UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------ ------
Commission file number 001-14575
---------
PRIZE ENERGY CORP.
--------------------------------------------------
(Exact name of registrant as specified in charter)
Delaware 75-2766114
- ------------------------------- -------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
3500 William D. Tate, Suite 200 Grapevine, TX 76051
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(817) 424-0400
----------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 13, 2001,
- ---------------------------- ---------------------------------
Common Stock, $.01 Par Value 12,536,006
PRIZE ENERGY CORP.
Index to Form 10-Q Quarterly Report
to the Securities and Exchange Commission
<Table>
<Caption>
Page No.
--------
Part I. Financial Information
Item 1. Consolidated Financial Statements............................................ 3
Consolidated Balance Sheets at September 30, 2001 (Unaudited)
and December 31, 2000.............................................................. 4
Consolidated Statements of Operations (Unaudited),
for the Three and Nine Months Ended September 30, 2001 and 2000.................... 5
Consolidated Statements of Stockholders' Equity, for the
Periods Ended September 30, 2001 (Unaudited)
and December 31, 2000.............................................................. 6
Consolidated Statements of Cash Flows (Unaudited), for
the Three and Nine Months Ended September 30, 2001 and 2000........................ 7
Notes to Unaudited Consolidated Financial Statements............................... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk................... 20
Part II. Other Information.............................................................. 21
</Table>
DEFINITIONS
As used in this document:
"Mcf" means thousand cubic feet
"MMcf" means million cubic feet
"Bcf" means billion cubic feet
"Bbl" means barrel
"MBbls" means thousand barrels
"MMBbls" means million barrels
"Boe" means equivalent barrels of oil
"Mboe" means thousand equivalent barrels of oil
"MMboe" means million equivalent barrels of oil
"Oil" includes crude oil and condensate
"NGLs" means natural gas liquids
2
PRIZE ENERGY CORP.
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS,
SEPTEMBER 30, 2001 AND 2000
3
PRIZE ENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SHARES)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 5,150 $ 820
Accounts receivable - oil & gas 23,638 29,710
Accounts receivable - trade, net of allowance for doubtful accounts of $251 4,204 4,942
Prepaid income taxes 7,352 5,153
Fair value of derivatives - short term 19,607 --
Other 2,829 3,078
------------ ------------
Total current assets 62,780 43,703
Properties and equipment at cost:
Oil and gas properties 457,788 349,971
Other 3,793 2,978
------------ ------------
461,581 352,949
Less accumulated depreciation and depletion (61,380) (34,186)
------------ ------------
Total properties and equipment at cost, net 400,201 318,763
Fair value of derivatives - long-term 9,002 --
Deposit on acquisition -- 6,500
Other assets, net 5,708 2,698
------------ ------------
TOTAL ASSETS $ 477,691 $ 371,664
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,984 $ 15,650
Accrued production taxes 4,717 2,240
Accrued interest 1,032 2,583
Fair value of derivatives 462 390
Other accrued liabilities 4,394 5,895
------------ ------------
Total current liabilities 22,589 26,758
Long-term debt 250,819 214,319
Deferred income taxes 41,313 19,019
Stockholders' equity:
Common stock, $.01 par value:
authorized shares - 50,000,000
issued and outstanding - 14,614,587 146 146
Paid-in capital 96,287 96,413
Retained earnings 74,895 40,285
Accumulated other comprehensive income 23,802 --
Treasury stock - 2,078,581 and 1,747,182 shares, respectively (32,160) (25,276)
------------ ------------
Total stockholders' equity 162,970 111,568
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 477,691 $ 371,664
============ ============
</Table>
The accompanying notes are an integral part of these
consolidated financial statements.
4
PRIZE ENERGY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND SHARES)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
OIL AND GAS SALES $ 43,006 $ 40,962 $ 145,712 $ 107,280
COSTS AND EXPENSES
Lease operations 11,622 7,836 32,309 23,340
Production taxes 3,554 4,412 14,021 11,064
Depletion, depreciation, and amortization 10,080 6,565 27,194 18,825
General and administrative 3,380 2,610 9,232 6,578
------------ ------------ ------------ ------------
Total costs and expenses 28,636 21,423 82,756 59,807
------------ ------------ ------------ ------------
OPERATING INCOME 14,370 19,539 62,956 47,473
OTHER:
Interest expense 3,901 4,846 13,474 12,806
Change in derivative fair value 1,645 -- (4,735) --
Other income (88) (250) (720) (501)
------------ ------------ ------------ ------------
Total other expense 5,458 4,596 8,019 12,305
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 8,912 14,943 54,937 35,168
PROVISION FOR INCOME TAXES (3,298) (5,529) (20,327) (13,012)
------------ ------------ ------------ ------------
NET INCOME 5,614 9,414 34,610 22,156
PREFERRED DIVIDEND -- -- -- (459)
------------ ------------ ------------ ------------
INCOME AVAILABLE TO
COMMON STOCKHOLDERS $ 5,614 $ 9,414 $ 34,610 $ 21,697
============ ============ ============ ============
INCOME PER COMMON SHARE:
Basic $ 0.45 $ 0.71 $ 2.71 $ 1.80
============ ============ ============ ============
Diluted $ 0.42 $ 0.66 $ 2.54 $ 1.56
============ ============ ============ ============
WEIGHTED-AVERAGE
COMMON SHARES OUTSTANDING:
Basic 12,587,910 13,314,060 12,791,211 12,074,592
Diluted 13,361,942 14,199,704 13,622,983 14,236,086
</Table>
The accompanying notes are an integral part of these
consolidated financial statements.
