-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SLMsN4NwBnbGOhqRSL9WI9QZ2n7E9XErGihMMw+4Voagk+WVALEt6ROmuuc9MH+k SaHFTdhyikkrd+MN+WBo3g== 0000899243-00-001013.txt : 20000501 0000899243-00-001013.hdr.sgml : 20000501 ACCESSION NUMBER: 0000899243-00-001013 CONFORMED SUBMISSION TYPE: S-2 PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 20000428 FILER: COMPANY DATA: COMPANY CONFORMED NAME: 3TEC ENERGY CORP CENTRAL INDEX KEY: 0000903267 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 631081013 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-2 SEC ACT: SEC FILE NUMBER: 333-35914 FILM NUMBER: 613723 BUSINESS ADDRESS: STREET 1: TWO SHELL PLZ STREET 2: 777 WALKER STE 2400 CITY: HOUSTON STATE: TX ZIP: 77002 BUSINESS PHONE: 7132226275 MAIL ADDRESS: STREET 1: PO BOX 390 CITY: MOBILE STATE: AL ZIP: 36602 FORMER COMPANY: FORMER CONFORMED NAME: MIDDLE BAY OIL CO INC DATE OF NAME CHANGE: 19930504 S-2 1 FORM S-2 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 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Title of Each Class of Proposed Maximum Amount of Securities to be Registered Aggregate Offering Price Registration Fee(1) - ------------------------------------------------------------------------------ Common stock, par value $.02 per share..................... $57,500,000 $15,180 - ------------------------------------------------------------------------------
(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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ******************************************************************************** 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.
Per Share Total --------- ----------- Public offering price.................................... $ $ Underwriting discounts and commissions................... $ $ Proceeds, before expenses, to us......................... $ $
------------ 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. MAP OF GULF COAST REGION OF U.S. WITH LOCATIONS OF MAJOR PROPERTIES NOTED 2 TABLE OF CONTENTS
Page ---- 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
---------------- 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 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 . 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:
Proved Reserves Added (as Purchase Cost of Price per Acquisition (in millions) Property Location 12/31/99) Unit (Mcfe) ----------- ------------- ------------------- ---------- ----------- 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 ====== ==========
. 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 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 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 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
- -------- (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 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.
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) 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
8
March 31, 2000 December 31, 1999 ------------------------- ------------------------- Pro Forma Pro Forma As Adjusted(c) Historical As Adjusted(c) Historical -------------- ---------- -------------- ---------- (unaudited) (unaudited) (in thousands) 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
- -------- (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 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.
As of December 31, 1999 -------------------------------------- Historical Pro Forma ---------------------------- --------- CWR 3TEC Magellan Properties -------- -------- ---------- 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 $293,557
Summary Operating Data The following table sets forth historical and pro forma information with respect to our production volumes, average sale prices and average costs for the periods indicated. The pro forma information gives effect to the acquisition of the Floyd Oil Properties and the CWR Properties, as if each had been acquired on January 1, 1999.
Three Months Ended March 31, 2000 Year Ended December 31, -------------------- ------------------------------- 1999 1998 -------------------- ---------- Pro Forma Historical Pro Forma Historical Historical --------- ---------- --------- ---------- ---------- Production Volumes: Natural gas (Mmcf)...... 17,928 4,737 3,847 Oil (MBbls)............. 1,347 532 581 Natural gas equivalents (Mmcfe)................ 26,010 7,928 7,333 Average Sale Prices: Natural gas ($ 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
10 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 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 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 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 . 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 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 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 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 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.
Period High Low ------ ---- ------ 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
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 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.
December 31, 1999 --------------------------------- Pro Forma Historical Pro Forma As Adjusted ---------- --------- ----------- (in thousands) 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 ======== ======== ========
20 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.
Three Months Ended Year Ended March 31, December 31, --------- -------------------- 2000 1999 1999 1998 ---- ---- --------- --------- 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 ========= =========
21 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 Unaudited Pro Forma Condensed Consolidated Statement of Operations For the Year Ended December 31, 1999
3TEC Floyd Oil CWR Pro Forma Pro Forma Consolidated Properties Properties Adjustments Consolidated ------------ ---------- ---------- ----------- ------------ (in thousands, except share and per share amounts) 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) ========= ==========
See accompanying notes to unaudited pro forma condensed consolidated financial data. 23 Unaudited Pro Forma Condensed Consolidated Statement of Operations For the Three Months Ended March 31, 2000 (unaudited)
3TEC CWR Pro Forma Pro Forma Consolidated Properties Adjustments Consolidated ------------ ---------- ----------- ------------ (in thousands, except share and per share amounts) 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)................
