-----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, BWrmu7YD0wsXE6xLQ0S8R700AbscTK5L3IavRDFw5ncUmmW4U1gj0Nhdq/IcwEE5 33BfGTtsxgzk1qf9ocdKXQ== /in/edgar/work/20000606/0000899243-00-001460/0000899243-00-001460.txt : 20000919 0000899243-00-001460.hdr.sgml : 20000919 ACCESSION NUMBER: 0000899243-00-001460 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 20000606 FILER: COMPANY DATA: COMPANY CONFORMED NAME: 3TEC ENERGY CORP CENTRAL INDEX KEY: 0000903267 STANDARD INDUSTRIAL CLASSIFICATION: [1311 ] IRS NUMBER: 631081013 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-2/A SEC ACT: SEC FILE NUMBER: 333-35914 FILM NUMBER: 649581 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/A 1 0001.txt AMENDMENT NO. 1 TO FORM S-2 As filed with the Securities and Exchange Commission on June 6, 2000 Registration No. 333-35914 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- AMENDMENT NO. 1 TO 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)(2) - ------------------------------------------------------------------------------ Common stock, par value $.02 per share................... $82,225,000 $16,014.90 - ------------------------------------------------------------------------------
(1) Calculated pursuant to Rule 457(o). (2) We have previously paid $15,180 in connection with our initial filing on April 28, 2000. 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 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 JUNE 6, 2000 PROSPECTUS 6,500,000 Shares [3TEC ENERGY CORPORATION LOGO] Common Stock We are offering for sale 6,500,000 shares of common stock of 3TEC Energy Corporation. All of the shares are being sold by us. Our common stock is quoted on the Nasdaq National Market under the symbol "TTEN." The last reported sale price of our common stock on June 5, 2000, was $11.00 per share. We are an independent energy company engaged in the acquisition, development, production and exploration of oil and natural gas reserves. Our properties are concentrated in East Texas and the Gulf Coast region, both onshore and in the shallow waters of the Gulf of Mexico. Investing in our common stock involves a high degree of risk. See "Risk Factors" beginning on page 11 to read about risks that you should consider before buying shares of our common stock. Neither the Securities and Exchange Commission nor any regulatory body has approved or disapproved these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
Per Share Total --------- ----------- Public offering price.................................... $ $ Underwriting discounts and commissions................... $ $ Proceeds, before expenses, to us......................... $ $
------------ The underwriters may also purchase up to an additional 975,000 shares of our common stock from us at the public offering price less the underwriting discount, solely to cover over-allotments. The underwriters are severally underwriting the shares being offered. The underwriters expect to deliver the shares to purchasers on , 2000. ------------ Bear, Stearns & Co. Inc. CIBC World Markets Prudential Securities First Union Securities, Inc. The date of this prospectus is , 2000. 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............................................................... 28 Business and Properties................................................... 35 Management................................................................ 47 Security Ownership of Principal Stockholders.............................. 50 Description of Capital Stock.............................................. 52 Description of Credit Facility............................................ 57 Underwriting.............................................................. 58 Legal Matters............................................................. 60 Experts................................................................... 60 Where You Can Find More Information....................................... 62 Incorporation of Certain Documents by Reference........................... 62 Glossary of Certain Oil and Gas Terms..................................... 63 Index to Financial Statements............................................. F-1
---------------- In this prospectus, the terms "3TEC," "we," "our," and "us" refer to 3TEC Energy Corporation and its subsidiaries and, where appropriate, to our predecessor, Middle Bay Oil Company, Inc. The term "you" refers to a prospective investor. We have included definitions of technical terms important to an understanding of our business under "Glossary of Certain Oil and Gas Terms" on page 63. You should rely only on the information contained in this prospectus or to which we have referred you in this prospectus. We have not authorized anyone to provide you with information that is different. This document may be used only where it is legal to sell these securities. The information in this prospectus may only be accurate on the date of this prospectus. 3 PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before investing in the common stock offered through this prospectus. You should read this entire prospectus carefully, especially the risks of investing in our common stock discussed under "Risk Factors" beginning on page 11. About 3TEC We are engaged in the acquisition, development, production and exploration of oil and natural gas reserves. Our properties are concentrated in East Texas and the Gulf Coast region, both onshore and in the shallow waters of the Gulf of Mexico. We also own significant properties in the Permian and San Juan basins and in the Mid-Continent region. Our management and technical staff have substantial experience in each of these areas. As of December 31, 1999, on a pro forma basis including the recent acquisitions of Magellan Exploration LLC ("Magellan") and properties in East Texas operated by C.W. Resources, Inc. (the "CWR Properties"), discussed below, we had estimated total net proved reserves of 312 Bcfe, of which approximately 77% were natural gas and approximately 71% were classified as proved developed, with an estimated PV-10 value of $296.7 million. As of April 30, 2000, on a pro forma basis including the CWR Properties, our net daily production was approximately 49.0 Mmcf of natural gas and 3.5 MBbls of oil or 70.0 Mmcfe. We have increased our reserves and production principally through acquisitions. We focus on properties that have a substantial proved reserve component and which management believes have additional exploitation opportunities. Through the recently completed acquisition of Magellan, we have also acquired a number of drilling prospects covered by an extensive 3-D seismic database that we believe have exploration potential. We have assembled an experienced management team and technical staff with expertise in property acquisitions and development, reservoir engineering, exploration and financial management. After this offering, we believe that our cash flow from operations and our financial resources will provide us with the ability to fully develop our current properties, to finance our current exploration projects and to pursue new acquisition opportunities. As further discussed below, in August 1999, W/E Energy Company L.L.C. ("W/E LLC") purchased a controlling interest in us, and Floyd C. Wilson was named our Chairman and Chief Executive Officer. Since that time, we have acquired net proved reserves of 258.6 Bcfe with an associated PV-10 value of $244.2 million, including the recently acquired CWR Properties, calculated as of December 31, 1999. In addition, we have raised or issued $25.0 million of private equity and equity linked financing and have entered into a new $250 million revolving credit facility. Our Strategy Our business strategy is focused on the following: . Pursuit of Strategic Acquisitions. We continually review opportunities to acquire producing properties, leasehold acreage and drilling prospects. We seek to acquire operational control of properties that we believe have significant exploitation and exploration potential. We are especially focused on increasing our holdings in fields and basins in which we already own an interest. . Further Development of Existing Properties. We intend to further develop our properties that have proved reserves. We seek to add proved reserves and increase production through the use of advanced technologies, including detailed technical analysis of our properties, and by drilling infill locations and selectively recompleting existing wells. We also plan to drill step-out wells to expand known field limits. We intend to enhance the efficiency and quality control of these activities by operating the majority of our properties. 4 . Growth Through Exploration. We conduct an active technology-driven exploration program that is designed to complement our property acquisition and development drilling efforts with moderate to high risk exploration projects that have greater reserve potential. We generate exploration prospects through the analysis of geological and geophysical data and the interpretation of 3-D seismic data. We intend to manage our exploration expenditures through the optimal scheduling of our drilling program and by selectively reducing our participation in certain exploratory prospects through sales of interests to industry partners. . Rationalization of Property Portfolio. We intend to actively pursue opportunities to reduce and control operating costs of our existing properties and properties we may acquire in the future through the consolidation of overlapping operations, the sale of marginal properties and by increasing the number of fields we operate as a percentage of our total properties. . Maintenance of Financial Flexibility. We intend to maintain substantial unused borrowing capacity under our bank credit facility by periodically refinancing our bank debt in the capital markets when conditions are favorable. We believe our expanded base of internally generated cash flow and other financial resources, including our existing financial partners, provide us with the financial flexibility to pursue additional acquisitions of producing properties and leasehold acreage and to develop our project inventory in an optimal fashion. Recent Developments Set forth below is a summary of the transactions we have completed following the acquisition by W/E LLC of a controlling interest in us:
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.............. 21.0 Gulf Coast 25.3 Bcfe 0.83 CWR Properties........ 55.2 E. Texas 67.8 Bcfe 0.81 ------ ---------- TOTAL............... $166.4 258.6 Bcfe ====== ==========
. Acquisition of Control by W/E LLC. In August 1999, W/E LLC, formerly known as 3TEC Energy Company L.L.C., which is owned by affiliates of EnCap Investments L.L.C. ("EnCap") and Floyd C. Wilson, purchased a controlling interest in us for approximately $20.5 million in cash and $875,000 in producing properties. As of March 31, 2000, W/E LLC owned approximately 25% of our outstanding common stock, or approximately 45% assuming the exercise and conversion of all securities purchased by them in August 1999. After giving effect to this offering, W/E LLC will own approximately 12% of our outstanding common stock, or approximately 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. Floyd Oil Company is not affiliated with Floyd C. Wilson. 5 . Credit Facility. Concurrently with our acquisition of the Floyd Oil Properties, we entered into a new $250 million credit facility with Bank One, Texas, N.A., as administrative agent, and Union Bank of California, N.A., Wells Fargo Bank, CIBC, Inc. and The Bank of Nova Scotia as participating lenders. Our borrowing base, which is redetermined semi- annually, was initially set at $95 million with $83.5 million outstanding as of March 31, 2000. In connection with the CWR Properties acquisition, we amended our credit facility to increase the availability under our borrowing base to $145 million enabling us to borrow all of the purchase price of the CWR Properties. In addition, Bank of Montreal became a participant in and syndication agent for this facility. The net proceeds of this offering will be used primarily to repay indebtedness outstanding under this facility. . Acquisition of Magellan. On February 3, 2000, we completed the acquisition of Magellan from certain affiliates of EnCap and other third parties for consideration of approximately $18.7 million consisting of (a) 1,085,934 shares of common stock, (b) four year warrants to purchase up to 333,333 shares of common stock at $30.00 per share, (c) 617,009 shares of 5% Series D Convertible Preferred Stock which have a redemption value of $24.00 per share and are each convertible into one share of common stock and (d) the assignment of a performance based "back-in" working interest of 5% of Magellan's interest in 12 exploration prospects. Magellan's properties are located both onshore and in the shallow waters of south Louisiana and consist of 20,243 gross (11,244 net) acres in three prospective areas. As of December 31, 1999, Ryder Scott Company ("Ryder Scott"), estimated that Magellan's net proved reserves were 25.3 Bcfe with an associated PV-10 value of $39.8 million. These proved reserves are approximately 67% natural gas and 69% are classified as proved undeveloped. Magellan operates approximately 80% of its properties on a PV-10 value basis. In addition to the proved reserves, the Magellan properties contain several exploratory drilling locations that have been identified using 3-D seismic data. In April 2000, we purchased additional interests in certain of these properties from an unrelated party, bringing our total net purchase price for the Magellan properties to approximately $21 million. . Acquisition of CWR Properties. On May 31, 2000, we acquired the CWR Properties for cash consideration of approximately $55 million. The purchase of the CWR Properties was financed under our existing credit facility, which we amended prior to closing this acquisition. The CWR Properties are located in Upshur and Gregg Counties, Texas, in strategic proximity to our core East Texas properties. The CWR Properties encompass approximately 38,000 gross acres (10,100 net acres). As of December 31, 1999, Ryder Scott estimated that the net proved reserves of the CWR Properties were 67.8 Bcfe with an associated PV-10 value of $58.3 million. The CWR Properties produce from the Cotton Valley formation and the reserves are approximately 92% natural gas and 51% are classified as proved developed. As of April 30, 2000, net daily production from the CWR Properties was approximately 10.9 Mmcfe. . Changes in Management. Since Mr. Wilson was named our Chairman and Chief Executive Officer in August 1999, we have assembled a management team with individuals who we believe have the skills necessary to execute our business strategy, including a new President and Chief Financial Officer, Vice President--Exploration, Vice President--Land, Vice President--Field Operations and Production and Controller. We have also added new members of the board of directors as well as key employees from the companies we have acquired. 6 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.. 6,500,000 shares(1) Common stock to be outstanding after the offering........... 12,922,181 shares(1)(2) Use of proceeds............... Pending application of the net proceeds to fund our future development, acquisition and exploration activities, we intend to use the net proceeds to repay a portion of our outstanding debt under our revolving credit facility. Nasdaq National Market symbol. TTEN
- -------- (1) Excludes a 30-day option granted to the underwriters to purchase up to 975,000 additional shares of common stock to cover over-allotments, if any. (2) The number of shares shown above to be outstanding after this offering is based upon 6,422,181 shares of common stock outstanding as of March 31, 2000 and does not include: (a) 1,338,255 shares of common stock that may be issued upon exercise of stock options outstanding under our existing employee stock option plans; (b) up to 444,444 shares of common stock reserved for issuance upon conversion of our Series B Preferred Stock; 722,385 shares of common stock reserved for issuance upon conversion of our Series C Preferred Stock, (of which 431,174 shares are issuable to our 80% owned subsidiary, and accordingly, only 377,446 shares are issuable to third parties); or 621,930 shares of common stock reserved for issuance upon conversion of our Series D Preferred Stock (for a description of our outstanding series of Preferred Stock, see "Description of Capital Stock-- Preferred Stock"); (c) 1,469,316 shares of common stock reserved for issuance upon conversion of our subordinated notes; or (d) 1,841,381 shares of common stock reserved for issuance upon exercise of outstanding warrants. 7 Summary Historical and Pro Forma Consolidated Financial Data The following table sets forth our summary historical and pro forma financial data as of the dates and for the periods indicated. The historical financial data for the years ended December 31, 1999 and 1998 is derived from financial statements which have been audited by KPMG LLP, independent certified public accountants. The historical financial data for the three months ended March 31, 2000 is derived from unaudited financial statements. The unaudited pro forma financial data for the year ended December 31, 1999 is derived in part from the 3TEC and CWR Properties historical financial statements audited by KPMG LLP. The unaudited pro forma financial data for the three months ended March 31, 2000 is derived in part from the unaudited historical financial statements of 3TEC and the CWR Properties. The unaudited pro forma statement of operations and other financial data give effect to the purchase of the Floyd Oil Properties and the purchase of the CWR Properties as if they had occurred on January 1, 1999. Pro forma data are based on assumptions and include adjustments as explained in the notes to the unaudited pro forma consolidated financial data included herein. The unaudited pro forma consolidated financial data are not necessarily indicative of the results of our future operations and should be read in conjunction with the financial statements included herein. For a description of the acquisitions of the Floyd Oil Properties and the CWR Properties, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." The following financial information should be read in conjunction with "Capitalization," "Selected Historical Financial Data," "Selected Unaudited Pro Forma Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the 3TEC, Floyd Oil Properties and CWR Properties financial statements. Except as to the March 31, 2000 pro forma as adjusted and historical balance sheet data, the following table does not include pro forma financial data for Magellan, which is not material with respect to the operations of 3TEC for the periods presented.
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................ $ 19,806 $ 16,915 $ 64,099 $ 19,952 $ 15,011 Gain on sale of properties............ 9 9 1,048 1,048 1,953 Other.................. 329 329 1,020 1,020 738 ---------- --------- ---------- --------- --------- Total revenues....... 20,144 17,253 66,167 22,020 17,702 ---------- --------- ---------- --------- --------- Costs and expenses: Lease operating and production taxes...... 5,123 4,581 20,379 6,728 7,801 Geological and geophysical........... 125 125 200 200 878 Dry hole............... 12 12 625 625 503 Depreciation, depletion and amortization.......... 4,704 3,920 16,069 6,691 7,116 Impairments............ -- -- 2,478 2,478 4,164 Interest............... 1,861 2,085 6,631 3,205 1,972 General and administrative........ 1,811 1,697 6,966 4,736 4,267 Other.................. 68 68 2,230 2,230 405 ---------- --------- ---------- --------- --------- Total costs and expenses............ 13,704 12,488 55,578 26,893 27,106 ---------- --------- ---------- --------- --------- Income (loss) before income taxes and minority interest...... 6,440 4,765 10,589 (4,873) (9,404) Minority interest....... 42 42 2 2 15 Income tax expense (benefit).............. 2,176 1,606 3,814 (1,443) (2,830) ---------- --------- ---------- --------- --------- Net income (loss)....... 4,222 3,117 6,773 (3,432) (6,589) Dividends to preferred stockholders........... 260 260 574 574 68 ---------- --------- ---------- --------- --------- Net income (loss) attributable to common stockholders........... $ 3,962 $ 2,857 $ 6,199 $ (4,006) $ (6,657) ========== ========= ========== ========= ========= Net income (loss) per share (diluted)........ $ 0.28 $ 0.35 $ 0.50 $ (1.14) $ (2.48) ========== ========= ========== ========= ========= Weighted average common shares outstanding (diluted).............. 15,842,722 9,342,722 14,321,467 3,519,532 2,683,369 ========== ========= ========== ========= ========= Other Financial Data: EBITDAX (b)............ $ 12,918 $ 10,683 $ 36,852 $ 8,586 $ 3,439
8
March 31, 2000 -------------------------------------- Pro Forma Historical Pro Forma(c) As Adjusted(d) ---------- ------------ -------------- (unaudited) (in thousands) Balance Sheet Data: Cash and cash equivalents.............. $ 3,917 $ 3,917 $ 3,917 Oil and natural gas properties, net.... 150,487 205,687 205,687 Total assets........................... 167,861 223,061 223,061 Long-term debt, including convertible subordinated notes.................... 96,724 131,924 85,424 Stockholders' equity................... 59,118 59,118 125,618
- -------- (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" Balance Sheet Data gives effect to the acquisition of the CWR Properties and the related financing transactions. (d) The "Pro Forma As Adjusted" Balance Sheet Data: . assumes the sale of 6,500,000 shares of our common stock in this offering and that the underwriters do not elect to exercise their over-allotment option; . gives effect to the application of the estimated net proceeds from the sale of common stock in this offering to repay a portion of our debt; and . gives effect to the acquisition of the CWR Properties and the related financing transactions. 9 Summary Reserve Information The table below presents our summary historical and pro forma reserve information as of December 31, 1999. Estimates of proved reserves are based on the December 31, 1999 reserve report prepared by Ryder Scott, our independent petroleum engineering consultants. The pro forma reserve information gives effect to the acquisition of Magellan and the CWR Properties as if each had been acquired on December 31, 1999. For additional information relating to our oil and natural gas reserves, please read "Business and Properties--Description of Our Properties," note 15 of the notes to our December 31, 1999, consolidated financial statements, note 6 of the notes to the Floyd Oil Properties September 30, 1999, statements of revenues and direct operating expenses and note 6 of the notes to the CWR Properties December 31, 1999 statements of revenues and direct operating expenses. As of December 31, 1999, on a pro forma basis including Magellan and the CWR Properties, our PV-10 value was $296.7 million. For purposes of this calculation, NYMEX prices of $2.33 per Mmbtu of natural gas and $25.60 per barrel of oil were used. These NYMEX prices were then adjusted for volumes subject to long-term contracts and financial hedges and all applicable basis and quality differentials. After taking into account such adjustments, the weighted average actual prices used to calculate our pro forma PV-10 value were $2.30 per Mcf for natural gas and $24.02 per barrel for oil.
As of December 31, 1999 -------------------------------------- Historical ---------------------------- CWR Pro Forma 3TEC Magellan Properties Combined -------- -------- ---------- --------- Estimated Proved Reserves: Natural gas (Mmcf)...................... 159,699 16,990 62,209 238,898 Oil (MBbls)............................. 9,835 1,383 933 12,151 Natural gas equivalents (Mmcfe)......... 218,712 25,286 67,808 311,806 Percentage proved developed reserves.... 82% 31% 51% 71% Estimated future net cash flows before income taxes (in thousands)............ $370,258 $55,699 $114,077 $540,034 PV-10 value (in thousands).............. $198,615 $39,782 $ 58,275 $296,672
Summary Operating Data The following table sets forth historical and pro forma information with respect to our production volumes, average sale prices and average costs for the periods indicated. The pro forma information gives effect to the acquisition of the Floyd Oil Properties and the CWR Properties, as if each had been acquired on January 1, 1999.
Three Months Ended March 31, 2000 Year Ended December 31, -------------------- ------------------------------- 1999 1998 -------------------- ---------- Pro Forma Historical Pro Forma Historical Historical --------- ---------- --------- ---------- ---------- Production Volumes: Natural gas (Mmcf)...... 4,429 3,578 18,162 4,737 3,847 Oil (MBbls)............. 322 308 1,350 532 581 Natural gas equivalents (Mmcfe)................ 6,361 5,426 26,262 7,928 7,333 Average Sale Prices: Natural gas ($ per Mcf). $ 2.59 $ 2.56 $ 2.25 $ 2.18 $ 2.00 Oil ($ per Bbl)......... 25.02 24.94 16.09 16.88 11.52 Natural gas equivalents ($ per Mcfe)........... 3.07 3.11 2.39 2.43 1.96 Average Costs ($ per Mcfe): Lease operating and production taxes....... $ 0.81 $ 0.84 $ 0.78 $ 0.85 $ 1.06 General and administrative......... 0.29 0.31 0.27 0.60 0.58 Depreciation, depletion and amortization....... 0.74 0.72 0.61 0.84 0.97
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 natural gas that we can economically produce. Historically, the markets for oil and natural gas have been volatile, and they are likely to continue to be volatile in the future. For example, oil and natural gas prices declined significantly in late 1997 and 1998. These declines had a significant negative impact on our financial results for 1997, 1998 and the first two quarters of 1999, contributing to our losses for those periods. Among the factors that can cause volatility are: . the domestic and foreign supply of oil and natural gas; . the ability of members of the Organization of Petroleum Exporting Countries to agree upon and maintain oil prices and production levels; . political instability or armed conflict in oil or natural gas producing regions; . the level of consumer product demand; . weather conditions; . the price and availability of alternative fuels; . the price of foreign imports; and . worldwide economic conditions. These external factors and the volatile nature of the energy markets make it difficult to estimate future prices of oil and natural gas. We may not successfully integrate the operations of the properties we have acquired or may acquire or achieve the benefits we are seeking. Our success will partially depend upon the integration of the operations and selected personnel relating to the Floyd Oil Properties, Magellan and the CWR Properties. Our management team does not have experience with the combined activities of 3TEC, the Floyd Oil Properties, Magellan and the CWR Properties. In addition, our new management team, including personnel formerly with Magellan and Floyd Oil Company, has not previously worked together as a single team and thus is subject to personnel and other risks experienced by newly combined operations. We may not be able to integrate these operations without loss of important employees, loss of revenues, increases in operating or other costs, or other difficulties. In addition, we may not be able to realize the operating efficiencies and other benefits sought from our acquisitions. 11 We may not be able to replace production with new reserves through our drilling or acquisition activities. In general, the volume of production from oil and natural gas properties declines as reserves are depleted. Our reserves will decline as they are produced unless we acquire properties with proved reserves or conduct successful development and exploration activities. Our future oil and natural gas production is highly dependent upon our level of success in finding or acquiring additional reserves. However, we cannot assure you that our future acquisition, development and exploration activities will result in additional proved reserves or that we will be able to drill productive wells at acceptable costs. Our recent growth is due largely to acquisitions of producing properties. The successful acquisition of producing properties requires an assessment of a number of factors. These factors include recoverable reserves, future oil and natural gas prices, operating costs and potential environmental and other liabilities, title issues and other factors. Such assessments are inexact and their accuracy is inherently uncertain. In connection with such assessments, we perform a review of the subject properties that we believe is generally consistent with industry practices. However, such a review will not reveal all existing or potential problems. In addition, the review will not permit a buyer to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities. Although the increased availability of properties has caused a decrease in the prices paid for these properties, we cannot assure you that we will be able to acquire properties at acceptable prices because the competition for producing oil and natural gas properties is intense and many of our competitors have financial and other resources which are substantially greater than those available to us. Our bank lenders can limit our borrowing capabilities, which may materially impact our operations. As of March 31, 2000, after giving pro forma effect to the application of the estimated net proceeds of this offering and the acquisition of the CWR Properties, our long-term bank debt would be $72.2 million. At March 31, 2000, our borrowing base was $95 million. In connection with the acquisition of the CWR Properties, we increased the amount of availability under our borrowing base to $145 million. The borrowing base limitation under our credit facility is semi-annually redetermined. Redeterminations are based upon a number of factors, including commodity prices and reserve levels. The next redetermination date is November 1, 2000. Upon a redetermination, we could be forced to repay a portion of our bank debt. We may not have sufficient funds to make such repayments, which could result in a default under the terms of the loan agreement and an acceleration of the loan. We intend to finance our development, acquisition and exploration activities with cash flow from operations, bank borrowings and other financing activities. In addition, we may significantly alter our capitalization in order to make future acquisitions or develop our properties. These changes in capitalization may significantly increase our level of debt. We may also be able to incur substantial additional indebtedness in the future. If we incur additional debt for these or other purposes, the related risks that we now face could intensify. A higher level of debt also increases the risk that we may default on our debt obligations. Our ability to meet our debt obligations and to reduce our level of debt depends on our future performance. General economic conditions and financial, business and other factors affect our operations and our future performance. Many of these factors are beyond our control. Our level of debt affects our operations in several important ways, including the following: . a portion of our cash flow from operations is used to pay interest on borrowings; . the covenants contained in the agreements governing our debt limit our ability to borrow additional funds, pay dividends, dispose of assets or issue shares of preferred stock and otherwise may affect our flexibility in planning for, and reacting to, changes in business conditions; . a high level of debt may impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes; . a leveraged financial position would make us more vulnerable to economic downturns and could limit our ability to withstand competitive pressures; . any debt that we incur under our credit facility will be at variable rates which makes us vulnerable to increases in interest rates; and 12 . the level of our debt could impact our ability to develop our proved undeveloped reserves in a timely manner, if at all. Our failure to develop our proved undeveloped reserves would have a negative impact on our future cash flow. We have incurred losses from operations in the past, and our failure to achieve or sustain profitability in the future could adversely affect the market price of our common stock. We incurred net losses of $6.7 million in 1998 and $4.0 million in 1999. On a pro forma basis, giving effect to the acquisition of the Floyd Oil Properties, the CWR Properties and this offering, we would have earned a profit of $6.2 million in 1999, but the pro forma results may not be indicative of actual operating results had we acquired the Floyd Oil Properties and the CWR Properties at January 1, 1999. We cannot assure you that we will achieve or sustain profitability in the future. Our failure to achieve or sustain profitability in the future could adversely affect the market price of our common stock. Prices of our common stock may be volatile. The market price of our common stock may be subject to significant fluctuations in response to events beyond our control. Normal fluctuations in the prices of our stock may be increased by our trading volumes, which have been historically low. Our trading volumes may be further reduced by the 1-for- 3 reverse split of our common stock effected on January 18, 2000. There can be no assurance that the market price of our common stock will not decline below the price at which shares are sold in this offering. Our ability to finance our business activities will require us to generate substantial cash flow. Our business activities require substantial capital. We have budgeted total capital expenditures for 2000 of approximately $24 million, including an estimated $3.7 million with respect to the CWR Properties. We intend to finance our capital expenditures in the future through cash flow from operations, the incurrence of additional indebtedness and/or the issuance of additional equity securities. We cannot be certain that our business will continue to generate cash flow at or above current levels. Future cash flows and the availability of financing will be subject to a number of variables, such as: . the level of production from existing wells; . prices of oil and natural gas; . our results in locating and producing new reserves; and . general economic, financial, competitive, legislative, regulatory and other factors beyond our control. If we are unable to generate sufficient cash flow from operations to service our debt, we may have to obtain additional financing. We cannot be sure that any additional financing will be available to us on acceptable terms. Issuing equity securities to satisfy our financing requirements could cause substantial dilution to our existing stockholders. The level of our debt financing could also materially affect our operations. See "Our bank lenders can limit our borrowing capabilities, which may materially impact our operations." If our revenues were to decrease due to lower oil and natural gas prices, decreased production or other reasons, and if we could not obtain capital through our credit facility or otherwise, our ability to execute our development and acquisition plans, replace our reserves or maintain production levels could be greatly limited. Drilling wells is speculative, often involves significant costs and may not result in additions to our production or reserves. Developing and exploring for oil and natural gas reserves involves a high degree of operating and financial risk. The budgeted costs of drilling, completing and operating wells are often exceeded and can increase significantly when drilling costs rise due to a tightening in the supply of various types of oilfield equipment and related services. Drilling may be unsuccessful for many reasons, including title problems, weather, cost 13 overruns, equipment shortages and mechanical difficulties. Moreover, the successful drilling of an oil or natural gas well does not ensure a profit on investment. Exploratory wells bear a much greater risk of loss than development wells. A variety of factors, both geological and market-related, can cause a well to become uneconomical or only marginally economic. In addition to their cost, unsuccessful wells can hurt our efforts to replace reserves. We do not insure against all potential losses and could be seriously harmed by unexpected liabilities. Exploration for and production of oil and natural gas can be hazardous, involving natural disasters and other unforeseen occurrences such as blowouts, cratering, fires and loss of well control, which can damage or destroy wells or production facilities, injure or kill people, and damage property and the environment. Because third party drilling contractors are used to drill our wells, we may not realize the full benefit of workmen's compensation laws in dealing with their employees. We maintain insurance against many potential losses and liabilities arising from our operations in accordance with customary industry practices and in amounts that we believe to be prudent. However, our insurance does not protect us against all operational risks. Estimates of oil and natural gas reserves are uncertain and inherently imprecise and any material inaccuracies in these reserve estimates will materially affect the quantities and PV-10 value of our reserves. This prospectus contains estimates of our proved oil and natural gas reserves and the estimated future net revenues from such reserves. These estimates are based upon various assumptions, including assumptions required by the Securities and Exchange Commission relating to oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. The process of estimating oil and natural gas reserves is complex. This process requires significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each reservoir. Therefore, these estimates are inherently imprecise. Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves will most likely vary from those estimated. Any significant variance could materially affect the estimated quantities and PV-10 value of reserves set forth in this prospectus and the information incorporated by reference. Our properties may also be susceptible to hydrocarbon drainage from production by other operators on adjacent properties. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development, prevailing oil and natural gas prices and other factors, many of which are beyond our control. Actual production, revenues, taxes, development expenditures and operating expenses with respect to our reserves will likely vary from the estimates used. These variances may be material. At December 31, 1999, on a pro forma basis for the acquisitions of Magellan and the CWR Properties, approximately 29% of our estimated proved reserves were undeveloped. The percentage of proved undeveloped properties were increased as a result of the addition of Magellan and the CWR Properties. Recovery of undeveloped reserves requires significant capital expenditures and successful drilling operations. The reserve data assumes that we will make significant capital expenditures to develop our reserves. Although we have prepared estimates of our oil and natural gas reserves and the costs associated with these reserves in accordance with industry standards, we cannot assure you that the estimated costs are accurate, that development will occur as scheduled or that the actual results will be as estimated. In addition, you should not construe PV-10 value as the current market value of the estimated oil and natural gas reserves attributable to our properties. We have based the estimated discounted future net cash flows from proved reserves on prices and costs as of the date of the estimate, in accordance with applicable regulations, whereas actual future prices and costs may be materially higher or lower. Many factors will affect actual future net cash flow, including: . prices for oil and natural gas; . the amount and timing of actual production; 14 . 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 12% of our common stock outstanding after this offering, assuming that the over-allotment option is not exercised by the underwriters, and would own approximately 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 to vote the shares they own to elect the seven members of our board of directors, at least two of whom shall qualify as independent directors, as follows: (i) three members of the board of directors designated by W/E LLC; (ii) two members of the board of directors designated by Kaiser-Francis Oil Company, C.J. Lett, III, Weskids, L.P. and Alvin V. Shoemaker; and (iii) two members of the board of directors designated by a majority of the board of directors, at least one of which must be an independent director whose designation is acceptable to W/E LLC. As a result of this agreement, these individuals and entities have a significant voice in the outcome of stockholder voting concerning the election of directors, the adoption or amendment of provisions in our charter and bylaws, the approval of mergers and other significant corporate transactions. Following the completion of this offering, however, any stockholder who has entered into the agreement but no longer beneficially owns at least 3.5% of our common stock shall no longer be subject to the rights and obligations under the agreement. Competition in our industry is intense, and we are smaller and have a more limited operating history than many of our competitors. We compete with major integrated oil and natural gas companies and independent oil and natural gas companies in all areas of operation. In particular, we compete for property acquisitions and for the equipment and labor required to operate and develop these properties. Most of our competitors have substantially greater 15 financial and other resources than we have. In addition, larger competitors may be able to absorb the burden of any changes in federal, state and local laws and regulations more easily than we can, which would adversely affect our competitive position. These competitors may be able to pay more for exploratory prospects and may be able to define, evaluate, bid for and purchase a greater number of properties and prospects than we can. Our ability to explore for oil and natural gas prospects and to acquire additional properties in the future will depend on our ability to conduct operations, to evaluate and select suitable properties and to consummate transactions in this highly competitive environment. In addition, most of our competitors have operated for a much longer time than we have and have demonstrated the ability to operate through industry cycles. Hedging transactions may limit our potential gains. In order to manage our exposure to price risks in the marketing of our oil and natural gas production, we have in the past and may in the future enter into oil and natural gas price hedging arrangements with respect to a portion of our expected production. Our hedging arrangements may include futures contracts on the New York Mercantile Exchange. While intended to reduce the effects of volatile oil and natural gas prices, such transactions may limit our potential gains if oil and natural gas prices were to rise substantially over the price established by the hedge. In addition, such transactions may expose us to the risk of loss in certain circumstances, including instances in which: . our production is less than expected; . there is a widening of price differentials between delivery points for our production and the delivery point assumed in the hedge arrangement; . the counterparties to our future contracts fail to perform the contracts; or . a sudden, unexpected event materially impacts oil or natural gas prices. We have recently entered into fixed price swap agreements covering 2,000 barrels per day of our oil production for the period March through October 2000 at an average price of $25.96 per barrel. These agreements cover approximately 62% of our current daily oil production. The price used to determine the settlement amount is the average of the near month contract on the NYMEX. Settlement is on the 23rd of each month for the preceding month. The hedging agreements are with financial institutions that participate in our credit facility. We have also recently entered into a forward sale agreement for 3,750 Mcf of natural gas per day for the period May through August 2000 at an average price of $3.07 per Mcf. This agreement covers approximately 8% of our current daily natural gas production. The loss of key personnel could adversely affect our ability to operate. Our management changed significantly with W/E LLC's investment. We have five new directors, a new chief executive officer and a number of other new management and professional personnel. Our operations will be dependent upon retaining this group of key management and technical personnel. Recognizing their importance, we have entered into employment agreements with Floyd C. Wilson, R. A. Walker and Stephen W. Herod. We cannot assure you that such individuals will remain with us for the immediate or foreseeable future. If we cannot retain our current personnel or attract additional experienced personnel, our ability to compete could be adversely affected. 16 We are subject to complex laws and regulations, including environmental regulations, that can adversely affect the cost, manner or feasibility of doing business. Our operations are subject to numerous laws and regulations governing the operation and maintenance of our facilities and the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations may: . require that we acquire permits before commencing drilling; . restrict the substances that can be released into the environment in connection with drilling and production activities; . limit or prohibit drilling activities on protected areas such as wetlands or wilderness areas; or . require remedial measures to mitigate pollution from former operations, such as plugging abandoned wells. Under these laws and regulations, we could be liable for personal injury and clean-up costs and other environmental and property damages, as well as administrative, civil and criminal penalties. We maintain limited insurance coverage for some but not all of the environmental damages for which we could be liable. Moreover, we do not believe that insurance coverage for the full potential liability that could be caused by sudden and accidental environmental damages is available at a reasonable cost. Accordingly, we may be subject to liability or we may be required to cease production from properties in the event of environmental damages. These laws and regulations have been changed frequently in the past. In general, these changes have imposed more stringent requirements that increase operating costs or require capital expenditures in order to remain in compliance. It is also possible that unanticipated developments could cause us to make environmental expenditures that are significantly different from those we currently expect. Existing laws and regulations could be changed, and any changes could have an adverse effect on our business. Shares eligible for future sale by our current stockholders could adversely affect the market price of our common stock. Sales of a substantial number of shares of our common stock in the market may have an adverse affect on the price of our stock. After giving effect to the 6,500,000 shares to be issued in this offering approximately 12,922,181 shares of common stock will be outstanding, assuming the underwriters' over- allotment option is not exercised. In addition, options and other warrants to purchase 3,179,636 shares are outstanding, of which 2,071,417 are currently exercisable. These options and warrants are exercisable at prices ranging from $3.00 to $30.00 per share. We also have preferred stock outstanding which is currently convertible into 1,430,840 additional shares of common stock. Subsequent to this offering, approximately 7.1 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; . our outlook on oil and natural gas prices; . estimates of our oil and natural gas reserves; . our future financial condition or results of operations; and . our business strategy and other plans and objectives for future operations. More specifically, some of the statements contained in this prospectus under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business and Properties" that relate to our business and the industry in which we operate are forward- looking. Statements or assumptions related to or underlying these forward- looking statements include, without limitation, statements regarding: . the quality or value of our properties with regard to, among other things, the existence of reserves in economic quantities; . our ability to increase our reserves through exploration and development activities; . the number of locations to be drilled and the time frame within which they will be drilled; . future prices of oil and natural gas; . anticipated domestic demand for oil and natural gas; and . the adequacy of our capital resources and liquidity. Actual results may differ materially from those suggested by the forward- looking statements for various reasons, including those discussed under "Risk Factors." USE OF PROCEEDS We estimate that the net proceeds to us from the sale of the 6,500,000 shares of common stock in this offering will be approximately $66.5 million (approximately $76.6 million if the underwriters' over-allotment option is exercised in full), after deducting underwriting discounts and commissions and estimated offering expenses. Pending application of the net proceeds to fund further acquisition, development, and exploration activities, we intend to use all of the net proceeds from this offering to repay a portion of our outstanding debt under our credit facility. At March 31, 2000, we had $83.5 million outstanding under our credit facility bearing interest at an average rate of 7.9%. The amount outstanding under our credit facility increased by approximately $55 million as of May 31, 2000, as a result of additional borrowings to fund the acquisition of the CWR Properties. The credit facility matures on May 31, 2003. We have used borrowings under the credit facility to fund a portion of our acquisitions and for other corporate purposes. 18 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY Effective June 6, 2000, our common stock began trading on the Nasdaq National Market under the symbol "TTEN." 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 June 2, 2000, as reported by the National Quotation Bureau, LLC. During this period our common stock traded on the Nasdaq SmallCap Market. 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 June 2, 2000)...................... 10.63 7.00
On June 5, 2000, the last reported sale price of our common stock on the Nasdaq SmallCap Market was $11.00 per share. On June 2, 2000, there were 1,004 holders of record of our common stock. We have never declared or paid any cash dividends on our common stock. We currently intend to retain future earnings, if any, for the operation and development of our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, our credit facility prohibits us from paying cash dividends on our common stock. Any future dividends are also restricted by the terms of our outstanding preferred stock and may be restricted by any loan agreements which we may enter into from time to time. We are obligated to pay net cash dividends in the amounts of approximately $570,000 per year on our Series C Preferred Stock. Additionally, we are obligated to pay dividends of $740,000 per year on our Series D Preferred Stock, which may be paid, at our option, in cash or in additional shares of Series D Preferred Stock during the three years ending February 2, 2003. Our credit facility permits the payment of cash dividends on our Series C Preferred Stock and the payment of dividends on the Series D Preferred Stock in additional shares of Series D Preferred Stock. 19 CAPITALIZATION The following table presents our capitalization as of March 31, 2000, on the following bases: . on an historical basis; . on a pro forma basis giving effect to the acquisition of the CWR Properties and the related financing transactions; and . on a pro forma basis as adjusted to reflect our anticipated use of the estimated net proceeds of this offering, assuming that the underwriters' over-allotment option is not exercised. You should read the table in conjunction with "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," our audited consolidated financial statements and our unaudited condensed consolidated pro forma financial data included in this prospectus.
