-----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, Na5QVPNpW9xsMqEharGbW2Z8GwUIOy7RDmJ/xjjBgl4T6imitx5t53ICuz5DvuQO JSPDQvfd3DL5d70iZKTeDQ== /in/edgar/work/20000814/0000899243-00-001974/0000899243-00-001974.txt : 20000921 0000899243-00-001974.hdr.sgml : 20000921 ACCESSION NUMBER: 0000899243-00-001974 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 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: 10QSB SEC ACT: SEC FILE NUMBER: 001-14745 FILM NUMBER: 700015 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: TWO SHELL PLZ STREET 2: 777 WALKER STE 2400 CITY: HOUSTON STATE: TX ZIP: 77002 FORMER COMPANY: FORMER CONFORMED NAME: MIDDLE BAY OIL CO INC DATE OF NAME CHANGE: 19930504 10QSB 1 0001.txt FOR THE QUARTER ENDED JUNE 30, 2000 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ______ to _______ Commission File No. 001-14745 3TEC ENERGY CORPORATION (Exact name of small business issuer as specified in its charter) DELAWARE 63-1081013 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 777 WALKER STREET TWO SHELL PLAZA, SUITE 2400 HOUSTON, TX 77002 (Address of principal executive offices) (713)821-7100 (Issuer's telephone number) N/A (Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: Common stock, $0.02 par value 14,433,662 shares as of August 11, 2000 Transitional Small Business Disclosure Format (check one) Yes [ ] No [X] 3TEC ENERGY CORPORATION AND SUBSIDIARIES INDEX PAGE NO. ---- PART I. CONSOLIDATED FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets- June 30, 2000 (Unaudited) and December 31, 1999 (Audited).... 1 Consolidated Statements of Operations (Unaudited)- Three and six months ended June 30, 2000 and 1999............ 2 Consolidated Statements of Cash Flows (Unaudited)- Six months ended June 30, 2000 and 1999...................... 3 Notes to Consolidated Financial Statements (Unaudited).......... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 12 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders.............. 18 Item 6. Exhibits and Reports on Form 8-K................................. 19 PART I. CONSOLIDATED FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS 3TEC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JUNE 30 DECEMBER 31 2000 1999 ----------- ----------- ASSETS (Unaudited) (Audited) CURRENT ASSETS Cash and cash equivalents $ 1,624,961 $ 6,141,153 Accounts receivable 20,954,921 9,453,551 Other current assets 1,072,415 176,226 -------------- --------------- Total current assets 23,652,297 15,770,930 PROPERTY (AT COST) Oil and gas-successful efforts method 251,443,325 168,840,499 Other 1,522,359 1,141,879 -------------- --------------- 252,965,684 169,982,378 Accumulated depreciation, depletion and amortization (46,414,350) (38,208,298) -------------- --------------- 206,551,334 131,774,080 OTHER ASSETS 1,637,525 1,698,496 -------------- --------------- TOTAL ASSETS $ 231,841,156 $ 149,243,506 ============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable-trade $ 8,461,614 $ 5,726,569 Revenue payable 1,574,245 1,576,731 Accounts payable-Stockholder Dissenters - 1,118,678 Other current liabilities 943,952 347,733 -------------- --------------- Total current liabilities 10,979,811 8,769,711 LONG-TERM DEBT 71,000,000 87,500,000 SENIOR SUBORDINATED CONVERTIBLE NOTES 13,223,844 13,223,844 DEFERRED INCOME TAXES 4,427,477 290,643 OTHER LIABILITIES 160,505 257,627 MINORITY INTEREST 1,256,121 1,089,044 STOCKHOLDERS' EQUITY Preferred stock, $0.02 par, 20,000,000 shares authorized, 266,667 designated Series B, 2,300,000 shares designated Series C and 725,167 shares designated Series D, none other designated - - Convertible preferred stock Series B, $7.50 stated value, 266,667 shares issued and outstanding. $2,000,000 aggregate liquidation preference 3,627,000 3,627,000 Convertible preferred stock Series C, $5.00 stated value, 1,092,549 and 1,139,506 shares issued and outstanding at June 30, 2000 and December 31, 1999, respectively. $5,462,745 aggregate liquidation preference 4,963,655 5,198,440 Convertible preferred stock Series D, $24.00 stated value, 621,930 shares issued and outstanding at June 30, 2000. $14,926,320 aggregate liquidation preference 7,758,311 - Common stock, $.02 par value, 60,000,000 shares authorized, 14,492,656 and 5,338,771 shares issued at June 30, 2000 and December 31, 1999, respectively 288,609 106,778 Additional paid-in capital 135,164,966 57,775,199 Accumulated deficit (19,960,303) (27,408,062) Treasury stock; 69,807 and 7,258 shares at June 30, 2000 and December 31, 1999, respectively (1,048,840) (1,186,718) -------------- --------------- TOTAL STOCKHOLDERS' EQUITY 130,793,398 38,112,637 COMMITMENTS AND CONTINGENCIES -------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 231,841,156 $ 149,243,506 ============== ===============
See accompanying notes to unaudited consolidated financial statements. 1 3TEC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 (Unaudited) (Unaudited) (Unaudited) (Unaudited) 2000 1999 2000 1999 --------------- -------------- -------------- ------------- REVENUE Oil and gas sales and plant income $ 21,590,921 $ 3,600,282 $ 38,505,494 $ 6,672,346 Gain on sale of properties 17,788 232,892 26,681 307,190 Other 164,996 122,157 494,115 224,934 ------------ ------------ ------------ ------------ TOTAL REVENUE 21,773,705 3,955,331 39,026,290 7,204,470 ------------ ------------ ------------ ------------ COSTS AND EXPENSES Lease operating, production taxes and plant costs 5,435,359 1,556,117 10,016,488 3,016,658 Geological and geophysical 38,155 72,159 163,416 141,716 Dry hole costs 17,018 1,442 29,261 63,631 Depreciation, depletion and amortization 4,626,945 1,230,910 8,547,381 2,580,540 Interest expense 2,184,926 509,689 4,269,425 1,021,445 General and administrative 1,957,569 1,025,321 3,654,622 2,145,638 Other 8,410 - 76,133 - ------------ ------------ ------------ ------------ TOTAL COSTS AND EXPENSES 14,268,382 4,395,638 26,756,726 8,969,628 INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT), MINORITY INTEREST AND DIVIDENDS TO PREFERRED STOCKHOLDERS 7,505,323 (440,307) 12,269,564 (1,765,158) Minority Interest 60,001 (54,003) 102,401 (63,773) Income tax expense (benefit) 2,531,411 (146,516) 4,136,835 (556,010) ------------ ------------ ------------ ------------ NET INCOME (LOSS) 4,913,911 (239,788) 8,030,328 (1,145,375) Dividends to preferred stockholders 322,477 142,833 582,567 285,666 ------------ ------------ ------------ ------------ NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ 4,591,434 $ (382,621) $ 7,447,761 $ (1,431,041) ============ ============ ============ ============ NET INCOME (LOSS) PER COMMON SHARE BASIC $ 0.71 $ (0.13) $ 1.20 $ (0.50) ============ ============ ============ ============ DILUTED $ 0.50 $ (0.13) $ 0.87 $ (0.50) ============ ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING BASIC 6,428,700 2,843,856 6,220,892 2,843,693 ============ =========== ============ ============ DILUTED 10,160,863 2,843,856 9,723,924 2,843,693 ============ =========== ============ ============
