by applicable
governmental authorities, regarding the Properties alleging a violation or
non-compliance with applicable environmental laws, or with respect to the
disposal, discharge or release from the Properties of hazardous materials
or constituents in a manner which is not in compliance with such laws.
(viii) GAS IMBALANCES AND PREPAYMENT. Seller is not obligated, by
virtue of any prepayment arrangement, a "take or pay" arrangement, gas
balancing agreement, a production payment or any other arrangement entered
into by it (or, to Seller's knowledge, entered into by any other party and
binding on the Oil and Gas Properties), to deliver hydrocarbons produced
from the Oil and Gas Properties at some future time without then or
thereafter receiving full payment therefor.
(ix) PROCEEDS IN SUSPENSE. Proceeds from the sale of hydrocarbons
produced from the Oil and Gas Properties are being received by Seller in a
timely manner and are not being held in suspense by the purchaser of said
hydrocarbons for any reason, other than amounts held in suspense by such
purchaser in the ordinary course of business which are individually or in
the aggregate not in excess of $100,000.
(x) MATERIAL CONTRACTS; PREFERENTIAL RIGHTS. The Disclosure Schedule
sets forth a complete and accurate description of every material agreement
entered into by Seller (or, to Seller's knowledge, entered into by any
other party and binding on the Oil and Gas Properties), and relating to the
Oil and Gas Properties, and no written claim has been received by Seller
that it is in default under any such agreement. No hydrocarbons produced
from the Oil and Gas Properties are subject to a sales contract or other
arrangement entered into by Seller and relating to the production,
gathering, transporting, processing, treating or marketing of hydrocarbons
(other than a contract disclosed on the Disclosure Schedule), and, except
as included in agreements set forth on the Disclosure Schedule, no person
has any preferential right to purchase any Oil and Gas Property and no
person has any call upon, option to purchase, preferential right to
purchase or similar rights granted by Seller with respect to production
from the Oil and Gas Properties and none of the persons so listed on the
Disclosure Schedule have exercised any such rights.
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(xi) RECEIPT OF PROCEEDS; PAYMENT OF EXPENSES. With respect to each
existing well identified on Schedule I, Seller is currently receiving from
all purchasers of production from the Oil and Gas Properties at least the
"Net Revenue Interests" set forth on such Schedule I without suspense.
With respect to each existing well listed on Schedule I, Seller is
currently paying the operators of the Oil and Gas Properties for the
development and operation thereof no more than the Operating Interests set
forth on such Schedule I, and Seller is current for all costs and expenses
pertaining to the development and operation of the Oil and Gas Properties,
except for those being contested in good faith.
(xii) PAYMENT OF ROYALTIES. Except for the Jane Turner Sheppard et al
vs. C.W. Resources et al. case disclosed on the Disclosure Schedule, Seller
has received no claims that royalties and other payments due by it under
the leases have not been properly and timely paid, or that any conditions
necessary to keep the leases in force have not been fully performed.
(xiii) COMPLIANCE WITH LAWS. Seller has received no claims, orders,
notices or other written communications from applicable governmental
authorities that the operation of the Oil and Gas Properties has not been
conducted in accordance with all laws, rules, regulations, ordinances and
orders (including without limitation, those pertaining to the environment)
of all local, state and federal governmental bodies, authorities and
agencies having jurisdiction of the Oil and Gas Properties.
(xiv) TAXES. Ad valorem, property, production, severance, excise and
similar taxes and assessments based on or measured by ownership of property
or the production of hydrocarbons or the receipt of proceeds therefrom on
the Oil and Gas Properties that have become due and payable have been
properly and timely paid, except for those being contested in good faith.
For purposes of this Agreement, taxes based on or measured by production
shall be deemed attributable to the period in which the production
occurred, regardless of the fact that such taxes may not be assessed or
payable until some subsequent period.
(b) DISCLAIMERS. THE EXPRESS REPRESENTATIONS AND WARRANTIES OF SELLER
CONTAINED IN SECTION 4(a) ABOVE ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER
REPRESENTATIONS AND WARRANTIES, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE,
AND, WITHOUT LIMITATION ON THE EXPRESS REPRESENTATIONS AND WARRANTIES
CONTAINED IN SECTION 4(a) ABOVE, SELLER EXPRESSLY DISCLAIMS ANY AND ALL
OTHER REPRESENTATIONS AND WARRANTIES (WITHOUT LIMITATION, EXCEPT FOR THE
EXPRESS REPRESENTATIONS AND WARRANTIES CONTAINED IN SECTION 4(a) ABOVE, THE
PROPERTIES SHALL BE CONVEYED PURSUANT HERETO WITHOUT ANY WARRANTY OR
REPRESENTATION WHETHER EXPRESS,
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IMPLIED, STATUTORY OR OTHERWISE, RELATING TO THE CONDITION, QUANTITY,
QUALITY, FITNESS FOR A PARTICULAR PURPOSE, CONFORMITY TO THE MODELS OR
SAMPLES OF MATERIALS OR MERCHANTABILITY OF ANY EQUIPMENT FOR ITS FITNESS
FOR ANY PURPOSE). UPON CLOSING, BUYER SHALL HAVE INSPECTED, OR WAIVED ITS
RIGHT TO INSPECT, THE PROPERTIES FOR ALL PURPOSES AND SATISFIED ITSELF AS
TO THEIR PHYSICAL AND ENVIRONMENTAL CONDITION, BOTH SURFACE AND SUBSURFACE,
INCLUDING BUT NOT LIMITED TO CONDITIONS SPECIFICALLY RELATED TO THE
PRESENCE, RELEASE OR DISPOSAL OF HAZARDOUS SUBSTANCES, SOLID WASTES,
ASBESTOS AND OTHER MAN MADE FIBERS, OR NATURALLY OCCURRING RADIOACTIVE
MATERIALS ("NORM"). BUYER IS RELYING UPON ITS OWN INSPECTION OF THE
PROPERTIES, AND BUYER SHALL ACCEPT ALL OF THE SAME IN THEIR "AS IS, WHERE
IS" CONDITION.
5. REPRESENTATIONS OF BUYER. Buyer represents to Seller that:
(a) ORGANIZATION AND QUALIFICATION. Buyer is a corporation duly
organized and legally existing and in good standing under the laws of its
state of incorporation and is qualified to do business and in good standing
in the State of Texas. Buyer is also qualified to own and operate oil and
gas properties with all applicable governmental agencies having
jurisdiction over the Properties, to the extent such qualification is
necessary or appropriate or will be necessary or appropriate upon
consummation of the transactions contemplated hereby (including, without
limitation, Buyer has met all bonding requirements of such agencies).
(b) DUE AUTHORIZATION. Buyer has full power to enter into and perform
its obligations under this Agreement and has taken all proper action to
authorize entering into this Agreement and performance of its obligations
hereunder.
(c) APPROVALS. Other than requirements (if any) that there be obtained
consents to assignment (or waivers of preferential rights to purchase) from
third parties, and except for Routine Governmental Approvals, neither the
execution and delivery of this Agreement, nor the consummation of the
transactions contemplated hereby, nor the compliance with the terms hereof,
will result in any default under any agreement or instrument to which Buyer
is a party, or violate any order, writ, injunction, decree, statute, rule
or regulation applicable to Buyer.
(d) VALID, BINDING AND ENFORCEABLE. This Agreement constitutes (and the
Conveyance provided for herein to be delivered at Closing will, when
executed and delivered, constitute) the legal, valid and binding obligation
of Buyer, enforceable in accordance with its terms, except as limited by
bankruptcy or other laws applicable generally to creditor's rights and as
limited by general equitable principles.
(e) NO LITIGATION. There are no pending suits, actions, or other
proceedings in
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which Buyer is a party (or, to Buyer's knowledge, which have been
threatened to be instituted against Buyer) which affect the execution and
delivery of this Agreement or the consummation of the transactions
contemplated hereby.
(f) KNOWLEDGEABLE BUYER, NO DISTRIBUTION. Buyer is a knowledgeable
purchaser, owner and operator of oil and gas properties, has the ability to
evaluate (and in fact has evaluated) the Properties for purchase, and is
acquiring the Properties for its own account and not with the intent to
make a distribution in violation of the Securities Act of 1933 as amended
(and the rules and regulations pertaining thereto) or in violation of any
other applicable securities laws, rules or regulations.
6. CERTAIN COVENANTS OF SELLER PENDING CLOSING. Between the date of this
Agreement and the Closing Date:
(a) ACCESS BY BUYER.
