-----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, VbfIgzp5XQWgMGgDF9y6OPxjfU+anpMkTtzreUHQfdKzQqAytmnXLZYFb950QRYw EH36a0ynwjL/d9qpmByyWQ== 0000899243-03-000645.txt : 20030326 0000899243-03-000645.hdr.sgml : 20030325 20030326172851 ACCESSION NUMBER: 0000899243-03-000645 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: 3TEC ENERGY CORP CENTRAL INDEX KEY: 0000903267 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 631081013 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14745 FILM NUMBER: 03619069 BUSINESS ADDRESS: STREET 1: 700 MILAM STREET STREET 2: SUITE 1100 CITY: HOUSTON STATE: TX ZIP: 77002-2 BUSINESS PHONE: 7138217100 FORMER COMPANY: FORMER CONFORMED NAME: MIDDLE BAY OIL CO INC DATE OF NAME CHANGE: 19930504 10-K 1 d10k.txt FORM 10-K FOR YEAR ENDED DECEMBER 31, 2002 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM 10-K (Mark One) [X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2002 [_] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number: 001-14745 3TEC ENERGY CORPORATION (Exact Name of Registrant as Specified in Its Charter) Delaware 63-1081013 (State or other (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) 700 Milam Street, Suite 1100 Houston, Texas 77002 (713) 821-7100 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ----------------- Securities to be registered pursuant to Section 12(b) of the Act: None Securities to be registered pursuant to Section 12(g) of the Act: Common Stock, $.02 Par Value Indicate by check mark whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [_] Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [_] Revenues of Registrant for fiscal year ended December 31, 2002 are $91,102,240. The aggregate market value as of March 18, 2003 of voting and nonvoting common stock held by nonaffiliates of the Registrant was $206,864,294. As of March 18, 2003 the Registrant had 16,696,597 shares of Common Stock, $.02 par value outstanding. ================================================================================ TABLE OF CONTENTS
Page ---- PART I Item 1. Business.................................................................. 4 Background................................................................ 4 Recent Developments....................................................... 4 Business Strategy......................................................... 5 Marketing................................................................. 5 Competition............................................................... 5 Regulation................................................................ 6 Employees................................................................. 8 Our Executive Offices..................................................... 8 Item 2. Properties................................................................ 9 Description of Our Properties............................................. 9 Natural Gas and Oil Reserves.............................................. 10 Volumes, Prices and Operating Expenses.................................... 11 Development, Exploration and Acquisition Capital Expenditures............. 11 Drilling Activity......................................................... 12 Productive Wells.......................................................... 12 Acreage Data.............................................................. 12 Current Activities........................................................ 13 Item 3. Legal Proceedings......................................................... 13 Item 4. Submission of Matters to Vote of Security Holders......................... 13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..... 14 Item 6. Selected Financial Data................................................... 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 16 Overview.................................................................. 16 Description of Critical Accounting Policies............................... 17 Liquidity and Capital Resources........................................... 19 Results of Operations..................................................... 20 Year Ended December 31, 2002, Compared With Year Ended December 31, 2001.. 20 Year Ended December 31, 2001, Compared With Year Ended December 31, 2000.. 21 Item 7A. Quantitative and Qualitative Disclosures About Market Risk................ 23 Item 8. Financial Statements and Supplementary Data............................... 24 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.............................................................. 24 PART III Item 10. Directors and Executive Officers of the Registrant........................ 25 Item 11. Executive Compensation.................................................... 27 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters..................................................... 34 Item 13. Certain Relationships and Related Transactions............................ 36 Item 14. Controls and Procedures................................................... 36 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K........... 37 Glossary of Certain Oil and Gas Terms..................................... 41 Signatures................................................................ 43 Power of Attorney......................................................... 43
Item 13(a) includes the Index of Exhibits to be filed with the Securities and Exchange Commission relative to this Report. 2 CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS Some of the information in this Annual Report on Form 10-K, including information incorporated by reference, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. The forward-looking statements speak only as of the date made and the Company undertakes no obligation to update such forward-looking statements. These forward-looking statements may be identified by the use of the words "believe," "expect," "anticipate," "will," "contemplate," "would" and similar expressions that contemplate future events. These future events include the following matters: . financial position; . business strategy; . budgets; . amount, nature and timing of capital expenditures; . drilling of wells; . natural gas and oil reserves; . timing and amount of future production of natural gas and oil; . operating costs and other expenses; . cash flow and anticipated liquidity; . prospect development and property acquisitions; and . marketing of natural gas and oil. Numerous important factors, risks and uncertainties may affect the Company's operating results, including: . the risks associated with exploration; . the ability to find, acquire, market, develop and produce new properties; . natural gas and oil price volatility; . uncertainties in the estimation of proved reserves and in the projection of production of proved reserves; . future rates of production and timing of development expenditures; . operating hazards attendant to the natural gas and oil business; . downhole drilling and completion risks that are generally not recoverable from third parties or insurance; . potential mechanical failure or under-performance of significant wells; . climactic conditions; . availability and cost of material and equipment; . delays in anticipated start-up dates; . actions or inactions of third-party operators of the Company's properties; . the ability to find and retain skilled personnel; . availability of capital; . the strength and financial resources of competitors; . regulatory developments; . environmental risks; and . general economic conditions, including wars and acts of terrorism. Any of the factors listed above and other factors contained in this Form 10-K could cause the Company's actual results to differ materially from the results implied by these or any other forward-looking statements made by the Company or on its behalf. The Company cannot assure you that future results will meet its expectations. 3 PART I Item 1. Business Background 3TEC Energy Corporation ("3TEC", "the Company", "we", "our" and "us") is the successor to Middle Bay Oil Company, Inc. ("Middle Bay"), an Alabama corporation formed on November 30, 1992. 3TEC was incorporated in Delaware on November 24, 1999, as a wholly owned subsidiary of Middle Bay for the sole purpose of merging with Middle Bay to effect a change in domicile to Delaware and to change our name to 3TEC Energy Corporation. Effective December 7, 1999, Middle Bay was merged into us and each share of common stock of Middle Bay was converted into one share of our common stock. Our common stock is quoted on the Nasdaq National Market under the symbol "TTEN". 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. As of December 31, 2002, we had estimated total net proved reserves of 296 Bcfe, of which approximately 259 Bcfe, or 87%, were natural gas and approximately 239 Bcfe, or 81%, were proved developed, with an estimated SEC Case PV-10 value of $488 million. For the fourth quarter of 2002, our average net daily production rate was 86 Mmcfe. Historically, 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. Additionally, we have also acquired a number of drilling prospects covered by an extensive 3-D seismic database that we believe have exploration potential. We have assembled an experienced management team and technical staff with expertise in property acquisitions and development, reservoir engineering, exploration and financial management. In August 1999, W/E Energy Company L.L.C. ("W/E LLC"), an entity which was owned by affiliates of EnCap Investments L.L.C. ("EnCap") and Floyd C. Wilson, purchased a controlling interest in us for approximately $20.5 million in cash and $875,000 in producing properties. Concurrently with the investment by W/E LLC, Mr. Wilson was named our Chairman and Chief Executive Officer. Following the change in control in August 1999, during the fourth quarter of 1999 and the first half of 2000 we closed several transactions that changed our senior management team, capital structure and our property base. During the fourth quarter of 2001, W/E LLC was dissolved and its holdings of 3TEC common stock and warrants were distributed to its members. See discussion in Note 3 of the Company's notes to consolidated financial statements. On June 30, 2000, the Company completed a public offering of 8.05 million shares of the Company's common stock priced at $9.00 per share. The net proceeds, approximately $66.6 million, were used primarily to repay a portion of the outstanding debt under the Company's Credit Facility, hereafter defined. Recent Developments On February 2, 2003, the Company entered into a definitive agreement with Plains Exploration & Production Company ("Plains") whereby Plains will acquire the Company for a combination of cash and stock. Under the terms of the agreement, the Company's shareholders will receive $8.50 in cash and 0.85 shares of Plains' Common Stock for each share of the Company's Common Stock, subject to certain adjustments if the average share price of Plains's Common Stock (as determined during a twenty-day trading period prior to closing) is less than $7.65 per share or greater than $12.35 per share. Although subject to shareholder approval and other customary closing conditions, the aforementioned transaction is expected to close during the second quarter of 2003. 4 Business Strategy Our business strategy is focused on the following: . Pursuit of Strategic Acquisitions. We continually review opportunities to acquire producing properties, leasehold acreage and drilling prospects. We seek to acquire operational control of properties that we believe have significant exploitation and exploration potential. We are especially focused on increasing our holdings in fields and basins in which we already own an interest. . Further Development of Existing Properties. We intend to further develop our properties that have proved reserves. We seek to add proved reserves and increase production through the use of advanced technologies, including detailed technical analysis of our properties, and by drilling in-fill locations and selectively recompleting existing wells. We also plan to drill step-out wells to expand known field limits. We intend to enhance the efficiency and quality control of these activities by operating the majority of our properties. . Growth Through Exploration. We conduct an active technology-driven exploration program that is designed to complement our property acquisition and development drilling efforts with moderate to high risk exploration projects that have greater reserve potential. We generate exploration prospects through the analysis of engineering, geological and geophysical data and the interpretation of 3-D seismic data. We intend to manage our exploration expenditures through the optimal scheduling of our drilling program and by selectively reducing our participation in certain exploratory prospects through sales of interests to industry partners. . Rationalization of Property Portfolio. We intend to actively pursue opportunities to reduce and control operating costs of our existing properties and properties we may acquire in the future through the consolidation of overlapping operations, the sale of marginal properties and by increasing the number of fields we operate as a percentage of our total properties. . Maintenance of Financial Flexibility. We intend to maintain a substantial unused borrowing capacity under our Credit Facility by periodically refinancing our bank debt in the capital markets when conditions are favorable. We believe our expanded base of internally generated cash flow and other financial resources, including our existing financial partners, provide us with the financial flexibility to pursue additional acquisitions of producing properties and leasehold acreage and to develop our project inventory in an optimal fashion. Marketing We have marketed the natural gas and oil produced from our properties through typical channels for these products. We generally sell our oil at local field prices paid by the principal purchasers of oil. The majority of our natural gas production is sold at current market rates. Both natural gas and oil are purchased by marketing companies, pipelines, major oil companies, public utilities, industrial customers and other users and processors of petroleum products. We are not confined to, or dependent upon, any one purchaser or small group of purchasers. Accordingly, the loss of a single purchaser, or a few purchasers, would not have a long-term material effect on our business because there are numerous purchasers in the areas in which we sell our production. In order to manage our exposure to price risks in the marketing of our natural gas and oil production, we have in the past and may in the future enter into natural gas and oil price hedging arrangements with respect to a portion of our expected production. Competition We face competition from other oil and gas companies in all aspects of our business, including acquisition of producing properties and oil and gas leases, marketing of oil and gas, and obtaining goods, services and labor. 5 Many of our competitors have substantially larger financial and other resources. Factors that affect our ability to acquire producing properties include available funds, available information about the property and our standards established for minimum projected return on investment. Competition is also presented by alternative fuel sources, including heating oil and other fossil fuels. We believe that we are competing and will compete effectively as a result of our expertise in the acquisition, exploration, and development of oil and gas reserves and our financial ability to take advantage of such opportunities. A significant portion of the Company's working interests are operated by third parties. The operations of the Company's interests are governed by joint operating agreements with the third party operators and contain customary industry standard terms and conditions. Wagner & Brown, Ltd. is the Company's largest single third party operator, operating approximately 15% of the Company's total produced oil and gas volumes on a monthly basis. No other third party operator operates interests that generate greater than 5% of the Company's monthly production. Regulation Federal Regulation of Transportation of Natural Gas. Historically, the transportation and sale for resale of natural gas in interstate commerce have been regulated by the Natural Gas Act of 1938, the Natural Gas Policy Act of 1978, and the regulations promulgated by the Federal Energy Regulatory Commission. In the past, the federal government has regulated the prices at which natural gas could be sold. Deregulation of natural gas sales by producers began with the enactment of the Natural Gas Policy Act. In 1989, Congress enacted the Natural Gas Wellhead Decontrol Act, which removed all remaining Natural Gas Act and Natural Gas Policy Act price and non-price controls affecting producer sales of natural gas effective January 1, 1993. Congress could, however, reenact price controls in the future. Our sales of natural gas are affected by the availability, terms and cost of pipeline transportation. The price and terms for access to pipeline transportation remain subject to extensive federal regulation. Beginning in April 1992, the Federal Energy Regulatory Commission issued Order No. 636 and a series of related orders, which required interstate pipelines to provide open-access transportation on a basis that is equal for all natural gas suppliers. The Federal Energy Regulatory Commission has stated that it intends for Order No. 636 to foster increased competition within all phases of the natural gas industry. Although Order No. 636 does not directly regulate our production and marketing activities, it does affect how buyers and sellers gain access to the necessary transportation facilities and how we and our competitors sell natural gas in the marketplace. The courts have largely affirmed the significant features of Order No. 636 and the numerous related orders, although some appeals remain pending and the Federal Energy Regulatory Commission continues to review and modify its regulations regarding the transportation of natural gas. One broad and significant pending review involves examination of several questions, including whether the transportation regulations should be changed to better operate together with changes in state law that are introducing competition in retail natural gas markets, whether the historical method of setting transportation rates based on cost should be changed for certain transportation, whether short term transportation capacity should be allocated based only on auctions, and whether additional changes need to be made to long term transportation policies to prevent a market bias in favor of short term transportation. We cannot predict what action the Federal Energy Regulatory Commission will take on these matters, nor can we accurately predict whether the Federal Energy Regulatory Commission's actions will achieve the goal of increasing competition in markets in which our natural gas is sold. However, we do not believe that any action taken will affect us in a way that materially differs from the way it affects other oil and natural gas producers. Additional proposals and proceedings that might affect the natural gas industry are pending before Congress, the Federal Energy Regulatory Commission and the courts. The natural gas industry historically has been very heavily regulated; therefore, we cannot assure you that the less stringent regulatory approach recently pursued by the Federal Energy Regulatory Commission and Congress will continue. 6 Federal Regulation of Transportation of Oil. Oil and sales of oil, condensate and natural gas liquids by us are not currently regulated and are made at market prices. Effective as of January 1, 1995, the Federal Energy Regulatory Commission implemented regulations establishing an indexing system for transportation rates for interstate common carrier oil pipelines. These rates are generally indexed to inflation, subject to conditions and limitations. These regulations may, over time, tend to increase transportation costs or reduce wellhead prices for oil. However, we do not believe that these regulations affect us any differently than other oil and gas producers, gatherers and marketers. State Regulation. Our oil and gas operations are subject to various types of regulation at the state and local levels. These regulations require drilling permits, regulate the methods for developing new fields and the spacing and operating of wells and waste prevention, and sometimes impose production limitations. These regulations may limit our production from wells and the number of wells or locations we can drill. Some states have adopted regulations with respect to gathering systems. These regulations have not had a material effect on the operation of our gathering systems, but we cannot predict whether any future regulations in this area may have a material impact on our gathering systems. Federal, State and Indian Leases. Our operations on federal, state or Indian oil and gas leases are subject to numerous restrictions, including nondiscrimination statutes. We must conduct our operations on these leases pursuant to permits and authorization and other regulations issued by the Bureau of Land Management, Minerals Management Service and other agencies. The Minerals Management Service currently has under consideration a proposal to change the manner in which crude oil is valued for purposes of calculating royalty due the government. If adopted, these changes would decrease reliance on historical valuation methods and instead adopt an indexing method intended to better reflect market value, but which may not reflect the proceeds actually received in the sale of the oil. We cannot predict what action the Minerals Management Service may ultimately take or how it will affect royalty payable on our production from federal leases, however, if adopted, the changes may tend to increase costs of royalty payments. Environmental Regulations. Our operations are subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Our exploration and production operations and facilities for gathering, treating, processing and handling hydrocarbons and related exploration and production wastes are subject to stringent environmental regulation. These laws and regulations sometimes require government approvals before activities occur, limit or prohibit activities because of protected areas or species, impose substantial liabilities for pollution and provide penalties for noncompliance. As with the industry generally, compliance with existing and anticipated regulations increases our overall cost of business. These regulations, however, generally affect us and our competitors similarly. Environmental laws and regulations are subject to frequent change, and we are not able to predict the costs or other impacts of environmental regulation on our future operations. The Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without regard to fault or the legality of the original conduct, on some classes of persons that are considered to have contributed to the release or threat of release of a "hazardous substance" into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources, and it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. Our operations are also subject to regulation of air emissions under the Clean Air Act and comparable state and local requirements. Implementation of these laws could lead to the gradual imposition of new air pollution control requirements on our operations. As a result, we may incur capital expenditures over the next several years 7 to upgrade our air pollution control equipment. We do not believe that our operations would be materially affected by any such requirements, nor do we expect such requirements to be any more burdensome to us than to other companies our size involved in natural gas and oil exploration and production activities. In addition, legislation has been proposed in Congress from time to time that would reclassify some natural gas and oil exploration and production wastes as "hazardous wastes," which would make the reclassified wastes subject to much more stringent handling, disposal and clean-up requirements. If Congress were to enact this legislation, it could increase our operating costs, as well as those of the natural gas and oil industry in general. Initiatives to further regulate the disposal of natural gas and oil wastes are also pending in some states, and these various initiatives could have a similar impact on us. The Clean Water Act imposes restrictions and controls on the discharge of oil and gas wastes and other forms of pollutants into waters of the United States. Federal law also imposes strict liability on owners of facilities for consequences of an oil spill where the spill is in navigable waters or along shorelines. These laws impose penalties for unauthorized discharges and substantial liability for costs of removal and damages resulting from an unauthorized discharge. State laws for the control of water pollution provide similar penalties and liabilities. The cost of compliance with water pollution laws has not historically been material to our operations. There can be no assurance that changes in federal, state or local water pollution laws and programs will not materially adversely affect our operations in the future. Our management believes that we are in substantial compliance with current environmental laws and regulations that affect us and that continued compliance with these requirements will not have a material adverse impact on us. Employees At December 31, 2002, we had 75 full-time employees. We believe that our relationships with our employees are satisfactory. None of our employees are covered by a collective bargaining agreement. From time to time, we use the services of independent consultants and contractors to perform various professional services, particularly in the areas of construction, design, well-site surveillance, permitting and environmental assessment. Our Executive Offices and Website Our principal executive offices are located at 700 Milam Street, Suite 1100, Houston, Texas 77002, and our telephone number is 713.821.7100. Our website is www.3tecenergy.com. We make available, free of charge, through our website, our annual report on Form 10K, quarterly reports on Form 10Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. 8 Item 2. Properties Description of Our Properties We present information regarding our natural gas and oil reserves, properties, and operating results below.
As of December 31, 2002 ------------------------------------------------------------------- Estimated Net Proved Reserves Percent Proved Budgeted ----------------------------- PV-10 Total Undeveloped 2003 Capital Gas Oil Total Value PV-10 Drilling Expenditures (Mmcf) (MBbls)(1) (Mmcfe) ($000) Value Locations ($MM) ------- ---------- ------- ------- ------- ----------- ------------ East Texas. 168,465 1,375 176,715 270,693 55.5% 128 16.6 Gulf Coast. 28,554 1,544 37,818 119,157 24.4% 2 38.6 South Texas 31,457 2 31,469 34,940 7.2% 10 7.0 Other Areas 30,550 3,287 50,272 63,183 12.9% 7 0.8 ------- ----- ------- ------- ----- --- ---- Total... 259,026 6,208 296,274 487,973 100.0% 147 63.0(2) ======= ===== ======= ======= ===== === ====
- -------- (1) Includes oil, condensate and plant products barrels. (2) As discussed in "Liquidity and Capital Resources" within Management's Discussion and Analysis, the Company's capital expenditure budget for 2003 is $63 million. East Texas. Our largest fields are located in the East Texas area. The Rosewood, Glenwood, White Oak, Beckville, Carthage, East Henderson and Oak Hill fields all produce from the Cotton Valley sand formation and have numerous proved undeveloped drilling locations. Many of these development drilling locations are based on a change in regulatory field rules that now permit wells to be drilled on 80 acre spacing as opposed to 160 acre spacing. At December 31, 2002 we have identified 128 proved undeveloped locations in this area. For 2003, we have budgeted approximately $16.6 million for drilling of development wells and exploitation activities in this area. Gulf Coast. We have established a substantial base of proved reserves and undeveloped acreage with significant exploration potential along the Gulf Coast of Texas and Louisiana. We have generated multiple drilling projects in several areas of South Louisiana, the most significant of those being in the state waters of Louisiana in Breton Sound/Main Pass/Chandeleur Sound, and the Garden City field in St. Mary Parish, Louisiana. During 2002, we participated in six exploratory wells in South Louisiana, of which five were gas discoveries. Four of the discoveries were in the Breton Sound/Main Pass/Chandeleur Sound, and one was located in Garden City. In 2003, we intend to drill a total of ten exploratory wells, with six being located in Breton Sound/Main Pass/Chandeleur Sound, two in Garden City, one in Queen Bess Island field in Jefferson Parish and one in Black Bayou field in Cameron Parish. Other significant fields in south Louisiana include Bay de Chene, East Roanoke and Riceville. For 2003, we have budgeted approximately $38.6 million for drilling of development wells and exploration activities in this area. South Texas. In South Texas, we are active in three main areas: Stuart City field in La Salle County, Segundo/Owen field in Webb County and Northeast Thompsonville field in Jim Hogg County. In 2003, we have budgeted approximately $7 million for development drilling in this area. Other. We own interests in numerous fields in the Anadarko, Permian, San Juan and Arkoma basins in Oklahoma, Texas and New Mexico. Our largest fields in these areas are Puerto Chiquito and Basin in the San Juan basin, and West Stigler in eastern Oklahoma. In 2003, we have budgeted approximately $750,000 for development drilling in these areas. 9 Natural Gas and Oil Reserves The following table presents our estimated net proved natural gas and oil reserves and the PV-10 value of our reserves as of December 31, 2002, 2001, and 2000. The period end prices of oil and natural gas at December 31, 2002, 2001, and 2000, used in the PV-10 calculation were $31.20, $19.84 and $25.31 per barrel of oil and $4.79, $2.57 and $9.40 per thousand cubic feet of natural gas, respectively. Our estimated net proved natural gas and oil reserves and the PV-10 value of our reserves as of December 31, 2002, 2001, and 2000, are based on reserve reports prepared by Ryder Scott Company for our properties. The PV-10 values shown in the table are not intended to represent the current market value of the estimated natural gas and oil reserves we own. For further information concerning the PV-10 values of these proved reserves, please read note 16 of the notes to our December 31, 2002 consolidated financial statements.