5
PRIZE ENERGY CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARES)
<Table>
<Caption>
CONVERTIBLE VOTING
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------------- -------------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
---------- ----------- ---------- ----------- ----------- -----------
Balance as of January 1, 2000 3,958,879 $ 30,907 8,291,301 $ 83 $ 49,260 $ 8,202
Issuance of stock in acquisition -- -- 2,339,089 23 15,788 --
Preferred stock dividend 25,318 198 -- -- -- (459)
Preferred conversion (3,984,197) (31,105) 3,984,197 40 31,065 --
Purchase of treasury shares -- -- -- -- -- --
Warrant exercises -- -- -- -- 330 --
Option exercises -- -- -- -- (30) --
Net income -- -- -- -- -- 32,542
---------- ----------- ---------- ----------- ----------- -----------
Balance as of December 31, 2000 -- -- 14,614,587 146 96,413 40,285
(UNAUDITED)
Option exercises -- -- -- -- (126) --
Issuance of shares to directors -- -- -- -- -- --
Purchase of treasury shares -- -- -- -- -- --
Comprehensive income:
Net income -- -- -- -- -- 34,610
Cumulative effect of change in
accounting -- -- -- -- -- --
Hedge fair value adjustment -- -- -- -- -- --
Total comprehensive income
---------- ----------- ---------- ----------- ----------- -----------
Balance as of September 30, 2001 -- $ -- 14,614,587 $ 146 $ 96,287 $ 74,895
========== =========== ========== =========== =========== ===========
<Caption>
OTHER TREASURY STOCK
COMPREHENSIVE ---------------------------
INCOME SHARES AMOUNT TOTAL
------------- ---------- ----------- -----------
Balance as of January 1, 2000 $ -- -- $ -- $ 88,452
Issuance of stock in acquisition -- (900) (22) 15,789
Preferred stock dividend -- -- -- (261)
Preferred conversion -- -- -- --
Purchase of treasury shares -- (1,810,182) (26,138) (26,138)
Warrant exercises -- 45,000 615 945
Option exercises -- 18,900 269 239
Net income -- -- -- 32,542
----------- ---------- ----------- -----------
Balance as of December 31, 2000 -- (1,747,182) (25,276) 111,568
(UNAUDITED)
Option exercises -- 90,433 1,314 1,188
Issuance of shares to directors -- 693 15 15
Purchase of treasury shares -- (422,525) (8,213) (8,213)
Comprehensive income:
Net income -- -- -- 34,610
Cumulative effect of change in
accounting (55,409) -- -- (55,409)
Hedge fair value adjustment 79,211 -- -- 79,211
-----------
Total comprehensive income 58,412
----------- ---------- ----------- -----------
Balance as of September 30, 2001 $ 23,802 (2,078,581) $ (32,160) $ 162,970
=========== ========== =========== ===========
</Table>
The accompanying notes are an integral part of these
consolidated financial statements.
6
PRIZE ENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED, IN THOUSANDS)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
--------- --------- --------- ---------
OPERATING ACTIVITIES
Net Income $ 5,614 $ 9,414 $ 34,610 $ 22,156
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion and amortization 10,080 6,565 27,194 18,825
Amortization of loan origination fees 135 110 392 323
Change in derivative fair value 1,645 -- (4,735) --
Shares issued to directors in lieu of cash 15 -- 15 --
Deferred income tax 4,650 9,444 22,294 9,444
--------- --------- --------- ---------
22,139 25,533 79,770 50,748
Changes in operating assets and liabilities:
Accounts receivable 8,448 633 6,810 (8,064)
Other assets 1,116 (12,381) (4,900) (15,816)
Accounts payable and accrued liabilities (2,591) (9,383) (4,241) (4,312)
--------- --------- --------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES 29,112 4,402 77,439 22,556
INVESTING ACTIVITIES
Additions to oil and gas properties (16,266) (12,519) (113,507) (33,207)
Additions to other properties and equipment (148) (346) (815) (1,338)
Proceeds from sale of properties and equipment -- -- 12,190 --
--------- --------- --------- ---------
CASH USED BY INVESTING ACTIVITIES (16,414) (12,865) (102,132) (34,545)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 45 991 736 991
Purchase of treasury stock (6,648) (260) (8,213) (18,689)
Borrowings under credit facilities 4,000 -- 72,000 28,750
Repayment of credit facilities (8,000) -- (35,500) --
Payment of preferred dividend -- -- -- (261)
--------- --------- --------- ---------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES (10,603) 731 29,023 10,791
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,095 (7,732) 4,330 (1,198)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,055 9,887 820 3,353
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,150 $ 2,155 $ 5,150 $ 2,155
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes $ -- $ 11,108 $ -- $ 16,915
Cash paid during the period for interest $ 4,381 $ 3,959 $ 14,633 $ 11,151
NON-CASH TRANSACTIONS
Other comprehensive income adjustment for fair value of derivatives $ 23,877 $ -- $ 25,178 $ --
Reclass of prior year acquisition deposit to property $ -- $ -- $ 6,500 $ --
Dividend in kind $ -- $ -- $ -- $ 198
</Table>
The accompanying notes are an integral part of these
consolidated financial statements
7
PRIZE ENERGY CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements and notes of Prize Energy
Corp. ("Prize" or the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. The accompanying
consolidated financial statements and notes should be read in conjunction with
the consolidated financial statements and notes included in Prize's 2000 annual
report on Form 10-K.