(i) RECORDS. Seller will give Buyer, or Buyer's authorized
representatives, at Seller's office and at all reasonable times before the
Closing Date, access to Seller's records pertaining to the ownership and/or
operation of the Properties (including, without limitation, title files,
division order files, well files, and production, severance and ad valorem
tax records), for the purpose of conducting due diligence reviews
contemplated by Section 7 below. Buyer may make copies of such records, at
its expense, but shall, if Seller so requests, return all copies so made if
the Closing does not occur; all costs of copying such items shall be borne
by Buyer. Seller shall not be obligated to provide Buyer with access to
any records or data which Seller believes that Seller cannot provide to
Buyer without, in Seller's reasonable opinion, breaching, or risking a
breach of, agreements with other parties, or waiving, or risking waiving,
legal privilege. Notwithstanding the foregoing sentence, Seller shall
provide Buyer a list of all records or data which Seller is withholding
pursuant to such sentence including a general description of such records'
contents and the specific reason claimed by Seller for such withholding.
(ii) PHYSICAL INSPECTION. Seller shall make a good faith effort to give
Buyer, or Buyer's authorized representatives, at all reasonable times
before the Closing Date and upon adequate notice to Seller, physical access
to the Properties for the purpose of inspecting same. Buyer recognizes
that some or all of the Properties may be operated by parties other than
Seller and that Seller's ability to obtain access to such properties, and
the manner and extent of such access, is subject to such third parties.
Buyer agrees to comply fully with the rules, regulations and instructions
issued by Seller (and, where Properties are operated by other parties, such
other parties) regarding the actions of Buyer while upon, entering or
leaving the Properties.
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(iii) EXCULPATION AND INDEMNIFICATION. If Buyer exercises rights of
access under this Section or otherwise, or conducts examinations or
inspections under this Section or otherwise, then (a) such access,
examination and inspection shall be at Buyer's sole risk, cost and expense
and Buyer waives and releases all claims against Seller (and the respective
affiliates of the parties constituting Seller and the respective directors,
officers, employees, attorneys, contractors and agents of such parties and
such affiliates) arising in any way therefrom or in any way connected
therewith or arising in connection with the conduct of its directors,
officers, employees, attorneys, contractors and agents in connection
therewith and (b) Buyer shall indemnify, defend and hold harmless Seller
(and the respective affiliates of the parties constituting Seller and the
respective officers, directors, employees, attorneys, contractors and
agents of such parties and such affiliates)from any and all claims,
actions, causes of action liabilities, damages, losses, costs or expenses
(including, without limitation, court costs and attorneys' fees), or liens
or encumbrances for labor or materials, arising out of or in any way
connected with Buyer's examinations or inspections.
(b) INTERIM OPERATION. Seller will continue the operation of the
Properties in the ordinary course of its business (or, where Seller is not
the operator of a Property, will continue its actions as a non-operator in
the ordinary course of its business), and will not sell or otherwise
dispose of any of the Properties, provided that Seller may make sales or
other dispositions of oil, gas and other minerals in the ordinary course of
business after production (but, in doing so, will not enter into any new
marketing arrangements unless the same terminate, or can be terminated, (in
either case without penalty or other detriment) in 31 days or less), and
may make sales or other dispositions of equipment and other personal
property or fixtures in the ordinary course of business where the same has
become obsolete and is no longer necessary for the operation of the
Properties, or is replaced by an item or items of at least equal
suitability and value. Except for those disclosed on the Disclosure
Schedule (with respect to which Seller may take the actions described on
the Disclosure Schedule) Seller will not, without Buyer's written consent,
commit to or propose the drilling of any additional wells, commit to or
propose the deepening, plugging back or reworking of any existing wells, or
commit to or propose the conducting of any other operations which require
consent under the applicable operating agreement. Except for those
disclosed on the Disclosure Schedule (with respect to which Seller may take
the actions described on the Disclosure Schedule) Seller will advise Buyer
of any such proposals made by other parties, and will consult with Buyer
concerning such proposals, but any decisions with respect to such proposals
shall be made by Seller in its own discretion, so long as the decisions are
made in the ordinary course of business; provided that, if the period for
responding to such a proposal extends beyond the Closing Date, Seller will
not respond to such proposal unless the Closing does not occur prior to the
next to last day allowed to respond (in which case Seller may respond).
Without expanding any obligations which Seller may have to Buyer, it is
expressly agreed that Seller shall never have any liability to Buyer with
respect to
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operation of a Property greater than that which it might have as the
operator to a non-operator under the applicable operating agreement (or, in
the absence of such an agreement, under the AAPL 610 (1989 Revision) form
Operating Agreement), IT BEING RECOGNIZED THAT, UNDER SUCH AGREEMENTS AND
SUCH FORM, THE OPERATOR IS NOT RESPONSIBLE FOR ITS OWN NEGLIGENCE, AND HAS
NO RESPONSIBILITY OTHER THAN FOR GROSS NEGLIGENCE OR WILFUL MISCONDUCT.
7. DUE DILIGENCE REVIEWS.
(a) REVIEW BY BUYER. Buyer may conduct, at its sole cost, such title
examination or investigation, and other examinations and investigations, as
it may in its sole discretion choose to conduct with respect to the
Properties in order to determine whether Defects (as below defined) exist.
Should, as a result of such examinations and investigations, or otherwise,
one or more matters come to Buyer's attention which would constitute a
Defect (as below defined), and should there be one or more of such Defects
which Buyer is unwilling to waive and close the transaction contemplated
hereby notwithstanding the fact that such Defects exist, Buyer shall notify
Seller in writing of such Defects as soon as the same are identified by
Buyer, but in no event no later than May 24, 2000, (such Defects of which
Buyer so provides notice are herein called "ASSERTED DEFECTS"). Such
notification shall include, for each Asserted Defect, (i) a description of
the Asserted Defect and the wells and/or units listed on Schedule I to
which it relates, (i) the Defect is a Defect described in Section 7(b)(i)
below, (ii) for each applicable well or unit, the size of any variance from
"Net Revenue Interest" or "Working Interest" which does or could result
from such Asserted Defect and (iii) the amount by which Buyer would propose
to adjust the Purchase Price. All access to Sellers records and the
Properties in connection with such due diligence shall be subject and
pursuant to Section 6(a) (including, without limitation, the exculpation
and indemnification provisions contained in Section 6(a)(iii)).
(b) NATURE OF DEFECTS. The term "DEFECT" as used in this Section shall
mean the following:
(i) NRI OR WI VARIANCES. Seller's ownership of the Properties is such
that, with respect to a well or PUD location listed on Schedule I hereto,
it clearly (A) entitles Seller to receive a decimal share of the oil, gas
and other hydrocarbons produced from currently producing completions in
such well (or, in the case of a PUD location, from the Cotton Valley Sand
Formation), which is less than the decimal share set forth on Schedule I in
connection with such well or PUD location in the column headed "Net Revenue
Interest" or (B) causes Seller to be obligated to bear a decimal share of
the cost of operation of such well (as to such completions) or PUD location
(as to such formation) greater than the decimal share set forth on Schedule
I in connection with such well or PUD location in the column headed
"Working Interest" (without at least a proportionate increase in the share
of
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production to which Seller is entitled to receive from such well or PUD
location).
(ii) LIENS. Seller's ownership of an Oil and Gas Property is subject to
a lien other than (A) a lien for taxes which are not yet delinquent or (B)
a mechanic's or materialmen's lien (or other similar lien), or a lien under
an operating agreement or similar agreement, to the extent the same relates
to expenses incurred which are not yet delinquent or (C) liens which will
be released at or before Closing.
(iii) PREFERENTIAL RIGHTS AND CONSENTS. Seller's ownership of an Oil
and Gas Property is subject to a Preferential Right or a requirement that
Consent to assignment be obtained, unless a waiver of such Preferential
Right or Consent has been obtained with respect to the transaction
contemplated hereby, or (in the case of a Preferential Right) an
appropriate tender of the applicable interest has been made to all parties
holding such right and, with respect to each such party, the period of time
required for such party to exercise such right has expired without such
party exercising such right.
(iv) IMPERFECTIONS IN TITLE. Seller's ownership of an Oil and Gas
Property is subject to an imperfection in title which, if asserted, would
cause a Defect, as defined in subparagraph (i) above, to exist, and such
imperfection in title is not such as would normally be waived by persons
engaged in the oil and gas business when purchasing producing properties.