See accompanying notes to unaudited pro forma condensed consolidated financial data. 24 Unaudited Pro Forma Condensed Consolidated Balance Sheet As of December 31, 1999
Pro Forma Adjustments --------------------- Common 3TEC CWR Stock Pro Forma Consolidated Properties Issuance Consolidated ------------ ---------- -------- ------------ (audited) 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 ======== ======= ======= ========
See accompanying notes to unaudited pro forma condensed consolidated financial data. 25 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 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:
Oil and Condensate (MBbls) Natural Gas (Mmcf) ------------------------------ -------------------------------- CWR Pro Forma CWR Pro Forma 3TEC Properties Consolidated 3TEC Properties Consolidated ----- ---------- ------------ ------- ---------- ------------ 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 ===== === ====== ======= ====== =======
Standard Measure of Discounted Future Net Cash Flows Relating to Proved Oil & Natural Gas Reserves:
3TEC CWR Properties Pro Forma -------- -------------- --------- (In thousands) 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 ======== ======== =========
Changes to Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Natural Gas Reserves:
CWR 3TEC Properties Pro Forma -------- ---------- --------- (In thousands) 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 ======== ======= ========
27 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 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 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 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 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. 32 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. 33 . 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 34 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.
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) ------- ------- ------- ------- ------- ---------- ------------ 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 ======= ====== ======= ======= ====== === ======
- -------- (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. 35 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 36 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 37 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.
3TEC December 31, December 31, 1999 1998 -------------------- ------------ Pro Forma Historical Historical --------- ---------- ------------ 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
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 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.
Three Months Ended March 31, 2000 Year Ended December 31, -------------------- ------------------------------ Historical Pro Forma -------------------- Pro Forma Historical 1999 1999 1998 1997 --------- ---------- --------- ------ ------ ------ 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
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.
Three Months Year Ended December 31, Ended ----------------------- March 31, 1999 1998 1997 --------- ------- ------- ------- (in thousands) 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 ======= ======= =======
39 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.
Three Months Ended March 31, Year Ended December 31, --------- ----------------------------------- 2000 1999 1998 1997 --------- ----------- ----------- ----------- Gross Net Gross Net Gross Net Gross Net ----- --- ----- ----- ----- ----- ----- ----- 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 === ===== === ===== === =====
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.
Total Productive Wells --------------------- Pro Forma Historical --------- ----------- Gross Net Gross Net ----- --- ------ ---- Natural Gas............................................ 857 298 677 252 Oil.................................................... 1,479 395 1,478 395 ----- --- ------ ---- Total................................................ 2,336 693 2,155 647 ===== === ====== ====
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 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.
Developed Undeveloped Acreage Acreage Total --------------- ------------- --------------- Gross Net Gross Net Gross Net ------- ------- ------ ------ ------- ------- 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 ======= ======= ====== ====== ======= =======
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 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 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 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 MANAGEMENT
Name Age Position(s) Held Since ---- --- ---------------- ----- 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*
- -------- * 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 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 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 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.
Shares Beneficially Owned Before the Offering Percent of Shares ----------------- Beneficially Owned Name and Address of 5% Shareholder Number Percent After the Offering ---------------------------------- --------- ------- ------------------ 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
- -------- (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 (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. 49 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. 50 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 51 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 52 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; 53 . 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. 54 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. 55 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.
Number of Underwriters Shares ------------ --------- Bear, Stearns & Co. Inc............................................ CIBC World Markets Corp............................................ Prudential Securities Incorporated................................. First Union Securities, Inc. ...................................... --------- Total............................................................ 6,250,000 =========
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: 56 . 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.