In the opinion of Prize's management, all adjustments (all of which are normal
and recurring) have been made which are necessary to fairly state the
consolidated financial position of Prize and its subsidiaries as of September
30, 2001, and the results of their operations and cash flows for the three and
nine months ended September 30, 2001 and 2000.
BUSINESS AND ORGANIZATION
Prize was formed on January 15, 1999 (inception) and is a Delaware corporation
engaged in the acquisition, development, and production of proved oil and gas
properties. The Company's corporate headquarters are located in Grapevine, Texas
with oil and gas producing properties primarily located in Texas, Louisiana, and
Oklahoma.
On February 8, 2000, the Company merged with Vista Energy Resources, Inc.
(Vista), an independent oil and gas development and production company. Though
the Company's stockholders exchanged their shares for new shares of Vista, the
stockholders of the Company acquired an 84% controlling interest in the merged
company. Accordingly, the transaction was accounted for as a purchase of Vista
by the Company in accordance with the provisions of APB 16. The merged company's
stock is listed on the American Stock Exchange under the ticker symbol "PRZ."
2. HEDGING
Effective January 1, 2001, the Company adopted Financial Accounting Standards
Board Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (Statement No. 133). The adoption of Statement No. 133 resulted in a
cumulative effect of an accounting change of $55.4 million being recognized as a
charge to accumulated other comprehensive income, a component of stockholders'
equity.
Under Statement No. 133, the accounting for changes in the fair value of a
derivative instrument depends on whether it has been designated and qualifies as
part of a hedging relationship and further, on the type of hedging relationship.
For those derivative instruments that are designated and qualify as hedging
instruments, a company must designate the hedging instrument, based upon the
exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a
net investment in a foreign operation. Substantially all of the Company's hedges
are cash flow hedges. As such, the effective portion of the gain or loss on the
derivative instrument is reported
8
as a component of other comprehensive income and reclassified into earnings in
the same period or periods during which the hedged transaction affects earnings.
The remaining gain or loss on the derivative instrument in excess of the
cumulative change in the present value of future cash flows of the hedged item,
if any, is recognized in earnings during the period of change. For derivative
instruments not designated as hedging instruments, the gain or loss is
recognized in current earnings during the period of change.
To protect against the volatility of oil and gas prices related to the Company's
production, the Company has instituted a program to hedge portions of its
forecasted revenues from oil and gas production. When oil and gas prices rise,
the increase in the expected cash flows from production is offset by hedging
losses. When oil and gas prices decrease, the decrease in the expected cash
flows from production is offset by hedging gains. The Company's hedging program
includes crude oil and natural gas swaps and collar options.
The Company's cumulative effect of adoption included a charge of $11.5 million
for certain options which previously qualified for hedge treatment but will not
qualify as hedges under Statement No. 133. Accordingly, this amount was
initially charged to accumulated other comprehensive income; all but $.4 million
has been reclassified to earnings during the nine months ended September 30,
2001.
During the first quarter of 2001, the Company recognized a net gain of $5
million related to the ineffectiveness of its cash flow hedging instruments. The
gain was primarily due to changes in the time and volatility value of the
Company's natural gas collar options. Beginning in April 2001, the Company
adopted an interpretation of Statement No. 133 (Derivatives Implementation
Group, or DIG, Issue G-20), which allows owners of options to measure
effectiveness based on a comparison of the cumulative change in the fair value
of the option to the cumulative change in the expected future cash flows of the
hedged transaction. Under DIG Issue G-20, if the measurement of effectiveness is
performed as described above, and the option has the same basis and maturity
dates of the expected dates of the hedged transaction, all changes in the
option's fair value are recorded in other comprehensive income until settlement
of the hedged transaction. Accordingly, beginning April 1, 2001, changes in the
time and volatility value of the Company's collars were recognized in other
comprehensive income.
The settlement of the Company's hedges which were designated against production
during the three and nine months ended September 30, 2001 resulted in an
increase in revenues of $.3 million and a charge to revenues of $27.6 million,
respectively.
At September 30, 2001, a net amount of $23.8 million remains in accumulated
other comprehensive income. Of this amount, $6.9 million relates to hedges which
are designated against 2001 production, while $16.9 million is designated
against 2002 and 2003 production.
9
The following table summarizes the effect of hedges not qualifying for hedge
accounting and the hedge ineffectiveness recognized in earnings during the three
and nine months ended September 30, 2001 (in thousands):
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001
------------------ ------------------
Change in fair value of derivatives not
qualifying for hedge accounting ................ $(1,455) $ 445
Ineffective portion of derivatives qualifying
for hedge accounting ........................... (190) 4,290
------- -------
$(1,645) $ 4,735
======= =======
</Table>
The estimated fair values of the Company's derivatives as of September 30, 2001
are provided below (in thousands):
<Table>
<Caption>
September 30,
2001
-------------
Derivative assets:
Natural gas collars ................ 23,098
Natural gas swaps .................. 1,580
Crude oil collars .................. 175
Crude oil swaps .................... 3,756
-------
$28,609
=======
Derivative liabilities:
Crude oil collars .................. 462
-------
$ 462
=======
</Table>
Set forth below is the contract amount and material terms of all natural gas
collars and swaps held by Prize at November 13, 2001 (the strike price of
outstanding swaps have been included in both floor and ceiling prices):
NATURAL GAS
- -----------
<Table>
<Caption>
Fourth Quarter
2001 2002 2003 2004
-------------- ---------- ---------- ----------
Weighted Average Daily Gas Volume (Mcf) 38,000 43,000 40,000 15,000
Weighted Average Floor Price per Mcf $ 3.12 $ 4.05 $ 3.23 $ 3.00
Weighted Average Ceiling Price per Mcf $ 4.52 $ 4.70 $ 3.90 $ 4.20
</Table>
10
Set forth below is the contract amount and material terms of all crude oil
collars and swaps held by Prize at November 13, 2001 (the strike price of
outstanding swaps have been included in both floor and ceiling prices):
CRUDE OIL
- ---------
<Table>
<Caption>
Fourth Quarter
2001 2002
-------------- ---------
Weighted Average Daily Oil Volume (Bbl) 6,500 5,750
Weighted Average Floor Price per Bbl $ 23.41 $ 23.23
Weighted Average Ceiling Price per Bbl $ 27.62 $ 26.17
</Table>
3. ACQUISITIONS AND DISPOSITIONS
On February 28, 2001, the Company closed on the purchase of $61.8 million of
interests in oil and gas properties from Apache Corporation ("Apache
Properties"), net of subsequent closing adjustments. The results of operations
of the Apache Properties have been included in the Company's earnings from the
date of acquisition. At December 31, 2000, the Company had deposited $6.5
million towards the purchase. The Company financed the acquisition under its
existing bank credit facility.