March 31, 2000 --------------------------------- Pro Forma Historical Pro Forma As Adjusted ---------- --------- ----------- (in thousands) Current portion of long-term debt............. $ -- $ 20,000 $ -- Long-term debt................................ 83,500 118,700 72,200 Convertible subordinated notes................ 13,224 13,224 13,224 -------- -------- -------- Total long-term debt and convertible subordinated notes....................... 96,724 151,924 85,424 Preferred stock, $0.02 par value, 20,000,000 shares authorized; Convertible preferred stock Series B, 266,667 shares issued and outstanding...... 3,627 3,627 3,627 Convertible preferred stock Series C, 1,139,506 shares issued and outstanding.... 5,163 5,163 5,163 Convertible preferred stock Series D, 621,930 shares issued outstanding.......... 7,572 7,572 7,572 Common stock, $0.02 par value, 60,000,000 shares authorized, 6,422,181 and 12,922,181 shares issued actual and pro forma and pro forma as adjusted, respectively.............. 129 129 259 Additional paid-in capital.................... 68,366 68,366 134,736 Accumulated deficit........................... (24,552) (24,552) (24,552) Treasury stock; 7,258 shares.................. (1,187) (1,187) (1,187) -------- -------- -------- Total stockholders' equity................ 59,118 59,118 125,618 -------- -------- -------- Total capitalization...................... $155,842 $211,042 $211,042 ======== ======== ========
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 ---------- ---------- ---------- ---------- (in thousands) Revenues: Oil and natural gas sales and plant income................. $ 16,915 $ 3,072 $ 19,952 $ 15,011 Gain on sale of properties.... 9 74 1,048 1,953 Other......................... 329 103 1,020 738 ---------- ---------- ---------- ---------- Total revenues.............. 17,253 3,249 22,020 17,702 ---------- ---------- ---------- ---------- Costs and expenses: Lease operating and production taxes........................ 4,581 1,559 6,728 7,801 Geological and geophysical.... 125 70 200 878 Dry hole...................... 12 62 625 503 Depreciation, depletion and amortization................. 3,920 1,350 6,691 7,116 Impairments................... -- -- 2,478 4,164 Interest...................... 2,085 512 3,205 1,972 General and administrative.... 1,697 1,021 4,736 4,267 Other......................... 68 -- 2,230 405 ---------- ---------- ---------- ---------- Total costs and expenses.... 12,488 4,574 26,893 27,106 ---------- ---------- ---------- ---------- Income (loss) before income tax expense (benefit) and minority interest....................... 4,765 (1,325) (4,873) (9,404) Minority interest............... 42 (10) 2 15 Income tax expense (benefit).... 1,606 (409) (1,443) (2,830) ---------- ---------- ---------- ---------- Net income (loss) before dividends to preferred stockholders................... 3,117 (906) (3,432) (6,589) Dividends to preferred stockholders................... 260 143 574 68 ---------- ---------- ---------- ---------- Net income (loss) attributable to common stockholders......... $ 2,857 $ (1,049) $ (4,006) $ (6,657) ========== ========== ========== ========== Net income (loss) per common share (diluted)................ $ 0.35 $ (0.37) $ (1.14) $ (2.48) ========== ========== ========== ========== Weighted average common shares outstanding (diluted).......... 9,342,722 2,843,531 3,519,532 2,683,369 ========== ========== ========== ==========
21 SELECTED UNAUDITED PRO FORMA FINANCIAL DATA Our unaudited pro forma condensed consolidated balance sheet as of March 31, 2000 gives effect to the purchases of the Floyd Oil Properties and the CWR Properties (the "Purchases") and this offering as if they occurred on March 31, 2000. Our unaudited pro forma condensed consolidated statements of operations for the three months ended March 31, 2000 and the year ended December 31, 1999 give effect to the Purchases and this offering as if they had occurred at the beginning of the periods presented. The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 1999 has also been prepared to give effect to the issuance of 351,681 shares of common stock and warrants to purchase 266,226 shares of common stock for an aggregate purchase price of $2,373,844 and the issuance of a senior convertible subordinated note for $2,373,844 under a securities purchase agreement between The Prudential Insurance Company of America ("Prudential") and 3TEC on October 19, 1999, as if it had occurred at the beginning of the year presented. The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 1999 also gives effect to the August 27, 1999 issuance of 1,585,185 shares of common stock and warrants to purchase 1,200,000 shares of common stock for an aggregate purchase price of $10,700,000 and the issuance of a senior convertible subordinated notes for $10,700,000 under the securities purchase agreement with W/E LLC, as if it had occurred at the beginning of the year presented. Prudential and W/E LLC transactions are included in the pro forma condensed consolidated financial statements as the transactions provided a significant portion of the financing for the purchase of the Floyd Oil Properties. The pro forma financial data does not include financial information for Magellan, which is not significant with respect to the operations of 3TEC as of and for the periods presented. The following unaudited pro forma financial data have been included as required by the rules of the SEC and are provided for comparative purposes only. The unaudited pro forma financial data presented are based upon the historical consolidated financial statements of 3TEC and the historical statements of revenues and direct operating expenses of the Floyd Oil Properties and the CWR Properties and should be read in conjunction with such financial statements and the related notes thereto included elsewhere in this registration statement. The pro forma financial data are based upon assumptions and include adjustments as explained in the notes to the unaudited pro forma condensed consolidated financial statements, and the actual recording of the transactions could differ. The unaudited pro forma financial data are not necessarily indicative of the financial results that would have occurred had the Purchases and the offering been effective on and as of the dates indicated and should not be viewed as indicative of operations in future periods. 22 Unaudited Pro Forma Condensed Consolidated Statement of Operations For the Year Ended December 31, 1999
3TEC Floyd Oil Properties Pro Forma Pro Forma Consolidated Properties of CWR Adjustments Consolidated ------------ ---------- ---------- ----------- ------------ (in thousands, except share and per share amounts) Revenues: Oil and natural gas sales and plant income............... $ 19,952 $ 33,759 $ 9,745 $ 643 (a) $ 64,099 Gain on sale of properties........... 1,048 1,048 Other................. 1,020 1,020 --------- -------- ------- -------- ---------- Total revenues...... 22,020 33,759 9,745 643 66,167 Costs and expenses: Lease operating and production taxes..... 6,728 11,995 2,148 (492)(a)(b) 20,379 Geological and geophysical.......... 200 200 Dry hole.............. 625 625 Depreciation, depletion and amortization......... 6,691 9,378 (c) 16,069 Impairments........... 2,478 2,478 Interest.............. 3,205 3,426 (d) 6,631 General and administrative....... 4,736 2,230 (e) 6,966 Other................. 2,230 2,230 --------- -------- ------- -------- ---------- Total costs and expenses........... 26,893 11,995 2,148 14,542 55,578 --------- -------- ------- -------- ---------- Income (loss) before income tax (benefit) and minority interest expense................ (4,873) 21,764 7,597 (13,899) 10,589 --------- -------- ------- -------- ---------- Minority interest....... 2 2 Provision for income tax expense (benefit)...... (1,443) 5,257 (f) 3,814 --------- -------- ------- -------- ---------- Net income (loss) before dividends to preferred stockholders........... (3,432) 21,764 7,597 (19,156) 6,773 Dividends to preferred stockholders........... 574 574 --------- -------- ------- -------- ---------- Net income (loss) attributable to common stockholders........... $ (4,006) $ 21,764 $ 7,597 $(19,156) $ 6,199 ========= ======== ======= ======== ========== Net income (loss) per common share (diluted). $ (1.14) $ 0.50 ========= ========== Weighted average common shares outstanding (diluted).............. 3,519,532 14,321,467(g) ========= ==========
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 Properties Pro Forma Pro Forma Consolidated of CWR Adjustments Consolidated ------------ ---------- ----------- ------------ (in thousands, except share and per share amounts) Revenues: Oil and natural gas sales and plant income. $ 16,915 $2,712 $ 179 (a) $ 19,806 Gain on sale of properties............. 9 9 Other................... 329 329 ---------- ------ ------- ----------- Total revenues........ 17,253 2,712 179 20,144 ---------- ------ ------- ----------- Costs and expenses: Lease operating and production taxes....... 4,581 508 34 (b) 5,123 Geological and geophysical............ 125 125 Dry hole................ 12 12 Depreciation, depletion and amortization....... 3,920 784 (c) 4,704 Impairments............. -- -- Interest................ 2,085 (224)(d) 1,861 General and administrative......... 1,697 114 (e) 1,811 Other................... 68 68 ---------- ------ ------- ----------- Total costs and expenses............. 12,488 508 708 13,704 ---------- ------ ------- ----------- Income (loss) before income tax expense (benefit) and minority interest expense......... 4,765 2,204 (529) 6,440 Minority interest......... 42 42 Provision for income tax expense.................. 1,606 570 (f) 2,176 ---------- ------ ------- ----------- Net income (loss) before dividends to preferred stockholders............. 3,117 2,204 (1,099) 4,222 Dividends to preferred stockholders............. 260 260 ---------- ------ ------- ----------- Net income (loss) attributable to common stockholders............. $ 2,857 $2,204 $(1,099) $ 3,962 ========== ====== ======= =========== Net income per common share (diluted).......... $ 0.35 $ 0.28 ========== =========== Weighted average common shares outstanding (diluted)................ 9,342,722 15,842,722(g) ========== ===========
See accompanying notes to unaudited pro forma condensed consolidated financial data. 24 Unaudited Pro Forma Condensed Consolidated Balance Sheet As of March 31, 2000
Pro Forma Adjustments --------------------- Common 3TEC Properties Stock Pro Forma Consolidated of CWR Issuance Consolidated ------------ ---------- -------- ------------ (audited) Current Assets Cash and cash equivalents.. $ 3,917 $ $ $ 3,917 Accounts receivable........ 9,824 9,824 Other current assets....... 875 875 -------- ------- ------- -------- Total current assets..... 14,616 -- -- 14,616 Property (at cost) Oil and natural gas- successful efforts method. 191,945 55,200(h) 247,145 Other...................... 1,567 1,567 Accumulated depreciation, depletion & amortization.... (42,001) (42,001) Other assets................. 1,734 1,734 -------- ------- ------- -------- Total assets............. $167,861 $55,200 $ -- $223,061 ======== ======= ======= ======== Current liabilities Current portion of long- term debt................. -- 20,000(h) (20,000)(i) -- Accounts payable--trade.... $ 5,404 $ $ $ 5,404 Revenue payable............ 1,431 1,431 Accounts payable-- stockholders dissenters... 1,119 1,119 Other current liabilities.. 796 796 -------- ------- ------- -------- Total current liabilities............. 8,750 20,000 (20,000) 8,750 Long-term debt, excluding current portion............. 83,500 35,200(h) (46,500)(i) 72,200 Senior subordinated notes.... 13,224 13,224 Deferred income taxes........ 1,896 1,896 Other liabilities............ 209 209 Minority interest............ 1,164 1,164 Stockholders' equity Preferred stock, $0.02 par, 20,000,000 shares authorized, 266,667 designated Series B, 2,300,000 shares designated Series C and 725,167 shares designated Series D, none other designated................ -- -- Convertible preferred stock Series B, $7.50 stated value, 266,667 shares issued and outstanding (historical and pro forma). $2,000,000 aggregate liquidation preference................ 3,627 3,627 Convertible preferred stock Series C, $5.00 stated value, 1,132,338 shares issued and outstanding (historical and pro forma). $5,661,690 aggregate liquidation preference................ 5,163 5,163 Convertible preferred stock Series D, $24.00 stated value, 621,930 shares issued and outstanding (historical and pro forma). $14,926,320 aggregate liquidation preference................ 7,572 7,572 Common stock, $.02 par value, 60,000,000 shares authorized, 6,429,439 shares issued (historical) and 12,929,439 shares issued (pro forma)........ 129 130 (i) 259 Additional paid-in capital. 68,366 66,370 (i) 134,736 Accumulated deficit........ (24,552) (24,552) Treasury stock; 7,258 shares.................... (1,187) (1,187) -------- ------- ------- -------- Total stockholders' equity.................. 59,118 -- 66,500 125,618 -------- ------- ------- -------- Total liabilities and stockholders' equity........ $167,861 $55,200 $ -- $223,061 ======== ======= ======= ========
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 6,500,000 shares of our common stock. The columns headed "Floyd Oil Properties" and "Properties of CWR" and the "Pro Forma Adjustments" in the Unaudited Pro Forma Condensed Consolidated Statements of Operations give effect to the revenues and direct operating expenses of the respective acquisitions for the periods they were not included in our historical financial statements. The unaudited pro forma condensed consolidated statements are not necessarily indicative of the results of our future operations. (a) To record additional revenues and direct operating expenses related to the purchase of additional third party interests in the properties also acquired from C.W. Resources, Inc. (b) To eliminate operator overhead charges of $634,000 for the year ended December 31, 1999, that will no longer be incurred on a portion of the Floyd Oil Properties, as these properties will be operated by us and our subsidiaries. (c) To adjust depreciation, depletion and amortization expense to give effect to the purchase price allocated to the Floyd Oil Properties and the CWR Properties using the unit of production method under the successful efforts method of accounting. (d) To record the net change in interest expense (at 7.27% and 7.93%, for the year ended December 31, 1999, and the three months ended March 31, 2000, respectively) and amortization of deferred financing costs relating to the borrowings under our credit facility and to record interest expense on convertible subordinated notes issued to W/E LLC, Prudential, and Alvin V. Shoemaker of $1.2 million for the year ended December 31, 1999. (e) To record additional general and administrative expenses relating to additional costs anticipated to be incurred due to contractual obligations incurred in completing the purchase of the Floyd Oil Properties and the CWR Properties. (f) To record income tax expense on the pro forma adjustments. (g) To reflect the impact on diluted weighted average common shares outstanding of 503,426 shares of our common stock issued for the Floyd Oil Properties, 351,681 shares of our common stock issued to Prudential under the securities purchase agreement, 1,607,407 shares of our common stock issued to W/E LLC and Alvin V. Shoemaker, for the year ended December 31, 1999, and 6,500,000 shares of common stock issued in this offering. Diluted weighted average common shares outstanding reflect the effect of our common stock equivalents when dilutive. (h) To record the acquisition of the CWR properties and related borrowings under our credit facility. (i) To record the issuance of 6,500,000 shares of our common stock at $11.00 per share, net of $5 million of issuance costs, 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. The pro forma reserve data does not include reserve information for Magellan. There are numerous uncertainties inherent in estimating the quantities of proved reserves and projecting future rates of production and timing of development expenditures. The following reserve data represent estimates only and should not be construed as being exact. The proved oil and natural gas reserve information is as of December 31, 1999 and reflects prices and costs in effect as of such date. Reserves:
Oil and Condensate (MBbls) Natural Gas (Mmcf) ------------------------------ -------------------------------- CWR Pro Forma CWR Pro Forma 3TEC Properties Consolidated 3TEC Properties Consolidated ----- ---------- ------------ ------- ---------- ------------ Balance, January 1, 1999................... 3,342 905 4,247 43,483 60,552 104,035 Extensions and discoveries............ 12 83 95 1,226 5,436 6,662 Purchases of reserves in place.................. 6,866 -- 6,866 126,556 -- 126,556 Revisions of previous estimates.............. 502 -- 502 (5,135) -- (5,135) Production.............. (532) (55) (587) (4,738) (3,779) (8,517) Sales of reserves in place.................. (355) -- (355) (1,693) -- (1,693) ----- --- ------ ------- ------ ------- Balance at December 31, 1999................... 9,835 933 10,768 159,699 62,209 221,908 ===== === ====== ======= ====== ======= Proved developed reserves............... 9,358 474 9,832 122,914 31,573 154,487 ===== === ====== ======= ====== =======
Standard Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Natural Gas Reserves:
3TEC CWR Properties Pro Forma -------- -------------- --------- (In thousands) Future cash inflows........................ $594,023 $172,552 $ 766,575 Future production and development costs.... (223,765) (58,475) (282,240) Future income tax expenses................. (92,975) -- (92,975) -------- -------- --------- Future net cash flows...................... 277,283 114,077 391,360 10% discount factor........................ (128,542) (55,802) (184,344) -------- -------- --------- Standardized measure of discounted future net cash flows............................ $148,741 $ 58,275 $ 207,016 ======== ======== =========
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 $53,793 $ 92,687 Sales, net of production costs.................. (13,224) (7,597) (20,821) Purchases of reserves........................... 150,295 -- 150,295 Net changes in prices and production costs...... 18,646 -- 18,646 Net change in income taxes...................... (49,874) -- (49,874) Extensions and discoveries and improved recovery, net of future production and development costs.............................. 1,945 6,700 8,645 Revisions of quantity estimates................. (1,994) -- (1,994) Accretion of discount........................... 3,889 5,379 9,268 Sales of reserves in place...................... (1,643) -- (1,643) Changes in production rates and other........... 1,807 -- 1,807 -------- ------- -------- Standardized measure, December 31, 1999......... $148,741 $58,275 $207,016 ======== ======= ========
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, including the recent acquisitions of Magellan and the CWR Properties, we had estimated total net proved reserves of 312 Bcfe, of which approximately 77% were natural gas and approximately 71% were proved developed, with an estimated PV-10 value of $296.7 million. As of April 30, 2000, on a pro forma basis including the CWR Properties, our net daily production was approximately 49.0 Mmcf of natural gas and 3.5 MBbls of oil or 70.0 Mmcfe. We have increased our reserves and production principally through acquisitions. We focus on properties that have a substantial proved reserve component and which management believes to have additional exploitation opportunities. In early 2000, through the acquisition of Magellan, we acquired a number of drilling prospects covered by an extensive 3-D seismic database that we believe have exploration potential. We have assembled an experienced management team and technical staff with expertise in property acquisitions and development, reservoir engineering, exploration and financial management. We underwent a change of control in August 1999, in a transaction in which W/E LLC invested $21.4 million in cash and oil and natural gas properties for common stock, warrants and convertible subordinated notes representing at that time approximately 36% of our then outstanding common stock. Since our formation in 1992, we have grown principally through several acquisitions of proved properties in the Gulf Coast, East Texas and the Mid- Continent region. Acquisitions made in 1997 and 1998 significantly increased our reserves and production but were primarily nonoperated properties with high per Mcfe lease operating costs. Following the change in control discussed above, during the second half of 1999 and the first half of 2000, we closed several transactions that changed our senior management team, capital structure and our property base. In addition, we added several experienced professionals to our technical staff. Because of these recent transactions, the historical results of operations and cash flows will differ materially from, and will not be representative of, our future results. We increased our asset base substantially and decreased our operating cost per Mcfe on a pro forma basis with the acquisition of the Floyd Oil Properties in November 1999. The Floyd Oil Properties had estimated net proved reserves at December 31, 1999, of 165.5 Bcfe with a PV-10 value of $146.1 million. On a pro forma basis, the Floyd Oil Properties resulted in additional EBITDAX of $17.9 million and $20.6 million and additional pro forma revenues of $34.1 million and $33.8 million for the years ended 1998 and 1999, respectively. Also on a pro forma basis, after giving effect to the acquisition of the Floyd Oil Properties, our total operating cost per Mcfe for the years ended 1998 and 1999 declined 10% and 1% to $0.95 and $0.84, respectively. Pro forma general and administrative cost per Mcfe for the same periods declined 45% and 50% to $0.32 and $0.30, respectively. Revenues and expenses from the Floyd Oil Properties are included in our historical operating results only for the period from November 23, 1999, the date of acquisition, through December 31, 1999. Additionally, in February 2000 we closed the acquisition of Magellan, which owns primarily proved undeveloped reserves, with significant 3-D seismic data. We plan to fund a development program of Magellan's 28 undeveloped properties, which we believe could increase future reserves and production. In addition, we are continually seeking and reviewing acquisitions of properties and companies which we believe will be complementary to our reserves and production. We expect our acquisition program to continue to be a significant source of growth for us, depending on the market for oil and natural gas properties, and industry conditions generally. On May 31, 2000, we acquired the CWR Properties for cash consideration of approximately $55 million. The CWR Properties are located in Upshur and Gregg Counties in East Texas and consist of 178 gross wells (48 net wells) and cover approximately 38,000 gross acres (approximately 10,100 net acres). According to Ryder Scott, at December 31, 1999, the CWR Properties had net proved reserves of 67.8 Bcfe with an associated PV-10 value of $58.3 million. These proved reserves are approximately 92% natural gas and 51% of the volumes are classified as proved developed. On a pro forma basis, the CWR Properties contributed additional revenues of $10.4 million and $2.9 million, and additional EBITDAX of $7.6 million and $2.2 million, for the year ended December 31, 1999, and the three months ended March 31, 2000, respectively. For the year ended December 31, 1999 and the three months ended March 31, 2000, on a pro forma basis, our lease operating expenses declined from historical amounts by 8% and 4% to $0.78 and $0.81, respectively. Also on a pro forma basis, after giving effect to the acquisition of the Floyd Oil Properties and the CWR Properties, our depreciation, depletion and amortization per Mcfe for the year ended December 31, 1999, declined from 1999 historical amounts 27% to $0.61 and for the three months ended March 31, 2000, increased 3% from historical amounts to $0.74. Pro forma general and administrative costs per Mcfe for the same periods declined from 1999 historical amounts 55% and 7% to $0.27 and $0.29, respectively. See "Description of the CWR Properties." Certain Accounting Practices We use the successful efforts method of accounting for our investments in oil and natural gas properties. Under this method, we capitalize all direct costs incurred in connection with the acquisition, drilling and development of productive oil and natural gas properties. Costs associated with unsuccessful exploration are expensed as incurred. Geological and geophysical costs and costs of carrying and retaining unevaluated properties are expensed as incurred. Depreciation, depletion and amortization of capitalized costs are computed separately for each field based on the unit of production method using only proved oil and natural gas reserves. We review our oil and natural gas properties on a field level for impairment when circumstances indicate that the capitalized costs less accumulated depreciation, depletion and amortization (the "Carrying Value") of the property may not be recoverable. If the Carrying Value of the property exceeds the expected future undiscounted cash flows, an amount equal to the excess of the Carrying Value over the fair value of the property is charged to operations. An impairment results in a non-cash charge to earnings but does not affect cash flows unless our borrowing base was significantly reduced as a result of the impairment. Liquidity and Capital Resources We believe that our cash flows from operations are adequate to meet the requirements of operating our business. However, future cash flows are subject to a number of variables, including our level of production and prices, and we cannot assure you that operations and other capital resources will provide cash in sufficient amounts to maintain planned levels of capital expenditures. Our principal operating sources of cash include sales of oil and natural gas production. Our pro forma EBITDAX, including the Floyd Oil Properties and the CWR Properties, for the year ended December 31, 1999, and the three months ended March 31, 2000, was $36.9 million and $12.9 million, respectively. For the year 2000, we have budgeted approximately $24 million for development and exploration capital expenditures, including an estimated $3.7 million with respect to the CWR Properties. We are obligated to pay net cash dividends of approximately $570,000 per year on the Series C Preferred Stock in cash. Additionally, we are obligated to pay dividends of $740,000 per year on the Series D Preferred Stock, which 29 we may pay in either cash or in additional shares of Series D Preferred Stock during the three years ending February 2, 2003. We are obligated to pay interest on convertible subordinated notes of approximately $1.2 million per year. Our primary source of financing for acquisitions has been borrowing under our credit facility, discussed below. We have also recently utilized private equity financing to supplement our capital requirements. We believe we will have sufficient cash flow from operations and borrowings under our credit facility to meet our obligations and operating needs for the current year. We also believe that we have the ability to raise additional private equity or debt financing and otherwise access the capital markets should such sources of capital prove insufficient to execute our strategic objectives. However, future cash flows are subject to a number of variables, including our level of production and prices, and we cannot assure you that operations and other capital resources will provide cash in sufficient amounts to maintain planned levels of capital expenditures. In connection with our acquisition of the Floyd Oil Properties on November 23, 1999, we entered into a $250 million credit facility with Bank One, Texas, N.A. and certain other financial institutions. Our then existing bank debt of $26.6 million was paid in full with proceeds from the new facility. The credit facility provides for a borrowing base which is adjusted periodically on the basis of the discounted present value attributable to our proved producing oil and natural gas reserves, as determined by our lenders. At March 31, 2000, the borrowing base under the credit facility was $95 million. The borrowing base is redetermined semi-annually on May 1 and November 1 of each year. At March 31, 2000 we were paying 7.9% per annum interest on the entire principal balance of the facility of $83.5 million. As revised as described below, the credit facility matures on May 31, 2003. Prior to maturity, other than a payment of $20 million due on or before December 31, 2000, no payments of principal are required so long as the borrowing base exceeds the loan balance. The borrowings under the credit facility are secured by substantially all of our properties. In connection with this credit facility, we are required to adhere to certain affirmative and negative covenants. The loan agreement contains a number of dividend restrictions and restrictive covenants which, among other things, requires that our consolidated EBITDAX (our consolidated earnings from ongoing operations before reduction for income tax expense, interest expense and depreciation, depletion, amortization expense and exploration expense) not be less than 2.5 times our consolidated interest expense for the quarter ending June 30, 2000, the quarter ending September 30, 2000, and for each subsequent four quarter period thereafter. At March 31, 2000, our quarterly consolidated EBITDAX was 5.16 times our consolidated interest expense. In connection with our acquisition of the CWR Properties we increased the amount of availability under the borrowing base to $145 million through November 1, 2000, to enable us to borrow the purchase price of the CWR Properties. As revised, interest under the facility accrues at our option at a rate calculated as either the bank's prime rate plus a low of zero to a high of 50 basis points or LIBOR plus basis points increasing from a low of 150.0 to a high of 212.5 as amounts outstanding increase as a percentage of the borrowing base. The credit facility requires a $20 million payment of principal on or before December 31, 2000, subject to the redetermination of our borrowing base on November 1, 2000. Following this revision to the credit facility and after giving effect to our borrowings to fund the acquisition of the CWR Properties and the application of the proceeds of this offering, on a pro forma basis at March 31, 2000, the amount available to be borrowed under the credit facility was approximately $72.8 million. As indicated elsewhere in this prospectus, the net proceeds of this offering will be used principally to repay indebtedness outstanding under this credit facility. In connection with our acquisition of the CWR Properties on May 31, 2000, and the concurrent amendment of our bank credit facility to increase our borrowing base to $145 million, we also entered into a private equity shelf facility with EnCap. Pursuant to the shelf facility, at any time through December 31, 2000, we may require EnCap to purchase from us up to $20 million (800,000 shares having a redemption price of $25 per share) of a new class of exchangeable preferred stock with a dividend rate of 8% per annum. The new class of preferred, which would be designated as our Series E preferred if it is ever issued, would be convertible into our common stock at a conversion price equal to 130% of the trading price of our common stock at the time of any takedown by us under the shelf facility. If we take down over $10 million under this 30 facility, no conversion feature will apply. Under the terms of the shelf facility, we would be required to redeem the Series E preferred in three equal annual payments beginning five years after issuance. In addition, in the event of a takedown under the facility, we would be required to issue warrants to EnCap to purchase three shares of our common stock for each share of Series E preferred which may be issued, at an exercise price of $0.02 per share. We entered into this shelf facility to provide us with the financial assurance that our debt levels can be appropriately reduced without reliance on this offering. Upon completion of this offering the shelf facility expires according to its terms and neither we nor EnCap will have any further rights or obligations under the shelf facility. We paid EnCap a fee of 2.5% of the amount of the commitment as consideration for this shelf facility. We generally sell our oil at local field prices paid by the principal purchasers of oil. The majority of our natural gas production is sold at spot prices. Accordingly, we are generally subject to the commodity prices for these resources as they vary from time to time. Prices since mid-1999 have generally followed an increasing trend, but the market continues to have considerable volatility. We have entered into fixed price swap agreements covering 2,000 barrels per day of our oil production for the period March through October 2000 at an average price of $25.96 per barrel. These agreements cover approximately 62% of our current daily oil production. The price used to determine the settlement amount is the average of the near month contract on the NYMEX. Settlement is on the 23rd of each month for the preceding month. The hedging agreements are with financial institutions that participate in our credit facility. We have entered into a forward sale agreement for 3,750 Mcf of natural gas per day for the period May through August 2000 at an average price of $3.07 per Mcf. This agreement covers approximately 8% of our current daily natural gas production. Our revenues and the value of our oil and natural gas properties have been and will be affected by changes in oil and natural gas prices. Our ability to maintain current borrowing capacity and to obtain additional capital on attractive terms is also substantially dependent on oil and natural gas prices. These prices are subject to significant seasonal and other fluctuations that are beyond our ability to control or predict. During 1999, we received an average of $16.88 per barrel of oil and $2.18 per Mcf of natural gas. Although some costs and expenses are affected by the level of inflation, inflation has not had a significant effect in recent years. Should conditions in the industry continue to improve, causing an increase in competition resulting in a relative shortage of oilfield supplies and/or services, inflationary cost pressures may resume. Results of Operations Our revenue, profitability, and future rate of growth are dependent upon prevailing prices for oil and natural gas, which, in turn, depend upon numerous factors such as economic, political, and regulatory developments as well as competition from other sources of energy. The energy markets historically have been highly volatile, and future decreases in prices could have an adverse effect on our financial position, results of operations, quantities of reserves that may be economically produced, and access to capital. Due to our significant property and corporate acquisitions in 1999, our 1999 change of control and our current capitalization structure, comparisons of our results of operations from year to year may not be meaningful. You should read the following discussion and analysis together with our audited consolidated financial statements and the related notes for the fiscal years ended December 31, 1999 and 1998. 31 Three Months Ended March 31, 2000, Compared With Three Months Ended March 31, 1999 The following table reflects certain summary operating data for the periods presented:
Three Months Ended March 31, ------------- 2000 1999 ------ ------ Net Production Data: Natural gas (Mmcf).......................................... 3,578 930 Oil (MBbls)................................................. 308 144 Natural gas equivalents (Mmcfe)............................. 5,426 1,794 Average Sales Price: (a) Natural gas (per Mcf)....................................... $ 2.56 $ 1.61 Oil (per Bbl)............................................... 24.94 9.87 Natural gas equivalents (per Mcfe).......................... 3.11 1.63 Expenses ($ per Mcfe): Oil and gas operating (b)................................... $ 0.84 $ 0.87 General and administrative.................................. 0.31 0.57 Depreciation and depletion (c).............................. 0.72 0.75 Cash margin (d)............................................. 1.96 0.19
- -------- (a) Excludes effect of our hedging activities. (b) Includes lease operating costs, production taxes and ad valorem taxes. (c) Represents depreciation, depletion and amortization, excluding impairments. (d) Represents average equivalent price per Mcfe less oil and gas operating expenses per Mcfe and general and administrative expenses per Mcfe. Revenue. Total revenue for the three months ended March 31, 2000, was $17.2 million, an increase of $14.0 million (431%) over total revenue for the three months ended March 31, 1999. Natural gas revenues for the three months ended March 31, 2000 were $9.2 million, approximately 512% higher than the natural gas revenues of $1.5 million for the three months ended March 31, 1999. Natural gas production volumes increased 285%, and oil production volumes increased by approximately 113%, principally as a result of the additional volumes from the Floyd Oil Properties in the three months ended March 31, 2000. Oil revenues for the three months ended March 31, 2000 were $7.7 million, approximately 438% higher than the oil revenues of $1.4 million for the three months ended March 31, 1999. Other oil and gas revenue increased 13%, from $147,000 to $165,000 for the three months ended March 31, 2000. We incurred a hedging loss of approximately $101,000 during the three months ended March 31, 2000 on our oil production hedge. Average natural gas sale prices increased 59% for the three months ended March 31, 2000 compared with the three months ended March 31, 1999, while oil prices, excluding the effects of hedging, increased 153% during the same period. For the three months ended March 31, 2000, approximately 54% of the dollar amount of our product sales were natural gas. Production from Magellan from the date of acquisition (February 3, 2000) to the end of the period contributed less than 1% to our total revenues in the three months ended March 31, 2000. Gain on Property Sales, Interest and Other Income. We did not sell a significant number of oil and natural gas properties during the periods ended March 31, 2000 and March 31, 1999. Other income for the three months ended March 31, 2000 of $329,000, consisted principally of interest income, lease bonus and delay rentals and approximately $147,000 from a lawsuit settlement. Expenses. Total expenses for the three months ended March 31, 2000 were $12.5 million, a $7.9 million increase over the $4.6 million for the three months ended March 31, 1999. This increase of total expenses was primarily the result of additional expenses of approximately $5.9 million attributable principally to the acquisition of the Floyd Oil Properties. Lease operating expense of $4.6 million, or approximately $0.84 per Mcfe, increased by approximately $3.0 million from the three months ended March 31, 1999, when it was approximately $0.87 Mcfe. Depreciation and depletion expense for the three months ended March 31, 2000 was 32 $3.9 million, or approximately $0.72 per Mcfe, compared to $1.3 million or approximately $0.75 per Mcfe for the three months ended March 31, 1999. The increase in depletion due to the acquisition of the Floyd Oil Properties was offset to a slight degree by lower depletion due to impairments, property sales and lower production on properties owned the entire period of 1999. General and administrative expense was $1.7 million, or approximately $0.31 per Mcfe, compared to $1.0 million or approximately $0.57 per Mcfe for the three months ended March 31, 1999. The general and administrative expense increase was primarily the result of increases in salary, insurance and rent expenses associated with the Company's growth. Interest expense of $2.1 million, increased $1.6 million (307%) for the three months ended March 31, 2000, the increase reflecting increased borrowings under our credit facility for acquisitions. Net Income. Our net income for the three months ended March 31, 2000 was approximately $3.1 million compared to a loss of approximately $900,000 for the three months ended March 31, 1999. The primary reason for the increased profitability was net increases in the volumes of and prices received from the sale of oil and natural gas. Dividends to Preferred Stockholders. Dividends to preferred stockholders of approximately $260,000 in the three months ended March 31, 2000 increased 82% over the three months ended March 31, 1999. The increase of dividends was due to the issuance of Series D Convertible Preferred Stock in connection with the acquisition of Magellan, which began accruing dividends on February 3, 2000. Year Ended December 31, 1999, Compared With Year Ended December 31, 1998 Revenue. Total revenue for the year ended December 31, 1999, was $22.0 million, an increase of $4.3 million (24%) over total revenue for 1998. Natural gas revenues for the 1999 period were $10.3 million, approximately 34% higher than 1998 natural gas revenues of $7.7 million. Natural gas production volumes increased 23% in 1999; oil production volumes decreased by approximately 9%, principally as a result of property sales during the period. Oil revenues for the 1999 period were $8.9 million, approximately 33% higher than 1998 oil revenues of $6.7 million. Natural gas plant and other product sales revenue of $648,000 increased 2% from $632,000 in 1998. Average natural gas sale prices increased 9% from the 1998 to the 1999 period, while oil prices increased 46% during the same period. For 1999, approximately 52% of the dollar amount of our product sales were natural gas. In addition, production from the Floyd Oil Properties from the date of acquisition (November 23, 1999) to year-end contributed approximately $4.5 million (approximately 20%) to our total revenues in the 1999 period. Gain On Property Sales, Interest and Other Income. In 1999 and 1998, our property divestments resulted in gains of $1.0 million and $1.9 million, respectively. Other income for 1999 of $1.0 million, consisted principally of interest income and a lawsuit settlement. Expenses. Total expenses for the year ended December 31, 1999 were $26.9 million, a slight decrease over the $27.1 million in 1998. Comparability of total expenses was affected by certain non-recurring expenses in 1999 of $1.7 million and additional expenses of $2.3 million attributable to the acquisition of the Floyd Oil Properties. Lease operating expense of $6.7 million or approximately $0.85 per Mcfe, decreased by approximately $1.1 million from the 1998 period, when it was approximately $1.06 per Mcfe, reflecting the effect of property sales. Depreciation and depletion expense was $6.7 million, or approximately $0.84 per Mcfe, compared to $7.1 million or approximately $0.97 per Mcfe for 1998. An increase in depletion due to the acquisition of the Floyd Oil Properties was offset by lower depletion due to impairments, property sales and lower production on properties owned the entire period of 1999. Impairment expense for 1999 was approximately $2.5 million, relating to impairments on fee mineral acreage, non-producing leasehold and proved oil and natural gas properties. More specifically, 1999 impairments were related to certain fee mineral acreage that reverted to the landowners, management's decision not to participate in additional exploration on certain prospects and new reserve engineers employed by us resulted in valuation changes on certain proved properties. The impairment expense in 1998 was principally attributable to decreasing oil prices. General and administrative expense was $4.7 million, or approximately $0.60 per Mcfe, compared to $4.3 million or 33 approximately $0.58 per Mcfe for 1998. The general and administrative expense increase was primarily the result of increases in salary, legal and consulting expenses in 1999 offset partially by declines in certain expenses due to the closing of subsidiary offices in Kingwood, Texas. Interest expense of $3.2 million, increased $1.23 million (62%) in the 1999 period, the increase reflecting increased borrowings under our credit facility for acquisitions. The non-recurring expense of $1.7 million was triggered by the change of control resulting from the sale of securities to W/E LLC and consists of stock compensation expense of $730,000, severance payments of $624,000, compensation plan payments of $292,000 and other expenses of $60,000. Net Loss. The net loss for 1999 was approximately $3.4 million compared to a loss of approximately $6.6 million in 1998. The current period net loss decreased primarily as a result of the increased income from oil and natural gas and the lower depletion and impairment expenses. Dividends to Preferred Stockholders. Dividends to preferred stockholders of approximately $574,000 in 1999 increased 745% over 1998. The increase was due to the dividends on the Series C Preferred Stock that began to accrue dividends on December 31, 1998 and the conversion of the Series A Preferred Stock to common stock on January 31, 1998. Year 2000 Compliance We had undertaken various initiatives to ensure that our hardware, software and equipment functioned properly with the rollover of the date to January 1, 2000. We experienced no problems as a result of the rollover of the dates to January 1, 2000, and the costs incurred for Year 2000 compliance were immaterial to our financial position and results of operations. Although we can provide no assurance, we anticipate any future costs associated with Year 2000 compliance to be immaterial to our financial position and results of operations. Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 standardizes the accounting for and disclosures of derivative instruments, including certain derivative instruments embedded in other contracts. The Statement is effective for financial statements for fiscal years beginning after June 15, 2000. We have not yet determined the impact of the Statement on our financial condition or results of operations. In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation: An Interpretation of APB Opinion No. 25. Among other issues, Interpretation No. 44 clarifies the application of Accounting Principles Board Opinion No. 25 (APB No. 25) regarding (a) the definition of employee for purposes of applying APB No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. The provisions of Interpretation No. 44 which affect us are to be applied on a prospective basis effective July 1, 2000. 34 BUSINESS AND PROPERTIES About 3TEC We are engaged in the acquisition, development, production and exploration of oil and natural gas reserves. Our properties are concentrated in East Texas and the Gulf Coast region, both onshore and in the shallow waters of the Gulf of Mexico. We also own significant properties in the Permian and San Juan basins and in the Mid-Continent region. Our management and technical staff have substantial experience in each of these areas. As of December 31, 1999, on a pro forma basis including the recent acquisitions of Magellan and the CWR Properties, discussed below, we had estimated total net proved reserves of 312 Bcfe, of which approximately 77% were natural gas, and approximately 71% were proved developed with an estimated PV-10 value of $296.7 million. As of April 30, 2000, on a pro forma basis including the CWR Properties, our actual net daily production was approximately 49.0 Mmcf of natural gas and 3.5 MBbls of oil or 70.0 Mmcfe. We have increased our reserves and production principally through acquisitions. We focus on properties that have a substantial proved reserve component and which management believes to have additional exploitation opportunities. Through the recently completed acquisition of Magellan, we have also acquired a number of drilling prospects covered by an extensive 3-D seismic database that we believe have exploration potential. We have assembled an experienced management team and technical staff with expertise in property acquisitions and development, reservoir engineering, exploration and financial management. After this offering, we believe that our cash flow from operations and our financial resources will provide us with the ability to fully develop our current properties, to finance our current exploration projects and to pursue new acquisition opportunities. 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 258.6 Bcfe with an associated PV-10 value of $244.2 million at December 31, 1999, including the recently acquired CWR Properties, calculated as of December 31, 1999. In addition, we have raised or issued $25.0 million of private equity and equity linked financing and have entered into a new $250 million credit facility. Our Strategy Our business strategy is focused on the following: . Pursuit of Strategic Acquisitions. We continually review opportunities to acquire producing properties, leasehold acreage and drilling prospects. We seek to acquire operational control of properties that we believe have significant exploitation and exploration potential. We are especially focused on increasing our holdings in fields and basins in which we already own an interest. . Further Development of Existing Properties. We intend to further develop our properties that have proved reserves. We seek to add proved reserves and increase production through the use of advanced technologies, including detailed technical analysis of our properties, and by drilling in-fill locations and selectively recompleting existing wells. We also plan to drill step-out wells to expand known field limits. We intend to enhance the efficiency and quality control of these activities by operating the majority of our properties. . Growth Through Exploration. We conduct an active technology-driven exploration program that is designed to complement our property acquisition and development drilling efforts with moderate to high risk exploration projects that have greater reserve potential. We generate exploration prospects through the analysis of geological and geophysical data and the interpretation of 3-D seismic data. We intend to manage our exploration expenditures through the optimal scheduling of our drilling program and by selectively reducing our participation in certain exploratory prospects through sales of interests to industry partners. 35 . Rationalization of Property Portfolio. We intend to actively pursue opportunities to reduce and control operating costs of our existing properties and properties we may acquire in the future through the consolidation of overlapping operations, the sale of marginal properties and by increasing the number of fields we operate as a percentage of our total properties. . Maintenance of Financial Flexibility. We intend to maintain a substantial unused borrowing capacity under our bank credit facility by periodically refinancing our bank debt in the capital markets when conditions are favorable. We believe our expanded base of internally generated cash flow and other financial resources, including our existing financial partners, provide us with the financial flexibility to pursue additional acquisitions of producing properties and leasehold acreage and to develop our project inventory in an optimal fashion. Our Strengths We believe our historical success and future performance are, and will be, directly related to the following combination of strengths: . Proven Acquisition Experience. Since the investment by W/E LLC in August 1999, through the acquisitions of the Floyd Oil Properties, Magellan and the CWR Properties, we have added approximately 259 Bcfe of proved reserves with a PV-10 value of approximately $244 million as of December 31, 1999. Our acquisition efforts are managed by an experienced team of property aggregators with extensive engineering, operating and financial skills. . Experienced Technical Team. Our technical team is comprised of respected energy industry professionals with an average of over 20 years of industry experience. . Substantial Inventory of Development and Exploration Prospects. Including the CWR Properties, we have assembled an inventory of over 220 drilling locations balanced between what we believe to be low to moderate risk development locations and higher risk, higher potential exploratory locations defined by, and supported with, 3-D seismic data. Our inventory of drilling locations and degree of operating control provide us flexibility in project selection and the timing of drilling projects. . Financial Flexibility. We have access to capital and the financial flexibility to respond quickly to opportunities for growth and changing business conditions. 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 $18.7 million, consisting of: (a) 1,085,934 shares of common stock, (b) four year warrants to purchase up to 333,333 shares of common stock at $30.00 per share, (c) 617,009 shares of 5% Series D Preferred Stock and (d) the assignment of a performance based "back-in" working interest of 5% of Magellan's interest in 12 exploration prospects. For a more detailed description of the Series D Preferred Stock, see "Description of Capital Stock." Magellan's properties are located both onshore and in the shallow waters of south Louisiana and consist of 20,243 gross (11,244 net) acres in three prospective areas. As of December 31, 1999, Magellan's independent reserve engineers, Ryder Scott, estimated that Magellan's net proved reserves were 25.3 Bcfe with an associated PV-10 value of $39.8 million. These proved reserves are approximately 67% natural gas and 69% of the volumes are classified as proved undeveloped. Magellan operates approximately 80% of its properties on a PV-10 value basis. In addition to the proved reserves, we believe the Magellan properties contain several 3-D seismic defined exploratory drilling locations. In April 2000, we purchased additional interests in certain of the Magellan properties from unrelated parties, bringing our total net purchase price for the Magellan properties to approximately $21 million. See "Description of Magellan." If requested by the holders of the securities issued in the Magellan transaction, we will be obligated to file no more than two registration statements to register the common stock received in the transaction or upon conversion of the Series D Preferred Stock and upon exercise of the related warrants and, if necessary, to keep the registration statements effective for up to two years. We have also agreed to give notice to recipients of the 36 securities if we propose to file a registration statement. These persons or entities have waived their right to include their common stock in this offering. Acquisition of CWR Properties On April 14, 2000, we entered into a definitive agreement to acquire certain properties operated by C.W. Resources, Inc. for cash consideration of approximately $52 million. In addition to the interests included under the April 14, 2000 agreement, we acquired certain other interests in the same fields from unrelated parties for approximately $3.5 million in cash. The purchase of these properties closed May 31, 2000, with an effective date of January 1, 2000. These purchases are subject to customary post-closing adjustments. We estimate that the total net purchase price after giving effect to the post-closing adjustments will be approximately $55.2 million. The properties are collectively referred to as the CWR Properties. The purchase of the CWR Properties was financed under our bank credit facility which we amended prior to closing on these transactions. The CWR Properties are located in Upshur and Gregg Counties in East Texas and consist of 178 gross wells (48 net wells) and cover approximately 38,000 gross acres (approximately 10,100 net acres). As of December 31, 1999, Ryder Scott estimated that the net proved reserves of the CWR Properties were 67.8 Bcfe with an associated PV-10 value of $58.3 million. These proved reserves are approximately 92% natural gas and 51% are classified as proved producing. As of April 30, 2000, net daily production from the CWR Properties was approximately 10.9 Mcfe. See "Description of the CWR Properties." Our Formation 3TEC is the successor to Middle Bay Oil Company, Inc. ("Middle Bay"), an Alabama corporation formed on November 30, 1992. 3TEC was incorporated in Delaware on November 24, 1999, as a wholly owned subsidiary of Middle Bay for the sole purpose of merging with Middle Bay to effect a change in domicile to Delaware and to change our name to 3TEC Energy Corporation. Effective December 7, 1999, Middle Bay was merged into us and each share of common stock of Middle Bay was converted into one share of our common stock. Description of Our Properties We present information regarding our oil and natural gas reserves, properties, and operating results below. The information below relating to oil and natural gas reserves, volumes, prices, operating expenses, productive wells, and acreage data, includes the Floyd Oil Properties, Magellan, and the recently acquired CWR Properties. Information relating to volumes, prices, and operating expenses, set forth below is presented on a pro forma basis as if we acquired the Floyd Oil Properties, Magellan, and the CWR Properties on December 31, 1999. We acquired the Floyd Oil Properties in November 1999, Magellan in February 2000, and the CWR Properties on May 31, 2000.
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......... 123,804 1,602 133,417 102,464 34.5% 162 7,300 Gulf Coast Area......... 67,651 2,927 85,214 99,553 33.6% 41 15,500 Permian/San Juan Area... 20,766 4,793 49,524 55,021 18.5% 3 400 Mid-Continent Area...... 26,590 2,398 40,978 36,163 12.2% 16 900 Other Areas............. 87 431 2,673 3,471 1.2% 0 100 ------- ------ ------- ------- ------ --- ------ Total................. 238,898 12,151 311,806 296,672 100.0% 222 24,200 ======= ====== ======= ======= ====== === ======
- -------- (a) Includes 16,990 Mmcf of natural gas, 1,383 MBbls of oil, 25,286 Mmcfe total, and $39.8 million PV-10 value associated with properties owned by Magellan, and includes 62,209 Mmcf of natural gas, 933 MBbls of oil, 67,808 Mmcfe total, and $58.3 million PV-10 value associated with the CWR Properties. 37 We describe our properties by operating area in the following paragraphs. We separately describe the Magellan and CWR Properties under the captions "Description of Magellan" and "Description of the CWR Properties," below. East Texas Area. Our properties in the East Texas region produce primarily from the Cotton Valley and Travis Peak formations which range in depth from approximately 7,000 feet to 10,500 feet. As of April 30, 2000, our estimated net daily production from this area was 14.0 Mmcfe per day. The producing formations of this area tend to contain multiple producing horizons and are typically low permeability sands that require fracture stimulation to achieve optimal producing rates. This type of fracture stimulation usually results in relatively high initial production rates that decline rapidly during the first year of production and subsequently stabilize at fairly low, more easily predictable annual decline rates. Much of our production in this area is from wells that have been producing for several years and are in their latter, more stable stage of production, resulting in a relatively long reserves to production ratio. Additionally, reservoirs with multiple producing horizons typically provide numerous recompletion and workover opportunities to enhance proved reserves and production. We have identified 53 proved undeveloped drilling locations in this area. Many of these development drilling locations are based on a change in regulatory field rules that now permit wells to be drilled on 80 acre spacing as opposed to 160 acre spacing. This type of infill drilling is generally effective in low permeability sands, such as the Cotton Valley formation, where one wellbore is only capable of draining an area less than the permitted spacing. Drilling infill wells on 80 acre spacing has been successful throughout the area in such notable Cotton Valley fields as Carthage, Oak Hill and Willow Springs. For 2000, we have budgeted approximately $3.7 million for the drilling of development wells and various exploitation activities. Gulf Coast Area. We have established a substantial base of proved reserves and undeveloped acreage with significant exploration potential along the Gulf Coast of Texas and Louisiana. As of April 30, 2000, our estimated net daily production from this area was 18.2 Mmcfe per day. Onshore in southern Louisiana and southeast Texas our production is mainly from the Hackberry, Miogyp and Vicksburg formations which range from approximately 13,000 feet to 17,000 feet in depth. Along the central and southern Texas coast we are active in two main areas, the Stuart City field in the Edwards Reef trend and the Segundo Olmos field in Webb County, Texas. The Edwards Reef trend extends from the Mexican border through the Texas Gulf Coast into southern Louisiana and has been extensively drilled since the late 1950's. The Edwards Reef trend formation is a very thick section of low permeability limestone that requires fracture stimulation to achieve optimal production rates and even then will only drain a limited area. Our acreage has seven producing wells that were drilled on 320 acre spacing and we have identified seven additional proved undeveloped locations on this acreage based on drilling infill locations on 120 acre spacing. Infill drilling has been successful throughout this trend. We are also evaluating the drilling of new horizontal legs in existing wells and conducting additional fracture stimulations, both of which have been successful in the Edwards Reef trend. The Segundo Olmos field produces from the Olmos formation, a relatively low permeability sandstone, at a depth of approximately 7,000 feet. This field was originally drilled on 160 acre spacing and has been successfully drilled on 80 acre spacing throughout the trend. We have identified an additional five proved undeveloped locations in this field. In 2000, we have budgeted approximately $2.9 million for the drilling of development wells and associated exploitation activity in these areas. Permian, San Juan and Mid-Continent Areas. We own interests in numerous fields in the Anadarko, Arkoma, Permian and San Juan basins in the states of Kansas, Oklahoma, Texas and New Mexico where our estimated net daily production as of April 30, 2000, was 25.6 Mmcfe per day. These fields are generally characterized as mature producing fields that have very stable, low rates of decline and a relatively small amount of development drilling and exploitation potential. In 2000, we have budgeted approximately $1.3 million for the drilling of wells and associated exploitation projects in these areas. Description of Magellan Through the acquisition of Magellan, we acquired interests in Breton Sound Block 34 in Louisiana state waters and the Bay De Chene and Garden City fields in south Louisiana. While there is a relatively small 38 amount of existing production, all three fields have had 3-D seismic surveys and in the aggregate have substantial proved undeveloped and proved developed non-producing reserves. Management believes these properties also have additional exploration potential. Several experienced engineers and geoscientists at Magellan, who developed many of the exploration prospects and have extensive experience in south Louisiana, have joined our technical staff. Breton Sound Block 34 is located in 12 feet to 15 feet of water east of the Main Pass area of the Mississippi River delta. As of April 30, 2000, this field was producing 0.7 Mmcfe per day net to our interest and has significant proved developed nonproducing and proved undeveloped reserves in the Krumbar and Hollywood formations at approximately 15,000 feet to 17,000 feet in depth. Additionally, we have identified and are currently drilling a well on a proved undeveloped location supported by 3-D seismic data in Breton Sound Block 34 (our "Alpha Prospect") that is structurally high to an offsetting well drilled by Conoco. In addition to our Alpha Prospect, we have identified four additional untested fault blocks that have similar characteristics to our Alpha Prospect based on the interpretation of the 3-D seismic data. In 2000, we have budgeted approximately $8.5 million for development drilling and recompletions. The Bay De Chene field and the Garden City field are older fields that have produced substantial amounts of oil and natural gas which we believe to have further development and exploration potential. The Bay De Chene field is a highly faulted, geologically complex salt dome based structure that has produced over 100 MBbls of oil and 230 Bcf of natural gas from over 67 different reservoirs. In 1997, Magellan conducted a 72 square mile 3-D seismic survey resulting in the identification of numerous potential development drilling locations and exploitation projects and several exploration drilling prospects. The majority of these opportunities are between 7,000 feet and 10,000 feet in depth and are in reservoirs that have been productive throughout the field. As of April 30, 2000, this field was producing 0.6 Mmcfe per day net to our interest. The Garden City field has produced over 2 Tcfe since its discovery and contains one proved undeveloped drilling location and several exploration prospects. All of these drilling opportunities have been evaluated with 3-D seismic and subsurface data, and we are currently drilling a well in the Garden City field. In 2000, we have budgeted approximately $4.1 million for the Bay De Chene and Garden City fields for development and exploration drilling and recompletions. We will continue to evaluate our exploration projects in these fields. Description of the CWR Properties The CWR Properties are located in the Glenwood and White Oak fields in Gregg and Upshur Counties, Texas, and produce from the Cotton Valley formation at a depth of approximately 10,500 feet. As of December 31, 1999, the acquired properties had estimated total net proved reserves of 67.8 Bcfe with a PV-10 value of $58.3 million, using constant pricing of $2.39 per Mcf for gas and $25.60 per barrel for oil. The estimated reserves are 92% natural gas on an equivalent basis. As of April 30, 2000, the net daily production from the CWR Properties was approximately 10.0 Mmcf of natural gas and 150 Bbls of oil. Approximately 51% of the reserves are classified as proved developed. We have identified over 100 proved undeveloped locations and plan an active drilling program on the properties. On a pro-forma basis, this acquisition increased our total proved reserves as of December 31, 1999 to 312 Bcfe and increased our net daily production to approximately 49.0 Mmcf of gas and 3,500 Bbls of oil as of April 30, 2000. In 2000, we have budgeted approximately $3.7 million for development drilling of our interests in approximately 24 wells on these properties. Oil and Natural Gas Reserves The following table presents our estimated net proved oil and natural gas reserves and the PV-10 value of our reserves as of December 31, 1999 and 1998. The period end prices of oil and natural gas at December 31, 1999 and 1998, in the PV-10 calculations were $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 39 the estimated oil and natural gas reserves we own. For further information concerning the PV-10 values of these proved reserves, please read note 15 of the notes to our December 31, 1999 consolidated financial statements. The pro forma reserve information set forth below includes reserve information for Magellan, which we acquired in February 2000, and for the CWR Properties, which we acquired on May 31, 2000, as though we owned Magellan and the CWR Properties at December 31, 1999.
December 31, December 31, 1999 1998 -------------------- ------------ Pro Forma Historical Historical --------- ---------- ------------ Proved reserves: Natural gas (Mmcf)......................... 238,898 159,699 43,483 Oil (MBbls)................................ 12,151 9,835 3,342 Natural gas equivalents (Mmcfe)............ 311,806 218,712 63,535 Proved developed reserves: Natural gas (Mmcf)......................... 159,669 122,914 36,731 Oil (MBbls)................................ 10,264 9,358 3,118 Natural gas equivalents (Mmcfe)............ 221,252 179,062 55,439 Estimated future net cash flows before income taxes (in thousands)........................ $540,034 $370,258 $71,464 PV-10 value (in thousands)................... $296,672 $198,615 $38,894
There are numerous uncertainties in estimating quantities of proved reserves and in projecting future rates of production and the timing of development expenditures, including many factors beyond our control. The reserve data set forth in this prospectus are only estimates. Although we believe these estimates to be reasonable, reserve estimates are imprecise and may be expected to change as additional information becomes available. Estimates of oil and natural gas reserves, of necessity, are projections based on engineering data, and there are uncertainties inherent in the interpretation of this data, as well as the projection of future rates of production and the timing of development expenditures. Reservoir engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be exactly measured. Therefore, estimates of the economically recoverable quantities of oil and natural gas attributable to any particular group of properties, classifications of the reserves based on risk of recovery and the estimates are a function of the quality of available data and of engineering and geological interpretation and judgment and the future net cash flows expected therefrom, prepared by different engineers or by the same engineers at different times may vary substantially. There also can be no assurance that the reserves set forth herein will ultimately be produced or that the proved undeveloped reserves will be developed within the periods anticipated. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and the variances may be material. In addition, the estimates of future net revenues from our proved reserves and the present value thereof are based upon certain assumptions about future production levels, prices and costs that may not be correct. We emphasize with respect to the estimates prepared by independent petroleum engineers that PV-10 value should not be construed as representative of the fair market value of our proved oil and natural gas properties since discounted future net cash flows are based upon projected cash flows which do not provide for changes in oil and natural gas prices or for the escalation of expenses and capital costs. The meaningfulness of such estimates is highly dependent upon the accuracy of the assumptions upon which they are based. Actual future prices and costs may differ materially from those estimated. Prospective purchasers of the common stock are cautioned not to place undue reliance on the reserve data included in this prospectus. 40 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)....... 4,429 3,578 18,162 4,737 3,847 1,929 Oil (MBbls).............. 322 308 1,350 532 581 254 Natural gas equivalents (Mmcfe)................. 6,361 5,426 26,262 7,928 7,333 3,453 Average sale prices: Natural gas ($ per Mcf).. $ 2.59 $ 2.56 $ 2.25 $ 2.18 $ 2.00 $ 2.39 Oil ($ per Bbl).......... 25.02 24.94 16.09 16.88 11.52 18.06 Natural gas equivalents ($ per Mcfe)............ 3.07 3.11 2.39 2.43 1.96 2.82 Average costs ($ per Mcfe): Lease operating and production taxes........ $ 0.81 $ 0.84 $ 0.78 $ 0.85 $ 1.06 $ 1.11 General and administrative.......... 0.29 0.31 0.27 0.60 0.58 0.68 Depreciation, depletion and amortization........ 0.74 0.72 0.61 0.84 0.97 1.32
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 Ended Year Ended December 31, March 31, ----------------------- 2000 1999 1998 1997 --------- ------- ------- ------- (in thousands) Acquisition................................... $19,987 $91,424 $29,215 $44,294 Exploration................................... 138 824 1,802 1,912 Development................................... 3,535 2,154 3,041 1,862 ------- ------- ------- ------- Total costs incurred........................ $23,660 $94,402 $34,058 $48,068 ======= ======= ======= =======
41 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 0 0.000 1 0.125 8 0.452 Non-Productive............. 0 0.000 5 0.900 8 0.793 11 1.280 --- ----- --- ----- --- ----- --- ----- Total.................... 0 0.000 5 0.900 9 0.918 19 1.732 === ===== === ===== === ===== === ===== Development Wells: Productive................. 15 5.261 21 5.667 12 1.508 17 5.627 Non-Productive............. 0 0.000 0 0.000 2 1.100 6 4.150 --- ----- --- ----- --- ----- --- ----- Total.................... 15 5.261 21 5.667 14 2.608 23 9.777 === ===== === ===== === ===== === =====
Productive Wells The following table sets forth the actual number of productive oil and natural gas wells in which we owned an interest as of December 31, 1999, and on a pro forma basis to include Magellan and the CWR Properties as if we owned the interests as of December 31, 1999.