See accompanying notes to unaudited consolidated financial statements. 2 3TEC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30 (Unaudited) (Unaudited) 2000 1999 ------------- ------------- OPERATING ACTIVITIES Net income (loss) $ 8,030,328 $ (1,145,375) Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation, depletion and amortization 8,547,381 2,580,540 Dry hole costs 29,261 63,631 Gain on sale of properties (26,681) (307,190) Deferred income taxes 4,136,835 (560,471) Minority interest 102,401 (63,773) Other charges - 100,000 ------------- ------------ Cash flow from operations before changes in current assets and liabilities 20,819,525 667,362 Changes in current assets and liabilities net of acquisition effects: Increase in accounts receivable and other current assets (11,606,380) 1,108,599 Decrease in accounts payable, revenue payable and other current liabilities 1,017,005 (1,536,610) ------------- ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 10,230,150 239,351 INVESTING ACTIVITIES Proceeds from sales of properties 237,746 321,890 Acquisition of Magellan Exploration LLC, net of cash acquired (269,937) - Additions to oil and gas properties - acquisitions (55,442,670) - Additions to oil and gas properties - drilling and other (8,238,308) (1,242,641) Additions to other assets (175,304) (10,677) Advances to stockholder - (3,475) ------------- ------------ NET CASH USED IN INVESTING ACTIVITIES (63,888,473) (934,903) FINANCING ACTIVITIES Proceeds from long term debt 58,100,000 1,036,000 Proceeds from issuance of common stock 66,772,195 - Principal payments on long term debt (74,600,000) - Preferred stock dividends (421,479) (72,564) Treasury stock purchase - Alabama dissenters 137,878 - Debt, common stock and preferred stock issue and registration costs (846,463) (48,518) ------------- ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 49,142,131 914,918 Net (decrease) increase in cash and cash equivalents (4,516,192) 219,366 Cash and cash equivalents-Beginning 6,141,153 1,040,096 ------------- ------------ Cash and cash equivalents-Ending $ 1,624,961 $ 1,259,462 ============= ============ See accompanying notes to unaudited consolidated financial statements. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 4,213,984 $ 1,187,786 ============= ============ Income taxes $ - $ - ============= ============ Non-cash investing and financing activities: Preferred dividends paid-in-kind $ 118,095 $ - ============= ============ Preferred dividends incurred but not paid $ 219,096 $ 142,833 ============= ============ Common stock and warrants issued in acquisition of Magellan Exploration LLC $ 10,572,935 $ - ============= ============ Preferred stock issued in acquisition of Magellan Exploration LLC $ 7,453,457 $ - ============= ============
See accompanying notes to unaudited consolidated financial statements. 3 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization 3TEC Energy Corporation, formerly Middle Bay Oil Company, Inc., (the "Company"), was incorporated under the laws of the state of Alabama on November 20, 1992. The Company was reincorporated in Delaware on December 7, 1999 and changed its name to 3TEC Energy Corporation. 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"), 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 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. On February 3, 2000, the Company completed the acquisition of Magellan Exploration LLC ("Magellan") for consideration of approximately $18.7 million. On May 31, 2000, the Company acquired natural gas and oil properties in East Texas operated by C.W. Resources, Inc. (the "CWR Properties") for a purchase price of approximately $51.9 million. On June 30, 2000, the Company completed an underwritten public offering of 8.050 million shares of common stock for net proceeds of $66.8 million (the "Offering"). The Company's common stock is quoted on the Nasdaq National Market under the symbol "TTEN". 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. Basis of Presentation In management's opinion, the accompanying consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the consolidated financial position of the Company as of June 30, 2000 and December 31, 1999 and the consolidated results of operations and consolidated cash flows for the periods ended June 30, 2000 and 1999. The consolidated financial statements were prepared pursuant to the rules and regulations of the Securities and Exchange Commission. An independent accountant has not audited the accompanying consolidated financial statements. Certain information and disclosures normally included in annual audited financial statements prepared in accordance with generally accepted accounting principles have been omitted, although the Company believes that the disclosures made are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the Company's financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999. Principles of Consolidation The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and Enex Resources Corporation ("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. 4 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Earnings Per Share Basic earnings and loss per common share are based on the weighted average shares outstanding without any dilutive effects considered. Diluted earnings and loss per share reflect dilution from all potential common shares, including options, warrants and convertible preferred stock and convertible notes. Diluted loss per share does not include the effect of any potential common shares if the effect would be to decrease the loss per share. For the three and six months ended June 30, 1999, the Company had a weighted average of 487,371 and 479,138 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 June 30, 1999, the Company had outstanding convertible preferred stock that was convertible into 379,609 shares of common stock. The convertible preferred stock and dividends of $142,833 and $285,666 were not reflected in the computation of diluted earnings per share for the three and six months ended June 30, 1999 because the effect of the assumed conversion and dividends of these preferred shares would have an antidilutive effect on the computation of diluted loss per share. Basic and diluted earnings per share for the three and six month periods ended June 30, 2000 was determined as follows (in thousands):
