<PAGE>
- -------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 1-12530
ESENJAY EXPLORATION, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 73-1421000
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification Number)
500 NORTH WATER STREET, SUITE 1100
CORPUS CHRISTI, TEXAS 78471
(Address of principal executive offices including zip code)
(361) 883-7464
(Issurer's telephone number including area code)
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 [ ]
15,784,834 shares as the registrant's common stock were outstanding
as of May 12, 1999.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [ X ]
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<PAGE>
ESENJAY EXPLORATION, INC.
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
PART I. FINANCIAL INFORMATION
<S> <C>
ITEM 1. Financial Statements - General Information......................................................3
Condensed Consolidated Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998.......................................................4
Condensed Consolidated Statements of Operations for the three months ended
March 31, 1999 and 1998 (unaudited).....................................................5
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998 (unaudited)...............................................6
Notes to Condensed Consolidated Financial Statements (unaudited)...............................7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .............................................................10
PART II. OTHER INFORMATION..............................................................................19
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL
The Condensed Consolidated Financial Statements herein have been
prepared by the Company without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission (the "SEC"). As applicable under
such regulations, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. The Company
believes the presentation and disclosures herein are adequate to make the
information not misleading, and the financial statements reflect all
elimination entries and normal adjustments which are necessary for a fair
presentation of the results of operations for the first quarter of 1999 and
1998.
Operating results for interim periods are not necessarily indicative
of the results for full years. It is suggested that these condensed
consolidated financial statements be read in conjunction with the
consolidated financial statements for the year ended December 31, 1998 and
the related notes thereto included in Form 10-KSB and 10KSB/A as filed with
the SEC. It is further suggested that all comparative information be
considered in the context of certain acquisitions closed on May 14, 1998,
which resulted in significant changes to the scope, focus and method of doing
business of the Company and may diminish the value of the comparisons when
analyzing relevant trends.
3
<PAGE>
ESENJAY EXPLORATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
1999 1998
------------------- ----------------
<S> (unaudited)
<C> <C>
Current assets:
Cash and cash equivalents.......................................... $ 515,092 $ 646,200
Accounts receivable, net of allowance for doubtful
accounts of $369,136 at March 31, 1999 and
$348,984 at December 31, 1998................................... 4,564,250 3,209,633
Prepaid expenses and other......................................... 1,269,995 122,422
Receivables from affiliates........................................ 841,264 963,700
------------------- -----------------
Total current assets...................................... 7,190,601 4,941,955
Property and equipment, successful efforts method of accounting......... 72,397,665 70,044,882
Less accumulated depletion, depreciation
and amortization................................................... (18,438,002) (15,517,656)
------------------- ----------------
53,959,663 54,527,226
Other assets .......................................................... 604,433 447,091
------------------- ----------------
Total assets.............................................. $ 61,754,697 $ 59,916,272
------------------- ----------------
------------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 31, DECEMBER 31,
1999 1998
----------------- ----------------
Current liabilities:
Accounts payable................................................... $ 5,531,132 $ 8,993,859
Accounts payable to affiliate, net................................. 4,281,750 4,322,548
Revenue distribution payable....................................... 3,669,924 1,996,091
Current portion of long-term debt.................................. 1,960,000 101,236
Accrued and other liabilities...................................... 1,202,387 484,756
------------------- ----------------
Total current liabilities................................. 16,645,193 15,898,490
Long-term debt ......................................................... 12,640,000 7,500,000
Non-recourse debt ...................................................... 864,000 864,000
Accrued interest on non-recourse debt .................................. 364,394 331,194
------------------- ----------------
Total liabilities ........................................ 30,513,587 24,593,684
Stockholders' equity:
Common stock:
Class A common stock, $.01 par value; 40,000,000 shares authorized;
15,784,834 outstanding at March 31,
1999 and December 31, 1998...................................... 157,849 157,849
Additional paid-in capital ........................................ 77,651,602 77,651,602
Accumulated deficit................................................ (46,568,341) (42,486,863)
------------------- ----------------
Total stockholders' equity................................ 31,241,110 35,322,588
------------------- ----------------
Total liabilities and stockholders' equity................ $ 61,754,697 $ 59,916,272
------------------- ----------------
------------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ESENJAY EXPLORATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------
1999 1998
------------------- ------------------
<S> <C> <C>
Revenues:
Gas and oil revenues................................................ $ 964,245 $ 48,503
Realized gain (loss) on commodity transactions...................... 190,849 (47,875)
Unrealized loss on commodity transactions........................... --- (51,011)
Gain on sale of assets.............................................. 271,652 2,875
Operating fees...................................................... 63,734 6,992
Other revenues...................................................... 20,522 23,930
---------------- ------------------
Total revenues.................................................. 1,511,002 (16,586)
---------------- ------------------
Costs and expenses:
Lease operating expense............................................. 253,971 69,773
Production taxes.................................................... 63,793 (1,090)
Transportation and gathering costs.................................. --- 639
Depletion, depreciation and amortization............................ 619,000 53,568
Amortization of unproved properties................................. 2,383,000 ---
Impairment of oil and gas properties................................ --- 60
Exploration costs - geological and geophysical...................... 745,458 (12,685)
Exploration costs - dry hole........................................ --- 3,500
Interest expense.................................................... 123,286 19,223
General and administrative expense.................................. 1,403,972 459,014
---------------- ------------------
Total costs and expenses........................................ 5,592,480 592,002
---------------- ------------------
Loss before provision for income taxes................................... (4,081,478) (608,588)
Benefit (provision) for income taxes..................................... --- ---
---------------- ------------------
Net loss................................................................. (4,081,478) (608,588)
Cumulative preferred stock dividend...................................... --- 25,788
---------------- ------------------
Net loss applicable to common stockholders............................... $(4,081,478) $ (634,376)
---------------- ------------------
---------------- ------------------
Net loss per common and common equivalent share.......................... $ (0.26) $ (0.38)(1)
---------------- ------------------
---------------- ------------------
Weighted average number of common shares
outstanding ( in thousands)..................................... 15,785 1,656(1)
---------------- ------------------
---------------- ------------------
</TABLE>
(1) After giving effect to the 1:6 reverse stock split effected on
May 14, 1998.
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ESENJAY EXPLORATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------
1999 1998
------------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss...................................................... $ (4,081,478) $ (608,588)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depletion, depreciation and amortization ..................... 619,000 53,568
Amortization of unproven property............................. 2,383,000 ---
Gain on sale of assets........................................ (271,652) (2,875)
Amortization of financing costs and warrants.................. 18,822 21,564
Unrealized loss on commodity transactions..................... --- 51,011
Exploration costs............................................. 745,458 3,560
Changes in operating assets and liabilities:
Trade and affiliate receivables........................... (1,232,181) 52,763
Prepaid expenses and other................................ (1,147,573) 108,254
Other assets.............................................. (176,164) (359,188)
Accounts payable.......................................... (3,503,525) (86,956)
Revenue distribution payable.............................. 1,673,833 6,194
Trade and affiliate payables.............................. 750,831 4,171
------------------- ------------------
Net cash used in operating activities......................... (4,221,629) (756,522)
------------------- ------------------
Cash flows used in investing activities:
Capital expenditures - gas and oil properties................. (6,618,455) (403,250)
Capital expenditures - other property and equipment........... (58,307) (13,328)
Notes receivable from EPC..................................... -- (1,750,000)
3,768,519 15,000
Proceeds from sale of assets..................................