Total Productive Wells --------------------- Pro Forma Historical --------- ----------- Gross Net Gross Net ----- --- ------ ---- Oil.................................................... 1,479 395 1,478 395 Natural gas............................................ 857 300 677 252 ----- --- ------ ---- Total................................................ 2,336 695 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 April 30, 2000, we operated approximately 475 wells, located primarily in Texas. 42 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............................. 208,404 63,377 6,575 1,315 214,979 64,692 Oklahoma.......................... 79,256 22,846 205 205 79,461 23,051 Louisiana......................... 40,080 12,253 5,761 2,665 45,841 14,918 Kansas............................ 20,579 13,171 6,507 6,507 27,086 19,678 Other............................. 164,857 60,258 560 490 165,417 60,748 ------- ------- ------ ------ ------- ------- Total........................... 513,176 171,905 19,608 11,182 532,784 183,087 ======= ======= ====== ====== ======= =======
At December 31, 1999, Magellan owned 17,049 gross developed acres, or 9,562 net developed acres, and 3,193 gross undeveloped acres, or 1,682 net undeveloped acres. The CWR Properties information included in the table above consists of 38,480 gross developed acres, or 10,132 net developed acres, and no gross undeveloped acres or net undeveloped acres. Excluded from the acreage data are approximately 35,214 net mineral acres owned by us, primarily in LaFourche, St. Mary and Terrebonne parishes of Louisiana, all of which we believe have potential for oil and natural gas exploration. Marketing We have marketed the oil and natural gas produced from our properties through typical channels for these products. We generally sell our oil at local field prices paid by the principal purchasers of oil. The majority of our natural gas production is sold at spot prices. Both oil and natural gas are purchased by marketing companies, pipelines, major oil companies, public utilities, industrial customers and other users and processors of petroleum products. We are not confined to, or dependent upon, any one purchaser or small group of purchasers. Accordingly, the loss of a single purchaser, or a few purchasers, would not have a long-term material effect on our business because there are numerous purchasers in the areas in which we sell our production. Competition We face competition from other oil and natural gas companies in all aspects of our business, including acquisition of producing properties and oil and natural gas leases, marketing of oil and natural gas, and obtaining goods, services and labor. Many of our competitors have substantially larger financial and other resources. Factors that affect our ability to acquire producing properties include available funds, available information about the property and our standards established for minimum projected return on investment. Competition is also presented by alternative fuel sources, including heating oil and other fossil fuels. We believe that we are competing and will compete effectively as a result of our expertise in the acquisition, exploration, and development of oil and natural gas reserves and our financial ability to take advantage of opportunities. Regulation Federal Regulation of Transportation of Natural Gas. Historically, the transportation and sale for resale of natural gas in interstate commerce have been regulated by the Natural Gas Act of 1938, the Natural Gas Policy Act of 1978, and the regulations promulgated by the Federal Energy Regulatory Commission. In the past, the 43 federal government has regulated the prices at which natural gas could be sold. Deregulation of natural gas sales by producers began with the enactment of the Natural Gas Policy Act. In 1989, Congress enacted the Natural Gas Wellhead Decontrol Act, which removed all remaining Natural Gas Act and Natural Gas Policy Act price and non-price controls affecting producer sales of natural gas effective January 1, 1993. Congress could, however, reenact price controls in the future. Our sales of natural gas are affected by the availability, terms and cost of pipeline transportation. The price and terms for access to pipeline transportation remain subject to extensive federal regulation. Beginning in April 1992, the Federal Energy Regulatory Commission issued Order No. 636 and a series of related orders, which required interstate pipelines to provide open- access transportation on a basis that is equal for all natural gas suppliers. The Federal Energy Regulatory Commission has stated that it intends for Order No. 636 to foster increased competition within all phases of the natural gas industry. Although Order No. 636 does not directly regulate our production and marketing activities, it does affect how buyers and sellers gain access to the necessary transportation facilities and how we and our competitors sell natural gas in the marketplace. The courts have largely affirmed the significant features of Order No. 636 and the numerous related orders, although some appeals remain pending and the Federal Energy Regulatory Commission continues to review and modify its regulations regarding the transportation of natural gas. One broad and significant pending review involves examination of several questions, including whether the transportation regulations should be changed to better operate together with changes in state law that are introducing competition in retail natural gas markets, whether the historical method of setting transportation rates based on cost should be changed for certain transportation, whether short term transportation capacity should be allocated based only on auctions, and whether additional changes need to be made to long term transportation policies to prevent a market bias in favor of short term transportation. We cannot predict what action the Federal Energy Regulatory Commission will take on these matters, nor can we accurately predict whether the Federal Energy Regulatory Commission's actions will achieve the goal of increasing competition in markets in which our natural gas is sold. However, we do not believe that any action taken will affect us in a way that materially differs from the way it affects other oil and natural gas producers. Additional proposals and proceedings that might affect the natural gas industry are pending before Congress, the Federal Energy Regulatory Commission and the courts. The natural gas industry historically has been very heavily regulated; therefore, we cannot assure you that the less stringent regulatory approach recently pursued by the Federal Energy Regulatory Commission and Congress will continue. Federal Regulation of Transportation of Oil. Oil and sales of oil, condensate and natural gas liquids by us are not currently regulated and are made at market prices. Effective as of January 1, 1995, the Federal Energy Regulatory Commission implemented regulations establishing an indexing system for transportation rates for interstate common carrier oil pipelines. These rates are generally indexed to inflation, subject to conditions and limitations. These regulations may, over time, tend to increase transportation costs or reduce wellhead prices for oil. However, we do not believe that these regulations affect us any differently than other oil and natural gas producers, gatherers and marketers. State Regulation. Our oil and natural gas operations are subject to various types of regulation at the state and local levels. These regulations require drilling permits, regulate the methods for developing new fields and the spacing and operating of wells and waste prevention, and sometimes impose production limitations. These regulations may limit our production from wells and the number of wells or locations we can drill. Some states have adopted regulations with respect to gathering systems. These regulations have not had a material effect on the operation of our gathering systems, but we cannot predict whether any future regulations in this area may have a material impact on our gathering systems. Federal, State and Indian Leases. Our operations on federal, state or Indian oil and natural gas leases are subject to numerous restrictions, including nondiscrimination statutes. We must conduct our operations on these leases pursuant to permits and authorization and other regulations issued by the Bureau of Land Management, 44 Minerals Management Service and other agencies. The Minerals Management Service currently has under consideration a proposal to change the manner in which crude oil is valued for purposes of calculating royalty due the government. If adopted, these changes would decrease reliance on historical valuation methods and instead adopt an indexing method intended to better reflect market value, but which may not reflect the proceeds actually received in the sale of the oil. We cannot predict what action the Minerals Management Service may ultimately take or how it will affect royalty payable on our production from federal leases, however, if adopted the changes may tend to increase costs of royalty payments. Environmental Regulations. Our operations are subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Our exploration and production operations and facilities for gathering, treating, processing and handling hydrocarbons and related exploration and production wastes are subject to stringent environmental regulation. These laws and regulations sometimes require government approvals before activities occur, limit or prohibit activities because of protected areas or species, impose substantial liabilities for pollution and provide penalties for noncompliance. As with the industry generally, compliance with existing and anticipated regulations increases our overall cost of business. These regulations, however, generally affect us and our competitors similarly. Environmental laws and regulations are subject to frequent change, and we are not able to predict the costs or other impacts of environmental regulation on our future operations. The Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without regard to fault or the legality of the original conduct, on some classes of persons that are considered to have contributed to the release or threat of release of a "hazardous substance" into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources, and it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. Our operations are also subject to regulation of air emissions under the Clean Air Act and comparable state and local requirements. Implementation of these laws could lead to the gradual imposition of new air pollution control requirements on our operations. As a result, we may incur capital expenditures over the next several years to upgrade our air pollution control equipment. We do not believe that our operations would be materially affected by any such requirements, nor do we expect such requirements to be any more burdensome to us than to other companies our size involved in oil and natural gas exploration and production activities. In addition, legislation has been proposed in Congress from time to time that would reclassify some oil and natural gas exploration and production wastes as "hazardous wastes," which would make the reclassified wastes subject to much more stringent handling, disposal and clean-up requirements. If Congress were to enact this legislation, it could increase our operating costs, as well as those of the oil and natural gas industry in general. Initiatives to further regulate the disposal of oil and natural gas wastes are also pending in some states, and these various initiatives could have a similar impact on us. The Clean Water Act imposes restrictions and controls on the discharge of oil and natural gas wastes and other forms of pollutants into waters of the United States. Federal law also imposes strict liability on owners of facilities for consequences of an oil spill where the spill is in navigable waters or along shorelines. These laws impose penalties for unauthorized discharges and substantial liability for costs of removal and damages resulting from an unauthorized discharge. State laws for the control of water pollution provide similar penalties and liabilities. The cost of compliance with water pollution laws has not historically been material to our operations. There can be no assurance that changes in federal, state or local water pollution laws and programs will not materially adversely affect our operations in the future. 45 Our management believes that we are in substantial compliance with current environmental laws and regulations that affect us and that continued compliance with these requirements will not have a material adverse impact on us. Legal Proceedings From time to time, we may be a party to various legal proceedings. We currently are not a party to any material litigation. Employees At May 31, 2000, we had 41 full-time employees. We believe that our relationships with our employees are satisfactory. None of our employees is covered by a collective bargaining agreement. From time to time, we use the services of independent consultants and contractors to perform various professional services, particularly in the areas of construction, design, well- site surveillance, permitting and environmental assessment. 46 MANAGEMENT
Name Age Position(s) Held Since ---- --- ---------------- ----- Floyd C. Wilson......... 52 Chairman, Chief Executive Officer 1999* R. A. Walker............ 43 President, Chief Financial Officer and Director 2000* Stephen W. Herod........ 41 Executive Vice President-Corporate Development, 1997* Treasurer and Director Richard K. Stoneburner.. 46 Vice President--Exploration 1999 Mark S. Holt............ 44 Vice President--Land 1999 Earl W. Ringeisen....... 65 Vice President--Field Operations and Production 1999 Terry W. Gautier........ 43 Controller 1999 David S. Elkouri........ 46 Secretary 2000 David B. Miller......... 50 Director 1999* D. Martin Phillips...... 46 Director 1999* Gary R. Christopher..... 49 Director 1997* Larry L. Helm........... 52 Director 2000*
- -------- * Each of our directors is elected for a term ending on the date of our next annual meeting of stockholders. Our next annual meeting of stockholders is scheduled for May 2001. FLOYD C. WILSON, Chairman and Chief Executive Officer, joined us on August 27, 1999, concurrent with the investment by W/E LLC. Mr. Wilson founded W/E LLC in 1998. Mr. Wilson began his career in the energy business in Houston in 1970 as a completion engineer. He moved to Wichita in 1976 to start an oil and natural gas operating company, one of several private energy ventures which preceded the formation of W/E LLC. Mr. Wilson founded Hugoton Energy Corporation ("Hugoton") in 1987, and served as its Chairman, President and Chief Executive Officer. In 1994, Mr. Wilson took Hugoton public, and sold the company in 1998 to Chesapeake Energy Corporation. R. A. WALKER, President, Chief Financial Officer and Director, joined 3TEC effective May 1, 2000. Prior to joining us, he was a Senior Managing Director and Co-head of Prudential Capital Group, a $32 billion asset management and merchant banking affiliate of The Prudential Insurance Company of America investing in privately-placed debt and equity securities. From 1990 to 1998, Mr. Walker was the Managing Director of the Dallas office of Prudential Capital Group where he was responsible for the firm's global energy investments, as well as general corporate finance for the Southwestern United States. He joined Prudential in 1987, holding various responsibilities in its Boston, Dallas and Newark offices, after spending approximately six years in commercial banking and two years with an independent oil and gas company. STEPHEN W. HEROD has served as our Executive Vice President-Corporate Development since December 1999 and as a director since July 1997. From July 1997 to December 1999, Mr. Herod was our Vice President--Corporate Development. Mr. Herod served as President and a director of Shore Oil Company from April 1992 until the merger of Shore with us on June 30, 1997. He joined Shore's predecessor as Controller in February 1991. Mr. Herod was employed by Conquest Exploration Company from 1984 until 1991 in various financial management positions, including Operations Accounting Manager. From 1981 to 1984, Superior Oil Company employed Mr. Herod as a financial analyst. RICHARD K. STONEBURNER joined us in August 1999 and became Vice President-- Exploration in December 1999. Mr. Stoneburner was employed by W/E LLC as District Geologist from 1998 to 1999. Prior to joining us, Mr. Stoneburner worked as a geologist for Texas Oil & Gas, The Reach Group, Weber Energy Corporation, Hugoton Energy Corporation and, independently through his own company, Stoneburner Exploration, Inc. Mr. Stoneburner has over 20 years of experience in the energy field. MARK S. HOLT joined us in August 1999 and became Vice President--Land in December 1999. W/E LLC employed Mr. Holt as District Landman from 1998 to 1999. From 1985 to 1998, Mr. Holt was the owner of Holt Resources, which provided land consulting services to various oil and natural gas companies and operators. From 1979 to 1985, Mr. Holt was a Senior Landman for Sun Oil Company. 47 EARL W. RINGEISEN joined us in August 1999 and became Vice President--Field Operations and Production in December 1999. From 1998 to 1999, Chesapeake Energy Corporation employed Mr. Ringeisen as their Kansas District Manager. Mr. Ringeisen served as Hugoton's Vice President of Operations from 1993 to 1998. From 1987 to 1993, Mr. Ringeisen served as Production Superintendent for Hugoton. TERRY W. GAUTIER joined us as Controller in December 1999. From July 1990 to November 1999, Mr. Gautier was employed by Floyd Oil Company as Vice President, Chief Accounting Officer and Controller. Prior to joining Floyd Oil Company, Mr. Gautier was employed by Pelto Oil Company for six years, serving the last two as Controller. From 1978 to 1983, Mr. Gautier was an Audit Senior with Touche Ross and Co. He is a certified public accountant. DAVID S. ELKOURI became Secretary in April 2000. Mr. Elkouri has been a member of the Wichita, Kansas law firm, Hinkle Elkouri Law Firm L.L.C., since 1986 and is currently its Co-Managing Director. He is currently a member of the Board of Directors of Rand Graphics, Inc. and previously served as a director of Hugoton Energy Corporation. He is an Adjunct Professor of Law at the University of Kansas School of Law and teaches business planning. DAVID B. MILLER has served as a director since 1999. Mr. Miller is a Managing Director and co-founder of EnCap. EnCap is an investment management and merchant banking firm focused on the upstream and midstream sectors of the oil and natural gas industry that was founded in 1988. EnCap is the general partner and controlling person of certain members of W/E LLC. From 1988 to 1996, Mr. Miller also served as President of PMC Reserve Acquisition Company, a partnership jointly owned by EnCap and Pitts Energy Group. Prior to the establishment of EnCap, Mr. Miller served as Co-Chief Executive Officer of MAZE Exploration Inc., a Denver, Colorado, based oil and natural gas company he co- founded in 1981. D. MARTIN PHILLIPS has served as a director since 1999. Mr. Phillips is a Managing Director and principal of EnCap. EnCap is an investment management and merchant banking firm focused on the upstream and midstream sectors of the oil and natural gas industry that was founded in 1988. EnCap is the general partner and controlling person of certain members of W/E LLC. Prior to joining EnCap in 1989, from 1978 to 1989, Mr. Phillips served in various management capacities with NCNB Texas National Bank, including as Senior Vice President in the Energy Banking Group. Mr. Phillips is also a director of Bargo Energy Company, a public oil and natural gas company. GARY R. CHRISTOPHER has served as a director since 1997. Mr. Christopher is Acquisitions Coordinator of Kaiser-Francis Oil Company, a position he has held since February 1996. From 1991 to 1996, Mr. Christopher served as Senior Vice President and Manager of Energy Lending for the Bank of Oklahoma. He continues to serve as a consultant to the Bank of Oklahoma. Mr. Christopher is also President, Chief Executive Officer and a director of PetroCorp Inc., a public oil and natural gas company controlled by Kaiser-Francis Oil Company. Kaiser- Francis Oil Company owns 1,112,578 of our shares of common stock. LARRY L. HELM was elected a director and a member of our Audit Committee on May 30, 2000. Mr. Helm is responsible for the nationwide Energy and Utilities Banking Group of Bank One Corporation, a position he assumed in 1998. Mr. Helm joined Bank One in 1989 and has held increasingly more responsible positions with Bank One, including, most recently, Chairman and Chief Executive Officer of Bank One's Dallas Region. Mr. Helm is a former director of the Independent Petroleum Association of America. Employment Contracts Floyd C. Wilson and 3TEC entered into an employment agreement commencing on April 15, 2000, and terminating on December 31, 2002, pursuant to which Mr. Wilson will serve as our Chief Executive Officer with an annual base salary of $325,000. Our board of directors may terminate Mr. Wilson's employment under the employment agreement with or without Cause. "Cause" is defined as (a) the inability, despite any reasonable accommodation required by law, due to bodily injury or disease or any other physical or mental 48 incapacity, to perform the services provided for under the employment agreement for a period of 120 days in the aggregate, within any given period of 180 consecutive days during the term of the employment agreement, in addition to any statutorily required leave of absence, (b) conduct that constitutes fraud, dishonesty, theft, or a criminal act involving moral turpitude, in each case only if it materially affects his ability to perform the duties and responsibilities of his position or has a material adverse effect on us, (c) commission of a material act of fraud against us, (d) embezzlement of funds or misappropriation of other property from us, or (e) failure to observe or perform his material duties and obligations as our employee or a material breach of the employment agreement, after 30 days advance written notice of such failure or breach which has not been cured. If Mr. Wilson is terminated by us without Cause, we are required to pay him a severance payment equal to the salary payable to him over the remaining term of his agreement. The employment agreement contains certain noncompete, confidentiality and noninterference provisions. For example, during the term of the employment agreement Mr. Wilson may not be employed or render advisory, consulting or other services in connection with any business enterprise or person that is engaged in leasing, acquiring, exploring, producing, gathering or marketing hydrocarbons and related products. Further, during the term of the employment agreement Mr. Wilson may not be financially interested, invest or engage in any business that is engaged in leasing, acquiring, exploring, producing, gathering or marketing hydrocarbons and related products, with certain limited exceptions. The agreement also provides that Mr. Wilson will not disclose or make use of any trade secrets or confidential or proprietary information pertaining to us in a way that is materially detrimental to us. Mr. Wilson is also prohibited during the two-year period of his employment agreement or the period for which Mr. Wilson is employed by us, whichever is longer, and for a six-month period commencing upon the termination of such longer period from soliciting any of our employees or any other person who is under contract with or rendering services to us to (a) terminate his or her employment with us, (b) refrain from extending or renewing his or her employment with us, (c) refrain from rendering services to or for us, (d) become employed by or to enter into contractual relations with any persons other than us, or (e) enter into a relationship with any of our competitors. R. A. Walker and 3TEC entered into an employment agreement commencing on May 1, 2000, and terminating on December 31, 2002, pursuant to which Mr. Walker will serve as our President and Chief Financial Officer with an annual base salary of $300,000. The agreement also provides that Mr. Walker will be granted options giving him the right to purchase 500,000 shares of our common stock, one-half of which shall be immediately vested with the remaining portion to vest equally on each of the next three anniversary dates of his employment. The exercise price under the option granted to Mr. Walker is the fair market value of shares of our common stock on the date of grant. We may terminate Mr. Walker's employment under the employment agreement with or without Cause. "Cause" is defined similarly to the definition of "Cause" contained in Mr. Wilson's employment agreement. If Mr. Walker is terminated by 3TEC without Cause, the Company is required to pay him a severance payment equal to two times his base salary. Mr. Walker's employment agreement also contains noncompete, confidentiality and noninterference provisions that are similar in scope and term to the noncompete, confidentiality and noninterference provisions in Mr. Wilson's employment agreement, described above. Stephen W. Herod executed an employment agreement with us with an effective date of July 1, 1997, and extending through June 30, 2000, with automatic one- year extensions upon each anniversary date of the employment agreement thereafter unless either party gives at least 30 days notice of termination. The employment agreement is terminable by us before expiration of the term if such termination is for cause (as specified in the employment agreement). The executive employment agreement provides for an annual salary of not less than the base salary of $100,000, which amount may be adjusted from time to time by the board of directors upon the recommendation of the compensation committee of the board of directors. It also provides for fringe benefits in accordance with our policies adopted from time to time for salaried executive employees holding comparable positions. 49 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% 23.45% 777 Walker Street Suite 2400 Houston, TX 77002 EnCap Investments L.L.C. (b), (d), (e).... 4,859,627 54.58% 31.55% 1100 Louisiana Suite 3150 Houston, TX 77002 Kaiser-Francis Oil Company (f)............ 1,112,578 17.32% 8.61% 6733 South Yale Tulsa, OK 74136 The Prudential Insurance Company of America (g).............................. 775,344 11.33% 5.81% 751 Broad Street Newark, NJ 07102 C. J. Lett, III (h)....................... 411,519 6.41% 3.18% 9320 East Central Wichita, KS 67206 Pel-Tex Partners, L.L.C. (i).............. 444,423 6.72% 3.39% 277 Park Avenue New York, NY 10172 Weskids, L.P. (j)......................... 320,385 4.96% 2.47% 310 South Street Morristown, NJ 07960 Alvin V. Shoemaker (k).................... 321,211 4.95% 2.47% 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. 50 (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. 51 DESCRIPTION OF CAPITAL STOCK The description of our capital stock below is only a summary and is not intended to be complete. For a complete description, please read our certificate of incorporation and bylaws, which have been filed with the Securities and Exchange Commission. Our authorized capital stock consists of 60,000,000 shares of common stock, par value $0.02 per share, and 20,000,000 shares of preferred stock, par value $0.02 per share. Pursuant to Certificates of Designations which have been filed with the Secretary of State of the State of Delaware, 266,667 shares of our Series B Preferred Stock, 2,300,000 shares of Series C Preferred Stock and 725,167 shares of our Series D Preferred Stock have been designated. As of March 31, 2000, 6,422,181 shares of common stock, 266,667 shares of Series B Preferred Stock, 2,167,156 shares of Series C Preferred Stock and 621,930 shares of Series D Preferred Stock were outstanding. Common Stock Subject to the preferential rights of any outstanding series of preferred stock, the holders of our common stock are entitled to one vote per share on all matters voted on by stockholders, including in the election of directors. Our certificate of incorporation does not provide for cumulative voting in the election of directors or grant preemptive rights with respect to future issuances of our common stock. We may in the future, however, enter into contracts with stockholders to grant holders preemptive rights. Subject to any preferential rights of any series of preferred stock outstanding, the holders of our common stock are entitled to dividends, if any, as may be declared from time to time by our board from funds legally available to pay dividends and, upon liquidation, are entitled to receive a pro rata share of all of our assets that are available for distribution to stockholders. All our common stock is fully paid and nonassessable. Transfer Agent The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company. The phone number for American Stock Transfer & Trust Company is (718) 921-8200. Preferred Stock Series B Convertible Preferred Stock. The Series B Preferred Stock has a redemption value of $7.50 per share. Dividends are payable when, as and if authorized and declared by the board of directors, and we are not restricted from declaring and paying dividends on any shares of preferred stock. Until December 31, 2002, holders of Series B Preferred Stock have the right, at any time, to convert one share of Series B Preferred Stock into one third of a share of common stock or into as many as a total of 444,444 shares of common stock, contingent upon the results of drilling and leasing activity on 3TEC's mineral acreage in south Louisiana. At any time after December 31, 2002, we have the right, upon not less than 30 days nor more than 90 days written notice, to redeem any or all shares of Series B Preferred Stock for $7.50 per share plus any accrued and unpaid dividends. The holders of the Series B Preferred Stock do not have the right to require us to redeem the Series B Preferred Stock and do not have voting rights except those required by law. In the event of our liquidation, dissolution or winding-up, the holders of Series B Preferred Stock are entitled to receive distributions of $7.50 per share plus any accrued but unpaid dividends before any holders of common stock or junior preferred stock receive any distributions. In the event of any stock split, reverse stock split, stock dividend, recapitalization or similar transaction, appropriate adjustments will be made to the Series B Preferred Stock to maintain the rate of conversion, redemption, or distributions upon liquidation. 52 Series C Convertible Preferred Stock. The Series C Preferred Stock has a redemption value of $5.00 per share and pays dividends at an amount per share of $0.50 per annum, payable semi-annually on March 31 and September 30 of each year. Of the 2,167,156 outstanding shares of Series C Preferred Stock, we beneficially own 1,034,818 shares, as 1,293,522 shares of Series C Preferred Stock are held by our 80% owned subsidiary. Holders of Series C Preferred Stock have the right, at any time, to convert one share of Series C Preferred Stock into one third of a share of common stock. We have the right, upon not less than 30 nor more than 90 days written notice, to redeem any or all shares of Series C Preferred Stock for $5.00 per share plus any accrued and unpaid dividends. The holders of the Series C Preferred Stock do not have the right to require us to redeem the Series C Preferred Stock. In the event of our liquidation, dissolution or winding-up, the holders of Series C Preferred Stock are entitled to receive distributions of $5.00 per share plus any accrued but unpaid dividends before any holders of common stock or junior preferred stock receive any distributions. In the event of any stock split, reverse stock split, stock dividend, recapitalization or similar transaction, appropriate adjustments will be made to the Series C Preferred Stock to maintain the rate of conversion, redemption, or distributions upon liquidation. Except as required by law, the holders of the Series C Preferred Stock are only entitled to vote upon those amendments, alterations or repeals of provisions of our Certificate of Incorporation that adversely affect their rights and preferences as preferred stockholders. The Series C Preferred Stock ranks in parity with the Series B and Series D Preferred Stock with regard to preferences upon our liquidation, dissolution or winding up. No dividends may be authorized or paid or set apart for payment or other distribution of cash or other property authorized or made directly or indirectly by us with respect to any shares of our common stock or any junior preferred stock unless the full cumulative dividends on all outstanding shares of Series C Preferred Stock shall have been paid or such dividends have been authorized and set apart for payment with respect to the Series C Preferred Stock. We have made application requesting that the Series C Preferred Stock be approved for listing on the Nasdaq SmallCap Stock Market. Series D Convertible Preferred Stock. In connection with the acquisition of Magellan, 617,009 shares of Series D Preferred Stock, par value $0.02 per share, were issued with a redemption value of $24.00 per share. While the per share redemption and dividends amounts vary, the rights as to dividends and liquidation payments of all outstanding issues of Preferred Stock are equal. Shares of Series D Preferred Stock earn dividends at 5% per annum cumulative, payable semi-annually on March 31 and September 30 of each year, when, as and if authorized and declared by the board of directors. For a period of three years from the closing date of the Magellan transaction, we may pay the dividends at our option in cash or in additional shares of Series D Preferred Stock. Holders of Series D Preferred Stock have the right to convert one share of Series D Preferred Stock into one share of common stock. Upon thirty days written notice, we have the right to redeem any or all shares of Series D Preferred Stock for $24.00 per share plus any accrued and unpaid dividends. Holders of the Series D Preferred Stock have no right to require us to redeem the Series D Preferred Stock. In the event of our liquidation, dissolution, winding-up or merger, the holders of Series D Preferred Stock are entitled to receive distributions of $24.00 per share of Series D Preferred Stock plus any accrued but unpaid dividends before any holders of common stock or junior preferred stock receive any distributions. In the event of any stock split, reverse stock split, stock dividend, recapitalization or similar transaction, appropriate adjustments will be made to the Series D Preferred Stock to maintain the rate of conversion, redemption, or distributions upon liquidation existing at the date of any such event. A majority of the holders of Series D Preferred Stock must consent to certain actions by us, including any which (a) adversely alters or changes the rights, preferences or privileges of the Series D Preferred Stock 53 holders by merger, consolidation or otherwise, (b) increases the authorized number of shares of Series D Preferred Stock, or (c) authorizes or issues any securities with rights senior to the Series D Preferred Stock. Other than these described consents or as required by law or any provision of our Certificate of Incorporation, the holders of Series D Preferred Stock have no voting rights. Additional shares of preferred stock may be issued from time to time in one or more series without shareholder approval. With regard to the preferred stock, the board of directors may determine: . the preferences; . conversion or other rights; . voting powers; . restrictions; . limitations on dividends; and . qualifications and terms and conditions of redemption. As a result, without shareholder approval, our board of directors could authorize the issuance of additional shares of preferred stock with voting, conversion and other rights that could dilute the voting power and other rights of the holders of common stock. Shareholders Agreement Pursuant to a Shareholders Agreement, dated August 27, 1999, and a First Amendment to the Shareholders Agreement, dated May 30, 2000, among us and certain of our stockholders collectively owning approximately 69% of our outstanding common stock as of March 31, 2000, before giving effect to this offering (or approximately 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, the seven members of our board of directors, at least two of whom shall qualify as independent directors, as follows: (i) three members of the board of directors designated by W/E LLC; (ii) two members of the board of directors designated by Kaiser- Francis Oil Company, C.J. Lett, III, Weskids, L.P. and Alvin V. Shoemaker (the "Remaining Stockholders"); and (iii) two members of the board of directors designated by a majority of the board of directors, at least one of which must be an independent director whose designation is approved by W/E LLC. Accordingly, the parties to the agreement currently have the ability to control the election of all of the members of our board of directors. As the ownership percentage of W/E LLC and the Remaining Stockholders decreases, the number of directors they may designate declines and ultimately, when that percentage falls below 5%, their right to designate board members pursuant to this agreement shall terminate. When the ownership percentage of both W/E LLC and the Remaining Stockholders falls below 5%, the agreement automatically terminates. Following the completion of this offering, if W/E LLC or one of the Remaining Shareholders, individually, no longer beneficially owns at least 3.5% of our common stock, then that stockholder's rights and obligations under the Shareholders Agreement, as amended, shall terminate. As of March 31, 2000, W/E LLC and its affiliates, including EnCap, own approximately 37% of our outstanding common stock. Registration Rights Pursuant to a Registration Rights Agreement dated August 27, 1999, as amended, we granted demand registration rights to W/E LLC, Shoemaker Family Partners, LP, Shoeinvest II, LP, and Prudential, providing these stockholders with the right to require us to use our best efforts to cause registration and sale in a public offering of all or a portion of the shares held by the stockholder or stockholders demanding the registration. In addition, subject to the underwriters discretion to limit the number of shares of selling stockholders to be included in an offering, we granted piggy-back registration rights to these stockholders and to Kaiser-Francis Oil Company, C.J. Lett, III, Weskids, L.P., and Alvin V. Shoemaker in the event that we propose to file, on our own behalf, a registration statement on Form S-1, S-2, S-3 or other similar forms available. All of these stockholders have agreed to waive their right to sell shares in this offering. 54 Pursuant to a Registration Rights Agreements dated February 2, 2000, we granted demand registration rights to Pel-Tex Partners, L.L.C. and EnCap and certain of EnCap's affiliates providing these stockholders with the right to use our best efforts to cause registration and sale in a public offering of all or a portion of the shares held by the stockholder or stockholders demanding the registration. In addition, subject to the underwriters' discretion to limit the number of shares of selling stockholders to be included in an offering, we granted piggy-back registration rights to these stockholders and to Earl P. Burke, Jr. Family Limited Partnership and Joint Energy Department Investments Limited Partnership in the event we propose to file, on our own behalf, a registration statement on Form S-1, S-2, S-3 or other similar forms available. All of these stockholders have 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. 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; 55 . 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. 56 DESCRIPTION OF CREDIT FACILITY Concurrent with the acquisition of the Floyd Oil Properties, we entered into a $250 million credit facility with Bank One, Texas, N.A., as administrative agent, and Union Bank of California, N.A., Wells Fargo Bank, CIBC, Inc., and The Bank of Nova Scotia as participating lenders. Our borrowing base was initially set at $95 million with $83.5 million outstanding as of March 31, 2000. The borrowing base is redetermined semi-annually on May 1 and November 1 of each year. As of March 31, 2000, we were paying 7.875% per annum interest on $82.5 million and 7.88% per annum interest on $1.0 million of the principal balance of this facility. The credit facility matures on May 31, 2003. Prior to maturity other than a payment of $20 million due on or before December 31, 2000, no payments of principal are required so long as the borrowing base exceeds the credit facility balance. The borrowings under the facility are secured by substantially all our properties. In connection with the acquisition of the CWR Properties, we increased the amount of availability under the borrowing base to $145 million to enable us to borrow the $55 million purchase price of the CWR Properties. As revised, interest under the facility accrues at a rate calculated at our option as either the bank's prime rate plus from a low of zero to a high of 50 basis points or LIBOR plus basis points increasing from a low of 150.0 to a high of 212.5 as loans outstanding increase as a percentage of the borrowing base. At the same time Bank of Montreal became a participant in and syndication agent for our facility. As indicated elsewhere in this prospectus, the net proceeds of this offering will be used principally to repay indebtedness outstanding under this credit facility. In connection with our credit facility, we are required to adhere to certain affirmative and negative covenants including but not limited to: . Use of all proceeds from sales of oil and natural gas properties for the repayment of the outstanding debt. . We may not allow the ratio of our current assets to our current liabilities to be less than 1:1 at the end of any fiscal quarter. . We may not allow our consolidated EBITDAX (our consolidated earnings from ongoing operations before reduction for income tax expense, interest expense, depreciation, depletion and amortization expense and exploration expense) to be less that 2.5 times our consolidated interest expense for the quarter ending September 30, 2000, and for each subsequent four quarter period thereafter. At March 31, 2000, our consolidated EBITDAX was 5.16 times our quarterly consolidated interest expense, thus well in excess of the requirements of the facility. . We may not declare or pay any cash dividend; purchase, redeem or otherwise acquire for value any of our outstanding stock; return capital to stockholders; or make any distribution of our assets to stockholders; except for dividends on and redemption of Series C Preferred Stock under certain circumstances. . We have agreed that we will not enter into any hedging transactions except with the lenders' consent and for certain pre-approved hedging activities in connection with oil and natural gas prices. Events of default under the facility include a final judgment or order in the excess of $2 million, a change of control of 3TEC or Floyd C. Wilson ceasing to act as our Chairman and Chief Executive Officer. 57 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............................................................ 6,500,000 =========
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 975,000 additional shares at the public offering price less the underwriting fees. The underwriters may exercise this option solely to cover over-allotments, if any, made in connection with this offering. To the extent that the underwriters exercise the option, each underwriter will become obligated, subject to conditions, to purchase a number of additional shares approximately proportionate to such underwriter's initial purchase commitment. The underwriters propose initially to offer some of the shares directly to the public at the public offering price set forth on the cover page of this prospectus and some of the shares to dealers at the public offering price less a concession not in excess of $ 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. We and certain of our stockholders, directors and executive officers have each agreed, without the prior written consent of Bear, Stearns & Co. Inc. during the period ending 180 days after the date of this prospectus, not to, directly or indirectly offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock, or enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of common stock, whether any such transaction described above is settled by delivery of common stock or other securities, in cash or otherwise. The foregoing restrictions shall not apply to: . transactions by any person of common stock or other securities acquired in open market transactions after the date of this prospectus; . any conversion of convertible securities into common stock provided the holder agrees to be bound by the restrictions above; 58 . common stock issued by us upon exercise of stock options under existing employee benefit plans; . private transfers of common stock or securities convertible into common stock, provided the transferee agrees to be bound by the restrictions above; or . any transfer to a family member, trust or affiliate of a security holder who agrees to be bound by the restrictions above. In order to facilitate the offering of our common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the market price of our common stock. Specifically, the underwriters may over-allot shares of our common stock in connection with this offering, thereby creating a short position in our common stock for their own account. In addition, to cover over-allotments or to stabilize the market price of our common stock, the underwriters may bid for, and purchase, shares of our common stock in the open market. The representatives, on behalf of the underwriters, also may reclaim selling concessions allowed to an underwriter or dealer if the underwriting syndicate repurchases shares distributed by that underwriter or dealer. Any of these activities may maintain the market price of our common stock at a level above that which might otherwise prevail in the open market. These transactions may be made in the over-the-counter market or otherwise. The underwriters are not required to engage in these activities and, if begun, may end any of these activities at any time. Rules of the SEC may limit the ability of the underwriters to bid for or purchase shares before the distribution of the shares is completed. However, the underwriters may engage in the following activities in accordance with the rules: . Stabilizing transactions--The representatives may make bids or purchases for the purpose of pegging, fixing or maintaining the price of the shares, so long as stabilizing bids do not exceed a specified maximum. . Over-allotments and syndicate covering transactions--The underwriters may create a short position in the shares by selling more shares than are set forth on the cover page of this prospectus. If a short position is created in connection with the offering, the representatives may engage in syndicate covering transactions by purchasing shares in the open market. The representatives may also elect to reduce any short position by exercising all or part of the over-allotment option. . Penalty bids--If the representatives purchase shares in the open market in a stabilizing transaction or syndicate covering transaction, they may reclaim a selling concession from the underwriters and selling group members who sold those shares as part of the offering. Stabilization and syndicate covering transactions may cause the price of the shares to be higher than they would be in the absence of such transactions. The imposition of a penalty bid might also have an effect on the price of the shares if it discourages resales of the shares. Prior to the pricing of the common stock subject to this offering and until the time when a stabilizing bid may have been made, some or all of the underwriters may make bids for or purchases of shares of our common stock, subject to certain restrictions, known as passive market making activity. Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the price of the shares. These transactions may occur on the Nasdaq or otherwise. If such transactions are commenced, they may be discontinued without notice at any time. We have agreed to indemnify the underwriters against a number of liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make as a result of these liabilities. 59 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 National Market under the symbol "TTEN." Prudential Securities Incorporated facilitates the marketing of new issues online through 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 advisors. Other than the prospectus in electronic format, any other information that references us, the information on Prudential Securities Incorporated's website and any other information maintained by Prudential Securities Incorporated is not a part of this prospectus and has not been approved or endorsed by us and should not be relied upon by prospective investors. CIBC Inc. currently is a participant in the bank group under our $250 million credit facility. In connection with this offering, we expect that approximately 14% of the net offering proceeds will be paid to CIBC Inc. as part of the repayment of a portion of the outstanding amounts under the credit facility. CIBC Inc. is affiliated with CIBC World Markets Corp., one of the co- managers of this offering. Prudential is an affiliate of Prudential Securities Incorporated, one of the co-managers of this offering. As described under "Security Ownership of Principal Stockholders," Prudential beneficially owns 775,344 shares of our common stock, which represent approximately 11% of our outstanding common stock. After this offering, Prudential will beneficially own approximately 6% of our outstanding common stock. This offering is being conducted in accordance with Rules 2710 and 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc. Pursuant to Rule 2710(c)(8), Bear, Stearns & Co. Inc., the lead manager of this offering, will assume the responsibilities of acting as qualified independent underwriter and will recommend a price in compliance with the requirements of Rule 2720, which provides that the public offering price of an equity security be no higher than that recommended by a "qualified independent underwriting" meeting certain standards. R. A. Walker, prior to joining us as President and Chief Financial Officer on May 1, 2000, was a Senior Managing Director and Co-head of Prudential Capital Group, a division of Prudential. Mr. Walker no longer has any affiliation with Prudential Capital Group. LEGAL MATTERS Certain legal matters in connection with the common stock offered hereby are being passed upon for us by Thompson Knight Brown Parker & Leahy LLP, Houston, Texas, and for the underwriters by Vinson & Elkins L.L.P., Houston, Texas. EXPERTS Our consolidated financial statements as of December 31, 1999 and 1998, and for each of the years in the two-year period ended December 31, 1999, have been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. 60 The statements of revenues and direct operating expenses of the Floyd Oil Properties for the nine months ended September 30, 1999 and the year ended December 31, 1998, included in this registration statement have been audited by Arthur Andersen LLP, independent public accountants, as reflected in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said reports. The statement of revenues and direct operating expenses of the CWR Properties for the year ended December 31, 1999 has been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. Certain information set forth in this prospectus relating to the estimated proved oil and natural gas reserves of 3TEC, Magellan, the Floyd Oil Properties and the CWR Properties at December 31, 1999, the related calculations of future net revenues and the related discounted future net income have been derived from independent petroleum engineering reports prepared by Ryder Scott. That information has been included herein in reliance on such firm as an expert in petroleum engineering. Certain information set forth in this prospectus relating to our estimated proved oil and natural gas reserves at December 31, 1998, the related calculations of future net revenues and the related discounted future net income have been derived from independent petroleum engineering reports prepared by Lee Keeling and Associates, Inc., and H.J. Gruy and Associates, Inc. That information has been included herein in reliance on such firms as experts in petroleum engineering. 61 WHERE YOU CAN FIND MORE INFORMATION We are subject to the informational requirements of the Securities Exchange Act of 1934, and in accordance therewith will file reports and other information with the SEC. The reports and other information filed by us with the SEC can be inspected and copies can be obtained at the public reference facilities maintained by the SEC at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Regional Offices of the SEC at 7 World Trade Center, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of these materials also can be obtained from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition, the SEC maintains a site on the World Wide Web at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. This prospectus constitutes a part of a registration statement on Form S-2 filed by us with the SEC under the Securities Act. This prospectus omits certain of the information contained in the registration statement, and reference is hereby made to the registration statement for further information with respect to us and the securities offered under this prospectus. Any statements contained in this prospectus concerning the provisions of any document filed as an exhibit to the registration statement or otherwise filed with the SEC is not necessarily complete, and in each instance, reference is made to the copy of the documents so filed. Each such statement is qualified in its entirety by such reference. We intend to furnish our stockholders with annual reports containing audited financial statements and an opinion expressed by independent auditors and with quarterly reports for the first three quarters of each fiscal year containing unaudited summary financial information. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following reports have been filed by us with the Securities and Exchange Commission and are incorporated by reference into this prospectus: . Form 10-KSB for the year ended December 31, 1999; . Form 8-K filed February 4, 2000; . Form 8-K filed April 3, 2000; . Form 8-K filed April 25, 2000; and . Form 10-QSB for the quarter ended March 31, 2000. We will provide without charge to each person to whom a copy of this prospectus is delivered, upon request, a copy of the foregoing documents (without exhibits). Written or telephone requests for such copies should be directed to Stephen W. Herod, 3TEC Energy Corporation, Two Shell Plaza, Suite 2400, 777 Walker Street, Houston, Texas 77002, telephone (713) 821-7100. 62 GLOSSARY OF CERTAIN OIL AND GAS TERMS The following are abbreviations and definitions of certain terms commonly used in the oil and gas industry and this prospectus: Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used in this prospectus in reference to oil or other liquid hydrocarbons. Bcf. One billion cubic feet of natural gas. Bcfe. One billion cubic feet of natural gas equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids. Btu or British Thermal Unit. The quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit. Completion. The installation of permanent equipment for the production of natural gas or oil, or in the case of a dry hole, the reporting of abandonment to the appropriate agency. Condensate. Liquid hydrocarbons associated with the production of a primarily natural gas reserve. Developed acreage. The number of acres that are allocated or assignable to productive wells or wells capable of production. Development well. A well drilled into a proved natural gas or oil reservoir to the depth of a stratigraphic horizon known to be productive. Exploratory well. A well drilled to find and produce natural gas or oil reserves that are not proved, to find a new reservoir in a field previously found to be productive of natural gas or oil in another reservoir or to extend a known reservoir. Field. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic level. MBbls. One thousand barrels of oil or other liquid hydrocarbons. Mcf. One thousand cubic feet of natural gas. Mcfe. One thousand cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids. Mmbtu. One million British Thermal Units. Mmcf. One million cubic feet of natural gas. Mmcfe. One million cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids. Productive well. A well that is found to be capable of producing sufficient quantities of oil and natural gas so that proceeds from the sale of the production are greater than production expenses and taxes. Prospect. A specific geographic area which, based on supporting geological, geophysical or other data and also preliminary economic analysis using reasonably anticipated prices and costs, is deemed to have potential for the discovery of oil and natural gas. 63 Proved developed reserves. Reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved reserves. The estimated quantities of oil, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved undeveloped reserves. Reserves that are expected to be recovered from new wells on developed acreage where the subject reserves cannot be recovered without drilling additional wells. PV-10 value. The estimated future net revenue to be generated from the production of proved reserves discounted to present value using an annual discount rate of 10%. These amounts are calculated net of estimated production costs and future development costs, using prices and costs in effect as of a certain date, without escalation and without giving effect to non-property related expenses, such as general and administrative expenses, debt service, future income tax expense, or depreciation, depletion, and amortization. Recompletion. The completion of an existing well for production from a formation that exists behind the casing of the well. Reservoir. A porous and permeable underground formation containing a natural accumulation of producible natural gas and/or oil that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs. Royalty interest. An interest in a natural gas and oil property entitling the owner to a share of natural gas and oil production free of costs of production. Standardized measure. The estimated future net cash flows from proved natural gas and oil reserves computed using prices and costs, at a specific date, after income taxes and discounted at 10%. Tcfe. One trillion cubic feet of natural gas equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids. Undeveloped acreage. Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of natural gas and oil regardless of whether such acreage contains proved reserves. Working interest. The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and receive a share of production. 64 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 ACQUISITION OF CWR PROPERTIES Independent Auditors' Report............................................. F-29 Statement of Revenues and Direct Operating Expenses for the year ended December 31, 1999, with respect to the CWR Properties................... F-30 Notes to Statement of Revenues and Direct Operating Expenses............. F-31 Unaudited Statements of Revenues and Direct Operating Expenses for the periods ended March 31, 2000 and 1999, with respect to the CWR Properties.............................................................. F-33 Notes to Unaudited Statements of Revenues and Direct Operating Expenses.. F-34 3TEC ENERGY CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1998........................................ F-36 Notes to Unaudited Pro Forma Condensed Consolidated Financial Statement.. F-37
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 617,009 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. 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............................................. 294,715 ---------- 9,744,707 ---------- Direct operating expenses: Lease operating expenses........................................... 1,974,219 Production taxes................................................... 173,353 ---------- 2,147,572 ---------- Revenues in excess of direct operating expenses.................. $7,597,135 ==========
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 CWR PROPERTIES UNAUDITED STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES For the three months ended March 31, 2000 and 1999
Three months ended March 31, --------------------- 2000 1999 ---------- ---------- Revenues: Oil revenues........................................... $ 382,254 $ 180,002 Gas revenues........................................... 2,280,752 1,659,911 Gas gathering revenues................................. 49,344 58,172 ---------- ---------- 2,712,350 1,898,085 ---------- ---------- Direct operating expenses: Lease operating expenses............................... 446,564 490,058 Production taxes....................................... 61,726 29,308 ---------- ---------- 508,290 519,366 ---------- ---------- Revenues in excess of direct operating expenses.......... $2,204,060 $1,378,719 ========== ==========
See accompanying notes to the unaudited statements of revenues and direct operating expenses. F-33 CWR PROPERTIES NOTES TO UNAUDITED STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES March 31, 2000 and 1999 (1) Basis of Presentation The accompanying financial statements present the revenues and direct operating expenses of oil and gas properties (the CWR Properties) to be acquired by 3TEC Energy Corporation from C. W. Resources, Inc. and its related parties, Westerman Royalty, Inc. and Carl A. Westerman. The CWR Properties are located in East Texas. The accompanying financial statements were derived from the historical accounting records of C. W. Resources, Inc. Direct operating expenses include lease and well repairs, maintenance and other direct operating expenses. Memorandum adjustments have been made to the financial information in order to present the accompanying financial statements in accordance with generally accepted accounting principles. C. W. Resources, Inc. has made a number of estimates and assumptions relating to the preparation of the financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (2) Omitted Historical Financial Information Full historical financial statements, including general and administrative expense, income tax expense and interest expense have not been presented historically because the CWR Properties were not accounted for or operated as a separate division by C. W. Resources, Inc. or its related parties. Historical depletion expense, including abandonment provision, also has not been included as the basis in the properties will be adjusted in the purchase price allocation when the properties are acquired by 3TEC Energy Corporation; therefore, historical depletion no longer will be relevant. (3) Commitments and Contingencies The management of C. W. Resources, Inc. is not aware of any legal, environmental or other commitments or contingencies that would be materially important in relation to the revenues and direct operating expenses of the CWR Properties. Substantially all gas production from the CWR Properties is marketed by one third party. Substantially all oil production is marketed by another third party. (4) Related Party Transactions C. W. Resources, Inc. operated the oil and gas wells included in the CWR Properties. Fees related to such wells in the amount of approximately $85,000 and $89,000 were charged to the CWR Properties during the three months ended March 31, 2000 and 1999, respectively. The fee is reflected in lease operating expenses in the accompanying statements. (5) Capital Expenditures Direct operating expenses do not include exploration and development expenditures related to the CWR Properties which totaled approximately $500,000 and $1 million for the three months ended March 31, 2000 and 1999, respectively. F-34 3TEC ENERGY CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA The unaudited pro forma condensed consolidated statement of operations of the Company for the year ended December 31, 1998 gives effect to the purchase of the Floyd Oil Properties (the Purchase) as if it had occurred at the beginning of the year presented. The unaudited pro forma condensed consolidated financial statement has also been prepared to give effect to the issuance of 351,681 shares of common stock and warrants to purchase 266,226 shares of Common Stock for an aggregate purchase price of $2,373,844 and the issuance of a senior convertible subordinated note for $2,373,844 under a securities purchase agreement between The Prudential Insurance Company of America (Prudential) and 3TEC Energy Corporation (3TEC) on October 19, 1999, as if it had occurred on September 30, 1999 and at the beginning of the year presented. The unaudited pro forma condensed consolidated statement of operations also gives effect to the August 27, 1999 issuance of 1,585,185 shares of common stock and warrants to purchase 1,200,000 shares of Common Stock for an aggregate purchase price of $10,700,000 and the issuance of a senior convertible subordinated notes for $10,700,000 under the securities purchase agreement with 3TEC Energy Company LLC (3TEC LLC) as if it had occurred at the beginning of the year presented. The Prudential and 3TEC LLC transactions are included in the pro forma condensed consolidated financial statement as the transactions provided a significant portion of the financing for the purchase of the Floyd Oil Properties. The following unaudited pro forma financial data have been included as required by the rules of the SEC and are provided for comparative purposes only. The unaudited pro forma financial data presented are based upon the historical consolidated financial statements of 3TEC and the historical statements of revenues and direct operating expenses of the Floyd Oil Properties and should be read in conjunction with such financial statements and the related notes thereto which are incorporated herein by reference. The pro forma financial data are based upon assumptions and include adjustments as explained in the notes to the unaudited pro forma condensed consolidated financial statements, and the actual recording of the transactions could differ. The unaudited pro forma financial data are not necessarily indicative of the financial results that would have occurred had the Purchase been effective on and as of the date indicated and should not be viewed as indicative of operations in future periods. F-35 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 statement. F-36 3TEC ENERGY CORPORATION NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENT A. To record the issuance of 351,681 shares of common stock and 266,226 warrants for an aggregate purchase price of $2,373,844 and the issuance of a senior convertible subordinated note for $2,373,844 under a securities purchase agreement to Prudential to provide partial financing for the acquisition. B. To record the purchase of the Floyd Oil Properties and other assets pursuant to the transaction. The allocation of the purchase price using the purchase method of accounting is presented below. The allocation of the purchase price is preliminary and, therefore subject to change. Any future adjustments to the allocation of the purchase price are not anticipated to be material to the unaudited pro forma financial statements. 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-37 3TEC ENERGY CORPORATION NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENT--(Continued) I. To record income tax expense on the pro forma adjustments based on 3TEC's statutory tax rate of 34%. J. To reflect the impact on basic weighted average common shares outstanding of 503,426 shares of 3TEC common stock issued for the Floyd Oil Properties, 351,681 shares of 3TEC common stock issued to Prudential under the securities purchase agreement, and 1,607,407 shares of 3TEC common stock issued to EnCap and related party. K. To reflect the impact on diluted weighted average common shares outstanding of 503,426 shares of 3TEC common stock issued for the Floyd Oil Properties, 351,681 shares of 3TEC common stock issued to Prudential under the securities purchase agreement, and 1,607,407 shares of 3TEC common stock issued to EnCap and related party, for the nine months ended September 30, 1999. The weighted average common stock equivalents were not included in 3TEC's diluted weighted average common shares outstanding for the year ended December 31, 1998, because their effect would have been antidilutive. Unaudited Pro Forma Supplemental Oil and Gas Disclosure The following tables set forth certain unaudited pro forma information concerning 3TEC's proved oil and gas reserves at September 30, 1999, giving effect to the acquisition of the Floyd Oil Properties as if they had occurred on January 1, 1998. There are numerous uncertainties inherent in estimating the quantities of proved reserves and projecting future rates of production and timing of development expenditures. The following reserve data represent estimates only and should not be construed as being exact. The proved oil and gas reserve information is as of September 30, 1999 and reflects prices and costs in effect as of such date. Reserves:
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-38 3TEC ENERGY CORPORATION NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENT--(Continued) Standard Measure of Discounted Future Net Cash Flows Relating to Proved Oil & Gas Reserves:
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-39 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 6,500,000 Shares [3TEC Logo] Common Stock ---------------- PROSPECTUS ---------------- Bear, Stearns & Co. Inc. CIBC World Markets Prudential Securities First Union Securities, Inc. June , 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....................... $16,015 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, 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. (Incorporated by reference to Exhibit C to Form DEF14A, filed January 11, 2000.) 2.2 Agreement and Plan of Merger, dated November 24, 1999, by and between 3TEC Energy Corporation, a Delaware corporation, and Middle Bay Oil Company, Inc., an Alabama corporation. (Incorporated by reference to Exhibit A to Form DEF14A, filed October 25, 1999.) 2.3 Form of Purchase Agreement between and among Middle Bay Oil Company, Inc. and private sellers of the properties managed by Floyd Oil Company. (Incorporated by reference to Exhibit 2.1 to Form 8-K filed December 7, 1999.) 2.4 Real Estate Exchange Agreement by and between Middle Bay Oil Company, Inc. and Floyd Oil Company. (Incorporated by reference to Exhibit 2.1 to Form 8-K/A filed December 17, 1999.) 2.5 First Amendment to Agreement and Plan of Merger, effective as of January 14, 2000, by and among 3TEC Energy Corporation, 3TM Acquisition L.L.C., Magellan Exploration, LLC, ECIC Corporation, EnCap Energy Capital Fund III, L.P., EnCap Energy Acquisition III-B, Inc., BOCP Energy Partners, L.P., and Pel-Tex Partners, L.L.C. (Incorporated by reference to Exhibit 2.1 to Form 8-K filed February 4, 2000.) 2.6 Second Amendment to Agreement and Plan of Merger, effective as of February 2, 2000, by and among 3TEC Energy Corporation, 3TM Acquisition L.L.C., Magellan Exploration, LLC, ECIC Corporation, EnCap Energy Capital Fund III, L.P., EnCap Energy Acquisition III-B, Inc., BOCP Energy Partners, L.P., and Pel-Tex Partners, L.L.C. (Incorporated by reference to Exhibit 2.2 to Form 8-K filed February 4, 2000.) 2.7 Form of Agreement of Sale and Purchase by and between C.W. Resources, Inc., Westerman Royalty, Inc., and Carl A. Westerman and 3TEC Energy Corporation. (Incorporated by reference to Exhibit 10.32 to Form S-2 filed April 28, 2000.) 3.1 Certificate of Incorporation of 3TEC Energy Corporation. (Incorporated by reference to Exhibit 3.1 Form 8-K/A filed December 6, 1999.) 3.2 Certificate of Amendment to the Certificate of Incorporation of 3TEC Energy Corporation. (Incorporated by reference to Form 3.3 10-KSB filed March 30, 2000.) 3.3 Certificate of Merger of Middle Bay Oil Company, Inc. into 3TEC Energy Corporation. (Incorporated by reference to Exhibit 3.3 Form 8- K/A filed December 16, 1999.) 3.4 Bylaws of the Company. (Incorporated by reference to Exhibit C of the Company's definitive proxy statement filed October 25, 1999.) 4.1 Certificate of Designation of Series B Preferred Stock of 3TEC Energy Corporation. (Incorporated by reference to Exhibit 3.1 to Form 8-K/A filed December 16, 1999.)
II-2
Exhibit No. Description ------- --------------------------------------------------------------------- 4.2 Certificate of Designation of Series C Preferred Stock of 3TEC Energy Corporation. (Incorporated by reference to Exhibit 3.2 Form 8-K/A filed December 16, 1999.) 4.3 Certificate of Designation of Series D Preferred Stock of 3TEC Energy Corporation. (Incorporated by reference to Exhibit 4.3 to Form 10-QSB filed May 15, 2000.) 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. (Incorporated by reference to Exhibit C to the definitive Proxy Statement filed July 19, 1999.) 10.2 Securities Purchase Agreement, dated August 27, 1999 by and between the Company and Shoemaker Family Partners, LP. (Incorporated by reference to Exhibit 10.2 to Form 10-QSB filed November 15, 1999.) 10.3 Securities Purchase Agreement, dated August 27, 1999 by and between the Company and Shoeinvest II, LP. (Incorporated by reference to Exhibits to Exhibit 10.3 to Form 10-QSB filed November 15, 1999.) 10.4 Securities Purchase Agreement, dated October 19, 1999 between The Prudential Insurance Company of America and the Company. (Incorporated by reference to Exhibit 10.1 to Form 8-K filed November 2, 1999.) 10.5 Shareholders Agreement, dated August 27, 1999 by and among the Company, 3TEC Energy Corporation and the Major Shareholders. (Incorporated by reference to Exhibit 10.5 to Form 10-QSB filed November 15, 1999.) 10.6 Registration Rights Agreement, dated August 27, 1999 by and among the Company, 3TEC Energy Corporation, the Major Shareholders, Shoemaker Family Partners, LP and Shoeinvest II, LP. (Incorporated by reference to Exhibit 10.6 to Form 10-QSB filed November 15, 1999.) 10.7 Amendment to Registration Rights Agreement, dated October 19, 1999 by and among the Company, W/E Energy Company, L.L.C. f/k/a 3TEC Energy Company L.L.C., f/k/a 3TEC Energy Corporation, Shoemaker Family Partners, LP, Shoeinvest II, LP, and The Prudential Insurance Company of America. (Incorporated by reference to Exhibit 10.2 to Form 8-K filed November 2, 1999.) 10.8 Participation Rights Agreement, dated October 19, 1999 by and among the Company, The Prudential Insurance Company of America and W/E Energy Company L.L.C. (Incorporated by reference to Exhibit 10.3 to Form 8-K filed November 2, 1999.) 10.9 Employment Agreement, dated April 15, 2000 by and between Floyd C. Wilson and the Company. (Incorporated by reference to Exhibit 10.9 to Form S-2 filed April 28, 2000.) 10.10 Employment Agreement, dated May 1, 2000, by and between R.A. Walker and the Company. (Incorporated by reference to Exhibit 10.9 to Form S-2 filed April 28, 2000.) 10.11 Restated Credit Agreement by and among Middle Bay Oil Company, Inc., Enex Resources Corporation and Middle Bay Production Company, Inc. as borrowers, and Bank One, Texas, N.A. and other institutions as lenders. (Incorporated by reference to Exhibit 10.1 to Form 8-K/A filed December 17, 1999.) 10.12 Credit Agreement, dated March 27, 1998 by and among the Company, Compass Bank, and Bank of Oklahoma, National Association. (Incorporated by reference to Exhibit 10.11 to Form 10-QSB filed November 15, 1999.) 10.13 First Amendment to Credit Agreement, dated August 27, 1999 by and among the Company, Compass Bank, and Bank of Oklahoma, National Association. (Incorporated by reference to Exhibit 10.12 to Form 10- QSB filed November 15, 1999.) 10.14 Second Amendment to Credit Agreement, dated October 19, 1999 by and among the Company, Compass Bank, and Bank of Oklahoma, National Association. (Incorporated by reference to Exhibit 10.13 to Form 10- QSB filed November 15, 1999.)