December 31, ---------------------------- 2002 2001 2000 -------- -------- ---------- Proved Reserves: Natural gas (Mmcf)....................................... 259,026 231,266 237,693 Oil (MBbls)(1)........................................... 6,208 5,337 10,672 Natural gas equivalents (Mmcfe).......................... 296,274 263,288 301,725 Proved Developed Reserves: Natural gas (Mmcf)....................................... 205,301 175,659 177,252 Oil (MBbls)(1)........................................... 5,546 4,705 9,895 Natural gas equivalents (Mmcfe).......................... 238,577 203,889 236,622 Proved Reserves: Estimated future net cash flows before income taxes, (in thousands)............................................. $947,670 $385,335 $1,996,831 PV-10 value, (in thousands).............................. $487,973 $212,349 $1,047,364
- -------- (1) Includes oil, condensate and plant product barrels. There are numerous uncertainties in estimating quantities of proved reserves and in projecting future rates of production and the timing of development expenditures, including many factors beyond our control. The reserve data herein are only estimates. Although we believe these estimates to be reasonable, reserve estimates are imprecise and may be expected to change as additional information becomes available. Estimates of oil and natural gas reserves, of necessity, are projections based on engineering data, and there are uncertainties inherent in the interpretation of this data, as well as the projection of future rates of production and the timing of development expenditures. Reservoir engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be exactly measured. Therefore, estimates of the economically recoverable quantities of oil and natural gas attributable to any particular group of properties, classifications of the reserves based on risk of recovery and the estimates are a function of the quality of available data and of engineering and geological interpretation and judgment and the future net cash flows expected therefrom, prepared by different engineers or by the same engineers at different times, may vary substantially. There also can be no assurance that the reserves set forth herein will ultimately be produced or that the proved undeveloped reserves will be developed within the periods anticipated. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and the variances may be material. In addition, the estimates of future net revenues from our proved reserves and the present value thereof are based upon certain assumptions about future production levels, prices and costs that may not be correct. We emphasize with respect to the estimates prepared by independent petroleum engineers that PV-10 value should not be construed as representative of the fair market value of our proved oil and natural gas properties since discounted future net cash flows are based upon projected cash flows which do not provide for changes in oil and natural gas prices or for escalation of expenses and capital costs. The meaningfulness of such estimates is highly dependent upon the accuracy of the assumptions upon which they are based. Actual future prices and costs may differ materially from those estimated. 10 Volumes, Prices and Operating Expenses The following table presents information regarding the production volumes of, average sales prices received for, and average production costs associated with, our sales of oil and natural gas for the periods indicated.
Years Ended December 31, ----------------------------- 2002 2001 2000 ------- ------- ------- Net Production Data: Natural gas (Mmcf)............................................ 25,647 22,352 17,764 Oil (MBbls)................................................... 828 952 1,139 Natural gas equivalents (Mmcfe)............................... 30,615 28,065 24,598 Average Sale Prices (before effect of 3TEC's hedging activities): Natural gas ($ per Mcf)....................................... $ 3.25 $ 4.15 $ 4.12 Oil ($ per Bbl)............................................... 23.01 23.95 26.99 Natural gas equivalents ($ per Mcfe).......................... 3.35 4.12 4.23 Average Sales Prices (after effect of 3TEC's hedging activities): Natural gas ($ per Mcf)....................................... $ 3.25(1) $ 4.15(1) $ 4.12 Oil ($ per Bbl)............................................... 23.01 23.95 25.11 Natural gas equivalents ($ per Mce)........................... 3.35 4.12 4.20 Expenses: ($ per Mcfe) Lease operations(2)........................................... $ 0.48 $ 0.57 $ 0.61 Production, severance and ad valorem taxes(2)................. $ 0.24 $ 0.27 $ 0.27 Gathering, transportation and other(2)........................ $ 0.11 $ 0.11 $ 0.06 General and administrative.................................... $ 0.30 $ 0.25 $ 0.25 Depreciation, depletion and amortization...................... $ 1.22 $ 1.10 $ 0.80
- -------- (1) 3TEC's natural gas derivative financial instruments were not designated as hedges at the time the instruments were executed, and in accordance with SFAS 133, were marked-to-market through earnings in each period. (2) Represents production cost. Development, Exploration and Acquisition Capital Expenditures The following table presents information regarding our net costs incurred in the purchase of properties and in exploration and development activities.
Years Ended December 31, ---------------------------- 2002 2001 2000 ------- -------- -------- (in thousands) Acquisition............. $ 302 $ 84,326(2) $ 79,865 Exploration(1).......... 21,531 11,059 695 Development(3).......... 37,510 62,668 25,346 ------- -------- -------- Total costs incurred. $59,343 $158,053 $105,906 ======= ======== ========
- -------- (1) Exploration costs include geological and geophysical expenses, dry hole expenses and other exploratory drilling expenditures. (2) Excludes approximately $29 million of acquisition costs related to deferred taxes recorded in connection with the Classic Acquisition. (3) Development costs include expenditures of $14.0 million in 2002, $8.7 million in 2001 and $5.1 million in 2000 related to the development of proved undeveloped reserves included in 3TEC's proved oil and gas reserves at the beginning of each year. 11 Drilling Activity The following table shows our drilling activity for the years ended December 31, 2002, 2001 and 2000. In the table, "gross" refers to the total wells in which we have a working interest and "net" refers to gross wells multiplied by our working interest in these wells.
Year Ended December 31, ----------------------------------- 2002 2001 2000 ----------- ----------- ----------- Gross Net Gross Net Gross Net ----- ----- ----- ----- ----- ----- Exploration Wells: Productive..... 5 2.67 4 2.52 -- -- Non-Productive. 2 1.02 5 1.93 -- -- -- ----- -- ----- -- ----- Total...... 7 3.69 9 4.45 -- -- == ===== == ===== == ===== Development Wells: Productive..... 52 18.46 71 26.80 66 18.30 Non-Productive. 1 0.92 2 1.30 -- -- -- ----- -- ----- -- ----- Total...... 53 19.38 73 28.10 66 18.30 == ===== == ===== == =====
Productive Wells The following table sets forth the number of productive natural gas and oil wells in which we owned a working interest as of December 31, 2002.
Total Productive Wells --------- Gross Net ----- --- Natural Gas 885 395 Oil........ 114 52 --- --- Total... 999 447 === ===
Productive wells consist of producing wells and wells capable of production, including natural gas wells awaiting pipeline connections to commence deliveries and oil wells awaiting connection to production facilities. Additionally, the Company owns a royalty interest in 184 wells and an overriding royalty interest in 876 wells. At December 31, 2002, we operated approximately 321 wells. Acreage Data The following table presents information regarding our developed and undeveloped leasehold acreage as of December 31, 2002. Developed acreage refers to acreage within producing units and undeveloped acreage refers to acreage that has not been placed in producing units.
Undeveloped Developed Acreage Acreage Total ----------------- ------------- --------------- Gross Net Gross Net Gross Net ------- ------- ------ ------ ------- ------- Texas.... 128,788 62,782 8,752 5,402 137,540 68,184 Louisiana 25,036 10,439 17,386 9,528 42,422 19,967 Oklahoma. 22,375 8,864 790 138 23,165 9,002 Other.... 84,472 49,514 1,307 776 85,779 50,290 ------- ------- ------ ------ ------- ------- Total. 260,671 131,599 28,235 15,844 288,906 147,443 ======= ======= ====== ====== ======= =======
12 Excluded from the acreage data are approximately 33,495 net mineral acres owned by us, primarily in La Fourche, St. Mary and Terrebonne parishes of Louisiana, all of which we believe have potential for oil and natural gas exploration. Additionally, the Company has lease options covering 28,427 gross acres in the Bayou Carlin area of St. Mary Parish, Louisiana, which begin expiring April, 2004. Current Activities As of March 7, 2003, 4 wells (1.4 net wells) were being drilled. Three wells are in Texas and one is in Louisiana. Item 3. Legal Proceedings On October 7, 1994, J.B. Hanks Co., Inc. ("Hanks") filed litigation in the 21st Judicial District, Parish of Livingston, State of Louisiana against Shore Oil Company ("Shore"), which merged with Middle Bay on June 30, 1997, seeking specific performance of a July, 1994 Agreement of Purchase and Sale (the "Agreement"). On the same date, Shore filed suit against Hanks in the 129th Judicial District, County of Harris, State of Texas also seeking specific performance of the Agreement. Hanks alleges that Shore failed to comply with the Agreement inasmuch as Hanks contended that royalties on certain of the oil and gas leases had not been properly paid. The petition alleges that at the time of the contemplated transaction, Shore was in an overproduced position with respect to the taking of gas on the allegedly affected oil and gas leases and that instead of Shore paying royalties based on actual production, royalties were paid based on entitlements. Despite having received no demand from the particular lessors, Hanks claimed that Shore was in violation of the oil and gas leases; an assertion that Shore denies. On November 15, 1994, the parties entered into a standstill agreement, which dismissed both actions. Nearly two (2) years after the dismissal, Hanks informed Shore that the royalty problems alleged by Hanks had been cured by the passage of time and that Hanks was therefore prepared to purchase the property in accordance with the Agreement. Shore refused to comply. Both parties again filed suit. The Louisiana litigation was removed to Federal District Court where the matter will be decided. In October 2002, the parties attempted to mediate their dispute. A settlement was not reached. The Company intends to vigorously pursue the defense of this matter. In the opinion of management, the ultimate resolution of this lawsuit will not have a material adverse effect on the Company's financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders None. 13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Market Information Our common stock is currently quoted on the Nasdaq National Market under the market symbol "TTEN." The following table sets forth the high and low closing prices per share of our common stock for the periods indicated on the Nasdaq National Market.
Period High Low ------ ------ ------ 2002 First Quarter.. $19.00 $13.57 Second Quarter. $18.20 $14.34 Third Quarter.. $17.47 $12.73 Fourth Quarter. $15.33 $12.31 2001 First Quarter.. $18.63 $15.69 Second Quarter. $20.40 $14.88 Third Quarter.. $17.30 $12.27 Fourth Quarter. $15.10 $13.20 2000 First Quarter.. $11.44 $ 6.38 Second Quarter. $13.50 $ 7.00 Third Quarter.. $17.25 $ 9.63 Fourth Quarter. $19.13 $13.38
On March 18, 2003 the last reported sales price of our common stock on the Nasdaq National Market was $15.76 per share. On March 18, 2003 there were 863 holders of record of our common stock. Our transfer agent is American Stock Transfer and Trust Company located at 59 Maiden Lane, New York, New York 10038. You may call them toll free at 800.937.5449 to answer any questions about transferring your stock. We have never declared or paid any cash dividends on our common stock. We currently intend to retain future earnings, if any, for the operation and development of our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, our Credit Facility prohibits us from paying cash dividends on our common stock. Any future dividends are also restricted by the terms of our outstanding preferred stock and may be restricted by any debt agreements which we may enter into from time to time. We are obligated to pay net cash dividends in the amount of approximately $740,000 per year on our Series D Preferred Stock which may be paid, at our option, in cash or in additional shares of Series D Preferred Stock during the three years ending February 1, 2003. Our Credit Facility permits the payment of dividends on our Series D Preferred Stock. 14 Item 6. Selected Financial Data The following table sets forth the Company's summary consolidated and combined historical financial information that has been derived from the audited combined statements of income and cash flows for the Company's business for each of the years ended December 31, 2002, 2001, 2000, 1999 and 1998 the unaudited consolidated statements of income and cash flows for the Company for the nine months ended. You should read this financial information in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company" and the Company's financial statements and notes thereto.
Years Ended December 31, (1) ------------------------------------------------------ 2002 2001 2000 1999 1998 -------- --------- -------- -------- -------- (Amounts in thousands, except per share data) (audited) Statement of Income Data: Revenues Oil, gas and plant income........................ $103,064 $ 116,080 $102,148 $ 20,088 $ 15,011 Gain (loss) on sale of properties................ (159) 815 800 1,048 1,953 Gain (loss) on derivative fair value............. (6,632) 3,081 -- -- -- Gain (loss) on derivative settlements............ (5,644) 162 -- -- -- Other............................................ 473 836 813 1,020 738 -------- --------- -------- -------- -------- Total revenues............................... 91,102 120,974 103,761 22,156 17,702 Costs and Expenses: Production expenses.............................. 25,326 26,670 23,179 7,788 7,801 Geological and geophysical....................... 2,683 1,172 666 473 878 Dryhole and Impairments.......................... 8,918 12,261 29 3,103 4,668 Surrendered and expired acreage.................. 860 7,875 -- -- -- Stock compensation (general and administrative)................................ 816 -- -- 730 266 Interest......................................... 3,962 6,773 7,556 3,205 1,972 Severance payments............................... -- -- -- 624 -- Compensation plan payments....................... -- -- -- 293 -- General and administrative....................... 9,154 6,991 6,141 4,122 4,266 Depreciation, depletion and amortization......... 37,357 30,983 19,779 6,691 7,116 Other............................................ 629 250 -- -- 139 -------- --------- -------- -------- -------- Total Expenses............................... 89,705 92,975 57,350 27,029 27,106 -------- --------- -------- -------- -------- Income (loss) before income taxes, minority interest and dividends to preferred stockholders........... 1,397 27,999 46,411 (4,873) (9,404) Minority interest................................... -- 511 305 (2) 15 Income tax (benefit) expense........................ 45 10,640 14,442 (1,443) (2,830) -------- --------- -------- -------- -------- Net income (loss)................................... $ 1,352 $ 16,848 $ 31,664 $ (3,432) $ (6,589) Dividends to preferred stockholders................. 738 710 1,488 574 68 -------- --------- -------- -------- -------- Net income (loss) attributable to common shares..... $ 614 $ 16,138 $ 30,176 $ (4,006) $ (6,657) ======== ========= ======== ======== ======== Basic net income (loss) per common share............ $ 0.04 $ 1.06 $ 2.91 $ (1.14) $ (2.48) ======== ========= ======== ======== ======== Diluted net income (loss) per common share.......... $ 0.03 $ 0.91 $ 2.28 $ (1.14) $ (2.48) ======== ========= ======== ======== ======== Weighted averaged common shares outstanding: Basic............................................ 16,533 15,170 10,383 3,520 2,683 ======== ========= ======== ======== ======== Diluted.......................................... 18,362 18,969 13,895 3,520 2,683 ======== ========= ======== ======== ======== Other Financial Data: Net cash provided by operating activities........... 49,802 89,780 44,468 1,401 2,068 Net cash used in investing activities............... (55,868) (122,519) (83,771) (80,372) (16,958) Net cash provided by (used in) financing activities. (9,447) 46,065 37,598 84,072 14,343 Oil and gas capital expenditures.................... 59,343 158,053 105,906 94,402 34,058
15
Year Ended December 31, ------------------------------------------------------- 2002 2001 2000 1999 1998 -------- -------- -------- -------- ------- (Amounts in thousands, except per share data) (audited) Balance Sheet Data: Cash and cash equivalents $ 2,249 $ 17,762 $ 4,436 $ 6,141 $ 1,040 Working capital (deficit) (1,637) 14,343 15,242 7,001 139 Total assets............. 349,185 363,038 254,764 149,243 57,941 Total debt............... 99,000 108,000 76,224 100,724 27,455 Stockholders' equity..... 182,964 180,712 149,595 38,112 22,558
- -------- (1) Certain reclassifications of prior period amounts have been made to conform to the current presentation. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis in conjunction with our audited consolidated financial statements. The following information contains forward-looking statements. See "Cautionary Statement About 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. As of December 31, 2002, we had estimated total net proved reserves of 296 Bcfe, of which approximately 259 Bcfe, or 87%, were natural gas and approximately 239 Bcfe, or 81%, were proved developed, with an estimated SEC case PV-10 value of $488 million. For the fourth quarter of 2002, our average net daily production rate was 86 Mmcfe. We have increased our reserves and production principally through acquisitions. We focus on properties that have a substantial proved reserve component and which management believes to have additional exploitation opportunities. Recently, we have also acquired a number of drilling prospects covered by an extensive 3-D seismic database that we believe have exploration potential. We have assembled an experienced management team and technical staff with expertise in property acquisitions and development, reservoir engineering, exploration and financial management. Description Of Critical Accounting Policies Oil and Natural Gas Properties. We utilize the successful efforts method of accounting for our oil and natural gas properties. Under this method, all development and acquisition costs of proved properties are capitalized and amortized on a unit-of-production basis over the remaining life of proved developed reserves or proved reserves, as applicable. Exploration expenses, including geological and geophysical expenses and delay rentals, are charged to expense as incurred. Costs of drilling exploratory wells are initially capitalized, but charged to expense if and when the well is determined to be unsuccessful. Expenditures for repairs and maintenance to sustain or increase production from the existing producing reservoir are charged to expense as incurred. Expenditures to recomplete a current well in a different or additional proven or unproven reservoir are capitalized pending determination that economic reserves have been added. If the recompletion to an unproven reservoir is not successful, the expenditures are charged to expense. Expenditures for redrilling or directional drilling in a previously abandoned well are classified as drilling costs to a proven or unproven reservoir for determination of capital or expense. Significant tangible equipment added or replaced is capitalized. Expenditures to construct facilities or increase the productive capacity from existing reserves are capitalized. Internal costs directly associated with the development and exploitation of properties are capitalized as a cost of the property and are classified accordingly in the Company's financial statements. Crude oil volumes are converted to equivalent Mcf's at the rate of one barrel to six Mcf. 16 The Company is required to assess the need for an impairment of capitalized costs of oil and natural gas properties and other long-lived assets whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. If impairment is indicated based on a comparison of the asset's carrying value to its undiscounted expected future net cash flows, then it is recognized to the extent that the carrying value exceeds fair value. Any impairment charge incurred is recorded in accumulated depletion, depreciation, and amortization ("DD&A") to reduce our recorded basis in the asset. Each part of this calculation is subject to a large degree of management judgment, including the determination of the property's reserves, future cash flows, and fair value. Management's assumptions used in calculating oil and natural gas reserves or regarding the future cash flows or fair value of our properties are subject to change in the future. Any change could cause impairment expense to be recorded, reducing our net income and our basis in the related asset. Future prices received for production and future production costs may vary, perhaps significantly, from the prices and costs assumed for purposes of calculating reserve estimates. With consideration of anticipated future commodity prices and field operation costs, all proved undeveloped reserves included in the Company's year-end reserve report have been scheduled for execution and included in the development plan and capital expenditure budget estimate by the Company for each respective year. Actual production may not equal the estimated amounts used in the preparation of reserve projections. As these estimates change, the amount of calculated reserves change. Any change in reserves directly impacts our estimate of future cash flows from the property, as well as the property's fair value. Additionally, as management's views related to future prices change, this changes the calculation of future net cash flows and also affects fair value estimates. Changes in either of these amounts will directly impact the calculation of impairment. DD&A expense is also directly affected by the Company's reserve estimates. Any change in reserves directly impacts the amount of DD&A expense the Company recognizes in a given period. Assuming no other changes, such as an increase in depreciable base, as the Company's reserves increase, the amount of DD&A expense in a given period decreases and vice versa. Changes in future commodity prices would likely result in increases or decreases in estimated recoverable reserves. The Company also uses estimates to record its accrual for oil and natural gas revenues. The production estimate portion of the accrual of revenue for a given period is based upon field production reports (both operated and non-operated), estimates of production added via drilling or acquisitions, historical production averages and natural production declines of the Company's properties. The price component of the Company's accrual for revenue incorporates historical averages of the Company's sales for periods being accrued as compared to the monthly closing NYMEX price for natural gas and the West Texas Intermediate index price for crude oil. Several factors can impact the Company's ability to estimate its production volume including the fact that a significant portion of the Company's production is operated by third parties. The Company's working interests, which are operated by third parties, are governed by joint operating agreements with the third party operators and contain customary industry standard terms and conditions. Wagner & Brown, Ltd. is the Company's largest single third party operator, operating approximately 15% of the Company's total produced oil and gas volumes on a monthly basis. No other third party operator operates interests that generate greater than 5% of the Company's monthly production. Reliance on accurate and timely data from the operators of these properties can change the actual amounts of production for which the Company receives payment. Additionally, production meters that are manually read can be different than the volume metered at the Company's sales points. Both the Company's estimate of sold volumes and the estimate of the price received for these sales is adjusted on an on-going basis as the Company receives payment for accrued volumes. Changes in the estimates of the accrual are adjusted in subsequent periods as payment is received or additional supporting data is obtained. Bad Debt Expense. The Company routinely assesses the recoverability of all material trade and other receivables to determine their collectibility. The Company historically has not required collateral or other 17 performance guarantees from creditworthy counterparties. Many of our receivables are from joint interest owners on property of which we are the operator. Thus, we may have the ability to withhold future revenue disbursements to cover any non-payment of joint interest billings. Our oil and natural gas receivables quickly turnover, usually one month for oil and two months for gas; thus, signaling any problem accounts in a timely manner. Counterparties to our derivative commodity contracts are routinely reviewed for creditworthiness to determine the realizability of any related derivative assets we might carry on our books. This review of receivables and counterparties is heavily dependent on the judgment of management. If it is determined that the carrying value of a receivable or financial instrument might not be recoverable, we record an allowance to the extent we believe the receivable or asset is not recoverable. The determination as to what extent a receivable or asset might be impaired is also heavily dependent on the judgment of management. As more information becomes known related to a particular counterparty or customer, management will continually reassess previous judgments and any resulting change in the related allowance could have a material positive or negative effect on our financial position and results of operations in the period of the change. Derivative Activities. We use various financial instruments in the normal course of our business to manage and reduce price volatility and other market risks associated with our crude oil and natural gas production. This activity is referred to as risk management. These arrangements are structured to reduce our exposure to commodity price decreases, but they can also limit the benefit we might otherwise receive from commodity price increases. Our risk management activity is generally accomplished through over-the-counter forward derivative contracts executed with large financial institutions. Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities". This standard requires us to recognize all of our derivative and hedging instruments in our consolidated balance sheets as either assets or liabilities and measure them at fair value. If a derivative does not qualify for hedge accounting, it must be adjusted to fair value through earnings. However, if a derivative does qualify for hedge accounting, depending on the nature of the hedge, changes in fair value can be offset against the change in fair value of the hedged item through earnings or recognized in other comprehensive income until such time as the hedged item is recognized in earnings. To qualify for cash flow hedge accounting, the cash flows from the hedging instrument must be highly effective in offsetting changes in cash flows due to changes in the underlying items being hedged. In addition, all hedging relationships must be designated, documented, and reassessed periodically. The Company's natural gas derivative financial instruments were not designated as hedges at the time the instruments were executed. According to the provisions of SFAS 133, these instruments are marked-to-market through earnings each period. Liquidity and Capital Resources Cash Flow. 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 are sales of natural gas and oil. For 2002 and 2001, the Company's development, exploitation and exploratory drilling related capital expenditures, exclusive of acquisitions, were approximately $43.3 million and $67.8 million, respectively. For the year 2003, we have budgeted approximately $63 million for capital expenditures. The 2003 capital expenditure plan is comprised of developmental, exploitation and exploratory activities by area as follows: East Texas, $16.6 million (developmental drilling), Gulf Coast, $38.6 million (primarily exploration and exploitation drilling), South Texas, $7.0 million (both developmental and exploitation drilling) and all other areas of non-core activities of $0.8 million. We are obligated to pay dividends of approximately $740,000 per year on the Series D 18 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. The Company paid the 2002 dividends and anticipates paying the 2003 Series D dividends in cash, financed through operating cash flow and if required, bank borrowings. Our activities in 2002 have been financed through operating cash flow and bank borrowings. Our primary source of financing for acquisitions has been borrowing under our Credit Facility described below. Credit Facility. The Company has in place a $250 million credit facility (the "Credit Facility") with Bank One, NA as agent and seven other banks. The Credit Facility, as amended, matures August 31, 2004. As of March 18, 2003, the Company's borrowing base under its Credit Facility was $160 million. The borrowing base is to be redetermined semi-annually on May 1 and November 1 and provides for interest as revised under the Credit Facility to accrue 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 37.5 basis points or LIBOR plus basis points increasing from a low of 150 to a high of 200 as loans outstanding increase as a percentage of the borrowing base. As of December 31, 2002, the Company was paying an average of 2.99% per annum interest on the principal balance of $99 million under the Credit Facility. Prior to maturity, no payments of principal are required so long as the borrowing base exceeds the loan balance. The borrowings under the Credit Facility are secured by substantially all of the Company's oil and natural gas properties. At December 31, 2002, the amount available to be borrowed under the Credit Facility was approximately $61 million. At February 28, 2003, borrowings under the Credit Facility totaled $99 million. In connection with the Credit Facility we are required to adhere to certain affirmative and negative covenants. The loan agreement contains a number of dividend restrictions and restrictive covenants which, among other things, require the maintenance of minimum current and interest coverage ratios. As of December 31, 2002, we were in compliance with the covenants contained in the Credit Facility and we expect to be in compliance for 2003. The following table illustrates the Company's contractual obligations outstanding at December 31, 2002:
Payments Due By Period ------------------------------------ Contractual Obligations Total 2003 2004-2005 2006-2007 Thereafter ----------------------- ------- ----- --------- --------- ---------- (in thousands) Long-term debt...... 99,000 -- 99,000 -- -- Operating leases.... 6,043 1,256 2,170 1,696 921 ------- ----- ------- ----- --- Totals........... 105,043 1,256 101,170 1,696 921 ======= ===== ======= ===== ===
Market Risk. 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. Inflation and Changes in Prices. Our revenues and the value of our oil and gas properties have been and will be affected by changes in natural gas and crude oil prices. Our ability to maintain current borrowing capacity and to obtain additional capital on attractive terms is also substantially dependent on natural gas and crude oil prices. These prices are subject to significant seasonal and other fluctuations that are beyond our ability to control or predict. We use various financial instruments in the course of our business to manage and reduce price volatility risks. During 2002, we received an average of $23.01 per barrel of crude oil and $3.25 per Mcf of gas. Additionally costs and expenses are affected by inflationary pressures, which could have a significant impact on the costs necessary to operate our business. Results of Operations Our revenue, profitability, and future rate of growth are dependent upon prevailing prices for oil and gas, which, in turn, depend upon numerous factors such as economic, political, and regulatory developments as well 19 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. You should read the following discussion and analysis together with our audited consolidated financial statements and the related notes for the fiscal years ended December 31, 2002, 2001 and 2000. 2002 Compared With 2001 Revenue. Total revenue for the year ended December 31, 2002 was $91.1 million, a decrease of $29.9 million (25%) over total revenue for 2001 of $121.0 million. Oil, natural gas and plant income revenues for the 2002 period were $103.1 million compared to $116.1 million in 2001, a decrease of $13.0 million (11%). Realized prices for the Company's production were $3.35/Mcfe in 2002 compared to $4.12/Mcfe in 2001, while production volumes increased to 30,615 Mmcfe in 2002 compared to 28,065 Mmcfe in 2001. The Company believes that lower natural gas prices in 2002 were a result of several dynamics. Natural gas prices for the year were 22% lower than the prior year as diminished economic conditions slowed industrial and commercial demand. Both historically high levels of working gas in storage and stable wellhead production further impacted price discovery for natural gas. These supply and demand factors combined to create a less favorable price for North American natural gas and geopolitical events continued to influence world oil prices, which in turn effect natural gas prices. Gain/(Loss) on Sale of Properties and Other Revenue. In 2002 vs. 2001, gains (losses) on property divestments were a loss of $0.2 million and a gain of $0.8 million, respectively, which is a direct result of minimal divestiture activity in 2002 versus significant efforts to divest non-strategic oil and gas properties in 2001. Other revenues in 2002 were $0.5 million compared to $0.8 million in 2001. Other revenue consists primarily of interest, delay rental and lease bonus income. Gain/(Loss) on Derivative Fair Value. During the fourth quarter of 2001, the Company entered into certain derivative transactions that were not designated as hedges and therefore are required under generally accepted accounting principals to be "marked-to-market." At December 31, 2002, these contracts had a fair value liability of $3.6 million, which resulted in a loss of $6.6 million in 2002. See further discussion in Note 12 of the Company's Notes to Consolidated Financial Statements. Expenses. Total expenses for the year ended December 31, 2002 were $89.7 million, a decrease of $3.3 million (4%) from total expenses in 2001 of $93.0 million. Comparability of total expenses was impacted by the decrease in dry hole and impairment expenses, surrendered and expired acreage and the increase in depreciation, depletion and amortization. On a per Mcfe basis, the Company's lease operating expenses decreased by 16% to $0.48 in 2002 from $0.57 in 2001. Production, severance and ad valorem tax decreased 11% to $0.24/Mcfe in 2002 from $0.27/Mcfe in 2001. Gathering, transportation and other expenses were $0.11/Mcfe for both 2002 and 2001. General and administrative expense was $0.30/Mcfe in 2002 compared to $0.25/Mcfe in 2001, interest expense $0.13/Mcfe vs. $0.24/Mcfe in 2001, and DD&A $1.22/Mcfe in 2002 compared to $1.10/Mcfe in 2001. Lease operating expenses on a unit basis continued to benefit from the Company's Classic Acquisition and 2001 divestiture program. The properties in the Classic Acquisition were natural gas wells with lower lease operating costs as compared to the divested properties that had higher lease operating costs which were primarily oil producers. Production, severance and ad valorem taxes were decreased year over year as expected with average sales prices on an mcfe basis being $3.35/Mcfe in 2002 vs. $4.12/Mcfe in 2001. General and administrative expenses were higher year over year as staffing needs increased as a result of the Company's significant growth. The increase on a per unit basis to depreciation, depletion and amortization ("DD&A") is attributed to (i) the Company's developmental drilling activity, which thereby increases the depletable property base and (ii) the increase in South Louisiana volumes, which carry a higher DD&A rate. 20 Income Taxes. The Company recorded a $0.1 million income tax provision during 2002 as compared to a $10.6 million income tax provision for 2001. The results from the Company's operations generated pre-tax income of $1.4 million during 2002 vs. a pre-tax income of $28.0 million in 2001. During 2002, the Company's effective tax rate was approximately 3%. Net Income. The Company's 2002 net income of $1.4 million is compared to $16.8 million in 2001. Dividends to Preferred Shareholders. Dividends to preferred shareholders of $0.7 million in 2002 was comparable to $0.7 million in 2001. 2001 Compared With 2000 Revenue. Total revenue for the year ended December 31, 2001 was $121.0 million, an increase of $17.2 million (17%) over total revenue for 2000 of $103.8 million. Oil, natural gas and plant income revenues for the 2001 period were $116.1 million compared to $102.1 million in 2000, an increase of $14.0 million (14%). Realized prices for the Company's production was $4.12/Mcfe in 2001 compared to $4.23/Mcfe in 2000, while production volumes increased to 28,065 Mmcfe in 2001 compared to 24,598 Mmcfe in 2000. Realized price increases for 2001 and 2000 were reflective of the continued strong commodity price environment in the industry. Comparability of the Company's revenues and volumes were both driven by a significant drilling program in 2001 and 2000 and the acquisitions of Magellan Properties in February 2000, the CWR Properties in May 2000 and the Classic Properties in January 2001, offset by the 2001 property divestments which were all significant contributors to the year over year increases. See further discussion in Note 2 of the Company's Notes to Consolidated Financial Statements. Gain on Sale of Properties and Other Revenue. In 2001 vs. 2000, property divestments resulted in the recognition of gains of $0.8 million and $0.8 million, respectively. The Company continues to actively review and manage its property portfolio for divestiture of non-strategic properties. Other revenues in 2001 were $0.8 million compared to $0.8 million in 2000. Other revenue consists primarily of interest, delay rental and lease bonus income. Gain on Derivative Fair Value. During the fourth quarter of 2001, the Company entered into certain derivative transactions that were not designated as hedges and therefore are required under generally accepted accounting principals to be "marked-to-market." At December 31, 2001, these contracts had a fair market value of $3.1 million. See further discussion in Note 12 of the Company's Notes to Consolidated Financial Statements. Expenses. Total expenses for the year ended December 31, 2001 were $93.0 million, an increase of $35.6 million (62%) from total expenses in 2000 of $57.4 million. Comparability of total expenses was impacted by the increase in dry hole and impairment expenses, surrendered and expired acreage and the increase in depreciation, depletion and amortization. On a per Mcfe basis, the Company's lease operating expenses decreased by 7% to $0.57 in 2001 from $0.61 in 2000. Production, severance and ad valorem tax was flat at $0.27/Mcfe in 2001 vs. $0.27/Mcfe in 2000. General and administrative expense was $0.25/Mcfe in 2001 compared to $0.25/Mcfe in 2000, interest expense $0.24/Mcfe vs. $0.31/Mcfe in 2000, and DD&A $1.10/Mcfe in 2001 compared to $0.80/Mcfe in 2000. Lease operating expenses on a unit basis were impacted by the Company's Classic Acquisition and 2001 divestiture program. The properties in the Classic Acquisition were natural gas wells with lower lease operating costs as compared to the divested properties that had higher lease operating costs which were primarily oil producers. Production, severance and ad valorem taxes were comparable year over year as expected with average sales prices on an Mcfe basis being $4.12/Mcfe in 2001 vs. $4.23/Mcfe in 2000. The increase on a per unit basis to depreciation, depletion and amortization ("DD&A") is attributed to the Classic Acquisition and the Company's developmental drilling program. At the time the Company acquired the 21 stock of Classic Resources, Inc., the historical tax basis of the Classic Acquisition properties were carried over to the Company's books. A corresponding deferred tax liability was recorded in the Company's purchase price allocation for the difference between the allocated value and the historical tax basis. This "gross-up" to record the deferred tax liability, resulted in approximately $29.0 million being added to the depletable book basis of the Classic Acquisition properties. The Company's development drilling activities during 2001 also contributed to the increase in the Company's DD&A rate in 2001 due to a majority of the proved undeveloped reserves associated with these capitalized costs associated having been already included the Company's December 31, 2000 reserve report estimate. Thus, additional costs were added to a relatively static reserve figure, thereby increasing the per unit rate. Income Taxes. The Company recorded a $10.6 million income tax provision during 2001 as compared to a $14.4 million income tax provision for 2000. The results from the Company's operations generated pre-tax income of $28.0 million during 2001 vs. a pre-tax income of $46.4 million in 2000. During 2001, the Company's effective tax rate was approximately 38%. Net Income. The Company's 2001 net income of $16.8 million is compared to $31.7 million in 2000. Dividends to Preferred Shareholders. Dividends to preferred shareholders of $0.7 million in 2001 is a $0.8 million decrease (53%) over 2000 dividends of $1.5 million. The Company redeemed its Series C preferred stock in September, 2000 and recognized a non-cash charge to dividend expense of $0.5 million in 2000. Factors that may Affect Financial Condition and Future Results The Company's business and stock price may be adversely affected if the merger with Plains Exploration & Production Company ("Plains") is not completed. On February 2, 2003, the Company entered into a definitive agreement with Plains whereby Plains will acquire the Company for a combination of cash and stock. If the acquisition is not completed, the Company could be subject to a number of risks that may adversely affect its business and stock price, including the following: . The Company would not realize the benefits it expects by being part of a combined company with Plains, as well as the potentially enhanced financial and competitive position as a result of being part of the combined company. . The diversion of management attention from The Company's day-to-day business and the unavoidable disruption to its employees and business partners as a result of efforts and uncertainties relating to the Company's anticipated merger with Plains may detract from its ability to grow revenues and minimize costs, which, in turn may lead to a loss of opportunities that the Company could be unable to regain if the merger does not occur. . The Company's ability to borrow in certain capital markets may be hindered, resulting in increased borrowing costs, more restrictive covenants and the extension of less open credit; the market price of shares of the Company's common stock may decline to the extent that the current market price of those shares reflects a market assumption that the merger will be completed. . Under certain circumstances the Company could be required to pay Plains a $9.0 million termination fee plus Plains' expenses up to $1.0 million; the Company must pay its costs related to the merger, such as legal and accounting fees and a portion of the investment banking fees. . The Company may not be able to continue its present level of operations, may need to scale back its business, may have to consider additional reductions in force, may have to consider alternative sources of funding and may not be able to take advantage of future opportunities or effectively respond to competitive pressures, any of which could have a material adverse effect on its business and results of operations. 22 In connection with the proposed merger, The Company and Plains have filed a preliminary joint proxy statement/prospectus with the SEC. Once the joint proxy statement/prospectus has been declared effective by the SEC, such definitive joint proxy statement/prospectus will be mailed to all holders of the Company stock and will contain important information about the Company, Plains and the proposed merger, risks relating to the merger and the combined company, and related matters. The Company urges all of its stockholders to read the definitive joint proxy statement/prospectus when it becomes available. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk The Company is exposed to changes in interest rates. Changes in interest rates affect the interest earned on cash, cash equivalents and short-term investments and the interest rate paid on borrowings under the Credit Facility. The Company does not currently use interest rate derivative instruments to manage exposure to interest rate changes, but may do so in the future. Commodity Price Risk The Company's revenues, profitability and future growth depend substantially on prevailing prices for natural gas and oil. Prices also affect the amount of cash flow available for capital expenditures and the Company's ability to borrow and raise additional capital. Lower prices may also reduce the amount of natural gas and oil production under fixed or floating market price contracts. The Company enters into commodity derivative arrangements from time to time to reduce its exposure to fluctuations in natural gas and oil prices and to achieve more predictable cash flow. However, these contracts also limit the benefits the Company would realize if prices increase. These financial arrangements take the form of swap contracts or costless collars and are placed with major trading counterparties the Company believes represent minimum credit risks. The Company cannot provide assurance that these trading counterparties will not become credit risks in the future. Under its current derivative practice, the Company generally does not hedge more than 75 percent of its estimated twelve-month production quantities. The Company enters into New York Mercantile Exchange ("NYMEX") related swap contracts and collar arrangements from time to time. The Company's swap contracts will settle based on the reported settlement price on the NYMEX for the last three trading days of each month for natural gas. In a swap transaction, the counterparty is required to make a payment to the Company for the difference between the fixed price and the settlement price if the settlement price is above the fixed price. As of March 18, 2003, the Company's commodity price risk management positions in fixed price natural gas and crude oil swap, put and call contracts were as follows:
Natural Gas Hedges (Mmbtu/d) 2003 Swaps--$5.02/Mmbtu (April - December)................ 50,000 2004 Swaps--$4.45/Mmbtu (January - December).............. 20,000 Collar--$4.00 x $5.15/Mmbtu (January - December)..... 20,000 Crude Oil Hedges (Bbls/d) 2003 Swaps--$29.62/Bbl (April - December)................. 1,000 2004 Swaps--$24.94/Bbl (January - December)............... 1,000
Based upon the fair value of the Company's derivative contracts outstanding at December 31, 2002, we reported a net current liability on that date of $3.5 million. The Company did not elect to classify these derivative contracts as hedges and therefore is required to mark the contracts to market at the end of each period and 23 recognize the resulting gain or loss through current period earnings. In connection with the derivative contracts outstanding during 2002 and 2001, the Company recognized derivative settlement gains (losses) in revenues of $(5.6) million and $0.2 million, respectively. Through March 18, 2003, the Company had paid net cash settlements of approximately $14.9 million related to 2003 closed contract months (January 2003 - March 2003). The $14.9 million net cash paid for settlements will be recognized in the 2003 statement of operations as a loss on derivative settlements. As of March 18, 2003, the Company only has contracts from April 2003 forward open, which have a fair value liability of $5.4 million. A 10% increase to the March 18, 2003 NYMEX prices would result in settlements of the open contract months (April 2003 through December 2004) for the Company's derivatives to increase by $12.7 million, while a 10% decrease in such prices would result in a $13.4 million decrease to these contract settlements versus the March 18, 2003 mark-to-market loss. Although these derivatives were not designated by the Company as hedges for accounting purposes, the economic volatility of these positions is substantially offset by the physical prices being received for its production. Item 8. Financial Statements and Supplementary Data The Consolidated Financial Statements that constitute this item follow the text of this report. An index to the Consolidated Financial Statements and Schedules appears in Item 15 of this report. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. 24 PART III Item 10. Directors and Executive Officers of the Registrant; Compliance with Section 16(a) of the Exchange Act DIRECTORS AND EXECUTIVE OFFICERS
Name Age Position(s) Held Since ---- --- ----------------------------------------------- ----- Floyd C. Wilson....... 56 Chairman, Chief Executive Officer and Director 1999 R. A. Walker.......... 46 President, Chief Financial Officer and Director 2000 Stephen W. Herod...... 44 Executive Vice President--Corporate Development 1997 and Assistant Secretary Shane M. Bayless...... 36 Vice President, Controller and Treasurer 2000 Richard K. Stoneburner 49 Vice President--Exploration 1999 Mark S. Holt.......... 47 Vice President--Land and Assistant Secretary 1999 C.E. Hackstedt........ 53 Vice President--Engineering and Operations 2000 David S. Elkouri...... 49 Secretary 2000 David B. Miller....... 53 Director 1999 D. Martin Phillips.... 49 Director 1999 Larry L. Helm......... 55 Director 2000 Larry J. Bump......... 63 Director 2002 James L. Irish III.... 58 Director 2002
- -------- FLOYD C. WILSON, Chairman and Chief Executive Officer, joined the Company on August 27, 1999, concurrent with the investment in the Company by W/E Energy Company L.L.C., formerly known as 3TEC Energy Company L.L.C. ("W/E"). Mr. Wilson has been a director of 3TEC since 1999. Mr. Wilson founded W/E in 1998. Mr. Wilson began his career in the energy business in Houston in 1970 as a completion engineer. He moved to Wichita in 1976 to start an oil and gas operating company, one of several private energy ventures which preceded the formation of W/E. Mr. Wilson founded Hugoton Energy Corporation ("Hugoton") in 1987, and served as its Chairman, President and Chief Executive Officer. In 1994, Hugoton completed an initial public offering and was merged into Chesapeake Energy Corporation in 1998. R.A. WALKER, President and Chief Financial Officer, joined 3TEC effective May 1, 2000. Mr. Walker has been a director of 3TEC since 2000. Prior to this he was a Senior Managing Director and Co-head of Prudential Capital Group, a $32 billion asset management and merchant banking affiliate of The Prudential Insurance Company of America investing in privately-placed debt and equity securities. From 1990 to 1998, Mr. Walker was the Managing Director of the Dallas office of Prudential Capital Group where he was responsible for the firm's global energy investments, as well as general corporate finance for the Southwestern United States. He joined Prudential in 1987, holding various responsibilities in its Boston, Dallas and Newark offices, after spending approximately six years in commercial banking and two years with an independent oil and gas company. STEPHEN W. HEROD has served as the Company's Executive Vice President-Corporate Development since December 1999 and as Assistant Secretary since May 2001. Mr. Herod served as a director of the Company from July 1997 until January 2002. Mr. Herod served as the Treasurer of the Company from 1999 until 2001. From July 1997 to December 1999, Mr. Herod was Vice President-Corporate Development. Mr. Herod served as President and a director of Shore Oil Company ("Shore") from April 1992 until the merger of Shore with the Company on June 30, 1997. He joined Shore's predecessor as Controller in February 1991. Mr. Herod was employed by Conquest Exploration Company from 1984 until 1991 in various financial management positions, including Operations Accounting Manager. From 1981 to 1984, Superior Oil Company employed Mr. Herod as a financial analyst. 25 SHANE M. BAYLESS joined the Company in July 2000 as Vice President and Controller. Mr. Bayless has served as the Treasurer of the Company since March 2001. Prior to joining 3TEC, Mr. Bayless was employed by Encore Acquisition Company as Vice President and Controller from 1998 to 2000. Mr. Bayless worked as the Controller from 1996 to 1998 and as the Accounting Manager from 1993 to 1996 at Hugoton. From 1990 to 1993, Mr. Bayless was an Audit Senior with Ernst & Young LLP. He is a Certified Public Accountant. RICHARD K. STONEBURNER joined the Company in August 1999 and became Vice President--Exploration in December 1999. Mr. Stoneburner was employed by W/E as District Geologist from 1998 to 1999. Prior to joining 3TEC, Mr. Stoneburner worked as a geologist for Texas Oil & Gas, The Reach Group, Weber Energy Corporation, Hugoton and, independently through his own company, Stoneburner Exploration, Inc. Mr. Stoneburner has over 20 years of experience in the energy field. MARK S. HOLT joined the Company in August 1999 and became Assistant Secretary in November 1999 and Vice President--Land in December 1999. W/E employed Mr. Holt as District Landman from 1998 to 1999. From 1985 to 1998, Mr. Holt was the owner of Holt Resources, which provided land consulting services to various oil and gas companies and operators. From 1979 to 1985, Mr. Holt was a Senior Landman for Sun Oil Company. C.E. HACKSTEDT joined the Company in December 2000 and became Vice President--Engineering and Operations in March 2001. Prior to joining 3TEC, Mr. Hackstedt was Vice President of Engineering and Operations for Panther Resources Corporation from 1999 to 2000. Mr. Hackstedt was the Vice President of Operations, Gulf Coast Division from 1995 to 1998 and Vice President of Operations from 1992 to 1995 for UMC Petroleum Corporation. DAVID S. ELKOURI became Secretary of the Company in May 2000. Mr. Elkouri is a founding member of the Wichita, Kansas law firm, Hinkle Elkouri Law Firm L.L.C., which was established in 1986. Mr. Elkouri is currently the firm's Co-Managing Director and the Chairman of its Corporate Department. Prior to establishing Hinkle Elkouri Law Firm L.L.C., Mr. Elkouri was a partner in the Wichita law firm of Regan & McGannon and an associate in the San Diego, California law firm of Gray Cary Wave & Freidenrich LLP. He is currently a member of the Board of Directors of Rand Graphics, Inc. and served as a director of Hugoton from 1993 until 1998. He has served an Adjunct Professor of Law at the University of Kansas School of Law teaching business planning. DAVID B. MILLER has served as a director of the Company since 1999 and is a member of our Compensation Committee. Mr. Miller is a Managing Director and co-founder of EnCap. EnCap is an investment management and merchant banking firm focused on the upstream and midstream sectors of the oil and gas industry that was founded in 1988. From 1988 to 1996, Mr. Miller also served as President of PMC Reserve Acquisition Company, a partnership jointly owned by EnCap and Pitts Energy Group. Prior to the establishment of EnCap, Mr. Miller served as Co-Chief Executive Officer of MAZE Exploration Inc., a Denver, Colorado, based oil and gas company he co-founded in 1981. Mr. Miller is also a director of Denbury Resources Inc. D. MARTIN PHILLIPS has served as a director of the Company since 1999. Mr. Phillips is a member of our Compensation Committee and chairman of our Nominating Committee. Mr. Phillips is a Managing Director and principal of EnCap. EnCap is an investment management and merchant banking firm focused on the upstream and midstream sectors of the oil and gas industry that was founded in 1988. Prior to joining EnCap in 1989, from 1978 to 1989, Mr. Phillips served in various management capacities with NCNB Texas National Bank, including as Senior Vice President in the Energy Banking Group. Mr. Phillips is also a director of Mission Resources Corporation and Plains Resources, Inc. LARRY L. HELM has served as a director of the Company since 2000 and is chairman of our Compensation Committee. Mr. Helm is also a member of our Audit Committee. Mr. Helm is responsible for the nationwide Middle Market Banking Group of Bank One Corporation, a position he assumed in 2001. Mr. Helm joined Bank One, NA in 1989 and has held increasingly more responsible positions with Bank One, NA, 26 including, most recently, head of Energy & Utilities Banking. Mr. Helm is a former director of the Independent Petroleum Association of America. LARRY J. BUMP has served as a director of the Company since 2002 and is a member of our Audit and Nominating Committees. Mr. Bump has served as Chairman of the Board of Willbros Group, Inc., an international engineering and construction company, since 1980. JAMES L. IRISH III has served as a director of the Company since 2002 and is chairman of our Audit Committee and a member of our Nominating Committee. Mr. Irish is currently of counsel with Thompson & Knight, L.L.P., a Texas based law firm. Mr. Irish has been an attorney with Thompson & Knight, L.L.P. serving in various capacities, including Managing Partner, since 1969. Section 16(a) Beneficial Ownership Reporting Compliance For the period January 1, 2002, to December 31, 2002, Larry J. Bump and David B. Miller each had one transaction that was not timely filed on a Form 4. EnCap had two transactions that were not timely filed on a Form 4. Item 11. Executive Compensation Executive Compensation Summary Compensation Table. The following table sets forth the aggregate cash compensation earned by and paid to 3TEC's named executive officers for fiscal years 2002, 2001, and 2000. All numbers are rounded to the nearest dollar.