------------------- ------------------
Net cash used in investing activities..................... (2,908,243) (2,151,578)
------------------- ------------------
Cash flows from financing activities:
Proceeds from issuance of debt................................ 7,000,000 3,000,000
Repayments of long-term debt.................................. (1,236) (593,981)
------------------- ------------------
Net cash provided by financing activities................. 6,998,764 2,406,019
------------------- ------------------
Net decrease in cash and cash equivalents..................... (131,108) (502,081)
Cash and cash equivalents at beginning of period................... 646,200 690,576
------------------- ------------------
Cash and cash equivalents at end of period......................... $ 515,092 $ 188,495
------------------- ------------------
------------------- ------------------
Supplemental disclosure of cash flow information:
Cash paid for interest........................................ $ 369,156 $ 98,325
------------------- ------------------
------------------- ------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying unaudited condensed consolidated financial
statements of Esenjay Exploration, Inc. and its subsidiaries and its
predecessor Frontier Natural Gas Corporation (the "Company") have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. Interim results are not
necessarily indicative of results for a full year.
The Company uses the successful efforts method of accounting for gas
and oil exploration and development costs. All costs of acquired wells,
productive exploratory wells, and development wells are capitalized and
depleted by the unit of production method based upon estimated proved
developed reserves. Exploratory dry hole costs, geological and geophysical
costs, and lease rentals on non-producing leases are expensed as incurred.
Gas and oil leasehold acquisition costs are capitalized. Costs of unproved
properties are transferred to proved properties when reserves are proved.
Valuation allowances are provided if the net capitalized costs of gas and oil
properties at the field level exceed their realizable values based on
expected future cash flows. Unproved properties are periodically assessed for
impairment and, if necessary, a loss is recognized. The Company recognized no
impairments for the quarter ended March 31, 1999.
In addition, the $54,200,000 fair market value assigned to unproven
gas and oil exploration projects contributed by Esenjay Petroleum Corporation
("EPC") and Aspect Resources LLC ("Aspect") pursuant to certain acquisitions
of undeveloped exploration projects (the "Acquisitions") which closed on May
14, 1998 is, until such time as the book value of each such project is either
drilled and transferred to producing properties or is otherwise evaluated as
impaired, are being amortized on a straight-line basis over a period not to
exceed forty-eight months. For the quarter ended March 31, 1999, such
amortization was $2,383,000.
A summary of all of the Company's significant accounting policies is
presented on pages 39 and 40 of its 1998 Form 10KSB/A filed with the SEC.
Users of financial information are encouraged to refer to the footnotes
contained therein when reviewing interim financial results. There have been
no material changes in the accounting policies followed by the Company during
1999.
The accompanying interim financial statements contain all material
adjustments, which are in the opinion of management, consistent with the
adjustments necessary to present the fairly stated consolidated financial
position, results of operations and cash flows of Esenjay Exploration, Inc.
for the interim period. Certain prior period amounts have been reclassified
to conform with the current period presentation.
7
<PAGE>
2. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Note payable repaid in 1999....................................................... $ --- $ 1,236
Non-recourse loan, payable out of an 8% ORRI on the Starboard Prospect, interest
accrued at 15%................................................................. 864,000 864,000
Note payable, interest at 12%, payable monthly, is currently due.................. 100,000 100,000
Loan with Bank of America NT & SA ("B of A"), in two Tranches: Tranche A is a
revolving credit facility which terminates October 13, 2000, thereafter
converting the unpaid balance into a five year term loan requiring quarterly
principle and interest payments; Tranche B is payable as to interest only until
maturity on April 13, 2000, at which time payment in full is required. Both
loans are at a varied interest rate utilizing either the B of A's Alternative
Reference Rate (Alternative Reference Rate is the greater of (i) B of A's
Reference Rate and (ii) the Federal Funds effective rate plus 0.50%) or the
Interbank rate plus 2% for Tranche A and 4% for Tranche B. The loan is secured
by a mortgage on all properties currently owned by the Company................ 7,500,000 7,500,000
Loan with Duke Energy Field Services, Inc., ("Duke") which provides for up to
$9,000,000 to the Company for eighteen months. The commitment reduces by
$930,000 per quarter for five quarters beginning on May 1, 1999, and reducing
to zero on August 1, 2000. The interest rate is prime plus 4%. The loan is
secured by a mortgage on all properties currently owned by the company........ 7,000,000 ---
-------------- -------------
15,464,000 8,465,236
Less current portion.............................................................. 1,960,000 101,236
-------------- -------------
$ 13,504,000 $ 8,364,000
-------------- -------------
-------------- -------------
</TABLE>
On October 13, 1998, the Company amended and restated the credit
agreement dated January 3, 1996 with B of A to an amount equal to the lesser
of the Collateral Value, or $20,000,000. The amended agreement provided for
an immediate borrowing base of up to $9,000,000 ($8,250,000 if the Company
did a third party financing in which the third party lender would share in
certain collateral of B of A). The $9,000,000 base represents the Collateral
Value until the initial Collateral Value Redetermination is made. In
conjunction with this financing, B of A received a 2% overriding royalty
interest, proportionately reduced to the Company's net interest, in the
properties classified proven as of the date of closing and received a five
year warrant to purchase 95,000 shares of common stock at a price equal to
the average daily closing price of the Company's common stock for the thirty
days prior to closing of the credit agreement. Proceeds of the loan primarily
supplement working capital. As part of the credit agreement, the Company is
subject to certain covenants and restrictions, among which are the
limitations on additional borrowing, and sales of significant properties,
working capital, cash, and net worth maintenance requirements and a minimum
debt to net worth ratio. The covenants regarding financial condition of
Company are as follows:
<TABLE>
<S> <C>
Tangible Net Worth............................ $45,000,000 + 50% of Consolidated Net Income + 100% of net
proceeds received from sale of any Non-Redeemable Stock
Current Ratio................................. 1.1:1.0
Debt to Capitalization........................ 0.5:1.0
Interest Coverage Ratio ...................... 1.0:1.0 - 1st quarter 1999; 3.0:1.0-2nd quarter
1999 and any consecutive quarters after June 30, 1999
</TABLE>
8
<PAGE>
At March 31, 1999 the Company's tangible net worth as calculated
pursuant to the Credit Agreement was $31,241,110. B of A has waived
noncompliance with this covenant through June 30, 1999. The Company and B of
A have been in discussions, both recognizing that the covenant as initially
established did not give adequate consideration to the effects of the
Company's successful efforts method of accounting on the future book value of
its properties, in particular the accounting treatment that the Company has
adopted which requires the amortization over a period not to exceed
forty-eight months of a substantial portion of the property values recorded
pursuant to the Acquisitions. As such, B of A has agreed with the Company in
concept to reduce the tangible net worth requirement to an amount not in
excess of $25,000,000, subject to approval of B of A's credit committee which
is anticipated in the second quarter of 1999. In the event the credit
committee does not approve the modification of the covenant, the Company
would be in noncompliance of this provision and will seek alternative
long-term financing arrangements.
Further, as of March 31, 1999, the Company's current ratio was
0.6939 and the Company's interest coverage ratio was (0.7006) to 1, both of
which were, therefore, in noncompliance. B of A has waived said noncompliance
at March 31, 1999. The Company believes it has improved its current ratio and
its interest coverage ratio since March 31, 1999 significantly. Although the
Company believes it can be in compliance with both of these covenants
throughout the remainder of 1999, there can be no assurance that it will be
in compliance. As a result it is possible that additional waivers may be
needed in the future. In the event B of A did not grant such waivers, if
needed, the Company would be in noncompliance of the covenants and would seek
alternative financing arrangements.