(v) PRODUCTION SALES CONTRACTS. An Oil and Gas Property is subject to a
production sales contract (other than a contract disclosed on the
Disclosure Schedule or a contract which provides market sensitive pricing)
which does not terminate by its terms on or before 185 days after the
Closing Date and which cannot be terminated on or before 185 days after the
Closing Date without penalty.
(vi) ENVIRONMENTAL MATTERS. An Oil and Gas Property is in violation of
(whether or not Seller has been cited for such violation) applicable
environmental laws (below defined) in any material respect ("applicable
environmental laws" shall mean all federal, state or local laws, rules,
orders or regulations pertaining to health or the environment, including
those relating to waste materials and/or hazardous substances) or there is
present upon or under such property a condition which requires or with the
passage of time is likely to require remediation under applicable
environmental law and such matter is not such as would normally be accepted
by persons engaged in the oil and gas business when purchasing producing
properties.
(vii) LITIGATION. A matter which should have been disclosed on the
Disclosure Schedule pursuant to Section 4(a)(v), but was not so disclosed.
Notwithstanding anything in the foregoing which may appear to the contrary,
unleased
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interests or non pooled, or ineffectively pooled, interests in a tract on
which no well (or a drillsite for a PUD location) included in the
Properties is located shall not constitute a "Defect." Similarly, in some
cases where an "APO NRI" net revenue interest is shown for a well or PUD
location on Schedule I one or more third parties have elections at payout
(which do not have to be exercised until then) to take one of two or more
possible interests, and such net revenue interest shown on Schedule I
assumes one of such interests would be elected; notwithstanding anything in
the foregoing which appears to the contrary, the fact that a third party
may make a different election at payout than that assumed in computing the
net revenue interest shown on Schedule I will not constitute a "Defect."
The presence of naturally occurring radioactive materials ("NORM") in
circumstances where, under current Texas Railroad Commission rules and
regulations, remediation is not currently required will not constitute a
"Defect."
(c) PUD LOCATIONS. Buyer and Seller have identified certain PUD
locations at which additional wells might be drilled to the Cotton Valley
Sand Formation, which locations are identified on Exhibit C hereto. Such
locations are included on Schedule I hereto (and have amounts allocated to
them as do existing wells), and are subject to the procedures relating to
Defects and Asserted Defects set forth above in this Section 7, and to the
curative and purchase price adjustment procedures set forth below in this
Section 7 and Section 8. With respect to such locations, and such
procedures, Buyer and Seller additionally agree as follows:
(i) ADJUST LOCATION, SUBSTITUTE PUD. If an Asserted Defect is
identified with the tract on which such location is located, Buyer will use
its best efforts to identify a reasonably acceptable alternative location
for such PUD, on a tract not so affected, in order to eliminate such
Defect. Alternatively, if Seller can identify an additional PUD location
on the Oil and Gas Properties which is not included in the PUD locations
shown on Exhibit C, Buyer will review such location (and any supporting
data furnished by Seller) in a good faith, and, should Buyer determine that
such location is a reasonably acceptable alternative location, such
location shall be substituted for the PUD location having the Asserted
Defect, and such Asserted Defect will be eliminated.
(ii) MINIMAL DEFECTS, INCOMPLETE POOLING. Asserted Defects relating to
a PUD location must affect at least 5% of Leasehold interest of the
drillsite tract for such PUD for the same to be considered Defects subject
to price adjustment procedures provided for below. If Asserted Defects for
a PUD location affect interests which exceed such amount, the price
adjustment procedure provided for below will be followed for the interest
affected in excess of such amount; if the interest affected do not exceed
such amount, no price adjustment for Asserted Defects will be made. The
absence of complete pooling authority for all interests held by Seller in a
PUD location will not constitute a Defect.
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(iii) OFFSETS. Should Seller have an interest in a PUD location that
is more than 105% of that projected on Schedule I, such excess (with the
amount attributable to such excess to be determined in the same manner as
provided below for price adjustments) may be used to offset purchase price
reductions otherwise applicable to other PUD locations due to Defects
thereon.
(iv) CONTINUING CURATIVE. If an Asserted Defect is identified with
respect to such a location, and the same cannot be cured before Closing (or
resolved as provided in (i) above), Seller may elect to continue curative
efforts past Closing. In such case, the amount determined, as provided in
Section 8 below, to be attributable to such Defect will be left in escrow
under the Escrow Agreement and will be disbursed (A) if such Defect is
cured within one year after Closing, to Seller when such curative is
completed (with interest earned on such amount up to Closing being
disbursed to Buyer, and all other interest earned on such amount being
disbursed to Seller) or (B) otherwise, to Buyer as promptly as possible
after such one year period (together with all interest earned on such
amount). If the amount to be so left in escrow exceeds $1,000,000, the
amount so left in escrow may, at Buyer's option, be limited to not less
than $1,000,000, and any additional amounts will be paid directly by Buyer;
provided that payments on account of curative by Seller shall be first paid
from the amount left in escrow (until the amount so left in escrow is
depleted), and then paid by Buyer; and provided further that any such
amounts to be paid directly by Buyer shall be (A) when and if curative is
done with respect to Asserted Defects, paid to Seller in the same manner as
provided for escrow funds above (but without interest), or (B) to the
extent curative does not occur within such period, retained by Buyer.
(d) SELLER'S RESPONSE. In the event that Buyer notifies Seller of
Asserted Defects:
(i) CURE. Seller may (but shall have no obligation to) attempt to cure,
prior to Closing, one or more Asserted Defects.
(ii) POSTPONE CLOSING. Whether or not Seller has then begun to, or ever
begins to, cure one or more Asserted Defects (and whether or not Seller has
elected options (iii) or (iv) below with respect to one or more Asserted
Defects), Seller may postpone the Closing by designating a new Closing Date
not later than June 15, 2000. Notwithstanding any such election to
postpone Closing, Seller shall still have no obligation to cure Asserted
Defects.
(iii) INDEMNIFICATION. At any time, and from time to time, prior to
Closing, and regardless of whether or not Seller has then elected any other
option or options under this Section as to such Asserted Defect or any
other Asserted Defect (including without limitation regardless of whether
the procedure under Section 8 is ongoing as to such Asserted Defect),
Seller may (but shall have no obligation to) elect, with respect to any
Asserted Defect, to indemnify and hold Buyer harmless
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from and against any actual damages or loss (but specifically excluding
consequential, special or similar damages) Buyer may suffer as a result of
a third party claim based on such Asserted Defect. If and when such
election is made as to an Asserted Defect, such Asserted Defect will be
treated under this Agreement as if cured.
(iv) ADJUSTMENT. Notwithstanding any other election made under this
Section (without limitation, it being expressly recognized that Seller may
attempt to cure Asserted Defects while acting under this election), Seller
may elect to have one or more Asserted Defects handled under Section 8
below.
8. CERTAIN PRICE ADJUSTMENTS.
(a) PROCEDURES. In the event that, as a part of the due diligence
reviews provided for in Section 7 above, Asserted Defects are presented to
Seller and Seller is unable (or unwilling) to cure such Asserted Defects
prior to Closing, or in the event that Buyer or Seller has elected
(pursuant to Section 15) to treat an Oil and Gas Property affected by a
casualty loss as if it was an Oil and Gas Property affected by an Asserted
Defect, then:
(i) AGREE UPON ADJUSTMENT. Buyer and Seller shall, with respect to each
Property affected by such matters, attempt to agree upon an appropriate
downward adjustment of the Purchase Price to account for such matters; and
(ii) EXCLUDE PROPERTY. With respect to each well or PUD location listed
on Schedule I as to which Buyer and Seller are unable to agree upon
appropriate adjustment with respect to all such matters affecting such well
or PUD location, such well or PUD location (together with such related
rights in any unit including the same, and other rights, as may be
necessary or appropriate to own, operate and produce the same) will be
excluded from the transaction contemplated hereby, and a downward
adjustment of the Purchase Price will be made by the amount attributed on
Schedule I to such well or PUD location.