Annual Compensation ------------------------------------------------------------------ Long-Term Awards Compensation Restricted Securities Payouts Stock Options/ Underlying All Other Salary Bonus Awards SARs LTIP Compensation Name and Principal Position Year ($) ($) ($)(2) (#) Payouts ($) ($)(1) - --------------------------- ---- ------- ------- ---------- -------- ----------- ------------ Floyd C. Wilson..................... 2002 400,000 130,000 -- -- -- 12,000 Chairman of the Board; Chief 2001 400,000 200,000 655,500(3) -- -- 10,500 Executive Officer 2000 296,875 525,000 -- 800,000 -- 10,500 R.A. Walker......................... 2002 300,000 90,000 -- -- -- 11,000 President; Chief Financial Officer 2001 300,000 175,000 437,500(4) -- -- 10,500 2000 200,000 280,000 -- 900,000 -- 10,500 Shane M. Bayless.................... 2002 150,000 90,000 -- -- -- 11,000 Vice President--Controller; 2001 150,000 100,000 131,100(5) -- -- 10,500 Treasurer 2000 52,083 80,000 -- 180,000 -- 4,552 Richard K. Stoneburner.............. 2002 165,000 170,000 -- -- 11,000 Vice President--Exploration 2001 135,416 100,000 131,100(5) -- -- 10,500 2000 102,833 110,000 -- 160,000 -- 7,013 C.E. Hackstedt...................... 2002 165,000 130,000 -- -- 11,000 Vice President--Engineering 2001 150,000 100,000 135,100(5) 20,000 10,500 and Operations 2000 -- -- -- 50,000 -- --
- -------- (1) Company matching contribution to 401(K) Plan. (2) Value as of date granted, which was May 8, 2002. Any dividends declared by the Company will be paid on the restricted stock. The shares vest in three equal installments beginning on the date of grant and continuing on the first and second anniversary date of the grant thereafter. (3) Represents 37,500 shares valued at $532,125 as of December 31, 2002 (based upon a stock closing price on December 31, 2002 of $14.19). In addition to the vesting provisions contained in footnote 2 above, these 27 shares shall not vest in any part unless and until the last trade price of the Company's common stock shall be at least $18.00 per share for a period of at least thirty (30) consecutive calendar days, with such thirty (30) day period occurring prior to the date the final one-third of the restricted stock would vest absent such condition. (4) Represents 25,000 shares valued at $354,750 as of December 31, 2002 (based upon a stock closing price on December 31, 2002 of $14.19). In addition to the vesting provisions contained in footnote 2 above, these shares shall not vest in any part unless and until the last trade price of the Company's common stock shall be at least $18.00 per share for a period of at least thirty (30) consecutive calendar days, with such thirty (30) day period occurring prior to the date the final one-third of the restricted stock would vest absent such condition. (5) Represents 7,500 shares valued at $106,425 as of December 31, 2002 (based upon a stock closing price on December 31, 2002 of $14.19). Aggregated Option Exercises in Last Fiscal Year and Option Value Table as of December 31, 2002. The following table sets forth certain information concerning each exercise of stock options during the year ended December 31, 2002, by each of the named executive officers and the aggregated fiscal year-end value of the unexercised options of each such named executive officer:
Number of Securities Underlying Unexercised Value of Unexercised In- Options/SARs at FY End the-Money Options/ SARs Value (#) at FY End ($) (1) - Shares Acquired Realized ------------------------- ------------------------- Name on Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable ---- --------------- -------- ----------- ------------- ----------- ------------- Floyd C. Wilson....... -- -- 633,335 166,665 2,000,838 400,162 R.A. Walker........... -- -- 725,001 174,999 2,587,502 517,498 Shane M. Bayless...... -- -- 150,000 30,000 476,875 95,375 Richard K. Stoneburner 5,500 49,843 133,334 26,666 332,979 73,469 C.E. Hackstedt........ -- -- 55,001 14,999 -- --
- -------- (1) Amounts are based on the fair market value of Company common stock on the last trading day of the year, December 31, 2002, which was $14.19. There is no guarantee that, if and when these options are exercised, they will have this value. Employment Contracts, Termination of Employment and Change-in-Control Arrangements Floyd C. Wilson and 3TEC entered into an employment agreement commencing on April 15, 2000, and terminating on December 31, 2002, with automatic one-year extensions upon each anniversary date of the last day of the employment period thereafter, unless either party gives at least 90 days' notice of termination, to serve as Chief Executive Officer with a $325,000 base annual salary. The Company may terminate Mr. Wilson's employment under the employment agreement for "Cause." "Cause" is defined as (i) the inability of employee, despite any reasonable accommodation required by law, due to bodily injury or disease or any other physical or mental incapacity, to perform the services provided for under the employment agreement for a period of 120 days in the aggregate, within any given period of 180 consecutive days during the term of the employment agreement, in addition to any statutorily required leave of absence, (ii) conduct of the employee that constitutes fraud, theft, or a criminal act involving moral turpitude, in each case only if it materially affects his ability to perform the duties and responsibilities of his position or has a material adverse effect on the Company, (iii) commission of a material act of fraud against the Company, (iv) embezzlement of funds or misappropriation of other property by the employee from the Company; (v) failure of employee to observe or perform his material duties and obligations as an employee of the Company or a material breach of the employment agreement, after 30 days advance written notice of such failure or breach which has not been cured; (vi) employee's habitual use of illegal controlled substances, or intoxication during normal business hours while conducting the Company's business, which, in the reasonable judgment of the Board, so impairs employee's credibility and reputation that employee can no longer perform his duties; or (vii) employee has been found civilly liable for sexual harassment or related offenses (or the Company has been found civilly liable for such actions by employee). 28 If a Change of Control (hereafter defined) has occurred, Mr. Wilson may terminate his employment for Good Reason. "Good Reason" is defined as the occurrence, without employee's express written consent, of any one or more of the following events: (i) a material change in employee's duties (without the consent of employee) or a change in the title or offices held by employee, or any occurrence which causes employee to have his principal place of employment somewhere other than Houston, Texas; (ii) a reduction in employee's compensation or the failure by the Company to continue to provide prompt payment (or reimbursement to employee) of all reasonable expenses incurred by employee in connection with employee's professional and business activities; (iii) a failure by the Company to waive any and all restrictions that might exist on the exercise of any stock options held by employee under the Company's stock option plans as of the date of a Change of Control; and (iv) the failure of the Company to obtain the assumption of the employment agreement, without limitation or reduction, by any successor to the Company. A "Change of Control" shall have occurred if: (i) fifty percent (50%) or more of the outstanding common stock of the Company has been acquired by any person or persons (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Act")), provided such person(s) is not a stockholder(s) of the Company currently holding ten percent (10%) or more of the outstanding common stock of the Company at the time of the execution of the employment agreement. For purposes of this paragraph, such person shall include affiliated persons (as defined in the Act); (ii) there has been a merger or equivalent combination involving the Company after which fifty percent (50%) or more of the voting stock of the surviving corporation is held by persons other than those persons who were stockholders holding ten percent (10%) or more of the outstanding stock of the Company immediately prior to the date of such merger or equivalent combination; or (iii) there has been a merger or equivalent combination or stock sale involving the Company and after such transaction fifty percent (50%) or more of the members of the surviving company's Board elected by stockholders are persons who were not directors immediately prior to such transaction. If Mr. Wilson is terminated by 3TEC without Cause, or Mr. Wilson leaves for Good Reason, the Company is required to pay him a lump sum amount equal to two times his annual base salary. The employment agreement contains certain noncompete, confidentiality and noninterference provisions. For example, during the term of the employment agreement Mr. Wilson may not be employed or render advisory, consulting or other services in connection with any business enterprise or person that is engaged in leasing, acquiring, exploring, producing, gathering or marketing hydrocarbons and related products. Further, during the term of the employment agreement Mr. Wilson may not be financially interested, invest or engage in any business that is engaged in leasing, acquiring, exploring, producing, gathering or marketing hydrocarbons and related products, with certain limited exceptions. The agreement also provides that Mr. Wilson will not disclose or make use of any trade secrets or confidential or proprietary information pertaining to the Company in a way that is materially detrimental to the Company. Mr. Wilson is also prohibited during the two-year period of his employment agreement or the period in which Mr. Wilson is employed by the Company, whichever is longer, and for a six-month period commencing upon the termination of such longer period from soliciting any employee of the Company or any other person who is under contract with or rendering services to the Company to (i) terminate his or her employment with the Company, (ii) refrain from extending or renewing his or her employment with the Company, (iii) refrain from rendering services to or for the Company, or (iv) become employed by or to enter into contractual relations with any persons other than the Company. R.A. Walker and 3TEC entered into an employment agreement commencing on May 1, 2000, and terminating on December 31, 2002, with automatic one-year extensions upon each anniversary date of the last day of the employment period thereafter, unless either party gives at least 90 days' notice of termination, to serve as President and Chief Financial Officer with a $300,000 base salary. The agreement provides that Mr. Walker will be granted stock options giving him the right to purchase 500,000 shares of common stock in the Company, one-half of which shall be vested upon grant with the remaining one-half to vest equally over a three (3) year period. The option price shall be the fair market value of the stock on the date of grant. The Company may terminate Mr. Walker's employment under the employment agreement for Cause or without Cause. "Cause" is defined as (i) the inability of employee, despite any reasonable accommodation required by law, due to bodily injury or disease or any other physical or mental incapacity, to perform the services provided for under the employment agreement for a period of 120 days in the aggregate, within any given period of 180 consecutive 29 days during the term of the employment agreement, in addition to any statutorily required leave of absence, (ii) conduct of the employee that constitutes fraud, theft, or a criminal act involving moral turpitude, in each case only if it materially affects his ability to perform the duties and responsibilities of his position or has a material adverse effect on the Company, (iii) commission of a material act of fraud against the Company, (iv) embezzlement of funds or misappropriation of other property by the employee from the Company; (v) failure of employee to observe or perform his material duties and obligations as an employee of the Company or a material breach of the employment agreement, after 30 days advance written notice of such failure or breach which has not been cured, (vi) employee's habitual use of illegal controlled substances, or intoxication during normal business hours while conducting the Company's business, which, in the reasonable judgment of the Board, so impairs employee's credibility and reputation that employee can no longer perform his duties, or (vii) employee has been found civilly liable for sexual harassment or related offenses (or the Company has been found civilly liable for such actions by employee). If a Change of Control (hereafter defined) has occurred, Mr. Walker may terminate his employment for Good Reason. "Good Reason" is defined as the occurrence, without employee's express written consent, of any one or more of the following events: (i) a material change in employee's duties (without the consent of employee) or a change in the title or offices held by employee, or any occurrence which causes employee to have his principal place of employment somewhere other than Houston, Texas; (ii) a reduction in employee's compensation or the failure by the Company to continue to provide prompt payment (or reimbursement to employee) of all reasonable expenses incurred by employee in connection with employee's professional and business activities; (iii) a failure by the Company to waive any and all restrictions that might exist on the exercise of any stock options held by employee under the Company's stock option plans as of the date of a Change of Control; and (iv) the failure of the Company to obtain the assumption of the employment agreement, without limitation or reduction, by any successor to the Company. A "Change of Control" shall have occurred if: (i) fifty percent (50%) or more of the outstanding common stock of the Company has been acquired by any person or persons (as defined in Section 3(a)(9) of the Act), provided such person(s) is not a stockholder(s) of the Company currently holding ten percent (10%) or more of the outstanding common stock of the Company at the time of the execution of the employment agreement. For purposes of this paragraph, such person shall include affiliated persons (as defined in the Act); (ii) there has been a merger or equivalent combination involving the Company after which fifty percent (50%) or more of the voting stock of the surviving corporation is held by persons other than those persons who were stockholders holding ten percent (10%) or more of the outstanding stock of the Company immediately prior to the date of such merger or equivalent combination; or (iii) there has been a merger or equivalent combination or stock sale involving the Company and after such transaction fifty percent (50%) or more of the members of the surviving company's Board elected by stockholders are persons who were not directors immediately prior to such transaction. If Mr. Walker is terminated by 3TEC without Cause, or Mr. Walker leaves for Good Reason, the Company is required to pay him a lump sum amount equal to two times his annual base salary. The employment agreement contains certain noncompete, confidentiality and noninterference provisions. For example, during the term of the employment agreement Mr. Walker may not be employed or render advisory, consulting or other services in connection with any business enterprise or person that is engaged in leasing, acquiring, exploring, producing, gathering or marketing hydrocarbons and related products. Further, during the term of the employment agreement Mr. Walker may not be financially interested, invest or engage in any business that is engaged in leasing, acquiring, exploring, producing, gathering or marketing hydrocarbons and related products, with certain limited exceptions. The agreement also provides that Mr. Walker will not disclose or make use of any trade secrets or confidential or proprietary information pertaining to the Company in a way that is materially detrimental to the Company. Mr. Walker is also prohibited during the period of his employment agreement or the period in which Mr. Walker is employed by the Company, whichever is longer, and for a six-month period commencing upon the termination of such longer period from soliciting any employee of the Company or any other person who is under contract with or rendering services to the Company to (i) terminate his or her employment with the Company, (ii) refrain from extending or renewing his or her 30 employment with the Company, (iii) refrain from rendering services to or for the Company, (iv) become employed by or to enter into contractual relations with any persons other than the Company. The Board approved an arrangement in December, 2000, whereby Shane M. Bayless is to receive a lump sum payment equal to two (2) times his annual compensation if Mr. Bayless is terminated by the Company without Cause or if Mr. Bayless terminates his employment for Good Reason. Cause and Good Reason are as defined in Mr. Wilson's employment agreement. On October 29, 2002, the Board approved a Severance Compensation Plan (the "Severance Plan") for employees, including the executive officers named herein. Upon the execution of a definitive agreement providing for a transaction resulting in a Change of Control ("Control Transaction"), if the surviving entity in such transaction or its affiliate does not, on or before thirty (30) days prior to the date set for closing (the "Closing") of the Change in Control, offer any Company employee a job with substantially comparable duties and at a base salary and fringe benefits at a level equal to or greater than those in effect at the time such offer is made and in a location that is within a fifteen mile radius of the metropolitan city in which such employee's employment is located at the time such offer is made, such employee shall be entitled to a severance benefit, as set forth on an exhibit to the Severance Plan (the "Severance Benefit"), which shall be paid by the Company prior to Closing. In addition, if within one (1) year following the occurrence of a Change in Control, the Company (or its successor) (a) terminates the employment of any employee (other than for cause as defined below), or (b) without such employee's consent (i) substantially changes such employee's duties, (ii) reduces such employee's base salary, (iii) fails to maintain fringe benefits at a level equal to or greater than those in effect at the date of the Change of Control, or (iv) relocates such employee outside a fifteen (15) miles radius of the metropolitan city in which such employee's employment location is located, the Severance Benefit will payable to the former employee within ten (10) days of such event. Change in Control is defined as: (i) the Company shall not be the surviving entity in any merger, consolidation or other reorganization (or survives only as a subsidiary of an entity other than a previously wholly-owned subsidiary of the Company), (ii) the Company sells, leases or exchanges substantially all of its assets to any other person or entity (other than a wholly-owned subsidiary of the Company), (iii) the Company is to be dissolved and liquidated, (iv) any person or entity, including a "group" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934 acquires or gains ownership or control (including, without limitation, power to vote) of more than 50% of the outstanding shares of the Company's voting stock (based upon voting power), or (v) as a result of or in connection with a contested election of directors, the persons who were directors of the Company before such election shall cease to constitute a majority of the Board. Cause is defined as (i) the inability of an employee, despite any reasonable accommodation required by law, due to bodily injury or disease or any other physical or mental incapacity, to perform his services for the Company for a period of 120 days in the aggregate, within any given period of 180 consecutive days, in addition to any statutorily required leave of absence, (ii) conduct of the employee that constitutes fraud, theft, or a criminal act involving moral turpitude, in each case only if it materially affects his ability to perform the duties and responsibilities of his position or has a material adverse effect on the Company, (iii) commission of a material act of fraud against the Company, (iv) embezzlement of funds or misappropriation of other property by the employee from the Company; (v) failure of the employee to observe or perform his material duties and obligations as an employee of the Company, which after thirty (30) days advance written notice of such failure has not been cured; (vi) employee's habitual use of illegal controlled substances, or intoxication during normal business hours while conducting the Company's business, which, in the reasonable judgment of the Board, so impairs the employee's credibility and reputation that employee can no longer perform his duties; or (vii) employee has been found civilly liable for sexual harassment or related offenses (or the Company has been found civilly liable for such employee's actions). 