II-3
Exhibit No. Description ------- ---------------------------------------------------------------------- 10.15 Subordination Agreement, dated August 27, 1999 by and between 3TEC Energy Corporation, Compass Bank, and Bank of Oklahoma, National Association. (Incorporated by reference to Exhibit 10.14 to Form 10- QSB filed November 15, 1999.) 10.16 Subordination Agreement, dated August 27, 1999 by and among Shoemaker Family Partners, LP, Compass Bank, and Bank of Oklahoma, National Association. (Incorporated by reference to Exhibit 10.15 to Form 10- QSB filed November 15, 1999.) 10.17 Subordination Agreement, dated August 27, 1999 by and among Shoeinvest II, LP, Compass Bank, and Bank of Oklahoma, National Association. (Incorporated by reference to Exhibit 10.16 to Form 10-QSB filed November 15, 1999.) 10.18 Letter Amendment No. 1 to Middle Bay Oil Company, Inc. Securities Purchase Agreement, dated November 23, 1999, by and between Middle Bay Oil Company, Inc. (n/k/a 3TEC Energy Corporation) and The Prudential Insurance Company of America (Incorporated by reference to Exhibit 10.21 to Form S-2 filed April 28, 2000 and replacing the unexecuted Exhibit 10.17 of Form 10-QSB filed November 15, 1999.) 10.19 Intercreditor Agreement, dated as of November 23, 1999, among Middle Bay Oil Company, Inc., Bank One Texas, N.A. and 3TEC Energy Company L.L.C. (Incorporated by reference to Exhibit 10.18 to Form S-2 filed April 28, 2000.) 10.20 Intercreditor Agreement, dated as of November 23, 1999, among Middle Bay Oil Company, Inc., Bank One Texas, N.A. and Shoemaker Family Partners, LP. (Incorporated by reference to Exhibit 10.18 to Form S-2 filed April 28, 2000.) 10.21 Intercreditor Agreement, dated as of November 23, 1999, among Middle Bay Oil Company, Inc., Bank One Texas, N.A. and Shoeinvest II, LP. (Incorporated by reference to Exhibit 10.20 to Form S-2 filed April 28, 2000.) 10.22 Amendment to Securities Purchase Agreement, dated as of November 23, 1999, among Middle Bay Oil Company, Inc. and 3TEC Energy Company L.L.C. (Incorporated by reference to Exhibit 10.22 to Form S-2 filed April 28, 2000.) 10.23 Amendment to Securities Purchase Agreement, dated as of November 23, 1999, among Middle Bay Oil Company, Inc. and Shoemaker Family Partners, LP. (Incorporated by reference to Exhibit 10.23 to Form S-2 filed April 28, 2000.) 10.24 Amendment to Securities Purchase Agreement, dated as of November 23, 1999, among Middle Bay Oil Company, Inc. and Shoeinvest II, LP. (Incorporated by reference to Exhibit 10.24 to Form S-2 filed April 28, 2000.) 10.25 Amended and Restated 1995 Stock Option and Stock Appreciation Rights Plan. (Incorporated by reference to Exhibit B to Form DEF 14A filed May 5, 1997.) 10.26 Amendment No. 1 to the Amended and Restated 1995 Stock Option and Stock Appreciation Rights Plan. (Incorporated by reference to Exhibit B to Form DEF 14A filed May 5, 1998.) 10.27 1999 Stock Option Plan. (Incorporated by reference to Exhibit E to Form DEF 14A filed October 25, 1999.) 10.28* Second Restated Credit Agreement among 3TEC Energy Corporation, Enex Resources Corporation, Middle Bay Production Company, Inc., and Magellan Exploration, LLC, as Borrowers, and Bank One, Texas, N.A. and the Institutions named therein, as Lenders, Bank One, Texas, N.A., as Administrative Agent, Bank of Montreal as Syndication Agent and Banc One Capital Markets, Inc., as Arranger, dated May 31, 2000. 10.29* First Amendment to Shareholders' Agreement by and among 3TEC Energy Corporation, the W/E Shareholders and the Major Shareholders, dated May 30, 2000. 10.30* Private Equity Shelf Agreement by and among 3TEC Energy Corporation and EnCap Energy Capital Fund III, L.P., EnCap Energy Capital Fund III-B, L.P., BOCP Energy Partners, L.P. and Energy Capital Investment Company PLC.
II-4
Exhibit No. Description ------- ---------------------------------------------------------------------- 10.31 Executive Employment Agreement between the Company and Steve W. Herod, dated July 1, 1997. (Incorporated by reference to Exhibit 10.3 to Form 10KSB40 filed on March 31, 1998.) 23.1* Consent of KPMG LLP, independent certified public accountants. 23.2* Consent of Arthur Andersen LLP, independent public accountants. 23.3* Consent of Ryder Scott Company, independent petroleum engineers. 23.4* Consent of H.J. Gruy and Associates, Inc., independent petroleum engineers. 23.5* Consent of Lee Keeling & Associates, Inc., independent petroleum engineers. 23.6 Consent of Thompson Knight Brown Parker & Leahy, L.L.P. (included as part of Exhibit 5.1 hereto.) 24.1 Powers of Attorney (included on signature pages to the Registration Statement.) 27.1* Financial Data Schedule
- -------- * Filed herewith 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. II-5 (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-6 SIGNATURES In accordance with the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has duly caused this Amendment No. 1 to the Registration Statement on Form S-2 to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Houston, State of Texas on June 5, 2000. 3TEC ENERGY CORPORATION /s/ Floyd C. Wilson By: _________________________________ Floyd C. Wilson, Chairman of the Board and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each of R.A. Walker and Larry L. Helm, 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 Amendment No. 1 to the Registration Statement on Form S-2 has been signed below by the following persons in the capacities indicated and on June 5, 2000. Signature Title /s/ Floyd C. Wilson Chairman of the Board and Chief - ----------------------------------- Executive Officer Floyd C. Wilson /s/ R. A. Walker President, Chief Financial Officer - ----------------------------------- and Director R. A. Walker /s/ Stephen W. Herod Executive Vice President and - ----------------------------------- Director Stephen W. Herod /s/ Terry W. Gautier* Controller - ----------------------------------- Terry W. Gautier /s/ David B. Miller* Director - ----------------------------------- David B. Miller /s/ D. Martin Phillips* Director - ----------------------------------- D. Martin Phillips /s/ Gary R. Christopher* Director - ----------------------------------- Gary R. Christopher /s/ Larry L. Helm Director - ----------------------------------- Larry L. Helm
/s/ Stephen W. Herod *By:__________________________ Stephen W. Herod, as attorney-in-fact II-7 EXHIBIT INDEX
Exhibit No. Description ------- --------------------------------------------------------------------- 1.1* Underwriting Agreement, 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. (Incorporated by reference to Exhibit C to Form DEF14A, filed January 11, 2000.) 2.2 Agreement and Plan of Merger, dated November 24, 1999, by and between 3TEC Energy Corporation, a Delaware corporation, and Middle Bay Oil Company, Inc., an Alabama corporation. (Incorporated by reference to Exhibit A to Form DEF14A, filed October 25, 1999.) 2.3 Form of Purchase Agreement between and among Middle Bay Oil Company, Inc. and private sellers of the properties managed by Floyd Oil Company. (Incorporated by reference to Exhibit 2.1 to Form 8-K filed December 7, 1999.) 2.4 Real Estate Exchange Agreement by and between Middle Bay Oil Company, Inc. and Floyd Oil Company. (Incorporated by reference to Exhibit 2.1 to Form 8-K/A filed December 17, 1999.) 2.5 First Amendment to Agreement and Plan of Merger, effective as of January 14, 2000, by and among 3TEC Energy Corporation, 3TM Acquisition L.L.C., Magellan Exploration, LLC, ECIC Corporation, EnCap Energy Capital Fund III, L.P., EnCap Energy Acquisition III-B, Inc., BOCP Energy Partners, L.P., and Pel-Tex Partners, L.L.C. (Incorporated by reference to Exhibit 2.1 to Form 8-K filed February 4, 2000.) 2.6 Second Amendment to Agreement and Plan of Merger, effective as of February 2, 2000, by and among 3TEC Energy Corporation, 3TM Acquisition L.L.C., Magellan Exploration, LLC, ECIC Corporation, EnCap Energy Capital Fund III, L.P., EnCap Energy Acquisition III-B, Inc., BOCP Energy Partners, L.P., and Pel-Tex Partners, L.L.C. (Incorporated by reference to Exhibit 2.2 to Form 8-K filed February 4, 2000.) 2.7 Form of Agreement of Sale and Purchase by and between C.W. Resources, Inc., Westerman Royalty, Inc., and Carl A. Westerman and 3TEC Energy Corporation. (Incorporated by reference to Exhibit 10.32 to Form S-2 filed April 28, 2000.) 3.1 Certificate of Incorporation of 3TEC Energy Corporation. (Incorporated by reference to Exhibit 3.1 Form 8-K/A filed December 6, 1999.) 3.2 Certificate of Amendment to the Certificate of Incorporation of 3TEC Energy Corporation. (Incorporated by reference to Form 3.3 10-KSB filed March 30, 2000.) 3.3 Certificate of Merger of Middle Bay Oil Company, Inc. into 3TEC Energy Corporation. (Incorporated by reference to Exhibit 3.3 Form 8- K/A filed December 16, 1999.) 3.4 Bylaws of the Company. (Incorporated by reference to Exhibit C of the Company's definitive proxy statement filed October 25, 1999.) 4.1 Certificate of Designation of Series B Preferred Stock of 3TEC Energy Corporation. (Incorporated by reference to Exhibit 3.1 to Form 8-K/A filed December 16, 1999.) 4.2 Certificate of Designation of Series C Preferred Stock of 3TEC Energy Corporation. (Incorporated by reference to Exhibit 3.2 Form 8-K/A filed December 16, 1999.) 4.3 Certificate of Designation of Series D Preferred Stock of 3TEC Energy Corporation. (Incorporated by reference to Exhibit 4.3 to Form 10-QSB filed May 15, 2000.) 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. (Incorporated by reference to Exhibit C to the definitive Proxy Statement filed July 19, 1999.)
Exhibit No. Description ------- ---------------------------------------------------------------------- 10.2 Securities Purchase Agreement, dated August 27, 1999 by and between the Company and Shoemaker Family Partners, LP. (Incorporated by reference to Exhibit 10.2 to Form 10-QSB filed November 15, 1999.) 10.3 Securities Purchase Agreement, dated August 27, 1999 by and between the Company and Shoeinvest II, LP. (Incorporated by reference to Exhibits to Exhibit 10.3 to Form 10-QSB filed November 15, 1999.) 10.4 Securities Purchase Agreement, dated October 19, 1999 between The Prudential Insurance Company of America and the Company. (Incorporated by reference to Exhibit 10.1 to Form 8-K filed November 2, 1999.) 10.5 Shareholders Agreement, dated August 27, 1999 by and among the Company, 3TEC Energy Corporation and the Major Shareholders. (Incorporated by reference to Exhibit 10.5 to Form 10-QSB filed November 15, 1999.) 10.6 Registration Rights Agreement, dated August 27, 1999 by and among the Company, 3TEC Energy Corporation, the Major Shareholders, Shoemaker Family Partners, LP and Shoeinvest II, LP. (Incorporated by reference to Exhibit 10.6 to Form 10-QSB filed November 15, 1999.) 10.7 Amendment to Registration Rights Agreement, dated October 19, 1999 by and among the Company, W/E Energy Company, L.L.C. f/k/a 3TEC Energy Company L.L.C., f/k/a 3TEC Energy Corporation, Shoemaker Family Partners, LP, Shoeinvest II, LP, and The Prudential Insurance Company of America. (Incorporated by reference to Exhibit 10.2 to Form 8-K filed November 2, 1999.) 10.8 Participation Rights Agreement, dated October 19, 1999 by and among the Company, The Prudential Insurance Company of America and W/E Energy Company L.L.C. (Incorporated by reference to Exhibit 10.3 to Form 8-K filed November 2, 1999.) 10.9 Employment Agreement, dated April 15, 2000 by and between Floyd C. Wilson and the Company. (Incorporated by reference to Exhibit 10.9 to Form S-2 filed April 28, 2000.) 10.10 Employment Agreement, dated May 1, 2000, by and between R.A. Walker and the Company. (Incorporated by reference to Exhibit 10.9 to Form S- 2 filed April 28, 2000.) 10.11 Restated Credit Agreement by and among Middle Bay Oil Company, Inc., Enex Resources Corporation and Middle Bay Production Company, Inc. as borrowers, and Bank One, Texas, N.A. and other institutions as lenders. (Incorporated by reference to Exhibit 10.1 to Form 8-K/A filed December 17, 1999.) 10.12 Credit Agreement, dated March 27, 1998 by and among the Company, Compass Bank, and Bank of Oklahoma, National Association. (Incorporated by reference to Exhibit 10.11 to Form 10-QSB filed November 15, 1999.) 10.13 First Amendment to Credit Agreement, dated August 27, 1999 by and among the Company, Compass Bank, and Bank of Oklahoma, National Association. (Incorporated by reference to Exhibit 10.12 to Form 10- QSB filed November 15, 1999.) 10.14 Second Amendment to Credit Agreement, dated October 19, 1999 by and among the Company, Compass Bank, and Bank of Oklahoma, National Association. (Incorporated by reference to Exhibit 10.13 to Form 10- QSB filed November 15, 1999.) 10.15 Subordination Agreement, dated August 27, 1999 by and between 3TEC Energy Corporation, Compass Bank, and Bank of Oklahoma, National Association. (Incorporated by reference to Exhibit 10.14 to Form 10- QSB filed November 15, 1999.) 10.16 Subordination Agreement, dated August 27, 1999 by and among Shoemaker Family Partners, LP, Compass Bank, and Bank of Oklahoma, National Association. (Incorporated by reference to Exhibit 10.15 to Form 10- QSB filed November 15, 1999.) 10.17 Subordination Agreement, dated August 27, 1999 by and among Shoeinvest II, LP, Compass Bank, and Bank of Oklahoma, National Association. (Incorporated by reference to Exhibit 10.16 to Form 10-QSB filed November 15, 1999.)
Exhibit No. Description ------- ---------------------------------------------------------------------- 10.18 Letter Amendment No. 1 to Middle Bay Oil Company, Inc. Securities Purchase Agreement, dated November 23, 1999, by and between Middle Bay Oil Company, Inc. (n/k/a 3TEC Energy Corporation) and The Prudential Insurance Company of America (Incorporated by reference to Exhibit 10.21 to Form S-2 filed April 28, 2000 and replacing the unexecuted Exhibit 10.17 of Form 10-QSB filed November 15, 1999.) 10.19 Intercreditor Agreement, dated as of November 23, 1999, among Middle Bay Oil Company, Inc., Bank One Texas, N.A. and 3TEC Energy Company L.L.C. (Incorporated by reference to Exhibit 10.18 to Form S-2 filed April 28, 2000.) 10.20 Intercreditor Agreement, dated as of November 23, 1999, among Middle Bay Oil Company, Inc., Bank One Texas, N.A. and Shoemaker Family Partners, LP. (Incorporated by reference to Exhibit 10.18 to Form S-2 filed April 28, 2000.) 10.21 Intercreditor Agreement, dated as of November 23, 1999, among Middle Bay Oil Company, Inc., Bank One Texas, N.A. and Shoeinvest II, LP. (Incorporated by reference to Exhibit 10.20 to Form S-2 filed April 28, 2000.) 10.22 Amendment to Securities Purchase Agreement, dated as of November 23, 1999, among Middle Bay Oil Company, Inc. and 3TEC Energy Company L.L.C. (Incorporated by reference to Exhibit 10.22 to Form S-2 filed April 28, 2000.) 10.23 Amendment to Securities Purchase Agreement, dated as of November 23, 1999, among Middle Bay Oil Company, Inc. and Shoemaker Family Partners, LP. (Incorporated by reference to Exhibit 10.23 to Form S-2 filed April 28, 2000.) 10.24 Amendment to Securities Purchase Agreement, dated as of November 23, 1999, among Middle Bay Oil Company, Inc. and Shoeinvest II, LP. (Incorporated by reference to Exhibit 10.24 to Form S-2 filed April 28, 2000.) 10.25 Amended and Restated 1995 Stock Option and Stock Appreciation Rights Plan. (Incorporated by reference to Exhibit B to Form DEF 14A filed May 5, 1997.) 10.26 Amendment No. 1 to the Amended and Restated 1995 Stock Option and Stock Appreciation Rights Plan. (Incorporated by reference to Exhibit B to Form DEF 14A filed May 5, 1998.) 10.27 1999 Stock Option Plan. (Incorporated by reference to Exhibit E to Form DEF 14A filed October 25, 1999.) 10.28* Second Restated Credit Agreement among 3TEC Energy Corporation, Enex Resources Corporation, Middle Bay Production Company, Inc., and Magellan Exploration, LLC, as Borrowers, and Bank One, Texas, N.A. and the Institutions named therein, as Lenders, Bank One, Texas, N.A., as Administrative Agent, Bank of Montreal as Syndication Agent and Banc One Capital Markets, Inc., as Arranger, dated May 31, 2000. 10.29* First Amendment to Shareholders' Agreement by and among 3TEC Energy Corporation, the W/E Shareholders and the Major Shareholders, dated May 30, 2000. 10.30* Private Equity Shelf Agreement by and among 3TEC Energy Corporation and EnCap Energy Capital Fund III, L.P., EnCap Energy Capital Fund III-B, L.P., BOCP Energy Partners, L.P. and Energy Capital Investment Company PLC. 10.31 Executive Employment Agreement between the Company and Steve W. Herod, dated July 1, 1997. (Incorporated by reference to Exhibit 10.3 to Form 10KSB40 filed on March 31, 1998.) 23.1* Consent of KPMG LLP, independent certified public accountants. 23.2* Consent of Arthur Andersen LLP, independent public accountants. 23.3* Consent of Ryder Scott Company, independent petroleum engineers. 23.4* Consent of H.J. Gruy and Associates, Inc., independent petroleum engineers.
Exhibit No. Description ------- -------------------------------------------------------------------- 23.5* Consent of Lee Keeling & Associates, Inc., independent petroleum engineers. 23.6 Consent of Thompson Knight Brown Parker & Leahy, L.L.P. (included as part of Exhibit 5.1 hereto.) 24.1 Powers of Attorney (included on signature pages to the Registration Statement). 27.1* Financial Data Schedule
- -------- * Filed herewith EX-1.1 2 0002.txt UNDERWRITING AGREEMENT EXHIBIT 1.1 6,500,000 Shares of Common Stock 3TEC ENERGY CORPORATION UNDERWRITING AGREEMENT June _____, 2000 BEAR, STEARNS & CO. INC. CIBC World Markets Corp. Prudential Securities Incorporated First Union Securities, Inc. as Representatives of the several Underwriters Named in Schedule I hereto c/o Bear, Stearns & Co. Inc. 245 Park Avenue New York, N.Y. 10167 Dear Sirs: 3TEC Energy Corporation, a corporation organized and existing under the laws of Delaware (the "Company"), proposes, subject to the terms and conditions stated herein, to issue and sell to the several underwriters named in Schedule I hereto (the "Underwriters"), acting severally and not jointly, an aggregate of 6,500,000 shares (the "Firm Shares") of the Company's common stock, par value $.02 per share (the "Common Stock"). The Company also proposes to issue and sell to the several Underwriters, for the sole purpose of covering over-allotments in connection with the sale of the Firm Shares, and at the option of the Underwriters, up to an additional 975,000 shares (the "Additional Shares") of Common Stock. The Firm Shares and the Additional Shares are referred to herein collectively as the "Shares." The Shares are more fully described in the Registration Statement referred to below. 1. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, the Underwriters that: (a) The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement, and may have filed an amendment or amendments thereto, on Form S-2 (Registration No. 333-35914), and related preliminary prospectuses, as amended, for the registration under the Securities Act of 1933, as amended (the "Securities Act"), of the Shares (including the Additional Shares) of Common Stock, which registration statement, as so amended, has been declared effective by the Commission on the date hereof and copies of which have heretofore been delivered to the Underwriters. The registration statement, as amended at the time it became effective, including the exhibits and information (if any) deemed to be a part of the registration statement at the time of effectiveness pursuant to paragraph (b) of Rule 430A or Rule 434 of the rules and regulations of the Commission under the Securities Act (the "Securities Act Regulations"), and any post-effective amendments thereto under Rule 462(d) through the Closing Date (as defined below) is hereinafter called the "Registration Statement." If the Company has filed or is required pursuant to the terms hereof to file a registration statement pursuant to Rule 462(b) under the Securities Act Regulations registering additional shares of Common Stock (a "Rule 462(b) Registration Statement"), then, and unless otherwise specified, any reference herein to the term "Registration Statement" shall be deemed to include such Rule 462(b) Registration Statement. Other than a Rule 462(b) Registration Statement, if any, which became effective upon filing, no other document with respect to the Registration Statement has heretofore been filed with the Commission (other than prospectuses filed pursuant to Rule 424(b) of the Securities Act Regulations, each in the form heretofore delivered to the Underwriters). No stop order suspending the effectiveness of the Registration Statement (including any Rule 462(b) Registration Statement) has been issued and no proceeding for that purpose has been initiated or, to the Company's knowledge, threatened by the Commission. The prospectus relating to the Shares, in the form in which it is to be filed with the Commission pursuant to Rule 424(b) of the Securities Act Regulations, is hereinafter referred to as the "Prospectus," except that, subject to Sections 4(a) and 4(b) below, if any revised prospectus or prospectus supplement shall be provided to the Underwriters by the Company for use in connection with the offering and sale of the Shares (the "Offering") which differs from the Prospectus (whether or not such revised prospectus or prospectus supplement is required to be filed by the Company pursuant to Rule 424(b) of the Securities Act Regulations), the term "Prospectus" shall refer to such revised prospectus or prospectus supplement, as the case may be, from and after the time it is first provided to the Underwriters for such use. All references to the "Registration Statement" and the "Prospectus" shall be deemed to include all documents incorporated therein by reference pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Any preliminary prospectus or prospectus subject to completion included in the Registration Statement or filed with the Commission as described in Rule 430A or Rule 424 of the Securities Act is hereafter called a "Preliminary Prospectus." All references in this Agreement to the Registration Statement, the Rule 462(b) Registration Statement, a Preliminary Prospectus and the Prospectus, or any amendments or supplements to any of the foregoing, shall be deemed to include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"). (b) The Registration Statement and the Prospectus, and any amendments thereof or supplements thereto, at the time the Registration Statement became effective, at the time any post-effective amendment to the Registration Statement is filed with the Commission, at the time the Prospectus is first filed with the Commission, at the time any supplement or amendment to the Prospectus is filed with the Commission, at the time any documents incorporated by reference in the Registration Statement or the Prospectus are amended or supplemented to comply with the Exchange Act, and as of the Closing Date, and Additional Closing Date, if any (as hereinafter respectively defined), and the Preliminary Prospectus, and any amendments thereof or supplements thereto, as of the date thereof, complied and comply in all material respects with the requirements of the Securities Act and the Securities Act Regulations, and did not and as of the Closing Date, and Additional Closing Date, if any, will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not 2 misleading. The Prospectus, as of the date hereof (unless the term "Prospectus" refers to a prospectus which has been provided to the Underwriters by the Company for use in connection with the offering of the Shares which differs from the Prospectus filed with the Commission pursuant to Rule 424(b) of the Securities Act Regulations, in which case at the time it is first provided to the Underwriters for such use) and on the Closing Date, and Additional Closing Date, if any, does not and will not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this Section (1)(b) shall not apply to statements in or omissions from the Registration Statement or Prospectus made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by any Underwriter expressly for use in the Registration Statement or the Prospectus. Each Preliminary Prospectus and Prospectus filed as part of the Registration Statement, as part of any amendment thereto or pursuant to Rule 424 under the Securities Act Regulations, if filed by electronic transmission pursuant to Regulation S-T under the Securities Act, was identical to the copy thereof delivered to the Underwriters for use in connection with the offer and sales of the Shares (except as may be permitted by Regulation S-T under the Securities Act). There are no contracts or other documents required to be described in the Prospectus or to be filed as exhibits to the Registration Statement under the Securities Act that have not been described or filed therein as required, and there are no business relationships or related-party transactions directly or indirectly involving the Company or any other person required to be described in the Prospectus that have not been described therein as required. (c) Arthur Andersen LLP and KPMG LLP, who have certified certain financial statements of the Company and have delivered their reports with respect to the Company's audited financial statements included in the Registration Statement, the Prospectus and any Preliminary Prospectus, are independent public accountants as required by the Securities Act and the Securities Act Regulations. (d) Ryder Scott Company ("Ryder"), petroleum engineers from whose reserve reports information is set forth in the Registration Statement, the Prospectus and each Preliminary Prospectus, are independent petroleum engineers with respect to the Company. The factual information underlying the estimates of the reserves of the Company which was provided by the Company to Ryder for purposes of preparing the reserve information referenced in the Registration Statement, the Prospectus and each Preliminary Prospectus (the "Reserve Information") including, without limitation, production, volumes, sales prices for production, contractual pricing provisions under gas sales or marketing contracts, hedging arrangements, incurred costs of operations and development, and working interest and net revenue information relating to the Company's ownership interests in properties, was true and correct in all material respects on the date such information was furnished to Ryder and as of the date hereof; the estimates of future capital expenditures and other future exploration and development costs supplied to Ryder were prepared in good faith and with a reasonable basis. The information provided to Ryder for purposes of preparing the Reserve Information was prepared in accordance with customary industry practices. Except as described in the Prospectus, the Company is not aware of any facts or circumstances that would result in a 3 material adverse change in its reserves in the aggregate, or the aggregate present value of estimated future net revenues or the standardized measure of discounted future net cash flows therefrom, as described in the Prospectus and reflected in the Reserve Information. Estimates of the reserves and the present value of the estimated future net revenues and the discounted future net cash flows derived therefrom as described in the Prospectus and reflected in the Reserve Information comply in all material respects to the applicable requirements of Regulation S-X of the Securities Act Regulations and Industry Guide 2 under the Securities Act. (e) The documents incorporated by reference in the Registration Statement and the Prospectus, at the time filed with the Commission, conformed in all material respects to the requirements of the Exchange Act, as amended, and the rules and regulations of the Commission thereunder, or the Securities Act and the Securities Act Regulations, as applicable. (f) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, there has been no material adverse change or any development involving a prospective material adverse change in the business, prospects, properties, operations, condition (financial or otherwise) affairs or management of the Company, whether or not arising from transactions in the ordinary course of business, and since the date of the latest balance sheet presented in the Registration Statement and the Prospectus, the Company has not incurred or undertaken any liabilities or obligations, direct or contingent, which are material to the Company, except for liabilities or obligations which are reflected in the Registration Statement and the Prospectus. (g) The Company (i) has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, (ii) has all requisite corporate power and authority, and all necessary consents, approvals, authorizations, orders, registrations, qualifications, licenses and permits of and from all public, regulatory or governmental agencies and bodies, to carry on its business as it is currently being conducted and as described in the Registration Statement and the Prospectus and to own, lease and operate its properties, (iii) other than the subsidiaries listed on Schedule 1 (the "Subsidiaries"), has no subsidiaries and (iv) is duly qualified and in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification except, with respect to clauses (i) (as it relates to good standing) and (iv), where the failure to be in good standing or so qualified does not and could not reasonably be expected to (x) individually or in the aggregate, result in a material adverse effect on the business, prospects, properties, operations, condition (financial or otherwise), affairs or management of the Company, (y) interfere with or adversely affect the issuance or marketability of the Shares pursuant hereto or (z) in any manner draw into question the validity of this Agreement or the transactions described in the Prospectus under the caption "Use of Proceeds" (any of the events set forth in clauses (x), (y) or (z), being referred to as a "Material Adverse Effect"). (h) Each of the Subsidiaries (i) has been duly organized and is validly existing as a corporation, or limited liability company, as the case may be, in good standing under the laws of the 4 province or state of its organization, (ii) has all requisite corporate or similar power and authority, and all necessary consents, approvals, authorizations, orders, registrations, qualifications, licenses and permits of and from all public, regulatory or governmental agencies and bodies, to carry on its business as it is currently being conducted and as described in the Registration Statement and the Prospectus and to own, lease and operate its properties, (iii) has no subsidiaries and (iv) is duly qualified and in good standing as a foreign corporation, or limited liability company, as the case may be, authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification except, with respect to clauses (i) (as it relates to good standing) and (iv), where the failure to be in good standing or so qualified does not and could not reasonably be expected to result in a "Material Adverse Effect". (i) This Agreement and the transactions contemplated hereby have been duly and validly authorized by the Company. This Agreement has been duly and validly executed and delivered by the Company, and is the legal, valid, binding agreement of the Company. (j) The execution, delivery, and performance of this Agreement, the issuance, offering and sale of the Shares, and the consummation of the transactions contemplated hereby and in the Prospectus do not and will not (i) violate, conflict with or constitute a breach of any of the terms and provisions of, or constitute a default (or an event which with notice or lapse of time, or both, would constitute a default) or require consent under, or result in the creation or imposition of any lien, charge or encumbrance upon any properties or assets of the Company, or result in an acceleration of any indebtedness of the Company pursuant to (A) the Certificate of Incorporation or By-Laws of the Company, in each case as amended through the date hereof (B) any bond, debenture, note, indenture, mortgage, deed of trust, contract or other agreement or instrument to which the Company or any subsidiary is a party or by which the Company or any of its subsidiaries or their respective properties or assets are or may be bound, (C) any statute, rule or regulation applicable to the Company or any of its subsidiaries or any of their respective properties or assets (D) any judgment, order or decree of any court or governmental agency or authority having jurisdiction over the Company or any of its subsidiaries or any of their respective properties or assets. No consent, approval, authorization, order, registration, filing, qualification, license or permit of or with (i) any court or any governmental agency or authority having jurisdiction over the Company or any of its subsidiaries or any of their respective properties or assets or (ii) any other person is required for (A) the execution, delivery and performance by the Company of this Agreement, (B) the issuance, sale and delivery of the Shares to be issued, sold and delivered by the Company hereunder and the consummation of the transactions contemplated hereby, except such as have been obtained under the Securities Act and such consents, approvals, authorizations, orders, registrations, filings, qualifications, licenses and permits as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters. (k) All of the outstanding shares of Common Stock, are duly authorized and validly issued, and are fully paid and nonassessable and were not issued and are not now in violation of or subject to any preemptive or similar rights. The Shares being sold by the Company under this Agreement are duly authorized, and, when issued, delivered and paid for in accordance with this 5 Agreement, will be validly issued, and fully paid and nonassessable, and will not have been issued in violation of or be subject to any preemptive or similar rights. As of March 31, 2000, after giving effect to the issuance and sale of the Shares pursuant hereto and the application of the net proceeds from the sale thereof, the Company had the pro forma capitalization as set forth in the Prospectus under the caption "Capitalization." The capital stock of the Company conforms to the description thereof contained in the Prospectus, or if the Prospectus is not in existence, the most recent Preliminary Prospectus. (l) Except as disclosed in the Prospectus, there are not currently, and will not be as a result of the Offering, any outstanding subscriptions, rights, warrants, calls, commitments of sale or options to acquire or instruments convertible into or exchangeable for, any capital stock or other equity interest of the Company or any of its subsidiaries (other than options issued pursuant to the Company's stock option plans). (m) There is (i) no action, suit or proceeding before or by any court, arbitrator or governmental agency, body or official, domestic or foreign, now pending or, to the best knowledge of the Company, threatened or contemplated to which the Company is a party or to which the business or property of the Company is subject, (ii) no statute, rule, regulation or order that has been enacted, adopted or issued by any governmental agency to the company's knowledge and (iii) no injunction, restraining order or order of any nature by a federal or state court or foreign court of competent jurisdiction to which the Company or any of its subsidiaries is or may be subject or to which the business, assets, or property of the Company or any of its subsidiaries are or may be subject, that, in the case of clauses (i), (ii) and (iii) above, is required to be disclosed in the Registration Statement and the Prospectus and which could, individually or in the aggregate, result in a Material Adverse Effect. (n) The Company has not directly or indirectly (a) taken (other than through the actions, if any, of the Underwriters) any action designed to, or that might reasonably be expected to, cause or result in or which constitutes or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares or (b) since the filing of the Preliminary Prospectus (i) sold, bid for, purchased or paid any person any compensation for soliciting purchases of, shares of Common Stock or (ii) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company. (o) The financial statements, together with the related notes, included in the Registration Statement and the Prospectus (and any amendment or supplement thereto) present fairly in all material respects the financial position, results of operations, cash flows, and changes in stockholders' equity of the Company or its predecessors, as applicable, as of and at the dates indicated and for the periods specified. Such financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved, and comply with Regulation S-X of the Securities Act Regulations. The financial data set forth in the Prospectus under the captions "Prospectus Summary--Summary Historical and Pro 6 Forma Consolidated Financial Data," "Selected Consolidated Historical and Pro Forma Financial Data" and "Capitalization" fairly present the information set forth therein on a basis consistent with that of the audited financial statements contained in the Prospectus. (p) There are no holders of securities of the Company who, by reason of the execution by the Company of this Agreement or the consummation by the Company of the transactions contemplated hereby, have the right to request or demand that the Company register under the Securities Act or analogous foreign laws and regulations securities held by them, other than such that have been duly exercised or waived. (q) The Company is not, and upon consummation of the transactions contemplated hereby will not be, (i) an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "Investment Company Act"), or be subject to registration under the Investment Company Act, or (ii) a "holding company" or a "subsidiary company" or an "affiliate" of a holding company within the meaning of the Public Utility Holding Company Act of 1935, as amended. (r) The Common Stock is registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is listed for quotation on the NASDAQ National Market, and the Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act or delisting the Common Stock from the NASDAQ National Market, nor has the Company received any notification that the Commission or the NASDAQ National Market is contemplating terminating such registration or listing. (s) The Company has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement and to consummate the transactions contemplated hereby, including, without limitation, the corporate power and authority to issue, sell and deliver the Shares as provided herein and the corporate power to effect the use of proceeds from the Offering as described in the Prospectus. (t) The Company is not (i) in violation of its Certificate of Incorporation or By-Laws, (ii) in breach or default (nor does any condition exist that, with notice, the passage of time or both, would constitute a breach or default) in the performance of any obligation, agreement or condition contained in any bond, debenture, note, indenture, mortgage, deed of trust or other material agreement or instrument to which it is a party or by which it is bound or to which any of its properties is subject, or (iii) in violation, in any material respect, of any local, state or federal law, statute, ordinance, rule, regulation, requirement, judgment or court decree applicable to the Company or any of its subsidiaries or any of their respective assets or properties (whether owned or leased). (u) No action has been taken and no statute, rule, regulation or order has been enacted, adopted or issued by any governmental agency that prevents the issuance of the Shares or prevents or suspends the use of the Prospectus; no injunction, restraining order or order of any kind by a federal or state court of competent jurisdiction has been issued that prevents the issuance of the 7 Shares, prevents or suspends the sale of the Shares in any jurisdiction or that could adversely affect the consummation of the transactions contemplated by this Agreement or the Prospectus; and every request of any securities authority or agency of any jurisdiction for additional information has been complied with in all material respects. (v) There is (i) no significant unfair labor practice complaint pending against the Company nor, to the best knowledge of the Company, threatened against it, before the National Labor Relations Board, any state or local labor relations board or any foreign labor relations board, and no significant grievance or significant arbitration proceeding arising out of or under any collective bargaining agreement is so pending against the Company nor, to the best knowledge of the Company, threatened against it, (ii) no strike, labor dispute, slowdown or stoppage pending against the Company nor, to the best knowledge of the Company, threatened against it and (iii) to the best knowledge of the Company, no union representation question existing with respect to the employees of the Company. To the best knowledge of the Company, no collective bargaining organizing activities are taking place with respect to the Company. The Company has not violated, in any material respect, (A) any federal, state or local law or foreign law relating to discrimination in hiring, promotion or pay of employees, (B) any applicable wage or hour laws or (C) any provision of the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder (collectively, "ERISA"). (w) The Company is not in violation of any federal or state law or regulation relating to occupational safety and health or to the storage, handling or transportation of hazardous or toxic materials ("Environmental Laws") and, to the best knowledge of the Company, the Company has received all permits, licenses and other approvals required of it under applicable federal and state occupational safety and health and environmental laws and regulations to conduct its business, and the Company is in compliance with all terms and conditions of any such permit, license or approval, except any such violation of law or regulation, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals which would not, individually or in the aggregate, be reasonably expected to have a Material Adverse Effect. There has been no storage, disposal, generation, transportation, handling or treatment of hazardous substances or solid wastes by the Company (or to the knowledge of the Company any of its predecessors in interest) at, upon or from any of the property now or previously owned or leased by the Company in violation of any applicable law, ordinance, rule, regulation, order, judgment, decree or permit which would require remedial action by the Company under any applicable law, ordinance, rule, regulation, order, judgment, decree or permit except for those which have already been remedied, have been provided for through escrow of a portion of the acquisition consideration, have been assumed by a third party, or which would not result in, or which would not be reasonably likely to result, individually or in the aggregate, in a Material Adverse Effect. There has been no spill, discharge, leak, emission, injection, escape, dumping or release of any kind onto such property or into the environment surrounding such property of any solid wastes or hazardous substances due to or caused by the Company, except for any such spill, discharge, leak, emission, injection, escape, dumping or release which has already been remedied, has been assumed by a third party, or which would not result, or which would not be reasonably expected to result, individually 8 or in the aggregate, in a Material Adverse Effect. The terms "hazardous substances" and "solid wastes" shall have the meanings set forth in any currently applicable local, state, and federal laws or regulations with respect to environmental protection. (x) The Company has (i) good and marketable title in fee simple to all items of real property and defensible title to all personal property owned by it, free and clear of all security interests, liens, charges, encumbrances, equities, restrictions, claims and other defects, except such as are described in the Prospectus or as would not have a Material Adverse Effect, and (ii) peaceful and undisturbed possession of its properties under all material leases to which it is a party as lessee. The Company has good and defensible title (i) to its oil and gas properties, including its wells and its leasehold interest therein, and (ii) to its net revenue interests therein in accordance with such leases, free and clear of all security interests, liens, charges, encumbrances, equities, restrictions, claims and other defects, except such as are described in the Prospectus or as would not have a Material Adverse Effect. The working interests in oil and gas leases held by the Company reflect in all material respects the right of the Company to explore or receive production from such underlying leases, and the care taken by the Company with respect to acquiring or otherwise procuring such leases was generally consistent with standard industry practices for acquiring or procuring such leases. All material leases to which the Company is a party are valid and binding, and no default by the Company has occurred and is continuing thereunder and, to the best knowledge of the Company, no material defaults by the landlord are existing under any such lease that could result in a Material Adverse Effect. (y) Except as described in the Prospectus (i) all royalties, rentals, deposits and other amounts due on the oil and gas properties of the Company have been properly and timely paid, and no proceeds from the sale or production attributable to the oil and gas properties of the Company are currently being held in suspense by any purchaser thereof that could result in a Material Adverse Effect, and (ii) there are no claims under take-or-pay contracts pursuant to which natural gas purchasers have any make-up rights affecting the interests of the Company in its oil and gas properties that could result in a Material Adverse Effect. (z) As of the date hereof, the aggregate undiscounted monetary liability of the Company for oil or natural gas taken or received under any operating or other agreement relating to its oil and gas properties that permits any person to receive any portion of the interest of the Company in oil and natural gas or to receive cash or other payments to balance any disproportionate allocation of oil or natural gas could not have a Material Adverse Effect. (aa) The Company has (i) all licenses, certificates, permits, authorizations, approvals, franchises and other rights from, and has made all declarations and filings with, all federal, state and local authorities, all self-regulatory authorities and all courts and other tribunals (each an "Authorization") necessary to engage in the business conducted by it in the manner described in the Prospectus, except as described in the Prospectus or where failure to hold such Authorizations would not, individually or in the aggregate, have a Material Adverse Effect and (ii) no reason to believe that any governmental body or agency is considering limiting, suspending or revoking any such 9 Authorization. Except where the failure to be in full force and effect would not have a Material Adverse Effect, all such Authorizations are valid and in full force and effect, and the Company is in compliance in all material respects with the terms and conditions of all such Authorizations and with the rules and regulations of the regulatory authorities having jurisdiction with respect thereto. (bb) Neither the Company nor, to the best knowledge of the Company, any of its officers, directors, partners, employees, agents or affiliates or any other person acting on behalf of the Company, has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, official or employee of any governmental agency (domestic or foreign), instrumentality of any government (domestic or foreign) or any political party or candidate for office (domestic or foreign) or other person who was, is or may be in a position to help or hinder the business of the Company (or assist the Company in connection with any actual or proposed transaction), which (i) might subject the Company, or any other individual or entity, to any damage or penalty in any civil, criminal or governmental litigation or proceeding (domestic or foreign), (ii) if not given in the past, might have had a Material Adverse Effect or (iii) if not continued in the future, might have a Material Adverse Effect. (cc) All material tax returns required to be filed by the Company in all jurisdictions have been so filed. All taxes, including withholding taxes, penalties and interest, assessments, fees and other charges due or claimed to be due from such entities or that are due and payable have been paid, other than those being contested in good faith through appropriate proceedings diligently pursued and for which adequate reserves have been provided or those currently payable without penalty or interest. To the knowledge of the Company, there are no material proposed additional tax assessments against the Company or the assets or property of the Company. The Company has made adequate (in the opinion of the Company) charges, accruals and reserves in the applicable financial statements included in the Prospectus in respect of all federal, state and foreign income and franchise taxes for all periods presented therein as to which the tax liability of the Company has not been finally determined. (dd) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that: (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences thereto. (ee) The Company maintains insurance covering its properties, operations, personnel and businesses with institutions it believes to be financially responsible. Such insurance insures against such losses and risks as are adequate in accordance with customary industry practice to protect the Company and its business. The Company has not received notice from any insurer or agent of such 10 insurer that substantial capital improvements or other expenditures will have to be made in order to continue such insurance. All such insurance is outstanding and duly in force on the date hereof, subject only to changes made in the ordinary course of business, consistent with past practice, which do not, either individually or in the aggregate, materially alter the coverage thereunder or the risks covered thereby. The Company has no reason to believe that it will not be able (a) to renew its existing insurance coverage as and when such policies expire or (b) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted or as presently contemplated and at a cost that would not result in a Material Adverse Effect. (ff) The Company and any "employee benefit plan" (as defined under ERISA) established or maintained by the Company or its "ERISA Affiliates" (as defined below) are in compliance in all material respects with ERISA. "ERISA Affiliate" means, with respect to the Company, any member of any group of organizations described in Sections 414(b), (c), (m) or (o) of the Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder (the "Code") of which the Company is a member. No "reportable event" (as defined under ERISA) has occurred or is reasonably expected to occur with respect to any "employee benefit plan" established or maintained by the Company or any of its ERISA Affiliates. No "employee benefit plan" established or maintained by the Company or any of its ERISA Affiliates, if such "employee benefit plan" were terminated, would have any "amount of unfunded benefit liabilities" (as defined under ERISA). Neither the Company nor any of its ERISA Affiliates has incurred or reasonably expects to incur any liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan" established or maintained by the Company or any of its ERISA Affiliates that is intended to be qualified under Section 401(a) of the Code is so qualified and nothing has occurred, whether by action or failure to act, which would cause the loss of such qualification. (gg) Subsequent to the respective dates as of which information is given in the Prospectus and up to the Closing Date, except as set forth in the Prospectus, (i) the Company has not incurred any liabilities or obligations, direct or contingent, that are or will be material, either individually or in the aggregate, to the Company and its subsidiaries taken as a whole, nor entered into any transaction not in the ordinary course of business, (ii) there has not been, either individually or in the aggregate, any change or development that could reasonably be expected to result in a Material Adverse Effect; (iii) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock; and (iv) there has been no material change in the capital stock, short- term debt or long-term debt of the Company, except in each case as described in the Prospectus, or if the Prospectus is not in existence the most recent Preliminary Prospectus. (hh) Except pursuant to this Agreement, there are no contracts, agreements or understandings between the Company and any other person that would give rise to a valid claim against the Company or any of the Underwriters for a brokerage commission, finder's fee or like payment in connection with the issuance, purchase and sale of the Shares. 11 (ii) The statements (including the assumptions described therein) included in the Prospectus (i) are within the coverage of Rule 175(b) under the Securities Act to the extent such data constitute forward looking statements as defined in Rule 175(c) and (ii) were made by the Company with a reasonable basis and reflect the Company's good faith estimate of the matters described therein. (jj) The Company does not have any debt securities or preferred stock which is rated by any "nationally recognized statistical rating organization" as defined for purposes of Rule 436(g) under the Securities Act. (kk) The Company has the power to submit, and pursuant to this Agreement has legally, validly, effectively and irrevocably submitted, to the jurisdiction of any federal or state court in the State of New York, County of New York, and has the power to designate, appoint and empower and pursuant to this Agreement has legally, validly, effectively and irrevocably designated, appointed and empowered an agent for service of process in any suit or proceeding based on or arising under this Agreement in any federal or state court in the State of New York, County of New York, as provided in Section 13 hereof. (ll) Each certificate signed by any officer of the Company and delivered to the Underwriters or counsel for the Underwriters pursuant to this Agreement shall be deemed to be a representation and warranty by the Company to the Underwriters as to the matters covered thereby. The Company acknowledges that each of the Underwriters and, for purposes of the opinions to be delivered to the Underwriters pursuant to Sections 6(b) and 6(c) hereof, counsel to the Company and counsel to the Underwriters, will rely upon the accuracy and truth of the foregoing representations and hereby consents to such reliance. 2. Purchase, Sale and Delivery of the Shares. (a) On the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms and conditions herein set forth, (i) the Company agrees to issue and sell 6,500,000 of the Firm Shares to the Underwriters and the Underwriters, severally and not jointly, agree to purchase from the Company, at a purchase price per share of $ ____, the number of Firm Shares set forth opposite the respective names of the Underwriters in Schedule I hereto plus any additional number of Shares which such Underwriter may become obligated to purchase pursuant to the provisions of Section 9 hereof. (b) Delivery of the Firm Shares to the Underwriters shall be made, against payment of the purchase price therefor, at the offices of Vinson & Elkins, L.L.P., 2300 First City Tower,1001 Fannin, Houston, Texas 77002, or such other location as may be mutually acceptable. Such delivery and payment shall be made at 10:00 am, New York City time, on _______,2000, or at such other time as shall be agreed upon by the Underwriters and the Company. The time and date of such delivery and payment are herein called the "Closing Date." On the Closing Date, one or more Firm 12 Shares in definitive global form, registered in the name of Cede & Co., as nominee of The Depositary Trust Company, New York, New York ("DTC"), having an aggregate amount corresponding to the aggregate principal amount of the Shares sold to the Underwriters (the "Global Shares") shall be delivered by the Company to Bear, Stearns & Co. Inc. ("Bear Stearns"), as agent for the Underwriters, against payment by the Underwriters of the purchase price therefor, by wire transfer, in same-day funds to an account designated by the Company, provided that the Company shall give at least two business days' prior written notice to Bear Stearns of the information required to effect such wire transfer. The Global Shares shall be made available to Bear Stearns for inspection not later than 9:30 a.m. on the business day immediately preceding the Closing Date. (c) In addition, the Company hereby grants to the Underwriters the option to purchase up to 975,000 Additional Shares at the same purchase price per share to be paid by the Underwriters to the Company for the Firm Shares as set forth in Section 2(a) hereof, for the sole purpose of covering over- allotments, if any, in the sale of Firm Shares by the Underwriters. This option may be exercised at any time, in whole or in part, on or before the thirtieth day following the date of the Prospectus, by written notice to the Company from Bear Stearns on behalf of the Underwriters. Such notice shall set forth the aggregate number of Additional Shares as to which the option is being exercised and the date and time, as reasonably determined by Bear Stearns on behalf of the Underwriters, when the Additional Shares are to be delivered (such date and time being herein sometimes referred to as the "Additional Closing Date"); provided, however, that the Additional Closing Date shall not be earlier than the Closing Date or, if thereafter, earlier than the third full business day after the date on which the option shall have been exercised nor later than the eighth full business day after the date on which the option shall have been exercised (unless such time and date are postponed in accordance with the provisions of Section 10 hereof). Certificates for the Additional Shares shall be registered in such name or names and in such authorized denominations as you may request in writing at least two full business days prior to the Additional Closing Date. The Company will permit you to examine and package such certificates for delivery at least one full business day prior to the Additional Closing Date. The number of Additional Shares to be sold to each Underwriter shall be the number which bears the same ratio to the aggregate number of Additional Shares being purchased as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number increased as set forth in Section 9 hereof) bears to 6,500,000 subject, however, to such adjustments to eliminate any fractional shares as Bear Stearns on behalf of the Underwriters in its sole discretion shall make. Delivery of the Additional Shares to the Underwriters shall be made, against payment of the purchase price therefor, at the offices of Vinson & Elkins, L.L.P., 2300 First City Tower,1001 Fannin, Houston, Texas 77002, or such other location as may be mutually acceptable. Such delivery and payment shall be made at 10:00 am, New York City time, on _______,2000, or at such other time as shall be agreed upon by the Underwriters and the Company. The time and date of such delivery and payment are herein called the "Additional Closing Date." On the Additional Closing Date, one or more Additional Shares in definitive global form, registered in the name of Cede & Co., 13 as nominee of DTC, having an aggregate amount corresponding to the aggregate principal amount of the Shares sold to the Underwriters (the "Additional Global Shares") shall be delivered by the Company to Bear, Stearns & Co. Inc., as agent for the Underwriters, against payment by the Underwriters of the purchase price therefor, by wire transfer, in same-day funds to an account designated by the Company, provided that the Company shall give at least two business days' prior written notice to Bear, Stearns & Co. Inc. of the information required to effect such wire transfer. The Additional Global Shares shall be made available to Bear, Stearns & Co. Inc. for inspection not later than 9:30 a.m. on the business day immediately preceding the Additional Closing Date. 3. Offering. Upon your authorization of the release of the Firm Shares, the Underwriters propose to offer the Firm Shares for sale to the public upon the terms set forth in the Prospectus. 4. Covenants of the Company. The Company covenants and agrees with the Underwriters that: (a) If the Registration Statement has not yet been declared effective on the date of this Agreement, the Company will use its best efforts to cause the Registration Statement and any amendments thereto to become effective as promptly as possible, and if Rule 430A is used or the filing of the Prospectus is otherwise required under Rule 424(b) or Rule 434, the Company will file the Prospectus (properly completed if Rule 430A has been used) pursuant to Rule 424(b) or Rule 434 within the prescribed time period and will provide evidence satisfactory to you of such timely filing. If the Company elects to rely on Rule 434, the Company will prepare and file a term sheet that complies with the requirements of Rule 434. The Company will notify you immediately (and, if requested by you, will confirm such notice in writing) (i) when the Registration Statement and any amendments thereto become effective, (ii) of any request by the Commission for any amendment of or supplement to the Registration Statement or the Prospectus or for any additional information, (iii) of the mailing or the delivery to the Commission for filing of any amendment of or supplement to the Registration Statement or the Prospectus, (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post- effective amendment thereto or of the initiation, or the threatening, of any proceedings therefor, (v) of the receipt of any comments from the Commission and (vi) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for that purpose. If the Commission shall propose or enter a stop order at any time, the Company will use its best efforts to prevent the issuance of any such stop order and, if issued, to obtain the lifting of such order as soon as possible. The Company will not file any amendment to the Registration Statement or any amendment of or supplement to the Prospectus (including the prospectus required to be filed pursuant to Rule 424(b)or Rule 434) that differs from the prospectus on file at the time of the effectiveness of the Registration Statement before or after the effective date of the Registration Statement to which you shall reasonably object in writing after being timely furnished in advance a copy thereof. 14 (b) If at any time when a prospectus relating to the Shares is required to be delivered under the Securities Act any event shall have occurred as a result of which the Prospectus as then amended or supplemented would, in the judgment of the Underwriters or the Company, include an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or if it shall be necessary at any time to amend or supplement the Prospectus or Registration Statement to comply with the Securities Act or the Securities Act Regulations, the Company will notify you promptly and prepare and file with the Commission an appropriate amendment or supplement (in form and substance satisfactory to you) which will correct such statement or omission and will use its best efforts to have any amendment to the Registration Statement declared effective as soon as possible. (c) The Company will promptly deliver to you two signed copies of the Registration Statement, including exhibits and all amendments thereto, and the Company will promptly deliver to each of the Underwriters such number of copies of any preliminary prospectus, the Prospectus, the Registration Statement, and all amendments of and supplements to such documents, if any, as you may reasonably request. (d) The Company will endeavor in good faith, in cooperation with you, at or prior to the time of effectiveness of the Registration Statement, to qualify the Shares for offering and sale under the securities laws relating to the offering or sale of the Shares of such jurisdictions as you may designate and to maintain such qualification in effect for so long as required for the distribution thereof; except that in no event shall the Company be obligated in connection therewith to qualify as a foreign corporation or to execute a general consent to service of process. (e) The Company will make generally available (within the meaning of Section 11(a) of the Securities Act) to its security holders and to you as soon as practicable, but not later than 45 days after the end of its fiscal quarter in which the first anniversary date of the effective date of the Registration Statement occurs, an earnings statement (in form complying with the provisions of Rule 158 of the Securities Act Regulations) covering a period of at least twelve consecutive months beginning after the effective date of the Registration Statement. (f) Other than the Company's sale of Shares hereunder and the Company's issuance of Common Stock pursuant to any existing employee benefit plans or upon the exercise, conversion or exchange of any currently outstanding stock options or warrants, during the period of 180 days from the date hereof, the Company will not, and will not permit any of its affiliates, directly or indirectly, to issue, sell, offer or agree to sell, grant any option for the sale of, pledge, make any short sale or maintain any short position, establish or maintain a "put equivalent position" (within the meaning of Rule 16a-1(h) under the Exchange Act), enter into any swap, derivative transaction or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock (whether any such transaction is to be settled by delivery of Common Stock, other securities, cash or other consideration) or otherwise dispose of, any Common Stock (or any securities convertible into, exercisable for or exchangeable for Common Stock) or any 15 interest therein or announce any intention to do any of the foregoing without the prior written consent of Bear Stearns. The Company will obtain the undertaking of each of its officers and directors and such of its other stockholders as have been heretofore designated by you and listed on Schedule II attached hereto not to engage in any of the aforementioned transactions or to announce their intention to do any of the foregoing on their own behalf. (g) During a period of three years from the effective date of the Registration Statement, the Company will furnish to you copies of (i) all reports to its stockholders; and (ii) all reports, financial statements and proxy or information statements filed by the Company with the Commission or any national securities exchange. (h) The Company will apply its net proceeds from the sale of the Shares as set forth under the caption "Use of Proceeds" in the Prospectus. (i) The Company will use its best efforts to cause the Shares to be listed on the NASDAQ National Market. (j) [The Company will report the use of its net proceeds from the Offering to the extent required pursuant to Rule 463 of the Securities Act Regulations.] 5. Payment of Expenses. Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, the Company hereby agrees to pay all costs and expenses incident to the performance of the obligations of the Company hereunder, including those in connection with (i) preparing, printing, duplicating, filing and distributing the Registration Statement, as originally filed and all amendments thereof (including all exhibits thereto), any Preliminary Prospectus, the Prospectus and any amendments or supplements thereto (including, without limitation, fees and expenses of the Company's accountants and counsel), the underwriting documents (including this Agreement) and all other documents related to the public offering of the Shares (including those supplied to the Underwriters in quantities as herein above stated), (ii) the issuance, transfer and delivery of the Shares to the underwriters, including any transfer or other taxes payable thereon, (iii) the qualification of the Shares under state or foreign securities or blue sky laws, including the costs of printing and mailing a preliminary and final "Blue Sky Survey" and the fees of counsel for the Underwriters and such counsel's disbursements in relation thereto, (iv) listing the Shares on NASDAQ National Market, (v) filing fees of the Commission and the National Association of Securities Dealers, Inc. (the "NASD"), (vi) the cost of printing certificates representing the Shares, (vii) any counsel fees incurred on behalf of or disbursements by Bear Stearns in its capacity as "qualified independent underwriter"and (viii) the cost and charges of any transfer agent or registrar for the Common Stock. 6. Conditions of Underwriters' Obligations. The obligations of the Underwriters to purchase and pay for the Firm Shares and the Additional Shares, as provided herein, shall be subject to the accuracy of the representations and warranties of the Company herein contained, as of the date hereof and as of the Closing Date (for purposes of this Section 6 "Closing Date" shall refer to the 16 Closing Date for the Firm Shares and any Additional Closing Date, if different, for the Additional Shares), to the absence from any certificates, opinions, written statements or letters furnished to you or to Vinson & Elkins ("Underwriters' Counsel") pursuant to this Section 6 of any misstatement or omission, to the performance by the Company of its obligations hereunder, and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 5:30 p.m., New York time, on the date of this Agreement, or at such later time and date as shall have been consented to in writing by you; if the Company shall have elected to rely upon Rule 430A or Rule 434 of the Securities Act Regulations, the Prospectus shall have been filed with the Commission in a timely fashion in accordance with Section 4(a) hereof; and, at or prior to the Closing Date no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereof shall have been issued and no proceedings therefor shall have been initiated or threatened by the Commission. (b) At the Closing Date you shall have received the opinion of Thompson, Knight, Brown Parker & Leahy, L.L.P., counsel for the Company, dated the Closing Date addressed to the Underwriters and in form and substance satisfactory to Underwriters' Counsel, to the effect that: (i) The Company and each of its subsidiaries has been duly organized and is validly existing as a corporation or limited liability company, as the case may be, in good standing under the laws of the state of its organization. The Company and each of its subsidiaries is duly qualified and in good standing as a foreign corporation or limited liability company, as the case may be, in each jurisdiction in which the character or location of its properties (owned, leased or licensed) or the nature or conduct of its business makes such qualification necessary, except for those failures to be so qualified or in good standing which will not in the aggregate have a Material Adverse Effect. The Company and each of its subsidiaries has all requisite corporate or similar authority to own, lease and license its respective properties and conduct its business as now being conducted and as described in the Registration Statement and the Prospectus. Except as disclosed in the Prospectus, all of the outstanding shares of capital stock or equity interests of the Company's subsidiaries are owned beneficially and of record by the Company and have been validly authorized and issued and are fully paid and nonassessable and, except as described in the Prospectus, there are no other equity securities of any subsidiary or any securities convertible into capital stock of any subsidiary, or are there any options, warrants, or other rights to acquire capital stock or other equity securities of any subsidiary of the Company. (ii) The Company has an authorized capital stock as set forth in the Registration Statement and the Prospectus. All of the outstanding shares of Common Stock are duly and validly authorized and issued, are fully paid and nonassessable and were not issued in violation of or subject to any preemptive rights, and no preemptive rights of stockholders exist with respect to any of the Company's Common Stock. The Shares to be delivered by the Company on the Closing Date have been duly and validly authorized and, when delivered by the Company against payment therefor in accordance with this Agreement, will be duly and validly issued, fully paid and nonassessable and 17 will not have been issued in violation of or subject to any preemptive or similar rights. The certificates for the Common Stock are in due and proper form. The Common Stock, the Firm Shares and the Additional Shares conform to the descriptions thereof contained in the Registration Statement and the Prospectus. (iii) The shares of Common Stock currently outstanding are listed, and the Shares (including the Additional Shares) have been approved for listing, on the NASDAQ National Market, subject only to notice of issuance. (iv) This Agreement has been duly and validly authorized, executed and delivered by the Company. (v) There is no litigation or governmental or other action, suit, proceeding or investigation before any court or before or by any public, regulatory or governmental agency or body pending or to the best of such counsel's knowledge, threatened against, or involving the properties or business of, the Company, which is of a character required to be disclosed in the Registration Statement and the Prospectus which has not been properly disclosed therein. (vi) The execution, delivery, and performance of this Agreement, the issuance, offering and sale of the Shares and the consummation of the transactions contemplated hereby by the Company do not and will not violate, conflict with or constitute a breach of any of the terms and provisions of, or constitute a default (or an event which with notice or lapse of time, or both, would constitute a default), or result in the creation or imposition of any lien, charge or encumbrance upon any properties or assets of the Company or any of its subsidiaries or result in any acceleration of any indebtedness of the Company pursuant to (A) any bond, debenture, note, indenture, mortgage, deed of trust, contract or other agreement known to such counsel to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or their respective properties or assets are or may be bound (B) any statute, rule or regulation applicable to the Company or any of its subsidiaries or any of their respective properties or assets or (C) to the best knowledge of such counsel, any judgment, order or decree of any court or governmental agency or authority having jurisdiction over the Company or any of its subsidiaries or any of their respective properties or assets. No consent, approval, authorization, order, registration, filing, qualification, license or permit of or with any court or any governmental agency or authority having jurisdiction over the Company or any of its subsidiaries or any of their respective properties or assets is required for the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby, except for (1) such as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters (as to which such counsel need express no opinion) and (2) such as have been made or obtained under the Securities Act. (vii) The Registration Statement and the Prospectus and any amendments thereof or supplements thereto (other than the financial statements and other financial, reserve, production or other statistical data included therein, as to which no opinion need be rendered) comply as to form 18 in all material respects with the requirements of the Securities Act and the Securities Act Regulations. (viii) The Registration Statement is effective under the Securities Act, and, to the best knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereof has been issued and no proceedings therefor have been initiated or threatened by the Commission and all filings required by Rule 424(b) of the Securities Act Regulations have been made. (ix) There are no holders of securities of the Company who, by reason of the execution by the Company of this Agreement or the consummation by the Company of the transactions contemplated hereby, have the right to request or demand that the Company register under the Securities Act or analogous foreign laws and regulations securities held by them, other than those such that have been duly exercised or waived. (x) The statements in the Prospectus which purport to summarize the provisions of statutes, regulations, contracts, and other documents, insofar as such statements constitute a summary of documents referred to therein or matters of law, are, in all material respects, accurate summaries and fairly and correctly present the information required to be shown with respect to such matters and documents. (xi) Such counsel does not know of any contracts or documents required to be filed as exhibits to the Registration Statement or described in the Registration Statement or Prospectus which are not so filed or described as required. (xii) To our knowledge, the Company has all approvals, licenses and permits required to conduct its business lawfully, except where the failure to so possess would not have a Material Adverse Effect. (xiii) The documents incorporated by reference in the Prospectus (other than the financial statements and related schedules therein, as to which such counsel need express no opinion), when they were filed with the Commission complied as to form in all material respects with the requirements of the Exchange Act, as applicable, and the rules and regulations of the Commission thereunder; and they have no reason to believe that any of such documents, when such documents were so filed contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made when such documents were so filed, not misleading. In addition, such opinion shall also contain a statement that such counsel has participated in conferences with officers and representatives of the Company, representatives of the independent public accountants for the Company and the Underwriters at which the contents of the Prospectus and related matters were discussed and, no facts have come to the attention of such counsel which would lead such counsel to believe that either the Registration Statement at the time it became 19 effective (including the information deemed to be part of the Registration Statement at the time of effectiveness pursuant to Rule 430A(b) or Rule 434, if applicable), or any amendment thereof made prior to the Closing Date as of the date of such amendment, contained an untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus as of its date (or any amendment thereof or supplement thereto made prior to the Closing Date as of the date of such amendment or supplement) and as of the Closing Date contained or contains an untrue statement of a material fact or omitted or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no belief or opinion with respect to the financial statements and other financial, reserve, production or other statistical data included therein). In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws other than the federal laws of the United States and jurisdictions in which they are admitted, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance reasonably satisfactory to Underwriters' Counsel) of other counsel reasonably acceptable to Underwriters' Counsel, familiar with the applicable laws; (B) as to federal regulatory issues, on the opinion of special regulatory counsel; (C) as to opinions relating to the subsidiaries in subparagraph (1), on the opinion of Hinkle, Eberhart & Elkouri, L.L.C.; (D) as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Company and certificates or other written statements of officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company and its subsidiaries, provided that copies of any such statements or certificates shall be delivered to Underwriters' Counsel. The opinion of such counsel for the Company shall state that the opinion of any such other counsel is being relied upon and for what purpose. (c) All proceedings taken in connection with the sale of the Firm Shares and the Additional Shares as herein contemplated shall be satisfactory in form and substance to you and to Underwriters' Counsel, and the Underwriters shall have received from said Underwriters' Counsel a favorable opinion, dated as of the Closing Date with respect to the issuance and sale of the Shares, the Registration Statement and the Prospectus and such other related matters as you may reasonably require, and the Company shall have furnished to Underwriters' Counsel such documents as they request for the purpose of enabling them to pass upon such matters. (d) At the Closing Date you shall have received a certificate of the President and Chief Financial Officer of the Company, dated the Closing Date, to the effect that (i) the condition set forth in subsection (a) of this Section 6 has been satisfied, (ii) as of the date hereof and as of the Closing Date the representations and warranties of the Company set forth in Section 1 hereof are accurate, (iii) as of the Closing Date the obligations of the Company to be performed hereunder on or prior thereto have been duly performed and (iv) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, the Company has not sustained any material loss or interference with its business or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or 20 governmental proceeding, and there has not been any material adverse change, or any development involving a material adverse change, in the business, prospects, properties, operations, condition (financial or otherwise), affairs or management of the Company, except in each case as described in or contemplated by the Prospectus. (e) At the time this Agreement is executed and at the Closing Date, you shall have received a letter from KPMG LLP, independent public accountants for the Company, dated, respectively, as of the date of this Agreement and as of the Closing Date addressed to the Underwriters and in form and substance satisfactory to you, stating that, among other things: (i) they are independent certified public accountants with respect to the Company within the meaning of the Securities Act and the Securities Act Regulations and stating that the information provided in response to Item 10 of Form S-2 is correct insofar as it relates to them; (ii) in their opinion, the financial statements and schedules of the Company included in the Registration Statement and the Prospectus and covered by their opinion therein comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the applicable published rules and regulations of the Commission thereunder; (iii) on the basis of procedures consisting of a reading of the latest available unaudited interim financial statements of the Company, a reading of the minutes of meetings and consents of the stockholders and Board of Directors of the Company and the committees of such Board of Directors subsequent to December 31, 1999, inquiries of officers and other employees of the Company who have responsibility for financial and accounting matters of the Company with respect to transactions and events subsequent to December 31, 1999, a review of interim financial information in accordance with the standards established by the American Institute of Certified Public Accountants in Statement of Auditing Standards No. 71, Interim Financial Information with respect to the nine month period ended March 31, 2000 and other specified procedures and inquiries to a date not more than five days prior to the date of such letter, nothing has come to their attention that would cause them to believe that: (A) the unaudited financial statements and schedules of the Company presented in the Registration Statement and the Prospectus, including the quarterly information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," do not comply as to form in all material respects with the applicable accounting requirements of the Securities Act and, if applicable, the Exchange Act and the applicable published rules and regulations of the Commission thereunder or that such unaudited consolidated financial statements are not fairly presented in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement and the Prospectus; (B) with respect to the period subsequent to March 31, 2000, there were, as of the date of the most recently available monthly consolidated financial statements of the Company, if any, and as of a specified date not more than five days prior to the date of such letter, any changes in the capital stock or long- term indebtedness of the Company or any decrease in the net current assets or shareholders' equity of the Company, in each case as compared with the amounts shown in the most recent balance sheet presented in the Registration Statement and the Prospectus, except for changes or decreases which the Registration Statement and the Prospectus disclose have occurred or may occur or which are set forth in such letter; (C) that during the period from April 1, 2000 to the date of the most recent available monthly financial statements of the Company, if any, 21 and to a specified date not more than five days prior to the date of such letter, there was any decrease, as compared with the corresponding period in the prior fiscal year, in total revenues, or total or per share net income, except for decreases which the Registration Statement and the Prospectus disclose have occurred or may occur or which are set forth in such letter; (D) the unaudited pro forma income statements and balance sheets presented in the Registration Statement and the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Securities Act and, if applicable, the Exchange Act and the applicable published rules and regulations of the Commission thereunder, that such unaudited pro forma income statements and balance sheets are not fairly presented in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement and the Prospectus or that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of those statements; or (E) any other unaudited pro forma income statement data or balance sheet items included in the Registration Statement or Prospectus do not agree with the corresponding amounts in the pro forma income statements or balance sheets included in the Registration Statement and Prospectus; and (iv) they have compared specific dollar amounts, numbers of shares, percentages of revenues and earnings, and other financial information pertaining to the Company set forth in the Registration Statement and the Prospectus, which have been specified by you prior to the date of this Agreement, to the extent that such amounts, numbers, percentages, and information may be derived from the general accounting and financial records of the Company or from schedules furnished by the Company, and excluding any questions requiring an interpretation by legal counsel, with the results obtained from the application of specified readings, inquiries, and other appropriate procedures specified by you set forth in such letter, and found them to be in agreement. (f) At the time this Agreement is executed and at the Closing Date, you shall have received a letter from Arthur Andersen LLP, independent public accountants for Floyd Oil Company ("Floyd Oil"), dated, respectively, as of the date of this Agreement and as of the Closing Date addressed to the Underwriters and in form and substance satisfactory to you. (g) Prior to the Closing Date the Company shall have furnished to you such further information, certificates and documents as you may reasonably request. (h) You shall have received from each person who is a director or officer and stockholder of the Company and from such other stockholders as have been heretofore designated by you and listed on Schedule II hereto a 180 day lock-up agreement, in form and substance satisfactory to the Underwriters and Underwriters' Counsel. (i) At the Closing Date, all of the Shares (including the Additional Shares) shall have been approved for listing on the NASDAQ National Market, subject only to notice of issuance. (j) You shall have received from Ryder Scott on the date of this Agreement a letter, dated on such date and also on the Closing Date a letter dated the Closing Date, addressed to the Underwriters and in form and substance satisfactory to you, [and substantially in the form attached 22 hereto as Annex I], stating, among other things,(i) they are independent petroleum engineers with respect to the Company, (ii) they have conducted an independent audit of the findings of the reserves as set forth in the reserve letters, (iii) the findings of such reserve letters are reasonable in the aggregate and were prepared in accordance with generally accepted petroleum engineering principles promulgated by the Society of Petroleum Engineers, and (iv) nothing has come to their attention that would lead them to conclude that the Reserve Information referenced in the Registration Statement or the Prospectus is inaccurate or incomplete in any material respect. If any of the conditions specified in this Section 6 shall not have been fulfilled when and as required by this Agreement, or if any of the certificates, opinions, written statements or letters furnished to you or to Underwriters' Counsel pursuant to this Section 6 shall not be in all material respects reasonably satisfactory in form and substance to you and to Underwriters' Counsel, all obligations of the Underwriters hereunder may be canceled by you at, or at any time prior to, the Closing Date and the obligations of the Underwriters to purchase the Additional Shares may be canceled by you at, or at any time prior to, the Additional Closing Date. Notice of such cancellation shall be given to the Company in writing, or by telephone, telex or telegraph, confirmed in writing. 7. Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, against any and all losses, liabilities, claims, damages and expenses whatsoever as incurred (including but not limited to attorneys' fees and any and all expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), jointly or severally, to which they or any of them may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement for the registration of the Shares, as originally filed or any amendment thereof, or any related Preliminary Prospectus or the Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any such case to the extent but only to the extent that any such loss, liability, claim, damage or expense arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter through you expressly for use therein. This indemnity agreement will be in addition to any liability which the Company may otherwise have, including under this Agreement. (b) The Company also agrees to indemnify and hold harmless Bear, Stearns & Co. Inc. ("Bear Stearns") and each person, if any, who controls Bear Stearns within the meaning of either Section 15 of the Act, or Section 20 of the Exchange Act, from and against any and all 23 losses, claims, damages, liabilities and judgments incurred as a result of Bear Stearns's participation as a "qualified independent underwriter" within the meaning of Rule 2720 of the National Association of Securities Dealers' Conduct Rules in connection with the offering of the Company's common stock, except to the extent any such losses, claims, damages, liabilities and judgments are found in a final judgment by a court of competent jurisdiction (not subject to further appeal) to have resulted primarily and directly from the gross negligence or willful misconduct of Bear Stearns. (c) Each Underwriter severally, and not jointly, agrees to indemnify and hold harmless the Company, each of the directors of the Company, each of the officers of the Company who shall have signed the Registration Statement and each other person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, against any and all losses, liabilities, claims, damages and expenses whatsoever as incurred (including but not limited to attorneys' fees and any and all expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), jointly or severally, to which they or any of them may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement for the registration of the Shares, as originally filed or any amendment thereof, or any related Preliminary Prospectus or the Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that any such loss, liability, claim, damage or expense arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter through you expressly for use therein; provided, however, that in no case shall any Underwriter be liable or responsible for any amount in excess of the underwriting discount applicable to the Shares purchased by such Underwriter hereunder. This indemnity will be in addition to any liability which any Underwriter may otherwise have, including under this Agreement. The Company acknowledges that the statements set forth in the first and fourth paragraphs under the caption "Underwriting" in the Prospectus constitute the only information furnished in writing by or on behalf of any Underwriter expressly for use in the Registration Statement relating to the Shares as originally filed or in any amendment thereof, any related Preliminary Prospectus or the Prospectus or in any amendment thereof or supplement thereto, as the case may be. (d) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify each party against whom indemnification is to be sought in writing of the commencement thereof (but the failure so to notify an indemnifying party shall not relieve it from any liability which it may have under this Section 7, except to the extent such failure prejudiced the indemnifying party). In case any such action is brought against any indemnified party, and it notifies an indemnifying party of the commencement 24 thereof, the indemnifying party will be entitled to participate therein, and to the extent it may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel satisfactory to such indemnified party. Notwithstanding the foregoing, the indemnified party or parties shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless (i) the employment of such counsel shall have been authorized in writing by one of the indemnifying parties in connection with the defense of such action, (ii) the indemnifying parties shall not have employed counsel to have charge of the defense of such action within a reasonable time after notice of commencement of the action, or (iii) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to one or all of the indemnifying parties (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such fees and expenses shall be borne by the indemnifying parties. Notwithstanding anything contained herein to the contrary, if indemnity may be sought pursuant to Section (a) or (b) hereof in respect of such action or proceeding, then in addition to such separate firm for the indemnified parties, the indemnifying party shall be liable for the reasonable fees and expenses of not more than one separate firm (in addition to any local counsel) for Bear Stearns in its capacity as a "qualified independent underwriter" and all persons, if any, who control Bear Stearns within the meaning of either Section 15 of the Act or Section 20 of the Exchange Act. Anything in this subsection to the contrary notwithstanding, an indemnifying party shall not be liable for any settlement of any claim or action effected without its written consent; provided, however, that such consent was not unreasonably withheld. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability or claims that are the subject matter of such proceeding. 8. Contribution. In order to provide for contribution in circumstances in which the indemnification provided for in Section 7 hereof is for any reason held to be unavailable from any indemnifying party or is insufficient to hold harmless a party indemnified thereunder, the Company and the Underwriters shall contribute to the aggregate losses, claims, damages, liabilities and expenses of the nature contemplated by such indemnification provision (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted, but after deducting in the case of losses, claims, damages, liabilities and expenses suffered by the Company any contribution received by the Company from persons, other than the Underwriters, who may also be liable for contribution, including persons who control the Company within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, officers of the Company who signed the Registration Statement and directors of the Company) as incurred to which the Company and one or more of the Underwriters may be subject, in such proportions as is appropriate to reflect the relative benefits received by the Company and the Underwriters from the offering of the Shares or, if such allocation 25 is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to above but also the relative fault of the Company and the Underwriters in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Underwriters shall be deemed to be in the same proportion as (x) the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company and (y) the underwriting discounts and commissions received by the Underwriters, respectively, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company and of the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this Section 8, (i) in no case shall any Underwriter be liable or responsible for any amount in excess of the underwriting discount applicable to the Shares purchased by such Underwriter hereunder, and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Notwithstanding the provisions of this Section 8 and the preceding sentence, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. For purposes of this Section 8, each person, if any, who controls an Underwriter within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act shall have the same rights to contribution as such Underwriter, and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to clauses (i) and (ii) of this Section 8. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties, notify each party or parties from whom contribution may be sought, but the omission to so notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any obligation it or they may have under this Section 8 or otherwise, except to the extent such failure prejudiced such party. No party shall be liable for contribution with respect to any action or claim settled without its consent; provided, however, that such consent was not unreasonably withheld. 9. Default by an Underwriter. 26 (a) If any Underwriter or Underwriters shall default in its or their obligation to purchase Firm Shares or Additional Shares hereunder, and if the Firm Shares or Additional Shares with respect to which such default relates do not (after giving effect to arrangements, if any, made by you pursuant to subsection (b) below) exceed in the aggregate 10% of the number of Firm Shares or Additional Shares, the Firm Shares or Additional Shares to which the default relates shall be purchased by the non-defaulting Underwriters in proportion to the respective proportions which the numbers of Firm Shares set forth opposite their respective names in Schedule I hereto bear to the aggregate number of Firm Shares set forth opposite the names of the non-defaulting Underwriters. (b) In the event that such default relates to more than 10% of the Firm Shares or Additional Shares, as the case may be, you may in your discretion arrange for yourself or for another party or parties (including any non- defaulting Underwriter or Underwriters who so agree) to purchase such Firm Shares or Additional Shares, as the case may be, to which such default relates on the terms contained herein. In the event that within five calendar days after such a default you do not arrange for the purchase of the Firm Shares or Additional Shares, as the case may be, to which such default relates as provided in this Section 9, this Agreement or, in the case of a default with respect to the Additional Shares, the obligations of the Underwriters to purchase and of the Company to sell the Additional Shares shall thereupon terminate, without liability on the part of the Company with respect thereto (except in each case as provided in Sections 5, 7 and 8 hereof) or the Underwriters, but nothing in this Agreement shall relieve a defaulting Underwriter or Underwriters of its or their liability, if any, to the other Underwriters and the Company for damages occasioned by its or their default hereunder. (c) In the event that the Firm Shares or Additional Shares to which the default relates are to be purchased by the non-defaulting Underwriters, or are to be purchased by another party or parties as aforesaid, you or the Company shall have the right to postpone the Closing Date or Additional Closing Date, as the case may be for a period, not exceeding five business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus or in any other documents and arrangements, and the Company agrees to file promptly any amendment or supplement to the Registration Statement or the Prospectus which, in the opinion of Underwriters' Counsel, may thereby be made necessary or advisable. The term "Underwriter" as used in this Agreement shall include any party substituted under this Section 9 with like effect as if it had originally been a party to this Agreement with respect to such Firm Shares and Additional Shares. 10. Survival of Representations and Agreements. All representations and warranties, covenants and agreements of the Underwriters and the Company contained in this Agreement, including representations of the Company in Section 1, the agreements contained in Section 5, the indemnity agreements contained in Section 7, the contribution agreements contained in Section 8 and the agreements contained in Section 13, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any controlling person thereof or by or on behalf of the Company, any of its officers and directors or any controlling person thereof and shall survive delivery of and payment for the Shares to and by the Underwriters. The 27 representations contained in Section 1 and the agreements contained in Sections 5, 7, 8, 11(d) and 13 hereof shall survive the termination of this Agreement, including termination pursuant to Sections 9 or 11 hereof. 11. Effective Date of Agreement; Termination. (a) This Agreement shall become effective, upon the later of when (i) you and the Company shall have received notification of the effectiveness of the Registration Statement or (ii) the execution of this Agreement. If either the initial public offering price or the purchase price per Share has not been agreed upon prior to 5:00 P.M., New York time, on the fifth full business day after the Registration Statement shall have become effective, this Agreement shall thereupon terminate without liability to the Company or the Underwriters except as herein expressly provided. Until this Agreement becomes effective as aforesaid, it may be terminated by the Company by notifying you or by you by notifying the Company. Notwithstanding the foregoing, the provisions of this Section 11 and of Sections 1, 5, 7, 8 and 13 hereof shall at all times be in full force and effect. (b) You shall have the right to terminate this Agreement at any time prior to the Closing Date, or the obligations of the Underwriters to purchase the Additional Shares at any time prior to the Additional Closing Date, as the case may be, if (A) any domestic or international event or act or occurrence has materially disrupted, or in your opinion will in the immediate future materially disrupt, the market for the Company's securities or securities in general; or (B) [if trading on the NASDAQ National Market shall have been suspended, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required, on the NASDAQ by the NASDAQ or by order of the Commission or any other governmental authority having jurisdiction;] or (C) if a banking moratorium has been declared by a state or federal authority or if any new restriction materially adversely affecting the distribution of the Firm Shares or the Additional Shares, as the case may be, shall have become effective; or (D) if the United States becomes engaged in hostilities or there is an escalation of hostilities involving the United States or there is a declaration of a national emergency or war by the United States or (ii) if there shall have been such change in political, financial or economic conditions if the effect of any such event in (i) or (ii) as in your judgment makes it impracticable or inadvisable to proceed with the offering, sale and delivery of the Firm Shares or the Additional Shares, as the case may be, on the terms contemplated by the Prospectus. (c) Any notice of termination pursuant to this Section 11 shall be by telephone, telex, or telegraph, confirmed in writing by letter. (d) If this Agreement shall be terminated pursuant to any of the provisions hereof (otherwise than pursuant to (i) notification by you as provided in Section 11(a) hereof or (ii) Section 9(b) or 11(b) hereof), or if the sale of the Shares provided for herein is not consummated because any condition to the obligations of the Underwriters set forth herein is not satisfied or because of any refusal, inability or failure on the part of the Company to perform any agreement herein or comply with any provision hereof, the Company will, subject to demand by you, reimburse the Underwriters 28 for all reasonable out-of-pocket expenses (including the reasonable fees and expenses of their counsel), incurred by the Underwriters in connection herewith. 12. Notices. All communications hereunder, except as may be otherwise specifically provided herein, shall be in writing and, if sent to any Underwriter, shall be mailed, delivered, or telexed or telegraphed and confirmed in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue, New York, NY 10167, Attention: Amos Levy, with a copy to: Vinson & Elkins, L.L.P.., 2300 First City Tower, 1001 Fannin, Houston, Texas 77002, Attention: T. Mark Kelly; if sent to the Company, shall be mailed, delivered, or telegraphed and confirmed in writing to the Company, Two Shell Plaza, Suite 2400, Houston, Texas 77002, Attention: Floyd C. Wilson, with a copy to Thompson, Knight, Brown, Parker & Leahy, L.L.P., 1200 Smith Street, Suite 3600, Houston, Texas 77002, Attention: Dallas Parker and William T. Heller, IV. 13. Consent to Jurisdiction; Waiver of Immunities; Appointment of Agent for Service. (a) The Company: (i) irrevocably submits to the nonexclusive jurisdiction of any New York State or federal court sitting in the State of New York, County of New York and any appellate court from any thereof in any action, suit or proceeding arising out of or relating to this Agreement or any other document delivered in connection herewith and irrevocably waives any immunity from such action or proceeding it may otherwise enjoy in the aforementioned courts; (ii) irrevocably agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State court or in such federal court; (iii) irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding; and (iv) irrevocably designates, appoints and empowers CT Corporation System, 1633 Broadway, New York, New York 10019 as its designee, appointee and authorized agent to receive for and on its behalf service of any and all legal process, summons, notices and documents that may be served in any action, suit or proceeding brought against it, with respect to its obligations, liabilities or any other matter arising out of or relating to this Agreement or any other document delivered in connection herewith and that such service may be made on such designee, appointee and authorized agent in accordance with legal procedures prescribed for such courts, and it being understood that the designation and appointment of CT Corporation System as such authorized agent shall become effective immediately without any further action; and further agrees that to the extent permitted by law, proper service of process upon CT Corporation System (or its successors as agent for service of process), shall be deemed in every respect effective service of process upon it in any such action, suit or proceeding. 29 (b) Nothing in this Section 13 shall affect the right of any person to serve legal process in any other manner permitted by law or affect the right of any person to bring any action or proceeding against the Company or its properties in the courts of other jurisdictions. (c) The provisions of this Section 13 shall survive any termination of this Agreement, in whole or in part. 14. Parties. This Agreement shall inure solely to the benefit of, and shall be binding upon, the Underwriters, the Company and the controlling persons, directors, officers and others referred to in Sections 7 and 8, and their respective successors and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provision herein contained. The term "successors and assigns" shall not include a purchaser, in its capacity as such, of Shares from any of the Underwriters. 15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York for contracts made and to be fully performed in such state without regard to principles of conflicts of law. 16. Counterparts. This Agreement may be executed and delivered (including by facsimile transmission) in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed and delivered shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. 30 If the foregoing correctly sets forth the understanding between you and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among us. Very truly yours, 3TEC ENERGY CORPORATION By: ------------------------------------ Name: ----------------------------------- Title: ---------------------------------- Accepted as of the date first above written BEAR, STEARNS & CO. INC. CIBC World Markets Corp. Prudential Securities Inc.First Union Securities, Inc. as representatives of the several Underwriters Named in Schedule I hereto c/o Bear Stearns & Co. Inc. 245 Park Avenue New York, N.Y. 10167 By: Bear, Stearns & Co. Inc. By: ------------------------------------ Name: ----------------------------------- Title: ---------------------------------- 31 SCHEDULE I Total Number of Firm Name of Underwriter Shares to be Purchased - ------------------- ---------------------- Bear, Stearns & Co. Inc.............................................. 2,150,000 Total.............................................................6,250,000 32 SCHEDULE II 33 EX-5.1 3 0003.txt LEGAL OPINION OF THOMPSON KNIGHT BROWN PARKER & LEAHY LLP EXHIBIT 5.1 Thompson Knight Brown Parker & Leahy, LLP Letterhead June 2, 2000 3TEC Energy Corporation Two Shell Plaza, Suite 2400 777 Walker Street Houston, Texas 77002 Gentlemen: We have acted as counsel for 3TEC Energy Corporation, a Delaware corporation (the "Company"), in connection with the offering and sale by the Company (the "Offering") of 7,475,000 shares (the "Shares") of Common Stock, par value $0.02 per share ("Common Stock"), of the Company, consisting of (i) 6,500,000 shares (the "Firm Shares") of Common Stock to be sold to the underwriters (the "Underwriters") that will be named in the Underwriting Agreement to be entered into between the Company and Bear Stearns & Co. Inc., CIBC World Markets Corp., Prudential Securities Incorporated, and First Union Securities, Inc., as representatives of the Underwriters (the "Underwriting Agreement"), and (ii) 975,000 additional shares (the "Over-Allotment Shares") of Common Stock that will be purchasable by the Underwriters pursuant to an over- allotment option contained in the Underwriting Agreement. The Firm Shares and, if the over-allotment option is exercised by the Underwriters, the Over- Allotment Shares are to be offered to the public by the Underwriters pursuant to the Underwriting Agreement. We have participated in and are familiar with the corporate proceedings of the Company relating to the preparation of the Company's Registration Statement on Form S-2 (the "Registration Statement") filed with the Securities and Exchange Commission on this date with respect to the registration of the Shares under the Securities Act of 1933, as amended (the "1933 Act"). In connection with the foregoing, we have examined the originals or copies certified or otherwise authenticated to our satisfaction of the Registration Statement, and such corporate records of the Company, certificates of public officials, and other agreements, instruments and documents as we have deemed necessary to require as a basis for the opinion hereinafter expressed. Based upon the foregoing and in reliance thereon, and subject to the assumptions and qualifications hereinafter specified, it is our opinion that the Shares have been duly authorized by all necessary corporate action on the part of the Company, and, when sold and paid for in accordance with the terms of the Underwriting Agreement, will be validly issued, fully paid and nonassessable. In rendering the opinion expressed herein, we have assumed that no action heretofore taken by the Board of Directors of the Company in connection with the matters described or referred to herein will be modified, rescinded or withdrawn after the date hereof. We have also assumed that the 3TEC Energy Corporation June 2, 2000 Page 2 Underwriting Agreement will be executed and delivered by one or more officers of the Company duly authorized to do so by the Board of Directors of the Company. We hereby consent to the reference to this firm in the Prospectus included in the Registration Statement under the caption "Legal Matters" as the attorneys who will pass upon the legal validity of the Shares, and to the filing of this opinion as Exhibit 5.1 to the Registration Statement. The foregoing, however, shall not constitute an admission to our being experts as provided for in Sections 7 and 11 of the 1933 Act. Respectfully submitted, /s/ Thompson Knight Brown Parker & Leahy L.L.P. ------------------------------------------------- THOMPSON KNIGHT BROWN PARKER & LEAHY L.L.P. EX-10.28 4 0004.txt SECOND RESTATED CREDIT AGREEMENT EXHIBIT 10.28 SECOND RESTATED CREDIT AGREEMENT AMONG 3TEC ENERGY CORPORATION, ENEX RESOURCES CORPORATION, MIDDLE BAY PRODUCTION COMPANY, INC., AND MAGELLAN EXPLORATION, LLC, AS BORROWERS, AND BANK ONE, TEXAS, N.A. AND THE INSTITUTIONS NAMED HEREIN AS LENDERS, BANK ONE, TEXAS, N.A., AS ADMINISTRATIVE AGENT AND BANK OF MONTREAL AS SYNDICATION AGENT AND BANC ONE CAPITAL MARKETS, INC. AS ARRANGER May 31, 2000 $250,000,000 REVOLVING CREDIT TABLE OF CONTENTS
Page No. 1. Definitions........................................................... 2 2. Commitments of the Lender............................................. 13 (a) Terms of Commitment............................................ 13 (b) Procedure for Borrowing........................................ 14 (c) Letters of Credit.............................................. 14 (d) Procedure for Obtaining Letters of Credit...................... 15 (e) Voluntary Reduction of Commitment.............................. 16 (f) Mandatory Commitment Reductions................................ 16 (g) Several Obligations............................................ 16 (h) Type and Number of Advances.................................... 16 (i) Limited Liability of Enex, Production and Magellan............. 16 3. Notes Evidencing Loans................................................ 17 (a) Form of Notes.................................................. 17 (b) Issuance of Additional Notes................................... 17 (c) Interest Rate.................................................. 17 (d) Payment of Interest............................................ 17 (e) Payment of Principal........................................... 17 (f) Payment to Lenders............................................. 18 (g) Sharing of Payments, Etc....................................... 18 (h) Non-Receipt of Funds by the Agent.............................. 18 4. Interest Rates........................................................ 19 (a) Options........................................................ 19 (b) Interest Rate Determination.................................... 20 (c) Conversion Option.............................................. 20 (d) Recoupment..................................................... 20 5. Special Provisions Relating to Loans.................................. 20 (a) Unavailability of Funds or Inadequacy of Pricing............... 20 (b) Change in Laws................................................. 21 (c) Increased Cost or Reduced Return............................... 21 (d) Discretion of Lender as to Manner of Funding................... 23 (e) Breakage Fees.................................................. 23 6. Collateral Security................................................... 24
-i- 7. Borrowing Base...................................................... 24 (a) Initial Borrowing Base....................................... 24 (b) Subsequent Determinations of Borrowing Base.................. 25 8. Fees................................................................ 26 (a) Unused Commitment Fee........................................ 26 (b) The Letter of Credit Fee..................................... 26 9. Prepayments......................................................... 27 (a) Voluntary Prepayments........................................ 27 (b) Mandatory Prepayment For Borrowing Base Deficiency........... 27 (c) Special Mandatory Prepayment................................. 27 10. Representations and Warranties...................................... 28 (a) Creation and Existence....................................... 28 (b) Power and Authority.......................................... 28 (c) Binding Obligations.......................................... 28 (d) No Legal Bar or Resultant Lien............................... 28 (e) No Consent................................................... 28 (f) Financial Condition.......................................... 28 (g) Liabilities.................................................. 29 (h) Litigation................................................... 29 (i) Taxes; Governmental Charges.................................. 29 (j) Titles, Etc.................................................. 29 (k) Defaults..................................................... 29 (l) Casualties; Taking of Properties............................. 30 (m) Use of Proceeds; Margin Stock................................ 30 (n) Location of Business and Offices............................. 30 (o) Compliance with the Law...................................... 30 (p) No Material Misstatements.................................... 31 (q) Not A Utility................................................ 31 (r) ERISA........................................................ 31 (s) Public Utility Holding Company Act........................... 31 (t) Subsidiaries................................................. 31 (u) Environmental Matters........................................ 31 (v) Liens........................................................ 32 11. Conditions of Lending............................................... 32
-ii- 12. Affirmative Covenants............................................... 34 (a) Financial Statements and Reports............................. 34 (b) Certificates of Compliance................................... 35 (c) Accountants' Certificate..................................... 36 (d) Taxes and Other Liens........................................ 36 (e) Compliance with Laws......................................... 36 (f) Further Assurances........................................... 36 (g) Performance of Obligations................................... 37 (h) Insurance.................................................... 37 (i) Accounts and Records......................................... 37 (j) Right of Inspection.......................................... 38 (k) Notice of Certain Events..................................... 38 (l) ERISA Information and Compliance............................. 38 (m) Environmental Reports and Notices............................ 38 (n) Compliance and Maintenance................................... 39 (o) Operation of Properties...................................... 39 (p) Compliance with Leases and Other Instruments................. 40 (q) Certain Additional Assurances Regarding Maintenance and Operations of Properties..................... 40 (r) Sale of Certain Assets/Prepayment of Proceeds................ 40 (s) Title Matters................................................ 41 (t) Curative Matters............................................. 41 (u) Change of Principal Place of Business........................ 41 (v) Cash Collateral Accounts..................................... 41 (w) Take Down of Exchangeable Preferred Stock.................... 42 (x) Additional Collateral........................................ 42 13. Negative Covenants.................................................. 42 (a) Negative Pledge.............................................. 42 (b) Current Ratio................................................ 43 (c) Minimum Interest Coverage Ratio.............................. 43 (d) Consolidations and Mergers................................... 43 (e) Debts, Guaranties and Other Obligations...................... 43 (f) Dividends.................................................... 44 (g) Loans and Advances........................................... 45 (h) Sale or Discount of Receivables.............................. 45 (i) Nature of Business........................................... 45 (j) Transactions with Affiliates................................. 45 (k) Hedging Transactions......................................... 45 (l) Investments.................................................. 45 (m) Amendment to Articles of Incorporation or Bylaws............. 46
-iii- (n) Proceeds of Production........................................... 46 (o) Issuance of Preferred Stock..................................... 46 (p) Amendments to and Redemption of Preferred Stock or Other Equity.. 46 (q) Payment or Pre-Payment of Other Indebtedness..................... 46 (r) Subordinated Indebtedness........................................ 46 14. Events of Default..................................................... 47 15. The Agent and the Lenders............................................. 49 (a) Appointment and Authorization.................................... 49 (b) Note Holders..................................................... 50 (c) Consultation with Counsel........................................ 50 (d) Documents........................................................ 50 (e) Resignation or Removal of Agent.................................. 51 (f) Responsibility of Agent.......................................... 51 (g) Independent Investigation........................................ 53 (h) Indemnification.................................................. 53 (i) Benefit of Section 15............................................ 53 (j) Pro Rata Treatment............................................... 53 (k) Assumption as to Payments........................................ 54 (l) Other Financings................................................. 54 (m) Interests of Lenders............................................. 54 (n) Investments...................................................... 55 16. Exercise of Rights.................................................... 55 17. Notices............................................................... 55 18. Expenses.............................................................. 55 19. Indemnity............................................................. 56 20. Governing Law......................................................... 57 21. Invalid Provisions.................................................... 57 22. Maximum Interest Rate................................................. 57 23. Amendments............................................................ 58 24. Multiple Counterparts................................................. 58
-iv- 25. Conflict............................................................ 58 26. Survival............................................................ 58 27. Parties Bound....................................................... 58 28. Assignments and Participations...................................... 58 29. Choice of Forum: Consent to Service of Process and Jurisdiction..... 60 30. Waiver of Jury Trial................................................ 61 31. Other Agreements.................................................... 61 32. Financial Terms..................................................... 61
-v- Exhibits - -------- Exhibit "A" - Notice of Borrowing Exhibit "B" - Note Exhibit "C" - Certificate of Compliance Exhibit "D" - Form of Assignment and Acceptance Agreement Schedules - --------- Schedule 1 - Liens Schedule 2 - Financial Condition Schedule 3 - Liabilities Schedule 4 - Litigation Schedule 5 - Subsidiaries Schedule 6 - Environmental Matters Schedule 7 - Title Matters Schedule 8 - Curative Matters -vi- SECOND RESTATED CREDIT AGREEMENT THIS SECOND RESTATED CREDIT AGREEMENT (hereinafter referred to as the "Agreement") executed as of the 31st day of May, 2000, by and between 3TEC ENERGY CORPORATION, a Delaware corporation ("3TEC") (successor in interest to Middle Bay Oil Company, Inc.), ENEX RESOURCES CORPORATION, a Delaware corporation ("Enex"), MIDDLE BAY PRODUCTION COMPANY, INC., a Kansas corporation ("Production") and MAGELLAN EXPLORATION, LLC, a Delaware limited liability company ("Magellan") (3TEC, Enex, Production and Magellan are hereinafter collectively referred to as "Borrowers", and individually as a "Borrower") and BANK ONE, TEXAS, N.A., a national banking association ("Bank One"), and each of the financial institutions which is a party hereto (as evidenced by the signature pages to this Agreement) or which may from time to time become a party hereto pursuant to the provisions of Section 28 hereof or any successor or assignee thereof (hereinafter collectively referred to as "Lenders", and individually, "Lender") and Bank One, as Administrative Agent (the "Agent") and Bank of Montreal, as Syndication Agent. W I T N E S S E T H: WHEREAS, as of March 27, 1998, Middle Bay Oil Company, Inc. ("Middle Bay") entered into a Credit Agreement with Compass Bank, as Agent for itself and Bank of Oklahoma, N.A., pursuant to which the Lenders made available to Middle Bay, a credit facility of up to $100,000,000 (the "Credit Agreement"); and WHEREAS, as of November 23, 1999, Middle Bay, Enex, Production, the Agent and the Lenders entered into a Restated Credit Agreement pursuant to which the Lenders made available to Middle Bay, a credit facility of up to $250,000,000 (the "Restated Credit Agreement"); and WHEREAS, as of November 23, 1999 the Lenders have acquired all of the interest of Compass Bank and Bank of Oklahoma in the Credit Agreement and the liens securing the same; and WHEREAS, as of December 7, 1999, Middle Bay merged with and into 3TEC Energy Corporation; and WHEREAS, effective February 3, 2000 Magellan was merged with and into 3TM Acquisition L.L.C., a Delaware limited liability company which was a wholly- owned subsidiary of 3TEC and became a wholly-owned subsidiary of 3TEC; and WHEREAS, the Borrowers have requested that the Lenders restate the Restated Credit Agreement to make certain changes thereto and the Lenders have agreed to restate the Restated Credit Agreement and make the changes requested by the Borrowers. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereby agree to restate the Credit Agreement as follows: Definitions. When used herein the terms "Agent", "Agreement", "Bank One", "Borrower", "Borrowers", "Enex", "Lender", "Lenders", "Magellan", "Production" and "3TEC" shall have the meanings indicated above. When used herein the following terms shall have the following meanings: Advance or Advances means a loan or loans hereunder. ------------------- Affiliate means any Person which, directly or indirectly, controls, is --------- controlled by or is under common control with the relevant Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean a member of the board of directors, a partner or an officer of such Person, or any other Person with possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, through the ownership (of record, as trustee, or by proxy) of voting shares, partnership interests or voting rights, through a management contract or otherwise. Any Person owning or controlling directly or indirectly ten percent or more of the voting shares, partnership interests or voting rights, or other equity interest of another Person shall be deemed to be an Affiliate of such Person. Alternate Base Rate shall mean, as of any date, a rate of interest per ------------------- annum equal to the higher of (i) the Prime Rate for such date, and (ii) the sum of the Federal Funds Effective Rate for such date plus one-half of one percent (.50%) per annum. Assignment and Acceptance means a document substantially in the form of ------------------------- Exhibit "D" hereto. Base Rate shall mean, as of any date, the sum of the Alternate Base Rate --------- plus the Base Rate Margin. Base Rate Loans shall mean any loan during any period which bears interest --------------- based upon the Alternate Base Rate or which would bear interest based upon the Alternate Base Rate if the Maximum Rate ceiling was not in effect at that particular time. Base Rate Margin shall be: ---------------- (i) one-half of one percent (.50%) per annum whenever the Borrowing Base Usage is equal to or greater than 90%; or (ii) three-eighths of one percent (.375%) per annum whenever the Borrowing Base Usage is equal to or greater than 75% but less than 90%; or -2- (iii) one-quarter of one percent (.25%) per annum whenever the Borrowing Base Usage is equal to or greater than 50%, but less than 75%; or (iv) zero percent (0%) per annum whenever the Borrowing Base Usage is less than 50%. Borrowing Base shall mean the value assigned by the Lenders from time to -------------- time to the Oil and Gas Properties pursuant to Section 7 hereof. Until the next determination of the Borrowing Base pursuant to Section 7(b) hereof and subject to Section 9(c) hereof, the Borrowing Base shall be $145,000,000. Borrowing Base Usage shall mean, as of any date, all amounts outstanding on -------------------- the Loan plus all outstanding Letters of Credit, divided by the Borrowing Base. Borrowing Date means the date elected by Borrowers pursuant to Section 2(b) -------------- hereof for an Advance on the Loan. Business Day shall mean (i) with respect to any borrowing, payment or note ------------ selection of LIBOR Loans, a day (other than Saturdays or Sundays) on which banks are legally open for business in Dallas, Texas and New York, New York and on which dealings in United States dollars are carried on in the London interbank market, and (ii) for all other purposes a day (other than Saturdays and Sundays) on which banks are legally open for business in Dallas, Texas. Cash Collateral Accounts is used herein as defined in Section 12(v). ------------------------ Change of Control shall occur if any Person (or syndicate or group of ----------------- Persons which is deemed a Person for the purposes of Sections 13(d) or 14(d)(ii) of the Securities Act of 1934, as amended) shall acquire, directly or indirectly an amount of issued and outstanding voting stock of Borrowers (including the acquisition of newly-issued stock) sufficient to change the control of Borrowers by causing the election or change of a majority of the directors of Borrowers. Change of Management means a Change of Management shall occur if Floyd C. -------------------- Wilson ever ceases to act as Chairman and Chief Executive Officer of 3TEC and a replacement for such officer, acceptable to Agent, is not appointed within sixty (60) days thereafter. Commitment means (A) For all Lenders, the lesser of (i) $250,000,000 or ---------- ------ (ii) the Borrowing Base, as reduced or increased from time to time pursuant to Sections 2 and 7 hereof, and (B) as to any Lender, its obligation to make Advances hereunder on the Loan and -3- purchase participations in Letters of Credit issued hereunder by the Agent in amounts not exceeding, in the aggregate, an amount equal to such Lender's Commitment Percentage times the total Commitment as of any date. The Commitment of each Lender hereunder shall be adjusted from time to time to reflect assignments made by such Lender pursuant to Section 28 hereof. Each reduction in the Commitment shall result in a Pro Rata reduction in each Lender's Commitment. Commitment Percentage means for each Lender the percentage derived by --------------------- dividing its Commitment at the time of the determination by the Commitments of all Lenders at the time of determination. The Commitment Percentage of each Lender hereunder shall be adjusted from time to time to reflect assignments made by such Lender pursuant to Section 28 hereof. Consolidated Current Assets means the total of the consolidated current --------------------------- assets determined in accordance with GAAP, plus, as of any date, the unused availability on the Commitment. Consolidated Current Liabilities means the total of consolidated current -------------------------------- obligations as determined in accordance with GAAP, excluding therefrom, as of any date, current maturities due on the Loans. Consolidated EBITDAX shall mean Consolidated Net Income (excluding gains -------------------- and losses from asset sales, extraordinary and non-recurring gains and losses) plus the sum of (i) income tax expense (but excluding income tax expense relating to the sales or other disposition of assets, including capital stock, the gains and losses from which are excluded in the determination of Consolidated Net Income), plus (ii) Consolidated Interest Expense, plus (iii) depreciation, depletion and amortization expense, plus (iv) other non-cash expenses, plus (v) dry hole costs and geological and geophysical expenses, all as determined in accordance with GAAP. Consolidated Interest Expense shall mean the aggregate amount of interest ----------------------------- expense of Borrowers as determined on a consolidated basis in accordance with GAAP. Consolidated Net Income shall mean Borrowers' consolidated net income after ----------------------- income taxes calculated in accordance with GAAP. Current Ratio means the ratio of Consolidated Current Assets for the period ------------- being measured to the Consolidated Current Liabilities for such period. CW Resources Acquisition means the acquisition by Borrowers of oil and gas ------------------------ properties from C.W. Resources, Inc., Westerman Royalty, Inc. and Carl A. Westerman -4- ("CWR et. al".) pursuant to an Agreement of Sale and Purchase between 3TEC, and CWR et. al dated April 14, 2000. Default means all the events specified in Section 14 hereof, regardless of ------- whether there shall have occurred any passage of time or giving of notice, or both, that would be necessary in order to constitute such event as an Event of Default. Defaulting Lender is used herein as defined in Section 3(f) hereof. ----------------- Effective Date means the date of this Agreement. -------------- Eligible Assignee means any of (i) a Lender or any Affiliate of a Lender; ----------------- (ii) a commercial bank organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least $100,000,000; (iii) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development, or a political subdivision of any such country, and having a combined capital and surplus of at least $100,000,000.00, provided that such bank is acting through a branch or agency located in the United States; (iv) a Person that is primarily engaged in the business of commercial lending and that (A) is a subsidiary of a Lender, (B) a subsidiary of a Person of which a Lender is a subsidiary, or (C) a Person of which a Lender is a subsidiary; (v) any other entity (other than a natural person) which is an "accredited investor" (as defined in Regulation D under the Securities Act) which extends credit or buys loans as one of its businesses, including, but not limited to, insurance companies, mutual funds, investments funds and lease financing companies; and (vi) with respect to any Lender that is a fund that invests in loans, any other fund that invests in loans and is managed by the same investment advisor of such Lender or by an Affiliate of such investment advisor (and treating all such funds so managed as a single Eligible Assignee); provided, however, that no Affiliate of Borrowers shall be an Eligible Assignee. Engineered Value is used herein as defined in Section 6 hereof. ---------------- Environmental Laws means the Comprehensive Environmental Response, ------------------ Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C.A. (S)9601, et seq., the Resource -- --- Conservation and Recovery Act, as amended by the Hazardous Solid Waste Amendment of 1984, 42 U.S.C.A. (S)6901, et seq., the Clean Water Act, 33 U.S.C.A. (S)1251, -- --- et seq., the Clean Air Act, 42 U.S.C.A. (S)1251, et seq., the Toxic Substances - -- --- -- --- Control Act, 15 U.S.C.A. (S)2601, et seq., The Oil Pollution Act of 1990, 33 U.S.G. (S)2701, et seq., and all other laws, statutes, codes, acts, ordinances, -- --- orders, judgments, decrees, injunctions, rules, regulations, orders, permits and restrictions of any federal, state, county, municipal and other governments, departments, commissions, boards, agencies, courts, authorities, officials and officers, domestic or foreign, -5- relating to oil pollution, air pollution, water pollution, noise control and/or the handling, discharge, disposal or recovery of on-site or off-site asbestos, radioactive materials, spilled or leaked petroleum products, distillates or fractions and industrial solid waste or "hazardous substances" as defined by 42 U.S.C. (S) 9601, et seq., as amended, as each of the foregoing may be amended -- --- from time to time. Environmental Liability means any claim, demand, obligation, cause of ----------------------- action, order, violation, damage, injury, judgment, penalty or fine, cost of enforcement, cost of remedial action or any other costs or expense whatsoever, including reasonable attorneys' fees and disbursements, resulting from the violation or alleged violation of any Environmental Law or the release of any substance into the environment which is required to be remediated by a regulatory agency or governmental authority or the imposition of any Environmental Lien (as hereinafter defined) which could reasonably be expected to individually or in the aggregate have a Material Adverse Effect. Environmental Lien means a Lien in favor of any court, governmental agency ------------------ or instrumentality or any other Person (i) for any Environmental Liability or (ii) for damages arising from or cost incurred by such court or governmental agency or instrumentality or other person in response to a release or threatened release of asbestos or "hazardous substance" into the environment, the imposition of which Lien could reasonably be expected to have a Material Adverse Effect. ERISA means the Employee Retirement Income Security Act of 1974, as ----- amended. Exchangeable Preferred Stock means 800,000 shares of 3TEC preferred stock ---------------------------- which may be designated by 3TEC as Exchangeable Preferred Stock and will have a stated value of $25.00 per share and will be subject to a take down at 3TEC's request from EnCap Investments L.L.C. and its affiliates pursuant to the Private Equity Shelf Agreement. Federal Funds Effective Rate shall mean, for any day, an interest rate per ---------------------------- annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10:00 a.m. (Dallas, Texas time) on such day on such transactions received by the Agent from three (3) Federal funds brokers of recognized standing selected by the Agent in its sole discretion. Financial Statements means balance sheets, income statements, statements of -------------------- cash flows and appropriate footnotes and schedules, prepared in accordance with GAAP. -6- GAAP means generally accepted accounting principles, consistently applied. ---- Intercreditor Agreements means (i) the Intercreditor Agreement among 3TEC, ------------------------ the Agent and W/E Energy Company LLC ("W/E LLC") (formerly known as 3TEC Energy Company L.L.C.), (ii) the Intercreditor Agreement among 3TEC, the Agent and Shoemaker Family Partnership, LP, (iii) the Intercreditor Agreement among 3TEC, the Agent and Shoeinvest II, LP, and (iv) Letter Amendment No. 1 to Middle Bay Oil Company, Inc. Securities Purchase Agreement (dated October 19, 1999), between 3TEC and The Prudential Insurance Company of America, each dated November 23, 1999. Interest Payment Date shall mean the last day of each calendar quarter in --------------------- the case of Base Rate Loans and, in the case of LIBOR Loans, the last day of the applicable Interest Period. Interest Period shall mean with respect to any LIBOR Loan (i) initially, --------------- the period commencing on the date such LIBOR Loan is made and ending one (1), three (3), or six (6) months thereafter as selected by the Borrowers pursuant to Section 4(a)(ii), and (ii) thereafter, each period commencing on the day following the last day of the next preceding Interest Period applicable to such LIBOR Loan and ending one (1), three (3) or six (6) months thereafter, as selected by the Borrowers pursuant to Section 4(a)(ii); provided, however, that (i) if any Interest Period would otherwise expire on a day which is not a Business Day, such Interest Period shall expire on the next succeeding Business Day unless the result of such extension would be to extend such Interest Period into the next calendar month, in which case such Interest Period shall end on the immediately preceding Business Day, (ii) if any Interest Period begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) such Interest Period shall end on the last Business Day of a calendar month, and (iii) any Interest Period which would otherwise expire after the Maturity Date shall end on such Maturity Date. Letters of Credit is used herein as defined in Section 2(c) hereof. ----------------- LIBOR Base Rate shall mean, with respect to any LIBOR Loan for the relevant --------------- Interest Period, the applicable British Bankers' Association Interest Settlement Rate for deposits in U.S. dollars appearing on Reuter's Screen FRBD as of 11:00 a.m. (London time) two (2) Business Days prior to the first day of each Interest Period, and having a maturity equal to such Interest Period; provided that, if Reuter's Screen FRBD is not available to the Agent for any reason, the applicable LIBOR Rate for the relevant Interest Period shall instead be the applicable British Bankers' Association Interest Settlement Rate for deposits in U.S. dollars as reported by any other generally recognized financial information service as of -7- 11:00 a.m. (London time) two (2) Business Days prior to the first day of such Interest Period, and having a maturity equal to such Interest Period. LIBOR Loans means any loans during any period which bear interest at the ----------- LIBOR Rate, or which would bear interest at such rate if the Maximum Rate ceiling was not in effect at a particular time. LIBOR Margin shall be: ------------ (i) two and one-eighths percent (2.125%) per annum whenever the Borrowing Base Usage is equal to or greater than 90%; (ii) two percent (2%) per annum whenever the Borrowing Base Usage is equal to or greater than 75%, but less than 90%; (iii) one and three-quarters percent (1.75%) per annum whenever the Borrowing Base Usage is equal to or greater than 50%, but less than 75%; or (iv) one and one-half percent (1.50%) per annum whenever the Borrowing Base Usage is less than 50%. LIBOR Rate means, with respect to a LIBOR Loan for the relevant Interest ---------- Period, the sum of (i) the quotient of (A) the LIBOR Base Rate applicable to such Interest Period, divided by (B) one minus the Reserve Requirement (expressed as a decimal) applicable to such Interest Period, plus the (ii) LIBOR Margin. The LIBOR Rate shall be rounded to the next higher multiple of 1/16th of one percent if the rate is not such a multiple. Lien means any mortgage, deed of trust, pledge, security interest, ---- assignment, encumbrance or lien (statutory or otherwise) of every kind and character. Loan or Loans means an Advance or Advances made under the Commitment. ------------- Loan Documents means this Agreement, the Notes, the Intercreditor -------------- Agreements, the Assignment, Acknowledgment, Agreement and Waiver, the Security Instruments and all other documents executed in connection with the transaction described in this Agreement. Majority Lenders means Lenders holding 66-2/3% or more of the Commitments ---------------- or if the Commitments have been terminated, Lenders holding 66-2/3% of the outstanding Loans. -8- Material Adverse Effect shall mean a material adverse effect on (i) the ----------------------- assets or properties, liabilities, financial condition, business, operations, affairs or circumstances of the Borrowers, (ii) the ability of the Borrowers to carry out their respective businesses as of the date of this Agreement or as proposed at the date of this Agreement to be conducted, (iii) the ability of Borrowers to perform fully and on a timely basis their obligations under any of the Loan Documents, or (iv) the validity or enforceability of any of the Loan Documents or the rights and remedies of the Agent or the Lenders thereunder. Maturity Date shall mean May 31, 2003. ------------- Maximum Rate means at any particular time in question, the maximum non- ------------ usurious rate of interest which under applicable law may then be charged on the Note. If such Maximum Rate changes after the date hereof, the Maximum Rate shall be automatically increased or decreased, as the case may be, without notice to Borrowers from time to time as the effective date of each change in such Maximum Rate. Minimum Interest Coverage Ratio means the ratio of Consolidated EBITDAX for ------------------------------- the period being measured to the sum of Consolidated Interest Expense for the period being measured plus preferred stock dividends paid in cash during the period being measured. Notes means the Notes, substantially in the form of Exhibit "B" hereto ----- issued or to be issued hereunder to each Lender, respectively, to evidence the indebtedness to such Lender arising by reason of the Advances on the Loan, together with all modifications, renewals and extensions thereof or any part thereof. Oil and Gas Properties means all oil, gas and mineral properties and ---------------------- interests, and related personal property, in which Borrowers grant to the Lenders either a first and prior lien and security interest pursuant to Section 6 hereof or a negative pledge pursuant to Section 13(a) hereof. Operating Accounts is used herein as defined in Section 12(v). ------------------ Other Financing is used herein as defined in Section 15(l) hereof. --------------- Payor is used herein as defined in Section 3(h)hereof. ----- Permitted Liens shall mean (i) royalties, overriding royalties, --------------- reversionary interests, production payments and similar burdens; (ii) sales contracts or other arrangements for the sale of production of oil, gas or associated liquid or gaseous hydrocarbons which would not (when considered cumulatively with the matters discussed in clause (i) above) deprive Borrowers of any material right in respect of any such Borrower's assets or properties (except -9- for rights customarily granted with respect to such contracts and arrangements); (iii) statutory Liens for taxes or other assessments that are not yet delinquent (or that, if delinquent, are being contested in good faith by appropriate proceedings, levy and execution thereon having been stayed and continue to be stayed and for which such Borrower has set aside on its books adequate reserves in accordance with GAAP); (iv) easements, rights of way, servitudes, permits, surface leases and other rights in respect to surface operations, pipelines, grazing, logging, canals, ditches, reservoirs or the like, conditions, covenants and other restrictions, and easements of streets, alleys, highways, pipelines, telephone lines, power lines, railways and other easements and rights of way on, over or in respect of Borrowers' assets or properties and that do not individually or in the aggregate, cause a Material Adverse Effect; (v) materialmen's, mechanic's, repairman's, employee's, warehousemen's, landlord's, carrier's, pipeline's, contractor's, sub-contractor's, operator's, non- operator's (arising under operating or joint operating agreements), and other Liens (including any financing statements filed in respect thereof) incidental to obligations incurred by Borrowers in connection with the construction, maintenance, development, transportation, storage or operation of Borrowers' assets or properties to the extent not delinquent (or which, if delinquent, are being contested in good faith by appropriate proceedings and for which such Borrower has set aside on its books adequate reserves in accordance with GAAP); (vi) all contracts, agreements and instruments, and all defects and irregularities and other matters affecting Borrowers' assets and properties which were in existence at the time Borrowers' assets and properties were originally acquired by Borrowers and all routine operational agreements entered into in the ordinary course of business, which contracts, agreements, instruments, defects, irregularities and other matters and routine operational agreements are not such as to, individually or in the aggregate, interfere materially with the operation, value or use of Borrowers' assets and properties, considered in the aggregate; (vii) liens in connection with workmen's compensation, unemployment insurance or other social security, old age pension or public liability obligations; (viii) legal or equitable encumbrances deemed to exist by reason of the existence of any litigation or other legal proceeding or arising out of a judgment or award with respect to which an appeal is being prosecuted in good faith and levy and execution thereon have been stayed and continue to be stayed; (ix) rights reserved to or vested in any municipality, governmental, statutory or other public authority to control or regulate Borrowers' assets and properties in any manner, and all applicable laws, rules and orders from any governmental authority; (x) landlord's liens; (xi) Liens incurred pursuant to the Security Instruments; and (xii) Liens existing at the date of this Agreement which are identified in Schedule "1" hereto. Person means an individual, a corporation, a partnership, an association, a ------ trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. -10- Plan means any plan subject to Title IV of ERISA and maintained by ---- Borrowers, or any such plan to which any Borrower is required to contribute on behalf of its employees. Pre-Approved Contracts as used herein shall mean any contracts or ---------------------- agreements entered into in connection with any Rate Management Transaction designed (i) to hedge, forward sell or swap crude oil or natural gas or otherwise sell up to 75% of the Borrowers' anticipated production from proved, developed producing reserves of crude oil, and/or up to 75% of the Borrowers' anticipated production from proved, developed producing reserves of natural gas, during the period from the immediately preceding settlement date (or the commencement of the term of such hedge transactions if there is no prior settlement date) to such settlement date, (ii) with a maturity of not exceeding the Maturity Date, and (iii) with counterparties to the hedging agreement (other than a Lender or Affiliate of a Lender which are approved counterparties) which are reasonably approved by Agent. Prime Rate means the rate per annum equal to the Prime Rate announced by ---------- the Agent from time to time, changing when and as said Prime Rate changes. Private Equity Shelf Agreement means that certain Private Equity Shelf ------------------------------ Agreement dated May 31, 2000, among 3TEC, EnCap Investments L.L.C. and certain of its affiliates, pursuant to which the Exchangeable Preferred Stock may be issued by 3TEC. Pro Rata or Pro Rata Part means for each Lender, (i) for all purposes where ------------------------- no Loan is outstanding, such Lender's Commitment Percentage and (ii) otherwise, the proportion which the portion of the outstanding Loans owed to such Lender bears to the aggregate outstanding Loans owed to all Lenders at the time in question. Rate Management Transaction means any transaction (including an agreement --------------------------- with respect thereto) now existing or hereafter entered into by any of the Borrowers which is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, forward exchange transaction, cap transaction, floor transaction, collar transaction, forward transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions) or any combination thereof, whether linked to one or more interest rates, foreign currencies, commodity prices, equity prices or other financial measures. Regulation D shall mean Regulation D of the Board of Governors of the ------------ Federal Reserve System as from time to time in effect and any successor thereto and other regulation or official interpretation of said Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System. -11- Reimbursement Obligations means, at any time, the obligations of the ------------------------- Borrowers in respect of all Letters of Credit then outstanding to reimburse amounts paid by any Lender in respect of any drawing or drawings under a Letter of Credit. Release Price is used herein as defined in Section 12(r) hereof. ------------- Required Payment is used herein as defined in Section 3(h) hereof. ---------------- Reserve Requirement means, with respect to any Interest Period, the ------------------- maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D or Eurocurrency liabilities. Security Instruments is used collectively herein to mean this -------------------- Agreement, all Deeds of Trust, Mortgages, Security Agreements, Assignments of Production and Financing Statements and other collateral documents covering the Oil and Gas Properties and related personal property, equipment, oil and gas inventory and proceeds of the foregoing, all such documents to be in form and substance satisfactory to Agent. Security Purchase Agreements mean (i) a Securities Purchase Agreement ---------------------------- dated August 27, 1999 between Middle Bay and Shoemaker Family Partnership, LP, (ii) a Securities Purchase Agreement dated August 27, 1999 between Middle Bay and Shoeinvest II, LP, (iii) a Securities Purchase Agreement dated July 1, 1999 between Middle Bay and W/E LLC and (iv) a Securities Purchase Agreement dated October 19, 1999 between Middle Bay and The Prudential Insurance Company of America, as amended by that certain Letter Amendment No. 1 to Middle Bay Securities Purchase Agreement dated November 23, 1999. Series B Preferred Stock means 266,667 shares of 3TEC preferred stock ------------------------ which has been designated as Series B and has a stated value of $7.50 per share, all of which is issued and outstanding. Series C Preferred Stock means 2,300,000 shares of 3TEC preferred ------------------------ stock which has been designated as Series C and has a stated value of $5.00 per share, 2,167,156 shares of which are issued and outstanding. Series D Preferred Stock means 725,167 shares of 3TEC preferred stock ------------------------ which has been designated as Series D and has a stated value of $24.00 per share, 621,930 of which are issued and outstanding as of March 31, 2000. Subordinated Lenders W/E LLC, Shoemaker Family Partnership, LP, -------------------- Shoeinvest II, LP and The Prudential Insurance Company of America. -12- Subordinated Notes means promissory notes issued by 3TEC pursuant to ------------------ the Security Purchase Agreements. Subsidiary means any corporation or other entity of which securities ---------- or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by Borrowers or another subsidiary. Total Outstandings means, as of any date, the sum of (i) the total ------------------ principal balance outstanding on the Notes, plus (ii) the total face amount of all outstanding Letters of Credit, plus (iii) the total amount of all unpaid Reimbursement Obligations. Tranche means a set of LIBOR Loans made by the Lenders at the same ------- time and for the same Interest Period. Unscheduled Redeterminations means a redetermination of the Borrowing ---------------------------- Base made at any time other than on the dates set for the regular semi- annual redetermination of the Borrowing Base which are made (A) at the request of Borrowers (but only once between Borrowing Base redeterminations), (B) at the request of Majority Lenders. Unused Commitment Fee Rate shall be: -------------------------- (i) one-half of one percent (.50%) per annum whenever the Borrowing Base Usage is equal to or greater than 90%; (ii) three-eighths of one percent (.375%) per annum whenever the Borrowing Base Usage is equal to or greater than 50% but less than 90%; or (iii) one-fourth of one percent (.25%) per annum whenever the Borrowing Base Usage is less than 50%. 2. Commitments of the Lender. (a) Terms of Commitment. On the terms and conditions hereinafter set ------------------- forth, each Lender agrees severally to make Advances to the Borrowers from time to time during the period beginning on the Effective Date and ending on the Maturity Date in such amounts as the Borrowers may request up to an amount not to exceed, in the aggregate principal amount outstanding at any time, the Commitment less Total Outstandings. The obligation of the Borrowers hereunder shall be evidenced by this Agreement and the Notes issued in connection herewith, said Notes to be as described in Section 3 hereof. Notwithstanding any other provision of this Agreement, no Advance shall be required to be made hereunder if any -13- Event of Default (as hereinafter defined) has occurred and is continuing or if any event or condition has occurred or failed to occur which with the passage of time or service of notice, or both, would constitute an Event of Default. Each Advance under the Commitment shall be an aggregate amount of at least $1,000,000 or any whole multiples of $100,000 in excess thereof. Irrespective of the face amount of the Note or Notes, the Lenders shall never have the obligation to Advance any amount or amounts in excess of the Commitment or to increase the Commitment. (b) Procedure for Borrowing. Whenever the Borrowers desire an ----------------------- Advance hereunder, they shall give Agent telegraphic, telex, facsimile or telephonic notice ("Notice of Borrowing") of such requested Advance, which in the case of telephonic notice, shall be promptly confirmed in writing. Each Notice of Borrowing shall be in the form of Exhibit "A" attached hereto and shall be received by Agent not later than 11:00 a.m. Dallas, Texas time, (i) one Business Day prior to the Borrowing Date in the case of the Base Rate Loan, or (ii) three Business Days prior to any proposed Borrowing Date in the case of LIBOR Loans. Each Notice of Borrowing shall specify (i) the Borrowing Date (which, if at Base Rate Loan, shall be a Business Day and if a LIBOR Loan, a Business Day), (ii) the principal amount to be borrowed, (iii) the portion of the Advance constituting Base Rate Loans and/or LIBOR Loans, (iv) if any portion of the proposed Advance is to constitute LIBOR Loans, the initial Interest Period selected by Borrowers pursuant to Section 4 hereof to be applicable thereto, and (v) the date upon which such Advance is required. Upon receipt of such Notice, Agent shall advise each Lender thereof; provided, that if the Lenders have received at least one (1) day's notice of such Advance prior to funding of a Base Rate Loan, or at least three (3) days' notice of each Advance prior to funding in the case of a LIBOR Loan, each Lender shall provide Agent at its office at 1717 Main Street, Dallas, Texas 75201, not later than 1:00 p.m., Dallas, Texas time, on the Borrowing Date, in immediately available funds, its pro rata share of the requested Advance, but the aggregate of all such fundings by each Lender shall never exceed such Lender's Commitment. Not later than 2:00 p.m., Dallas, Texas time, on the Borrowing Date, Agent shall make available to the Borrowers at the same office, in like funds, the aggregate amount of such requested Advance. Neither Agent nor any Lender shall incur any liability to the Borrowers in acting upon any Notice referred to above which Agent or such Lender believes in good faith to have been given by a duly authorized officer or other person authorized to borrow on behalf of Borrowers or for otherwise acting in good faith under this Section 2(b). Upon funding of Advances by Lenders in accordance with this Agreement, pursuant to any such Notice, the Borrowers shall have effected Advances hereunder. (c) Letters of Credit. On the terms and conditions hereinafter set ----------------- forth, the Agent shall from time to time during the period beginning on the Effective Date and ending on the Maturity Date upon request of Borrowers issue standby Letters of Credit for the account of Borrowers (the "Letters of Credit") in such face amounts as Borrowers may request, but not -14- to exceed in the aggregate face amount at any time outstanding the sum of Five Million Dollars ($5,000,000). The face amount of all Letters of Credit issued and outstanding hereunder shall be considered as Advances on the Commitment for Borrowing Base purposes and all payments made by the Agent on such Letters of Credit shall be considered as Advances under the Notes. Each Letter of Credit issued for the account of Borrowers hereunder shall (i) be in favor of such beneficiaries as specifically requested by Borrowers, (ii) have an expiration date not exceeding the earlier of (a) one year or (b) the Maturity Date, and (iii) contain such other terms and provisions as may be required by issuing Lender. Each Lender (other than Agent) agrees that, upon issuance of any Letter of Credit hereunder, it shall automatically acquire a participation in the Agent's liability under such Letter of Credit in an amount equal to such Lender's Commitment Percentage of such liability, and each Lender (other than Agent) thereby shall absolutely, unconditionally and irrevocably assume, as primary obligor and not as surety, and shall be unconditionally obligated to Agent to pay and discharge when due, its Commitment Percentage of Agent's liability under such Letter of Credit. The Borrowers hereby unconditionally agree to pay and reimburse the Agent for the amount of each demand for payment under any Letter of Credit that is in substantial compliance with the provisions of any such Letter of Credit at or prior to the date on which payment is to be made by the Agent to the beneficiary thereunder, without presentment, demand, protest or other formalities of any kind. Upon receipt from any beneficiary of any Letter of Credit of any demand for payment under such Letter of Credit, the Agent shall promptly notify the Borrowers of the demand and the date upon which such payment is to be made by the Agent to such beneficiary in respect of such demand. Forthwith upon receipt of such notice from the Agent, Borrowers shall advise the Agent whether or not they intend to borrow hereunder to finance their obligations to reimburse the Agent, and if so, submit a Notice of Borrowing as provided in Section 2(b) hereof. If Borrowers fail to so advise Agent and thereafter fail to reimburse Agent, the Agent shall notify each Lender of the demand and the failure of the Borrowers to reimburse the Agent, and each Lender shall reimburse the Agent for its Commitment Percentage of each such draw paid by the Agent and unreimbursed by the Borrowers. All such amounts paid by Agent and/or reimbursed by the Lenders shall be treated as an Advance or Advances under the Commitment, which Advances shall be immediately due and payable and shall bear interest at the Maximum Rate. (d) Procedure for Obtaining Letters of Credit. The amount and date ----------------------------------------- of issuance, renewal, extension or reissuance of a Letter of Credit pursuant to the Lenders' commitments above in Section 2(c) shall be designated by Borrowers' written request delivered to Agent at least three (3) Business Days prior to the date of such issuance, renewal, extension or reissuance. Concurrently with or promptly following the delivery of the request for a Letter of Credit, Borrowers shall execute and deliver to the Agent an application and agreement with respect to the Letters of Credit, said application and agreement to be in the form used by the Agent. The Agent shall not be obligated to issue, renew, extend or reissue such Letters of Credit if (A) the amount thereon when added to the face amount of the outstanding -15- Letters of Credit plus any Reimbursement Obligations exceeds Five Million Dollars ($5,000,000) or (B) the amount thereof when added to the Total Outstandings would exceed the Commitment. Borrowers agree to pay the Agent for the benefit of the Lenders commissions for issuing the Letters of Credit (calculated separately for each Letter of Credit) in an amount equal to the greater of (i) the LIBOR Margin then in effect times the maximum face amount of the Letter of Credit or (ii) $500.00. Borrowers further agree to pay Agent an additional fronting fee equal to one-eighth of one percent (0.125%) per annum on the maximum face amount of each Letter of Credit. Such commissions shall be payable prior to the issuance of each Letter of Credit and thereafter on each anniversary date of such issuance while such Letter of Credit is outstanding. (e) Voluntary Reduction of Commitment. Subject to the provisions of --------------------------------- Section 5(e) hereof, the Borrowers may at any time, or from time to time, upon not less than three (3) Business Days' prior written notice to Agent, reduce or terminate the Commitment; provided, however, that (i) each reduction in the Commitment must be in the amount of $1,000,000 or more, in increments of $1,000,000 and (ii) each reduction must be accompanied by a prepayment of the Notes in the amount by which the outstanding principal balance of the Notes exceeds the Commitment as reduced pursuant to this Section 2. (f) Mandatory Commitment Reductions. The Borrowing Base shall be ------------------------------- reduced by the amount of the Special Mandatory Prepayment required pursuant to Section 9(c) hereof. In addition, the Borrowing Base shall be reduced from time to time by the amount of any prepayment required by Section 12(r) hereof upon the sale of assets. If, as a result of any such reduction in the Borrowing Base, the Total Outstandings ever exceed the Borrowing Base then in effect, the Borrowers shall make the mandatory prepayment of principal required pursuant to Section 9(b) hereof. (g) Several Obligations. The obligations of the Lenders under the ------------------- Commitments are several and not joint. The failure of any Lender to make an Advance required to be made by it shall not relieve any other Lender of its obligation to make its Advance, and no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender. No Lender shall be required to lend hereunder any amount in excess of its legal lending limit. (h) Type and Number of Advances. Any Advance of the Commitment may --------------------------- be a Base Rate Loan or a LIBOR Loan, or a combination thereof, as selected by the Borrowers pursuant to Section 4 hereof. The total number of Tranches which may be outstanding at any time shall never exceed four (4). (i) Limited Liability of Enex, Production and Magellan. While the -------------------------------------------------- obligations of the Borrowers under the Agreement and the Notes shall be joint and several obligations -16- of 3TEC, Enex, Production and Magellan, the liability of Enex, Production and Magellan thereunder shall be limited to the maximum amount of liability that can be incurred without rendering the obligations of Enex, Production and Magellan under the Loan Documents voidable under applicable law relating to fraudulent conveyance or fraudulent transfer, and not for any greater amount. 3. Notes Evidencing Loans. The loans described above in Section 2 shall be evidenced by promissory notes of Borrowers as follows: (a) Form of Notes. The Loan shall be evidenced by a Note or Notes in ------------- the aggregate face amount of $250,000,000, and shall be in the form of Exhibit "B" hereto with appropriate insertions (each a "Note"). Notwithstanding the face amount of the Notes, the actual principal amount due from the Borrowers to Lenders on account of the Notes, as of any date of computation, shall be the sum of Advances then and theretofore made on account thereof, less all principal payments actually received by Lenders in collected funds with respect thereto. Although the Notes may be dated as of the Effective Date, interest in respect thereof shall be payable only for the period during which the loans evidenced thereby are outstanding and, although the stated amount of the Notes may be higher, the Notes shall be enforceable, with respect to Borrowers' obligation to pay the principal amount thereof, only to the extent of the unpaid principal amount of the Loans. Irrespective of the face amount of the Notes, no Lender shall ever be obligated to advance on the Commitment any amount in excess of its Commitment then in effect. (b) Issuance of Additional Notes. At the Effective Date there shall ---------------------------- be outstanding Notes in the aggregate face amount of $250,000,000 payable to the order of Lenders. From time to time new Notes may issued to other Lenders as such Lenders become parties to this Agreement. Upon request from Agent, the Borrowers shall execute and deliver to Agent any such new or additional Notes. From time to time as new Notes are issued the Agent shall require that each Lender exchange its Note(s) for newly issued Note(s) to better reflect the extent of each Lender's Commitments hereunder. (c) Interest Rates. The unpaid principal balance of the Notes shall -------------- bear interest from time to time as set forth in Section 4 hereof. (d) Payment of Interest. Interest on the Notes shall be payable on ------------------- each Interest Payment Date. (e) Payment of Principal. Principal of the Note or Notes shall be -------------------- due and payable to the Agent for the ratable benefit of the Lenders on the Maturity Date unless earlier due in whole or in part as a result of an acceleration of the amount due or pursuant to the mandatory prepayment provisions of Sections 2(f), 9(b) and 9(c) hereof. -17- (f) Payment to Lenders. Each Lender's Pro Rata Part of payment or ------------------ prepayment of the Loans shall be directed by wire transfer to such Lender by the Agent at the address provided to the Agent for such Lender for payments no later than 2:00 p.m., Dallas, Texas, time on the Business Day such payments or prepayments are deemed hereunder to have been received by Agent; provided, however, in the event that any Lender shall have failed to make an Advance as contemplated under Section 2 hereof (a "Defaulting Lender") and the Agent or another Lender or Lenders shall have made such Advance, payment received by Agent for the account of such Defaulting Lender or Lenders shall not be distributed to such Defaulting Lender or Lenders until such Advance or Advances shall have been repaid in full to the Lender or Lenders who funded such Advance or Advances. Any payment or prepayment received by Agent at any time after 12:00 noon, Dallas, Texas, time on a Business Day shall be deemed to have been received on the next Business Day. Interest shall cease to accrue on any principal as of the end of the day preceding the Business Day on which any such payment or prepayment is deemed hereunder to have been received by Agent. If Agent fails to transfer any principal amount to any Lender as provided above, then Agent shall promptly direct such principal amount by wire transfer to such Lender. (g) Sharing of Payments, Etc. If any Lender shall obtain any payment ------------------------- (whether voluntary, involuntary, or otherwise) on account of the Loans, (including, without limitation, any set-off) which is in excess of its Pro Rata Part of payments on either of the Loans, as the case may be, obtained by all Lenders, such Lender shall purchase from the other Lenders such participation as shall be necessary to cause such purchasing Lender to share the excess payment pro rata with each of them; provided that, if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, the purchase shall be rescinded and the purchase price restored to the extent of the recovery. The Borrowers agree that any Lender so purchasing a participation from another Lender pursuant to this Section may, to the fullest extent permitted by law, exercise all of its rights of payment (including the right of offset) with respect to such participation as fully as if such Lender were the direct creditor of the Borrowers in the amount of such participation. (h) Non-Receipt of Funds by the Agent. Unless the Agent shall have --------------------------------- been notified by a Lender or the Borrowers (the "Payor") prior to the date on which such Lender is to make payment to the Agent of the proceeds of a Loan to be made by it hereunder or the Borrowers are to make a payment to the Agent for the account of one or more of the Lenders, as the case may be (such payment being herein called the "Required Payment"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Agent, the Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient on such date and, if the Payor has not in fact made the Required Payment to the Agent, the recipient of such payment shall, on demand, pay to the Agent the amount made available to it together with interest thereon in respect of the period -18- commencing on the date such amount was made available by the Agent until the date the Agent recovers such amount at the rate applicable to such portion of the applicable Loan. 4. Interest Rates. (a) Options. ------- (i) Base Rate Loans. On all Base Rate Loans the Borrowers agree --------------- to pay interest on the Notes calculated on the basis of the actual days elapsed in a year consisting of 365, or if appropriate, 366 days with respect to the unpaid principal amount of each Base Rate Loan from the date the proceeds thereof are made available to Borrowers until maturity (whether by acceleration or otherwise), at a varying rate per annum equal to the lesser of (i) the Maximum Rate (defined herein), or (ii) the Base Rate. Subject to the provisions of this Agreement as to prepayment, the principal of the Notes representing Base Rate Loans shall be payable as specified in Section 3(e) hereof and the interest in respect of each Base Rate Loan shall be payable on each Interest Payment Date. Past due principal and, to the extent permitted by law, past due interest in respect to each Base Rate Loan, shall bear interest, payable on demand, at a rate per annum equal to the Maximum Rate. (ii) LIBOR Loans. On all LIBOR Loans the Borrowers agree to pay ----------- interest calculated on the basis of a year consisting of 360 days with respect to the unpaid principal amount of each LIBOR Loan from the date the proceeds thereof are made available to Borrowers until maturity (whether by acceleration or otherwise), at a varying rate per annum equal to the lesser of (i) the Maximum Rate, or (ii) the LIBOR Rate. Subject to the provisions of this Agreement with respect to prepayment, the principal of the Notes shall be payable as specified in Section 3(e) hereof and the interest with respect to each LIBOR Loan shall be payable on each Interest Payment Date. Past due principal and, to the extent permitted by law, past due interest shall bear interest, payable on demand, at a rate per annum equal to the Maximum Rate. Upon three (3) Business Days' written notice prior to the making by the Lenders of any LIBOR Loan (in the case of the initial Interest Period therefor) or the expiration date of each succeeding Interest Period (in the case of subsequent Interest Periods therefor), Borrowers shall have the option, subject to compliance by Borrowers with all of the provisions of this Agreement, as long as no Event of Default exists, to specify whether the Interest Period commencing on any such date shall be a one (1), three (3) or six (6) month period. If Agent shall not have received timely notice of a designation of such Interest Period as herein provided, Borrowers shall be -19- deemed to have elected to convert all maturing LIBOR Loans to Base Rate Loans. (b) Interest Rate Determination. The Agent shall determine each --------------------------- interest rate applicable to the Loans hereunder. The Agent shall give prompt notice to the Borrowers and the Lenders of each rate of interest so determined and its determination thereof shall be conclusive absent error. (c) Conversion Option. Borrowers may elect from time to time (i) to ----------------- convert all or any part of their LIBOR Loans to Base Rate Loans by giving Agent irrevocable notice of such election in writing prior to 10:00 a.m. (Dallas, Texas time) on the conversion date and such conversion shall be made on the requested conversion date, provided that any such conversion of LIBOR Loan shall only be made on the last day of the Interest Period with respect thereof, (ii) to convert all or any part of their Base Rate Loans to LIBOR Loans by giving the Agent irrevocable written notice of such election three (3) Business Days prior to the proposed conversion and such conversion shall be made on the requested conversion date or, if such requested conversion date is not a Business Day, on the next succeeding Business Day. Any such conversion shall not be deemed to be a prepayment of any of the loans for purposes of this Agreement on the Notes. (d) Recoupment. If at any time the applicable rate of interest ---------- selected pursuant to Sections 4(a)(i) or 4(a)(ii) above shall exceed the Maximum Rate, thereby causing the interest on the Notes to be limited to the Maximum Rate, then any subsequent reduction in the interest rate so selected or subsequently selected shall not reduce the rate of interest on the Notes below the Maximum Rate until the total amount of interest accrued on the Note equals the amount of interest which would have accrued on the Notes if the rate or rates selected pursuant to Sections 4(a)(i) or (ii), as the case may be, had at all times been in effect. 5. Special Provisions Relating to Loans. (a) Unavailability of Funds or Inadequacy of Pricing. In the event ------------------------------------------------ that, in connection with any proposed LIBOR Loan, the Agent reasonably determines, which determination shall, absent manifest error, be final, conclusive and binding upon all parties, due to changes in circumstances since the date hereof, adequate and fair means do not exist for determining the LIBOR Rate or such rate will not accurately reflect the costs to the Lenders of funding LIBOR Loan for such Interest Period, the Agent shall give notice of such determination to the Borrowers and the Lenders, whereupon, until the Agent notifies the Borrowers and the Lenders that the circumstances giving rise to such suspension no longer exist, the obligations of the Lenders to make, continue or convert Loan into LIBOR Loan shall be suspended, and all loans to Borrowers shall be Base Rate Loan during the period of suspension. -20- (b) Change in Laws. If at any time any new law or any change in -------------- existing laws or in the interpretation of any new or existing laws shall make it unlawful for any Lender to make or continue to maintain or fund LIBOR Loan hereunder, then such Lender shall promptly notify Borrowers in writing and such Lender's obligation to make, continue or convert Loan into LIBOR Loan under this Agreement shall be suspended until it is no longer unlawful for such Lender to make or maintain LIBOR Loan. Upon receipt of such notice, Borrowers shall either repay the outstanding LIBOR Loan owed to the Lenders, without penalty, on the last day of the current Interest Periods (or, if any Lender may not lawfully continue to maintain and fund such LIBOR Loan, immediately), or Borrowers may convert such LIBOR Loan at such appropriate time to Base Rate Loan. (c) Increased Cost or Reduced Return. -------------------------------- (i) If, after the date hereof, the adoption of any applicable law, rule, or regulation, or any change in any applicable law, rule, or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank, or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender with any request or directive (whether or not having the force of law) of any such governmental authority, central bank, or comparable agency: (A) shall subject such Lender to any tax, duty, or other charge with respect to any LIBOR Loan, its Notes, or its obligation to make LIBOR Loan, or change the basis of taxation of any amounts payable to such Lender under this Agreement or its Notes in respect of any LIBOR Loan (other than franchise taxes and taxes imposed on the overall net income of such Lender); (B) shall impose, modify, or deem applicable any reserve, special deposit, assessment, or similar requirement (other than reserve requirements, if any, taken into account in the determination of the LIBOR Rate) relating to any extensions of credit or other assets of, or any deposits with or other liabilities or commitments of, such Lender, including the Commitment of such Lender hereunder; or (C) shall impose on such Lender or on the London interbank market any other condition affecting this Agreement or its Notes or any of such extensions of credit or liabilities or commitments; and the result of any of the foregoing is to increase the cost to such Lender of making, converting into, continuing, or maintaining any LIBOR Loan or to reduce any sum received or receivable by such Lender under this Agreement or its Notes -21- with respect to any LIBOR Loan, then Borrowers shall pay to such Lender on demand such amount or amounts as will reasonably compensate such Lender for such increased cost or reduction. If any Lender requests compensation by Borrowers under this Section 5(c), Borrowers may, by notice to such Lender (with a copy to Agent), suspend the obligation of such Lender to make or continue LIBOR Loan, or to convert all or part of the Base Rate Loan owing to such Lender to LIBOR Loan, until the event or condition giving rise to such request ceases to be in effect (in which case the provisions of Section 5(c) shall be applicable); provided that such suspension shall not affect -------- the right of such Lender to receive the compensation so requested. (ii) If, after the date hereof, any Lender shall have determined that the adoption of any applicable law, rule, or regulation regarding capital adequacy or any change therein or in the interpretation or administration thereof by any governmental authority, central bank, or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such governmental authority, central bank, or comparable agency, has or would have the effect of reducing the rate of return on the capital of such Lender or any corporation controlling such Lender as a consequence of such Lender's obligations hereunder to a level below that which such Lender or such corporation could have achieved but for such adoption, change, request, or directive (taking into consideration its policies with respect to capital adequacy), then from time to time upon demand Borrowers shall pay to such Lender such additional amount or amounts as will reasonably compensate such Lender for such reduction. (iii) Each Lender shall promptly notify Borrowers and Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Lender to compensation pursuant to this Section 5(c) and will designate a separate lending office, if applicable, if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Lender, be otherwise disadvantageous to it. Any Lender claiming compensation under this Section 5(c) shall furnish to Borrowers and Agent a statement setting forth the additional amount or amounts to be paid to it hereunder which shall be conclusive in the absence of manifest error. In determining such amount, such Lender may use any reasonable averaging and attribution methods. (iv) Any Lender giving notice to the Borrowers through the Agent, pursuant to Sections 3(k) or 5(c) shall give to the Borrowers a statement signed by an officer of such Lender setting forth in reasonable detail the basis for, and the calculation of such additional cost, reduced payments or capital requirements, as the -22- case may be, and the additional amounts required to compensate such Lender therefor. (v) Within five (5) Business Days after receipt by the Borrowers of any notice referred to in Sections 3(k) or 5(c), the Borrowers shall pay to the Agent for the account of the Lender issuing such notice such additional amounts as are required to compensate such Lender for the increased cost, reduce payments or increase capital requirements identified therein, as the case may be. (d) Discretion of Lender as to Manner of Funding. Notwithstanding -------------------------------------------- any provisions of this Agreement to the contrary, each Lender shall be entitled to fund and maintain its funding of all or any part of its Loan in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder shall be made as if each Lender had actually funded and maintained each LIBOR Loan through the purchase of deposits having a maturity corresponding to the last day of the Interest Period applicable to such LIBOR Loan and bearing an interest rate to the applicable interest rate for such LIBOR Period. (e) Breakage Fees. Without duplication under any other provision ------------- hereof, if any Lender incurs any loss, cost or expense including, without limitation, any loss of profit and loss, cost, expense or premium reasonably incurred by reason of the liquidation or re-employment of deposits or other funds acquired by such Lender to fund or maintain any LIBOR Loan or the relending or reinvesting of such deposits or amounts paid or prepaid to the Lenders as a result of any of the following events other than any such occurrence as a result in the change of circumstances described in Sections 5(a) and (b): (i) any payment, prepayment or conversion of a LIBOR Loan on a date other than the last day of its Interest Period (whether by acceleration, prepayment or otherwise); (ii) any failure to make a principal payment of a LIBOR Loan on the due date thereof; or (iii) any failure by the Borrowers to borrow, continue, prepay or convert to a LIBOR Loan on the dates specified in a notice given pursuant to Section 2(b) or 4(c) hereof; then the Borrowers shall pay to such Lender such amount as will reimburse such Lender for such loss, cost or expense. If any Lender makes such a claim for compensation, it shall furnish to Borrowers and Agent a statement setting forth the amount of such loss, cost or expense in reasonable detail (including an explanation of the basis for and the computation -23- of such loss, cost or expense) and the amounts shown on such statement shall be conclusive and binding absent manifest error. 6. Collateral Security. To secure the performance by Borrowers of their obligations hereunder, and under the Notes and Security Instruments, whether now or hereafter incurred, matured or unmatured, direct or contingent, joint or several, or joint and several, including extensions, modifications, renewals and increases thereof, and substitutions therefore, Borrowers have heretofore granted and shall herewith grant and assign to Agent for the ratable benefit of the Lenders a first and prior Lien on certain of their Oil and Gas Properties, certain related equipment, oil and gas inventory and proceeds of the foregoing. The Oil and Gas Properties heretofore and herewith mortgaged to the Agent shall represent not less than 80% of the Engineered Value (as hereinafter defined) of Borrowers' Oil and Gas Properties as of the Effective Date. Obligations arising from agreements arising from Rate Management Transactions between Borrowers and one or more of the Lenders or an Affiliate of any of the Lenders providing for the hedging, forward sale or swap of crude oil or natural gas or interest rate protection shall be secured by the Collateral (as hereinafter defined) on a pari passu basis with the indebtedness and obligations of the Borrowers under the Loan Documents. All Oil and Gas Properties and other collateral in which Borrowers herewith grant or hereafter grant to Agent for the ratable benefit of the Lenders a first and prior Lien (to the satisfaction of the Agent) in accordance with this Section 6 or the Oil and Gas Properties and other collateral in which the Agent has acquired an interest for the ratable benefit of the Lenders from Compass Bank, as such properties and interests are from time to time constituted, are hereinafter collectively called the "Collateral". The granting and assigning of such security interests and Liens by Borrowers shall be pursuant to Security Instruments in form and substance reasonably satisfactory to the Agent. Concurrently with the delivery of each of the Security Instruments or within a reasonable time thereafter, Borrowers shall have furnished to the Agent mortgage and title opinions and other title information satisfactory to Agent with respect to the title and Lien status of Borrowers' interests in not less than 90% of the Engineered Value of the Oil and Gas Properties covered by the Security Instruments as Agent shall have designated. "Engineered Value" for this purpose shall mean future net revenues discounted at the discount rate being used by the Agent as of the date of any such determination utilizing the pricing parameters used in the engineering report furnished to the Agent for the ratable benefit of the Lenders, pursuant to Sections 7 and 12 hereof. Borrowers will cause to be executed and delivered to the Agent, in the future, additional Security Instruments if the Agent reasonably deems such are necessary to insure perfection or maintenance of Lenders' security interests and Liens in the Oil and Gas Properties or any part thereof. 7. Borrowing Base. (a) Initial Borrowing Base. At the Effective Date, the Borrowing Base ---------------------- shall be $145,000,000. -24- (b) Subsequent Determinations of Borrowing Base. Subsequent ------------------------------------------- determinations of the Borrowing Base shall be made by the Lenders at least semi-annually on May 1 and November 1 of each year beginning November 1, 2000 or as Unscheduled Redeterminations. The Borrowers shall furnish to the Lenders as soon as possible but in any event no later than April 1 of each year, beginning April 1, 2001, with an Engineering Report in form and substance satisfactory to the Agent prepared by an independent petroleum engineering firm or firms acceptable to Agent covering the Oil and Gas Properties utilizing economic and pricing parameters used by Agent as established from time to time, together with such other information concerning the value of the Oil and Gas Properties as the Agent shall deem necessary to determine the value of the Oil and Gas Properties. By October 1 of each year, beginning October 1, 2000, or within thirty (30) days after either (i) receipt of notice from Agent that the Lenders require an Unscheduled Redetermination, or (ii) the Borrowers give notice to Agent of their desire to have an Unscheduled Redetermination performed, the Borrowers shall furnish to the Lenders an engineering report in form and substance satisfactory to Agent prepared by Borrowers' in-house engineering staff valuing the Oil and Gas Properties utilizing economic and pricing parameters used by the Agent as established from time to time, together with such other information, reports and data concerning the value of the Oil and Gas Properties as Agent shall deem reasonably necessary to determine the value of such Oil and Gas Properties. Agent shall by written notice to the Borrowers no later than May 1 and November 1 of each year, or within a reasonable time thereafter (herein called the "Determination Date"), notify the Borrowers of the designation by the Lenders of the new Borrowing Base for the period beginning on such Determination Date and continuing until, but not including, the next Determination Date. If an Unscheduled Redetermination is made by the Lenders, the Agent shall notify the Borrowers within a reasonable time after receipt of all requested information of the new Borrowing Base, and such new Borrowing Base shall continue until the next Determination Date. If the Borrowers do not furnish all such information, reports and data by any date specified in this Section 7(b), unless such failure is of no fault of the Borrowers, the Lenders may nonetheless designate the Borrowing Base at any amounts which the Lenders in their reasonable discretion determine and may redesignate the Borrowing Base from time to time thereafter until the Lenders receive all such information, reports and data, whereupon the Lenders shall designate a new Borrowing Base as described above. Each Lender shall determine the amount of the Borrowing Base based upon the loan collateral value which such Lender in its reasonable discretion (using such methodology, assumptions and discounts rates as such Lender customarily uses in assigning collateral value to oil and gas properties, oil and gas gathering systems, gas processing and plant operations) assigns to such Oil and Gas Properties of the Borrowers at the time in question and based upon such other credit factors consistently applied (including, without limitation, the assets, liabilities, cash flow, business, properties, prospects, management and ownership of the Borrowers and their affiliates) as such Lender customarily considers in evaluating similar oil and gas credits, but such Lender in its discretion shall not be required to give any additional positive value to any Oil and Gas -25- Property over the current economic and pricing parameters used by such Lender for such Determination Date which additional value is derived directly from a hedging, forward sale or swap agreement covering such Oil and Gas Property as of the date of such determination. All determinations or Unscheduled Redeterminations of the Borrowing Base require the approval of Majority Lenders; provided, however, that notwithstanding anything to the contrary herein, the amount of the Borrowing Base may not be increased, without the approval of all Lenders. If the Lenders cannot otherwise agree on the Borrowing Base, the Agent shall notify each of the Lenders of such fact or facts and each Lender will submit within five (5) days thereafter its proposed Borrowing Base. The redetermined Borrowing Base shall be then determined based upon the weighted arithmetic average of the proposed amounts submitted by each Lender, said proposals to be weighted according to each Lender's Commitment. If at any time any of the Oil and Gas Properties are sold, the Borrowing Base then in effect shall automatically be reduced by a sum equal to the amount of prepayment, if any, required to be made pursuant to Section 12(r) hereof. The Borrowing Base shall be additionally reduced from time to time pursuant to the provisions of Sections 2(e) and 2(f) hereof. It is expressly understood that the Lenders have no obligation to designate the Borrowing Base at any particular amounts, except in the exercise of their discretion, whether in relation to the Commitment or otherwise. Provided, however, that the Lenders shall not have the obligation to designate a Borrowing Base in an amount in excess of the Commitment. 8. Fees. (a) Unused Commitment Fee. The Borrowers shall pay to Agent for the --------------------- ratable benefit of the Lenders an unused commitment fee (the "Unused Commitment Fee") equivalent to the Unused Commitment Fee Rate times the daily average of the unadvanced amount of the Commitment. Such Unused Commitment Fee shall be calculated on the basis of a year consisting of 360 days. The Unused Commitment Fee shall be payable in arrears on the last Business Day of each calendar quarter beginning June 30, 2000 with the final fee payment due on the Maturity Date for any period then ending for which the Unused Commitment Fee shall not have been theretofore paid. In the event the Commitment terminates on any date prior to the end of any such monthly period, the Borrowers shall pay to the Agent for the ratable benefit of the Lenders, on the date of such termination, the total Unused Commitment Fee due for the period in which such termination occurs. (b) The Letter of Credit Fee. Borrowers shall pay to the Agent the ------------------------ Letter of Credit fees required above in Section 2(d). -26- 9. Prepayments. (a) Voluntary Prepayments. Subject to the provisions of Section 5(e) --------------------- hereof, the Borrowers may at any time and from time to time, without penalty or premium, prepay the Notes, in whole or in part. Each such prepayment shall be made on at least three (3) Business Days' notice to Agent in the case of LIBOR Loan Tranches and without notice in the case of Base Rate Loans and shall be in a minimum amount of (i) $500,000 or any whole multiple of $100,000 in excess thereof (or the unpaid balance of the Notes, whichever is less), for Base Rate Loans, plus accrued interest thereon and (ii) $1,000,000 or any whole multiple of $100,000 in excess thereof (or the unpaid balance on the Notes, whichever is less) for LIBOR Loans, plus accrued interest thereon to the date of prepayment. (b) Mandatory Prepayment For Borrowing Base Deficiency. In the event -------------------------------------------------- the Total Outstandings ever exceed the Borrowing Base as determined by Lenders pursuant to Section 7(b) hereof, the Borrowers shall, within thirty (30) days after written notification from the Agent, either (A) by instruments reasonably satisfactory in form and substance to the Lender, provide the Agent with collateral with value and quality in amounts satisfactory to all of the Lenders in their discretion in order to increase the Borrowing Base by an amount at least equal to such excess, or (B) prepay, without premium or penalty, the principal amount of the Notes in an amount at least equal to such excess plus accrued interest thereon to the date of prepayment, or (C) prepay, without premium or penalty, the principal amount of such excess in five (5) equal monthly installments to be applied to principal plus accrued interest thereon with the first such monthly payment being due upon the 30th day after receipt of notice of such deficiency. If the Total Outstandings ever exceed the Commitment as a result of any required reduction in the Commitment, then in such event, Borrowers shall, upon written notice, immediately prepay the principal amount of the Notes in an amount at least equal to such excess plus accrued interest to the date of prepayment. (c) Special Mandatory Prepayment. In addition to any mandatory ---------------------------- prepayment required pursuant to Section 9(b) above, on or before December 31, 2000, Borrowers shall make a mandatory prepayment (the "Special Mandatory Prepayment") in an amount sufficient to reduce the Total Outstandings to the greater of $125,000,000 or (ii) the amount of Borrowing Base as redetermined on November 1, 2000. Provided, however, that if the Borrowing Base as of November 1, 2000 is less than $125,000,000, the provisions of Section 9(b) above shall apply. Such Special Mandatory Prepayment may be made by the Borrowers in one or more prepayments but the full amount must be paid by December 31, 2000. Any proceeds received by the Borrowers from the sale of any equity securities must be applied upon receipt by the Borrowers to the Special Mandatory Prepayment. -27- 10. Representations and Warranties. In order to induce the Lenders to enter into this Agreement, the Borrowers represent and warrant to the Lenders (which representations and warranties will survive the delivery of the Notes) that: (a) Creation and Existence. Each Borrower is a corporation or ---------------------- limited liability company duly organized, validly existing and in good standing under the laws of the jurisdiction in which it was formed and is duly qualified in all jurisdictions wherein failure to qualify may result in a Material Adverse Effect. Each Borrower has all power and authority to own its properties and assets and to transact the business in which it is engaged. (b) Power and Authority. Each Borrower is duly authorized and ------------------- empowered to create and issue the Notes; and is duly authorized and empowered to execute, deliver and perform the Loan Documents, including this Agreement; and all corporate and limited liability company action on each Borrower's part requisite for the due creation and issuance of the Notes and for the due execution, delivery and performance of the Loan Documents, including this Agreement, has been duly and effectively taken. (c) Binding Obligations. This Agreement does, and the Notes and ------------------- other Loan Documents upon their creation, issuance, execution and delivery will, constitute valid and binding obligations of each Borrower, enforceable in accordance with its respective terms (except that enforcement may be subject to any applicable bankruptcy, insolvency, or similar debtor relief laws now or hereafter in effect and relating to or affecting the enforcement of creditors' rights generally). (d) No Legal Bar or Resultant Lien. The Notes and the Loan ------------------------------ Documents, including this Agreement, do not and will not, to the best of each Borrower's knowledge violate any provisions of any contract, agreement, law, regulation, order, injunction, judgment, decree or writ to which any Borrower is subject, or result in the creation or imposition of any lien or other encumbrance upon any assets or properties of any Borrower, other than those contemplated by this Agreement. (e) No Consent. The execution, delivery and performance by each ---------- Borrower of the Notes and the Loan Documents, including this Agreement, does not require the consent or approval of any other person or entity, including without limitation any regulatory authority or governmental body of the United States or any state thereof or any political subdivision of the United States or any state thereof except for consents required for federal, state and, in some instances, private leases, right of ways and other conveyances or encumbrances of oil and gas leases. (f) Financial Condition. The unaudited consolidated Financial ------------------- Statements of 3TEC dated December 31, 1999, which have been delivered to Lenders are complete and -28- correct in all material respects, and fully and accurately reflect in all material respects the financial condition and results of the operations of the Borrowers on a consolidated basis as of the date or dates and for the period or periods stated subject to normal year-end adjustments and provided that such Financial Statements do not contain footnotes. No change has since occurred in the condition, financial or otherwise, of any Borrower which is reasonably expected to have a Material Adverse Effect, except as disclosed to the Lenders in Schedule "2" attached hereto. (g) Liabilities. No Borrower has any material liability, direct or ----------- contingent, except as disclosed to the Lenders in the Financial Statements and on Schedule "3" attached hereto. No unusual or unduly burdensome restrictions, restraint, or hazard exists by contract, law or governmental regulation or otherwise relative to the business, assets or properties of any Borrower which is reasonably expected to have a Material Adverse Effect. (h) Litigation. Except as described in the Financial Statements, or ---------- as otherwise disclosed to the Lenders in Schedule "4" attached hereto, there is no litigation, legal or administrative proceeding, investigation or other action of any nature pending or, to the knowledge of the officers of any of the Borrowers threatened against or affecting any of the Borrowers which involves the possibility of any judgment or liability not fully covered by insurance, and which is reasonably expected to have a Material Adverse Effect. (i) Taxes; Governmental Charges. Each Borrower has filed all tax --------------------------- returns and reports required to be filed and has paid all taxes, assessments, fees and other governmental charges levied upon it or its assets, properties or income which are due and payable, including interest and penalties, the failure of which to pay could reasonably be expected to have a Material Adverse Effect, except such as are being contested in good faith by appropriate proceedings and for which adequate reserves for the payment thereof as required by GAAP has been provided and levy and execution thereon have been stayed and continue to be stayed. (j) Titles, Etc. Each Borrower has good and defensible title to all ------------ of its assets, including without limitation, the Oil and Gas Properties, free and clear of all liens or other encumbrances except Permitted Liens. (k) Defaults. No Borrower is in default and no event or circumstance -------- has occurred which, but for the passage of time or the giving of notice, or both, would constitute a default under any loan or credit agreement, indenture, mortgage, deed of trust, security agreement or other agreement or instrument to which any Borrower is a party in any respect that would be reasonably expected to have a Material Adverse Effect. No Event of Default hereunder has occurred and is continuing. -29- (l) Casualties; Taking of Properties. Since the dates of the latest -------------------------------- Financial Statements of the Borrowers delivered to Lenders, neither the business nor the assets or properties of any Borrower has been affected (to the extent it is reasonably likely to cause a Material Adverse Effect), as a result of any fire, explosion, earthquake, flood, drought, windstorm, accident, strike or other labor disturbance, embargo, requisition or taking of property or cancellation of contracts, permits or concessions by any domestic or foreign government or any agency thereof, riot, activities of armed forces or acts of God or of any public enemy. (m) Use of Proceeds; Margin Stock. The proceeds of the Commitment ----------------------------- may be used by the Borrowers for the purposes of (i) refinance existing indebtedness, (ii) acquisition and development of oil and gas properties, (iii) Letters of Credit, (iv) working capital and (v) general corporate purposes including redemption of the Series C Stock made in compliance with the requirements of Section 13(f) hereof. None of the Borrowers are engaged principally or as one of their important activities in the business of extending credit for the purpose of purchasing or carrying any "margin stock " as defined in Regulation U of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 221), or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry a margin stock or for any other purpose which might constitute this transaction a "purpose credit" within the meaning of said Regulation U. No Borrower nor any person or entity acting on behalf of the Borrowers has taken or will take any action which might cause the loans hereunder or any of the Loan Documents, including this Agreement, to violate Regulation U or any other regulation of the Board of Governors of the Federal Reserve System or to violate the Securities Exchange Act of 1934 or any rule or regulation thereunder, in each case as now in effect or as the same may hereafter be in effect. (n) Location of Business and Offices. The principal place of -------------------------------- business and chief executive offices of the each Borrower is located at the address stated in Section 17 hereof. (o) Compliance with the Law. To the best of each Borrower's ----------------------- knowledge, no Borrower: (i) is in violation of any law, judgment, decree, order, ordinance, or governmental rule or regulation to which Borrower, or any of its assets or properties are subject; or (ii) has failed to obtain any license, permit, franchise or other governmental authorization necessary to the ownership of any of its assets or properties or the conduct of its business; -30- which violation or failure is reasonably expected to have a Material Adverse Effect. (p) No Material Misstatements. No information, exhibit or report ------------------------- furnished by any Borrower to the Lenders in connection with the negotiation of this Agreement or in the preparation of the offering memo contained any material misstatement of fact or omitted to state a material fact or any fact necessary to make the statement contained therein not materially misleading. (q) Not A Utility. No Borrower is an entity engaged in the State of ------------- Texas in the (i) generation, transmission, or distribution and sale of electric power; (ii) transportation, distribution and sale through a local distribution system of natural or other gas for domestic, commercial, industrial, or other use; (iii) provision of telephone or telegraph service to others; (iv) production, transmission, or distribution and sale of steam or water; (v) operation of a railroad; or (vii) provision of sewer service to others. (r) ERISA. Each Borrower is in compliance in all material respects ----- with the applicable provisions of ERISA, and no "reportable event", as such term is defined in Section 403 of ERISA, has occurred with respect to any Plan of any Borrower. (s) Public Utility Holding Company Act. No Borrower is a "holding ---------------------------------- company", or "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a"subsidiary company" of a "holding company", or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended. (t) Subsidiaries. Each of the Borrower's Subsidiaries are listed on ------------ Schedule "5" hereto. (u) Environmental Matters. Except as disclosed on Schedule "6", no --------------------- Borrower (i) has received notice or otherwise learned of any Environmental Liability which would be reasonably likely to individually or in the aggregate have a Material Adverse Effect arising in connection with (A) any non-compliance with or violation of the requirements of any Environmental Law or (B) the release or threatened release of any toxic or hazardous waste into the environment, (ii) has received notice of any threatened or actual liability in connection with the release or notice of any threatened release of any toxic or hazardous waste into the environment which would be reasonably likely to individually or in the aggregate have a Material Adverse Effect or (iii) has received notice or otherwise learned of any federal or state investigation evaluating whether any remedial action is needed to respond to a release or threatened release of any toxic or hazardous waste into the environment for which any Borrower is or may be liable which may reasonably be expected to result in a Material Adverse Effect. -31- (v) Liens.Except (i) as disclosed on Schedule "1" hereto and (ii) ----- for Permitted Liens, the assets and properties of the each Borrower are free and clear of all liens and encumbrances. 