On April 30, 2001, the Company closed on the sale of $12.2 million of interests
in oil and gas properties to Texas Petroleum Investment Company. The properties
divested are located in the Onshore Gulf Coast region of South Texas and
Louisiana. The sales price approximated the carrying value of the properties,
and no significant gain or loss was recognized.
4. CREDIT FACILITIES
On February 8, 2000, in connection with the merger with Vista, the Company
amended its credit facility (Senior Facility) to provide for total borrowings of
up to $400 million. Since then, the Company has further amended the Senior
Facility which is now due June 29, 2006. The revised Senior Facility provides
for letters of credit in addition to a revolving credit facility. In October
2000 and July 2001, the Company amended the Senior Facility to provide for
letters of credit up to an aggregate of $15 million. At September 30, 2001, $2.5
million was outstanding under the letter of credit provisions of the facility.
As of April 1, 2001, the Company's borrowing base was raised from $325 million
to $375 million. Effective, October 1, 2001, the Company's borrowing base was
reaffirmed at $375 million with prior approval from the bank group required for
borrowings above $325 million. At September 30, 2001, $250.8 million was
outstanding. Since financing the Apache acquisition in February 2001, the
Company has repaid $35.5 million through October 31, 2001.
The Senior Facility converts to a term loan on June 29, 2004, with quarterly
principal payments after that date through June 29, 2008. Interest is due
quarterly at either the bank's prime rate or LIBOR rate plus a margin as defined
in the agreement. Currently, Prize's interest rate is LIBOR plus 1.75%. The bank
credit facility has various restrictions including a limit on incurred debt and
asset dispositions. The Company is required to maintain certain financial and
non-financial covenants including minimum current and interest coverage ratios.
Borrowings under the credit facility are secured by substantially all of the
Company's assets.
11
In October 2001, the Company entered into interest rate protection agreements
with Fleet National Bank (the "Swap Agreements") to modify the interest
characteristics of certain portions of the revolving line of credit from a
variable rate to a fixed rate. The Swap Agreements require the Company to pay a
fixed rate interest obligation and receive an interest obligation based on
variable LIBOR rates. All of the Company's Swap Agreements have been designated
as cash flow hedges. As such, the effective portion of any gain or loss on the
Swap Agreements will be reported as a component of other comprehensive income
and reclassified into earnings in the same period or periods during which the
hedged transaction affects earnings. The remaining gain or loss on the Swap
Agreements in excess of the cumulative change in the present value of future
cash flows of the hedged item, if any, will be recognized in interest expense
during the period of change. The terms of the Swap Agreements are set forth
below:
<Table>
<Caption>
Hedged Weighted-Average
Year Amount Fixed Rate
- ---- --------------- ----------------
2001 $170.8 million 3.37%
2002 $160.6 million 3.42%
2003 $121.48 million 3.67%
2004 $50.8 million 3.98%
</Table>
5. STOCKHOLDERS' EQUITY
On March 28, 2000, Prize entered into an agreement with Pioneer Natural
Resources (Pioneer) to repurchase 1,346,482 shares of Prize common stock from
Pioneer for approximately $18.4 million. Prior to the acquisition, Pioneer
agreed to convert all convertible preferred stock to common stock, resign the
two board seats held by Pioneer, and cancel the exploration and participation
agreement associated with the convertible preferred stock. The transaction was
effective March 31, 2000 and was funded through the Company's Senior Credit
Facility.
On May 8, 2001 and August 22, 2001, 324 and 369 shares of common stock of the
Company, respectively, were issued in lieu of cash to three of the outside
directors of the Company for attending meetings of the Board of Directors of the
Company.
On July 30, 2001, the Company amended its Senior Facility to allow for the
purchase of $25 million of its common shares from that date forward. In August
2001, the Company's Board of Directors approved a plan to buyback an additional
$25 million of its common stock which, when combined with the previous
repurchases, brought the total Board authorized repurchases to $40 million
(excluding the shares repurchased from Pioneer discussed above). From June 18,
2001 through September 30, 2001, Prize repurchased 422,525 of its common shares
for a total of $8.2 million.
12
6. EARNINGS PER SHARE
The following tables provide reconciliations between basic and diluted earnings
per common share for the three and nine months ended September 30, 2001 and
2000.