31 Compensation of Directors As adopted by the Board on November 1, 2001 to be effective as of January 1, 2002, the Company pays each non-employee director an annual board retainer fee of $15,000. Additionally, the Company pays each non-employee director $1,000 for attending meetings of the Board or its Nominating and Compensation committees, whether in attendance in person or by telephone. As adopted by the Board on October 29, 2002, effective as of that date, the Company pays each non-employee director who is a member of the Audit Committee $2,500 for each meeting of the Audit Committee and $3,500 to the Chairman of the Audit Committee for each meeting of the Audit Committee, whether in attendance in person or by telephone. Non-employee directors are given the opportunity to receive their cash compensation in the form of Company common stock based on the closing market price of the common stock on the last trading day of the calendar quarter during which such director is entitled to receive the cash compensation. 3TEC reimburses directors' documented travel and lodging expenses incurred in connection with services to the Company. Each non-employee director is eligible for incentive awards under the Amended and Restated 1995 Stock Option and Stock Appreciation Rights Plan, however none were issued in 2002. Pursuant to the 3TEC Energy Corporation 2000 Non-Employee Directors' Stock Option Plan, as amended (the "2000 Non-Employee Plan"), on the date an individual becomes a non-employee director, the director receives an initial option to purchase 15,000 shares of common stock. In addition, on the first trading day on or after January 1st of each year, each non-employee director who is then serving and has served as a non-employee director for more than six months receives an option to purchase 10,000 shares of common stock. The exercise price of an option is the fair market value which is defined as the closing price of the common stock reported by NASDAQ on the date of grant. Options vest and are exercisable immediately. In January 2002, Mr. Helm, Mr. Phillips and Mr. Miller were each granted an option to purchase 10,000 shares of common stock under the 2000 Non-Employee Plan, and Mr. Bump and Mr. Irish were each granted an option to purchase 15,000 shares of common stock under the 2000 Non-Employee Plan. Mr. Phillips and Mr. Miller then assigned their options to EnCap Energy Capital Fund III, L.P. Compensation Committee Interlocks and Insider Participation During 2002: None of the members of the Board's Compensation Committee was an officer (or former officer) or employee of the Company or any of its subsidiaries; None of the Company's executive officers served on the compensation committee (or another board committee with similar functions, or in the absence of any such committee, the entire board of directors) of any entity where one of that entity's executive officers served on the Company's Compensation Committee; None of the Company's executive officers was a director of another entity where one of that entity's executive officers served on the Company's Compensation Committee; and None of the Company's executive officers served on the compensation committee (or another board committee with similar functions, or in the absence of any such committee, the entire board of directors) of another entity where one of that entity's executive officers served as a director on the Company's Board. Larry L. Helm, the chairman of the Compensation Committee and a director of the Company, is responsible for the nationwide Middle Market Banking Group of Bank One Corporation. The Company has a $250 million credit facility with Bank One, NA, as administrative agent, Bank of Montreal, as syndication agent, and Union Bank of California, N.A., Wells Fargo Bank Texas, National Association, CIBC, Inc., Comerica Bank, Fleet 32 National Bank and The Bank of Nova Scotia as participating lenders. The borrowing base is redetermined semi-annually and as of March 7, 2003, was $160 million. In addition, the Company is a party to certain derivative contracts that Bank One, NA is the counter-party to. These derivative contracts cover a portion of the Company's anticipated natural gas production for 2003. On February 2, 2003, the Company entered into a definitive agreement with Plains Exploration & Production Company ("Plains") whereby Plains will acquire the Company for a combination of cash and stock. Under the terms of the agreement, the Company's shareholders will receive $8.50 in cash and 0.85 shares of Plains' Common Stock for each share of the Company's Common Stock, subject to certain adjustments based on Plains' share price prior to closing. Although subject to shareholder approval, the aforementioned transaction is expected to close during the second quarter of 2003. Two members of 3TEC's Board who are also members of the Compensation Committee, D. Martin Phillips and David B. Miller, are managing directors of EnCap, which beneficially owns 453,980 shares of 3TEC preferred stock and 2,980,635 shares of 3TEC common stock, as well as 1,848,728 shares of Plains's common stock. 33 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The following table sets forth the shares of 3TEC's common stock beneficially owned by those persons known by 3TEC to be the beneficial owner of more than five percent of 3TEC's issued and outstanding common stock, as well as the shares of 3TEC's common stock beneficially owned by each director and named executive officer and all directors and executive officers as a group. All percentages are based on 16,780,776 shares of common stock issued and outstanding on February 12, 2003:
Amount and Nature of Percent Beneficial of Name and Address of Beneficial Owner Ownership (1) Class ------------------------------------ ------------- ------- Shane M. Bayless................................................ 152,500(2) * Larry J. Bump................................................... 25,000 * C.E. Hackstedt.................................................. 60,834(3) * Larry L. Helm................................................... 55,000 * James L. Irish III.............................................. 26,799 * David B. Miller................................................. 0 * D. Martin Phillips.............................................. 0 * Richard K. Stoneburner.......................................... 130,334(4) * R.A. Walker..................................................... 727,001 4.2% Floyd C. Wilson................................................. 1,495,959(5) 8.5% Directors and executive officers of 3TEC as a group (13 persons) 3,015,113 18.0% Artisan Partners Limited Partnership 1000 N. Water Street, Suite 770 Milwaukee, WI 53202........................................... 1,449,808(6) 8.6% EnCap Energy Acquisition III-B, Inc. (7)........................ 1,445,537(8) 8.4% EnCap Energy Capital Fund III, L.P. (7)......................... 2,021,322(9) 11.5% EnCap Energy Capital Fund III-B, L.P. (7)....................... 1,445,537(10) 8.4% EnCap Investments L.L.C. (7).................................... 4,609,452(11) 25.0% Kaiser-Francis Oil Company 6733 South Yale Tulsa, OK 74136............................................... 1,112,578(12) 6.6% Plains Exploration & Production Company 500 Dallas Street, Suite 700 Houston, TX 77002............................................. 7,139,465(13) 35.3% Royce & Associates, Inc. 1414 Avenue of the Americas New York, NY 10019............................................ 1,731,075(14) 10.3% T. Rowe Price Associates, Inc. 100 E. Pratt Street Baltimore, MD 21202........................................... 1,198,500(15) 7.1% Wentworth, Hauser & Violich 353 Sacramento Street, Suite 600 San Francisco, CA 94111....................................... 1,439,151(16) 8.6%
- -------- * Represents less than 1%. (1) Includes both outstanding shares of 3TEC common stock and shares of 3TEC common stock such person has the right to acquire within 60 days of February 12, 2003 by the exercise of outstanding stock options. Shares subject to stock options exercisable within 60 days of February 12, 2003 include: 150,000 shares for Mr. Bayless; 25,000 shares for Mr. Bump; 58,334 shares for Mr. Hackstedt; 55,000 shares for Mr. Helm; 25,000 shares for Mr. Irish; 127,834 shares for Mr. Stoneburner; 725,001 shares for Mr. Walker; and 633,335 shares for Mr. Wilson. 34 (2) Includes 2,500 shares of restricted stock. (3) Includes 2,500 shares of restricted stock. (4) Includes 2,500 shares of restricted stock. (5) Includes 5,000 shares of common stock owned by Wilvest Limited Partnership of which Mr. Wilson is the general partner; and warrants to purchase 290,014 shares of common stock granted to Mr. Wilson. Mr. Wilson disclaims beneficial ownership of the shares owned by Wilvest Limited Partnership except to the extent of his pecuniary interest therein. (6) As disclosed in a joint filing with Artisan Investment Corporation, Andrew A. Ziegler and Carlene Murphy Ziegler on Schedule 13 G/A filed with the SEC on January 31, 2003. (7) The address for EnCap Energy Acquisition III-B, Inc., EnCap Energy Capital Fund III, L.P., EnCap Energy Capital Fund III-B, L.P. and EnCap Investments L.L.C. is 1100 Louisiana, Suite 3150, Houston, TX 77002. (8) As disclosed in a joint filing on Schedule 13D/A filed with the SEC on February 12, 2003. This figure includes 957,587 shares of common stock, 145,850 shares of Series D Preferred Stock convertible into 145,850 shares of common stock, and warrants to purchase 342,100 shares of common stock. (9) As disclosed in a joint filing on Schedule 13D/A filed with the SEC on February 12, 2003. This figure includes 1,266,144 shares of common stock, 192, 846 shares of Series D Preferred Stock convertible into 192,846 shares of common stock, warrants to purchase 452,332 shares of common stock, and 110,000 shares issuable upon exercise of stock options. (10) As disclosed in a joint filing on Schedule 13D/A filed with the SEC on February 12, 2003. Includes 1,445,537 shares owned by EnCap Acquisition described in footnote 8 above. As the controlling person of EnCap Acquisition, EnCap III-B may be deemed to share voting and dispositive power with respect to the shares of common stock owned by EnCap Acquisition; however, EnCap III-B disclaims any beneficial ownership of these shares. (11) As disclosed in a joint filing on Schedule 13 D/A filed with the SEC on February 12, 2003. As the general partner or controlling person of each entity, Encap Investments L.L.C. ("EnCap") may be deemed to have the power to vote and direct the vote or to dispose or direct the disposition of 4,609,452 shares of common stock beneficially owned by EnCap Energy Capital Fund III, L.P., EnCap Energy Acquisition III-B, Inc. ("EnCap Acquisition"), ECIC Corporation, and BOCP Energy Partners, L.P. ("BOCP"). This figure includes the shares described in footnotes 8 and 9 above, as well as 447,095 shares of common stock, 68,097 shares of Series D Preferred Stock convertible into 68,097 shares of common stock, and warrants to purchase 159,725 shares of common stock beneficially owned by ECIC Corporation, and 309,809 shares of common stock, 47,187 shares of Series D Preferred Stock convertible into 47,187 shares of common stock, and warrants to purchase 110,680 shares of common stock beneficially owned by BOCP. The controlling person of EnCap is El Paso Merchant Energy North America Company ("El Paso Merchant Energy"). The controlling person of El Paso Merchant Energy is El Paso Corporation. El Paso Merchant Energy and El Paso Corporation may be deemed to have the power to vote and direct the vote or to dispose or direct the disposition of the shares. El Paso Merchant Energy and El Paso Corporation disclaim any beneficial ownership of these shares. (12) Kaiser-Francis Oil Company is a wholly owned subsidiary of GBK Corporation, which is owned 78.22% directly by George B. Kaiser and 21.78% indirectly by Mr. Kaiser through affiliates. (13) Represents (i) 3,668,131 shares of 3TEC common stock, (ii) 1,354,851 shares of 3TEC common stock issuable upon exercise of warrants; (iii) 453,980 shares of Series D Preferred Stock, convertible into common shares, and (iv) 1,662,503 shares of 3TEC common stock issuable upon exercise of options that are subject to a voting agreement detailed below in the section titled Changes in Control. The voting agreement was executed in connection with the execution of a definitive merger agreement with Plains whereby Plains will acquire the Company for a combination of cash and stock. As a result of entering into the voting 35 agreement, Plains may be deemed to have the power to vote, and to be the beneficial owner of 7,139,465 shares. Each voting agreement will terminate upon the first to occur of (i) the effective time of the merger or (ii) the date upon which the merger agreement is terminated. (14) As disclosed in a filing on Schedule 13 G/A filed with the SEC on February 5, 2003. (15) As disclosed in a filing on Schedule 13 G/A filed with the SEC on February 5, 2003. (16) As disclosed in a joint filing with Laird Norton Financial Group, Inc. on Schedule 13 G/A filed with the SEC on February 13, 2002. Changes in Control On February 2, 2003, the Company entered into a definitive agreement with Plains whereby Plains will acquire the Company for a combination of cash and stock. In connection with the execution of the merger agreement, each of EnCap Energy Capital Fund III, L.P., EnCap Energy Acquisition III-B, Inc., BOCP Energy Partners, L.P., ECIC Corporation, Floyd C. Wilson, Stephen W. Herod and R.A. Walker entered into voting agreements with Plains and 3TEC to vote all of the shares of 3TEC common stock and 3TEC preferred stock they own in favor of the adoption of the merger agreement. Mr. Wilson and Mr. Walker are officers and directors of 3TEC. Mr Herod is an officer of 3TEC. The entities described above in the aggregate and Mr. Wilson own more than 5% of 3TEC's common stock and, in the case of the entities, a majority of the 3TEC preferred stock. In addition, each has agreed not to transfer their shares of 3TEC common stock or 3TEC preferred stock (except they may transfer their shares to an affiliate or other stockholder of 3TEC who agrees to be bound by the terms of the voting agreement), not to grant a proxy with respect to such shares and not to solicit or vote in favor of any competing transaction to the merger. Finally, each has agreed to not exercise their employee stock options or warrants to purchase 3TEC common stock for $3.00, except as contemplated by the merger agreement. The aggregate amount of shares of 3TEC common stock and 3TEC preferred stock subject to these voting agreements represents approximately 22% of the outstanding 3TEC common stock and approximately 74% of the outstanding 3TEC preferred stock. Each voting agreement will terminate upon the first to occur of (i) the effective time of the merger or (ii) the date upon which the merger agreement is terminated. In addition, as a result of the merger with Plains: (1) all restrictions on restricted common stock held the Company's officers and directors (except 37,500 shares held by Mr. Wilson and 25,000 shares held by Mr. Walker, which will be cancelled) will fully vest on or before the effective date of the merger, and (2) all outstanding options that have not vested (except for 80,000 stock options held by Mr. Wilson and 70,000 stock options held by Mr. Walker, which will be cancelled) will fully vest on or before the effective date of the merger and will be converted into merger consideration on a cashless exercise basis. Item 13. Certain Relationships and Related Transactions Larry L. Helm, the chairman of the Compensation Committee and a director of the Company, is responsible for the nationwide Middle Market Banking Group of Bank One Corporation. The Company has a $250 million credit facility with Bank One, NA, as administrative agent, Bank of Montreal, as syndication agent, and Union Bank of California, N.A., Wells Fargo Bank Texas, National Association, CIBC, Inc., Comerica Bank, Fleet National Bank and The Bank of Nova Scotia as participating lenders. The borrowing base is redetermined semi-annually and as of March 7, 2003, was $160 million. In addition, the Company is a party to certain derivative contracts that Bank One, NA is the counter-party to. These derivative contracts cover a portion of the Company's anticipated natural gas production for 2003. On February 2, 2003, the Company entered into a definitive agreement with Plains Exploration & Production Company ("Plains") whereby Plains will acquire the Company for a combination of cash and stock. Under the terms of the agreement, the Company's shareholders will receive $8.50 in cash and 0.85 shares of Plains' Common Stock for each share of the Company's Common Stock, subject to certain adjustments based on Plains' share price prior to closing. Although subject to shareholder approval, the aforementioned transaction is expected to close during the second quarter of 2003. Two members of 3TEC's Board, D. Martin Phillips and David B. Miller, are managing directors of EnCap, which beneficially owns 453,980 shares of 3TEC preferred stock and 2,980,635 shares of 3TEC common stock, as well as 1,848,728 shares of Plains's common stock. 36 Item 14. Controls and Procedures Within 90 days of the filing date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the Company's disclosure controls and procedures (as defined in Rule 13a-14(c) of the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Consolidated Financial Statements: See Index to Consolidated Financial Statements on page F-1 2. 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 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.) 2.4 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.) 2.5 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.) 2.6 Form of Stock Purchase Agreement by and between 3TEC Energy Corporation and Classic Resources, Inc., Natural Gas Partners IV, L.P., Natural Gas Partners V, L.P., and certain individual signatories. (Incorporated by reference to Exhibit 2.1 to Form 8-K filed February 13, 2001.) 2.7 Merger Agreement, dated October 25, 2001, by and among 3TEC Energy Corporation, 3NEX Acquisition Corporation and Enex Resources Corporation. (Incorporated by reference to Exhibit 2.7 to form 10-KSB filed April 1, 2002.) 2.8 Certificate of Ownership and Merger Merging Enex Resources Corporation into 3TEC Energy Corporation filed with the Delaware Secretary of State January 31, 2002. (Incorporated by reference to Exhibit 2.8 to Form 10-KSB filed April 1, 2002.) 2.9 Certificate of Ownership and Merger Merging 3TEC/CRI Corporation into 3TEC Energy Corporation filed with the Delaware Secretary of State August 6, 2002. * 2.10 Agreement and Plan of Merger by and among Plains Exploration & Production Company, PXP Gulf Coast Inc. and 3TEC Energy Corporation dated as of February 2, 2003. (Incorporated by reference to Exhibit 10.1 to Form 8-K filed February 4, 2003).
37 3.1 Certificate of Incorporation of 3TEC Energy Corporation. (Incorporated by reference to Exhibit 3.1 of Form 8-K filed December 6, 1999.) 3.2 Certificate of Amendment to the Certificate of Incorporation of 3TEC Energy Corporation. (Incorporated by reference to Exhibit 3.3 of Form 10-KSB filed March 30, 2000.) 3.3 Certificate of Amendment of the Certificate of Incorporation of 3TEC Energy Corporation, dated June 14, 2001 (Incorporated by reference to Exhibit 3.5 Form 10-QSB filed August 8, 2001.) 3.4 Certificate of Merger of Middle Bay Oil Company, Inc. into 3TEC Energy Corporation. (Incorporated by reference to Exhibit 3.3 of Form 8-K/A filed December 16, 1999.) 3.5 Bylaws of the Company. (Incorporated by reference to Exhibit C to Form DEF14A filed October 25, 1999.) 3.6 Amendment No. 1 to Bylaws of the Company. (Incorporated by reference to Exhibit 4.5 Form S-8 filed October 26, 2001.) 3.7 Amendment No. 2 to Bylaws of 3TEC Energy Corporation. (Incorporated by reference to Exhibit 3.6 to Form 10-QSB filed August 8, 2001.) 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 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 Form DEF14A 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 Agreement to Terminate Shareholders' Agreement, dated April 30, 2001, by and among the Company and the Major Shareholders. (Incorporated by reference to Exhibit 10.6 to Form 10-QSB filed November 8, 2001.) 10.7 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.) 10.8 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.) 10.9 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.)
38 10.10 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.) 10.11 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.) 10.12 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.) 10.13 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 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.) 10.15 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.) 10.16 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.) 10.17 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 10.19 to Form S-2 filed April 28, 2000.) 10.18 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.) 10.19 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.) 10.20 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.) 10.21 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.) 10.22 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.) 10.23 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.) 10.24 Amendment No. 1 to Amended and Restated 1995 Stock Option and Stock Appreciation Rights Plan. (Incorporated by reference to Exhibit 99.7 Form S-8 filed November 6, 2000.) 10.25 Amendment No. 3 to Amended and Restated 1995 Stock Option and Stock Appreciation Rights Plan. (Incorporated by reference to Exhibit 99.8 Form S-8 filed November 6, 2000.) 10.26 1999 Stock Option Plan. (Incorporated by reference to Exhibit E to Form DEF 14A filed October 25, 1999.)
