-----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, JJuYsXThTj8R2+0SHCK+/DJieG3ex3Ya2AcwqQVwAOMEGfcBXIbGvsLQ27yEUTyq o7DamEzmE78rl/yDEDz3uQ== /in/edgar/work/0000899243-00-002509/0000899243-00-002509.txt : 20001115 0000899243-00-002509.hdr.sgml : 20001115 ACCESSION NUMBER: 0000899243-00-002509 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 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: 767251 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 FORM 10-Q FOR QUARTER ENDED SEPTEMBER 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 September 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 incorporation or organization) Identification No.) 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 14,510,069 shares as of October 18, 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- September 30, 2000 (Unaudited) and December 31, 1999 (Audited).... 1 Consolidated Statements of Operations (Unaudited)- Three and nine months ended September 30, 2000 and 1999............ 2 Consolidated Statements of Cash Flows (Unaudited)- Nine months ended September 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 ...................... 9 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K.............................. 14 PART I. CONSOLIDATED FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS 3TEC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 DECEMBER 31 2000 1999 ------------ ----------- ASSETS (Unaudited) (Audited) CURRENT ASSETS Cash and cash equivalents $ 1,010,886 $ 6,141,153 Accounts receivable 20,522,881 9,453,551 Other current assets 2,499,603 176,226 ------------ ------------ Total current assets 24,033,370 15,770,930 PROPERTY (AT COST) Oil and gas-successful efforts method 249,935,680 168,840,499 Other 1,630,047 1,141,879 ------------ ------------ 251,565,727 169,982,378 Accumulated depreciation, depletion and amortization (49,637,167) (38,208,298) ------------ ------------ 201,928,560 131,774,080 OTHER ASSETS 2,452,367 1,698,496 ------------ ------------ TOTAL ASSETS $228,414,297 $149,243,506 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 8,517,020 $ 5,726,569 Accrued liabilities 1,480,390 1,576,731 Series C Preferred stock redemption payable 4,786,766 - Income taxes payable 702,057 - Accounts payable-Stockholder Dissenters - 1,118,678 Other current liabilities - 347,733 ------------ ------------ Total current liabilities 15,486,233 8,769,711 LONG-TERM DEBT 55,000,000 87,500,000 SENIOR SUBORDINATED CONVERTIBLE NOTES 13,223,844 13,223,844 DEFERRED INCOME TAXES 8,405,797 290,643 OTHER LIABILITIES 350,099 257,627 MINORITY INTEREST 1,374,630 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, 0 and 1,139,506 shares issued and outstanding at September 30, 2000 and December 31, 1999, respectively. - 5,198,440 Convertible preferred stock Series D, $24.00 stated value, 621,930 shares issued and outstanding at September 30, 2000. $14,926,320 aggregate liquidation preference 7,571,553 - Common stock, $.02 par value, 60,000,000 shares authorized, 14,577,050 and 5,338,771 shares issued at September 30, 2000 and December 31, 1999, respectively 291,757 106,778 Additional paid-in capital 135,770,414 57,775,199 Accumulated deficit (11,638,190) (27,408,062) Treasury stock; 69,807 and 7,258 shares at September 30, 2000 and December 31, 1999, respectively (1,048,840) (1,186,718) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 134,573,694 38,112,637 ------------ ------------ COMMITMENTS AND CONTINGENCIES TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $228,414,297 $149,243,506 ============ ============
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1 3TEC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 (Unaudited) (Unaudited) (Unaudited) (Unaudited) 2000 1999 2000 1999 ----------- ----------- ----------- ----------- REVENUES Oil, natural gas and plant income $26,740,844 $ 4,656,156 $66,001,245 $11,328,502 Gain on sale of properties 315,175 575,287 341,856 882,477 Other 251,545 531,419 703,987 756,353 ----------- ----------- ----------- ----------- TOTAL REVENUES 27,307,564 5,762,862 67,047,088 12,967,332 ----------- ----------- ----------- ----------- EXPENSES Production Lease Operations 3,483,393 1,177,232 11,305,417 3,856,818 Production, severance and ad valorem tax 1,627,371 241,954 4,446,304 556,828 Gathering, transportation and other 651,690 14,999 1,406,591 37,197 Geological and geophysical 38,482 46,768 201,898 188,484 Dry hole - 391,477 29,261 455,108 General and administrative 1,402,038 1,112,181 4,466,659 3,048,430 Interest 1,683,960 717,917 5,953,385 1,739,362 Depreciation, depletion and amortization 4,568,645 1,466,006 13,116,023 4,046,546 Impairment - 1,688,443 - 1,688,443 Stock compensation - 729,938 - 729,938 Severance and compensation plan payments - 576,587 - 576,587 Other - 272,233 - 481,622 ----------- ----------- ----------- ----------- TOTAL EXPENSES 13,455,579 8,435,735 40,925,539 17,405,363 INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT), MINORITY INTEREST DIVIDENDS TO PREFERRED STOCKHOLDERS 13,851,985 (2,672,873) 26,121,550 (4,438,031) Minority Interest 86,171 (23,545) 