(b) CERTAIN ADJUSTMENTS. In the event that Buyer raises as an Asserted
Defect one of the following types of Defects, Seller may (but shall not be
obligated to) propose the adjustment of the Purchase Price set forth below
in connection with such Defect:
(i) NRI VARIANCE/PROPORTIONATE PRICE REDUCTIONS. If the Asserted Defect
is (I) a Defect described in clause (A) of Section 7(b)(i) or (II) a Defect
which otherwise affects a portion of Seller's interest in a well or PUD
location listed on Schedule I: a downward adjustment equal to the amount
determined by multiplying the amount set forth for such well or PUD
location on Schedule I by a fraction (A) the numerator of which is an
amount equal to the "Net Revenue Interest" shown on Schedule I for such
well or PUD location less the decimal share to which Seller
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would be entitled to as a result of its ownership interest in such well or
PUD location which is unaffected by such Defect and (B) the denominator of
which is the "Net Revenue Interest" shown for such well or PUD location on
Schedule I. Notwithstanding subsection (ii) below, a Defect to which such
subsection is applicable may, at Seller's election, be treated as a Defect
under this subsection.
(ii) LIENS/PAYOFF AMOUNT. If the Asserted Defect is a Defect described
in Section 7(b)(ii): a downward adjustment equal to the amount of the debt
secured by such lien.
If Seller proposes such an adjustment, such adjustment will be deemed an
adjustment agreed to under Section 8(a)(i) above.
(c) LIMITATIONS ON ADJUSTMENTS. If the Purchase Price reduction (or
increase) with respect to a particular Asserted Defect which would result
from the above provided for procedure does not exceed $25,000, no
adjustment shall be made for such Asserted Defect. If the Purchase Price
reduction which would result from the above provided for procedure, as
applied to all Asserted Defects for which an adjustment is to be made, does
not exceed $250,000, then no adjustment of the Purchase Price shall occur,
and none of the Properties which would be excluded by such procedure shall
be excluded. If the Purchase Price reduction which would result from the
above provided for procedure, as applied to all Asserted Defects for which
an adjustment is to be made exceeds $250,000, the Purchase Price shall be
adjusted by the amount by which such reduction exceeds $250,000.
9. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER. The obligations of
Buyer under this Agreement are subject to each of the following conditions being
met:
(a) REPRESENTATIONS TRUE AND CORRECT. Each and every representation of
Seller under this Agreement shall be true and accurate in all material
respects as of the date when made and shall be deemed to have been made
again at and as of the time of Closing and shall at and as of such time of
Closing be true and accurate in all material respects except as to changes
specifically contemplated by this Agreement or consented to by Buyer.
(b) COMPLIANCE WITH COVENANTS AND AGREEMENTS. Seller shall have
performed and complied in all material respects with (or compliance
therewith shall have been waived by Buyer) each and every covenant and
agreement required by this Agreement to be performed or complied with by
Seller prior to or at the Closing.
(c) PRICE ADJUSTMENT LIMITATIONS. The aggregate downward adjustment (if
any) of the Purchase Price which results from the procedures set forth in
Section 8 does not exceed $2,600,000.
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(d) LITIGATION. No suit, action or other proceedings shall, on the date
of Closing, be pending or threatened before any court or governmental
agency seeking to restrain, prohibit, or obtain material damages or other
material relief in connection with the consummation of the transactions
contemplated by this Agreement.
(e) CONSENTS. Seller shall have obtained all consents of third parties
as required pursuant to the terms of the contracts identified in Paragraph
4(a)(x) or the Disclosure Schedule.
If any such condition on the obligations of Buyer under this Agreement is
not met as of the Closing Date, or in the event the Closing does not occur on or
before the Closing Date, and (in either case) Buyer is not in material breach of
its obligations hereunder in the absence of Seller being in material breach of
its obligations hereunder, this Agreement may, at the option of Buyer, be
terminated. In the event such a termination by Buyer occurs the parties shall
have no further obligations to one another hereunder (other than the obligations
under Sections 3, 6(a)(iii) and 14 hereof all of which will survive such
termination).
10. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER. The obligations of
Seller under this Agreement are subject to the each of the following conditions
being met:
(a) REPRESENTATIONS TRUE AND CORRECT. Each and every representation of
Buyer under this Agreement shall be true and accurate in all material
respects as of the date when made and shall be deemed to have been made
again at and as of the time of Closing and shall at and as of such time of
Closing be true and accurate in all material respects except as to changes
specifically contemplated by this Agreement or consented to by Seller.
(b) COMPLIANCE WITH COVENANTS AND AGREEMENTS. Buyer shall have
performed and complied in all material respects with (or compliance
therewith shall have been waived by Seller) each and every covenant and
agreement required by this Agreement to be performed or complied with by
Buyer prior to or at the Closing.
(c) PRICE ADJUSTMENT LIMITATIONS. The aggregate downward adjustment (if
any) of the Purchase Price which results from the procedures set forth in
Section 8 does not exceed $2,600,000.
(d) LITIGATION. No suit, action or other proceedings shall, on the date
of Closing, be pending or threatened before any court or governmental
agency seeking to restrain, prohibit, or obtain material damages or other
material relief in connection with the consummation of the transactions
contemplated by this Agreement.
If any such condition on the obligations of Seller under this Agreement is
not met as of the Closing Date, or in the event the Closing does not occur on or
before the Closing Date, and
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(in either case) Seller is not in material breach of its obligations hereunder
in the absence of Buyer being in material breach of its obligations hereunder,
this Agreement may, at the option of Seller, be terminated, in which case the
parties shall have no further obligations to one another hereunder (other than
the obligations under Sections 3, 6(a)(iii) and 14 hereof, all of which will
survive such termination).
11. CLOSING.
(a) ACTIONS AT CLOSING. The closing (herein called the "CLOSING") of
the transaction contemplated hereby shall take place in the offices of
Thompson & Knight LLP at 1700 Pacific Avenue, Dallas, Texas 75201, on or
before May 31, 2000, at 10 a.m. Central Daylight Time, or at such other
date and time (i) as the Buyer and Seller may mutually agree upon or (ii)
to which Seller may postpone the Closing pursuant to Section 7 hereof (such
date and time, as changed pursuant to clauses (i) and (ii), being herein
called the "CLOSING DATE"). At the Closing:
(i) DELIVERY OF CONVEYANCE. Seller shall execute, acknowledge and
deliver to Buyer a conveyance of the Properties (the "CONVEYANCE"), in the
form attached hereto as Schedule III (and with Exhibit A hereto, with such
modifications as may be mutually agreed to by Buyer and Seller, being
attached thereto), effective as to runs of oil and deliveries of gas and
for all other purposes as of 7 o'clock a.m., local time at the locations of
the Properties, respectively, on January 1, 2000 (herein called the
"EFFECTIVE DATE").
(ii) PAYMENT TO SELLER. Buyer shall deliver to the C.W. Resources,
Inc., by wire transfer of immediately available funds to an account
designated by C.W. Resources, Inc. in a bank located in the United States,
an amount equal to (A) the Purchase Price, plus (B) interest at the rate of
8% per annum on an amount equal to the Base Purchase Price, as adjusted by
any adjustments made under Section 8, from March 15, 2000 to (i) if Seller
exercises its right under Section 7 to extend the Closing Date, May 31,
2000, or (ii) otherwise, the Closing Date, less or plus (as the case may
be) (C) any adjustments under Section 12 which are to be made at Closing,
less (D) the Deposit. Unless Seller has, at or before Closing, obtained
the agreements contemplated by the fourth sentence of Section 11(b)(ii),
the Operations Adjustment portion of the Purchase Price will not be
required to be paid at Closing, and such payment to Seller will also be
reduced by the amount of the Operations Adjustment plus any interest under
clause (B) above attributable to that portion of the Purchase Price. C.W.
Resources, Inc. shall receive such amount on behalf of all parties
constituting Seller, and Buyer, having so paid such amount, shall have no
responsibility for the proper division of such amount among the parties
constituting Seller.
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(iii) TURN OVER POSSESSION. Seller shall, to the extent Seller can do
so, turn over possession of the Properties.
(iv) SUCCESSION BY BUYER. Buyer shall (A) furnish to Seller such
evidence (including, without limitation, evidence of satisfaction of all
applicable bonding requirements) as Seller may require that Buyer is
qualified with the applicable authorities to succeed Seller as the owner
and, where applicable, operator of the Properties, (B) with respect to
properties operated by Seller where Buyer is to succeed Seller as operator,
execute and deliver to Seller appropriate evidence reflecting change of
operator as required by applicable authorities (including, without
limitation, Form P-4 for filing with the Railroad Commission of Texas), and
(C) execute and deliver to Seller such forms as Seller may reasonably
request for filing with the applicable authorities to reflect Buyer's
assumption of plugging and abandonment liabilities with respect to the
wells located on the Properties or on units in which the Properties
participate.