39 10.27 Amendment No. 1 to 3TEC Energy Corporation 1999 Stock Option Plan. (Incorporated by reference to Exhibit 99.4 Form S-8 filed November 6, 2000.) 10.28 2000 Stock Option Plan (Incorporated by reference to Exhibit A to Form DEF 14A filed on May 1, 2000.) 10.29 Amendment No. 1 to 3TEC Energy Corporation 2000 Stock Option Plan. (Incorporated by reference to Exhibit 99.2 Form S-8 filed November 6, 2000.) 10.30 3TEC Energy Corporation 2001 Stock Option Plan. (Incorporated by reference to Exhibit 99.1 Form S-8 filed October 26, 2001.) 10.31 3TEC Energy Corporation 2000 Non-Employee Directors Stock Option Plan. (Incorporated by reference to Exhibit 99.2 Form S-8 filed October 26, 2001.) 10.32 Amendment No. 1 to 3TEC Energy Corporation 2000 Non-Employee Directors' Stock Option Plan. (Incorporated by reference to Exhibit 10.32 to Form 10-Q filed May 13, 2002. 10.33 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.) 10.34 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.) 10.35 Third Restated Credit Agreement among 3TEC Energy Corporation, Enex Resources Corporation and 3TEC/CRI Corporation, as Borrowers, and Bank One, N.A. and the Institutions named therein, as Lenders, Bank One, N.A., as Administrative Agent, Bank of Montreal as Syndication Agent and Banc One Capital Markets, Inc., as Arranger, dated March 12, 2001. (Incorporated by reference to Exhibit 10.27 to Form 10-QSB filed May 14, 2001.) 10.36 3TEC Energy Corporation Amended and Restated 2001 Stock Option and Restricted Stock Plan (Incorporated by reference to Exhibit B to Form DEF 14A filed April 4, 2002. 10.37 Letter Amendment to Third Restated Credit Agreement among 3TEC Energy Corporation, as Borrower, and Bank One, N.A., as Administrative Agent and Lender, and the Major Lenders, dated September 30, 2002. (Incorporated by reference to Exhibit 10.37 to Form 10Q filed November 11, 2002. 23.1 Consent of KPMG LLP, independent auditors. * 23.2 Consent of Ryder Scott Company, independent petroleum engineers. * 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. * 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. *
- -------- * Filed herewith (b) The following reports were filed on Form 8-K during the fourth quarter of 2002: None 40 GLOSSARY OF CERTAIN OIL AND GAS TERMS The following are abbreviations and definitions of certain terms commonly used in the oil and gas industry and herein: Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in reference to oil or other liquid hydrocarbons. Bcf. One billion cubic feet of natural gas. Bcfe. One billion cubic feet of natural gas equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids. Btu or British Thermal Unit. The quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit. Completion. The installation of permanent equipment for the production of natural gas or oil, or in the case of a dry hole, the reporting of abandonment to the appropriate agency. Condensate. Liquid hydrocarbons associated with the production of a primarily natural gas reserve. Developed acreage. The number of acres that are allocated or assignable to productive wells or wells capable of production. Development well. A well drilled into a proved natural gas or oil reservoir to the depth of a stratigraphic horizon known to be productive. Exploratory well. A well drilled to find and produce natural gas or oil reserves that are not proved, to find a new reservoir in a field previously found to be productive of natural gas or oil in another reservoir or to extend a known reservoir. Field. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic level. MBbls. One thousand barrels of oil or other liquid hydrocarbons. Mcf. One thousand cubic feet of natural gas. Mcfe. One thousand cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids. Mmbtu. One million British Thermal Units. Mmcf. One million cubic feet of natural gas. Mmcfe. One million cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids. Productive well. A well that is found to be capable of producing sufficient quantities of oil and gas so that proceeds from the sale of the production are greater than production expenses and taxes. Prospect. A specific geographic area which, based on supporting geological, geophysical or other data and also preliminary economic analysis using reasonably anticipated prices and costs, is deemed to have potential for the discovery of oil and natural gas. Proved developed reserves. Reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. 41 Proved reserves. The estimated quantities of oil, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved undeveloped reserves. Reserves that are expected to be recovered from new wells on developed acreage where the subject reserves cannot be recovered without drilling additional wells. PV-10 value. The estimated future net revenue to be generated from the production of proved reserves discounted to present value using an annual discount rate of 10%. These amounts are calculated net of estimated production costs and future development costs, using prices and costs in effect as of a certain date, without escalation and without giving effect to non-property related expenses, such as general and administrative expenses, debt service, future income tax expense, or depreciation, depletion, and amortization. Recompletion. The completion of an existing well for production from a formation that exists behind the casing of the well. Reservoir. A porous and permeable underground formation containing a natural accumulation of producible natural gas and/or oil that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs. Royalty interest. An interest in a natural gas and oil property entitling the owner to a share of natural gas and oil production free of costs of production. Standardized measure. The estimated future net cash flows from proved natural gas and oil reserves computed using prices and costs, at a specific date, after income taxes and discounted at 10%. Tcfe. One trillion cubic feet of natural gas equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids. Undeveloped acreage. Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of natural gas and oil regardless of whether such acreage contains proved reserves. Working interest. The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and receive a share of production. 42 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 on its behalf by the undersigned, thereunto duly authorized, as of March 26, 2003. 3TEC ENERGY CORPORATION (Registrant) By: /s/ FLOYD C. WILSON ----------------------------- Floyd C. Wilson Chairman and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Floyd C. Wilson, his true and lawful attorney-in-fact and agent, each with full power of substitution and resubstitution, to sign any and all amendments (including post-effective amendments) to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, or any of them, shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature Title Date --------- ----- ---- /s/ FLOYD C. WILSON Chairman and Chief Executive March 26, 2003 - ----------------------------- Officer Floyd C. Wilson /s/ R.A. WALKER President, Chief Financial March 26, 2003 - ----------------------------- Officer, Director R. A. Walker /s/ SHANE M. BAYLESS Vice President--Controller & March 26, 2003 - ----------------------------- Treasurer Principal Shane M. Bayless Accounting Officer /s/ LARRY J. BUMP Director March 26, 2003 - ----------------------------- Larry J. Bump /s/ LARRY L. HELM Director March 26, 2003 - ----------------------------- Larry L. Helm /s/ DAVID B. MILLER Director March 26, 2003 - ----------------------------- David B. Miller /s/ D. MARTIN PHILLIPS Director March 26, 2003 - ----------------------------- D. Martin Phillips /s/ JAMES L. IRISH III Director March 26, 2003 - ----------------------------- James L. Irish III 43 CERTIFICATIONS I, Floyd C. Wilson, certify that: 1. I have reviewed this annual report on Form 10-K of 3TEC Energy Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 26, 2003 By: /s/ Floyd C. Wilson ---------------------------- Floyd C. Wilson Chief Executive Officer 44 I, R.A. Walker, certify that: 1. I have reviewed this annual report on Form 10-K of 3TEC Energy Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 26, 2003 By: /s/ R.A. Walker ---------------------------- R.A. Walker Chief Financial Officer 45 INDEX TO FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report............................................................................. F-2 Consolidated Balance Sheets as of December 31, 2002 and 2001............................................. F-3 Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2002................................................................................................... F-4 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2002................................................................................................... F-5 Consolidated Statements of Changes in Stockholders' Equity for each of the years in the three-year period ended December 31, 2002................................................................................ F-6 Notes to Consolidated Financial Statements............................................................... F-7
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders 3TEC Energy Corporation: We have audited the accompanying consolidated balance sheets of 3TEC Energy Corporation and subsidiaries, as of December 31, 2002 and 2001, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of 3TEC Energy Corporation and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. As explained in Note 1 to the consolidated financial statements, the Company changed its method of accounting for derivative instruments and hedging activities effective January 1, 2001. KPMG LLP Houston, Texas February 14, 2003 F-2 3TEC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)
As of December 31, ------------------- 2002 2001 --------- -------- ASSETS Current Assets: Cash and cash equivalents................................................................................ $ 2,249 $ 17,762 Accounts receivable...................................................................................... 17,486 16,835 Income tax receivable.................................................................................... -- 4,464 Other.................................................................................................... 1,285 4,473 --------- -------- Total Current Assets.................................................................................. 21,020 43,534 Properties and Equipment, at cost: Oil and gas properties, successful efforts method........................................................ 435,591 385,264 Other property and equipment............................................................................. 3,931 3,549 --------- -------- 439,522 388,813 Accumulated depletion, depreciation and amortization........................................................ (112,732) (71,039) --------- -------- Net Properties and Equipment................................................................................ 326,790 317,774 --------- -------- Other Assets, net........................................................................................... 1,375 1,730 TOTAL ASSETS................................................................................................ $ 349,185 $363,038 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable......................................................................................... $ 13,440 $ 25,052 Accrued liabilities...................................................................................... 1,340 1,322 Series C Preferred stock redemption payable.............................................................. 1,272 1,349 Derivative fair value liability.......................................................................... 3,551 -- Other current liabilities................................................................................ 3,055 1,468 --------- -------- Total Current Liabilities............................................................................. 22,658 29,191 --------- -------- Long-term debt........................................................................................... 99,000 108,000 Deferred income taxes.................................................................................... 44,563 45,135 --------- -------- TOTAL LIABILITIES........................................................................................... 166,221 182,326 --------- -------- Commitments and Contingencies (Note 11)..................................................................... -- -- STOCKHOLDERS' EQUITY Preferred stock, $.02 par value, 20,000,000 shares authorized, 266,667 shares 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 as of December 31, 2001. $2,000 aggregate liquidation preference.............................................. -- 3,627 Convertible preferred stock Series D, 5% $24.00 redemption value, 613,919 shares and 614,776 issued and outstanding at December 31, 2002 and December 31, 2001, respectively, $14,734 aggregate liquidation preference at December 31, 2002......................................................................... 7,475 7,485 Common stock, $.02 par value, 60,000,000 shares authorized, 16,850,572 and 16,547,595 shares issued at December 31, 2002 and December 31, 2001, respectively................................................... 337 331 Additional paid-in capital............................................................................... 157,557 151,412 Retained earnings........................................................................................ 19,520 18,906 Treasury stock; 69,807 shares at December 31, 2002 and December 31, 2001................................. (1,049) (1,049) Deferred compensation.................................................................................... (876) -- --------- -------- TOTAL STOCKHOLDERS' EQUITY.................................................................................. 182,964 180,712 --------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................................................. $ 349,185 $363,038 ========= ========
See accompanying notes to consolidated financial statements. F-3 3TEC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data)
Year Ended December 31, ------------------------------------ 2002 2001 2000 ----------- ----------- ----------- REVENUES: Oil, natural gas and plant income................ $ 103,064 $ 116,080 102,148 Gain (loss) on sale of properties................ (159) 815 800 Gain (loss) on derivative fair value............. (6,632) 3,081 -- Gain (loss) on derivative settlements............ (5,644) 162 -- Other............................................ 473 836 813 ----------- ----------- ----------- TOTAL REVENUES............................... $ 91,102 $ 120,974 $ 103,761 EXPENSES: Production-- Lease operations............................. $ 14,590 $ 15,957 $ 14,994 Production, severance and ad valorem tax..... 7,271 7,711 6,692 Gathering, transportation and other.......... 3,465 3,002 1,493 Geological and geophysical....................... 2,683 1,172 666 Dry hole and impairments......................... 8,918 12,261 29 Surrendered and expired acreage.................. 860 7,875 -- General and administrative....................... 9,154 6,991 6,141 Stock compensation (general and administrative).. 816 -- -- Interest......................................... 3,962 6,773 7,556 Depreciation, depletion and amortization......... 37,357 30,983 19,779 Other............................................ 629 250 -- ----------- ----------- ----------- TOTAL EXPENSES............................... $ 89,705 $ 92,975 $ 57,350 NET INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND DIVIDENDS TO PREFERRED STOCKHOLDERS...................................... 1,397 27,999 46,411 Minority Interest................................... -- 511 305 Income Tax Expense.................................. 45 10,640 14,442 ----------- ----------- ----------- NET INCOME.......................................... 1,352 16,848 31,664 Dividends to preferred stockholders................. 738 710 1,488 ----------- ----------- ----------- NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS...................................... $ 614 $ 16,138 $ 30,176 =========== =========== =========== NET INCOME PER COMMON SHARE: Basic............................................ $ 0.04 $ 1.06 $ 2.91 =========== =========== =========== Diluted.......................................... $ 0.03 $ 0.91 $ 2.28 =========== =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic............................................ 16,533,405 15,170,116 10,382,836 =========== =========== =========== Diluted.......................................... 18,361,956 18,968,973 13,894,961 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-4 3TEC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended ------------------------------------- December 31, December 31, December 31, 2002 2001 2000 ------------ ------------ ------------ OPERATING ACTIVITIES Net income....................................................................... 1,352 16,848 31,664 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization...................................... 36,758 30,265 18,713 Amortization of debt issue costs and other.................................... 599 967 1,066 Dry hole and impairments...................................................... 8,918 12,261 29 Surrendered and expired leases................................................ 860 7,875 -- (Gain)/Loss on derivative fair value.......................................... 6,632 (3,081) -- (Gain)/Loss on sale of properties............................................. 159 (815) (800) Deferred income taxes......................................................... (67) 9,017 6,480 Minority interest............................................................. -- 511 305 Restricted stock compensation (general and administrative).................... 816 -- -- Other changes................................................................. 28 166 -- Changes in operating assets and liabilities:.................................. Accounts receivable and other current assets.................................. 3,834 9,961 (21,706) Account payable and accrued liabilities....................................... (10,087) 5,805 8,717 -------- --------- -------- CASH PROVIDED BY OPERATING ACTIVITIES............................................ 49,802 89,780 44,468 INVESTING ACTIVITIES Proceeds from sales of oil and gas properties................................. 1,181 36,818 5,840 Acquisition of Magellan Exploration LLC, net of cash acquired................. -- -- 418 Acquisition of Classic Resources, Inc., net of cash acquired.................. -- (58,670) -- Acquisition of Enex Resources Corporation..................................... -- (3,803) -- Acquisition of oil and gas properties......................................... (302) (22,380) (64,612) Development of oil and gas properties......................................... (56,356) (72,554) (24,091) Additions of other assets..................................................... (391) (1,930) (1,326) -------- --------- -------- CASH USED IN INVESTING ACTIVITIES................................................ (55,868) (122,519) (83,771) FINANCING ACTIVITIES Proceeds from long-term debt.................................................. 51,000 130,000 66,100 Proceeds from issuance of common stock........................................ -- -- 68,103 Proceeds from exercise of stock options and warrants.......................... 616 1,590 705 Payments on long-term debt.................................................... (60,000) (85,000) (90,600) Preferred stock dividends..................................................... (738) (525) (1,369) Treasury stock purchase--Alabama dissenters................................... -- -- (981) Redemption of Preferred Series C stock........................................ -- -- (1,433) Debt issuance costs........................................................... (325) -- (2,927) -------- --------- -------- CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.................................. (9,447) 46,065 37,598 (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................................. (15,513) 13,326 (1,705) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................... 17,762 4,436 6,141 -------- --------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD......................................... $ 2,249 $ 17,762 $ 4,436 ======== ========= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest...................................................................... $ 3,915 $ 6,795 $ 7,539 Income Taxes.................................................................. -- 10,571 3,500 Non-cash investing and financing activities: Common stock and warrants issued in acquisition of Magellan Exploration LLC... -- -- 10,573 Preferred Stock Series D issued in acquisition of Magellan Exploration LLC.... -- -- 7,453 Preferred Stock Series C conversions to common stock.......................... -- -- 362 Preferred dividends incurred but not paid..................................... 185 185 -- Common stock repurchase contingency accrual--Alabama dissenters............... -- -- 138 Conversion of Preferred Series C into Common Stock............................ -- -- 910 Preferred dividends paid in-kind.............................................. -- -- 118 Liability for redemption of Preferred Stock Series C.......................... -- -- 2,856 Deferred taxes recorded in acquisition of Classic Resources, Inc.............. -- 29,347 -- Preferred Stock Series B conversions to Common Stock.......................... 3,627 -- -- Preferred Stock Series D conversions to Common Stock.......................... 10 -- --
See accompanying notes to consolidated financial statements. F-5 3TEC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (in thousands, except shares)
Preferred Stock ------------------------------------------------------- Series B Series C Series D Common Stock ----------------- ------------------- --------------- ---------------- Shares Par Shares Par Shares Par Shares Par -------- ------- ---------- ------- ------- ------ ---------- ---- Balance January 1, 2000...................... 266,667 $ 3,627 1,139,506 $ 5,198 -- -- 5,338,771 $107 Common stock issued in merger with Magellan Exploration LLC.................... 1,085,934 22 Warrants issued in merger with Magellan Exploration LLC............................. Preferred Series D issued in merger with Magellan Exploration LLC.................... 617,009 7,453 Stockholder dissenters repurchase contingency adjustment.................................. Preferred Series C conversions............... (72,496) (362) 63,465 1 Common stock issued.......................... 8,050,000 161 Common stock offering and registration costs....................................... Preferred Series C redemption................ (1,067,010) (4,836) 36,527 1 Reverse split fractional shares.............. (314) Employee stock option exercises.............. 95,190 2 Warrant exercises............................ 18,333 Net Income................................... Preferred stock dividends.................... 4,921 119 -------- ------- ---------- ------- ------- ------ ---------- ---- Balance December 31, 2000.................... 266,667 $ 3,627 -- -- 621,930 $7,572 14,687,906 $294 ======== ======= ========== ======= ======= ====== ========== ==== Employee stock option exercises.............. 81,682 2 Preferred Series D Conversions............... (7,154) (87) 7,154 Warrant exercises............................ 283,047 6 Senior subordinated debt conversions......... 1,487,806 29 Net Income................................... Preferred stock dividends.................... -------- ------- ---------- ------- ------- ------ ---------- ---- Balance December 31, 2001.................... 266,667 $ 3,627 -- $ -- 614,776 $7,485 16,547,595 $331 ======== ======= ========== ======= ======= ====== ========== ==== Employee Stock Option Exercises.............. 58,817 1 Preferred Series B Conversions............... (266,667) (3,627) 186,230 4 Preferred Series D Conversions............... (857) (10) 857 Common Stock Issues.......................... 1,799 Restricted Stock Grants...................... 95,000 2 Net Income................................... Preferred Stock Dividends.................... Employee Stock Option Deferred Tax Adjustment.................................. Other........................................ (39,726) (1) -------- ------- ---------- ------- ------- ------ ---------- ---- Balance December 31, 2002.................... -- $ -- -- $ -- 613,919 $7,475 16,850,572 $337 ======== ======= ========== ======= ======= ====== ========== ====
Accumulated Treasury Paid-in Earnings Deferred Stock Stockholders' Capital (Deficit) Compensation Par Equity -------- ----------- ------------ -------- ------------- Balance January 1, 2000...................... $ 57,775 $(27,408) $(1,187) $ 38,112 Common stock issued in merger with Magellan Exploration LLC.................... 10,251 10,273 Warrants issued in merger with Magellan Exploration LLC............................. 300 300 Preferred Series D issued in merger with Magellan Exploration LLC.................... 7,453 Stockholder dissenters repurchase contingency adjustment.................................. 138 138 Preferred Series C conversions............... 361 -- Common stock issued.......................... 67,943 68,104 Common stock offering and registration costs....................................... (1,497) (1,497) Preferred Series C redemption................ 547 (4,288) Reverse split fractional shares.............. -- Employee stock option exercises.............. 648 650 Warrant exercises............................ 55 55 Net Income................................... 31,664 31,664 Preferred stock dividends.................... (1,488) (1,369) -------- -------- ----- ------- -------- Balance December 31, 2000.................... $136,383 $ 2,768 $ -- $(1,049) $149,595 ======== ======== ===== ======= ======== Employee stock option exercises.............. 739 741 Preferred Series D Conversions............... 85 (2) Warrant exercises............................ 843 849 Senior subordinated debt conversions......... 13,362 13,391 Net Income................................... 16,848 16,848 Preferred stock dividends.................... (710) (710) -------- -------- ----- ------- -------- Balance December 31, 2001.................... $151,412 $ 18,906 $ -- $(1,049) $180,712 ======== ======== ===== ======= ======== Employee Stock Option Exercises.............. 615 616 Preferred Series B Conversions............... 3,623 -- Preferred Series D Conversions............... 10 -- Common Stock Issues.......................... 26 26 Restricted Stock Grants...................... 1,690 (876) 816 Net Income................................... 1,352 1,352 Preferred Stock Dividends.................... (738) (738) Employee Stock Option Deferred Tax Adjustment.................................. 181 181 Other........................................ (1) -------- -------- ----- ------- -------- Balance December 31, 2002.................... $157,557 $ 19,520 $(876) $(1,049) $182,964 ======== ======== ===== ======= ========
See accompanying notes to consolidated financial statements F-6 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization 3TEC Energy Corporation, (formerly Middle Bay Oil Company, Inc.), was incorporated under the laws of the state of Alabama on November 20, 1992. The Company was reincorporated in Delaware on December 7, 1999 and changed its name to 3TEC Energy Corporation. The reincorporation and name change were part of a series of transactions related to a securities purchase agreement that closed on August 27, 1999 between the Company and W/E Energy Company, LLC ("W/E LLC"), formerly known as 3TEC Energy Company, LLC, whereby the Company received $21.4 million in cash and oil and natural gas properties for the sale of common stock, warrants and debt securities (See Note 3). 3TEC Energy Corporation (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. Effective November 23, 1999, the Company acquired oil and natural gas properties and interests managed by Floyd Oil Company from a group of private sellers. Effective February 3, 2000, the Company acquired oil and natural gas properties through a merger with Magellan Exploration, LLC. Effective May 31, 2000, the Company acquired oil and natural gas properties from C.W. Resources, Inc. Effective November 15, 2000, the Company acquired oil and natural gas properties from H.G. Westerman and a group of private sellers. Effective January 30, 2001, the Company acquired oil and natural gas properties through the purchase of the stock of Classic Resources, Inc. On February 2, 2003, the Company entered into a definitive agreement with Plains Exploration & Production Company ("Plains") whereby Plains will acquire the Company for a combination of cash and stock. Under the terms of the agreement, the Company's shareholders will receive $8.50 in cash and 0.85 shares of Plains's Common Stock for each share of the Company's Common Stock, subject to certain adjustments if the average share price of Plains's Common Stock (as determined during a twenty-day trading period prior to closing) is less than $7.65 per share or greater than $12.35 per share. Although subject to shareholder approval and other customary closing conditions, the aforementioned transaction is expected to close during the second quarter of 2003. Significant Accounting Policies The Company's accounting policies reflect industry standards and conform to generally accepted accounting principles. The more significant of such policies are described below. Principles of Consolidation The consolidated financial statements include the accounts of the Company and Enex Resources Corporation ("Enex") which prior to December 31, 2001 was an 80% owned subsidiary. The equity of the minority interests in Enex is reflected in the consolidated financial statements as "minority interest". On December 31, 2001, the Company acquired the remaining 20% of Enex pursuant to the merger of Enex into a wholly-owned subsidiary of the Company for cash consideration of $3.8 million. All significant intercompany balances and transactions have been eliminated in consolidation. Reclassifications Certain prior-year amounts have been reclassified to conform with current year presentation. Consolidated Statements of Cash Flows For the purpose of cash flows, the Company considers all highly liquid investments with a maturity date of three months or less to be cash equivalents. Significant transactions may occur which do not directly affect cash F-7 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 balances and as such will not be disclosed in the Consolidated Statements of Cash Flows. Certain of such non-cash transactions are disclosed in the Consolidated Statements of Shareholders' Equity relating to shares issued as compensation, and shares issued for stock and debt of an acquired company. Oil and Gas Properties The Company follows the successful efforts method of accounting for oil and natural gas properties, and accordingly, capitalizes all direct costs incurred in connection with the acquisition, drilling and development of productive oil and natural gas properties. Costs associated with unsuccessful exploration are charged to expense currently. Geological and geophysical costs and costs of carrying and retaining unevaluated properties are charged to expense. Depreciation, depletion and amortization of capitalized costs are computed separately for each field based on the unit-of-production method using only proved oil and natural gas reserves. In arriving at such rates, commercially recoverable reserves have been estimated by an independent petroleum engineering firm. The Company reviews its undeveloped properties continually and charges them to expense on a property-by-property basis when it is determined that they have been condemned by dry holes, or have otherwise diminished in value. For the years ended December 31, 2002, 2001 and 2000, the Company recorded surrendered and expired acreage expense on its undeveloped properties of $0.9 million, $7.9 million and $-0-, respectively. Gains and losses are recorded on sales of interests in proved properties and on sales of entire interests in unproved properties. The Company realized losses on sales of properties of $0.2 million for the year ended December 31, 2002 and gains of $0.8 million for both years ended December 31, 2001 and 2000. Proved oil and natural gas reserves are the estimated quantities of oil, natural gas and natural gas liquids which are expected to be recoverable in future years from known reservoirs under existing economic and operating conditions. Reservoirs are considered proved if economic productability is supported by either actual production or conclusive formation tests. The Company reviews long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of such an asset may not be recoverable. This review consists of a comparison of the carrying value of the asset to the asset's expected future undiscounted cash flows. Estimates of expected future cash flows represent management's best estimate based on reasonable and supportable assumptions and projections. If the expected future cash flows, assuming escalated prices, are less than the carrying value of the asset, an impairment exists and is measured as the excess of the carrying value over the estimated fair value of the asset. The Company estimates discounted future net cash flows to determine fair value. Any impairment provisions recognized are permanent and may not be restored in the future. For the years ended December 31, 2002, 2001 and 2000, the Company's proved properties were assessed for impairment on an individual field basis and the Company recorded impairment provisions on certain producing properties of $5.6 million, $3.4 million, and $-0- respectively. Revenue Recognition of Production Imbalances Oil and natural gas revenues are recorded using the sales method, whereby the Company recognizes revenues based on the amount of oil and natural gas sold to purchasers on its behalf not-withstanding its ownership percentage. At December 31, 2002 and 2001, the Company's net imbalance position was immaterial. Hedging In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). In June 2000, the FASB issued SFAS 138, Accounting for Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. SFAS 133, as amended, establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) F-8 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 be recorded in the balance sheet as either an asset or liability measured at its fair market value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the statement of operations, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company adopted SFAS 133 effective January 1, 2001. Based upon the historical volatility of oil and gas commodity prices, the Company expects that SFAS 133 will increase volatility in the Company's earnings and other comprehensive income for periods where hedging activities are present. SFAS 133, in part, allows hedge accounting. SFAS 133 provides that the effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedging instrument be reported as a component of other comprehensive income and be reclassified into earnings in the same period during which the hedged forecasted transaction affects earnings. The remaining gain or loss on the derivative instrument, if any, must be recognized currently in earnings. To qualify for cash flow hedge accounting, the cash flows from the hedging instrument must be highly effective in offsetting changes in cash flows due to changes in the underlying items being hedged. In addition, all hedging relationships must be designated, documented, and reassessed periodically. The Company's natural gas derivative instruments entered into during the periods presented were not designated as hedges at the time the instruments were executed. In accordance with provisions of SFAS 133, these instruments were marked-to-market through earnings at December 31, 2002 and 2001, resulting in a decrease to revenues of $6.6 million and an increase to revenues of $3.1 million during those annual periods, respectively. 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. At December 31, 2002, 2001 and 2000, the Company had a weighted average of 2,442,929, 3,798,857 and 3,512,000 combined stock options, warrants and convertible preferred stock and notes outstanding included in the Company's fully diluted per share calculation, respectively. F-9 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 Basic and diluted earnings per share for the years ended December 31, 2002, 2001 and 2000 were determined as follows (in thousands):