188,572 (40,228) Income tax expense (benefit) 4,680,377 (686,314) 8,817,212 (1,242,324) ----------- ----------- ----------- ----------- NET INCOME (LOSS) 9,085,437 (2,010,104) 17,115,766 (3,155,479) Dividends to preferred stockholders 763,326 142,843 1,345,894 428,509 ----------- ----------- ----------- ----------- NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ 8,322,111 $(2,152,947) $15,769,872 $(3,583,988) =========== =========== =========== =========== NET INCOME (LOSS) PER COMMON SHARE BASIC $0.58 $(0.21) $1.76 $(0.39) =========== =========== =========== =========== DILUTED $0.50 $(0.21) $1.39 $(0.39) =========== =========== =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING BASIC 14,439,232 10,351,990 8,980,318 9,137,784 =========== =========== =========== =========== DILUTED 18,749,552 10,351,990 12,696,971 9,137,784 =========== =========== =========== ===========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 2 3TEC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30 (Unaudited) (Unaudited) 2000 1999 ------------ ----------- OPERATING ACTIVITIES Net income (loss) $ 17,115,766 $(3,155,479) Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation, depletion and amortization 13,116,023 4,046,546 Dry hole costs 29,261 455,108 Impairments - 1,688,443 Stock compensation expense - 729,938 Gain on sale of properties (341,856) (882,477) Deferred income taxes 8,115,155 (1,242,324) Minority interest 188,572 (40,228) Other charges 498,706 345,533 ------------ ----------- Cash flow from operations before changes in current assets and liabilities 38,721,627 1,945,060 Changes in current assets and liabilities net of acquisition effects: Accounts receivable and other current assets (12,601,526) 827,906 Accounts payable, accrued liabilities and other current liabilities 1,018,601 (1,330,626) ------------ ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 27,138,702 1,442,340 INVESTING ACTIVITIES Proceeds from sales of properties 5,024,612 3,614,453 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 (14,106,303) (1,827,614) Additions to other assets (568,730) (251,680) Advances from stockholder - 173,115 ------------ ----------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (65,363,028) 1,708,274 FINANCING ACTIVITIES Proceeds from long term debt 58,100,000 1,036,000 Principal payments on long term debt (90,600,000) - Proceeds from issuance of common stock 68,115,052 9,975,000 Proceeds from subordinated notes issued - 10,850,000 Preferred stock dividends (1,249,068) (242,293) Treasury stock purchase - Alabama dissenters 137,878 - Debt, common stock and preferred stock issue and registration costs (1,409,803) (48,518) Other - (684,434) ------------ ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 33,094,059 20,885,755 Net (decrease) increase in cash and cash equivalents (5,130,267) 24,036,369 Cash and cash equivalents-Beginning 6,141,153 1,040,096 ------------ ----------- Cash and cash equivalents-Ending $ 1,010,886 $25,076,465 ============ =========== See accompanying notes to unaudited consolidated financial statements. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 6,153,687 $ 1,446,736 ============ =========== Income taxes $ - $ - ============ =========== Non-cash investing and financing activities: Preferred dividends paid-in-kind $ 118,095 $ - ============ =========== Preferred dividends incurred but not paid $ 97,014 $ 186,216 ============ =========== 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 $ - ============ =========== Acquisition of oil and gas properties from W/E Energy, LLC $ - $ 875,000 ============ =========== Dryhole costs accrued but not paid $ - $ 345,841 ============ ===========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 3 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) INTERIM FINANCIAL STATEMENTS 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. 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 September 30, 2000 and December 31, 1999 and the consolidated results of operations and consolidated cash flows for the periods ended September 30, 2000 and 1999. 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. The results of operations for the nine months ended September 30, 2000, are not necessarily indicative of the results which may be expected for any other interim period or for the entire fiscal year ending December 31, 2000. Reclassifications Certain reclassifications of prior period amounts have been made to conform to the current presentation. (2) 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 decrease the loss per share. For the three and nine months ended September 30, 1999, the Company had a weighted average of 1,095,250 and 680,584 combined stock options, warrants and convertible preferred stock and notes outstanding, respectively, which were not included in the computation of diluted loss 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 September 30, 1999, the Company had outstanding convertible preferred stock that was convertible into 380,999 shares of common stock. The convertible preferred stock and dividends of $142,843 and $428,509 were not reflected in the computation of diluted loss per share for the three and nine months ended September 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. 4 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (2) EARNINGS PER SHARE (CONTINUED) Basic and diluted earnings per share for the three and nine month periods ended September 30, 2000 was determined as follows (in thousands):