Three Months Ended September 30, 2001 and 2000 (in thousands, except shares and
per share amounts):
<Table>
<Caption>
2001 2000
-------------------------------------- -------------------------------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
---------- ---------- --------- ---------- ---------- ---------
Basic earnings per share
Income available
to common stockholders $ 5,614 12,587,910 $0.45 $ 9,414 13,314,060 $0.71
Effect of dilutive securities:
Employee stock options 774,032 884,106
Warrants 1,538
---------- ---------- ----- ---------- ---------- -----
Diluted earnings per share $ 5,614 13,361,942 $0.42 $ 9,414 14,199,704 $0.66
========== ========== ===== ========== ========== =====
</Table>
Nine Months Ended September 30, 2001 and 2000 (in thousands, except shares and
per share amounts):
<Table>
<Caption>
2001 2000
------------------------------------- -------------------------------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
---------- ---------- --------- ---------- ---------- ---------
Basic earnings per share
Income available
to common stockholders $ 34,610 12,791,211 $2.71 21,697 12,074,592 $1.80
Effect of dilutive securities:
Employee stock options 831,580 837,949
Convertible preferred shares 459 1,323,219
Warrants 192 326
---------- ---------- ----- ---------- ---------- -----
Diluted earnings per share $ 34,610 13,622,983 $2.54 $ 22,156 14,236,086 $1.56
========== ========== ===== ========== ========== =====
</Table>
Warrants to purchase 1,718,724 and 1,687,296 shares of common stock have been
excluded from the earnings per share calculation as antidilutive for the three
months ended September 30, 2001 and 2000, respectively, and warrants to purchase
1,708,724 and 1,500,734 shares of common stock have been excluded from the
earnings per share calculation as antidilutive for the nine months ended
September 30, 2001 and 2000, respectively.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion addresses material changes in results of operations for
the three and nine months ended September 30, 2001 compared to the same periods
in 2000 and in financial condition since December 31, 2000. It is presumed that
readers have read or have access to Prize's 2000 annual report on Form 10-K. The
following discussion also includes "forward-looking" statements as defined by
the Securities and Exchange Commission. Such statements are those concerning the
Company's plans, expectations and objectives for future operations. All
statements, other than statements of historical facts, included in this
discussion that address activities, events or developments that the Company
expects, believes or anticipates will or may occur in the future are
forward-looking statements. This includes reserve estimates, future financial
performance, and other matters. These statements are based on certain
assumptions made by the Company based on its experience and perception of
historical trends, current conditions, expected future developments and other
factors it believes is appropriate in the circumstances. Such statements are
subject to a number of assumptions, risks and uncertainties, many of which are
beyond the control of the Company. Factors that could cause actual results to
differ materially include, among others: general economic conditions, the market
price of oil and natural gas, the risks associated with exploration, the
Company's ability to find, acquire, market, develop and produce new properties,
operating hazards inherent to the oil and natural gas business, uncertainties in
the estimation of proved reserves and in the projection of future rates of
production and timing of development expenditures, the strength and financial
resources of the Company's competitors, the Company's ability to find and retain
skilled personnel, climatic conditions, labor relations, availability and cost
of material and equipment, environmental risks, the results of financing
efforts, and regulatory developments. All forward-looking statements in this
Form 10-Q are expressly qualified in their entirety by such Cautionary
Disclosures. The Company disclaims any obligation to update or revise any
forward-looking statement to reflect events or circumstances occurring hereafter
or to reflect the occurrence of anticipated or unanticipated events.
OVERVIEW
On February 28, 2001, the Company closed on the purchase of $61.8 million of
interests in oil and gas properties from Apache Corporation ("Apache
Properties"), net of subsequent closing adjustments. The results of operations
of the Apache Properties have been included in the Company's earnings from the
date of acquisition. At December 31, 2000, the Company had deposited $6.5
million towards the purchase. The Company financed the acquisition under its
existing bank credit facility.
On April 30, 2001, the Company closed on the sale of $12.2 million of interests
in oil and gas properties to Texas Petroleum Investment Company. The properties
divested are primarily located in the Onshore Gulf Coast region of South Texas
and Louisiana. The sales price approximated the carrying value of the
properties, and no significant gain or loss was recognized.
For the quarter ended September 30, 2001, net income was $5.6 million or $0.45
(basic) per common share. This compares to third quarter of 2000 net income of
$9.4 million or $.71 (basic) per common share. For the nine months ended
September 30, 2001, net income available to common stockholders was $34.6
million or $2.71 (basic) per common share. This compares to net income available
to common stockholders for the nine months ended September 30, 2000 of
14
$21.7 million or $1.80 (basic) per common share. The decline in the third
quarter net income is attributable to the decline in realized prices and higher
operating expenses from the properties acquired from Apache. The substantial
increase in the 2001 nine months net income is the result of increased
production from acquisitions and heightened levels of development activities as
well as substantial increases in oil and gas prices during the first half of
2001.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND
2000
Prize merged with Vista on February 8, 2000. Accordingly, the financial
statements of Prize for the nine months ended September 30, 2000 include only
eight months of the oil and gas operations from the Vista properties. Likewise,
the financial statements for the three and nine months ended September 30, 2000
do not contain any operations from the properties acquired from Apache on
February 28, 2001. Consequently, a portion of the changes discussed below are
due to these acquisitions. Changes in oil/liquids and gas production, average
realized prices including the effects of hedging, and revenues for the three and
nine months ended September 30, 2001 and 2000, are shown in the table below:
<Table>
<Caption>
THREE MONTHS ENDED SEPT 30, NINE MONTHS ENDED SEPT 30,
------------------------------- ------------------------------
2001 2001
VS. VS.