(v) NON-FOREIGN STATUS TAX AFFIDAVIT. If Buyer so requests, Seller will
execute and deliver to Buyer an affidavit or other certification (as
permitted by such code) that Seller is not a "foreign person" within the
meaning of Section 1445 (or similar provisions) of the Internal Revenue
Code of 1986 as amended (i.e., Seller is not a non-resident alien, foreign
corporation, foreign partnership, foreign trust or foreign estate as those
terms are defined in such code and regulations promulgated thereunder).
(vi) FEDERAL AND STATE CONVEYANCE FORMS. Seller shall, where
appropriate, prepare, execute (and, where required, acknowledge) and
deliver to Buyer forms of conveyance or assignment as required by the
applicable authorities for transfers of interests in state and federal
leases included in the Oil and Gas Properties.
(vii) LETTERS IN LIEU. Seller shall, if requested by Buyer, prepare,
execute and deliver to Buyer letters in lieu of transfer orders (or similar
documentation), in form acceptable to both parties.
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(b) POST CLOSING ACTIONS.
(i) TRANSFER OF FILES. Seller will use its best efforts to deliver to
Buyer, at Buyer's expense, and within 15 days after Closing, all of
Seller's lease files, abstracts and title opinions, division order files,
production records, well files, accounting records (but not including
general financial accounting or tax accounting records), and other similar
files and records which directly relate to the Properties, provided that
Seller shall not be obligated to turn over to Buyer any records or data
which Seller believes that Seller cannot provide to Buyer without, in
Seller's reasonable opinion, breaching, or risking a breach of, agreements
with other parties, or waiving, or risking waiving, legal privilege.
Notwithstanding the foregoing sentence, Seller shall provide Buyer a list
of all records or data which Seller is withholding pursuant to such
sentence to Buyer including a general description of such records' contents
and the specific reason claimed by for Seller's for such withholding.
(ii) BUYER AS SUCCESSOR OPERATOR. Buyer desires to become successor
operator with respect to as many of the Oil and Gas Properties operated by
Seller as it can, other than the Oil and Gas Properties described in
subsection 1(e) above. IT IS RECOGNIZED THAT THERE IS NO ASSURANCE GIVEN
BY SELLER THAT BUYER SHALL SUCCEED SELLER AS OPERATOR OF ANY PROPERTY WHERE
OTHER PARTIES OWN INTERESTS IN THE WELLS LOCATED THEREON. Buyer and Seller
agree to undertake reasonable efforts to cooperate toward accomplishing
such goal. If, despite its best efforts undertaken in good faith, Buyer is
unable to obtain, on or before a date which is 120 days after Closing
occurs, necessary agreements such that it will become such successor
operator with respect to wells and units identified on Schedule I
representing at least 90% of the value (determined based on the allocated
amounts shown on Schedule I) of the wells and units identified on such
Schedule I which are operated by Seller, then the Purchase Price will be
reduced by an amount equal to $3,000,000 (the "OPERATIONS ADJUSTMENT");
otherwise any portion of the Operations Adjustment not paid at Closing due
to the next to last sentence of Section 11(a)(ii) (together with interest
thereon at the rate of 8% per annum from March 15, 2000 until such payment
is made) shall be paid to C.W. Resources, Inc. (in the same manner as
payments under Section 11(a)(ii)) promptly after the agreements
contemplated above are obtained and in any event not later than 125 days
after Closing.
(iii) OPERATIONAL TRANSITION. For a reasonable period of time after
Closing, Buyer and Seller shall undertake reasonable efforts to cooperate
with respect to transition activities as to Properties where Buyer succeeds
Seller as operator. To the extent Seller remains an operator after Closing
(which it shall have no obligation to do), it shall serve as operator under
the applicable operating agreement in the manner provided by such agreement
and, to the extent Seller so operates any Property after Closing and/or
provides disbursement services under subsection (iv)
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below, its obligations to Buyer with respect thereto shall be no greater
than those which it would have to a non-operator under the applicable
operating agreement (and, in the absence of an operating agreement, under
the AAPL 610 (1989 Revision) form Operating Agreement), IT BEING RECOGNIZED
THAT, UNDER SUCH AGREEMENTS AND SUCH FORM, THE OPERATOR IS NOT RESPONSIBLE
FOR ITS OWN NEGLIGENCE, AND HAS NO RESPONSIBILITY OTHER THAN FOR GROSS
NEGLIGENCE OR WILFUL MISCONDUCT.
(iv) TRANSITION OF CERTAIN ACCOUNTING MATTERS. With respect to each Oil
and Gas Property as to which Buyer becomes successor operator and with
respect to which Seller is disbursing proceeds of production attributable
to other parties entitled thereto, (i) Seller shall continue to receive
such proceeds of production up to the Closing and, to the extent it
actually receives such proceeds, shall be responsible for making
disbursements, in accordance with its normal procedures (and at normal
times), of such proceeds of production to the parties entitled to same,
with any such proceeds of production after the Closing received by Seller
to be promptly forwarded to Buyer (who shall thereafter account for same to
the parties entitled thereto) and Seller shall, as promptly as possible
after Closing, deliver to Buyer a copy of its "pay list" for each such
property (which list shall include the names of all parties for whom it is
holding in suspense proceeds of production). Seller will retain all
suspense funds, and responsibility therefor, and such suspense funds, and
Seller's handling thereof, shall be included in the matters which Seller
indemnifies Buyer with respect to, under Section 13 below. Following
delivery of the materials referred to above, Buyer shall become responsible
for all disbursements of proceeds of production from such properties and
such disbursement activities shall be included in the matters which Buyer
assumes, and indemnifies Seller with respect to, under Section 13 below.
12. CERTAIN ACCOUNTING ADJUSTMENTS.
(a) ADJUSTMENTS FOR REVENUES AND EXPENSES. Appropriate adjustments
shall be made between Buyer and Seller so that (i) Buyer will bear all
expenses which are incurred in the operation of the Properties after the
Effective Date (including, without limitation, all drilling costs, all
capital expenditures, all overhead charges under applicable operating
agreements (regardless of whether such operating agreements are with third
parties or related entities and regardless of whether Seller is the
operator or a non-operator)), and all other overhead charges actually
charged by Seller (and for which Seller bills third parties for their
respective shares) or charged to Seller by third parties, and operating
expenses), and Buyer will receive all proceeds (net of applicable
production, severance, and similar taxes) from sales of oil, gas and/or
other minerals which are produced from (or attributable to) the Properties
and which are produced after the Effective Date, and (ii) Seller will bear
all expenses which are incurred in the
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operation of the Properties before the Effective Date and Seller will
receive all proceeds (net of applicable production, severance, and similar
taxes) from the sale of oil, gas and/or other minerals which were produced
from (or attributable to) the Properties and which were produced before the
Effective Date. It is agreed that, in making such adjustments: (i) oil
which was produced from the Oil and Gas Properties and which was, on the
Effective Date, stored in tanks located on the Oil and Gas Properties (or
located elsewhere but used by Seller to store oil produced from, or
attributable to, the Oil and Gas Properties prior to delivery to oil
purchasers) and above pipeline connections shall be deemed to have been
produced before the Effective Date, (ii) ad valorem and similar taxes
assessed for periods prior to the Effective Date shall be borne by Seller
and ad valorem taxes assessed for periods on or after the Effective Date
shall be borne by Buyer, (iii) ad valorem and similar taxes assessed with
respect to a period which the Effective Date splits shall be prorated based
on the number of days in such period which fall on each side of the
Effective Date (with the day on which the Effective Date falls being
counted in the period after the Effective Date), (iv) casualty losses shall
be handled in accordance with Section 15, and (v) no consideration shall be
given to the local, state or federal income tax liabilities of any party.
(b) INITIAL ADJUSTMENT AT CLOSING. At least 5 days before the Closing
Date, Seller shall provide to Buyer a statement showing its computations of
the amount of the adjustments provided for in subsection (a) above based on
amounts which prior to such time have actually been paid or received by
Seller. Buyer and Seller shall attempt to agree upon such adjustments
prior to Closing, provided that if agreement is not reached, Seller's
computation shall be used at Closing, subject to further adjustment under
subsection (c) below. If the amount of adjustments so determined which
would result in a credit to Buyer exceed the amount of adjustments so
determined which would result in a credit to Seller, Buyer shall receive a
credit at Closing for the amount of such excess, and if the converse is
true, then the amount to be paid by Buyer to Seller at Closing shall be
increased by the amount of such excess.