Three Months Nine Months Ended Ended September 30, 2000 September 30, 2000 ------------------ ------------------ Basic net income attributable to common stockholders $ 8,322 $15,770 Plus preferred stock dividends 763 1,346 Plus interest expense (net of tax) on subordinated convertible notes 197 588 ------------------ ------- Fully diluted net income attributable to common stockholders $ 9,282 $17,704 ================== ======= Outstanding Outstanding Shares Shares -------------- ----------- Basic shares outstanding (weighted average shares) 14,439 8,980 Plus potentially dilutive securities: Dilutive options and warrants applying treasury stock method 1,767 1,242 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 361 370 Shares from conversion of Series D preferred stock 622 544 ------------------ ------- Fully diluted shares outstanding (weighted average shares) 18,749 12,696 ================== =======
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. (3) 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. 5 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (3) ACQUISITIONS (CONTINUED) 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 nine months ended September 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 nine months ended September 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): w
Pro Forma Pro Forma Nine Months Ended Nine Months Ended September 30, 2000 September 30, 1999 (Unaudited) (Unaudited) ------------------- ------------------ Total revenues $71,938 $47,221 Net income (loss) attributable to common stockholders 18,053 2,565 Net income (loss) per basic share attributable to common stockholders 1.26 0.19
(4) RELATED PARTY TRANSACTIONS 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 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 Company's public offering of common stock on June 30, 2000, the shelf facility expired. 6 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (5) 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 over allotments. The net proceeds, approximately $66.8 million, were used primarily to repay a portion of the outstanding debt under the amended credit facility. Series C Preferred Stock Redemption On August 31, 2000, the Company sent notices to the holders of its Series C Preferred Stock (the "Series C") advising that the Series C would be redeemed on September 30, 2000. The Series C had a redemption price of $5.00 per share and the holders had the right to convert their Series C shares into Company common stock at a ratio of one share of common for three shares of Series C prior to September 30, 2000. A total of 2,115,930 shares of the Series C were outstanding on August 31, 2000, with 1,293,521 shares (61%) held by the Company's 80% owned subsidiary, Enex Resources Corporation. Approximately 125,000 Series C shares were converted to 41,666 shares of common stock and approximately 1,990,930 Series C shares were redeemed. On a consolidated basis, the Company's liability for the Series C redemption is approximately $4.8 million. As a result of the Series C redemption, the Company incurred a non-cash charge to dividend expense of $498,706. Series D Preferred Stock In connection with the Magellan Acquisition, 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 our different series 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, and as of September 30, 2000 in cash payment. 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 7 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. (6) 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 62,549 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. (7) 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 nine month period ending September 30, 2000, the Company's oil revenues were reduced by the effect of our hedging activities by $1,176,749 and $1,584,289 respectively. The fair market value of the open position at September 30, 2000 was an unrealized loss of approximately $565,000. (8) PROPERTY SALE 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 Company's credit facility. (9) ACCOUNTING PRONOUNCEMENTS In September 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended, standardizes the accounting for and disclosures of derivative instruments, including certain derivative instruments embedded in other contracts. The statement is effective for the Company's financial statements on January 1, 2001. As of September 30, 2000, the Company does not have any derivative instruments or hedging activities that will impact 2001 operations and therefore does not expect any income statement or balance sheet impact for 2001. However, the Company cannot assure that such instruments or activities will not be put into place in the future. 