The Company has entered into an interest rate swap with B of A
guaranteeing a fixed interest rate of 5.37% on the loan, and the Company will
pay fees of three-eighths of 1% (.0375%) on the unused portion of the
commitment amount. The unrealized loss on the interest rate swap agreement
was $1,275 at March 31, 1999. The actual rate for the Company is the fixed
rate of 5.37% plus 2% on Tranche A and 4% on Tranche B.
On January 28, 1999, the Company closed a credit facility with Duke.
This facility for Duke to loan up to $9,000,000 to the Company for eighteen
months. The Company had drawn $7,000,000 and $7,930,000 on said facility as
of March 31, 1999 and May 12, 1999, respectively. The commitment reduces by
$930,000 per quarter for five quarters and reduces to zero on August 1, 2000.
Principal outstanding cannot exceed the commitment amount at any time. Duke
is paid interest at a rate of prime plus 4%. It also received a right to
gather and process, at fair market value, gas and condensate from a
designated area of interest, and a net revenue interest in certain of the
Company's future drilling activities not to exceed 0.49% of the Company's net
interest. Proceeds primarily supplement exploration costs.
On January 28, 1999, the Company, B of A, and Duke entered into an
intercreditor agreement which governs the collateral which is used to secure
the credit facility with B of A and the credit facility with Duke. Tranche A
of the B of A credit facility is secured by a first mortgage on most of the
Company's proven properties. Collateral securing amounts outstanding under
both the Duke credit facility and Tranche B of the B of A facility is
primarily comprised of mortgages taken on a significant proportion of the
Exploration Projects of the Company which have not been developed. At such
time as drilling is conducted on the Exploration Projects and proven reserves
are discovered, the Company has a right to seek increases in the available
amount to be drawn under Tranche A of its credit facility with B of A. In
the event B of A agrees to increase the amounts available pursuant to Tranche A,
then, subject to Duke's consent, security interests in proven reserves would
be used as additional primary collateral on Tranche A loans from B of A
supporting the borrowing availability increases. The Company's request for
an increase in Tranche A availability is pending completion of third party
engineering reports on recently drilled wells.
3. RELATED PARTY TRANSACTIONS
The Company's outstanding accounts receivable from employees and
affiliates of the Company at March 31, 1999 and December 31, 1998 was
$841,264 and $963,700, respectively. The March 31, 1999 and December 31, 1998
receivables include approximately $47,787 from an affiliated partnership for
which the Company serves as the managing general partner. In addition, the
March 31, 1999 balance includes a net $772,486 receivable from EPC primarily
related to joint interest billings. In addition, at March 31, 1999 the
Company had a net account payable to Aspect in the amount of $4,281,750.
4. COMMITMENTS AND CONTINGENCIES
The Company markets its natural gas through monthly spot sales.
Because sales made under spot sales contracts result in fluctuating revenues
to the Company depending upon the market price of gas, the Company may enter
into various hedging agreements to minimize the fluctuations and the effect
of price declines or swings. During January 1999, the Company completed
performance on a 1996 swap agreement on approximately 1,040 MMBtu's per day
of Mid-Continent natural gas production for $1.566 per MMBtu for the period
beginning April 1, 1996 and ending January 31, 1999.
In October of 1998, the Company entered into two swap agreements,
one for 4,000 MMBtu's per day of its Gulf Coast natural gas production for
$2.14 per MMBtu for the period beginning November 1998 and ending in October
1999, and the second one for 700 MMBtu's per day of its Gulf Coast natural gas
production for $2.13 per MMBtu for the period beginning November 1998 and
ending in October 1999. Both of these swap agreements were supplemented in
December 1998 when the Company entered into additional swap agreements, one
of which was for 4,000 MMBtu's per day of its Gulf Coast natural gas
production for $2.07 per MMBtu for the period beginning November 1999 and
ending in October 2000, and the second one was for 700 MMBtu's per day of its
Gulf Coast natural gas production for $2.07 per MMBtu for the period
beginning November 1999 and ending in October 2000. As a result of the
foregoing transactions, the Company has 4,700 MMBtu's per day of its Gulf
Coast natural gas production hedged through October 2000.
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133, which is effective for all fiscal
quarters of fiscal years beginning after June 1, 1999, establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to
as "derivatives") and for hedging activities. SFAS 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The Company is
currently evaluating the impact of the application of SFAS 133, which when
adopted, could have a material effect on its financial position, liquidity or
results of operations.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis reviews Esenjay Exploration,
Inc.'s and/or its predecessor Frontier Natural Gas Corporation's operations
for the three month periods ended March 31, 1999 and 1998 and should be read
in conjunction with the consolidated financial statements and notes related
thereto. Certain statements contained herein that set forth management's
intentions, plans, beliefs, expectations or predictions of the future are
forward-looking statements. It is important to note that actual results could
differ materially from those projected in such forward-looking statements.
The risks and uncertainties include but are not limited to potential
unfavorable or uncertain results of 3-D seismic surveys, drilling costs and
operational uncertainties, risks associated with quantities of total reserves
and rates of production from existing gas and oil reserves and pricing
assumptions of said reserves, potential delays in the timing of planned
operations, competition and other risks associated with permitting seismic
surveys and with leasing gas and oil properties, potential cost overruns,
potential dry holes and regulatory uncertainties and the availability of
capital to fund planned expenditures as well as general industry and market
conditions.
OVERVIEW
OVERVIEW OF HISTORICAL DEVELOPMENTS - INCEPTION THROUGH MAY 1998. In
mid-1996, the Company refocused its activities from acquiring gas reserves
principally in the Mid-Continent region of the United States to concentrate
on exploration and related development drilling projects in Southern
Louisiana and along the Gulf Coast region of Alabama, Mississippi and Texas.
During 1996 and 1997, the Company's drilling activities, which were based
primarily on 2-D seismic data, were largely unsuccessful. This fact, along
with an unexpected drop in production from the Company's Mobile Bay area
wells, greatly reduced the Company's cash and capital resources.
To address the Company's capital needs, the Board of Directors, at
its meeting on August 12, 1997, directed management to look for potential
assets to acquire in exchange for the Company's Common Stock, to identify and
review potential business consolidation opportunities, identify potential
partners to help fund the Company's proposed drilling activities, and to
consider any other avenues to strengthen the Company's capital resources and
diversify its exploration opportunities. The Board also directed management
to reduce overhead wherever prudently possible and the Company retained an
investment advisor to aid in achieving these objectives. The Company explored
a series of such transactions and the Board, after receipt of the advice of
management and its investment advisor, and receipt of due diligence reports
and other materials, unanimously agreed that a transaction with Aspect and
EPC was the best option for the Company's shareholders. This process led to
the Company entering into the Acquisition Agreement among the Company, EPC,
and Aspect. This Acquisition Agreement, and certain provisions of it,
required approval of the shareholders of the Company. At a special meeting of
shareholders held on May 14, 1998 the shareholders approved the Acquisition
Agreement, a recapitalization of the Company pursuant to which each
outstanding share of common stock would convert into one-sixth (1/6) of a
share of new common stock (the "Reverse Split"), a plan and agreement of
merger pursuant to which the Company would reincorporate in the state of
Delaware and would change its name to Esenjay Exploration, Inc. (the
"Reincorporation"), and the election of seven directors.