11. Conditions of Lending. (a) The effectiveness of this Agreement, and the obligation to make the initial Advance or issue any initial Letter of Credit under the Commitment shall be subject to satisfaction of the following conditions precedent: (i) Execution and Delivery. Each Borrower shall have executed ---------------------- and delivered the Agreement, the Notes and other required Loan Documents, all in form and substance satisfactory to the Agent; (ii) Legal Opinion. The Agent shall have received from ------------- Borrowers' legal counsel a favorable legal opinion in form and substance satisfactory to it (i) as to the matters set forth in Subsections 10(a), (b), (c), (d), (e) and (h) hereof, (ii) the enforceability of the Private Shelf Equity Agreement and (iii) as to such other matters as Agent or its counsel may reasonably request; provided that the opinion as to 10(e) and 10(h) may be limited to knowledge; (iii) Corporate Resolutions. The Agent shall have received --------------------- appropriate certified corporate resolutions of each Borrower; (iv) Good Standing. The Agent shall have received evidence of ------------- existence and good standing for each Borrower; (v) Incumbency. The Agent shall have received a signed ---------- certificate of each Borrower, certifying the names of the officers of each Borrower authorized to sign loan documents on behalf of each Borrower, together with the true signatures of each such officer. The Agent may conclusively rely on such certificate until the Agent receives a further certificate of any Borrower canceling or amending the prior certificate and submitting signatures of the officers named in such further certificate; (vi) Articles of Incorporation and Bylaws. The Agent shall have ------------------------------------ received copies of the Articles of Incorporation of each Borrower and all amendments thereto, certified by the Secretary of State of the State of its incorporation, and a copy of the bylaws of each Borrower and all amendments thereto, certified by each Borrower as being true, correct and complete; -32- (vii) Closing of CW Resources Acquisition. The Agent shall have ----------------------------------- received satisfactory evidence that the CW Resources Acquisition will close concurrently with the initial funding hereunder; (viii) Execution of Private Equity Shelf Agreements. The Agent -------------------------------------------- shall have received satisfactory evidence of the execution and enforceability of the Private Equity Shelf Agreements, said agreements to be in form and substance satisfactory to Agent and shall provide, among other things, that EnCap Investments L.L.C. and/or its affiliates executing such agreements shall be obligated, upon not less than ten (10) days prior notice, to acquire the Exchangeable Preferred Stock for cash; (ix) Authorizations and Approvals. [Intentionally Deleted]. ---------------------------- (x) Representation and Warranties. The representations and ----------------------------- warranties of Borrowers under this Agreement are true and correct in all material respects as of such date, as if then made (except to the extent that such representations and warranties related solely to an earlier date); (xi) No Event of Default. No Event of Default shall have ------------------- occurred and be continuing nor shall any event have occurred or failed to occur which, with the passage of time or service of notice, or both, would constitute an Event of Default; (xii) Other Documents. Agent shall have received such other --------------- instruments and documents incidental and appropriate to the transaction provided for herein as Agent or its counsel may reasonably request, and all such documents shall be in form and substance reasonably satisfactory to the Agent; and (xiii) Legal Matters Satisfactory. All legal matters incident to -------------------------- the consummation of the transactions contemplated hereby shall be reasonably satisfactory to special counsel for Agent retained at the expense of the Borrowers. (b) The obligation of the Lenders to make any Advance or issue any Letter of Credit under the Commitment (including the initial Advance) shall be subject to the following additional conditions precedent that, at the date of making each such Advance and after giving effect thereto: (i) Representation and Warranties. The representations and ----------------------------- warranties of Borrowers under this Agreement are true and correct in all material respects as of such date, as if then made (except to the extent that such representations and warranties related solely to an earlier date); -33- (ii) No Event of Default. No Event of Default shall have ------------------- occurred and be continuing nor shall any event have occurred or failed to occur which, with the passage of time or service of notice, or both, would constitute an Event of Default; (iii) Other Documents. Agent shall have received such other --------------- instruments and documents incidental and appropriate to the transaction provided for herein as Agent or its counsel may reasonably request, and all such documents shall be in form and substance reasonably satisfactory to the Agent; and (iv) Legal Matters Satisfactory. All legal matters incident to -------------------------- the consummation of the transactions contemplated hereby shall be reasonably satisfactory to special counsel for Agent retained at the expense of Borrowers. 12. Affirmative Covenants. A deviation from the provisions of this Section 12 shall not constitute an Event of Default under this Agreement if such deviation is consented to in writing by Majority Lenders prior to the date of deviation. The Borrowers will at all times comply with the covenants contained in this Section 12 from the date hereof and for so long as the Commitments are in existence or any amount is owed to the Agent or the Lenders under this Agreement or the other Loan Documents. (a) Financial Statements and Reports. Each Borrower shall promptly -------------------------------- furnish to the Agent from time to time upon request such information regarding the business and affairs and financial condition of each Borrower, as the Agent may reasonably request, and will furnish to the Agent: (i) Annual Audited Financial Statements. As soon as available, ----------------------------------- and in any event within ninety (90) days after the close of each fiscal year beginning with the fiscal year ended December 31, 2000, the annual audited consolidated Financial Statements of Borrowers, prepared in accordance with GAAP accompanied by an unqualified opinion rendered by an independent accounting firm reasonably acceptable to the Agent; (ii) Annual Unaudited Financial Statements. Contemporaneously ------------------------------------- with the delivery of the annual audited Financial Statements required above in Section 12(a)(i), the annual unaudited consolidating Financial Statements of Borrowers prepared in accordance with GAAP; (iii) Quarterly Financial Statements. As soon as available, and ------------------------------ in any event within forty-five (45) days after the end of each fiscal quarter of each year beginning with the fiscal quarter ended March 31, 2000, the quarterly unaudited, -34- consolidated and consolidating Financial Statements of the Borrowers prepared in accordance with GAAP; (iv) Report on Properties. As soon as available and in any event -------------------- on or before April 1 and October 1 of each calendar year, and at such other times as any Lender, in accordance with Section 7 hereof, may request, the engineering reports required to be furnished to the Agent under such Section 7 on the Oil and Gas Properties; (v) SEC Reports. As soon as available, and in any event within ----------- five (5) days of filing, copies of all filings by each Borrower with the Securities and Exchange Commission; (vi) Hedging Reports. As soon as available, and in any event --------------- within thirty (30) days after the end of each fiscal quarter, a report of all existing Rate Management Transactions , said report to be in form and substance satisfactory to Agent; (vii) Additional Information. Promptly upon request of the Agent ---------------------- from time to time any additional financial information or other information that the Agent may reasonably request. All such reports, information, balance sheets and Financial Statements referred to in Subsection 12(a) above shall be in such detail as the Agent may reasonably request and shall be prepared in a manner consistent with the Financial Statements. (b) Certificates of Compliance. Concurrently with the furnishing of -------------------------- the annual audited Financial Statements pursuant to Subsection 12(a)(i) hereof and the quarterly unaudited Financial Statements pursuant to Subsection 12(a)(ii) hereof for the months coinciding with the end of each calendar quarter, each Borrower will furnish or cause to be furnished to the Agent a certificate in the form of Exhibit "C" attached hereto, signed by the President or Chief Financial Officer of each Borrower, (i) stating that each Borrower has fulfilled in all material respects its obligations under the Notes and the Loan Documents, including this Agreement, and that all representations and warranties made herein and therein continue (except to the extent they relate solely to an earlier date) to be true and correct in all material respects (or specifying the nature of any change), or if a Default has occurred, specifying the Default and the nature and status thereof; (ii) to the extent requested from time to time by the Agent, specifically affirming compliance of each Borrower in all material respects with any of its representations (except to the extent they relate solely to an earlier date) or obligations under said instruments; (iii) setting forth the computation, in reasonable detail as of the end of each period covered by such certificate, of compliance with -35- Sections 13(b) and (c); and (iv) containing or accompanied by such financial or other details, information and material as the Agent may reasonably request to evidence such compliance. (c) Accountants' Certificate. Concurrently with the furnishing of ------------------------ the annual audited Financial Statement pursuant to Section 12(a)(i) hereof, Borrowers will furnish a statement from the firm of independent public accountants which prepared such Financial Statement to the effect that nothing has come to their attention to cause them to believe that there existed on the date of such statements any Event of Default and specifically calculating Borrowers' compliance with Sections 13(b) and (c) of this Agreement. (d) Taxes and Other Liens. Each Borrower will pay and discharge --------------------- promptly all taxes, assessments and governmental charges or levies imposed upon each Borrower, or upon the income or any assets or property of any Borrower, as well as all claims of any kind (including claims for labor, materials, supplies and rent) which, if unpaid, might become a Lien or other encumbrance upon any or all of the assets or property of any Borrower and which could reasonably be expected to result in a Material Adverse Effect; provided, however, that such Borrower shall not be required to pay any such tax, assessment, charge, levy or claim if the amount, applicability or validity thereof shall currently be contested in good faith by appropriate proceedings diligently conducted, levy and execution thereon have been stayed and continue to be stayed and if such Borrower shall have set up adequate reserves therefor, if required, under GAAP. (e) Compliance with Laws. Each Borrower will observe and comply, in -------------------- all material respects, with all applicable laws, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, orders and restrictions relating to environmental standards or controls or to energy regulations of all federal, state, county, municipal and other governments, departments, commissions, boards, agencies, courts, authorities, officials and officers, domestic or foreign. (f) Further Assurances. Borrowers will cure promptly any defects in ------------------ the creation and issuance of the Notes and the execution and delivery of the Notes and the Loan Documents, including this Agreement. Borrowers at their sole expense will promptly execute and deliver to Agent upon its reasonable request all such other and further documents, agreements and instruments in compliance with or accomplishment of the covenants and agreements in this Agreement, or to correct any omissions in the Notes or more fully to state the obligations set out herein. (g) Performance of Obligations. Borrowers will pay the Notes and -------------------------- other obligations incurred by them hereunder according to the reading, tenor and effect thereof and hereof; and Borrowers will do and perform every act and discharge all of the obligations -36- provided to be performed and discharged by the Borrowers under the Loan Documents, including this Agreement, at the time or times and in the manner specified. (h) Insurance. The Borrowers now maintain and will continue to --------- maintain insurance with financially sound and reputable insurers with respect to their respective assets against such liabilities, fires, casualties, risks and contingencies and in such types and amounts as is customary in the case of persons engaged in the same or similar businesses and similarly situated. Upon request of the Agent, the Borrowers will furnish or cause to be furnished to the Agent from time to time a summary of the respective insurance coverage of Borrowers in form and substance satisfactory to the Agent, and, if requested, will furnish the Agent copies of the applicable policies. Upon demand by Agent any insurance policies covering any such property shall be endorsed (i) to provide that such policies may not be canceled, reduced or affected in any manner for any reason without fifteen (15) days prior notice to Agent, (ii) to provide for insurance against fire, casualty and other hazards normally insured against, in the amount of the full value (less a reasonable deductible not to exceed amounts customary in the industry for similarly situated business and properties) of the property insured, and (iii) to provide for such other matters as the Agent may reasonably require. The Borrowers shall at all times maintain adequate insurance with respect to all of their assets, including but not limited to, the Oil and Gas Properties or any collateral against their liability for injury to persons or property, which insurance shall be by financially sound and reputable insurers and shall without limitation provide the following coverages: comprehensive general liability (including coverage for damage to underground resources and equipment, damage caused by blowouts or cratering, damage caused by explosion, damage to underground minerals or resources caused by saline substances, broad form property damage coverage, broad form coverage for contractually assumed liabilities and broad form coverage for acts of independent contractors), worker's compensation and automobile liability. The Borrowers shall at all times maintain cost of control of well insurance with respect to the Oil and Gas Properties which shall insure the Borrowers against seepage and pollution expense; redrilling expense; and cost of control of well; fires, blowouts, etc., if deemed economical in the reasonable discretion of the Borrowers. Additionally, the Borrowers shall at all times maintain adequate insurance with respect to all of their other assets and wells in accordance with prudent business practices. (i) Accounts and Records. Each Borrower will keep books, records and -------------------- accounts in which full, true and correct entries will be made of all dealings or transactions in relation to its business and activities, prepared in a manner consistent with prior years, subject to changes suggested by such Borrower's auditors. (j) Right of Inspection. Each Borrower will permit any officer, ------------------- employee or agent of the Lenders to examine such Borrower's books, records and accounts, and take copies and extracts therefrom, all at such reasonable times during normal business hours and -37- as often as the Lenders may reasonably request. The Lenders will use best efforts to keep all Confidential Information (as herein defined) confidential and will not disclose or reveal the Confidential Information or any part thereof other than (i) as required by law, and (ii) to the Lenders', and the Lenders' subsidiaries', Affiliates, officers, employees, legal counsel and regulatory authorities or advisors to whom it is necessary to reveal such information for the purpose of effectuating the agreements and undertakings specified herein or as otherwise required in connection with the enforcement of the Lenders' and the Agent's rights and remedies under the Notes, this Agreement and the other Loan Documents. As used herein, "Confidential Information" means information about the Borrowers furnished by the Borrowers to the Lenders, but does not include information (i) which was publicly known, or otherwise known to the Lenders, at the time of the disclosure, (ii) which subsequently becomes publicly known through no act or omission by the Lenders, or (iii) which otherwise becomes known to the Lenders, other than through disclosure by the Borrowers. (k) Notice of Certain Events. The Borrowers shall promptly notify the ------------------------ Agent if Borrowers learn of the occurrence of (i) any event which constitutes an Event of Default together with a detailed statement by Borrowers of the steps being taken to cure such Event of Default; (ii) any legal, judicial or regulatory proceedings affecting Borrowers or any of the assets or properties of Borrowers which, if adversely determined, could reasonably be expected to have a Material Adverse Effect; (iii) any dispute between Borrowers and any governmental or regulatory body or any other Person or entity which, if adversely determined, might reasonably be expected to cause a Material Adverse Effect; (iv) any other matter which in Borrowers' reasonable opinion could have a Material Adverse Effect. (l) ERISA Information and Compliance. The Borrowers will promptly -------------------------------- furnish to the Agent immediately upon becoming aware of the occurrence of any "reportable event", as such term is defined in Section 4043 of ERISA, or of any "prohibited transaction", as such term is defined in Section 4975 of the Internal Revenue Code of 1954, as amended, in connection with any Plan or any trust created thereunder, a written notice signed by the chief financial officer of Borrowers specifying the nature thereof, what action Borrowers are taking or proposes to take with respect thereto, and, when known, any action taken by the Internal Revenue Service with respect thereto. (m) Environmental Reports and Notices. The Borrowers will deliver to --------------------------------- the Agent (i) promptly upon its becoming available, one copy of each report sent by any Borrower to any court, governmental agency or instrumentality pursuant to any Environmental Law, (ii) notice, in writing, promptly upon any Borrower's receipt of notice or otherwise learning of any claim, demand, action, event, condition, report or investigation indicating any potential or actual liability arising in connection with (x) the non- compliance with or violation of the requirements of any Environmental Law which reasonably could be expected to have a Material Adverse Effect; (y) the release or threatened release of any toxic or -38- hazardous waste into the environment which reasonably could be expected to have a Material Adverse Effect or which release any Borrower would have a duty to report to any court or government agency or instrumentality, or (iii) the existence of any Environmental Lien on any properties or assets of any Borrower, and Borrowers shall immediately deliver a copy of any such notice to Agent. (n) Compliance and Maintenance. The Borrowers will (i) observe and -------------------------- comply in all material respects with all Environmental Laws; (ii) except as provided in Subsections 12(o) and 12(p) below, maintain the Oil and Gas Properties and other assets and properties in good and workable condition at all times and make all repairs, replacements, additions, betterments and improvements to the Oil and Gas Properties and other assets and properties as are needed and proper so that the business carried on in connection therewith may be conducted properly and efficiently at all times in the opinion of the Borrowers exercised in good faith; (iii) take or cause to be taken whatever actions are necessary or desirable to prevent an event or condition of default by Borrowers under the provisions of any gas purchase or sales contract or any other contract, agreement or lease comprising a part of the Oil and Gas Properties or other collateral security hereunder which default could reasonably be expected to result in a Material Adverse Effect; and (iv) furnish Agent upon request evidence satisfactory to Agent that there are no Liens, claims or encumbrances on the Oil and Gas Properties, except laborers', vendors', repairmen's, mechanics', worker's, or materialmen's liens arising by operation of law or incident to the construction or improvement of property if the obligations secured thereby are not yet due or are being contested in good faith by appropriate legal proceedings or Permitted Liens. (o) Operation of Properties. Except as provided in Subsection 12(p) ----------------------- and (q) below, the Borrowers will operate, or use reasonable efforts to cause to be operated, all Oil and Gas Properties in a careful and efficient manner in accordance with the practice of the industry and in compliance in all material respects with all applicable laws, rules, and regulations, and in compliance in all material respects with all applicable proration and conservation laws of the jurisdiction in which the properties are situated, and all applicable laws, rules, and regulations, of every other agency and authority from time to time constituted to regulate the development and operation of the properties and the production and sale of hydrocarbons and other minerals therefrom; provided, however, that the Borrowers shall have the right to contest in good faith by appropriate proceedings, the applicability or lawfulness of any such law, rule or regulation and pending such contest may defer compliance therewith, as long as such deferment shall not subject the properties or any part thereof to foreclosure or loss. (p) Compliance with Leases and Other Instruments. The Borrowers will -------------------------------------------- pay or cause to be paid and discharge all rentals, delay rentals, royalties, production payment, and indebtedness required to be paid by Borrowers (or required to keep unimpaired in all material -39- respects the rights of Borrowers in Oil and Gas Properties) accruing under, and perform or cause to be performed in all material respects each and every act, matter, or thing required of Borrowers by each and all of the assignments, deeds, leases, subleases, contracts, and agreements in any way relating to Borrowers or any of the Oil and Gas Properties and do all other things necessary of Borrowers to keep unimpaired in all material respects the rights of Borrowers thereunder and to prevent the forfeiture thereof or default thereunder; provided, however, that nothing in this Agreement shall be deemed to require Borrowers to perpetuate or renew any oil and gas lease or other lease by payment of rental or delay rental or by commencement or continuation of operations nor to prevent Borrowers from abandoning or releasing any oil and gas lease or other lease or well thereon when, in any of such events, in the opinion of Borrowers exercised in good faith, it is not in the best interest of the Borrowers to perpetuate the same. (q) Certain Additional Assurances Regarding Maintenance and ------------------------------------------------------- Operations of Properties. With respect to those Oil and Gas Properties ------------------------ which are being operated by operators other than the Borrowers, the Borrowers shall not be obligated to perform any undertakings contemplated by the covenants and agreement contained in Subsections 12(o) or 12(p) hereof which are performable only by such operators and are beyond the control of the Borrowers; however, the Borrowers agree to promptly take all reasonable actions available under any operating agreements or otherwise to bring about the performance of any such material undertakings required to be performed thereunder. (r) Sale of Certain Assets/Prepayment of Proceeds. The Borrowers will --------------------------------------------- immediately pay over to the Agent for the ratable benefit of the Lenders as a prepayment of principal on the Notes and a reduction of the Commitments, an amount equal to 100% of the Release Price from the proceeds of the sale of the Oil and Gas Properties (other than sales permitted by Sections 13(a)(ii)(A) and (B) hereof), which sale has been approved in advance by the Majority Lenders. The term "Release Price" as used herein shall mean a price determined by the Majority Lenders in their discretion based upon the loan collateral value of the Oil and Gas Properties being sold by Borrowers which such Lenders in their discretion (using such methodology, assumptions and discounts rates as such Lenders customarily use in assigning collateral value to oil and gas properties, oil and gas gathering systems, gas processing and plant operations) assign to such Oil and Gas Properties at the time in question. Any such prepayment of principal on the Notes required by this Section 12(r), shall not be in lieu of, but shall be in addition to any mandatory prepayment of principal required to be paid pursuant to Sections 9(b) and 9(c) hereof. (s) Title Matters. Within ninety (90) days after the Effective Date ------------- with respect to the Oil and Gas Properties listed on Schedule "7" hereto, Borrowers shall furnish Agent with title opinions and/or title information reasonably satisfactory to Agent showing good and defensible title of Borrowers to such Oil and Gas Properties subject only to the Permitted -40- Liens. As to any Oil and Gas Properties hereafter mortgaged to Agent, Borrowers will promptly (but in no event more than thirty (30) days following such mortgaging), furnish, if requested, Agent with title opinions and/or title information reasonably satisfactory to Agent showing good and defensible title of Borrowers to such Oil and Gas Properties subject only to Permitted Liens. (t) Curative Matters. Within sixty (60) days after the Effective Date ---------------- with respect to matters listed on Schedule "8" and, thereafter, within sixty (60) days after receipt by Borrowers from Agent or its counsel of written notice of title defects the Agent reasonably requires to be cured, Borrowers shall either (i) provide such curative information, in form and substance satisfactory to Agent, or (ii) substitute Oil and Gas Properties of value and quality satisfactory to the Agent for all of Oil and Gas Properties for which such title curative was requested but upon which Borrowers elected not to provide such title curative information, and, within sixty (60) days of such substitution, provide title opinions or title information satisfactory to the Agent covering the Oil and Gas Properties so substituted. If the Borrowers fail to satisfy (i) or (ii) above within the time specified, the loan collateral value assigned by the Lenders to the Oil and Gas Properties for which such curative information was requested shall be deducted from the Borrowing Base resulting in a reduction thereof. (u) Change of Principal Place of Business. Borrowers shall give Agent ------------------------------------- at least thirty (30) days prior written notice of their intention to move their principal place of business from the address set forth in Section 17 hereof. (v) Cash Collateral Accounts. Each Borrower shall establish and ------------------------ maintain with Agent one or more operating accounts (the "Operating Accounts"), the maintenance of each of which shall be subject to such rules and regulations as Agent from time to time specify. Such Operating Accounts shall be the sole operating accounts of the Borrowers. Such accounts shall be maintained with the Agent until all amounts due hereunder and under the Notes have been paid in full. To the extent not already so instructed, Borrowers shall within sixty (60) days of the Effective Date instruct and cause all monetary proceeds of production from the Oil and Gas Properties to be remitted to their respective Operating Accounts. Such proceeds of production shall not be redirected without the prior written consent of the Agent until such time as all indebtedness due Lenders by Borrowers has been paid in full and the Commitments have been terminated. Each Borrower hereby grants a security interest to Lenders in and to their respective Operating Accounts (collectively, the "Cash Collateral Accounts") and all checks, drafts and other items ever received by any Lender for deposit therein. If any Event of Default shall occur and be continuing, Agent shall have the immediate right, without prior notice or demand, to take and apply against the Borrowers' obligations hereunder any and all funds legally and beneficially owned by the Borrowers then or thereafter on deposit in the Cash Collateral Accounts for the ratable benefit of the Lenders. -41- (w) Take Down of Exchangeable Preferred Stock. Borrowers agree that ----------------------------------------- (i) upon the occurrence of an Event of Default (other than an Event of Default occurring as a result of a breach of the affirmative covenants contained in Section 12 of this Agreement), and (ii) receipt of written notice from Agent that Majority Banks have determined that a take down is required and (iii) prior to the time that the Special Mandatory Prepayment has been made, they will, within ten (10) Business Days, cause the take down of the Exchangeable Preferred Stock by EnCap Investments L.L.C. and/or its affiliates as described in the Private Equity Shelf Agreement to occur. The proceeds received by the Borrowers from the take down of the Exchangeable Preferred Stock shall be applied upon receipt to payment of the Special Mandatory Prepayment. (x) Additional Collateral. The Borrowers agree to regularly monitor --------------------- engineering data covering all producing oil and gas properties and interests owned or acquired by Borrowers on or after the date hereof and to mortgage or cause to be mortgaged such of the same to Agent for the ratable benefit of the Lenders in substantially the form of the Security Instruments, as applicable, to the extent that the Lenders shall at all times during the existence of the Commitment be secured by perfected Liens and security interests covering not less than eighty percent (80%) of the Engineered Value of all producing oil and gas properties of Borrowers. In addition, the Borrowers agree that in connection with the mortgaging of such additional oil and gas properties, they shall within a reasonable time thereafter, deliver to the Agent such mortgage and title opinions and other title information with respect to the title and Lien status of such oil and gas properties as may be necessary to maintain at all times a level of such title opinions and title information of not less than ninety percent (90%) of the Engineered Value of all Oil and Gas Properties mortgaged to the Agent for the ratable benefit of the Lenders. 13. Negative Covenants. A deviation from the provisions of this Section 13 shall not constitute an Event of Default under this Agreement if such deviation is consented to in writing by Majority Lenders prior to the date of deviation. The Borrowers will at all times comply with the covenants contained in this Section 13 from the date hereof and for so long as the Commitment is in existence or any amount is owed to the Agent or the Lenders under this Agreement or the other Loan Documents. (a) Negative Pledge. Borrowers shall not without the prior written --------------- consent of the Lenders: (i) create, incur, assume or permit to exist any Lien, security interest or other encumbrance on any of their assets or properties except Permitted Liens; or (ii) sell, lease, transfer or otherwise dispose of, in any fiscal year, any of their assets except for (A) sales, leases, transfers or other dispositions made in the -42- ordinary course of Borrowers' oil and gas businesses, (B) sales, leases or transfers or other dispositions made by Borrowers between Borrowing Base Determination Dates which do not exceed $10,000,000 of net proceeds in the aggregate between such Determination Dates, and (C) other sales, leases, transfer or other dispositions made with the consent of Majority Lenders which are made pursuant to, and in full compliance with, Section 12(r) hereof; (b) Current Ratio. Borrowers shall not allow their ratio Current ------------- Ratio to be less than 1.0 to 1.0 as of the end of any fiscal quarter. (c) Minimum Interest Coverage Ratio. The Borrowers will not allow ------------------------------- their Minimum Interest Coverage Ratio to be less than (i) 2.5 to 1.0 for the two quarter period ending March 31, 2000, (ii) 2.5 to 1.0 for the three quarter period ending June 30, 2000, (iii) 2.5 to 1.0 for the four quarter period ending September 30, 2000 and each four quarter period thereafter. (d) Consolidations and Mergers. No Borrower will consolidate or merge -------------------------- with or into any other Person, except that any Borrower may merge with another Person if such Borrower is the surviving entity in such merger and if, after giving effect thereto, no Default or Event of Default shall have occurred and be continuing except that Enex, Production and/or Magellan may merge into 3TEC. (e) Debts, Guaranties and Other Obligations. Without the consent of --------------------------------------- Majority Lenders, no Borrower will incur, create, assume or in any manner become or be liable in respect of any indebtedness, nor will any Borrower guarantee or otherwise in any manner become or be liable in respect of any indebtedness, liabilities or other obligations of any other person or entity, whether by agreement to purchase the indebtedness of any other person or entity or agreement for the furnishing of funds to any other person or entity through the purchase or lease of goods, supplies or services (or by way of stock purchase, capital contribution, advance or loan) for the purpose of paying or discharging the indebtedness of any other person or entity, or otherwise, except that the foregoing restrictions shall not apply to: (i) the Notes and any renewal or increase thereof, or other indebtedness of the Borrowers heretofore disclosed to Lenders in the Borrower's Financial Statements or on Schedule "3" hereto; or (ii) taxes, assessments or other government charges which are not yet due or are being contested in good faith by appropriate action promptly initiated and diligently conducted, if such reserve as shall be required by GAAP shall have been -43- made therefor and levy and execution thereon have been stayed and continue to be stayed; or (iii) indebtedness (other than in connection with a loan or lending transaction) incurred in the ordinary course of business, including, but not limited to indebtedness for drilling, completing, leasing and reworking oil and gas wells; or (iv) indebtedness evidenced by the Subordinated Notes; or (v) any renewals or extensions of (but not increases in) any of the foregoing. (f) Dividends. No Borrower will declare or pay any cash dividend, --------- purchase, redeem or otherwise acquire for value any of its stock now or hereafter outstanding, return any capital to its stockholders, or make any distribution of its assets to its stockholders as such, except the foregoing shall not apply to: (i) dividends on the Series C Preferred Stock and interest on the Subordinated Note; (ii) redemption of the Series C Preferred Stock after the payment in full of the Special Mandatory Prepayment, but only if at least $10,000,000 availability exists under the Commitment after such redemption; or (iii) cash dividends on the Exchangeable Preferred Stock after the end of the third year after issuance thereof by Borrowers pursuant to the Private Equity Shelf Agreement; or (iv) redemption of the Exchangeable Preferred Stock in accordance with the provisions of the Private Equity Shelf Agreement. Provided, however, that no dividends may be paid on the Series C Preferred Stock or the Exchangeable Preferred Stock nor may any interest be paid on the Subordinated Notes nor may the Series C Preferred Stock or the Exchangeable Preferred Stock be redeemed if, immediately before or after giving effect thereto, a Default or Event of Default exists. (g) Loans and Advances. Borrowers shall not make or permit to remain ------------------ outstanding any loans or advances to or in any person or entity, except that the foregoing restriction shall not apply to: -44- (i) loans or advances to any person, the material details of which have been set forth in the Financial Statements of the Borrowers heretofore furnished to Lenders; or (ii) advances made in the ordinary course of Borrowers' oil and gas business; or (iii) loans or advances to Affiliates and non-related third parties not exceeding $100,000 in the aggregate during the existence of the Commitment. (h) Sale or Discount of Receivables. Borrowers will not discount or ------------------------------- sell with recourse, or sell for less than the greater of the face or market value thereof, any of their notes receivable or accounts receivable. (i) Nature of Business. Borrowers will not permit any material ------------------ change to be made in the character of their respective businesses as carried on at the date hereof. (j) Transactions with Affiliates. Borrowers will not enter into any ---------------------------- transaction with any Affiliate, except (i) transactions upon terms that are no less favorable to them than would be obtained in a transaction negotiated at arm's length with an unrelated third party; and (ii) the transaction described in the Private Equity Shelf Agreement. (k) Hedging Transactions. Borrowers will not enter into any Rate -------------------- Management Transactions, except the foregoing prohibitions shall not apply to (x) transactions consented to in writing by the Majority Lenders which are on terms acceptable to the Majority Lenders, or (y) Pre-Approved Contracts. (l) Investments. Borrowers shall not make any investments in any ----------- person or entity, except such restriction shall not apply to: (i) investments and direct obligations of the United States of America or any agency thereof; or (ii) investments in certificates of deposit issued by the Lenders or certificates of deposit with maturities of less than one year, issued by other commercial banks in the United States having capital and surplus in excess of $500,000,000 and which have a senior unsecured debt rating of A+ by Standard & Poors or A1 by Moody's; or -45- (iii) investments in insured money market funds, LIBOR investment accounts and other similar accounts at Agent or such investment with maturities of less than ninety (90) days at other commercial banks having capital and surplus in excess of $500,000,000 and which have a senior unsecured debt rating of A+ by Standard & Poors or A1 by Moody's. (m) Amendment to Articles of Incorporation or Bylaws. Borrowers will ------------------------------------------------ not permit any material amendment to, or any alteration of, their Articles of Incorporation or Bylaws. (n) Proceeds of Production. Borrowers shall not redirect the payment ---------------------- of the proceeds of production from the Oil and Gas Properties to anyone or any place other than to the Operating Accounts at the Agent. (o) Issuance of Preferred Stock. Borrowers shall not issue any ---------------------------- additional preferred stock after the Effective Date without the consent of Majority Lenders, except as permitted for the exchange of securities for the Exchangeable Preferred Stock or as payment in kind to the holders of Series D Preferred Stock or Series E Preferred Stock. (p) Amendments to and Redemption of Preferred Stock or Other Equity. --------------------------------------------------------------- Borrowers shall not (i) amend any outstanding equity issue after the Effective Date without the consent of Majority Lenders, or (ii) redeem any preferred stock (other than the Series C Preferred Stock and the Exchangeable Preferred Stock which may be redeemed pursuant to Section 13(f)) without the consent of Majority Lenders. (q) Payment or Pre-Payment of Other Indebtedness. Except as -------------------------------------------- otherwise provided for in this Agreement, Borrowers shall not make any unscheduled payments on or redeem any of their indebtedness (other than indebtedness owed the Lenders hereunder) unless such payment, pre-payment or redemption is approved by Majority Lenders. (r) Subordinated Indebtedness. Borrowers shall not fail in any ------------------------- respect to comply with all of the provisions of the Intercreditor Agreements or the subordination provisions of the Security Purchase Agreements and shall not make any payments on the Subordinated Notes in violation of the provisions thereof. 3TEC shall not amend in any respect the provisions of the Subordinated Notes or the Security Purchase Agreements, except as permitted by the provisions of the Intercreditor Agreements or any of the Security Purchase Agreements. 14. Events of Default. Any one or more of the following events shall be considered an "Event of Default" as that term is used herein: -46- (a) The Borrowers shall fail to pay when due or declared due the principal of any note or any Reimbursement Obligation when due; or (b) Borrowers shall fail to pay any accrued interest due and owing on any Note or any fees or any other amount payable hereunder when due and such failure shall continue for a period of three (3) business days following the due date; (c) Any representation or warranty made by Borrowers under this Agreement, or in any certificate or statement furnished or made to the Lenders pursuant hereto, or in connection herewith, or in connection with any document furnished hereunder, shall prove to be untrue in any material respect as of the date on which such representation or warranty is made (or deemed made), or any representation, statement (including financial statements), certificate, report or other data furnished or to be furnished or made by Borrowers under any Loan Document, including this Agreement, proves to have been untrue in any material respect, as of the date as of which the facts therein set forth were stated or certified; or (d) Default shall be made in the due observance or performance of any of the covenants or agreements of the Borrowers contained in the Loan Documents, including this Agreement (excluding covenants contained in Section 13 of the Agreement for which there is a twenty (20) day cure period), and such default shall continue for more than thirty (30) days after written notice is received by Borrowers; or (e) Default shall be made in the due observance or performance of the covenants of the Borrowers contained in Section 13 of this Agreement and such default shall continue for more than twenty (20) days after written notice is received by Borrowers; or (f) Default shall be made in respect of any obligation for borrowed money, other than the Notes, for which Borrowers are liable (directly, by assumption, as guarantor or otherwise), or any obligations secured by any mortgage, pledge or other security interest, lien, charge or encumbrance with respect thereto, on any asset or property of any Borrower or in respect of any agreement relating to any such obligations unless such Borrower is not liable for same (i.e., unless remedies or recourse for failure to pay such obligations is limited to foreclosure of the collateral security therefor), and if such default shall continue beyond the applicable grace period, if any; or (g) Borrowers shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to any of them or their debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking an appointment of a trustee, receiver, liquidator, custodian or other similar official of any of them or any substantial part of their property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other -47- proceeding commenced against them, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay their debts as they become due, or shall take any corporate action authorizing the foregoing; or (h) An involuntary case or other proceeding, shall be commenced against Borrowers seeking liquidation, reorganization or other relief with respect to them or their debts under any bankruptcy, insolvency or similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of their property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of sixty (60) days; or an order for relief shall be entered against Borrowers under the federal bankruptcy laws as now or hereinafter in effect; or (i) A final judgment or order for the payment of money in excess of $2,000,000 (or judgments or orders aggregating in excess of $2,000,000) shall be rendered against Borrowers and such judgments or orders shall continue unsatisfied and unstayed for a period of thirty (30) days; or (j) In the event the Total Outstandings shall at any time exceed the Borrowing Base established for the Notes, and the Borrowers shall fail to comply with the provisions of Section 9(b) hereof; or (k) A Change of Control shall occur; or (l) A Change of Management shall occur; or (m) The Special Mandatory Prepayment is not paid in full on or before December 31, 2000. Upon occurrence of any Event of Default specified in Subsections 14(g) and (h) hereof, the entire principal amount due under the Notes and all interest then accrued thereon, and any other liabilities of the Borrowers hereunder, shall become immediately due and payable all without notice and without presentment, demand, protest, notice of protest or dishonor or any other notice of default of any kind, all of which are hereby expressly waived by the Borrowers. In any other Event of Default, the Agent, upon request of Majority Lenders, shall by written notice to the Borrowers declare the principal of, and all interest then accrued on, the Notes and any other liabilities hereunder to be forthwith due and payable, whereupon the same shall forthwith become due and payable without presentment, demand, protest, notice of intent to accelerate, notice of acceleration or other notice of any kind, all of which the Borrowers hereby expressly waive, anything contained herein or in the Note to the contrary notwithstanding. Nothing contained in this Section 14 shall be -48- construed to limit or amend in any way the Events of Default enumerated in the Note, or any other document executed in connection with the transaction contemplated herein. Upon the occurrence and during the continuance of any Event of Default, the Lenders are hereby authorized at any time and from time to time, without notice to the Borrowers (any such notice being expressly waived by the Borrowers), to set-off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by any of the Lenders to or for the credit or the account of the Borrowers against any and all of the indebtedness of the Borrowers under the Notes and the Loan Documents, including this Agreement, irrespective of whether or not the Lenders shall have made any demand under the Loan Documents, including this Agreement or the Notes and although such indebtedness may be unmatured. Any amount set-off by any of the Lenders shall be applied against the indebtedness owed the Lenders by the Borrowers pursuant to this Agreement and the Notes. The Lenders agree promptly to notify the Borrowers after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Lender under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Lenders may have. 15. The Agent and the Lenders. (a) Appointment and Authorization. Each Lender hereby appoints Agent ----------------------------- as its nominee and agent, in its name and on its behalf: (i) to act as nominee for and on behalf of such Lender in and under all Loan Documents; (ii) to arrange the means whereby the funds of Lenders are to be made available to the Borrowers under the Loan Documents; (iii) to take such action as may be requested by any Lender under the Loan Documents (when such Lender is entitled to make such request under the Loan Documents); (iv) to receive all documents and items to be furnished to Lenders under the Loan Documents; (v) to be the secured party, mortgagee, beneficiary, and similar party in respect of, and to receive, as the case may be, any collateral for the benefit of Lenders; (vi) to promptly distribute to each Lender all material information, requests, documents and items received from the Borrowers under the Loan Documents; (vii) to promptly distribute to each Lender such Lender's Pro Rata Part of each payment or prepayment (whether voluntary, as proceeds of insurance thereon, or otherwise) in accordance with the terms of the Loan Documents and (viii) to deliver to the appropriate Persons requests, demands, approvals and consents received from Lenders. Each Lender hereby authorizes Agent to take all actions and to exercise such powers under the Loan Documents as are specifically delegated to Agent by the terms hereof or thereof, together with all other powers reasonably incidental thereto. With respect to its commitments hereunder and the Notes issued to it, Agent and any successor Agent shall have the same rights under the Loan Documents as any other Lender and may exercise the same as though it were not the Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include Agent and any successor Agent in its capacity as a Lender. -49- Agent and any successor Agent and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of and generally engage in any kind of business with the Borrowers, and any person which may do business with the Borrowers, all as if Agent and any successor Agent was not Agent hereunder and without any duty to account therefor to the Lenders; provided that, if any payments in respect of any property (or the proceeds thereof) now or hereafter in the possession or control of Agent which may be or become security for the obligations of the Borrowers arising under the Loan Documents by reason of the general description of indebtedness secured or of property contained in any other agreements, documents or instruments related to any such other business shall be applied to reduction of the obligations of the Borrowers arising under the Loan Documents, then each Lender shall be entitled to share in such application according to its pro rata part thereof. Each Lender, upon request of any other Lender, shall disclose to all other Lenders all indebtedness and liabilities, direct and contingent, of the Borrowers to such Lender as of the time of such request. (b) Note Holders. From time to time as other Lenders become a party ------------ to this Agreement, Agent shall obtain execution by the Borrowers of additional Notes in amounts representing the Commitment of each such new Lender, up to an aggregate face amount of all Notes not exceeding $250,000,000. The obligation of such Lender shall be governed by the provisions of this Agreement, including but not limited to, the obligations specified in Section 2 hereof. From time to time, Agent may require that the Lenders exchange their Notes for newly issued Notes to better reflect the Commitments of the Lenders. Agent may treat the payee of any Note as the holder thereof until written notice of transfer has been filed with it, signed by such payee and in form satisfactory to Agent. (c) Consultation with Counsel. Lenders agree that Agent may consult ------------------------- with legal counsel selected by Agent and shall not be liable for any action taken or suffered in good faith by it in accordance with the advice of such counsel. Lenders acknowledge that Gardere & Wynne, L.L.P. is counsel for Bank One, both as Agent and as a Lender, and that such firm does not represent any of the other Lenders in connection with this transaction. (d) Documents. Agent shall not be under a duty to examine or pass --------- upon the validity, effectiveness, enforceability, genuineness or value of any of the Loan Documents or any other instrument or document furnished pursuant thereto or in connection therewith, and Agent shall be entitled to assume that the same are valid, effective, enforceable and genuine and what they purport to be. (e) Resignation or Removal of Agent. Subject to the appointment and ------------------------------- acceptance of a successor Agent as provided below, Agent may resign at any time by giving written notice thereof to Lenders and the Borrowers, and Agent may be removed at any time with -50- or without cause by all Lenders. If no successor Agent has been so appointed by all Lenders (and approved by the Borrowers) and has accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation or removal of the retiring Agent, then the retiring Agent may, on behalf of Lenders, appoint a successor Agent. Any successor Agent must be approved by Borrowers, which approval will not be unreasonably withheld. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Agent, and the retiring Agent, as the case may be, shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Section 15 shall continue in effect for its benefit in respect to any actions taken or omitted to be taken by it while it was acting as Agent. To be eligible to be an Agent hereunder the party serving, or to serve, in such capacity must own a Pro Rata Part of the Commitments equal to the level of Commitment required to be held by any Lender pursuant to Section 28 hereof. (f) Responsibility of Agent. It is expressly understood and agreed ----------------------- that the obligations of Agent under the Loan Documents are only those expressly set forth in the Loan Documents as to each and that Agent, shall be entitled to assume that no Default or Event of Default has occurred and is continuing, unless Agent has actual knowledge of such fact or has received notice from a Lender or the Borrowers that such Lender or the Borrowers considers that a Default or an Event of Default has occurred and is continuing and specifying the nature thereof. Neither Agent nor any of its directors, officers, attorneys or employees shall be liable for any action taken or omitted to be taken by them under or in connection with the Loan Documents, except for its or their own gross negligence or willful misconduct. Agent shall not incur liability under or in respect of any of the Loan Documents by acting upon any notice, consent, certificate, warranty or other paper or instrument believed by it to be genuine or authentic or to be signed by the proper party or parties, or with respect to anything which it may do or refrain from doing in the reasonable exercise of its judgment, or which may seem to it to be necessary or desirable. Agent shall not be responsible to Lenders for any of the Borrowers' recitals, statements, representations or warranties contained in any of the Loan Documents, or in any certificate or other document referred to or provided for in, or received by any Lender under, the Loan Documents, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of or any of the Loan Documents or for any failure by the Borrowers to perform any of its obligations hereunder or thereunder. Agent may employ agents and attorneys-in-fact and shall not be answerable, except as to money or securities received by it or its authorized agents, for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. -51- The relationship between Agent and each Lender is only that of agent and principal and has no fiduciary aspects. Nothing in the Loan Documents or elsewhere shall be construed to impose on Agent any duties or responsibilities other than those for which express provision is therein made. In performing its duties and functions hereunder, Agent does not assume and shall not be deemed to have assumed, and hereby expressly disclaims, any obligation or responsibility toward or any relationship of agency or trust with or for the Borrowers or any of their beneficiaries or other creditors. As to any matters not expressly provided for by the Loan Documents, Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of all Lenders and such instructions shall be binding upon all Lenders and all holders of the Notes; provided, however, that Agent shall not be required to take any action which is contrary to the Loan Documents or applicable law. Agent shall have the right to exercise or refrain from exercising, without notice or liability to the Lenders, any and all rights afforded to Agent by the Loan Documents or which Agent may have as a matter of law; provided, however, Agent shall not (i) except as provided herein and in Section 7(b) hereof, without the consent of Majority Lenders designate the amount of the Borrowing Base or (ii) take any other action with regard to amending the Loan Documents, waiving any default under the Loan Documents or taking any other action with respect to the Loan Documents. Provided further, however, that no amendment, waiver, or other action shall be effected pursuant to the preceding clause (ii) without the consent of all Lenders which: (i) would increase the Borrowing Base, (ii) would reduce any fees hereunder, or the principal of, or the interest on, any Lender's Note or Notes, (iii) would postpone any date fixed for any payment of any fees hereunder, or any principal or interest of any Lender's Note or Notes, (iv) would materially increase any Lender's obligations hereunder or would materially alter Agent's obligations to any Lender hereunder, (v) would release Borrowers from their obligation to pay any Lender's Note or Notes, (vi) release any of the Collateral except as permitted by Sections 12(r) and 13(a)(ii) hereof, (vii) would change the definition of Majority Lenders, (viii) would amend, modify or change any provision of this Agreement requiring the consent of all the Lenders, (ix) would waive any of the conditions precedent to the Effective Date or the making of any Loan or issuance of any Letter of Credit or (x) would extend the Maturity Date or (xi) would amend this sentence or the previous sentence. Agent shall not have liability to Lenders for failure or delay in exercising any right or power possessed by Agent pursuant to the Loan Documents or otherwise unless such failure or delay is caused by the gross negligence of the Agent, in which case only the Agent responsible for such gross negligence shall have liability therefor to the Lenders. (g) Independent Investigation. Each Lender severally represents and ------------------------- warrants to Agent that it has made its own independent investigation and assessment of the financial condition and affairs of the Borrowers in connection with the making and continuation of its -52- participation hereunder and has not relied exclusively on any information provided to such Lender by Agent in connection herewith, and each Lender represents, warrants and undertakes to Agent that it shall continue to make its own independent appraisal of the credit worthiness of the Borrowers while the Notes are outstanding or its commitments hereunder are in force. Agent shall not be required to keep itself informed as to the performance or observance by the Borrowers of this Agreement or any other document referred to or provided for herein or to inspect the properties or books of the Borrowers. Other than as provided in this Agreement, Agent shall not have any duty, responsibility or liability to provide any Lender with any credit or other information concerning the affairs, financial condition or business of the Borrowers which may come into the possession of Agent. (h) Indemnification. Lenders agree to indemnify Agent, ratably --------------- according to their respective Commitments on a Pro Rata basis, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any proper and reasonable kind or nature whatsoever which may be imposed on, incurred by or asserted against Agent in any way relating to or arising out of the Loan Documents or any action taken or omitted by Agent under the Loan Documents, provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from Agent's gross negligence or willful misconduct. Each Lender shall be entitled to be reimbursed by the Agent for any amount such Lender paid to Agent under this Section 15(h) to the extent the Agent has been reimbursed for such payments by the Borrowers or any other Person. The parties intend for the provisions of this Section to apply to and protect the Agent from the consequences of any liability including strict liability imposed or threatened to be imposed on Agent as well as from the consequences of its own negligence, whether or not that negligence is the sole, contributing or concurring cause of any such liability. (i) Benefit of Section 15. The agreements contained in this Section --------------------- 15 are solely for the benefit of Agent and the Lenders and are not for the benefit of, or to be relied upon by, the Borrowers, any affiliate of the Borrowers or any other person. (j) Pro Rata Treatment. Subject to the provisions of this Agreement, ------------------ each payment (including each prepayment) by the Borrowers and collection by Lenders (including offsets) on account of the principal of and interest on the Notes and fees provided for in this Agreement, payable by the Borrowers shall be made Pro Rata; provided, however, in the event that any Defaulting Lender shall have failed to make an Advance as contemplated under Section 3 hereof and Agent or another Lender or Lenders shall have made such Advance, payment received by Agent for the account of such Defaulting Lender or Lenders shall not be distributed to such Defaulting Lender or Lenders until such Advance or -53- Advances shall have been repaid in full to the Lender or Lenders who funded such Advance or Advances. (k) Assumption as to Payments. Except as specifically provided ------------------------- herein, unless Agent shall have received notice from the Borrowers prior to the date on which any payment is due to Lenders hereunder that the Borrowers will not make such payment in full, Agent may, but shall not be required to, assume that the Borrowers have made such payment in full to Agent on such date and Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent the Borrowers shall not have so made such payment in full to Agent, each Lender shall repay to Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to Agent, at the interest rate applicable to such portion of the Loan. (l) Other Financings. Without limiting the rights to which any ---------------- Lender otherwise is or may become entitled, such Lender shall have no interest, by virtue of this Agreement or the Loan Documents, in (a) any present or future loans from, letters of credit issued by, or leasing or other financial transactions by, any other Lender to, on behalf of, or with the Borrowers (collectively referred to herein as "Other Financings") other than the obligations hereunder; (b) any present or future guarantees by or for the account of the Borrowers which are not contemplated by the Loan Documents; (c) any present or future property taken as security for any such Other Financings; or (d) any property now or hereafter in the possession or control of any other Lender which may be or become security for the obligations of the Borrowers arising under any loan document by reason of the general description of indebtedness secured or property contained in any other agreements, documents or instruments relating to any such Other Financings. (m) Interests of Lenders. Nothing in this Agreement shall be -------------------- construed to create a partnership or joint venture between Lenders for any purpose. Agent, Lenders and the Borrowers recognize that the respective obligations of Lenders under the Commitments shall be several and not joint and that neither Agent nor any of Lenders shall be responsible or liable to perform any of the obligations of the other under this Agreement. Each Lender is deemed to be the owner of an undivided interest in and to all rights, titles, benefits and interests belonging and accruing to Agent under the Security Instruments, including, without limitation, liens and security interests in any collateral, fees and payments of principal and interest by the Borrowers under the Commitments on a Pro Rata basis. Each Lender shall perform all duties and obligations of Lenders under this Agreement in the same proportion as its ownership interest in the Loans outstanding at the date of determination thereof. -54- (n) Investments. Whenever Agent in good faith determines that it is ----------- uncertain about how to distribute to Lenders any funds which it has received, or whenever Agent in good faith determines that there is any dispute among the Lenders about how such funds should be distributed, Agent may choose to defer distribution of the funds which are the subject of such uncertainty or dispute. If Agent in good faith believes that the uncertainty or dispute will not be promptly resolved, or if Agent is otherwise required to invest funds pending distribution to the Lenders, Agent may invest such funds pending distribution (at the risk of the Borrowers). All interest on any such investment shall be distributed upon the distribution of such investment and in the same proportions and to the same Persons as such investment. All monies received by Agent for distribution to the Lenders (other than to the Person who is Agent in its separate capacity as a Lender) shall be held by the Agent pending such distribution solely as Agent for such Lenders, and Agent shall have no equitable title to any portion thereof. 