8 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 subsequent acquisition of Magellan Exploration LLC ("Magellan") and the properties in East Texas operated by C.W. Resources, Inc. (the "CWR Properties"), we had estimated at that date 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. 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 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. For the year 2000, we have budgeted approximately $23 million for development and exploration capital expenditures. Through September 30, 2000, the Company has expended approximately $15 million of its capital budget. 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. On September 30, 2000, the Company redeemed the Series C Preferred Stock (See Note 5). 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 believe we will have sufficient cash flow from operations and borrowings under our credit facility to meet our obligations and 9 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 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 of sufficient amounts to maintain planned levels of capital expenditures. The Facility provides for a borrowing base which is redetermined on a semi- annual basis, and as of November 2000, was set at $140 million. Interest under the Facility is based upon 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. At September 30, 2000, we were paying an average of approximately 8.36% per annum interest on the entire principal balance of the Facility of $55 million. The Facility matures on May 31, 2003. The borrowings under the Facility are secured by substantially all of our properties. 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. At September 30, 2000, the Company was in compliance with the terms of the 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. 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. As of September 30, 2000, the Company does not have any derivative instruments or hedging activities that will impact 2001 operations and therefore does not expect any income statement or balance sheet impact for 2001. However, the Company cannot assure that such instruments or activities will not be put into place in the future. 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. 10 The following table reflects certain summary operating data for the periods presented:
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 2000 1999 2000 1999 ------ ------ ------ ------ Net Production Data : - --------------------- Oil and Liquids (MBbls) 267 116 867 367 Natural Gas (MMcf) 4,642 982 12,273 2,778 Equivalent Production (MMcfe) 6,244 1,680 17,475 4,980 Average Sales Price: (1) - ------------------------ Oil and Liquids (per Bbl) $24.22 $19.10 $ 24.69 $14.66 Natural Gas (per Mcf) 4.26 2.35 3.56 2.01 Equivalent price (per Mcfe) 4.28 2.69 3.78 2.20 Expenses ($ per Mcfe): - ---------------------- Lease operations $ 0.56 $ 0.70 $ 0.65 $ 0.77 Production, severance and ad valorem 0.26 0.14 0.25 0.11 Gathering, transportation and other 0.10 0.01 0.08 0.01 General and administrative 0.22 0.66 0.26 0.61 Depreciation and depletion (2) 0.73 0.87 0.75 0.81
(1) Includes effect of our hedging activities. (2) Represents depreciation, depletion and amortization, excluding impairments. Three Months Ended September 30, 2000 Compared to Three Months Ended September 30, 1999 Oil and Gas Revenues. Revenues from oil and gas operations increased by 474% to $26.7 million for the three months ended September 30, 2000, compared to $4.7 million for the same period during 1999. The increase is attributable to the Company's significant revenue growth via acquisitions and drilling as well as higher commodity prices received by the Company during the period. Production Expense. Production expense for the three months ended September 30, 2000, increased by 302% to $5.8 million compared to $1.4 million during the same period of 1999. Lease operating expenses on an $/MCFE basis decreased to $0.56/MCFE from $0.70/MCFE, while production, severance and ad valorem taxes increased to $0.26/MCFE from $0.14/MCFE. Lower per unit operating costs added with the Company's acquired properties and higher per unit operating costs of properties sold by the Company in 2000 are attributed to the current period decrease. Higher realized commodity prices during the three months ended September 30, 2000 of $4.28/MCFE vs. $2.69/MCFE in 1999 is the principal reason for the increase in taxes. Dry Hole Expense. Dry hole expense for the three months ended September 30, 2000, decreased to zero compared to $0.4 million during the same period in 1999. General and Administrative Expense. General and administrative expense (excluding stock compensation, severance, compensation plan payments and other during 1999) for the three months ended September 30, 2000 increased by $0.3 million compared to the same period in 1999. The increase is attributable to increased staffing levels as a result of the Company's significant growth from acquisitions. 