On May 14, 1998 after a Special Meeting of Shareholders, the Company
closed the transactions provided for in the Acquisition Agreement,
implemented the Reverse Split, and completed the Reincorporation. All
references in the accompanying financial statements to the number of common
shares have been restated to reflect the foregoing. In addition, as required
by the Acquisition Agreement, the Company called for redemption, all of its
issued and outstanding cumulative convertible preferred stock and did redeem
said preferred stock. The result of the foregoing is that the Company
conveyed a substantial majority of its Common Stock to acquire an array of
significant technology enhanced natural gas oriented exploration projects.
The Company believed the Acquisitions would facilitate expanded access to
capital markets due to the value and diversity of its exploration project
portfolio. The Company also believes the members of EPC's management that
joined the Company after consummation of the acquisitions significantly
enhanced the Company's management team.
In connection with the Acquisitions, an affiliate of Enron Corp.
exercised an option to exchange $3.8 million of debt Aspect owed to such
Enron affiliate for 675,000 shares of the Company's Common Stock that would
otherwise have been issued to Aspect in the Acquisitions, at an effective
conversion rate of $5.63 per share.
10
<PAGE>
As a result of the Acquisitions and this exchange and the secondary public
offering effective in July of 1998, EPC, Aspect and the Enron affiliate own
approximately 32.8%, 27.7% and 4.3%, respectively, of the Company's Common
Stock.
On July 21, 1998 the Company closed an underwritten offering of
4,000,000 shares of its common stock at a price of $4.00 per share. The net
proceeds to the Company were approximately $14,880,000. After the offering
the Company had 15,762,723 shares outstanding.
OVERVIEW OF CURRENT ACTIVITIES - SINCE MAY 1998. As a result of the
above-described acquisitions, restructuring, and the underwritten offering,
the Company believes it is positioned for a period of significant exploration
activity on its technology enhanced projects. Many of the projects have
reached the drilling stage. In many instances the requisite process of
geological and/or engineering analysis, followed by acreage acquisition of
leasehold rights and seismic permitting, and 3-D seismic field data
acquisition, then processing of the data and finally its interpretation,
required several years and the investment of significant capital. Management
believes the acquisition of projects at this advanced stage has not only
reduced the drilling risk, but should allow the Company to consistently drill
on a broad array of exploration prospects in 1999 and subsequent years. On
Exploration Projects acquired pursuant to the Acquisitions, the Company
participated in the drilling of twenty-four wells through December 31, 1998
with working interests which range from 8% to 79%. Out of those twenty-four
wells drilled, 13 wells have been completed and 11 were dry holes. Several of
the successful wells went into production late in the third quarter of 1998,
and in the fourth quarter of 1998. In addition, in the first quarter of 1999,
the Company participated in six wells of which 4 were completed, 1 were
drilling at March 31, 1999 and is now completed, and 1 was determined dry in
April, with costs of $65,278 to be expensed in the second quarter of 1999.
It has also commenced drilling on 2 additional wells in the second quarter of
1999.
The Company entered 1999 having gone from nominal second quarter
1998 gas and oil revenues of approximately $35,000 per month and large
operating cash flow deficits to a company with $385,000 per month in net oil
and gas revenues and associated hedging revenues from commodity transactions
in the first quarter of 1999. This number is expected to exceed $700,000 per
month as first quarter 1999 exploration discoveries come on line and continue
to increase as additional wells are drilled. This should allow it to achieve
positive operating cash flow (before capital expenditures and changes in
working capital) in 1999 and beyond. In addition, the Company has entered
into two agreements to sell additional project interests for a total of
approximately $3,900,000. The project sales expected to close will result in
increased availability of cash resources, and enhance working capital. (See
"Liquidity and Capital Resources").
The Company will look to a variety of sources to fund its continuing
capital expenditures budget, including it's new credit facilities and sales
of promoted project interests to industry partners, as it seeks to maximize
its interests and manage its risks while aggressively pursuing its
exploration projects. (see "Liquidity and Capital Resources")
SUCCESSFUL EFFORTS ACCOUNTING AND RELATED MATTERS. The Company
utilizes the successful efforts method of accounting. Under this method it
expenses its exploratory dry hole costs and the field acquisition costs of
3-D seismic data as incurred. The undeveloped properties which were acquired
pursuant to the Acquisitions, and which were comprised primarily of interests
in unproven 3-D seismic based projects, recorded in May of 1998 at an
independently estimated fair market value of $54.2 million as determined by
Cornerstone Ventures, L.P., a Houston, Texas based investment banking firm.
Pursuant to the successful efforts method of accounting, the Company is
amortizing such initial costs of unproved properties on a straight-line
basis over a period not to exceed forty-eight months, as well as recognizing
property specific impairments. Hence significant non-cash charges will
likely depress reported earnings of the Company over the next several years,
but will not affect cash flows provided by operating activities nor the
ultimate realized value of the Company's natural gas and oil properties.
As a result of the tax rules applicable to the Acquisitions, the
Company will likely not be able to fully use its existing net operating loss
carry forward in the future.
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YEAR 2000
The Company is exposed to the risk that the Year 2000 issue could
cause system failures or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send joint interest billings, or engage in similar normal business
activities. During 1998, the Company undertook a corporate-wide initiative
designed to assess the impact of the Year 2000 issue on software and hardware
utilized in the Company's operations.
The Company's initiative is to be conducted in these phases:
assessment, implementation and testing. During the assessment phase, the
Company completed a comprehensive inventory of all "mission critical" systems
and equipment. Many of the Company's systems include hardware and packaged
software purchased from large vendors who have represented that these systems
are already Year 2000 compliant.
The Company relies on other producers and transmission companies to
conduct its basic operations. Should any third party with which the Company
has a material relationship fail, the impact could impair the Company's
ability to perform its basic operation. Examples of such changes are an
inability to transport production to market or an inability to continue
drilling activities. As part of the Company's assessment phase, the Company
will address the most reasonably likely worst-case scenarios and potential
costs.
The majority of the Company's technical applications are not date
sensitive. Of those applications that are date sensitive, most have recently
been, or are currently being, upgraded. However, if such modifications are
not adequate or do not operate properly, the Year 2000 issue could have a
material impact on the Company. The Company intends to complete the testing
of Year 2000 modifications during the third quarter of 1999. The Company has
not established a contingency plan but intends to formulate one to address
unavoidable risks, including those discussed above. The Company expects to
have the contingency plan formulated by mid-1999.
The Company's efforts with respect to the Year 2000 issue have been
handled internally by management and other Company personnel. Costs of
developing and carrying out this initiative are being funded from the
Company's operations and have not represented a material expense to the
Company. The Company has not completed its assessment but currently believes
that the costs of addressing the Year 2000 issue should not be significant
and should not have a material adverse impact on the Company's financial
condition.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998
All comparative discussions should be considered in the context of
the Acquisitions closed on May 14, 1998, which, together with related changes
significantly modified the scope, focus and the method of doing business of
the Company. As a result, the comparisons may be of more limited value when
analyzing relevant trends.
REVENUE. Total revenues increased 9,210% from ($16,586) for the
first quarter of 1998 to $1,511,002 for the first quarter of 1999.