Per Share Total ----------------------------- ----------------------------- Without With Without With Over-allotment Over-allotment Over-allotment Over-allotment -------------- -------------- -------------- -------------- Underwriting discounts and commissions Payable by us......... $ $ $ $ Expenses payable by us.. $ $ $ $
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. 57 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 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 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 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 3TEC ENERGY CORPORATION INDEX TO FINANCIAL STATEMENTS
Page ---- 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
F-1 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 3TEC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, December 31, 1999 1998 ------------ ------------ ASSETS 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 ============ ===========
See accompanying notes to consolidated financial statements. F-3 3TEC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, ------------------------ 1999 1998 ----------- ----------- 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 =========== ===========
See accompanying notes to consolidated financial statements. F-4 3TEC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, -------------------------- 1999 1998 ------------ ------------ 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 ============ ============
See accompanying notes to consolidated financial statements. F-5 3TEC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999 AND 1998
Preferred Stock ----------------------------------------------------------------- Series A Series B Series C Common Stock Unearned ----------------------- ------------------ --------------------- ------------------ Paid-in Stock Shares Par Shares Par Shares Par Shares Par Capital Compensation ---------- ----------- ------- ---------- --------- ---------- --------- -------- ----------- ------------ 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 $ -- ========== =========== ======= ========== ========= ========== ========= ======== =========== ======= Accumulated Treasury Stockholders' Deficit Stock Equity ------------- ------------ ------------- 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 ============= ============ =============
See accompanying notes to consolidated financial statements F-6 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 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 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 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 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) Working capital.................................................. $ 5,640 Oil and natural gas properties (proved and unproved)............. 19,090 Minority interest................................................ (7,669) ------- Total.......................................................... $17,061 =======
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 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): 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 =======
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): Estimated fair value of 1,142,663 shares of Company Series C preferred stock.................................................... $5,713 Cash consideration.................................................. 539 Legal, accounting and other expenses................................ 431 ------ Total............................................................. $6,683 ======
The Company's purchase price was allocated to the assets and liabilities 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): Working capital..................................................... $ (539) Oil and natural gas properties...................................... (23) Minority interest................................................... 5,844 ------ Series C Preferred Stock.......................................... $5,282 ======
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 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):
Pro Forma --------------- 1999 1998 ------- ------- (Unaudited) 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)
(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 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):
1999 1998 ------- ------- $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 ======= =======
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 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): 2000.............................................................. $ -- 2001.............................................................. -- 2002.............................................................. 87,500 Thereafter........................................................ -- ------- Total........................................................... $87,500 =======
(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):
December 31, ---------------- 1999 1998 ------- ------- Current................................................. $ -- $ -- Deferred................................................ (1,443) (2,830) ------- ------- Total................................................. $(1,443) $(2,830) ======= =======
F-15 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):
December 31, ---------------- 1999 1998 ------- ------- 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) ======= =======
The Company's net deferred tax liability at December 31, 1999 and 1998 is as follows (in thousands):
1999 1998 ------- ------- 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 ======= =======
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 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):
December 31, ---------------- 1999 1998 ------- ------- 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)
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 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:
Average Exercise Shares Price Per Share ------- ---------------- 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 =======
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 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 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 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 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.
1999 1998 -------- ------- 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 ======== =======
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 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):
1999 1998 --------- --------- 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
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):
1999 1998 ----------- ---------- 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
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 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):
1999 1998 --------- -------- 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 ========= ========
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):
1999 1998 -------- ------- 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 ======== =======
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 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 THE FLOYD OIL PROPERTIES STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES (In thousands)
Nine Months Year Ended Ended December 31, September 30, 1998 1999 ------------ ------------- 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 ======= =======
The accompanying notes are an integral part of these statements. F-26 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 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.
Nine Months Year Ended Ended December 31, September 30, 1998 1999 --------------- --------------- Oil Gas Oil Gas (Mbbl) (MMcf) (Mbbl) (MMcf) ------ ------- ------ ------- 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 ===== ======= ===== =======
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Reserves as of September 30, 1999 (in thousands): 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 =========
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): 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 ========
F-28 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 CWR PROPERTIES STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES For the year ended December 31, 1999 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 ===========
See accompanying notes to the statement of revenues and direct operating expenses. F-30 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 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.