2001 2000 2000 2001 2000 2000
-------- -------- ---- -------- -------- ----
PRODUCTION
Oil/liquids (MBbls) 972 935 4.0% 2,843 2,657 7.0%
Gas (MMcf) 7,281 6,130 18.8% 22,170 17,605 25.9%
Total (Mboe) 2,186 1,957 11.7% 6,538 5,591 16.9%
AVERAGE REALIZED PRICES
Oil/liquids (per Bbl) $ 23.68 $ 24.17 (2.0)% $ 23.36 $ 22.04 6.0%
Gas (per Mcf) $ 2.75 $ 2.99 (8.0)% $ 3.58 $ 2.77 29.2%
Per Boe $ 19.67 $ 20.93 (6.0)% $ 22.29 $ 19.19 16.2%
TOTAL REVENUES (IN THOUSANDS)
Oil/liquids $ 23,017 $ 22,603 1.8% $ 66,403 $ 58,555 13.4%
Gas 19,989 18,359 8.9% 79,309 48,725 62.8%
-------- -------- -------- --------
Total $ 43,006 $ 40,962 5.0% $145,712 $107,280 35.8%
======== ======== ======== ========
</Table>
OIL/LIQUIDS REVENUES FOR 2001 COMPARED TO 2000. Oil/liquids revenues increased
$.4 million or 1.8% in the third quarter of 2001 compared to the same period in
2000. Production gains of 37,000 barrels, or 4%, increased oil/liquids revenues
by $.9 million in the 2001 period. The increase in production occurred as a
result of Prize's ongoing development program and the Apache acquisition. These
production increases were partially offset by a decrease of $.5 million in
oil/liquids revenues as a result of the $0.49 per barrel, or 2%, price decrease
realized in the third quarter of 2001 compared to the same period in 2000.
Realized hedging losses decreased oil/liquids revenue by $.1 million or $.14 per
barrel for the three months ended September 30, 2001 compared to $4.2 million or
$4.49 per barrel in the 2000 period.
Oil/liquids revenues increased $7.8 million or 13.4% in the first nine months of
2001 compared to the same period in 2000. Production gains of 186,000 barrels,
or 7%, added $4.1 million of
15
oil/liquids revenues in the 2001 period. The increase in production occurred as
a result of Prize's ongoing development program and the Vista and Apache
acquisitions. In addition to the production increases, oil/liquids revenues
increased $3.7 million as a result of the $1.32 per barrel, or 6%, price
increase realized in the nine month period of 2001. Realized hedging losses
decreased oil/liquids revenue by $5.7 million or $2.01 per barrel for the nine
months ended September 30, 2001 compared to $12.1 million or $4.55 per barrel in
the 2000 period.
GAS REVENUES FOR 2001 COMPARED TO 2000. Gas revenues increased $1.6 million or
8.9% in the third quarter of 2001 compared to the same period in 2000.
Production gains of 1.2 Bcf of gas, or 18.8%, added $3.3 million of gas revenues
in the 2001 period. The production gains were primarily the result of Prize's
ongoing development program and the Apache acquisition. These production
increases were partially offset by a decrease of $1.7 million in gas revenues as
a result of the realized gas price decreasing $.24 per Mcf, or 8%, in the third
quarter of 2001 as compared to the same period in 2000. Realized hedging gains
increased gas revenue by $.4 million or $0.05 per Mcf for the three months ended
September 30, 2001 compared to a loss of $6.0 million or $0.99 per Mcf in the
2000 period.
Gas revenue increased $30.6 million or 62.8% in the first nine months of 2001
compared to the same period in 2000. Production increased by 4.6 Bcf of gas, or
25.9%, increasing revenues by $12.6 million in the 2001 period. The increase in
production occurred as a result of Prize's ongoing development program and the
Vista and Apache acquisitions. Gas revenues increased $18 million as a result of
the $.81 per Mcf, or 29.2%, price increase realized in the first nine months of
2001. Realized hedging losses decreased gas revenue by $21.9 million or $.98 per
Mcf for the nine months ended September 30, 2001 compared to $9.0 million or
$0.51 per Mcf in the 2000 period.
PRODUCTION AND OPERATING EXPENSE. Listed below are the changes in production and
operating expenses for the three and nine months ended September 30, 2001 as
compared to the 2000 period:
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2001 2001
VS. VS.
2001 2000 2000 2001 2000 2000
------- ------- ---- ------- ------- ----
PRODUCTION AND OPERATING
EXPENSES (000'S)
Recurring Operations and
Maintenance Expense $ 9,130 $ 6,047 51.0% $24,268 $17,413 39.4%
Well Workover Expense 2,492 1,789 39.3% 8,041 5,927 35.7%
Production Taxes 3,554 4,412 (19.4)% 14,021 11,064 26.7%
------- ------- ------- -------
Total $15,176 $12,248 24.0% $46,330 $34,404 34.7%
======= ======= ======= =======
PER BOE PRODUCED
Recurring Operations and
Maintenance Expense $ 4.18 $ 3.09 36.9% $ 3.71 $ 3.11 19.9%
Well Workover Expense $ 1.14 $ .91 25.3% $ 1.23 $ 1.06 16.0%
Production Taxes $ 1.63 $ 2.25 (27.6)% $ 2.14 $ 1.98 8.1%
</Table>
Recurring operations and maintenance expenses increased $3.1 million or 51.0% in
the third quarter of 2001 and $6.9 million or 39.4% in the nine months ended
September 30, 2001. The increase in the recurring operations and maintenance
expenses is substantially attributable to
16
operating expenses from the Apache acquisition properties and increased well
servicing activities. Well workover expense increased $0.7 million or 39.3% in
the third quarter of 2001 and $2.1 million or 35.7% in the nine months ended
September 30, 2001. The rise in well workover expense is a result of the
Company's ongoing effort to enhance production and reserves. Production taxes
decreased $0.9 million or 19.4% and increased $3.0 million or 26.7% in the three
and nine months ended September 30, 2001. The production tax increase for the
nine months ended is directly correlated to the corresponding changes in oil and
gas revenues.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSES (DD&A). DD&A expense in the
quarter ended September 30, 2001 was $10.1 million as compared to $6.6 million
in the 2000 period. On a Boe basis, the average DD&A rate was $4.61, or 37.6%
higher than the rate of $3.35 in 2000. The DD&A expense in the nine months ended
September 30, 2001 was $27.2 million or $4.16 per Boe, as compared to $18.8
million or $3.37 per Boe for 2000. The increase in rate is attributable to the
Vista and Apache acquisitions and capital expenditures from the Company's
ongoing development program. Since the end of the year, natural gas prices have
declined. Consequently, the Company has revised its reserve estimates, resulting
in an additional increase in depletion expense of approximately $.5 million in
the third quarter of 2001.