Total gas and oil revenues increased 1,888% from $48,503 to
$964,245. The increase in gas and oil revenue was attributed mainly to
revenues from wells placed into production during the third and fourth
quarters of 1998. There was an increase in gain on the sale of assets of
$268,777 from $2,875 reported for the first quarter of 1998 to $271,652
reported for the first quarter of 1999. This increase was due to the closing
of the sale and the implementation of a joint 3-D seismic program with XPLOR
Energy SPV-I, Inc. ("XPLOR"). As a result of the increase in operations
stemming from both exploratory and developmental drilling, operating fees
increased 811.53% from $6,992 for the first quarter of 1998 to $63,734 for
the first quarter of 1999. The Company realized a loss from various commodity
transactions totaling $47,875 for the first quarter of 1998, these losses
were attributed to various transactions in which the Company hedged its
future gas delivery obligations as a requirement of its bank loan facility.
The Company recognized net gains of $190,849 for the first quarter of 1999,
this was due to the Company's average hedge prices exceeding the spot market
prices, and its ability to fulfill its hedge commitments. In 1998, the
Company also recognized an unrealized loss on commodity transactions due to
hedged volumes exceeding actual production volumes. In 1999, production
volumes exceed hedged volumes and, as a result, unrealized gains or losses
are not recognized. In addition to the foregoing, the Company had other
revenues of $20,522 for the first quarter of 1999 as compared to $23,930 for
the first quarter of 1998.
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COSTS AND EXPENSES. Total costs and expenses of the Company
increased 845% from $592,002 for the first quarter of 1998 compared to
$5,592,480 for the first quarter of 1999. The increases primarily relate to
the changes in scope, focus and method of doing business, which occurred upon
closing of the Acquisitions. As a result, staffing and activity volume
increased dramatically. Also the increase in 3-D seismic and other geological
and geophysical work was intended to lead to increased, risk-controlled
drilling and ultimately increased gas and oil reserves and production.
Increasing during the three month ended March 31, 1999 were amortization of
gas and oil properties, exploration costs-geological and geophysical, general
and administrative costs, depletion, depreciation, and amortization, interest
expense, lease operating expenses, and production taxes. Partially offsetting
the foregoing increases were decreases in transportation and gathering costs,
impairment of oil and gas properties and exploration costs-dry hole.
AMORTIZATION OF UNPROVED PROPERTIES was $2,383,000 for the first
quarter of 1999 (none in 1998). The Company will amortize the undeveloped and
unevaluated value of the properties acquired pursuant to the Acquisitions
over a period not to exceed forty-eight months. (See "Overview -Successful
Efforts Accounting and Related Matters").
EXPLORATION COSTS - GEOLOGICAL AND GEOPHYSICAL was $745,458 for the
first quarter of 1999 and ($12,685) for the first quarter of 1998. These
exploration costs reflect the costs of topographical, geological and
geophysical studies and include the expenses of geologists, geophysical crews
and other costs of acquiring and analyzing 3-D seismic data. The Company's
technology enhanced exploration program on the Exploration Projects has
required the acquisition and interpretation of substantial quantities of such
data and these costs have greatly increased for the first quarter of 1999 as
compared with the first quarter of 1998. The Company considers 3-D seismic
data a valuable asset; however, its successful efforts accounting method
requires such costs to be expensed for accounting purposes. Included in
exploration costs are $31,689 in delay rental costs for the first quarter of
1999, as compared to ($12,685) for the first quarter of 1998.
GENERAL AND ADMINISTRATIVE EXPENSES increased 206% from $459,014
for the first quarter of 1998 as compared to $1,403,972 for the first quarter
of 1999. This was primarily attributable to increases in operational expenses
incurred after May 14, 1998, the effective date of the Acquisition Agreement
with Aspect and EPC, after which time the scope of the Company's activities
increased significantly. Approximately $52,243 in first quarter 1999 costs
were costs associated with IT systems conversions and implementation.
DEPLETION, DEPRECIATION AND AMORTIZATION ("DD&A") increased
1,056% from $53,568 for the first quarter of 1998 to $619,000 for the
first quarter of 1999. The increase to DD&A was primarily attributable to
wells placed in production in the third and fourth quarters of 1998. Of the
total, $246,483 was associated with one well, the Pipkin, which has a short
expected productive life.
INTEREST EXPENSE increased 541% from $19,223 for the first
quarter of 1998 to $123,286 for the first quarter of 1999. The increase in
interest expense was primarily attributed to a credit facility with Duke
Energy Financial Services, Inc. closed in February 1999 and an increase in
borrowings pursuant to its credit facility with Bank of America NT & SA in
October, 1998. The Company also capitalized a large portion of its interest
associated with its on-going projects, of which capitalized amounts totaled
$333,982 for the first quarter of 1999 and $79,102 for the first quarter of
1998.
PRODUCTION TAXES increased from ($1,090) for the first quarter of
1998 to $63,793 for the first quarter of 1999. The increase in production
taxes was attributed to revenues of wells placed in production as a result of
the Company's drilling success in the second half of 1998.
LEASE OPERATING EXPENSE increased 264% from $69,773 for the first
quarter of 1998 to $253,971 for the first quarter of 1999. The increase in
lease operating expense relates to operational costs for the Company's wells
placed in production during the last quarter of 1998. In addition, $149,067
were costs associated with compressor installations, road repairs due to
flood damages and other non-recurring expenses.
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TRANSPORTATION AND GATHERING COSTS decreased 100% from $639 for the
first quarter of 1998 as compared to none for the first quarter of 1999. The
decrease in transportation and gathering cost was entirely attributable to
the ceased production of the Company's wells in Mobile Bay.
IMPAIRMENT OF GAS AND OIL PROPERTIES decreased from $60 in the first
quarter of 1998 as compared to none for the first quarter of 1999. The
non-cash impairment is reviewed by Management on each individual Exploration
Project and results in the periodic expense of the book value of certain
projects based upon the belief that they no longer have a realistic potential
to realize the book value from such projects in the future. There were no
impairments recognized in the first quarter of 1999.
EXPLORATION COSTS - DRY HOLE decreased 100% from $3,500 for the
first quarter of 1998 compared to none for the first quarter of 1999. One
well drilled in the first quarter was determined dry in April and will be
reflected by a $65,278 dry hole expense recognized in the second quarter.
NET LOSS PER COMMON SHARE decreased from a net loss of $0.38 per
share for the first quarter of 1998 to a net loss of $0.26 per share for the
first quarter of 1999. There was an increase in net loss applicable to common
stockholders of $3,472,890 from the first quarter of 1998 as compared to the
first quarter of 1999, but it was more than offset by the increased number of
weighted average common equivalent shares at March 31, 1999, resulting from
the Acquisitions which closed May 14, 1998, and the underwritten common stock
offering closed July 21, 1998. Approximately 15,785,000 weighted average
common equivalent shares were outstanding at March 31, 1999 as compared to
approximately 1,656,000 at March 31, 1998.
KNOWN AND ANTICIPATED TRENDS, CONTINGENCIES AND DEVELOPMENTS IMPACTING FUTURE
OPERATING RESULTS.
The Company's future operating results will be substantially
dependent upon the success of the Company's efforts to develop the projects
acquired in the Acquisitions, as well as its other prospects.
While management believes said projects represent the most promising
prospects in the Company's history, and the wells drilled on projects
acquired pursuant to the Acquisitions in 1998 substantially increased the
Company's revenues, the capital expenditures planned in 1999 will continue to
require substantial outlays of capital to explore, develop and produce.