2002 2001 2000 ------- ------- ------- Basic net income attributable to common shareholders................. $ 614 $16,138 $30,176 Plus preferred stock dividends....................................... -- (1) 710 1,488 Plus interest expense (net of tax) on subordinated convertible notes. -- 505 -- ------- ------- ------- Fully diluted net income attributable to common shareholders......... $ 614 $17,353 $31,664 ======= ======= ======= Basic shares outstanding (weighted average shares)................... 16,533 15,170 10,383 Plus potentially dilutive securities: .. Dilutive options and warrants applying treasury stock method.... 1,688 2,052 1,390 .. Shares from conversion of subordinated convertible notes........ 996 1,469 .. Shares from conversion of Series B preferred stock.............. 127 132 91 .. Shares from conversion of Series D preferred stock.............. -- 619 562 .. Non-vested restricted stock..................................... 14 -- -- ------- ------- ------- Fully diluted shares outstanding (weighted average shares)........... 18,362 18,969 13,895 ======= ======= =======
- -------- (1) Preferred stock dividends in the amount of $738,000 were not included in the 2002 calculation as they were antidilutive. 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. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Stock Compensation Stock-based employee compensation is accounted for under the intrinsic value method of Accounting Principles Bulleting No. 25 "Accounting for Stock Issued to Employees." For the years ending December 31, 2002, 2001 and 2000, the exercise price of the options granted is equal to the quoted market price of the Company's stock at the grant date, and therefore, no compensation costs have been recognized for its stock option plans. Had compensation cost for the Company's Plans been determined based on the fair value at the grant date for stock options granted for the years ending December 31, 2002, 2001 and 2000, the Company's net income and income per share would have been adjusted to the pro forma amounts listed below (in thousands, except per share amounts): F-10 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002 and 2001
December 31, ------------------------- 2002 2001 2000 ------- ------- ------- Net Income attributable to Common Stockholders As Reported....................................................... $ 614 $16,138 $30,176 Add: Stock-based employee compensation expense included and reported in net income, net of tax.............................. 530 -- -- Less: Total stock-based employee compensation expense determined under fair value based methods for all awards net of related tax effects............................................. (3,098) (2,691) (8,287) Pro Forma......................................................... $(1,954) $13,447 $21,889 Net Income per common share, basic As Reported....................................................... $ 0.04 $ 1.06 $ 2.91 Pro Forma......................................................... $ 0.04 $ 0.89 $ 2.11 Net Income per common share, diluted As Reported....................................................... $ 0.03 $ 0.91 $ 2.28 Pro Forma......................................................... $ 0.03 $ 0.77 $ 1.58
The fair value of grants was estimated on the date of grant using the Black Scholes option pricing model with the following weighted-average assumptions used in 2002, 2001 and 2000, respectively: risk free interest rates of 4.30%, 3.96% and 6.48%, expected volatility of 65%, 69% and 72%, no dividend yield, and an expected life of the option of 3 years in 2002, 2001 and 2000. The weighted average fair value of stock options granted in 2002, 2001 and 2000 was $6.33, $7.02 and $5.72 per share, respectively. Concentrations of Market Risk The future results of the Company will be affected by the market prices of oil and natural gas. The availability of a ready market for oil and natural gas in the future will depend on numerous factors beyond the control of the Company, including weather, production of other oil and natural gas, imports, marketing of competitive fuels, proximity and capacity of oil and natural gas pipelines and other transportation facilities, any oversupply or undersupply of oil and natural gas, the regulatory environment, and other regional and political events, none of which can be predicted with certainty. Concentrations of Credit Risk Financial instruments which subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable. The Company places its cash investments with high credit qualified financial institutions. Risk with respect to receivables is concentrated primarily in the current production revenue receivable from multiple oil and natural gas purchasers, and is typical in the industry. Concentrations within the industry have the potential to impact the Company's overall exposure to credit risk, either positively or negatively, in that the customer base may be similarly affected by changes in economic, industry or other conditions. For 2002, Superior Natural Gas Corporation, Conoco Inc. and Wagner & Brown, Ltd. accounted for approximately 15%, 14% and 11% of total oil and gas sales, respectively. Calpine Producer Services, L.P. (formerly Highland Energy Company) and Wagner & Brown, Ltd. accounted for approximately 22% and 19% of total oil and natural gas sales, respectively, for the year ended December 31, 2001. No single customer accounted for greater than 10% of the Company's total oil and natural gas sales for the year ended December 31, 2000. Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities to prepare the financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates. F-11 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 Accounting Pronouncements In October, 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS 144 supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of that Statement. SFAS 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of business. However, it retains the requirement in Opinion 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. By broadening the presentation of discontinued operations to include more disposal transactions, the FASB has enhanced managements ability to provide information that helps financial statement users to assess the effects of a disposal transaction on the ongoing operations of an entity. In August, 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement Obligations". SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal use of the asset. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The Company adopted SFAS No. 143 as of January 1, 2003. Upon adoption of this statement, the Company expects to record a cumulative effect accounting adjustment of between $0.1 million and $1.0 million, net of deferred tax expense of between $0.03 million and $0.5 million. Additionally, the Company expects to establish a liability for asset retirement obligations of between $4.0 million and $6.0 million, a corresponding increase in property, plant and equipment of between $3.0 million and $5.0 million and a decrease in accumulated DD&A of between $0.1 million and $1.0 million in the Company's balance sheets. During second quarter 2002 the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This statement rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and requires that all gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria in APB No. 30. Applying APB No. 30 will distinguish transactions that are part of an entity's recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in APB No. 30 for classification as an extraordinary item must be reclassified. The Company does not expect that there will be any current impact from SFAS No. 145. The FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, in June 2002. This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). F-12 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 SFAS No. 146 applies to costs incurred in an "exit activity," which includes, but is not limited to, a restructuring, or a "disposal activity" covered by SFAS No. 144. SFAS No. 146 will be effective for the Company in January 2003. In December 2002, SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123" was issued. SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS 148 are effective for financial statements for fiscal years ending after December 15, 2002. SFAS 148 does not change the provisions of SFAS 123 that permit entities to continue to apply the intrinsic value method of Accounting Principles Bulletin No. 25, "Accounting for Stock Issued to Employees". We have and will continue to account for stock-based compensation in accordance with the provisions of APB No. 25. During 2002, the FASB issued two interpretations: FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" and FIN 46 "Consolidation of Variable Interest Entities". There was no current impact of FIN 45 or FIN 46 on the Company's financial position or results of operations. (2) ACQUISITIONS AND DIVESTITURES On January 30, 2001, the Company acquired 100% of the issued and outstanding stock of Classic Resources Inc. (the "Classic Acquisition") for cash consideration of approximately $53.5 million plus other acquisition costs. The operating results of the Classic Acquisition have been included in the consolidated financial statements since that date. Classic was a privately-held exploration and production company with properties located in East Texas. The Company's estimate of total net proved reserves at the time of the acquisition for Classic's oil and gas properties was 47 Bcfe and net daily production of approximately 11 Mmcfe. The Company financed the acquisition under its existing Credit Facility. The purchase price of the Classic Acquisition was allocated principally to proved properties, with additional amounts allocated to working capital related to amounts recorded for production related receivables and payables in existence and accrued for at January 30, 2001. On May 31, 2000, we completed the acquisition of the CWR Properties (the "CWR Acquisition") located in East Texas for cash consideration of approximately $51.7 million. Operating results from this acquisition are included in the Company's consolidated financial statements beginning June 1, 2000. The CWR 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 using the purchase method of accounting. On February 3, 2000, we completed the acquisition of Magellan Exploration LLC (the "Magellan Acquisition"), from certain affiliates of EnCap Investments L.L.C. ("EnCap"), a Delaware limited liability company and an investor in W/E LLC, 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 using the purchase method of accounting. F-13 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 The following pro forma data presents the results of the Company for the year ended December 31, 2000, as if the Classic Acquisition and the CWR Acquisition had occurred on January 1, 2000, and the results of the Company for the year ended December 31, 2001 as if the Classic Acquisition had occurred on January 1, 2001. The unaudited pro forma data assumes the acquisition of the respective properties and the debt financing transactions related to these acquisitions. The unaudited 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. (in thousands, except per share amounts):
Pro Forma Pro Forma Year Ended Year Ended December 31, 2001 December 31, 2000 ----------------- ----------------- (unaudited) (unaudited) Total revenues................................... $120,008 $120,662 Net income attributable to common stockholders... 13,958 24,266 Net income per basic share attributable to common stockholders................................... $ 0.92 $ 2.34
During 2001, the Company completed the sale of certain non-strategic oil and gas properties for net cash proceeds of approximately $36.7 million. In order to defer the tax gain on the sales of the properties, the Company successfully replaced a portion of these properties in accordance with the Like-Kind Exchange regulations of the Internal Revenue Service. At December 31, 2001, the Company had $13.9 million of cash in like-kind escrow accounts. In January 2002, the like-kind replacement term expired in accordance with the Internal Revenue Service regulations and the balance of the escrow accounts were used to reduce borrowings under the Company's Credit Facility. (3) COMMON STOCK, WARRANT AND SENIOR SUBORDINATED CONVERTIBLE NOTE SALE TO W/E ENERGY COMPANY, L.L.C. ("W/E LLC") On August 27, 1999, the Company closed a Securities Purchase Agreement (the "Agreement") for a total of $21.4 million with W/E 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 was EnCap. The sole member of EnCap is El Paso Field Services Company, a Delaware corporation ("El Paso Field Services"). The controlling person of El Paso Field Services is El Paso Corporation, a Delaware corporation. The Company received $9.8 million in cash and properties valued at $875,000 for 1,585,185 shares of common stock and 1,200,000 warrants (the "Warrants") and $10.7 million for a 5-year senior subordinated convertible note with a face value of $10.7 million (See Note 6). On November 28, 2001, W/E LLC was dissolved and all shares of common stock and warrants of the Company held by W/E LLC were distributed to its members. (4) RELATED PARTY TRANSACTIONS David B. Miller and D. Martin Phillips, directors of the Company, are managing directors of EnCap, which was the controlling person of W/E LLC. Floyd C. Wilson, Chairman and Chief Executive Officer of the Company, was also a member of W/E LLC. Gary R. Christopher, a shareholder and director of the Company until December 31, 2001, is employed by Kaiser-Francis Oil Co., which owns approximately 7% of the common stock of the Company as of December 31, 2002. F-14 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 In 2000, the Company paid EnCap a fee of $500,000 in connection with a private equity shelf facility related to the CWR 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. The Company has a $250 million credit facility (the "Credit Facility") with Bank One, NA, as administrative agent, Bank of Montreal, as syndication agent, and Union Bank of California, N.A., Wells Fargo Bank Texas, N.A., CIBC, Inc., Comerica Bank, Fleet National Bank and The Bank of Nova Scotia as participating lenders. The borrowing base is redetermined semi-annually and as of December 31, 2002, was $160 million. In addition, the Company is a party to certain derivative contracts that Bank One, NA is the counterparty to. These derivative contracts cover a portion of the Company's anticipated natural gas and oil production for 2003 and 2004. Larry L. Helm, a director of the Company, is responsible for the nationwide Middle Market Banking Group of Bank One Corporation. (5) LONG-TERM DEBT Long-term debt at December 31, 2002 and 2001, consisted of the following (in thousands):
2002 2001 ------- -------- $250 million Credit Facility............... $99,000 $108,000 Less current maturities.................... -- -- ------- -------- Long-term debt excluding current maturities $99,000 $108,000 ======= ========
The Company's Credit Facility is with Bank One, NA as agent and seven other banks. The Credit Facility as amended, matures August 31, 2004. As of December 31, 2002, the borrowing base was $160 million. The borrowing base is to be redetermined semi-annually on May 1 and November 1 and provides for interest as revised under the Credit Facility to accrue 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 37.5 basis points or LIBOR plus basis points increasing from a low of 150 to a high of 200 as loans outstanding increase as a percentage of the borrowing base. As of December 31, 2002, the Company was paying an average of 2.99% per annum interest on the principal balance of $99 million under the Credit Facility. Prior to maturity, no payments of principal are required so long as the borrowing base exceeds the loan balance. The borrowings under the Credit Facility are secured by substantially all of the Company's oil and natural gas properties. At December 31, 2002, the amount available to be borrowed under the Credit Facility was approximately $61 million. The Credit Facility is governed by various financial and other covenants, including requirements to maintain a current ratio of one to one (1:1), and an interest rate coverage ratio of 2.5 to 1. Additionally, limitations on asset dispositions, declaration and payment of cash dividends and the entering into hedge transactions without the bank's consent are included. Aggregate amounts of expected required repayments of long term debt at December 31, 2002 are as follows (in thousands): 2002...... $ -- 2003...... -- 2004...... 99,000 Thereafter -- ------- Total.. $99,000 =======
F-15 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 (6) SENIOR SUBORDINATED CONVERTIBLE NOTES On August 27, 1999, senior subordinated convertible promissory notes (the "Senior Subordinated 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 $0.2 million, respectively. On October 19, 1999, $2.4 million of Senior Subordinated Notes were sold to The Prudential Insurance Company of America ("Prudential"). The Senior Subordinated Notes bore interest at an annual rate of 9%. Interest was payable beginning on December 31, 1999, every March 31, June 30, September 30 and December 31, until maturity on August 27, 2004. The Company could defer payment of fifty percent (50%) of the first eight quarterly interest payments. The Senior Subordinated Notes could be prepaid, without premium or penalty, in whole or in part, at any time after August 27, 2001. The holders of the Senior Subordinated Notes could convert all or any portion of outstanding principal and accrued interest at any time into shares of Company common stock at a conversion price of $9.00 per common share, a total of 1,469,316 common shares. The conversion price could 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 would be immediately due and payable. The Senior Subordinated Notes ranked senior in right of payment to all Company notes and indebtedness other than the Credit Facility. During the second quarter of 2001, the Company received notice of an election by Shoemaker to convert approximately $0.2 million of Senior Subordinated Notes. The conversion resulted in the retirement of $0.2 million in senior subordinated debt and the issuance of an additional 16,666 shares of common stock of the Company. During the third quarter of 2001, the Company sent notice of an election to W/E LLC to prepay the $10.7 million of Senior Subordinated Notes. Pursuant to the terms of the convertible note agreement, W/E LLC elected instead to exercise its right to convert the principal and accrued interest outstanding into common shares of the Company. Under the terms of the convertible note agreement, the balance of the note plus any accrued interest was to be converted at $9.00 per share. The conversion by W/E LLC resulted in the retirement of approximately $10.7 million in senior subordinated debt and the issuance of an additional 1,206,127 shares of common stock of the Company. During the fourth quarter of 2001, the Company received notice of an election by Prudential to convert approximately $2.4 million of Senior Subordinated Notes. The conversion resulted in the retirement of $2.4 million in senior subordinated debt and the issuance of an additional 265,013 shares of common stock of the Company. (7) INCOME TAXES The components of income tax expense for the years ended December 31, 2002, 2001 and 2000 consisted of the following (in thousands):
2002 2001 2000 -------------------- ---------------------- ---------------------- Federal State Total Federal State Total Federal State Total ------- ----- ----- ------- ------ ------- ------- ------ ------- Current.. $ 438 $ 179 $ 617 $1,143 $ 479 $ 1,622 $ 6,120 $1,842 $ 7,962 Deferred. (427) (146) (573) 7,582 1,436 9,018 6,224 256 6,480 ----- ----- ----- ------ ------ ------- ------- ------ ------- Total. $ 11 $ 33 $ 44 $8,725 $1,915 $10,640 $12,344 $2,098 $14,442 ===== ===== ===== ====== ====== ======= ======= ====== =======
F-16 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 The reconciliation of income tax computed at the U.S. federal statutory tax rates to the provision for income taxes is as follows (in thousands):
December 31, ----------------------- 2002 2001 2000 ----- ------- ------- Income tax provision at statutory rate.... $ 489 $ 9,800 $16,137 State income taxes, net of federal benefit 70 1,224 1,364 Decrease in valuation allowance........... -- -- (2,523) Utilization of Sec. 29 tax credits........ (500) (500) (400) Other..................................... (15) 116 (136) ----- ------- ------- Total.................................. $ 44 $10,640 $14,442 ===== ======= =======
The Company's net deferred tax liability at December 31, 2002 and 2001 is as follows (in thousands):
2002 2001 2000 ------- ------- ------- Deferred tax liability Basis difference in oil and natural gas properties. $45,709 $47,563 $ 9,547 ------- ------- ------- Deferred tax asset NOL carryforward................................... (3,868) (5,237) (5,812) AMT tax credit carryforward........................ (4,367) (327) (36) Other.............................................. (408) (430) (495) ------- ------- ------- (4,712) (5,994) (6,343) Valuation allowance................................ 3,566 3,566 3,566 ------- ------- ------- Net deferred tax liability............................ $44,563 $45,135 $ 6,770 ======= ======= =======
In connection with the Classic Acquisition, the Company recorded $29.3 million in deferred taxes for the future tax impact of the difference between the allocated book basis and the historical tax basis of the Classic Properties. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax asset will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon projections for future taxable income over the periods in which the deferred tax assets are deductible and the Section 382 limitation discussed below, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 2002, 2001 and 2000. The net change in the total valuation allowance for the years ended December 31, 2002, 2001 and 2000 was $-0-, $-0- and $2.5 million and the amount remaining at December 31, 2002 is $3.6 million. The Enex acquisition caused an ownership change pursuant to Section 382 in March 1998. As a result of this ownership change, the Company's use of its net operating loss carryforwards subsequent to that date will be limited. The Floyd Oil Acquisition in November 1999 also caused an ownership change pursuant to Section 382. As a result of these changes, the Company's use of its net operating loss carryforwards subsequent to that date will be limited. In February 2000, Enex had an ownership change pursuant to Section 382 with respect to its net operating losses. F-17 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 As of December 31, 2002, the Company had net operating loss carryforwards of approximately $11.1 million, expiring beginning in 2009 through 2019. (8) RETIREMENT PLAN AND EMPLOYEE INCENTIVE PLAN All of the employees of the Company are eligible to participate in a defined contribution plan that provides for the maximum employee contributions permissible under the Internal Revenue Code and discretionary Company contributions. Company contributions made to the plan for the years ending December 31, 2002, 2001 and 2000 were $365,172, $462,763 and $135,225, respectively. (9) STOCK OPTION PLANS The Company's stock option plans authorize the granting of options to key employees and non-employee directors at prices equivalent to the market value at the date of grant. Options generally become exercisable in the following manner: 50% upon the date of grant with the remaining 50% exercisable in three annual installments commencing one year after the date of grant and, if not exercised, expire 10 years from the date of grant. A summary of the status of the Company's plans as of December 31, 2002, 2001 and 2000, and changes during the years ended on those dates is presented below:
Average Exercise Shares Price Per Share --------- ---------------- Options outstanding at January 1, 2000.......... 335,922 $15.00 Granted in 2000.............................. 2,898,500 $11.07 Exercised in 2000............................ (95,190) $ 6.83 Forfeited in 2000............................ (248,160) $16.39 --------- ------ Options outstanding at January 1, 2001 2,891,072 $11.15 Granted in 2001.............................. 502,835 $14.67 Exercised in 2001............................ (81,682) $ 9.12 Forfeited in 2001............................ (36,729) $18.53 --------- ------ Options outstanding at January 1, 2002.......... 3,275,496 $11.66 Granted in 2002.............................. 269,500 $13.71 Exercised in 2002............................ (58,817) $10.54 Forfeited in 2002............................ (14,833) $16.50 --------- ------ Options outstanding at December 31, 2002........ 3,471,346 $11.82 Options outstanding at December 31, 2001........ 3,275,496 $11.66 Options outstanding at December 31, 2000........ 2,891,072 $11.15 Options exercisable at December 31, 2002........ 2,605,528 $11.49 Options exercisable at December 31, 2001........ 2,058,765 $11.45 Options exercisable at December 31, 2000........ 1,442,995 $11.16 Options available for grant at December 31, 2002 757,360 Options available for grant at December 31, 2001 1,012,527 Options available for grant at December 31, 2000 275,298
- -------- At December 31, 2002, the range of exercise prices and weighted average remaining contractual life of options outstanding was $4.50 to $18.56 and 7.9 years, respectively. F-18 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 Warrants to purchase 1,216,822 shares and 266,226 shares of common stock at $3.00 per share, which were issued on August 27, 1999 and October 19, 1999, respectively, and warrants to purchase 333,333 shares of common stock at $30.00 per share, which were issued on February 3, 2000, are excluded from the table above because the warrants were issued in conjunction with the sales of stock and are not stock-based compensation. During 2002, no warrants were exercised. (10) STOCKHOLDERS' EQUITY Preferred Stock--Series B In connection with the merger with Shore Oil Company, effective June 30, 1997, the Company issued 266,667 shares of Series B Preferred Stock ("Series B"). The Series B is nonvoting and pays no dividends. The Series B has a liquidation value of $7.50 per share. During the first quarter of 2002, 58,762 shares of Series B were converted into 34,065 shares of Company Common Stock ("Common"). On December 31, 2002, the remaining 207,905 Series B shares were converted into 152,165 shares of Common. The conversion calculation was calculated as 88,889 shares plus the result of multiplying (i) (the value of approximately 40,000 net mineral acres owned by the Company in South Louisiana (the "Mineral Acres") minus $2,000,000) divided by $8,000,000 times (ii) 355,555. Preferred Stock--Series C 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 2,101,827 shares of the Series C were outstanding on September 30, 2000 with 1,293,521 (62%) held by the Company's then 80% owned subsidiary, Enex. 109,580 Series C shares were converted to 36,527 shares of common stock and approximately 1,992,247 Series C shares were redeemed. On a consolidated basis, the Company's initial liability for the Series C redemption was approximately $4.8 million. As a result of the Series C redemption, the Company recognized a charge to dividend expense in 2000 of $498,706. At December 31, 2002, the remaining liability was $1.3 million. Preferred Stock--Series D On February 3, 2000, we completed the Magellan Acquisition, from certain affiliates of EnCap and an investor in W/E LLC, 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. During 2002, 857 shares of the Series D were converted to common stock. Common Stock On June 30, 2000, the Company completed its public offering of 8.05 million shares of the Company's common stock (priced at $9.00 per share). The net proceeds, approximately $66.6 million, were used primarily to repay a portion of the outstanding debt under the then existing Credit Facility. On January 14, 2000, the Company's stockholders voted to affect a one-for-three reverse split of the Company's common stock for the stockholders of record on December 9, 1999. The par value of these shares F-19 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 was transferred to additional paid-in capital. All common share and earnings per common share amounts have been retroactively restated in the accompanying consolidated financial statements to reflect the reverse stock split. On August 27, 1999, the Company sold to W/E LLC 1,585,185 shares of common stock and five-year warrants to purchase 1,200,000 shares of common stock for $9.8 million in cash and oil and natural gas properties valued at $0.9 million. On the same date, the Company sold 22,222 shares of common stock and five-year warrants to purchase 16,822 shares of common stock to Shoemaker for $0.2 million (See Notes 3 and 6). On October 19, 1999, the Company closed a private placement of securities to Prudential. The economic terms and conditions of the private placement are similar to those of the securities purchase agreement with W/E LLC and Shoemaker entered into on July 1, 1999. The private placement consisted of the sale of 351,681 shares of common stock and five-year warrants to purchase 266,226 shares at $3.00 per share of common stock for $2.4 million and a five-year senior subordinated convertible note for $2.4 million (See Note 6). The warrants issued to W/E LLC, Shoemaker and Prudential are exercisable for $3.00 per share and expire five years from the issue date. Sixty percent of the warrants were immediately exercisable, in whole or in part at any time until the expiration date. An additional 10% of the warrants may be exercised at each anniversary of the grant date until expiration. At December 31, 2001, 1,200,000 warrants were exercisable. As a result of the conversion of the entire principal balance of the Senior Subordinated Notes during 2001, all of the warrants became immediately exercisable. During 2002, no warrants were exercised. On February 3, 2000, the Company completed the acquisition of Magellan Exploration, LLC ("Magellan"), from certain affiliates of EnCap and other third parties for consideration consisting of (a) 1,085,934 shares of Company common stock, (b) four year warrants to purchase up to 333,333 shares of common stock at $30.00 per share, (c) 617,008 shares of 5% Series D Convertible Preferred Stock with a redemption value of $24.00 per share and (d) the assignment of performance based "back-in" working interest of 5% of Magellan's interest in 12 exploration prospects. During 2002, no warrants were exercised. At December 31, 2002, 333,333 warrants were exercisable. Restricted Stock During May 2002, the Company issued 95,000 shares of restricted stock to certain members of the Company's management valued at $1.6 million. During the year ended December 31, 2002, the Company recognized approximately $0.8 million as restricted stock compensation expense and will recognize the remaining $0.8 million over the remaining service and vesting periods of two years. Of the 95,000 shares that were issued, 10,832 shares had vested and were outstanding as of December 31, 2002. The remaining shares will vest either over a two-year period, when the Company's stock price meets a certain price target or when there is a change of control, as defined by the plan documents. (11) 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 meeting, the Company received shareholder dissents representing ownership of 99,438 shares of common stock. Over the period December 15, F-20 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 1999 to January 25, 2000, the Company received formal demands for payment from the dissenting shareholders (the "dissenters"). At December 31, 1999 the Company had accrued the estimated cash payment to the dissenters of approximately $1.1 million. 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 for them to surrender 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 36,889 shares of common stock agreed to withdraw his dissent. On October 7, 1994, J.B. Hanks Co., Inc. ("Hanks") filed litigation in the 21st Judicial District, Parish of Livingston, State of Louisiana against Shore Oil Company ("Shore"), which merged with Middle Bay on June 30, 1997, seeking specific performance of a July, 1994 Agreement of Purchase and Sale (the "Agreement"). On the same date, Shore filed suit against Hanks in the 129th Judicial District, County of Harris, State of Texas also seeking specific performance of the Agreement. Hanks alleges that Shore failed to comply with the Agreement inasmuch as Hanks contended that royalties on certain of the oil and gas leases had not been properly paid. The petition alleges that at the time of the contemplated transaction, Shore was in an overproduced position with respect to the taking of gas on the allegedly affected oil and gas leases and that instead of Shore paying royalties based on actual production, royalties were paid based on entitlements. Despite having received no demand from the particular lessors, Hanks claimed that Shore was in violation of the oil and gas leases; an assertion that Shore denies. On November 15, 1994, the parties entered into a standstill agreement which dismissed both actions. Nearly two (2) years after the dismissal Hanks informed Shore that the royalty problems alleged by Hanks had been cured by the passage of time and that Hanks was therefore prepared to purchase the property in accordance with the Agreement. Shore refused to comply. Both parties again filed suit. The Louisiana litigation was removed to Federal District Court where the matter will be decided. In October 2002, the parties attempted to mediate their dispute. A settlement was not reached. The Company intends to vigorously pursue the defense of this matter. In the opinion of management, the ultimate resolution of this lawsuit will not have a material adverse effect on the Company's financial position or results of operations. The Company has commitments for operating leases (primarily for office space in Houston, Texas). Rental expense for office space was $1,135,485 in 2002 and $670,842 in 2001. Future minimum lease commitments at December 31, 2002 are $1,255,546 in 2003; $1,285,412 in 2004; $884,171 in 2005; $847,822 in 2006; and $1,769,192 in years thereafter. (12) FINANCIAL INSTRUMENTS Oil and Natural Gas Derivatives During February 2002, the Company unwound the floor portion of the April through October 2002 collar for net proceeds of approximately $5.8 million ($0.48/Mmbtu), and then re-swapped the 56,000 Mmbtu of daily natural gas production for the same period at $2.56/Mmbtu. Also during February 2002, the Company put in place a collar on 20,000 Mmbtu of daily gas production from November 2002 to March 2003 with a floor of $3.20/Mmbtu and a weighted average ceiling of $3.53/Mmbtu. F-21 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 The following table details the Company's derivative contract positions which were in place at December 31, 2002, which had a fair value liability of $3.5 million at that date.