GENERAL AND ADMINISTRATIVE EXPENSES (G&A). G&A expense in the quarter ended
September 30, 2001 was $3.4 million versus $2.6 million for the 2000 period. On
a Boe basis, the G&A rate was $1.55, 16.5% higher than the rate of $1.33 for the
2000 period. G&A expense during the nine months ended September 30, 2001 was
$9.2 million, or $1.41 per Boe, versus $6.6 million, or $1.18 per Boe in the
2000 period. The increase in the 2001 period resulted substantially from Prize's
increase in its corporate staff during the second half of 2000 and the first
half of 2001.
INTEREST EXPENSE. Interest expense for the three and nine months ended September
30, 2001 was $3.9 million and $13.5 million, respectively, as compared to $4.8
million and $12.8 million in the respective 2000 periods. The average rate on
the debt outstanding was 5.65% and 7.02% for the three and nine months ended
September 30, 2001, respectively, compared to 8.47% and 8.21% for the respective
2000 periods. In addition, 2000 included $53.7 million of debt assumed in the
Vista acquisition only from February 8, 2000, forward and $18.4 million borrowed
on March 28, 2000 for the purchase of shares from Pioneer. 2001 also included
interest after February 28, 2001 on $54 million borrowed in connection with the
Apache acquisition.
CHANGE IN DERIVATIVE FAIR VALUE. The Company recorded an unrealized loss of $1.6
million in the 2001 third quarter and an unrealized gain of $4.7 million for the
nine month period primarily relating to the ineffective portion of derivatives
qualifying for hedge accounting. See Footnote 2 to the Financial Statements for
additional discussion.
INCOME TAXES. Income tax expense is based upon the estimated effective income
tax rate that is expected for the entire fiscal year. The estimated effective
tax rate for 2001 and 2000 is 37%.
CAPITAL EXPENDITURES, CAPITAL RESOURCES, AND LIQUIDITY
The following discussion of capital expenditures, capital resources and
liquidity should be read in conjunction with the consolidated statements of cash
flows included in Part 1, Item 1 elsewhere herein.
17
CAPITAL EXPENDITURES. Approximately $16.3 million was spent in the third quarter
of 2001 for oil and gas property capital expenditures bringing the 2001 year to
date total to $113.5 million. Of the $16.3 million incurred, $15.9 million was
spent on drilling and development, and an additional $.4 million was spent
related to the Apache acquisition. Of the $120 million incurred for the nine
months ended September 30, 2001 (including a $6.5 million deposit on the Apache
acquisition made in December 2000), $58.2 million was spent on drilling and
development, and $61.8 million was spent on the Apache acquisition. For the
three and nine months ended September 30, 2001, the Company has participated in
the drilling of 13 and 54 wells, respectively, achieving a success rate of 92%
and 94%, respectively. In addition, the Company has performed a total of 15 and
59 recompletions, respectively, with a success rate of 67% and 83%,
respectively. The success rates achieved in the 2001 capital expenditure program
have significantly contributed to the increase in production realized in 2001.
The timing of most of the Company's capital expenditures is discretionary with
no material long-term capital expenditure commitments. Consequently, the Company
has a significant degree of flexibility to adjust the level of such expenditures
as circumstances warrant. The Company uses internally generated cash flow to
substantially fund capital expenditures other than significant acquisitions and
anticipates that its cash flow, net of debt service obligations, will be
sufficient to fund its planned 2001 capital expenditures, estimated between $62
million and $65 million, excluding acquisitions.
Prize does not have a specific acquisition budget since the timing and size of
acquisitions are difficult to forecast. Prize regularly engages in discussions
relating to the potential acquisition of oil and gas properties. Any future
acquisitions may require additional financing and will be dependent upon
financing arrangements being available at the time.
CAPITAL RESOURCES AND LIQUIDITY. On February 8, 2000, in connection with the
merger agreement with Vista, the Company amended its Senior Facility to provide
for total borrowings of $400 million. The amended Senior Facility is due June
29, 2006. As of Apri1 1, 2001, the Company's borrowing base was raised from $325
million to $375 million. Effective October 1, 2001, the Company's borrowing base
was reaffirmed at $375 million with prior approval from the bank group required
for borrowings above $325 million. Also, in June 2001, the Company reduced the
outstanding balance on its letter of credit to $2.5 million. As of September 30,
2001, Prize's outstanding long-term debt was $250.8 million. During the first
nine months of 2001, Prize borrowed $72 million on the Senior Facility. Prize
utilized the borrowings to fund the Apache acquisition and a portion of its
capital expenditures. Since financing the Apache acquisition in February 2001,
the Company has repaid borrowings of $35.5 million under the Senior Facility
through October 31, 2001.