16. Exercise of Rights. No failure to exercise, and no delay in exercising, on the part of the Agent or the Lenders, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right. The rights of the Agent and the Lenders hereunder shall be in addition to all other rights provided by law. No modification or waiver of any provision of the Loan Documents, including this Agreement, or the Note nor consent to departure therefrom, shall be effective unless in writing, and no such consent or waiver shall extend beyond the particular case and purpose involved. No notice or demand given in any case shall constitute a waiver of the right to take other action in the same, similar or other circumstances without such notice or demand. 17. Notices. Any notices or other communications required or permitted to be given by this Agreement or any other documents and instruments referred to herein must be given in writing (which may be by facsimile transmission) and must be personally delivered or mailed by prepaid certified or registered mail to the party to whom such notice or communication is directed at the address of such party as follows: (a) BORROWERS: c/o 3TEC ENERGY CORPORATION, Two Shell Plaza, 777 Walker, Suite 2400, Houston, Texas 77002, Attn: Floyd C. Wilson, Chief Executive Officer, Facsimile (713) 821-7200; (b) AGENT: BANK ONE, TEXAS, N.A., 1717 Main Street, Dallas, Texas 75201, Facsimile No. (214) 290-2332, Attention: Mynan C. Feldman, First Vice President. Any such notice or other communication shall be deemed to have been given (whether actually received or not) on the day it is personally delivered or delivered by facsimile as aforesaid or, if mailed, on the third day after it is mailed as aforesaid. Any party may change its address for purposes of this Agreement by giving notice of such change to the other party pursuant to this Section 17. Any notice required to be given to the Lenders shall be given to the Agent and distributed to all Lenders by the Agent . 18. Expenses. The Borrowers shall pay (i) all reasonable and necessary out-of-pocket expenses of the Lenders, including reasonable fees and disbursements of special counsel for the -55- Agent, in connection with the preparation of this Agreement, any waiver or consent hereunder or any amendment hereof or any default or Event of Default or alleged default or Event of Default hereunder, (ii) all reasonable and necessary out-of-pocket expenses of the Agent, including reasonable fees and disbursements of special counsel for the Agent in connection with the preparation of any participation agreement for a participant or participants requested by the Borrowers or any amendment thereof and (iii) if a default or an Event of Default occurs, all reasonable and necessary out-of-pocket expenses incurred by the Lenders, including fees and disbursements of counsel, in connection with such default and Event of Default and collection and other enforcement proceedings resulting therefrom. The Borrowers hereby acknowledge that Gardere & Wynne, L.L.P. is special counsel to Bank One, as Agent and as a Lender, under this Agreement and that it is not counsel to, nor does it represent the Borrowers in connection with the transactions described in this Agreement. The Borrowers are relying on separate counsel in the transaction described herein. The Borrowers shall indemnify the Lenders against any transfer taxes, document taxes, assessments or charges made by any governmental authority by reason of the execution, delivery and filing of the Loan Documents. The obligations of this Section 18 shall survive any termination of this Agreement, the expiration of the Loans and the payment of all indebtedness of the Borrowers to the Lenders hereunder and under the Notes. 19. Indemnity. The Borrowers agree to indemnify and hold harmless the Lenders and their respective officers, employees, agents, attorneys and representatives (singularly, an "Indemnified Party", and collectively, the "Indemnified Parties") from and against any loss, cost, liability, damage or expense (including the reasonable fees and out-of-pocket expenses of counsel to the Lenders, including all local counsel hired by such counsel) ("Claim") incurred by the Lenders in investigating or preparing for, defending against, or providing evidence, producing documents or taking any other action in respect of any commenced or threatened litigation, administrative proceeding or investigation under any federal securities law, federal or state environmental law, or any other statute of any jurisdiction, or any regulation, or at common law or otherwise, which is alleged to arise out of or is based upon any acts, practices or omissions or alleged acts, practices or omissions of the Borrowers or their agents or arises in connection with the duties, obligations or performance of the Indemnified Parties in negotiating, preparing, executing, accepting, keeping, completing, countersigning, issuing, selling, delivering, releasing, assigning, handling, certifying, processing or receiving or taking any other action with respect to the Loan Documents and all documents, items and materials contemplated thereby even if any of the foregoing arises out of an Indemnified Party's ordinary negligence. The indemnity set forth herein shall be in addition to any other obligations or liabilities of the Borrowers to the Lenders hereunder or at common law or otherwise, and shall survive any termination of this Agreement, the expiration of the Loans and the payment of all indebtedness of the Borrowers to the Lenders hereunder and under the Notes, provided that the Borrowers shall have no obligation under this Section to the Lender with respect to any of the foregoing arising out of the gross negligence or willful misconduct of the Lender. If any Claim is asserted against any Indemnified Party, the Indemnified Party shall endeavor to notify the Borrowers of such Claim (but failure to do so shall not affect the indemnification herein made -56- except to the extent of the actual harm caused by such failure). The Indemnified Party shall have the right to employ, at the Borrowers' expense, counsel of the Indemnified Parties' choosing and to control the defense of the Claim. The Borrowers may at their own expense also participate in the defense of any Claim. Each Indemnified Party may employ separate counsel in connection with any Claim to the extent such Indemnified Party believes it reasonably prudent to protect such Indemnified Party. The parties intend for the provisions of this Section to apply to and protect each Indemnified Party from the consequences of any liability including strict liability imposed or threatened to be imposed on Agent as well as from the consequences of its own negligence, whether or not that negligence is the sole, contributing, or concurring cause of any Claim. 20. Governing Law. THIS AGREEMENT IS BEING EXECUTED AND DELIVERED, AND IS INTENDED TO BE PERFORMED, IN DALLAS, DALLAS COUNTY, TEXAS, AND THE SUBSTANTIVE LAWS OF TEXAS SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT AND ALL OTHER DOCUMENTS AND INSTRUMENTS REFERRED TO HEREIN, UNLESS OTHERWISE SPECIFIED THEREIN. 21. Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective during the term of this Agreement, such provisions shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of the Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Agreement. 22. Maximum Interest Rate. Regardless of any provisions contained in this Agreement or in any other documents and instruments referred to herein, the Lenders shall never be deemed to have contracted for or be entitled to receive, collect or apply as interest on the Notes any amount in excess of the Maximum Rate, and in the event any Lender ever receives, collects or applies as interest any such excess, or if an acceleration of the maturities of any Notes or if any prepayment by the Borrowers results in the Borrowers having paid any interest in excess of the Maximum Rate, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance of the Notes for which such excess was received, collected or applied, and, if the principal balance of such Note is paid in full, any remaining excess shall forthwith be paid to the Borrowers. All sums paid or agreed to be paid to the Lenders for the use, forbearance or detention of the indebtedness evidenced by the Notes and/or this Agreement shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of such indebtedness until payment in full so that the rate or amount of interest on account of such indebtedness does not exceed the Maximum Rate. In determining whether or not the interest paid or payable under any specific contingency exceeds the Maximum Rate of interest permitted by law, the Borrowers and the Lenders shall, to the maximum extent permitted under applicable law, (i) characterize any non- principal payment as an expense, fee or premium, rather than as interest; and -57- (ii) exclude voluntary prepayments and the effect thereof; and (iii) compare the total amount of interest contracted for, charged or received with the total amount of interest which could be contracted for, charged or received throughout the entire contemplated term of the Note at the Maximum Rate. 23. Amendments. Subject to the provisions of Section 15(b) hereof, this Agreement may be amended only by an instrument in writing executed by an authorized officer of the party against whom such amendment is sought to be enforced. 24. Multiple Counterparts. This Agreement may be executed in a number of identical separate counterparts, each of which for all purposes is to be deemed an original, but all of which shall constitute, collectively, one agreement. No party to this Agreement shall be bound hereby until a counterpart of this Agreement has been executed by all parties hereto. 25. Conflict. In the event any term or provision hereof is inconsistent with or conflicts with any provision of the Loan Documents, the terms or provisions contained in this Agreement shall be controlling. 26. Survival. All covenants, agreements, undertakings, representations and warranties made in the Loan Documents, including this Agreement, the Notes or other documents and instruments referred to herein shall survive all closings hereunder and shall not be affected by any investigation made by any party. 27. Parties Bound. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns, heirs, legal representatives and estates, provided, however, that the Borrowers may not, without the prior written consent of all of the Lenders, assign any rights, powers, duties or obligations hereunder. 28. Assignments and Participations. (a) Each Lender shall have the right to sell, assign or transfer all or any part of its Note or Notes, its Commitment and its rights and obligations hereunder to one or more Affiliates, Lenders, financial institutions, pension plans, insurance companies, investment funds, or similar Persons who are Eligible Assignees or to a Federal Reserve Bank; provided, that in connection with each sale, assignment or transfer (other -------- than to an Affiliate, a Bank or a Federal Reserve Bank), shall require the consent of Agent and the Borrowers, which consents will not be unreasonably withheld; provided, however, that if an Event of Default has occurred and is continuing, the consent of the Borrowers shall not be required. Any such assignee, transferee or recipient shall have, to the extent of such sale, assignment, or transfer, the same rights, benefits and obligations as it would if it were such Lender and a holder of such Note, Commitment and rights and obligations, including, without limitation, the right -58- to vote on decisions requiring consent or approval of all Lenders or Majority Lenders and the obligation to fund its Commitment; provided, that (1) each such sale, assignment, or transfer (other than to an Affiliate, a Bank or a Federal Reserve Bank) shall be in an aggregate principal amount not less than $5,000,000, (2) each remaining Lender shall at all times maintain Commitment then outstanding in an aggregate principal amount at least equal to $5,000,000; (3) each such sale, assignment or transfer shall be of a Pro Rata portion of such Lender's Commitment, (4) no Lender may offer to sell its Note or Notes, Commitment, rights and obligations or interests therein in violation of any securities laws; and (5) no such assignments (other than to a Federal Reserve Bank) shall become effective until the assigning Lender and its assignee delivers to Agent and Borrowers an Assignment and Acceptance and the Note or Notes subject to such assignment and other documents evidencing any such assignment. An assignment fee in the amount of $3,500 for each such assignment (other than to an Affiliate, a Bank or the Federal Reserve Bank) will be payable to Agent by assignor or assignee. Within five (5) Business Days after its receipt of copies of the Assignment and Acceptance and the other documents relating thereto and the Note or Notes, the Borrowers shall execute and deliver to Agent (for delivery to the relevant assignee) a new Note or Notes evidencing such assignee's assigned Commitment and if the assignor Lender has retained a portion of its Commitment, a replacement Note in the principal amount of the Commitment retained by the assignor (except as provided in the last sentence of this paragraph (a) such Note or Notes to be in exchange for, but not in payment of, the Note or Notes held by such Lender). On and after the effective date of an assignment hereunder, the assignee shall for all purposes be a Lender, party to this Agreement and any other Loan Document executed by the Lenders and shall have all the rights and obligations of a Lender under the Loan Documents, to the same extent as if it were an original party thereto, and no further consent or action by Borrowers, Lenders or the Agent shall be required to release the transferor Lender with respect to its Commitment assigned to such assignee and the transferor Lender shall henceforth be so released. (b) Each Lender shall have the right to grant participations in all or any part of such Lender's Notes and Commitment hereunder to one or more pension plans, investment funds, insurance companies, financial institutions or other Persons, provided, that: (i) each Lender granting a participation shall retain the right to vote hereunder, and no participant shall be entitled to vote hereunder on decisions requiring consent or approval of Lender or Majority Lenders (except as set forth in (iii) below); (ii) in the event any Lender grants a participation hereunder, such Lender's obligations under the Loan Documents shall remain unchanged, such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, such Lender shall remain the holder of any -59- such Note or Notes for all purposes under the Loan Documents, and Agent, each Lender and Borrowers shall be entitled to deal with the Lender granting a participation in the same manner as if no participation had been granted; and (iii) no participant shall ever have any right by reason of its participation to exercise any of the rights of Lenders hereunder, except that any Lender may agree with any participant that such Lender will not, without the consent of such participant (which consent may not be unreasonably withheld) consent to any amendment or waiver requiring approval of all Lenders. (c) It is understood and agreed that any Lender may provide to assignees and participants and prospective assignees and participants financial information and reports and data concerning Borrowers' properties and operations which was provided to such Lender pursuant to this Agreement. (d) Upon the reasonable request of either Agent or Borrowers, each Lender will identify those to whom it has assigned or participated any part of its Notes and Commitment, and provide the amounts so assigned or participated. 29. Choice of Forum: Consent to Service of Process and Jurisdiction. THE OBLIGATIONS OF BORROWERS UNDER THE LOAN DOCUMENTS ARE PERFORMABLE IN DALLAS COUNTY, TEXAS. ANY SUIT, ACTION OR PROCEEDING AGAINST THE BORROWERS WITH RESPECT TO THE LOAN DOCUMENTS OR ANY JUDGMENT ENTERED BY ANY COURT IN RESPECT THEREOF, MAY BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS, COUNTY OF DALLAS, OR IN THE UNITED STATES COURTS LOCATED IN DALLAS COUNTY, TEXAS AND THE BORROWERS HEREBY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF SUCH COURTS FOR THE PURPOSE OF ANY SUCH SUIT, ACTION OR PROCEEDING. THE BORROWERS HEREBY IRREVOCABLY CONSENT TO SERVICE OF PROCESS IN ANY SUIT, ACTION OR PROCEEDING IN SAID COURT BY THE MAILING THEREOF BY LENDER BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE BORROWERS, AS APPLICABLE, AT THE ADDRESS FOR NOTICES AS PROVIDED IN SECTION 17. THE BORROWERS HEREBY IRREVOCABLY WAIVE ANY OBJECTION WHICH THEY MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENT BROUGHT IN THE COURTS LOCATED IN THE STATE OF TEXAS, COUNTY OF DALLAS, AND HEREBY FURTHER IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. -60- 30. Waiver of Jury Trial. THE BORROWERS HEREBY WAIVE, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 31. Other Agreements. THIS WRITTEN CREDIT 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. 32. Financial Terms. All accounting terms used in this Agreement which are not specifically defined herein shall be construed in accordance with GAAP. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -61- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. BORROWERS: --------- 3TEC ENERGY CORPORATION a Delaware corporation By:____________________________________________ R.A. Walker, President and Chief Financial Officer ENEX RESOURCES CORPORATION a Delaware corporation By:____________________________________________ Floyd C. Wilson, President MIDDLE BAY PRODUCTION COMPANY, INC. a Kansas corporation By:____________________________________________ Floyd C. Wilson, President MAGELLAN EXPLORATION, LLC a Delaware limited liability company By:____________________________________________ Floyd C. Wilson, President -62- LENDERS: ------- BANK ONE, TEXAS, N.A., a national banking association By:____________________________________________ Mynan C. Feldman, First Vice President THE BANK OF NOVA SCOTIA By:____________________________________________ Name:__________________________________________ Title:_________________________________________ UNION BANK OF CALIFORNIA, N.A. By:____________________________________________ Name:__________________________________________ Title:_________________________________________ By:____________________________________________ Name:__________________________________________ Title:_________________________________________ BANK OF MONTREAL By:____________________________________________ Name:__________________________________________ Title:_________________________________________ WELLS FARGO BANK TEXAS, NATIONAL ASSOCIATION By:____________________________________________ Brian K. Otis, Vice President -63- CIBC, INC. By:____________________________________________ Name:__________________________________________ Title:_________________________________________ ADMINISTRATIVE AGENT: -------------------- BANK ONE, TEXAS, N.A., a national banking association By:____________________________________________ Mynan C. Feldman, First Vice President SYNDICATION AGENT: ----------------- BANK OF MONTREAL By:____________________________________________ Name:__________________________________________ Title:_________________________________________ -64- EX-10.29 5 0005.txt FIRST AMENDMENT TO SHAREHOLDERS AGREEMENT EXHIBIT 10.29 FIRST AMENDMENT TO SHAREHOLDERS' AGREEMENT This First Amendment to Shareholders' Agreement (the "Amendment") is made and entered into this 30th day of May, 2000, by and among 3TEC Energy Corporation, a Delaware corporation, successor in interest to Middle Bay Oil Company, Inc. (the "Company") and W/E Energy Company L.L.C., formerly known as 3TEC Energy Company L.L.C. and successor in interest to the 3TEC Energy Corporation referenced in the Agreement (as defined below) ("W/E"), ECIC Corporation ("ECIC"), EnCap Energy Capital Fund III, L.P. ("Fund III"), EnCap Energy Acquisition III-B, Inc. ("Acquisition III-B"), BOCP Energy Partners, L.P. ("BOCP") (W/E, ECIC, Fund III, Acquisition III-B and BOCP are sometimes hereinafter referred to collectively as the "W/E Shareholders") and Kaiser- Francis Oil Company ("Kaiser-Francis"), C.J. Lett, III ("Lett"), Weskids, L.P. ("Weskids") and Alvin V. Shoemaker ("Shoemaker") (Kaiser-Frances, Lett, Weskids and Shoemaker are sometimes hereinafter referred to collectively as the "Major Shareholders"). RECITALS WHEREAS, on August 27, 1999, the Company, W/E and the Major Shareholders executed that certain Shareholders Agreement (the "Agreement"); WHEREAS, the W/E Shareholders and the Major Shareholders are hereinafter referred to collectively as the "Shareholders"; WHEREAS, the Company and the Shareholders 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. Terms Defined in the Agreement. Unless otherwise defined in this ------------------------------- Amendment, each term defined in the Agreement shall have the meaning assigned to it in the Agreement. 2. Additional Parties to the Agreement; Certain Defined Terms. ---------------------------------------------------------- (a) EnCap Energy Capital Fund III, L.P., EnCap Energy Acquisition III-B, Inc., ECIC Corporation and BOCP Energy Partners, L.P. shall be added as parties to the Agreement. (b) The Agreement shall be amended: (i) to add a new defined term "W/E Shareholders" which, for purposes of the Agreement, shall mean "W/E Energy Company L.L.C., EnCap Energy Capital Fund III, L.P., EnCap Energy Acquisition III-B, Inc., ECIC Corporation and BOCP Energy Partners, L.P.," and (ii) to redefine "Shareholders" to mean "W/E Shareholders and the Major Shareholders." 3. Paragraph 1. Paragraph 1 of the Agreement is hereby deleted in its ------------ entirety and replaced with the following: "Nomination and Election of Directors. Each of the Shareholders agrees, so ------------------------------------- long as it owns such shares, to vote (including the taking of any action by written consent, as necessary or appropriate) and cause its affiliates to vote all shares of Common Stock (and any and all shares of any other voting class of capital stock of the Company presently or at any future time owned by the Shareholders or their affiliates) which it is entitled to vote (or control the voting directly or indirectly) to ensure that the following shall occur: (a) The Company shall at all times be managed by or under the direction of the Board of Directors of the Company (the "Board"), which shall consist of seven (7) members, at least two of whom shall qualify as an "independent director" as defined in Section 4200(14) of the NASDAQ Marketplace Rules. The Shareholders shall use their best efforts (including voting the shares owned by them and their Affiliates, in calling special meetings of the Shareholders and executing and delivering written consents), to elect such seven (7) members of the Board, consisting of the following: (i) Three (3) members designated by W/E Energy Company L.L.C. ("W/E"); (ii) Two (2) members designated by the Major Shareholders; and (iii) Two (2) members designated by a majority of the Board, at least one of which so elected shall be an "independent director" as defined in the Section 4200(14) of the NASDAQ Marketplace Rules, which independent director shall be acceptable to W/E. The party designating a director may remove such director, with or without cause, and designate his or her successor. If the director designated by a party resigns, dies, becomes incapacitated or is otherwise unable to serve, the party designating such director may designate his or her successor. All Shareholders shall vote all shares held by them in favor of the election or removal of such persons so designated. Action taken by either W/E or the Major Shareholders in designating or removing directors shall be in writing executed by either W/E or the Major Shareholders, as the case may be, and promptly delivered to the other Shareholders and the Company." 4. Paragraph 4. Paragraph 4 of the Agreement is hereby deleted in ------------ its entirety and replaced with the following: "Termination of W/E's Right to Elect Directors. W/E's right to designate ---------------------------------------------- the directors as provided in paragraph 1(b)(i) above shall terminate as follows: (a) if W/E's Shareholders' percentage of beneficial ownership of Common Stock is below 15%, W/E shall be entitled to designate only two (2) members to the Board; (b) if W/E's Shareholders' percentage of beneficial ownership of Common Stock is below 7%, W/E shall be entitled to designate only one (1) member to the Board; and 2 (c) if W/E's Shareholders' percentage of beneficial ownership of Common Stock is below 5%, W/E's right to designate a member to the Board shall terminate. For purposes of this Agreement, "beneficial ownership" of Common Stock or to "beneficially own" Common Stock shall be determined in accordance with Rule 13d- 3(d)(1) under the Securities Exchange Act of 1934, as amended. 5. Paragraph 5. Paragraph 5 of the Agreement is hereby deleted in its ------------ entirety and replaced with the following: "Termination of Major Shareholders' Right to Elect Directors. The Major ------------------------------------------------------------ Shareholders' right to designate the directors as provided in paragraph 1(b)(ii) above shall terminate as follows: (a) if the Major Shareholders' percentage of beneficial ownership of Common Stock is below 7 1/2%, the Major Shareholders shall be entitled to designate only one (1) member to the Board; (b) if the Major Shareholders' percentage of beneficial ownership of Common Stock is below 5%, the Major Shareholders' right to designate a member to the Board shall terminate." 6. Paragraph 8. Paragraph 8 of the Agreement is hereby deleted in its ----------- entirety and replaced with the following: "8. Termination of Agreement. This Agreement shall continue until, ------------------------ and shall terminate immediately upon (a) execution of a written agreement of termination by the Shareholders and the Company, (b) the adjudication of the Company as a bankrupt or insolvent by a court of competent jurisdiction or (c) each of (i) the W/E Shareholders, in the aggregate, and (ii) the Major Shareholders beneficially own less than 5% of the Common Stock." 7. Paragraph 19. Paragraph 19 of the Agreement is hereby deleted in its ------------- entirety and replaced with the following: "19. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE ------------- WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE." 8. New Paragraph 21. The following shall be added as paragraph 21 ----------------- of the Agreement: "21. Ownership of less than 3.5%. Notwithstanding any other -------------------------- provision herein to the contrary, in the event (i) the Company completes its offering of common stock as contemplated in its Form S-2 Registration Statement filed with the Securities and Exchange Commission, and (ii) if any Shareholder's percentage of beneficial ownership of Common Stock falls below three and one- half percent (3.5%), then such Shareholder's rights and obligations under this Agreement shall terminate upon the Company's receipt of written notice executed by a duly authorized representative of such Shareholder that its percentage of beneficial ownership of Common Stock has fallen below such threshold. Upon the Company's receipt of such duly executed notice, the Company shall promptly 3 take all action necessary to notify the Company's transfer agent that the restrictive legend as required in paragraph 7 of the Agreement on such Shareholder's Common Stock certificate(s) should be removed and shall be of no further force or effect." 9. Successors. This Amendment shall be binding upon and shall operate ---------- for the benefit of the Company, its shareholders, and their respective successors, assigns, executors, administrators and heirs, and it shall be binding upon the Shareholders and any entity to whom any shares of Common Stock is transferred by the Shareholders in accord with or in violation of the provisions of this Agreement, and the executor or administrator of such entity. 10. Shareholders' Agreement in Effect. Except as modified herein, the --------------------------------- terms and provisions of the Agreement remain in full force and effect. 11. Counterparts. This Amendment may be signed in any number of ------------ counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed on the day and year first above written. COMPANY: 3TEC ENERGY CORPORATION By:________________________________ Name: Stephen W. Herod Title: Executive Vice President Address for Notice: 3TEC Energy Corporation Two Shell Plaza, 777 Walker Street Houston, TX 77002 Fax: (713) 821-7200 W/E ENERGY COMPANY L.L.C. By: ________________________________ Name: Floyd C. Wilson Title: Managing Director Address for Notice: W/E Energy Company L.L.C. Two Shell Plaza, 777 Walker Street Houston, TX 77002 Fax: (713) 821-7200 4 ECIC CORPORATION By ____________________________ ____________________________ Vice President Address for Notice: c/o EnCap Investments L.L.C. Attn: David B. Dunton 3811 Turtle Creek Blvd., Suite 1080 Dallas, Texas 75219 ENCAP ENERGY CAPITAL FUND III, L.P. By: EnCap Investments L.L.C., General Partner By: __________________________ __________________________ Managing Director Address for Notice: c/o EnCap Investments L.L.C. Attn: David B. Dunton 3811 Turtle Creek Blvd., Suite 1080 Dallas, Texas 75219 ENCAP ENERGY ACQUISITION III-B, INC. By ___________________________ ___________________________ Vice President Address for Notice: c/o EnCap Investments L.L.C. Attn: David B. Dunton 3811 Turtle Creek Blvd., Suite 1080 Dallas, Texas 75219 BOCP ENERGY PARTNERS, L.P. By: EnCap Investments L.L.C., Manager By: __________________________ __________________________ Managing Director 5 Address for Notice: c/o EnCap Investments L.L.C. Attn: David B. Dunton 3811 Turtle Creek Blvd., Suite 1080 Dallas, Texas 75219 KAISER-FRANCIS OIL COMPANY By:__________________________________ Name:________________________________ Title:_______________________________ Address for Notice: Kaiser-Francis Oil Company 6733 South Yale Tulsa, OK 74136 Fax: (918) 491-4694 ________________________________ C.J. LETT, III Address for Notice: C.J. Lett, III 9320 East Central Wichita, Kansas 67206 Fax: (316) 636-1803 ________________________________________ ALVIN V. SHOEMAKER Address for Notice: Alvin V. Shoemaker 8800 First Avenue Stone Harbor, NJ 08247 Fax: (609) 368-0147 WESKIDS, L.P. By: Weskids, Inc. Its General Partner By:___________________________________ Name:_________________________________ Title:________________________________ 6 Address for Notice: Weskids, L.P. 310 South Street Morristown, NJ 07960 Fax: (973) 682-2684 7 EX-10.30 6 0006.txt PRIVATE EQUITY SHELF AGREEMENT EXHIBIT 10.30 PRIVATE EQUITY SHELF AGREEMENT This Private Equity Shelf Agreement (this "Agreement") is entered into as of the ___ day of May, 2000, by and among 3TEC Energy Corporation, a Delaware corporation (the "Company") and EnCap Energy Capital Fund III, L.P., EnCap Energy Capital Fund III-B, L.P., BOCP Energy Partners, L.P., and Energy Capital Investment Company PLC (collectively, "Buyer", and each individually a "Buyer Entity"). W I T N E S S E T H: WHEREAS, the Company is negotiating the terms of a Second Restated Credit Agreement to be executed as of the ____ day of May, 2000, by and between the Company, Enex Resources Corporation, Middle Bay Production Company, Inc., and Magellan Exploration, LLC, as Borrowers, and Bank One, Texas, N.A., and each of the financial institutions which is a party thereto (or which may from time to time become a party thereto), as Lenders, and Bank One, Texas, N.A., as Administrative Agent (the "Credit Facility"); and WHEREAS, the proceeds of the Credit Facility will be used by the Company, in part, to fund the acquisition of certain properties from C.W. Resources, Inc., Westerman Royalty, Inc. and Carl A. Westerman (the "CWR Acquisition"); and WHEREAS, the Credit Facility requires the Company to make a special mandatory prepayment of the loan balance no later than December 31, 2000; and WHEREAS, if requested by the Company or required under the terms of the Credit Facility, and subject to the terms and conditions set forth in this Agreement, the Company desires to issue to Buyer, and Buyer desires to purchase from the Company, up to 800,000 units (the "Units"), each Unit consisting of (a) one share of the Company's Series E Preferred Stock, par value $0.02 per share (the "Preferred Stock") and (b) three warrants, each of which entitles the holder to purchase one share of the Company's common stock, par value $0.02 per share ("Common Stock") at an initial exercise price of $0.02 per share (the "Warrants"); and NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the parties agree as follows: ARTICLE I AGREEMENT TO PURCHASE UNITS Section 1.1. Agreement to Purchase Units. Subject to the terms and --------------------------- conditions contained in this Agreement, Buyer agrees to purchase from the Company up to 800,000 Units at a purchase price of $25.00 per Unit. The number of Units to be purchased by Buyer shall be determined by the Company and stated in the Takedown Notice given pursuant to Section 1.2. Subject to the satisfaction of the conditions set forth in this Agreement, on the Closing Date established in accordance with Section 1.2, Buyer shall pay the aggregate purchase price for the Units to the Company and the Company shall issue the Preferred Stock and the Warrants comprising the Units to Buyer. The aggregate purchase price for the Units (the "Takedown Amount") shall be paid by wire transfer of immediately available funds to the account designated by the Company. Each Buyer Entity will fund the portion of the Takedown Amount, and purchase the portion of the Units, shown below: EnCap Energy Capital Fund III, L.P. 42.4790% EnCap Energy Capital Fund III-B, L.P. 32.1269% BOCP Energy Partners, L.P. 10.3941% Energy Capital Investment Company PLC 15.0000% Section 1.2. Takedown. Under this Agreement, the Company may effect one -------- "Takedown" by giving written notice to Buyer (the "Takedown Notice") stating the Takedown Amount and the proposed "Closing Date" (which date must be at least 10 business days after the date the Takedown Notice is given and also must be prior to the Takedown Expiration Date). The "Takedown Expiration Date" shall mean the earlier of (a) December 31, 2000, (b) the date that the Company consummates a private or public equity offering (other than an offering of shares in connection with a merger or acquisition, or an offering to employees under a stock option or other employee benefit plan), or (c) the date the Company makes the Special Mandatory Prepayment (as defined in the Credit Facility). Section 1.3. Preferred Stock. To authorize the Preferred Stock, the --------------- Company shall adopt and file as necessary with the Secretary of State of Delaware a Certificate of Designations in the form attached hereto as Exhibit A. --------- The Company shall not amend the Certificate of Designations without the prior written consent of Buyer. The Company shall not issue any Preferred Stock except (a) to Buyer on the Closing Date and (b) after the Closing Date in respect of dividends on outstanding shares of Preferred Stock. Section 1.4. Warrants. Each Warrant shall entitle the holder thereof to -------- purchase one share of Common Stock at an initial exercise price of $0.02 per share. The Warrants will be governed by the terms, and evidenced by certificates in the form, attached hereto as Exhibit B. --------- Section 1.5. Reservation of Shares. --------------------- (a) From and after the Closing Date, the Company will at all times have authorized, and reserve and keep available, free from preemptive rights, for the purpose of enabling it to satisfy any obligation to issue Common Stock upon the exercise by the holders of the Preferred Stock of their conversion rights, the number of shares of Common Stock deliverable upon such conversion rights. The Company covenants that all Common Stock issued by it upon conversion of the Preferred Stock will, upon issuance in accordance with the terms of this Agreement and the Certificate of Designations, be fully paid and nonassessable. (b) From and after the Closing Date, the Company will at all times have authorized, and reserve and keep available, free from preemptive rights, for the purpose of enabling it to satisfy any obligation to issue Common Stock upon the exercise of the Warrants, the number of -2- shares of Common Stock deliverable upon exercise of all outstanding Warrants (whether or not exercisable). The Company covenants that all Common Stock issued by it upon exercise of Warrants will, upon issuance in accordance with the terms of this Agreement and the Warrant certificates, be fully paid and nonassessable. Section 1.6. Restriction on Transfer. Buyer understands and agrees that ----------------------- the Units consisting of Preferred Stock and Warrants to be issued by the Company to Buyer on the Closing Date, and the Common Stock issuable upon conversion of the Preferred Stock and exercise of the Warrants (collectively, the "Securities"), have not been registered under the Securities Act of 1933, as amended (the "Securities Act") or any state securities laws, and that accordingly, they will not be fully transferable except as permitted under various exemptions contained in the Securities Act and applicable state securities laws, or upon satisfaction of the registration and prospectus delivery requirements of the Securities Act and applicable state securities laws. Buyer acknowledges that it must bear the economic risk of its investment in the Securities for an indefinite period of time since they have not been registered under the Securities Act and applicable state securities laws and therefore cannot be sold unless they are subsequently registered or an exemption from registration is available. Absent an effective registration statement under the Securities Act and applicable state securities laws covering the disposition of the Securities, Buyer will not sell, transfer, assign, pledge, hypothecate or otherwise dispose of any or all of the Securities absent a valid exemption from the registration and prospectus delivery requirements of the Securities Act and the registration or qualification requirements of any applicable state securities laws. Section 1.7. Fees and Expenses. ----------------- (a) Upon the execution and delivery of this Agreement by the parties hereto, the Company shall pay Buyer a standby facility fee equal to $500,000. The standby facility fee shall be paid by wire transfer of immediately available funds to an account or accounts designated by Buyer. (b) On the Closing Date, the Company shall pay Buyer a takedown fee equal to 1 1/2% of the Takedown Amount. This fee, at the Company's option, shall be paid either (i) by wire transfer of immediately available funds to an account or accounts designated by Buyer or (ii) by an offset against the purchase price to be delivered by Buyer to the Company on the Closing Date. (c) The Company shall pay directly or reimburse Buyer for payment of the reasonable attorneys' fees and expenses of its counsel in connection with the negotiation, preparation and implementation of this Agreement. The Company shall pay such reimbursement to Buyer in cash no later than 15 days after Buyer presents a reasonably detailed written summary of such fees and expenses to the Company. Section 1.8 Credit Facility. The Company shall require that the Credit --------------- Facility permit the Company to fulfill its obligations under this Agreement and the Preferred Stock and the Warrants, including without limitation the obligations relating to dividends, conversion, -3- redemption and repurchase. The Company shall not permit any amendment or modification to the Credit Facility that would not permit the Company to fulfill such obligations. The Company shall use the proceeds from the Takedown to make the Special Mandatory Prepayment (as defined in the Credit Facility). ARTICLE II REPRESENTATIONS OF THE COMPANY The Company hereby represents and warrants to Buyer as follows: Section 2.1 Corporate Existence and Power. The Company (a) is a ----------------------------- corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware, (b) has all corporate power and authority necessary to carry on its business as now conducted and as proposed to be conducted, and (c) is duly qualified as a foreign corporation in all jurisdictions where such qualification is necessary to conduct its business. Section 2.2. Corporate and Governmental Authorization; Contravention. The ------------------------------------------------------- execution, delivery and performance of this Agreement by the Company are within its corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental authority (other than the filing of the Certificate of Designations with the Secretary of State of Delaware), and, except for matters which have been waived in writing by the appropriate person, do not contravene, or constitute a default under, any provision of applicable law or of the Company's Certificate of Incorporation or Bylaws or of any material judgment, injunction, order, decree or material agreement binding upon the Company or its assets. Section 2.3. Binding Effect. This Agreement constitutes the valid and -------------- binding agreement of the Company, enforceable in accordance with its terms except as (a) the enforceability hereof may be limited by bankruptcy, insolvency or similar laws affecting creditors rights generally, and (b) the availability of equitable remedies may be limited by equitable principles of general applicability. Section 2.4. SEC Documents. The Company is current in its obligations to -------------- file all periodic reports and proxy statements with the Securities and Exchange Commission (the "SEC") required to be filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Buyer has had available to it true and correct complete copies of each report, schedule, registration statement and definitive proxy statement filed by the Company with the SEC since January 1, 1999, and prior to the date of this Agreement (the "SEC Documents"), which are all the documents (other than preliminary material) that the Company was required to file with the SEC since such date. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act as the case may be, and the rules and regulations of the SEC thereunder applicable to such SEC Documents, and none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in -4- light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents comply in all material respects with the published rules and regulations of the SEC with respect thereto, and such financial statements (i) were prepared from the books and records of the Company and its consolidated subsidiaries, (ii) were prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as may be indicated therein or in the notes or schedules thereto) and (iii) present fairly the financial position of the Company as at the dates thereof. Section 2.5. Absence of Undisclosed Liabilities. Except as and to the ---------------------------------- extent disclosed in the SEC Documents filed prior to the date hereof, as of March 31, 2000, the Company has no material liabilities or obligations (whether accrued, absolute, contingent, unliquidated, or otherwise, whether or not known to the Company, and whether due or to become due) of a nature required by generally accepted accounting principles to be recognized or disclosed in consolidated financial statements of the Company. Since March 31, 2000, the Company has not incurred any such liabilities or obligations, other than those incurred in the ordinary course of business consistent with past practice or pursuant to or as contemplated by this Agreement. Section 2.6. Absence of Certain Changes. Except as disclosed in the SEC -------------------------- Documents filed prior to the date hereof, since March 31, 2000, (ai) there has not been any material adverse change in, or any event or condition that might reasonably be expected to result in any material adverse change in, the business, assets, results of operations, condition (financial or otherwise), or prospects of the Company; (b) the business of the Company has been conducted only in the ordinary course consistent with past practice; (c) the Company has not incurred any material liability, engaged in any material transaction, or entered into any material agreement outside the ordinary course of business consistent with past practice; and (d) the Company has not suffered any material loss, damage, destruction, or other casualty to any of its assets (whether or not covered by insurance). Section 2.7. Securities. The Securities will have been duly authorized for ---------- issuance and, when issued and delivered by the Company in accordance with the provisions of this Agreement, will be validly issued, fully paid, and nonassessable. The issuance of the Securities under this Agreement is not subject to any preemptive or similar rights. ARTICLE III REPRESENTATIONS OF BUYER Each Buyer Entity hereby represents and warrants to the Company, but only as to itself and not as to any other Buyer Entity, and not jointly or severally, as follows: Section 3.1. Existence and Power. Each Buyer Entity (a) is a corporation or ------------------- limited partnership, duly organized, validly existing and in good standing under the laws of its jurisdiction of formation, (b) has all requisite corporate or partnership power and authority necessary to carry on its business as it is now conducted, and (c) is duly qualified as a foreign -5- corporation or partnership in all jurisdictions where such qualification is necessary to conduct its business. Section 3.2. Authorization; Contravention. The execution, delivery and ---------------------------- performance of this Agreement by each Buyer Entity are within such Buyer Entity's powers, have been duly authorized by all necessary action, require no action by or in respect of, or filing with, any governmental authority, and, except for matters which have been waived in writing by the appropriate person, do not contravene, or constitute a default under, any provision of applicable law or of the organizational documents of such entity or of any material judgment, injunction, order, decree or material agreement binding upon such Buyer Entity or its assets. Section 3.3. Binding Effect. This Agreement constitutes the valid and -------------- binding agreement of each Buyer Entity, enforceable against it in accordance with its terms except as (a) the enforceability hereof may be limited by bankruptcy, insolvency or similar laws affecting creditors rights generally, and (b) the availability of equitable remedies may be limited by equitable principles of general applicability. Section 3.4. Investment Representation. Each Buyer Entity understands that ------------------------- the Securities have not been registered under the Securities Act and that the Securities are being offered and sold pursuant to an exemption from registration contained in the Securities Act based in part upon such Buyer Entity's representations contained in this Agreement. Taking into account its respective personnel and resources, each Buyer Entity is knowledgeable, sophisticated and experienced in making, and is qualified to make, decisions with respect to investments in securities presenting an investment decision like that involved in the purchase of the Securities, and has requested, received, reviewed and considered all information such Buyer Entity deems relevant in making an informed decision to purchase the Securities. Each Buyer Entity is acquiring the Securities for its own account for investment only and with no present intention of distributing any of the Securities and has no arrangement or understanding with any other persons regarding the distribution of the Securities. No Buyer Entity will, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of) any of the Securities except in compliance with the Securities Act and applicable state securities laws, the rules and regulations promulgated thereunder and the terms and conditions hereof. Each Buyer Entity is an "accredited investor" within the meaning of Rule 501 of Regulation D promulgated under the Securities Act. ARTICLE IV CONDITIONS TO CLOSING Section 4.1. Conditions Precedent to Obligations of Buyer. The obligations -------------------------------------------- of Buyer to purchase the Units on the Closing Date shall be subject to the fulfillment on or prior to the Closing Date of each of the following conditions: -6- (a) Representations and Warranties. The representations and warranties of ------------------------------ the Company contained in Sections 2.1, 2.2, 2.3 and 2.7 of this Agreement shall be true and correct in all material respects on the Closing Date as if they were made on such date. (b) Covenants and Agreements Performed. The Company shall have performed ---------------------------------- and complied with all covenants and agreements required by this Agreement to be performed or complied with by it on or prior to the Closing Date, including without limitation the obligation of the Company to reserve shares of Common Stock under Section 1.5 of this Agreement. (c) Officer's Certificate. Buyer shall have received a certificate from an --------------------- authorized officer of the Company certifying in such detail as Buyer shall reasonably request that the conditions set forth in this Section 4.1 have been fulfilled. (d) Preferred Stock. The Certificate of Designations in the form set --------------- forth as Exhibit A hereto shall have been filed with the Secretary of State of --------- Delaware and shall not have been amended, modified or repealed in any way. (e) Credit Facility; CWR Acquisition. The Company shall have entered into --------------- the Credit Facility and consummated the CWR Acquisition. The Credit Facility shall not have been amended or modified in any way that would restrict the ability of the Company to carry out its obligations under this Agreement or the terms of the Preferred Stock and the Warrants, including without limitation the obligations relating to dividends, conversion, redemption and repurchase. (f) Legal Opinion. Buyer shall have received the favorable opinion of ------------- counsel for the Company, which counsel shall be reasonably acceptable to Buyer, and which opinion shall be in form and substance reasonably satisfactory to Buyer and its counsel. (g) Actions or Proceedings. No action or proceeding shall, on the Closing ---------------------- Date, be pending or threatened to restrain, prohibit or obtain damages or other relief in connection with this Agreement or the consummation of the transactions contemplated hereby. (h) Legal Prohibition. No statute, rule or regulation shall make ----------------- consummation of the transactions contemplated hereby illegal or otherwise prohibited. (i) Other Matters. Buyer shall have received such other documents, ------------- instruments and agreements as it shall reasonably request. Section 4.2. Conditions Precedent to Obligations of the Company. The -------------------------------------------------- obligations of the Company to issue the Units to Buyer on the Closing Date shall be subject to the fulfillment on or prior to the Closing Date of each of the following conditions: (a) Representations and Warranties. The representations and warranties of ------------------------------ Buyer contained in this Agreement shall be true and correct in all material respects on the Closing Date as if they were made on such date. -7- (b) Covenants and Agreements Performed. Buyer shall have performed and ---------------------------------- complied with all covenants and agreements required by this Agreement to be performed or complied with by it on or prior to the Closing Date. (c) Officer's Certificate. The Company shall have received a certificate --------------------- executed on behalf of all of the Buyer Entities certifying in such detail as the Company shall reasonably request that the conditions set forth in this Section 4.2 have been fulfilled. (d) Actions or Proceedings. No action or proceeding shall, on the Closing ---------------------- Date, be pending or threatened to restrain, prohibit or obtain damages or other relief in connection with this Agreement or the consummation of the transactions contemplated hereby. (e) Legal Prohibition. No statute, rule or regulation shall make ----------------- consummation of the transactions contemplated hereby illegal or otherwise prohibited. (f) Other Matters. The Company shall have received such other documents, ------------- instruments and agreements as it shall reasonably request. ARTICLE V EXCHANGE OF PREFERRED STOCK AND WARRANTS Section 5.1. Exchange Option. Subject to the terms and conditions of this --------------- Article V, if the Company makes a Private Equity Issuance (as defined below) while Buyer owns shares of Preferred Stock, Buyer shall have the option to exchange some or all of its Preferred Stock and Warrants for the equity security being issued by the Company. A "Private Equity Issuance" shall mean the issuance by the Company of equity securities (the "New Securities") other than (i) in connection with a merger or acquisition, (ii) to employees under a stock option or other employee benefit plan, or (iii) pursuant to a registration statement that has been declared effective by the SEC under the Exchange Act. Section 5.2. Exchange Procedure. No less than 15 days prior to the closing ------------------ of a Private Equity Issuance, the Company shall provide Buyer with (i) written notice describing the New Securities, the price of the New Securities, the terms of the offering, and the scheduled closing date, and (ii) all other written or electronic materials that have been provided to prospective purchasers of the New Securities. Buyer shall notify the Company within ten days of its receipt of these materials whether Buyer desires to exchange all or a portion of its Preferred Stock and Warrants for New Securities. If Buyer desires to exchange less than all of its Preferred Stock, Buyer's notice shall set forth the amount to be exchanged. If Buyer fails to deliver a notice within the time period specified above, Buyer will be deemed to have elected not to exchange its Preferred Stock and Warrants for New Securities. However, if the terms of the equity offering are materially changed from the terms described in the Company's original notice, the Company shall not issue the New Securities without first delivering a new notice to Buyer, to which Buyer may respond, all as provided in the first four sentences of this Section 5.2. If Buyer elects to exchange its Preferred Stock and Warrants, then at the closing of the Company's equity offering -8- Buyer shall surrender to the Company the certificates representing the Preferred Stock and Warrants to be exchanged and the Company shall issue to Buyer certificates representing the number of New Securities determined in accordance with Section 5.3. Section 5.3. Exchange Ratio. At the closing of the Private Equity Issuance, -------------- the Company shall issue to Buyer the amount of New Securities that Buyer would be receiving if Buyer were investing an amount in cash equal to the liquidation value of the Preferred Stock being exchanged (including the amount of all accumulated or accrued dividends that have not been paid). To the extent Buyer owns any Warrants at the time of such exchange, then Buyer shall also surrender to the Company, in consideration for such New Securities, three Warrants per share of Preferred Stock being surrendered, counting only shares of Preferred Stock issued on the Closing Date and not counting shares of Preferred Stock issued subsequently in payment of dividends or otherwise. ARTICLE VI MISCELLANEOUS Section 6.1. Notices. All notices, requests and other communications to any ------- party hereunder shall be in writing and shall be given to such party at its address or telecopy number set forth on the signature pages hereof or such other address or telecopy number as such party may hereafter specify for the purpose by notice to the other party. Each such notice, request or other communication shall be effective (a) if given by telecopy, when such telecopy is transmitted to the telecopy number specified in this Section 6.1 and the appropriate answer ----------- back is received or receipt is otherwise confirmed, (b) if given by mail, three (3) business days after deposit in the US mail with first class postage prepaid, addressed as aforesaid, or (c) if given by any other means, when delivered at the address specified in this Section 6.1. ----------- Section 6.2. Indemnification. The Company agrees to indemnify and hold --------------- harmless each Buyer Entity and its shareholders, and their respective directors, officers, employees, agents, successors and assigns (collectively, the "Indemnified Parties") from and against (and will reimburse each Indemnified Party as the same are incurred) any and all liabilities, losses, damages, costs and expenses of any kind (including, without limitation, reasonable attorneys' fees and disbursements that may be incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or by reason of (including, without limitation, in connection with any investigation, litigation or proceeding or preparation of a defense in connection therewith) (a) any breach by the Company of any of its representations, warranties, covenants or agreements contained in this Agreement or (b) any matters contemplated by this Agreement. Section 6.3. Amendment and Waiver. This Agreement may not be modified or -------------------- amended except by an instrument or instruments in writing signed by the party against whom enforcement of any such modification or amendment is sought. No failure or delay by any holder of Securities in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further -9- exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. Section 6.4. Entire Agreement. This agreement and the exhibits hereto ---------------- collectively represent the final agreement between the parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements between the parties. There are no unwritten oral agreements between the parties with respect to the subject matter hereof. Section 6.5. Binding Effect; Assignment; No Third Party Benefit. This -------------------------------------------------- Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Except as otherwise expressly provided in this Agreement, neither this Agreement nor any of the rights, interests, or obligations hereunder shall be assigned by any of the parties hereto without the prior written consent of the other parties. Nothing in this Agreement, express or implied, is intended to or shall confer upon any person other than the parties hereto, and their respective successors and permitted assigns, any rights, benefits, or remedies of any nature whatsoever under or by reason of this Agreement. Section 6.6. Severability. If any provision of this Agreement is held to be ------------ unenforceable, this Agreement shall be considered divisible and such provision shall be deemed inoperative to the extent it is deemed unenforceable, and in all other respects this Agreement shall remain in full force and effect; provided, however, that if any such provision may be made enforceable by limitation thereof, then such provision shall be deemed to be so limited and shall be enforceable to the maximum extent permitted by applicable law. Section 6.7. GOVERNING LAW. THIS AGREEMENT AND THE TRANSACTION DOCUMENTS ------------- SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS. Section 6.8. Counterparts. This Agreement may be signed in any number of ------------ counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. -10- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective duly authorized officers on the day and year first above written. 3TEC ENERGY CORPORATION By: ______________________________ Name: R. A. Walker Title: President Address for Notice: 3TEC Energy Corporation Two Shell Plaza 777 Walker, Suite 2400 Houston, TX 77002 Fax: (713) 222-6418 ENERGY CAPITAL INVESTMENT COMPANY PLC By: _________________________________ Name: David B. Miller Title: Authorized Representative Address for Notice: c/o EnCap Investments L.L.C. 3811 Turtle Creek Blvd., Suite 1080 Dallas, Texas 75219 Attention: David B. Dunton Fax: (214) 599-0200 -11- ENCAP ENERGY CAPITAL FUND III, L.P. By: ENCAP INVESTMENTS L.L.C., General Partner By: _____________________________________ Name: David B. Miller Title: Managing Director Address For Notice: c/o EnCap Investments L.L.C. 3811 Turtle Creek Blvd., Suite 1080 Dallas, Texas 75219 Attention: David B. Dunton Fax: (214) 599-0200 ENCAP ENERGY CAPITAL FUND III-B, L.P. By: ENCAP INVESTMENTS L.L.C., General Partner By: _____________________________________ Name: David B. Miller Title: Managing Director Address For Notice: c/o EnCap Investments L.L.C. 3811 Turtle Creek Blvd., Suite 1080 Dallas, Texas 75219 Attention: David B. Dunton Fax: (214) 599-0200 -12- BOCP ENERGY PARTNERS, L.P. By: ENCAP INVESTMENTS L.L.C., Manager By: ____________________________ Name: David B. Miller Title: Managing Director Address For Notice: c/o EnCap Investments L.L.C. 3811 Turtle Creek Blvd., Suite 1080 Dallas, Texas 75219 Fax: (214) 599-0200 -13- EX-23.1 7 0007.txt CONSENT OF KPMG EXHIBIT 23.1 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 June 5, 2000 EX-23.2 8 0008.txt CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.2 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. 333-35914. /s/ ARTHUR ANDERSEN LLP ----------------------- ARTHUR ANDERSEN LLP Houston, Texas June 1, 2000 EX-23.3 9 0009.txt CONSENT OF RYDER SCOTT COMPANY EXHIBIT 23.3 [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 Amendment No. 1 to the Registration Statement of 3TEC Energy Corporation on Form S-2, dated June 2, 2000, of our summary letters, dated December 16, 1999, May 25, 2000 and May 31, 2000, regarding our estimates of 3TEC Energy Corporation's proved oil and natural gas reserves as of December 31, 1999. We further 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 CWR Resources, Inc. RYDER SCOTT COMPANY, L.P. /s/ Ryder Scott Company, L.P. ----------------------------- Houston, Texas June 2, 2000 EX-23.4 10 0010.txt CONSENT OF H.J. GRUY AND ASSOCIATES, INC. EXHIBIT 23.4 [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 June 2, 2000. H. J. GRUY & ASSOCIATES, INC. By: /s/ Sylvia Castilleja ------------------------ Sylvia Castilleja Senior Reservoir Consultant June 2, 2000 Houston, Texas EX-23.5 11 0011.txt CONSENT OF LEE KEELING & ASSOCIATES, INC. EXHIBIT 23.5 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS Board of Directors 3TEC Energy Corporation Houston, Texas As independent petroleum engineers, we hereby consent to all references to our Firm and regarding our estimates of 3TEC Energy Corporation's proved oil and gas reserves as of December 31, 1998 in Registration Statement No. 333-35914, and all amendments thereto, of 3TEC Energy Corporation (formerly Middle Bay Oil Company, Inc.). LEE KEELING AND ASSOCIATES, INC. By: /s/ Kenneth Renberg ------------------- Name: Kenneth Renberg Title: Vice-President Tulsa, Oklahoma June 1, 2000 EX-27 12 0012.txt FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 3,916,880 0 9,823,915 0 0 14,616,107 193,511,519 42,001,016 167,860,433 8,749,938 96,723,844 0 16,361,152 68,494,435 (25,738,453) 167,860,433 16,914,573 17,252,585 4,581,129 12,488,344 0 0 2,084,499 4,721,841 1,605,424 2,856,327 0 0 0 2,856,327 0.475 0.355
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