Three Months Six Months Ended Ended June 30, 2000 June 30, 2000 ------------- ------------- Basic net income attributable to common stockholders $ 4,591 $7,448 Plus preferred stock dividends 322 583 Plus interest expense (net of tax) on subordinated convertible notes 196 393 ------- ------ Fully diluted net income attributable to common stockholders $ 5,109 $8,424 ======= ====== Outstanding Outstanding Shares Shares ----------- ----------- Basic shares outstanding (weighted average shares) 6,429 6,221 Plus potentially dilutive securities: Dilutive options and warrants applying treasury stock method 1,179 1,064 Shares from conversion of subordinated convertible notes 1,469 1,469 Shares from conversion of Series B preferred stock 91 91 Shares from conversion of Series C preferred stock 371 375 Shares from conversion of Series D preferred stock 622 504 ------- ------ Fully diluted shares outstanding (weighted average shares) 10,161 9,724 ======= ======
5 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) All share and per share amounts have been retroactively adjusted for a one-for- three reverse split that was approved by the Company's shareholders on January 14, 2000. Reclassifications Certain reclassifications of prior period amounts have been made to conform to the current presentation. (2) ACQUISITIONS On May 31, 2000, we completed the acquisition of the CWR Properties located in East Texas for cash consideration of approximately $51.9 million. The effective date of the acquisition was January 1, 2000 and the operations are included in the Company's consolidated financial statements beginning June 1, 2000. The CWR Properties acquisition was financed under our existing credit facility, which we amended prior to closing the acquisition. The total purchase price was allocated principally to oil and natural gas properties. On February 3, 2000, we completed the acquisition of Magellan Exploration LLC (the "Magellan Acquisition"), from certain affiliates of EnCap Investments L.L.C., a Delaware limited liability company and an investor in W/E LLC ("EnCap Investments"), and other third parties for consideration consisting of (a) 1,085,934 shares of common stock, (b) four year warrants to purchase up to 333,333 shares of common stock at $30.00 per share, (c) 617,009 shares of 5% Series D Convertible Preferred Stock with a redemption value of $24.00 per share and (d) the assignment of a performance based "back-in" working interest of 5% of Magellan's interest in 12 exploration prospects. The total purchase price of approximately $19 million was allocated principally to proved undeveloped oil and natural gas properties. On November 23, 1999, the Company completed the acquisition of oil and natural gas properties and interests, managed by Floyd Oil Company, owned by a group of private sellers (the "Floyd Oil Acquisition") for $86.8 million in cash and 503,426 shares of Company common stock. Floyd Oil Company is not affiliated with Floyd C. Wilson, Chief Executive Officer of the Company. The effective date of the acquisition was January 1, 1999 and the cost was allocated using the purchase method of accounting. The total purchase price of $90.2 million, considering post-closing adjustments and transaction costs, was allocated principally to oil and natural gas properties. The following pro forma data presents the results of the Company for the six months ended June 30, 1999, as if the Floyd Oil Acquisition and the CWR Acquisition had occurred on January 1, 1999, and the results of the Company for the six months ended June 30, 2000 as if the CWR Acquisition had occurred on January 1, 2000. The pro forma data assumes the acquisition of the respective properties and the debt and equity financing transactions related to these acquisitions. The pro forma results are presented for comparative purposes only and are not necessarily indicative of the results which would have been obtained had the acquisitions been consummated as presented. The pro forma financial data does not include the financial information for Magellan, which is not significant with respect to the operations of the Company for the period presented (in thousands, except per share amounts): 6 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (2) ACQUISITIONS (continued)
Pro Forma Pro Forma Six Months Ended Six Months Ended June 30, 2000 June 30, 1999 (Unaudited) (Unaudited) ----------- ----------- Total revenues $43,918 $20,727 Net income (loss) attributable to common stockholders 9,731 (1,212) Net income (loss) per basic share attributable to common stockholders 0.68 (0.07)
(3) COMMON STOCK, WARRANT AND SENIOR SUBORDINATED CONVERTIBLE NOTE SALE TO W/E ENERGY COMPANY, LLC ("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 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. 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 in exchange 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 6). W/E LLC is currently the Company's largest shareholder. (4) RELATED PARTY TRANSACTIONS 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. W/E LLC is a significant shareholder of the Company. Gary R. Christopher, a shareholder and director of the Company, is employed by Kaiser-Francis Oil Co., which is a significant shareholder of the Company. The Company paid EnCap Investments a fee of $500,000 in connection with a private equity shelf facility related to the CWR Properties acquisition. As required by the Company's $250 million Credit Facility, the private equity shelf facility would have allowed the Company to require EnCap Investments to purchase up to $20 million of a new class of exchangeable preferred stock from the Company. Upon completion of the Offering, the shelf facility expired. 7 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (5) LONG-TERM DEBT Long-term debt at June 30, 2000 and December 31, 1999, consisted of the following (in thousands): June 30, December 31, 2000 1999 ------- ------------ $250 million Credit Facility $71,000 $87,500 Less current maturities --- --- ------- ------- Long term debt excluding current maturities $71,000 $87,500 ======= ======= 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. In connection with the CWR Acquisition, we amended our Facility to increase the borrowing base to $145 million. In addition, Bank of Montreal became a participant in and syndication agent for this Facility. The Company's borrowing base had been initially set at $95 million, with $71 million outstanding at June 30, 2000. The Facility calls for the borrowing base to 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 a low of zero to a high of 50 basis points or LIBOR plus basis points increasing from a low of 150 to a high of 212.5 as amounts outstanding increase as a percentage of the borrowing base. The Facility required a $20 million payment of principal on or before December 31, 2000, subject to the redetermination of our borrowing base on November 1, 2000. On June 30, 2000, we reduced the total amount outstanding under the Facility by $67.3 million through the use of the proceeds from the Offering, which satisfied the principal payment requirement. As a result of this, the borrowing base was set at $125 million, effective June 30, 2000. At June 30, 2000, we were paying an average of approximately 8.78% per annum interest on the entire principal balance of the Facility of $71 million. As revised, the Facility matures on May 31, 2003. The borrowings under the Facility are secured by substantially all of the Company's oil and natural gas properties. As defined, 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 contains 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. . 