11 Depreciation, Depletion and Amortization Expense. Depreciation, depletion and amortization expense ("DD&A") for the three months ended September 30, 2000 was $4.6 million compared to $1.5 million for the same period of 1999. The additional DD&A recorded is again attributed the Company's significant growth from acquisitions. DD&A on a $/MCFE basis decrease for during 2000 to $.73/MCFE from $.87/MCFE due to lower DD&A rates associated with the Company's acquisition and development activities. Income Taxes. For the three months ended September 30, 2000, the Company recorded a tax provision of $4.7 million compared to a tax benefit of $0.7 during the same period in 1999. The provision recorded in 2000 represents the Company's net income for the three months ended at its expected effective tax rate for 2000 of 34%. Dividends to Preferred Stockholders. Dividends to preferred stockholders of approximately $0.8 million in the three months ended September 30, 2000 increased from $0.1 million for the three months ended September 30, 1999. The increase in 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 and the charge to dividend expense of $0.5 million in connection with the Series C Preferred Stock redemption at September 30, 2000. Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30, 1999 Oil and Gas Revenues. Revenues from oil and gas operations increased by 483% to $66.0 million for the nine months ended September 30, 2000, compared to $11.3 million for the same period during 1999. The increase is attributable to the Company's significant growth through acquisitions and drilling as well as higher commodity prices received by the Company. Production Expense. Production expense for the nine months ended September 30, 2000, increased by 286% to $17.2 million compared to $4.5 million during the same period of 1999. Lease operating expenses on an $/MCFE basis decreased to $0.65/MCFE from $0.77/MCFE, while production, severance and ad valorem taxes increased to $0.25/MCFE from $0.11/MCFE. Lower per unit oprating costs added with the Company's acquired properties and higher per unit operating costs of properties sold by the Company in 2000 are attributed to the current period decrease. Higher realized commodity prices during the nine months ended September 30, 2000 of $3.78/MCFE vs. $2.20/MCFE in 1999 is the principal reason for the increase in taxes. Dry Hole Expense. Dry hole expense for the nine months ended September 30, 2000, decreased to zero compared to $0.5 million during the same period in 1999. General and Administrative Expense. General and administrative expense (excluding stock compensation, severance, compensation plan payments and other during 1999) for the nine months ended September 30, 2000 increased by $1.4 million from the same period in 1999. The increase is attributable to increased staffing levels as result of the Company's significant growth from acquisitions. 12 Depreciation, Depletion and Amortization Expense. Depreciation, depletion and amortization ("DD&A") for the nine months ended September 30, 2000 was $13.1 million compared to $4.0 million for the same period of 1999. The additional DD&A recorded is again attributed the Company's significant growth from acquisitions. DD&A on a $/MCFE basis decrease for during 2000 to $.75/MCFE from $.81/MCFE due to lower DD&A rates associated with the Company's acquisition and development activities. Income Taxes. For the nine months ended September 30, 2000, the Company recorded a tax provision of $8.8 million compared to a tax benefit of $1.2 during the same period in 1999. The provision recorded in 2000 represents the Company's net income for the nine months ended at its expected effective tax rate for 2000 of 34%. Dividends to Preferred Stockholders. Dividends to preferred stockholders of approximately $1.3 million in the nine months ended September 30, 2000 increased from $0.4 million for the nine months ended September 30, 1999. The increase in 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 and the charge to dividend expense of $0.5 million in connection with the Series C Preferred Stock redemption at September 30, 2000. 13 PART II. OTHER INFORMATION 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.) 14 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 15 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 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 16 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 September 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 September 6, 2000.) 27.1 Financial Data Schedule * * Filed herewith (b) The following reports were filed on Form 8-K during the third quarter of 2000: None 17 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 November 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 18 EX-27.1 2 0002.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEET AS OF SEPTEMBER 30, 2000, AND STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 1,010,886 0 20,522,881 0 0 24,033,370 251,565,727 49,637,167 228,414,297 15,486,233 0 0 11,198,553 136,062,171 (12,687,030) 228,414,297 66,001,245 67,047,088 17,158,312 40,925,539 188,572 0 4,466,659 25,932,978 8,817,212 17,115,766 0 0 0 17,115,766 1.76 1.39
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