(c) ADJUSTMENT POST CLOSING. On or before 120 days after Closing,
Seller shall provide to Buyer a statement showing its computations
regarding any information which may then be available pertaining to the
adjustments provided for in subsection (a) above, and Buyer shall review
such statement. Buyer and Seller shall determine if Seller's statement
accurately reflects any additional adjustments that should be made beyond
those made at Closing (whether the same be made to account for expenses or
revenues not considered in making the adjustments made at Closing, or to
correct errors made in the adjustments made at Closing), and shall make any
such adjustments by appropriate payments from Seller to Buyer or from Buyer
to Seller. After such adjustments are made, no further adjustments shall
be made under this Section 12.
13. ASSUMPTION AND INDEMNIFICATION. Except as provided in Section 18(b)
below with respect to the JW Litigation (below defined), and except for matters
which would constitute
21
<PAGE>
breaches of the express representations and warranties of Seller set forth in
Section 4(a) above, Buyer shall, on the date of Closing, agree (and, upon the
delivery to Buyer of the Conveyance, shall be deemed to have agreed) (a) to
assume, and to timely pay and perform, all duties, obligations and liabilities
relating to the ownership and/or operation of the Properties after the Effective
Date (including, without limitation, those arising under the contracts and
agreements described in Section 1(c) above), and (b) to indemnify and hold
Seller (and the respective affiliates of the parties constituting Seller, and
the respective directors, officers, employees, attorneys, contractors and agents
of such affiliates and such parties) harmless from and against any and all
claims, actions, causes of action, liabilities, damages, losses, costs or
expenses (including, without limitation, court costs and attorneys' fees) of any
kind or character arising out of or otherwise relating to either (A) the
ownership and/or operation of the Properties after the Effective Date or (B) a
breach of Buyer's express representations and warranties set forth in Section 5
above. In connection with (but not in limitation of) the foregoing, it is
specifically understood and agreed that such duties, obligations and liabilities
arising out or otherwise relating to the ownership and/or operation of the
Properties after the Effective Date (other than matters which should have been
disclosed under Section 4(a)(vii) above, but were not) shall (notwithstanding
anything herein appearing to be to the contrary) be deemed to include all
matters arising out of the condition of the Properties on the Effective Date
(including, without limitation, within such matters all obligations to properly
plug and abandon, or replug and re-abandon, wells located on the Properties, to
restore the surface of the Properties and to comply with, or to bring the
Properties into compliance with, applicable environmental laws, rules,
regulations and orders, including conducting any remediation activities which
may be required on or otherwise in connection with activities on the
Properties), regardless of whether such condition or the events giving rise to
such condition arose or occurred before or after the Effective Date, and the
assumptions and indemnifications by Buyer provided for in the first sentence of
this section shall expressly cover and include such matters. Seller shall, on
the date of Closing, agree (and, upon the delivery to Buyer of the Conveyance
shall be deemed to have agreed) to indemnify and hold Buyer (and its affiliates,
and the respective directors, officers, employees, attorneys, contractors and
agents of such parties) harmless from and against any and all claims, actions,
causes of action, liabilities, damages, losses, costs or expenses (including,
without limitation, court costs and attorneys' fees) of any kind or character
arising out of or otherwise relating to either (A) the ownership and/or
operation of the Properties prior to the Effective Date, except to the extent
the same arise out of the condition of the Properties (such matters having been
provided for above), and except to the extent the same arise out of any matter
disclosed on the Disclosure Schedule (other than the litigation for which Seller
retains responsibility under Section 18(b) below, which is covered by such
Section 18(b)), or out of any matter made the subject of an Asserted Defect
pursuant to Section 7 above or (B) a breach of Seller's express representations
and warranties set forth in Section 4(a) above. In the event of any conflict
which may appear to exist between this Section and Section 12 above, this
Section shall control. THE FOREGOING ASSUMPTIONS AND INDEMNIFICATIONS SHALL
APPLY WHETHER OR NOT SUCH DUTIES, OBLIGATIONS OR LIABILITIES, OR SUCH CLAIMS,
ACTIONS, CAUSES OF ACTION, LIABILITIES, DAMAGES, LOSSES, COSTS OR EXPENSES ARISE
OUT OF (i) NEGLIGENCE (INCLUDING SOLE NEGLIGENCE, SINGLE
22
<PAGE>
NEGLIGENCE, CONCURRENT NEGLIGENCE, ACTIVE OR PASSIVE NEGLIGENCE, BUT EXPRESSLY
NOT INCLUDING GROSS NEGLIGENCE) OF ANY INDEMNIFIED PARTY, OR (ii) STRICT
LIABILITY.
14. NO COMMISSIONS OWED. Seller agrees to indemnify and hold Buyer (and
its affiliates, and the respective officers, directors, employees, attorneys,
contractors and agents of Buyer and such parties) harmless from and against any
and all claims, actions, causes of action, liabilities, damages, losses, costs
or expenses (including, without limitation, court costs and attorneys' fees) of
any kind or character arising out of or resulting from any agreement,
arrangement or understanding alleged to have been made by, or on behalf of,
Seller with any broker or finder in connection with this Agreement or the
transaction contemplated hereby. Buyer agrees to indemnify and hold Seller (and
the respective affiliates of the parties constituting Seller, and the respective
officers, directors, employees, attorneys, contractors and agents of such
affiliates and such parties) harmless from and against any and all claims,
actions, causes of action, liabilities, damages, losses, costs or expenses
(including, without limitation, court costs and attorneys' fees) of any kind or
character arising out of or resulting from any agreement, arrangement or
understanding alleged to have been made by, or on behalf of, Buyer with any
broker or finder in connection with this Agreement or the transaction
contemplated hereby.
15. CASUALTY LOSS. In the event of damage by fire or other casualty to
the Properties prior to the Closing, this Agreement shall remain in full force
and effect, and in such event:
(a) OIL AND GAS PROPERTIES. As to each such Property so damaged which
is an Oil and Gas Property, then (unless Seller elects to repair such
damage, which Seller shall have no obligation to do, in which case all
rights to insurance proceeds related thereto shall belong to Seller), (i)
at the election of either Buyer of Seller, such Property shall be treated
as if it had an Asserted Defect associated with it and the procedure
provided for in Section 8 shall be applicable thereto (in which case,
unless Buyer and Seller agree to the contrary, all rights to insurance
proceeds related thereto shall belong to Seller), or, (ii) if no such
election is made by Buyer or Seller, the Purchase Price will not be
adjusted, and Seller shall, at Seller's election, either collect (and when
collected pay over to Buyer) any insurance claims related to such damage,
or assign to Buyer such insurance claims, and, in either event, Buyer shall
take title to the Property affected by such loss without reduction of the
Purchase Price.
(b) OTHER PROPERTIES. As to each such Property so damaged which is
other than an Oil and Gas Property, Seller shall, at Seller's election,
either (i) repair such damage or replace such Property, (ii) collect (and
when collected pay over to Buyer) any insurance claims related to such
damage, or (iii) assign to Buyer any insurance claims related to such
damage, and Buyer shall take title to the Property affected by such loss
without reduction of the Purchase Price.
Seller has no obligation to carry insurance coverage, or to carry any particular
types or amounts
23
<PAGE>
of coverage, and, in the event of a loss which is not covered by insurance,
Seller shall have no obligation to Buyer with respect thereto.
16. NOTICES. All notices and other communications required under this
Agreement shall (unless otherwise specifically provided herein) be in writing
and be delivered personally, by recognized commercial courier or delivery
service which provides a receipt, by telecopier (with receipt acknowledged), or
by registered or certified mail (postage prepaid), at the following addresses:
If to Buyer: 3TEC Energy Corporation
Two Shell Plaza
777 Walker, Suite 2400
Houston, Texas 77002
Fax: (713) 821-7200
Attention: Floyd C. Wilson
With a copy to:
Hinkle Elkouri Law Firm L.L.C.
301 N. Main, Suite 2000
Wichita, Kansas 67202
Fax: (316) 264-1518
Attention: David S. Elkouri
If to Seller: Carl A. Westerman
P.O. Box 6531
3400 West Marshall
Longview, Texas 75604
Fax: (903) 759-2153
With a copy to:
Samuel D. Haas
175 Calle Ventoso West
Santa Fe, New Mexico 87501
Fax: (505) 988-5865
and shall be considered delivered on the date of receipt. Either Buyer or
Seller may specify as its proper address any other post office address within
the continental limits of the United States by giving notice to the other party,
in the manner provided in this Section, at least ten (10) days prior to the
effective date of such change of address.