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 $2 million, a change of control of the Company or Floyd C. Wilson ceasing to act as Chief Executive Officer. 8 3TEC ENERGY CORPORATION AND SUBSIDARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (6) 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, approximately $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 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 by the Company, 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 a total of 1,469,316 common shares of Company common stock at a conversion price of $9.00 per share. 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. (7) STOCKHOLDERS' EQUITY Common Stock On June 30, 2000, the Company completed its public offering of 7 million shares of the Company's common stock (priced at $9.00 per share), plus an additional 1,050,000 shares subject to an option granted to the underwriters to cover overallotments. The net proceeds, approximately $66.8 million, were used primarily to repay a portion of the outstanding debt under the amended credit facility. Series D Preferred Stock In connection with the acquisition of Magellan, the Company issued 617,009 shares of Series D Preferred Stock, par value $0.02 per share, with a redemption value of $24.00 per share. While the per share redemption and dividend amounts vary, the rights as to dividends and liquidation payments of all outstanding issues of Preferred Stock are equal. Shares of Series D Preferred Stock earn dividends at 5% per annum cumulative, payable semi-annually on March 31 and September 30 of each year, when, as and if authorized and declared by the board of directors. For a period of three years from the closing date of the Magellan transaction, the Company may pay the dividends at its option in cash or in additional shares of Series D Preferred Stock. Dividends were paid on the outstanding shares of Series D Preferred Stock as of March 31, 2000 in the form of additional shares of Series D Preferred Stock. 9 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (7) STOCKHOLDERS' EQUITY (continued) Holders of Series D Preferred Stock have the right to convert one share of Series D Preferred Stock into one share of common stock. Upon thirty days written notice, the Company has the right to redeem any or all shares of Series D Preferred Stock for $24.00 per share plus any accrued and unpaid dividends. Holders of the Series D Preferred Stock have no right to require the Company to redeem the Series D Preferred Stock. In the event of liquidation, dissolution, winding-up or merger of the Company, the holders of Series D Preferred Stock are entitled to receive distributions of $24.00 per share of Series D Preferred Stock plus any accrued but unpaid dividends before any holders of common stock or junior preferred stock receive any distributions. A majority of the holders of Series D Preferred Stock must consent to certain actions by the Company, which would adversely affect any holder's rights and preferences. (8) COMMITMENTS AND CONTINGENCIES On November 18, 1999, the Company's shareholders approved a reincorporation of the Company from Alabama to Delaware (See Note 1). The Alabama Code has a shareholder dissent provision that allows a shareholder to dissent from the reincorporation and demand cash payment equal to the fair value of the common stock owned at the date of the reincorporation. Before the November 18, 1999 shareholders meeting, the Company received shareholder dissents representing ownership of 99,438 shares of common stock. Over the period December 15, 1999 to January 25, 2000, the Company received formal demands for payment from the dissenting shareholders (the "dissenters"). The Company made an offer to the dissenters on March 14, 2000 and the dissenters made a counteroffer in late March. On May 26, 2000, the Company agreed to a settlement with the dissenters to purchase 62,459 shares of common stock for a total of $980,800, including interest. The settlement closed on June 30, 2000 and the shares are held by the Company as treasury stock. A shareholder holding 36,979 shares of common stock agreed to withdraw his dissent. As of June 30, 2000, 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. (9) HEDGING ACTIVITIES In February 2000, the Company entered into fixed price swap agreements covering 2,000 barrels of oil per day for the period March through October 2000 at a weighted average NYMEX West Texas Intermediate price of $25.96 per barrel. During the three and six month period ending June 30, 2000, the Company's oil revenues were reduced by the effect of our hedging activities by $306,635 and $407,540, respectively. The fair market value of the open position at June 30, 2000 was an unrealized loss of approximately $1,469,000. 10 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (9) HEDGING ACTIVITIES (continued) In April 2000, the Company entered into a forward sale agreement for 3,750 Mcf of gas per day from May through August 2000, at an average price of $3.07 per Mcf. During the three month period ending June 30, 2000, the Company's gas revenues were reduced by the effect of our hedging activities by $143,675. The fair market value of the forward position at June 30, 2000 was an unrealized loss of approximately $449,000. (10) SUBSEQUENT EVENTS In July 2000, the Company sold certain non-core properties to various third parties for net proceeds of approximately $4.7 million. The effective date of the sale was July 1, 2000. The proceeds from the sale were used to repay a portion of the outstanding debt under the amended credit facility. At August 7, 2000, the outstanding debt under the credit facility was $62 million. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This quarterly report on Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve risks and uncertainties and other factors beyond the control of the Company. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and that actual results or developments may differ materially from those projected in the forward-looking statements. OVERVIEW We are engaged in the acquisition, development, production and exploration of oil and natural gas reserves. Our properties are concentrated in East Texas and the Gulf Coast region, both onshore and in the shallow waters of the Gulf of Mexico. We also own significant properties in the Permian and San Juan basins and in the Mid-Continent region. Our management and technical staff have substantial experience in each of these areas. As of December 31, 1999, on a pro forma basis including the recent acquisition of Magellan Exploration LLC ("Magellan") and the properties in East Texas operated by C.W. Resources, Inc. (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. We have increased our reserves and production principally through acquisitions. We focus on properties that have a substantial proved reserve component and which management believes to have additional exploitation opportunities. In early 2000, through the acquisition of Magellan, we acquired a number of drilling prospects, covered by an extensive 3-D seismic database, that we believe have exploration potential. We have assembled an experienced management team and technical staff with expertise in property acquisitions and development, reservoir engineering, exploration and financial management. We underwent a change of control in August 1999, in a transaction in which W/E Energy Company LLC invested $21.4 million in cash and oil and natural gas properties for common stock, warrants and subordinated notes representing at that time approximately 36% of our then outstanding common stock. Since our formation in 1992, we have grown principally through several acquisitions of proved properties in the Gulf Coast and Mid-Continent regions. Acquisitions made in 1997 and 1998 significantly increased our reserves and production but were primarily nonoperated properties with high per Mcfe lease operating costs. Following the change in control discussed above, during the second half of 1999 and the first half of 2000, we closed several transactions including the Floyd Oil Properties acquisition, the Magellan acquisition and the CWR Properties acquisition 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. On May 31, 2000, we acquired the CWR Properties for cash consideration of approximately $51.9 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). At December 31, 1999, the CWR Properties had estimated 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. 12 On June 30, 2000, the Company completed its public offering of 7 million shares of the Company's common stock (priced at $9.00 per share), plus an additional 1,050,000 shares subject to an option granted to the underwriters to cover overallotments. The net proceeds, approximately $66.8 million, were used primarily to repay a portion of the outstanding debt under the amended credit facility. 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. As of June 30, 2000, there was no impairment related to the oil and natural gas properties. 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 natural gas and oil production. Our pro forma EBITDAX, including the Floyd Oil Properties and the CWR Properties, for the six months ended June 30, 2000 and 1999 was $28.9 million and $4.2 million, respectively, compared to historical EBITDAX of $25.1 million and $1.6 million, respectively. 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. 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 dividends of approximately $570,000 per year on the Series C Preferred Stock in cash and dividends of $740,000 per year on the Series D Preferred Stock, which we may pay in either cash or in additional shares of Series D Preferred Stock during the three years ending February 1, 2003. We are obligated to pay interest on the convertible subordinated notes of approximately $1.2 million per year. Our primary source of financing for acquisitions has been borrowings under our credit facility (the "Facility"), discussed below. We have also recently utilized 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 equity or debt financing and otherwise access the capital markets should those sources of 13 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 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. In connection with the CWR Properties acquisition, the Facility's borrowing base was increased to $145 million through November 1, 2000. The borrowing base will be redetermined semi- annually on May 1 and November 1 of each year. Interest under the Facility accrues at our option at a rate calculated at the Company's option 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 to a high of 212.5 as amounts outstanding increase as a percentage of the borrowing base. The 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. On June 30, 2000, we reduced the total amount outstanding under the Facility by $67.3 million from proceeds from the public offering of equity securities discussed below, satisfying the principal payment requirement. As a result of this payment, the borrowing base was set at $125 million, effective June 30, 2000. At June 30, 2000, we were paying an average of approximately 8.78% per annum interest on the entire principal balance of the Facility of $71 million. As revised, the Facility matures on May 31, 2003. The borrowings under the Facility are secured by substantially all of our properties. At June 30, 2000, the amount available to be borrowed under the Facility was $54 million. In connection with this Facility, we are required to adhere to certain affirmative and negative covenants. The loan agreement contains a number of dividend restrictions and restrictive covenants which, among other things, require the maintenance of a minimum current ratio and interest coverage ratio. On June 30, 2000, the Company completed its public offering of 7 million shares of the Company's common stock (priced at $9.00 per share), plus an additional 1,050,000 shares subject to an option granted to the underwriters to cover overallotments. The net proceeds, approximately $66.8 million, were used to repay a portion of the outstanding debt under the amended credit facility. We generally sell our oil at local field prices paid by the principal purchasers of oil. The majority of our natural gas production is sold at spot prices. Accordingly, we are generally subject to the commodity prices for these resources as they vary from time to time. Prices since mid-1999 have increased significantly, 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 (approximately 62% of our current oil production) for the period March through October 2000 at an average price of $25.96 per barrel. 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 gas per day (approximately 8% of our current gas production) for the period May through August 2000 at an average price of $3.07 per Mcf. Our revenues and the value of our oil and gas properties have been and will be affected by changes in natural gas and oil prices. Our ability to maintain current borrowing capacity and to continue to obtain additional capital on attractive terms is also substantially dependent on natural gas and oil prices. These prices are subject to significant seasonal and other fluctuations that are beyond our ability to control or predict. During the second quarter 2000, we received an average of $3.46 per Mcf of gas and $25.19 per barrel of oil. Although the level of 14 inflation affects some costs and expenses, 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 and 2000, our 1999 change of control and our current capital structure, comparisons of our results of operations for interim periods in 2000 may not be meaningful. You should read the following discussion and analysis together with our audited consolidated financial statements and the related notes for the fiscal year ended December 31, 1999, filed in our 1999 Form 10-KSB. As stated above, on June 30, 2000, we issued 8.050 million shares of our common stock in an underwritten public offering. Therefore, the number of basic shares issued and outstanding at such date increased materially from 6.4 million to 14.4 million. Because this event occurred on the last day of the quarter, the effect of the additional shares on reported per share data through June 30, 2000, was negligible. The full effect of the issuance of the additional shares will appear in third quarter and subsequent periods per share data. The following table reflects certain summary operating data for the periods presented:
Three Months Ended Six Months Ended June 30, June 30, -------- -------- 2000 1999 2000 1999 ------ ------ ------- ------ Net Production Data : --------------------- Oil and Liquids (MBbls) 291 106 599 251 Natural Gas (MMcf) 4,052 865 7,631 1,795 Equivalent Production (MMcfe) 5,798 1,501 11,225 3,301 Average Sales Price: (1) ------------------------ Oil and Liquids (per Bbl) $25.19 $16.32 $ 24.89 $12.61 Natural Gas (per Mcf) 3.46 2.07 3.04 1.83 Equivalent price (per Mcfe) 3.68 2.40 3.39 1.97 Expenses ($ per Mcfe): ---------------------- Oil and gas operating (2) $ 0.94 $ 1.04 $ 0.89 $ 0.91 General and administrative 0.34 0.68 0.33 0.65 Depreciation and depletion (3) 0.80 0.82 0.76 0.78 Cash margin ($ per Mcfe) (4) 2.40 0.68 2.17 0.41
(1) Includes effect of our hedging activities. (2) Includes lease operating costs, production taxes and ad valorem taxes. (3) Represents depreciation, depletion and amortization, excluding impairments. (4) Represents average equivalent price per Mcfe (as defined in (1)) less oil and gas operating expenses per Mcfe and general and administrative expenses per Mcfe. THREE MONTHS ENDED JUNE 30, 2000, COMPARED WITH THREE MONTHS ENDED JUNE 30, 1999 REVENUE. Total revenue for the three months ended June 30, 2000, was $22 million, an increase of $18 million (450%) over total revenue for the three months ended June 30, 1999. Natural gas revenues for the three months ended June 30, 2000 were $14 million, approximately 600% higher than the natural gas revenues of $2 million for the three months ended June 30, 1999. Oil revenues for the three months ended June 30, 2000 were $8 million, approximately 300% higher than the oil revenues of $2 million for the three months ended June 30, 1999. Natural gas production volumes increased 368% and oil production volumes increased by approximately 175% in the three months ended June 30, 2000. Hedging activities reduced the Company's revenue during the three months ended June 30, 2000 by approximately $307,000 related to our oil production hedging and by approximately $144,000 related to our natural gas hedging. Average natural gas sale prices increased 67% for the three months ended June 30, 2000 compared with the three months ended June 30, 1999, while oil prices 15 increased 54% during the same period. For the three months ended June 30, 2000, approximately 65% of the dollar amount of our product sales were natural gas. GAIN ON PROPERTY SALES, INTEREST AND OTHER INCOME. There were no significant oil and gas property sales by the Company during the periods ended June 30, 2000 and June 30, 1999. Other income for the three months ended June 30, 2000 of approximately $165,000, consisted principally of interest income, lease bonuses and delay rentals. EXPENSES. Total expenses for the three months ended June 30, 2000 were $14 million, a $10 million increase over the $4 million for the three months ended June 30, 1999. Comparability of total expenses was affected by the acquisition of the Floyd Oil Properties, Magellan, and the CWR Properties. Lease operating expense of $5 million, or approximately $0.94 per Mcfe, increased by approximately $3 million from the three months ended June 30, 1999, when it was approximately $1.04 Mcfe. Depreciation and depletion expense for the three months ended June 30, 2000 was $5 million, or approximately $0.80 per Mcfe, compared to $1 million or approximately $0.82 per Mcfe for the three months ended June 30, 1999. General and administrative expense was $2 million, or approximately $0.34 per Mcfe, compared to $1 million or approximately $0.68 per Mcfe for the three months ended June 30, 1999. The general and administrative expense increase was primarily the result of expenses associated with the Company's significant growth. Interest expense of $2.2 million, increased $1.7 million (329%) for the three months ended June 30, 2000, the increase reflecting increased borrowings under our credit facility for acquisitions and higher interest rates. DIVIDENDS TO PREFERRED STOCKHOLDERS. Dividends to preferred stockholders of approximately $322,000 in the three months ended June 30, 2000 increased 125% over the three months ended June 30, 1999. The increase of dividends was due to the issuance of the shares Series D Convertible Preferred Stock in connection with the acquisition of Magellan, which began accruing dividends on February 3, 2000. SIX MONTHS ENDED JUNE 30, 2000, COMPARED WITH SIX MONTHS ENDED JUNE 30, 1999 REVENUE. Total revenue for the six months ended June 30, 2000, was $39 million, an increase of $32 million (457%) over total revenue for the six months ended June 30, 1999. Natural gas revenues for the six months ended June 30, 2000 were $23 million, approximately 667% higher than the natural gas revenues of $3 million for the six months ended June 30, 1999. Oil revenues for the six months ended June 30, 2000 were $15 million, approximately 400% higher than the oil revenues of $3 million for the six months ended June 30, 1999. Natural gas production volumes increased 325% and oil production volumes increased 139% in the six months ended June 30, 2000. Hedging activities reduced the Company's revenue during the six months ended June 30, 2000 by approximately $408,000 on our oil production hedging and $144,000 on our natural gas hedging. Average natural gas sale prices increased 66% for the six months ended June 30, 2000 compared with the six months ended June 30, 1999, while oil prices increased 97% during the same period. For the six months ended June 30, 2000, approximately 61% of the dollar amount of our product sales were natural gas. GAIN ON PROPERTY SALES, INTEREST AND OTHER INCOME. There were no significant oil and gas property sales by the Company during the periods ended June 30, 2000 and June 30, 1999. Other income for the six months ended June 30, 2000 of approximately $494,000 consisted principally of interest income, lease bonuses, delay rentals and a lawsuit settlement. EXPENSES. Total expenses for the six months ended June 30, 2000 