Natural Gas Derivatives ----------------------- Mmbtu Total NYMEX Period Per Day Mmbtu Type Price ------ ------- --------- ---- ----- January 2003-March 2003 20,000 3,020,000 Put $3.20 January 2003-March 2003 10,000 1,510,000 Call $3.40 January 2003-March 2003 20,000 3,020,000 Call $3.60
Through December 31, 2002, the Company has paid net cash settlements of approximately $11.4 million related to its derivative activities. The $5.8 million gain from the sale of the put floor and the $11.4 million of net cash paid for settlements on the derivative activities have been included in the statement of operations as loss on derivative settlements. Counterparty Risk The Company's counterparties to the derivative contracts open at December 31, 2002 are Bank One, NA and Bank of Montreal, both commercial banks who are also participants in the Company's Credit Facility. We feel the credit worthiness of our current counterparties is sound and do not anticipate any non-performance of contractual obligations. F-22 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 (13) QUARTERLY FINANCIAL DATA (Unaudited) The following unaudited summarized quarterly financial data is presented in thousands, except per share data.
2002 ------------------------------------ 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. -------- -------- -------- -------- Total Revenues............................. $ 3,589 $31,820 $23,887 $ 31,806 Operating Income (loss).................... (14,179) 8,651 3,732 3,193 Net Income (loss).......................... (8,648) 5,277 2,277 2,447 Net Income (loss) per share (fully diluted) $ (0.54) $ 0.27 $ 0.12 $ 0.12 2001 ------------------------------------ 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. -------- -------- -------- -------- Total Revenues............................. $ 44,296 $39,879 $17,530 $ 19,269 Operating Income (loss).................... 26,294 21,495 (766) (19,024) Net Income (loss).......................... 16,177 13,209 (915) (11,623) Net Income (loss) per share (fully diluted) $ 0.86 $ 0.70 $ (0.07) $ (0.72) 2000 ------------------------------------ 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. -------- -------- -------- -------- Total Revenues............................. $ 17,609 $21,986 $26,893 $ 37,273 Operating Income........................... 4,764 7,505 13,852 20,290 Net Income................................. 3,116 4,914 9,085 14,549 Net Income per share (fully diluted)....... $ 0.35 $ 0.50 $ 0.50 $ 0.93
The financial results of the Company have been restated for the first and second quarters of 2001. The changes reflect adjustments to oil and natural gas production and revenues as a result of the Company's overaccrual of revenue related to these quarters. The impact of the adjustments decreased the previously reported amounts as follows (in thousands):
2001 ----------------- 1st Qtr. 2nd Qtr. -------- -------- Total Revenues....................... $4,345 $3,494 Cost and operating expenses.......... 693 961 Operating Income..................... 3,652 2,533 Net Income........................... 2,272 1,571 Net Income per share, (fully-diluted) 0.12 0.08
F-23 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 (14) SUPPLEMENTAL OIL AND NATURAL GAS INFORMATION (UNAUDITED) Capitalized Costs and Costs Incurred The following tables present the capitalized costs related to oil and natural gas producing activities and the related depreciation, depletion, amortization and impairment as of December 31, 2002 and 2001 and costs incurred in oil and natural gas property acquisition, exploration and development activities (in thousands) for the years ended December 31, 2002, 2001 and 2000.
2002 2001 2000 --------- -------- -------- Capitalized Costs Proved properties................................................ $ 421,512 $374,449 $263,801 Nonproducing leasehold........................................... 14,079 10,974 6,477 Accumulated depreciation, depletion, amortization and impairment. (111,238) (70,299) (54,260) --------- -------- -------- Net capitalized costs........................................ $ 324,353 $315,124 $216,018 ========= ======== ======== Costs Incurred Proved properties................................................ $ 302 $ 75,766 $ 79,770 Unproved properties.............................................. -- 8,560 95 Exploration costs................................................ 21,531 11,059 695 Development costs................................................ 37,510 62,668 25,346 --------- -------- -------- Total........................................................ $ 59,343 $158,053 $105,906 ========= ======== ======== Depletion, depreciation, amortization and impairment................ $ 42,943 $ 32,982 $ 18,459 ========= ======== ========
Estimated Quantities of Reserves The Company has interests in oil and natural gas properties that are located principally in Texas, Louisiana, Oklahoma and New Mexico. The Company does not own or lease any oil and natural gas properties outside the United States. There are no quantities of oil and natural gas subject to long-term supply or similar agreements with any governmental agencies. F-24 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 The Company retains independent engineering firms to provide year-end estimates of the Company's future net recoverable oil, natural gas and natural gas liquids reserves. In 2002, 2001 and 2000, such estimates were prepared by Ryder Scott Company. The reserve information was prepared in accordance with guidelines established by the Securities and Exchange Commission. Estimated proved net recoverable reserves as shown below include only those quantities that can be expected to be commercially recoverable at prices and costs in effect at the balance sheet dates under existing regulatory practices and with conventional equipment and operating methods. Proved developed reserves represent only those reserves expected to be recovered through existing wells. Proved undeveloped reserves include those reserves expected to be recovered from new wells or on undrilled acreage or from existing wells on which a relatively major expenditure is required for recompletion. Net quantities of proved developed and undeveloped reserves of oil, including condensate and natural gas liquids, for the years ended December 31, 2002 and 2001 are summarized as follows:
2002 2001 2000 ------------------ ------------------ ------------------ Oil Gas Oil Gas Oil Gas (MBbls)(1) (MMcf) (MBbls)(1) (MMcf) (MBbls)(1) (MMcf) ---------- ------- ---------- ------- ---------- ------- Proved Reserves Beginning of year............... 5,337 231,266 10,672 237,693 9,835 159,699 Purchases of reserves in place.. 6 2,282 211 33,712 1,981 85,437 Extensions and discoveries...... 738 21,066 308 11,547 51 2,699 Revisions of previous estimates. 1,056 30,189 (1,520) (18,822) 659 8,698 Sales of reserves in place...... (101) (130) (3,382) (10,512) (715) (1,076) Production for the year......... (828) (25,647) (952) (22,352) (1,139) (17,764) ----- ------- ------ ------- ------ ------- End of year................. 6,208 259,026 5,337 231,266 10,672 237,693 ===== ======= ====== ======= ====== ======= Proved Developed Reserves Beginning of year............... 4,705 175,659 9,895 177,252 9,358 122,914 ===== ======= ====== ======= ====== ======= End of year..................... 5,546 205,301 4,705 175,659 9,895 177,252 ===== ======= ====== ======= ====== =======
- -------- (1) Includes oil, condensate and plant product barrels. Standardized Measure of Discounted Future Net Cash Flows From Proved Reserves The following is a summary of the standardized measure of discounted future net cash flows related to the Company's proved oil and natural gas reserves. For these calculations, estimated future cash flows from estimated future production of proved reserves are computed using oil and natural gas prices as of the end of each period presented. Future development and production costs attributable to the proved reserves were estimated assuming that existing conditions would continue over the economic lives of the individual leases and costs were not escalated for the future. Estimated future income taxes were calculated by applying statutory tax rates (based on current law adjusted for permanent differences and tax credits) to the estimated future pre-tax net cash flows related to proved oil and natural gas reserves, less the tax basis of the properties involved. The Company cautions against using this data to determine the value of its oil and natural gas properties. To obtain the best estimate of the fair value of the oil and natural gas properties, forecasts of future economic conditions, varying discount rates, and consideration of other than proved reserves would have to be incorporated into the calculation. In addition, there are significant uncertainties inherent in estimating quantities of proved reserves and in projecting rates of production that impair the usefulness of the data. F-25 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 The standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves for the years ended December 31, 2002, 2001 and 2000 are summarized as follows (in thousands):
2002 2001 2000 ---------- --------- ---------- Future cash inflows..................................... $1,285,657 $ 628,537 $2,349,534 Future production costs................................. (284,860) (188,783) (301,344) Future development costs................................ (53,127) (54,418) (51,359) Future income tax expenses.............................. (277,372) (58,051) (676,227) ---------- --------- ---------- Future net cash flows................................... 670,298 327,285 1,320,604 10% discount to reflect timing of cash flows............ (320,858) (145,686) (627,930) ---------- --------- ---------- Standardized measure of discounted future net cash flows $ 349,440 $ 181,599 $ 692,674 ========== ========= ==========
3TEC anticipates spending $30.3 million in 2003, $12.2 million in 2004 and $5.5 million in 2005 to develop its proved undeveloped reserves. The following are the principal sources of changes in the standardized measure of discounted future net cash flows for the years ended December 31, 2002, 2001 and 2000 (in thousands):
2002 2001 2000 --------- --------- --------- Sales of oil and natural gas, net of production cost........... $(102,120) $ (89,410) $ (78,969) Net changes in prices and production cost...................... 244,957 (765,134) 467,920 Changes in estimated future development costs.................. 810 (2,699) (25,849) Previously estimated development costs incurred during the year 15,364 15,591 5,102 Extensions and discoveries..................................... 77,849 11,388 15,393 Purchases of reserves.......................................... 2,514 26,461 397,280 Sales of reserves.............................................. (1,503) (22,682) (8,789) Revisions of previous quantity estimates....................... 62,484 (24,809) 39,442 Net change in income taxes..................................... (130,153) 322,700 (304,816) Accretion of discount.......................................... 21,235 104,736 19,843 Changes in production rates (timing) and other................. (23,596) (87,217) 17,376 --------- --------- --------- Change for year................................................ $ 167,841 $(511,075) $ 543,933 ========= ========= =========
The period end prices of oil and natural gas at December 31, 2002, 2001 and 2000, used in the above table were $31.20, $19.84 and $25.31 per barrel of oil and $4.79, $2.57 and $9.40 per thousand cubic feet of natural gas, respectively. F-26 EX-2.9 3 dex29.txt CERTIFICATE OF OWNERSHIP AND MERGER EXHIBIT 2.9 CERTIFICATE OF OWNERSHIP AND MERGER MERGING 3TEC/CRI CORPORATION a Texas Corporation INTO 3TEC ENERGY CORPORATION a Delaware Corporation (Under Section 253 of the General Corporation Law of the State of Delaware) 3TEC ENERGY CORPORATION, a Delaware corporation (the "Corporation"), DOES HEREBY CERTIFY: FIRST: That this Corporation was incorporated on November 24, 1999, pursuant to the Delaware General Corporation Law. THIRD: That this Corporation owns all of the outstanding shares of each class of the stock of 3TEC/CRI Corporation, a corporation incorporated on the 21st day of May, 1998, pursuant to the Texas Business Corporation Act ("Subsidiary"). THIRD: That this Corporation, by the following resolutions of its Board of Directors, duly adopted at a meeting held on the 5th day of August, 2002, determined to merge Subsidiary into itself: RESOLVED, that the Corporation, being the owner of one-hundred percent (100%) of the outstanding shares of common stock, par value $0.01 per share, of 3TEC/CRI Corporation ("Subsidiary"), does hereby elect to merge Subsidiary with and into itself (the "Merger") pursuant to the provisions of the Delaware General Corporation Law and the Texas Business Corporation Act. FURTHER RESOLVED, that the terms and conditions of the Merger are as follows: 1. The effective date and time of the Merger (the "Effective Time") shall be the date and time of filing the Certificate of Ownership and Merger with the Delaware Secretary of State. 2. At the Effective Time of the Merger: (a) Subsidiary shall be merged with and into the Corporation, and the separate existence of Subsidiary shall cease. (b) The Corporation shall assume all of Subsidiary's liabilities and obligations and shall succeed to all of Subsidiary's assets. (c) The Certificate of Incorporation of the Corporation in effect immediately prior to the Effective Time shall remain in effect until duly amended in accordance with its terms and the Delaware General Corporation Law. (d) The Bylaws of the Corporation in effect immediately prior to the Effective Time shall remain in effect until duly amended in accordance with their terms and the Delaware General Corporation Law. (e) The officers and directors of the Corporation immediately prior to the Effective Time shall, from and after the Effective Time, be the officers and directors of the Corporation as the corporation surviving the Merger, until their successors are duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Certificate of Incorporation and Bylaws of the Corporation. (f) Each share of capital stock of the Corporation issued and outstanding immediately prior to the Effective Time shall continue in existence unaffected by the Merger. (g) Each share of the capital stock of Subsidiary issued and outstanding immediately prior to the Effective Time and owned by the Corporation shall, by virtue of the Merger and without any action on the part of this Corporation, be cancelled and retired without payment of any consideration therefor and shall cease to exist. RESOLVED FURTHER, that this Merger may be terminated and abandoned by the Board of Directors of this Corporation at any time prior to the Effective Time. RESOLVED FURTHER, that the proper officers of this Corporation be, and they hereby are, directed and authorized to make and execute an appropriate Certificate of Ownership and Merger and to cause the same to be filed with the Secretary of State of Delaware; and to make and execute appropriate Articles of Merger and to cause the same to be filed with the Secretary of State of Texas. RESOLVED FURTHER, that the proper officers of this Corporation be, and they hereby are, authorized and directed, in the name and on behalf of the Corporation to execute and deliver all documents and instruments and to do all acts and things whatsoever, whether within or without the State of Delaware, which may be necessary or proper to effect the Merger. Dated this 5th day of August, 2002. 3TEC ENERGY CORPORATION By: ------------------------------------- Floyd C. Wilson Chief Executive Officer EX-23.1 4 dex231.txt CONSENT OF KPMG LLP EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors 3TEC Energy Corporation: We consent to the incorporation by reference in the registration statements (Nos. 333-49354, 333-53192, and 333-72344) on Form S-8 and in the registration statement (No. 333-51964) on Form S-3 of 3TEC Energy Corporation and subsidiaries of our report dated February 14, 2003, with respect to the consolidated balance sheets of 3TEC Energy Corporation and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2002, which report appears in the December 31, 2002, annual report on From 10-K of 3TEC Energy Corporation and subsidiaries. Our report refers to a change in accounting for derivative financial instruments and hedging activities, effective January 1, 2001. KPMG LLP Houston, Texas March 25, 2003 EX-23.2 5 dex232.txt CONSENT OF RYDER SCOTT COMPANY EXHIBIT 23.2 [RYDER SCOTT COMPANY, L.P. LETTERHEAD] CONSENT OF INDEPENDENT PETROLEUM ENGINEERS Board of Directors 3TEC Energy Corporation Houston, Texas As independent petroleum engineers, we hereby consent to all references in the Form 10-K for the year ended December 31, 2002, to Ryder Scott Company, L.P. and/or our summary letters dated February 14, 2001, January 15, 2002, and January 29, 2003, regarding our estimates of the proved oil and natural gas reserves of 3TEC Energy Corporation as of December 31, 2000, 2001, and 2002, respectively. We further consent to all references to Ryder Scott Company, L.P. in previous filings that are incorporated by reference in the Form 10-K, including our reserve estimates of the oil and natural gas properties acquired by 3TEC Energy Corporation from Floyd Oil Company, Magellan Exploration, LLC, and CWR Resources, Inc. RYDER SCOTT COMPANY, L.P. Houston, Texas March 26, 2003 EX-99.1 6 dex991.txt CERTIFICATION EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying Annual Report of 3TEC Energy Company (the "Company") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Floyd C. Wilson, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,to the best of my knowledge and belief that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Floyd C. Wilson Chief Executive Officer March 26, 2003 A signed original of this written statement required by Section 906 has been provided to 3TEC Energy Company and will be retained by 3TEC Energy Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-99.2 7 dex992.txt CERTIFICATION EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying Annual Report of 3TEC Energy Company (the "Company") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, R.A. Walker, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,to the best of my knowledge and belief that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ R.A. Walker Chief Financial Officer March 26, 2003 A signed original of this written statement required by Section 906 has been provided to 3TEC Energy Company and will be retained by 3TEC Energy Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----