Cash provided by operating activity before changes in working capital
("operating cash flow") was the primary source of capital and liquidity in the
first nine months of 2001. Operating cash flow for the three and nine months
ended September 30, 2001 was $22.1 million and $79.8 million, respectively.
On March 28, 2000, the Company entered into a stock purchase agreement with
Pioneer Natural Resources to acquire 1,346,482 shares of Prize common stock for
$18.4 million. In September 2000, the Company's Board of Directors approved a
plan to buy back up to an additional $15 million of its common stock from time
to time in the open market or through negotiated transactions. On July 30, 2001,
the Company amended its Senior Facility to allow for the
18
purchase of $25 million of its common shares from that date forward. Also, in
August 2001, the Company's Board of Directors approved a plan to buyback an
additional $25 million of its common stock, which when combined with the
previously approved $15 million repurchase plan, brings the total Board
authorized repurchases to $40 million (excluding shares repurchased from Pioneer
discussed above). As of September 30, 2001, the Company had acquired an
additional 422,525 common shares in 2001 for $8.2 million and reissued 90,433
shares for stock option exercises.
In October 2001, the Company entered into interest rate protection agreements
with its bank (the "Swap Agreements") to modify the interest characteristics of
certain portions of the revolving line of credit from a variable rate to a fixed
rate. The Swap Agreements require the Company to pay a fixed rate interest
obligation and receive an interest obligation based on variable LIBOR rates. The
terms of the Swap Agreements are set forth below:
<Table>
<Caption>
Hedged Weighted-Average
Year Amount Fixed Rate
- ---- --------------- ----------------
2001 $170.8 million 3.37%
2002 $160.6 million 3.42%
2003 $121.48 million 3.67%
2004 $50.8 million 3.98%
</Table>
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
See the information included in "Quantitative and Qualitative Disclosures About
Market Risk" in Item 7A of Prize's 2000 Annual Report on Form 10-K and the
information included in Note 2 in Part 1, Item 1 elsewhere herein. Such
information includes a description of Prize's potential exposure to market
risks, including commodity price risk and interest rate risk. As a result of
decreases in both oil and natural gas prices, Prize had a net asset of $28.1
million as of September 30, 2001, at fair market value, relating to its hedges,
as compared to a net liability of $55.4 million as of December 31, 2000.
Interest Rates. Prize significantly increased its interest rate hedging in
October 2001. Prize's interest rate risk exposure results from having short-term
variable rates under its credit facility. All of Prize's outstanding
indebtedness is subject to market rates of interest as determined from time to
time by the banks under the credit facility. Any increases in the variable
interest rates related to this facility can have an adverse impact on Prize's
results of operations and cash flow. As of November 13, 2001, Prize had $250.8
million of outstanding debt under the credit facility.
In October 2001, the Company entered into interest rate protection agreements
with its bank (the "Swap Agreements") to modify the interest characteristics of
certain portions of the revolving line of credit from a variable rate to a fixed
rate. The Swap Agreements require the Company to pay a fixed rate interest
obligation and receive an interest obligation based on variable LIBOR rates. The
effect of changes in the fair value of the swaps due to changes in interest
rates will be reduced by offsetting changes in interest expense associated with
the Senior Facility. The terms of the Swap Agreements are set forth below:
<Table>
<Caption>
Hedged Weighted-Average
Year Amount LIBOR Rate
- ---- --------------- ----------------
2001 $170.8 million 3.37%
2002 $160.6 million 3.42%
2003 $121.48 million 3.67%
2004 $50.8 million 3.98%
</Table>
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The outside directors of the Company receive a fee payable in
cash for each meeting of the Board of Directors of the Company
that they attend. The outside directors, however, may elect to
receive 50% of that fee in common stock of the Company. Three
of the directors have elected to receive 50% of their fees in
common stock. On August 22, 2001, an aggregate of 369 shares
of common stock of the Company were issued to such directors
at a price of $20.26 per share. The issuance of such shares
was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended. Each of the outside
directors is an accredited investor.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
The following documents are included as exhibits to this Form
10-Q. Those exhibits below incorporated by reference herein
are indicated as such by the information supplied in the
parenthetical thereafter. If no parenthetical appears after an
exhibit, such exhibit is filed herewith.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 Sixth Amendment to Amended and Restated Credit Agreement,
dated as of October 1, 2001, among Prize Energy Resources,
L.P., the Company, Fleet National Bank, successor-in-interest
to BankBoston, N.A., as administrative agent, and certain
financial institutions.
b) Reports on Form 8-K
None.
21
Signatures
----------
Pursuant to the requirements 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.
Prize Energy Corp.
-----------------------------------------
(Registrant)
DATE: November 13, 2001 /s/ Lon C. Kile
----------------- -----------------------------------------
Lon C. Kile
President
(Principal Accounting Officer)
22
EXHIBIT INDEX
The following documents are included as exhibits to this Form 10-Q. Those
exhibits below incorporated by reference herein are indicated as such by the
information supplied in the parenthetical thereafter. If no parenthetical
appears after an exhibit, such exhibit is filed herewith.
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Sixth Amendment to Amended and Restated Credit Agreement, dated as
of October 1, 2001, among Prize Energy Resources, L.P., the
Company, Fleet National Bank, successor-in-interest to BankBoston,
N.A., as administrative agent, and certain financial institutions.
</Table>