were $27 million, a $18 million increase over the $9 million for the six months ended June 30, 1999. Comparability of total expenses was affected by the acquisition of the Floyd Oil Properties, Magellan, and the CWR Properties. Lease operating expense of $10 16 million, or approximately $0.89 per Mcfe, increased by approximately $7 million from the six months ended June 30, 1999, when it was approximately $0.91 per Mcfe. Depreciation and depletion expense for the six months ended June 30, 2000 was $9 million, or approximately $0.76 per Mcfe, compared to $3 million or approximately $0.78 per Mcfe for the six months ended June 30, 1999. General and administrative expense was $4 million, or approximately $0.33 per Mcfe, compared to $2 million or approximately $0.65 per Mcfe for the six months ended June 30, 1999. The general and administrative expense increase was primarily the result of the Company's significant growth. Interest expense of $4 million, increased $3 million (300%) for the six months ended June 30, 2000, the increase reflecting increased borrowings under our credit facility for acquisitions and higher interest rates. DIVIDENDS TO PREFERRED STOCKHOLDERS. Dividends to preferred stockholders of approximately $583,000 in the six months ended June 30, 2000 increased 104% over the six months ended June 30, 1999. The increase of dividends was due to the issuance of the shares Series D Convertible Preferred Stock in connection with the acquisition of Magellan, which began accruing dividends on February 3, 2000. CURRENT ACTIVITIES As of August 7, 2000, there were two wells drilling in East Texas. Three wells were being completed, two in East Texas and one in the Breton Sound Block 34 field, offshore Louisiana. 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 consolidated financial condition or consolidated results of operations. In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation: An Interpretation of APB 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. 17 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Shareholders of the Company was held May 24, 2000 for the purpose of voting on the following items: 1. The election of the five (5) directors nominated by the Company. 2. The ratification of the appointment of KPMG, LLP as the Company's independent auditors for the current fiscal year. 3. The approval of the 3TEC Energy Corporation 2000 Stock Option Plan The following table summarizes the tabulation of votes with respect to the foregoing matters: Proposal 1: For Against Abstain ---- ------- ------- Election of five (5) directors as follows: Floyd C. Wilson 5,097,349 0 1,149 Gary R. Christopher 5,097,349 0 1,016 Stephen W. Herod 5,097,349 0 983 David B. Miller 5,097,349 0 1,567 D. Martin Phillips 5,097,349 0 1,567 Proposal 2: Ratification of the appointment of KPMG, LLP 5,094,174 746 4,186 as the Company's independent auditors for the current fiscal year Proposal 3: Approval of the 3TEC Energy Corporation 5,112,877 19,376 1,822 2000 Stock Option Plan 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: The following documents are filed as exhibits to this report: 2.1 Agreement and Plan of Merger, dated December 21, 1999, by and between 3TEC Energy Corporation 3TM Acquisition L.L.C., Magellan Exploration, LLC and ECIC Corporation, EnCap Energy Capital Fund III, L.P., EnCap Energy Acquisition III- B, Inc., BOCP Energy Partners, L.P., and Pel-Tex Partners, L.L.C. (Incorporated by reference to Exhibit C to Form DEF14A, filed January 11, 2000.) 2.2 Agreement and Plan of Merger, dated November 24, 1999, by and between 3TEC Energy Corporation, a Delaware corporation, and Middle Bay Oil Company, Inc., an Alabama corporation. (Incorporated by reference to Exhibit A to Form DEF14A, filed October 25, 1999.) 2.3 Form of Purchase Agreement between and among Middle Bay Oil Company, Inc. and private sellers of the properties managed by Floyd Oil Company. (Incorporated by reference to Exhibit 2.1 to Form 8-K filed December 7, 1999.) 2.4 Real Estate Exchange Agreement by and between Middle Bay Oil Company, Inc. and Floyd Oil Company. (Incorporated by reference to Exhibit 2.1 to Form 8-K/A filed December 17, 1999.) 2.5 First Amendment to Agreement and Plan of Merger, effective as of January 14, 2000, by and among 3TEC Energy Corporation, 3TM Acquisition L.L.C., Magellan Exploration, LLC, ECIC Corporation, EnCap Energy Capital Fund III, L.P., EnCap Energy Acquisition III-B, Inc., BOCP Energy Partners, L.P., and Pel-Tex Partners, L.L.C. (Incorporated by reference to Exhibit 2.1 to Form 8-K filed February 4, 2000.) 2.6 Second Amendment to Agreement and Plan of Merger, effective as of February 2, 2000, by and among 3TEC Energy Corporation, 3TM Acquisition L.L.C., Magellan Exploration, LLC, ECIC Corporation, EnCap Energy Capital Fund III, L.P., EnCap Energy Acquisition III-B, Inc., BOCP Energy Partners, L.P., and Pel-Tex Partners, L.L.C. (Incorporated by reference to Exhibit 2.2 to Form 8-K filed February 4, 2000.) 2.7 Form of Agreement of Sale and Purchase by and between C.W. Resources, Inc., Westerman Royalty, Inc., and Carl A. Westerman and 3TEC Energy Corporation. (Incorporated by Reference to Exhibit 10.32 to Form S-2 filed April 28, 2000.) 3.1 Certificate of Incorporation of 3TEC Energy Corporation. (Incorporated by reference to Exhibit 3.1 Form 8-K/A filed December 6, 1999.) 3.2 Certificate of Amendment to the Certificate of Incorporation of 3TEC Energy Corporation. (Incorporated by reference to Form 3.3 10-KSB filed March 30, 2000.) 3.3 Certificate of Merger of Middle Bay Oil Company, Inc. into 3TEC Energy Corporation. (Incorporated by reference to Exhibit 3.3 Form 8-K/A filed December 16, 1999.) 3.4 Bylaws of the Company. (Incorporated by reference to Exhibit C of the Company's definitive proxy statement filed October 25, 1999.) 4.1 Certificate of Designation of Series B Preferred Stock of 3TEC Energy Corporation. (Incorporated by reference to Exhibit 3.1 to Form 8-K/A filed December 16, 1999.) 4.2 Certificate of Designation of Series C Preferred Stock of 3TEC Energy Corporation. (Incorporated by reference to Exhibit 3.2 Form 8-K/A filed December 16, 1999.) 4.3 Certificate of Designation of Series D Preferred Stock of 3TEC Energy Corporation. (Incorporated by reference to Exhibit 4.3 to Form 10-QSB filed May 15, 2000.) 10.1 Securities Purchase Agreement, dated July 1, 1999 by and between the Company and 3TEC Energy Corporation. (Incorporated by reference to Exhibit C to the definitive Proxy Statement filed July 19, 1999.) 10.2 Securities Purchase Agreement, dated August 27, 1999 by and between the Company and Shoemaker Family Partners, LP. (Incorporated by reference to Exhibit 10.2 to Form 10-QSB filed November 15, 1999.) 10.3 Securities Purchase Agreement, dated August 27, 1999 by and between the Company and Shoeinvest II, LP. (Incorporated by reference to Exhibits to Exhibit 10.3 to Form 10-QSB filed November 15, 1999.) 