17. SURVIVAL OF PROVISIONS. All representations and warranties made
herein by Buyer and Seller shall be continuing and shall be true and correct on
and as of the date of Closing with
24
<PAGE>
the same force and effect as if made at that time (and shall inure to the
benefit of the respective successors and assigns of Buyer and Seller), and all
of such representations and warranties shall, survive the Closing and the
delivery of the Conveyance indefinitely, except that other than those set forth
in Section 4(a)(i) through 4(a)(v) above, representations and warranties of
Seller shall terminate six months after the Closing Date. The provisions of
Section 11 (to the extent the same are, by mutual agreement, not performed at
Closing), and Sections 12, 14, 16 and 18 shall (subject to any limitations set
forth therein) survive the Closing and delivery of the conveyance indefinitely.
The obligations of Buyer under Section 13 shall survive the Closing and the
delivery of the Conveyance indefinitely, and the obligations of Seller under
Section 13 shall also survive the Closing and the delivery of the Conveyance,
but (i) except as provided in subsections (ii) and (iii) below, shall terminate
one year after the Closing Date, and (ii) as to breaches of Seller's
representations and warranties, shall terminate when such representations and
warranties terminate (as provided above), and (iii) as to proper payment of
royalties due with respect to the Oil and Gas Properties under leases (interests
in which are included in the Oil and Gas Properties), or any matter that should
have been disclosed in connection with Section 4(a)(v), but was not, or any
matter that should have been disclosed in connection with Section 4(a)(vii), but
was not, shall terminate two years after the Closing Date.
18. MISCELLANEOUS MATTERS.
(a) FURTHER ASSURANCES. After the Closing, Seller shall execute and
deliver, and shall otherwise cause to be executed and delivered, from time
to time, such further instruments, notices, division orders, transfer
orders and other documents, and do such other and further acts and things,
as may be reasonably necessary to more fully and effectively grant, convey
and assign the Properties to Buyer.
(b) JW LITIGATION, OTHER LITIGATION. The parties acknowledge the
existence of that certain lawsuit styled Wagner & Brown, Ltd. vs. H.G.,
Westerman vs. C.W. Resources, Inc., et al. (Cause No 41,534), 238th
Judicial District Court, Midland County, Texas (the "JW LITIGATION") and
agree that the existence of the JW Litigation shall in no way interfere
with the consummation of the transaction contemplated hereby. Seller shall
retain full responsibility, and full control, over such JW Litigation,
handling it (including, without limitation, decisions on litigation
strategy, decisions to settle (and settlement terms) or prosecute the same
and/or decisions to appeal or not appeal any judgment) in its sole,
unfettered discretion, and at its sole cost (including cost of settlement
or payment of judgment, if any) and with it having sole right to any
amounts (including any settlement or judgment amounts) paid by other
parties thereto. Seller shall indemnify and hold Buyer (and its
affiliates, and the respective officers, directors, employees, attorneys,
contractors and agents of Buyer and such affiliates) harmless from and
against any and all claims, actions, causes of action, liabilities,
damages, losses, costs or expenses (including court costs and attorneys'
fees, except attorneys' fees, and costs, for attorneys, if any, employed by
Buyer) of any kind arising out of or resulting from such JW Litigation.
25
<PAGE>
Notwithstanding anything in the foregoing appearing to the contrary, if, as
a result of a settlement of such JW Litigation, or a final nonappealable
judgment with respect thereto, title to any portion of the Properties
conveyed to Buyer pursuant to this agreement is lost, Seller's liability
for such loss shall be an amount computed in the same manner as if such
loss had been Defects handled under Section 8(b)(i), and such amount (which
shall be paid to Buyer promptly after such settlement or judgment is
finalized) shall be deemed to fully compensate Buyer for such loss; Buyer
recognizes such risk of title loss, and, in the event the same occurs,
agrees to relinquish the lost interest and account for revenues received
(less expenses paid) by it with respect thereto. Seller shall also retain
responsibility, and full control, over those certain lawsuits styled Jane
Turner Sheppard, et al vs. C.W. Resources, et al, Jerrell L. McBride vs.
Clarence N. Schwab dba CNS Energy, et al, vs. Procom Energy, Inc., W. L.
Dixon, et al vs. Amoco Production Company, et al (each disclosed on the
Disclosure Schedule) (the "CERTAIN LITIGATION"), in the same manner, and on
the same terms, as provided above for the JW Litigation. Buyer will assume
full responsibility for, and control over, all litigation disclosed on the
Disclosure Schedule other than the JW Litigation and the Certain
Litigation, with such assumption of responsibility and control to be on the
same basis as provided above for Seller's responsibility for, and control
over, the JW Litigation (except that, of course, the language providing for
certain matters in the event of a loss of title by Buyer will be
inapplicable). The party having responsibility for and control of a
litigation matter shall be entitled to receive, from the other party, and
it is agreed that the other party shall give, its cooperation in the
handling of such litigation (for example, and without limitation, Seller
agrees to make its employees available for depositions, if any, and for
testimony at any trial); similarly, the party handling a litigation matter
will cooperate with the other party so as to minimize the impact on the
other party's business operations to the extent reasonably possible. It is
agreed that the total out-of-pocket cost (including attorneys' fees, any
settlement payments and payment of any judgement) to Buyer of handling the
C.W. Resources, Inc. et al. vs. Valence Operating Company matter
(identified on the Disclosure Schedule) shall be limited to $200,000 and
that Seller will bear all out-of-pocket costs in excess of such amount;
provided that Seller may, at any time, elect (by notice in writing to
Buyer) to take over responsibility for, and control of, such matter (on the
same basis as provided above for Seller's responsibility for, and control
over, the JW Litigation), and Buyer shall have no further obligation for
out-of-pocket costs incurred after Seller actually takes over such matter.
(c) SHALLOW COMPLETION IN HAYNESVILLE WELL. Should a well drilled to
the Haynesville Formation under the Oil and Gas Properties described in
Section 1(e) above not be completed in such formation, it is recognized
that Buyer, as the owner of rights to depths above such formation, may take
over Seller's interest in such well prior to its abandonment, but if Buyer
elects to do so, it shall reimburse Seller for its portion of the cost of
drilling such well which would be attributable to drilling such well to a
depth sufficient to attempt a Cotton Valley Sand Formation completion.
26
<PAGE>
(d) DECEPTIVE TRADE PRACTICES WAIVER. TO THE EXTENT APPLICABLE TO THE
TRANSACTION CONTEMPLATED HEREBY OR ANY PORTION THEREOF, BUYER WAIVES
BUYER'S RIGHTS UNDER THE PROVISIONS OF THE TEXAS DECEPTIVE TRADE PRACTICES
- CONSUMER PROTECTION ACT, SECTIONS 17.41 ET. SEQ. OF THE TEXAS BUSINESS
AND COMMERCE CODE, A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND
PROTECTIONS, AND ANY COMPARABLE ACT IN ANY OTHER STATE IN WHICH THE
PROPERTIES ARE LOCATED. BUYER STATES THAT, AFTER CONSULTATION WITH AN
ATTORNEY OF BUYER'S SELECTION, BUYER VOLUNTARILY CONSENTS TO THIS WAIVER.
(e) PARTIES BEAR OWN EXPENSES/NO SPECIAL DAMAGES. Each party shall bear
and pay all expenses (including, without limitation, legal fees) incurred
by it in connection with the transaction contemplated by this Agreement.
NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY NEITHER PARTY SHALL HAVE
ANY OBLIGATIONS WITH RESPECT TO THIS AGREEMENT, OR OTHERWISE IN CONNECTION
HEREWITH, FOR ANY SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES.
(f) NO SALES TAXES. No sales, transfer or similar tax will be collected
at Closing from Buyer in connection with this transaction. If, however,
this transaction is later deemed to be subject to sales, transfer or
similar tax, for any reason, Buyer agrees to be solely responsible, and
shall indemnify and hold Seller (and its affiliates, and its and their
directors, officers, employees, attorneys, contractors and agents)
harmless, for any and all sales, transfer or other similar taxes (including
related penalty, interest or legal costs) due by virtue of this transaction
on the Properties transferred pursuant hereto and the Buyer shall remit
such taxes at that time. Seller and Buyer agree to cooperate with each
other in demonstrating that the requirements for exemptions from such taxes
have been met.