Year ended December 31, 1999 ------------- Oil Gas (Mbbl) (MMcf) ------ ------ 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 === ======
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Reserves as of December 31, 1999 (in thousands): 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 ========
Changes to Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Reserves for the year ended December 31, 1999 (in thousands): 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 =======
F-32 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 3TEC ENERGY CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET September 30, 1999
3TEC Pro forma Pro forma Consolidated Adjustments Consolidated ------------ ------------ ------------ 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 =========== ============ ============
See accompanying notes to unaudited pro forma condensed consolidated financial statements. F-34 3 TEC ENERGY CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS Year Ended December 31, 1998
3TEC Floyd Oil Pro Forma Pro forma Consolidated Properties Adjustments Consolidated ------------ ----------- ------------ ------------ 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
See accompanying notes to unaudited pro forma condensed consolidated financial statements. F-35 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. 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 ===========
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 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:
Oil and Condensate (MBbls) Natural Gas (MMcf) ------------------------------ ------------------------------- Floyd Oil Pro Forma Floyd Oil Pro Forma 3TEC Properties Consolidated 3TEC Properties Consolidated ----- ---------- ------------ ------ ---------- ------------ 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 ===== ===== ====== ====== ======= =======
F-37 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:
Floyd Oil 3TEC Properties Pro Forma -------- -------------- --------- (In thousands) 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 ======== ========= =========
Changes to Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves:
Floyd Oil 3TEC Properties Pro Forma ------- ---------- --------- (In thousands) 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 ======= ======== ========
F-38 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 6,250,000 Shares [3TEC Logo] Common Stock ---------------- PROSPECTUS ---------------- Bear, Stearns & Co. Inc. CIBC World Markets Prudential Securities First Union Securities, Inc. , 2000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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:
Description Amount ----------- ------- 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............................................................. $ * =======
- -------- * 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 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
Exhibit No. Description ------- ---------------------------------------------------------------------- 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)
II-2 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.
II-3 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
- -------- * 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 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 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. 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
II-6 EXHIBIT INDEX
Exhibit No. Description ------- ---------------------------------------------------------------------- 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)
II-7 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
II-8 - -------- * 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 EX-10.9 2 EMPLOYMENT AGREEMENT 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 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. 2 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 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 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 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 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 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 (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 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. 10 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 EX-10.18 3 3TEC INCREDITOR AGREEMENT DATED 11/23/1999 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 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 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 (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 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 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 EX-10.19 4 SHOEMAKER INCREDITOR AGREEMENT DATED 11/23/1999 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 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 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 (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 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 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 EX-10.20 5 SHOEINVEST INCREDITOR AGREEMENT DATED 11/23/1999 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 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 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 (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 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 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 EX-10.21 6 LETTER AMDT NO. 1 TO SECURITIES PURCHASE AGREEMENT 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 "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 "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 (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 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 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 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 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 EX-10.22 7 AMDT TO 3TEC SECURITIES PURCHASE AGREEMENT 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 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 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 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 EX-10.23 8 AMDT TO SHOEMAKER SECURITIES PURCHASE AGREEMENT 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 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 "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 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 EX-10.24 9 AMDT TO SHOEINVEST SECURITIES PURCHASE AGREEMENT 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 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 "Shoeinvest" SHOEINVEST II, LP By:___________________ Name: Title: Address for Notice: Shoeinvest II, LP 60 Brushhill Road Kinnelon, NJ 07405 Fax: (310) 444-3833 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 EX-10.31 10 EXECUTIVE EMPLOYMENT AGREEMENT 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. 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 2 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 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 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. 5 (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. 6 (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 (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 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 9 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. 10 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 11 EX-10.32 11 FORM OF AGREEMENT OF SALE AND PURCHASE 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 1 (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 2 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. 3 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 4 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. 5 (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, 6 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 7 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. 8 (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 9 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 10 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 11 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. 12 (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 13 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 14 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. 15 (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 16 (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. 17 (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. 18 (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) 19 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 20 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 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 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 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 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 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 (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 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 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 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 EX-23.01 12 CONSENT OF KPMG LLP 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 EX-23.02 13 CONSENT OF ARTHUR ANDERSEN LLP 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 EX-23.03 14 CONSENT OF RYDER SCOTT COMPANY 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 EX-23.04 15 CONSENT OF H.J. GRUY AND ASSOCIATES 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 EX-23.05 16 CONSENT OF LEE KEELING AND ASSOCIATES 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 EX-27.1 17 FINANCIAL DATA SCHEDULE
5 YEAR YEAR DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 DEC-31-1999 DEC-31-1998 6,141,153 1,040,096 0 0 9,453,551 3,757,126 0 0 0 0 176,226 141,364 169,982,378 91,644,762 38,208,298 39,073,584 149,243,506 57,940,817 8,769,711 4,799,932 0 0 0 0 8,825,440 8,908,937 106,778 57,016 29,180,419 13,591,880 149,243,506 57,940,817 19,951,750 15,011,354 22,020,066 17,702,578 0 0 26,892,542 27,106,258 583,998 138,855 0 0 3,204,768 1,971,595 (4,874,799) (9,418,769) (1,442,524) (2,829,762) (3,432,275) (6,589,007) 0 0 0 0 0 0 (3,432,275) (6,589,007) (1.14) (2.48) (1.14) (2.48)
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