Drilling results of 1998 have in fact resulted in substantial revenue
increases. Wells drilled in the fourth quarter of 1998 and first quarter of
1999 are expected to contribute to continued rapid increases in the Company's
monthly gas and oil revenues as they come on line in the first and second
quarters of 1999. However, because of the Company's expanded 1999 drilling
budget capital from sources other than cash flow from operations will
continue to be required for funding planned exploration activities. The
Company's 1999 budget includes the sales of certain project interests to
industry partners, which have not materialized as rapidly as planned. The
Company expects said sales to be completed but will delay the drilling of
certain wells pending such sales. The Company's drilling program may have to
be reduced if the Company does not execute such sales in the second quarter
of 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has budgeted approximately $24,000,000 to fund its 1999
capital budget which includes the drilling and/or completion of its interest
in over 40 wells on the Exploration Projects in 1999. The Company's sources
of financing include borrowing capacity under its existing credit facilities,
the sale of promoted interests in the Exploration Projects to industry
partners and cash provided from operations. The Company's 1999 budget
includes the sales of certain project interests to industry partners, which
have not materialized as rapidly as planned. The Company expects said sales
to be completed but will delay the drilling of certain wells pending such
sales. The Company's drilling program may have to be reduced if the Company
does not execute such sales in the second quarter of 1999.
The Company entered 1999 having gone from nominal second quarter
1998 gas and oil production of approximately $35,000 per month and large
operating cash flow deficits to a company which averaged over $385,000 per
month in oil and gas revenues and realized revenue from hedges on production
in the first quarter of 1999, most of which is attributable to wells which
commenced production in September and throughout the fourth quarter of 1998.
This number is expected to continue to increase. The Company believes net
monthly production revenue will exceed $700,000 per month as exploratory
discoveries from the first quarter of 1999 come on line. Additional drilling
success
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in 1999 is expected to continue the trend of rapid increases. This should
allow it to achieve steadily increasing operating cash flow throughout the
year (prior to capital expenditures and new 3-D seismic data acquisition
costs, which costs the successful efforts accounting method utilized by the
Company mandate to be expensed rather than capitalized). In addition, the
Company has entered definitive agreements to sell certain project interests
to two industry partners for a total of approximately $3,900,000. The
resultant availability of cash is expected to enhance working capital. In
order to effect its full business plan, capital resources must be
supplemented by sales of interests to industry partners.
The two transactions include a sale to Helmerich & Payne, Inc.
("H&P") and a sale to Aspect, an affiliate. The Company has entered into
agreement to sell to H&P all of its undeveloped property interests in the Big
Hill/Stowell project area and its interests in a project area called Gill
East for $1,300,000. Closing is to occur in May 1999. It has also entered
into an agreement to sell to Aspect a 12.5% (of 100%) interest in the Caney
Creek Project, a 12% (of 100%) interest in the Gillock Project, and all of
the Company's undeveloped property interests in the West Beaumont project
area for an aggregate of $2,610,000. Closing is scheduled for May 1999.
Proceeds from the sale will be used to settle amounts due Aspect. In that
Aspect is a related party, closing was subject to receipt of an independent
fairness opinion which management has recently obtained.
On October 23, 1998, the Company amended and restated its credit
agreement dated January 3, 1996 with B of A. The amended agreement is in a
total amount of $20,000,000 and provided for an immediate borrowing base of
up to $9,000,000. The Company had drawn $7,500,000 pursuant to the B of A
loan facility as of March 31, 1999 and May 12, 1999. The loan is in two
tranches. Tranche A is a revolving facility with no required principal
payments for two years after which it converts into a thirty-six month term
loan. Tranche B is payable in interest only until maturity in eighteen
months. Both loans are at a varied interest rate utilizing either the B of
A's Alternate Reference Rate (Alternate Reference Rate is the greater of (i)
B of A's Reference Rate and (ii) the Federal Funds effective rate plus 0.50%)
or the London Interbank rate plus 2% for Tranche A and 4% for Tranche B. The
remaining funds will be available for future drilling activities of the
Company, subject to the approval of the bank. The Tranche A loan is secured
by a mortgage on most proven properties currently owned by the Company. In
addition, certain mortgages on the Company's exploration project inventory
secure Tranche B of the credit facility with B of A as well as the entire
credit facility with Duke discussed below. All such shared collateral is
governed by an intercreditor agreement between B of A and Duke in which B of
A serves as the collateral agent. In addition to the foregoing, B of A
received a 2.0% overriding royalty interest, proportionately reduced to the
Company's net interest, in the properties classified as proven as of the date
of closing and received a five year warrant to purchase 95,000 shares of
common stock at a price equal to the average daily closing price of the
Company's common stock for the thirty days prior to closing of the credit
agreement. The credit agreement does not provide for any additional
overriding interests in favor of B of A. Proceeds of the loan primarily
supplement working capital and exploration costs. The Company has
requested an increase in Tranche A availability based upon its recent
drilling successes.
On January 28, 1999, the Company closed a credit facility with Duke.
This facility provides for Duke to loan up to $9,000,000 to the Company for
eighteen months. The Company had drawn $7,000,000 and $7,930,000 on said
facility as of March 31, 1999 and May 12, 1999, respectively. The commitment
reduces by $930,000 per quarter for five quarters and reduces to zero on
August 1, 2000. Principal outstanding cannot exceed the commitment amount at
any time. Duke is paid interest at a rate of prime plus 4%. It also received
a right to gather and process, at fair market value, gas and condensate from
a designated area of interest, and a net revenue interest in certain of the
Company's future drilling activities not to exceed 0.49% of the Company's net
interest. Proceeds primarily supplement exploration costs.
On January 28, 1999, the Company, B of A, and Duke entered into an
intercreditor agreement which governs the collateral which is used to secure
the credit facility with B of A and the credit facility with Duke. Tranche A
of the B of A credit facility is secured by a first mortgage on most of the
Company's proven properties. Collateral securing amounts outstanding under
both the Duke credit facility and Tranche B of the B of A facility is
primarily comprised of mortgages taken on a significant proportion of the
Exploration Projects of the Company which have not been developed. At such
time as drilling is conducted on the Exploration Projects and proven reserves
are discovered, the Company has a right to seek increases in the available
amount to be drawn under Tranche A of its credit facility with B of A. In the
event B of A agrees to increase the amounts available pursuant to Tranche A,
then, subject to Duke's consent, security interests in proven reserves would
be used as additional primary collateral on Tranche A loans from B of A
supporting the borrowing availability increases. The Company's request for
an increase in Tranche A availability is pending completion of third party
engineering reports on recently drilled wells.
At March 31, 1999 the Company's tangible net worth as calculated
pursuant to the Credit Agreement was $31,241,110. B of A has waived
noncompliance with this covenant through June 30, 1999. The Company and B of
A have been in discussions, both recognizing that the covenant as initially
established did not give adequate consideration to the effects of the
Company's successful efforts method of accounting on the future book value of
its properties, in particular the accounting treatment that the Company has
adopted, which requires the amoritization over a period not to exceed
forty-eight months of a substantial portion of the property values recorded
pursuant to the Acquisitions. As such, B of A has agreed with the Company in
concept to reduce the tangible net worth requirement to an amount not in
excess of $25,000,000, subject to approval of B of A's credit committee,
which is anticipated in the second quarter of 1999. In the event the credit
committee does not approve the modification of the covenant, the Company
would be in noncompliance of this provision and will seek alternative
long-term financing arrangements. The Company expects B of A to approve the
modification.