10.4 Securities Purchase Agreement, dated October 19, 1999 between The Prudential Insurance Company of America and the Company. (Incorporated by reference to Exhibit 10.1 to Form 8-K filed November 2, 1999.) 10.5 Shareholders Agreement, dated August 27, 1999 by and among the Company, 3TEC Energy Corporation and the Major Shareholders. (Incorporated by reference to Exhibit 10.5 to Form 10-QSB filed November 15, 1999.) 10.6 Registration Rights Agreement, dated August 27, 1999 by and among the Company, 3TEC Energy Corporation, the Major Shareholders, Shoemaker Family Partners, LP and Shoeinvest II, LP. (Incorporated by reference to Exhibit 10.6 to Form 10-QSB filed November 15, 1999.) 10.7 Amendment to Registration Rights Agreement, dated October 19, 1999 by and among the Company, W/E Energy Company, L.L.C. f/k/a 3TEC Energy Company L.L.C., f/k/a 3TEC Energy Corporation, Shoemaker Family Partners, LP, Shoeinvest II, LP, and The Prudential Insurance Company of America. (Incorporated by reference to Exhibit 10.2 to Form 8-K filed November 2, 1999.) 10.8 Participation Rights Agreement, dated October 19, 1999 by and among the Company, The Prudential Insurance Company of America and W/E Energy Company L.L.C. (Incorporated by reference to Exhibit 10.3 to Form 8-K filed November 2, 1999.) 19 10.9 Employment Agreement, dated April 15, 2000 by and between Floyd C. Wilson and the Company. (Incorporated by reference to Exhibit 10.9 to Form S-2 filed April 28, 2000.) 10.10 Employment Agreement, dated May 1, 2000, by and between R.A. Walker and the Company. (Incorporated by reference to Exhibit 10.9 to Form S-2 filed April 28, 2000.) 10.11 Restated Credit Agreement by and among Middle Bay Oil Company, Inc., Enex Resources Corporation and Middle Bay Production Company, Inc. as borrowers, and Bank One, Texas, N.A. and other institutions as lenders. (Incorporated by reference to Exhibit 10.1 to Form 8-K/A filed December 17, 1999.) 10.12 Subordination Agreement, dated August 27, 1999 by and among Shoemaker Family Partners, LP, Compass Bank, and Bank of Oklahoma, National Association. (Incorporated by reference to Exhibit 10.15 to Form 10-QSB filed November 15, 1999.) 10.13 Subordination Agreement, dated August 27, 1999 by and among Shoeinvest II, LP, Compass Bank, and Bank of Oklahoma, National Association. (Incorporated by reference to Exhibit 10.16 to Form 10-QSB filed November 15, 1999.) 10.14 Letter Amendment No. 1 to Middle Bay Oil Company, Inc. Securities Purchase Agreement, dated November 23, 1999, by and between Middle Bay Oil Company, Inc. (n/k/a 3TEC Energy Corporation) and The Prudential Insurance Company of America (Incorporated by reference to Exhibit 10.21 to Form S-2 filed April 28, 2000 and replacing the unexecuted Exhibit 10.17 of Form 10-QSB filed November 15, 1999.) 10.15 Intercreditor Agreement, dated as of November 23, 1999, among Middle Bay Oil Company, Inc., Bank One Texas, N.A. and 3TEC Energy Company L.L.C. (Incorporated by reference to Exhibit 10.18 to Form S-2 filed April 28, 2000.) 10.16 Intercreditor Agreement, dated as of November 23, 1999, among Middle Bay Oil Company, Inc., Bank One Texas, N.A. and Shoemaker Family Partners, LP. (Incorporated by reference to Exhibit 10.18 to Form S-2 filed April 28, 2000.) 10.17 Intercreditor Agreement, dated as of November 23, 1999, among Middle Bay Oil Company, Inc., Bank One Texas, N.A. and Shoeinvest II, LP. (Incorporated by reference to Exhibit 10.20 to Form S-2 filed April 28, 2000.) 10.18 Amendment to Securities Purchase Agreement, dated as of November 23, 1999, among Middle Bay Oil Company, Inc. and 3TEC Energy Company L.L.C. (Incorporated by reference to Exhibit 10.22 to Form S-2 filed April 28, 2000.) 10.19 Amendment to Securities Purchase Agreement, dated as of November 23, 1999, among Middle Bay Oil Company, Inc. and Shoemaker Family Partners, LP. (Incorporated by reference to Exhibit 10.23 to Form S-2 filed April 28, 2000.) 10.20 Amendment to Securities Purchase Agreement, dated as of November 23, 1999, among Middle Bay Oil Company, Inc. and Shoeinvest II, LP. (Incorporated by reference to Exhibit 10.24 to Form S-2 filed April 28, 2000.) 10.21 Amended and Restated 1995 Stock Option and Stock Appreciation Rights Plan. (Incorporated by reference to Exhibit B to Form DEF 14A filed May 5, 1997.) 10.22 Amendment No. 1 to the Amended and Restated 1995 Stock Option and Stock Appreciation Rights Plan. (Incorporated by reference to Exhibit B to Form DEF 14A filed May 5, 1998.) 10.23 1999 Stock Option Plan. (Incorporated by reference to Exhibit E to Form DEF 14A filed October 25, 1999.) 10.24 2000 Stock Option Plan (Incorporated by reference to Exhibit A to Form DEF 14A filed on May 1, 2000.) 10.25 Second Restated Credit Agreement among 3TEC Energy Corporation, Enex Resources Corporation, Middle Bay Production Company, Inc., and Magellan Exploration, LLC, as Borrowers, and Bank One, Texas, N.A. and the Institutions named therein, as Lenders, Bank One, Texas, N.A., as Administrative Agent, Bank of Montreal as Syndication Agent and Banc One Capital Markets, Inc., as Arranger, dated May 31, 2000. (Incorporated by reference to Exhibit 10.28 to Form S-2/A filed June 6, 2000.) 10.26 First Amendment to Shareholders' Agreement by and among 3TEC Energy Corporation, the W/E Shareholders and the Major Shareholders, dated May 30, 2000. (Incorporated by reference to Exhibit 10.29 to Form S-2/A filed June 6, 2000.) 27.1 Financial Data Schedule * * Filed herewith (b) The following reports were filed on Form 8-K during the second quarter of 2000: On April 3, 2000, we filed a Form 8-K to report that our annual meeting of its shareholders would be held on May 24, 2000 and that shareholder proposals must be received not later than April 13, 2000 to be considered at the meeting. On April 25, 2000, we filed a Form 8-K to report that 3TEC Energy Corporation ("3TEC") announced April 18, 2000, that we had entered into an agreement to acquire oil and natural gas properties managed by C. W. Resources, Inc. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned, thereunto duly authorized, as of August 14, 2000. 3TEC ENERGY CORPORATION (Registrant) By: /s/ Floyd C. Wilson ------------------- Floyd C. Wilson Chief Executive Officer and Chairman By: /s/ R.A. Walker --------------- R.A. Walker President and Chief Financial Officer By: /s/ Stephen W. Herod -------------------- Stephen W. Herod Executive Vice-President By: /s/ Shane M. Bayless -------------------- Shane M. Bayless Vice President and Controller 21 EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEET AS OF JUNE 30, 2000, AND STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 1,624,961 0 20,954,921 0 0 23,652,297 252,443,325 46,414,350 231,841,156 10,979,811 74,223,840 0 16,348,966 135,453,575 (21,009,143) 231,841,156 38,505,484 39,026,290 10,016,488 26,756,726 0 0 4,269,425 12,167,163 4,136,835 7,447,761 0 0 0 7,447,761 1.20 0.87
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