(g) ENTIRE AGREEMENT. This Agreement contains the entire understanding
of the parties hereto with respect to subject matter hereof and supersedes
all prior agreements, understandings, negotiations, and discussions among
the parties with respect to such subject matter; provided that any
Confidentiality Agreement executed by Buyer and Seller, or any
representative of Seller, in connection with the transaction contemplated
hereby remains in full force and effect and is not superseded or modified
by this Agreement.
(h) AMENDMENTS, WAIVERS. This Agreement may be amended, modified,
supplemented, restated or discharged (and provisions hereof may be waived)
only by an instrument in writing signed by the party against whom
enforcement of the amendment, modification, supplement, restatement or
discharge (or waiver) is sought.
(i) CHOICE OF LAW. Without regard to principles of conflicts of law,
this Agreement shall be construed and enforced in accordance with and
governed by the laws of the state of Texas applicable to contracts made and
to be performed entirely within such state and the laws of the United
States of America, except that, to the extent that the law of a state in
which a portion of the Properties is located (or which is otherwise
27
<PAGE>
applicable to a portion of the Properties) necessary governs, the law of
such state shall apply as to that portion of the property located in (or
otherwise subject to the laws of) such state.
(j) HEADINGS, TIME OF ESSENCE, ETC. The descriptive headings contained
in this Agreement are for convenience only and shall not control or affect
the meaning or construction of any provision of this Agreement. Within
this Agreement words of any gender shall be held and construed to cover any
other gender, and words in the singular shall be held and construed to
cover the plural, unless the context otherwise requires. Time is of the
essence in this Agreement.
(k) NO ASSIGNMENT. Prior to Closing, neither party shall have the right
to assign its rights under this Agreement, without the prior written
consent of the other party first having been obtained.
(l) LIKE KIND EXCHANGE. Seller may elect to structure this transaction
as a like-kind exchange pursuant to Section 1031 of the Internal Revenue
Code of 1986, as amended, and the regulations promulgated thereunder, with
respect to any or all of the Properties (a "Like-Kind Exchange") at any
time prior to the date of Closing. In order to effect a Like-Kind
Exchange, Buyer shall cooperate and do all acts as may be reasonably
required or requested by Seller with regard to effecting the Like-Kind
Exchange, including, but not limited to, permitting Seller to assign its
rights under this Agreement to a qualified intermediary of Seller's choice
in accordance with Treasury Regulation 1.1031(k)-1(g)(4) or executing
additional escrow instructions, documents, agreements or instruments to
effect an exchange; provided, however, Buyer shall incur no expense in
connection with such Like-Kind Exchange, Buyer shall not be required to
take title to any property other than the Properties in connection with the
Like-Kind Exchange, and Buyer's possession of the Properties will not be
delayed by reason of any such Like-Kind Exchange.
(m) SUCCESSORS AND ASSIGNS. Subject to the limitation on assignment
contained in subsection (k) above, the Agreement shall be binding on and
inure to the benefit of the parties hereto and their respective successors
and assigns.
(n) COUNTERPART EXECUTION. This Agreement may be executed in
counterparts, all of which are identical and all of which constitute one
and the same instrument. It shall not be necessary for Buyer and Seller to
sign the same counterpart.
28
<PAGE>
IN WITNESS WHEREOF, this Agreement is executed by the parties hereto on the
date set forth above.
C.W. RESOURCES, INC.
By:
------------------------------
Carl A. Westerman, President
WESTERMAN ROYALTY, INC.
By:
------------------------------
Dawne W. Tadlock, President
---------------------------------
Carl A. Westerman
3TEC ENERGY CORPORATION
By:
------------------------------
Floyd C. Wilson
President and Chief Executive Officer
29
<PAGE>
LIST OF SCHEDULES AND EXHIBITS
Schedules - I Wells and Units with WI & NRI and allocated price
II Disclosure Schedule
III Conveyance Form
Exhibits - A Property Descriptions
B Escrow Agreement
C PUD Locations Map
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
3TEC Energy Corporation:
We consent to the inclusion in this registration statement on Form S-2 of
3TEC Energy Corporation of our audit report dated February 25, 2000 relating to
the consolidated balance sheets of 3TEC Energy Corporation (formerly Middle Bay
Oil Company, Inc.) and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years then ended and our report dated April 21, 2000
relating to the statement of revenues and direct operating expenses for the CWR
Properties for the year ended December 31, 1999, and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG LLP
Houston, Texas
January 12, 2000
<PAGE>
EXHIBIT 23.02
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
3TEC Energy Corporation
Houston, Texas
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made part of this
Registration Statement File No. 333-______.
/s/ ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
Houston, Texas
April 28, 2000
<PAGE>
EXHIBIT 23.03
[RYDER SCOTT COMPANY, L.P. LETTERHEAD]
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
Board of Directors
3TEC Energy Corporation
Houston, Texas
As independent petroleum engineers, we hereby consent to the inclusion in
this Registration Statement of 3TEC Energy Corporation on Form S-2, dated
April 28, 2000, of our summary letter, dated December 16, 1999, regarding our
estimates of 3TEC Energy Corporation's proved oil and natural gas reserves as of
December 31, 1999, and consent to all references to our Firm, including our
reserve estimates of the oil and natural gas properties acquired by 3TEC Energy
Corporation from Floyd Oil Company, Magellan Exploration, LLC, and the oil and
natural gas properties included in the pending acquisition of properties owned
by CWR Resources, Inc.
RYDER SCOTT COMPANY, L.P.
/s/ Ryder Scott Company, L.P.
-----------------------------
Houston, Texas
April 26, 2000
<PAGE>
EXHIBIT 23.04
[H.J. GRUY AND ASSOCIATES, INC. LETTERHEAD]
CONSENT OF H.J. GRUY AND ASSOCIATES, INC.
We hereby consent to the use of the name H.J. Gruy and Associates, Inc. and
references to H.J. Gruy and Associates, Inc. and to inclusion of and references
to our report, or information contained therein, dated February 24, 1999,
prepared for 3TEC Energy Corporation (Formerly Middle Bay Oil Company) in the
Registration Statement on Form S-2, for the filing dated April 28, 2000.
H. J. GRUY & ASSOCIATES, INC.
By: /s/ Marilyn Wilson
-------------------
Marilyn Wilson, PE
President and Chief Operating Officer
April 26, 2000
Houston, Texas
<PAGE>
EXHIBIT 23.05
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
Board of Directors
3TEC Energy Corporation
Houston, Texas
As independent petroleum engineers, we hereby consent to all references in
this Registration Statement of 3TEC Energy Corporation (formerly Middle Bay Oil
Company, Inc.) on Form S-2, dated April 28, 2000, to our Firm and regarding our
estimates of 3TEC Energy Corporation's proved oil and gas reserves as of
December 31, 1998.
LEE KEELING AND ASSOCIATES, INC.
By: /s/ Kenneth Renberg
-------------------
Name: Kenneth Renberg
Title: Vice-President
Tulsa, Oklahoma
April 24, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 6,141,153 1,040,096
<SECURITIES> 0 0
<RECEIVABLES> 9,453,551 3,757,126
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 176,226 141,364
<PP&E> 169,982,378 91,644,762
<DEPRECIATION> 38,208,298 39,073,584
<TOTAL-ASSETS> 149,243,506 57,940,817
<CURRENT-LIABILITIES> 8,769,711 4,799,932
<BONDS> 0 0
0 0
8,825,440 8,908,937
<COMMON> 106,778 57,016
<OTHER-SE> 29,180,419 13,591,880
<TOTAL-LIABILITY-AND-EQUITY> 149,243,506 57,940,817
<SALES> 19,951,750 15,011,354
<TOTAL-REVENUES> 22,020,066 17,702,578
<CGS> 0 0
<TOTAL-COSTS> 26,892,542 27,106,258
<OTHER-EXPENSES> 583,998 138,855
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,204,768 1,971,595
<INCOME-PRETAX> (4,874,799) (9,418,769)
<INCOME-TAX> (1,442,524) (2,829,762)
<INCOME-CONTINUING> (3,432,275) (6,589,007)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,432,275) (6,589,007)
<EPS-BASIC> (1.14) (2.48)
<EPS-DILUTED> (1.14) (2.48)
</TABLE>