Further, as of March 31, 1999, the Company's current ratio was
0.6939 and the Company's interest coverage ratio was (0.7006) to 1, both of
which were, therefore, in noncompliance. B of A has waived said
noncompliance at March 31, 1999. The Company believes it has improved its
current ratio and its interest coverage ratio since March 31, 1999
significantly. Although the Company believes it can be in compliance with
both of these covenants throughout the remainder of 1999, there can be no
assurance that it will be in compliance. As a result it is possible that
additional waivers may be needed in the future. In the event B of A did not
grant such waivers, if needed, the Company would be in noncompliance of the
covenants and would seek alternative financing arrangements.
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The Company will require additional sources of capital to fund its
exploration budget over the next 12 months. It anticipates substantial growth
of its credit facility with B of A as proven reserves of gas and oil are
added by its exploration program. It also plans to continue to sell promoted
interests in certain of its Exploration Projects to fund its exploration
program over the next 12 months. In the second quarter of 1999, its capital
expenditures budget will be significantly dependent upon sales of additional
interests in the Exploration Projects. Said sales have not materialized as
rapidly as expected and the Company will delay the drilling of certain wells.
The Company historically has addressed its long-term liquidity needs
through the issuance of debt and equity securities, through bank credit and
other credit facilities and with cash provided by operating activities. Its
major obligations at May 12, 1999, consisted principally of (i) servicing
loans under the credit facilities with B of A and with Duke and other loans,
(ii) funding of the Company's exploration activities, and (iii) funding of
the day-to-day operating costs.
Many of the factors that may affect the Company's future operating
performance and long-term liquidity are beyond the Company's control,
including, but not limited to, oil and natural gas prices, governmental
actions and taxes, the availability and attractiveness of financing and its
operational results. The Company continues to examine alternative sources of
long-term capital, the acquisition of a company with producing properties for
common stock or other equity securities, including bank borrowings, the
issuance of debt instruments, the sale of common stock or other equity
securities, the issuance of net profits interests, sales of promoted
interests in its Exploration Projects, and various forms of joint venture
financing. In addition, the prices the Company receives for its future oil
and natural gas production and the level of the Company's production will
have a significant impact on future operating cash flows.
In order to minimize the pricing risk associated with oil and gas
sales, the Company entered into hedging transactions aggregating a
twenty-four month period with Bank of America's Financial Engineering and
Risk Management Group. The hedging instruments called for the delivery of
4,700 MMBtu per day at prices net to the wellhead which range from $2.07 to
$2.14 per MMBtu for the period November 1, 1998 through October 31, 2000.
WORKING CAPITAL. At March 31, 1999, the Company had a cash balance
of $515,092 and a working capital deficit of $9,454,592. In addition to
availability of unused portions of its credit facilities with B of A and
Duke, pending additional availability from its credit facilities with B of A,
the use of which facilities could enhance working capital, the Company has
entered into two previously referenced agreements to sell additional project
interests for approximately $3,900,000. Such cash resources serve to
substantially improve working capital. Gas and oil revenues and associated
hedging revenues from commodity transactions from wells which went into
production in 1998 are anticipated to generate revenues which will exceed
ongoing cash costs of operations (prior to capital expenditures and the cost
of new 3-D seismic data acquisitions) in the second quarter of 1999 and
beyond.
Upon the closing of the credit facilities with B of A, the sale of
certain promoted interests in exploration projects, and receipt of the Duke
credit commitment, the Company increased its exploration activities in the
first quarter of 1999. In order to fully implement its 1999 exploration
budget while maintaining adequate working capital, the Company will rely upon
additional sales of promoted project interests through the summer of 1999. In
this regard, it had budgeted sales to industry partners netting approximately $7
to $10 million in net proceeds to the Company during the summer of 1999. Delays
in these projected sales will delay certain planned drilling. In the second
half of the year, it projects certain increases in its Tranche A facility
with B of A. It also expects continued rapid increases in monthly oil and gas
revenues due to its exploration successes in the first quarter of 1999.
Increased revenues are anticipated to generate significantly increasing cash
flow as the year progresses, which cash flow will also further supplement the
Company's working capital.
SUMMARY. The Company believes it is positioned for a period of
significant exploration activity on its technology enhanced projects. Many of
the projects have reached the drilling stage. In many instances the requisite
process of geological and/or engineering analysis, followed by acreage
acquisition of leasehold rights and seismic permitting, and 3-D seismic field
data acquisition, then processing of the data and finally its interpretation
took several years of time and the investment of significant capital.
Management believes the acquisition of projects at this advanced stage has
not only reduced the drilling risk, but should allow the Company to
consistently drill on a broad array of exploration prospects throughout 1999.
As evidence of this activity the Company has participated in the
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drilling of twenty-four wells on exploratory projects acquired pursuant to
the Acquisition through December 31, 1998, with working interests which range
from 8% to 79%. Out of the twenty-four wells drilled, 13 wells were completed
and 11 were dry holes. In the first quarter of 1999 through March 31, 1999,
the Company participated in the drilling of six wells, of which 4 were
completed, 1 was drilling at March 31, 1999 and is now completed, and one was
determined dry in April, with cost of $65,278 to be expensed in the second
quarter. Since the beginning of the second quarter of 1999, the Company has
commenced drilling on 2 wells. The Company's recent drilling results have
served to increase its confidence in its anticipated 1999 drilling on the
technology enhanced Exploration Projects. The Company believes its monthly
net oil and gas revenues will exceed $700,000 per month (at current natural
gas one year futures prices) when the recently drilled wells are all on line
late in the second quarter. In that overhead is stable, operating cash flow
should steadily and substantially increase throughout 1999. Additional
exploration success would continue this positive trend. Pending the sale of
project interests to industry partners in the second quarter, the Company
will, however, delay certain of its drilling activities.
In that the Company will not fund most of its 1999 capital
expenditure budget from cash flow, the Company will continue to look to a
variety of sources to fund its continuing capital expenditures budget
including credit facilities and sales of promoted project interests to
industry partners, as it seeks to maximize its interests and manage its risks
while aggressively pursuing its exploration projects. This process will be
limited more by capital availability than by its inventory of drillable
prospects.
Timing of funding its exploration budget will determine the pace of
drilling and, to the extent drilling is successful, the growth of future oil
and gas revenues. Management believes expanded credit facilities will be
available to it in 1999 if it achieves meaningful exploratory and
developmental drilling success, and that strategic sales of prospect
interests will be contracted and closed which will allow it to continue its
planned exploration activities throughout the year.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. In June 1998, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133, which is effective for all fiscal quarters of fiscal years
beginning after June 1, 1999, establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts (collectively referred to as "derivatives") and for
hedging activities. SFAS 133 requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The Company is currently evaluating the
impact of the application of SFAS 133, which when adopted, could have a
material effect on its financial position, liquidity or results of operations.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
EPC was a defendant in a lawsuit regarding injuries to a oil field
worker not employed by the Company that resulted in a judgment against EPC of
approximately $17,700,000. The judgment was settled by EPC's insurers, who
agreed to make cash payments to the plaintiff, and by EPC who agreed to
implement a mutually agreeable work safety plan in exchange for approximately
$6.0 million in punitive damages that otherwise would have been payable to
the plaintiff. The settlement was entered into and approved by the court
entering an agreed judgment on December 3, 1997. On approximately April 16,
1998, the plaintiff filed an action against both EPC and the Company
alleging, in part, that EPC has failed and refused to implement an
appropriate safety plan and entered into negotiations with the Company to
convey material assets to it which, if consummated, would negate plaintiffs
benefits to be obtained by EPC's safety plan, thereby fraudulently inducing
plaintiff to settle the judgment against EPC. The Company believes the claims
are not supported by the facts and are without merit. The Company has in fact
implemented a safety plan as part of its business strategy which it believes
equals or exceeds the one EPC agreed to implement. It took this action as
part of its business activities and not due to any obligation it believes
exists to the Plaintiff. The Company and EPC have been advised by counsel for
the plaintiff that the litigation will be dismissed subject to agreement on a
procedure for verification of the Company's ongoing safety plan. Charles J.
Smith and Michael E. Johnson, shareholders of 100% of the common stock of
EPC, have indemnified the Company in the event that any damages were to be
assessed against the Company. In the event it is not timely dismissed, the
Company and EPC will vigorously defend the claims and the Company does not
believe it will sustain any material loss.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
On May 12, 1999, the Company announced that on May 11, 1999 it had
signed a Plan and Agreement of Merger with 3DX Technologies Inc. ("3DX")
which provides for the merger of 3DX into the Company. The Boards of both
companies have approved the transaction, and closing of the merger is
conditioned upon approval from the shareholders of both companies and
satisfaction of certain other conditions set forth in the Plan and Agreement
of Merger.
The terms of the merger provide for 3DX shareholders to receive, at
their election, either (i) the issuance of one share of common stock of the
Company for 3.25 shares of 3DX common stock; or (ii) the issuance of a new
convertible preferred stock of the Company at a ratio of one share of
convertible preferred stock for each 2.75 shares of 3DX common stock. The
preferred stock is limited to 50% of the total 3DX shares converted and may
be redeemed at the Company's sole option during the first twelve months after
the merger at $1.925 per share. If not redeemed during the first year, the
preferred will automatically convert into one share of common stock of the
Company if the average closing price of the common is greater than $1.875
during the twelfth month after closing. If the common is less than $1.875,
the preferred holder has the right for one month to "put" the shares to the
Company, which will then have the option, at the sole election of the
Company, to retire the convertible preferred stock for $1.65 in cash or for
common stock with the number of shares of common stock adjusted based upon a
formula set out in the merger agreement. Any share of convertible preferred
stock not redeemed by the Company or tendered by the holder, as set forth
above, by the fourteenth month after the merger will automatically convert
into
18
<PAGE>
one share of common stock of the Company. The Company currently has
15,784,834 common shares outstanding and 3DX currently has 9,685,761 shares
outstanding.
3DX Technologies Inc. is a Houston-based exploration and production
company whose strategic business focus has been the utilization of 3-D
seismic imaging and other advanced technologies in the search for natural gas
and oil principally in the onshore gulf coast of the United States. As a
result of the merger, if consummated, the Company will offer employment to
approximately five members of the reservoir engineering and geophysical staff
of 3DX, increase its gas and oil reserves, its monthly gas and oil revenues,
and expand its ownership of 3D seismic data and projects.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(2) Plan and Agreement of Merger of Esenjay Exploration, Inc.
and 3DX Technologies Inc. dated as of May 11, 1999.
(11) Computation of Earnings Per Common Share
(27.1) Financial Data Schedule
(b) Reports on Form 8-K
None.
19
<PAGE>
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 of the
undersigned thereunto duly authorized.
ESENJAY EXPLORATION, INC.
Date: May 19, 1999 By: /s/ Michael E. Johnson
------------ -------------------------------------
MICHAEL E. JOHNSON, President,
Chief Executive Officer and Director
Date: May 19, 1999 By: /s/ David B. Christofferson
------------ -------------------------------------
DAVID B. CHRISTOFFERSON,
Senior Vice President, General Counsel,
Principal Financial Officer
Date: May 19, 1999 By: /s/ Howard E. Williams
------------ -------------------------------------
HOWARD E. WILLIAMS,
Vice President, Treasurer, and
Principal Accounting Officer
20
<PAGE>
- ------------------------------------------------------------------------------
PLAN AND AGREEMENT OF MERGER
OF
ESENJAY EXPLORATION, INC.
AND
3DX TECHNOLOGIES, INC.
---------------
DATED AS OF MAY 11, 1999
- ------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
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ARTICLE I.
MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.1 SURVIVING CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.2 STOCKHOLDER APPROVAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.3 EFFECTIVE DATE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.4 NAME AND CONTINUED CORPORATE EXISTENCE OF SURVIVING CORPORATION . . . . . . . .2
1.4.1 NAME AND EXISTENCE . . . . . . . . . . . . . . . . . . . . . . . . .2
1.4.2 FEDERAL INCOME TAX TREATMENT OF MERGER . . . . . . . . . . . . . . .2
1.5 DELAWARE LAW GOVERNS AND ESENJAY CERTIFICATE OF INCORPORATION, AS AMENDED
AND RESTATED, SURVIVES. . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.6 BYLAWS OF SURVIVING CORPORATION.. . . . . . . . . . . . . . . . . . . . . . . .3
1.7 DIRECTORS OF SURVIVING CORPORATION. . . . . . . . . . . . . . . . . . . . . . .3
1.8 OFFICERS OF SURVIVING CORPORATION . . . . . . . . . . . . . . . . . . . . . . .3
1.9 VACANCIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
1.10 CAPITAL STOCK OF SURVIVING CORPORATION. . . . . . . . . . . . . . . . . . . . .3
1.11 CONVERSION OF SECURITIES UPON MERGER. . . . . . . . . . . . . . . . . . . . . .3
1.11.1 GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
1.11.2 CONVERSION OF 3DX COMMON STOCK. . . . . . . . . . . . . . . . . . . .4
1.11.2.1 CONVERSION INTO ESENJAY COMMON STOCK . . . . . . . . . . .4
1.11.2.2 CONVERSION INTO PREFERRED STOCK . . . . . . . . . . . . . .4
1.11.2.3 EFFECT OF FAILURE TO ELECT MERGER CONSIDERATION . . . . . .4
1.11.2.4 3DX OPTIONS . . . . . . . . . . . . . . . . . . . . . . . .4
1.11.3 LIMITATION ON ISSUANCE OF ESNJ-CP STOCK . . . . . . . . . . . . . . .4
1.11.4 EXCHANGE OF 3DX COMMON STOCK CERTIFICATES . . . . . . . . . . . . . .5
1.11.5 EXCHANGE PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . .5
1.12 ESENJAY FRACTIONAL SHARES.. . . . . . . . . . . . . . . . . . . . . . . . . . .6
1.13 3DX'S TRANSFER BOOKS CLOSED . . . . . . . . . . . . . . . . . . . . . . . . . .6
1.14 ASSETS AND LIABILITIES OF MERGING CORPORATIONS BECOME THOSE OF SURVIVING
CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
1.15 CONVEYANCES TO SURVIVING CORPORATION. . . . . . . . . . . . . . . . . . . . . .6
1.16 ACCOUNTING TREATMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
1.17 UNCLAIMED MERGER CONSIDERATION. . . . . . . . . . . . . . . . . . . . . . . . .7
1.18 DISSENTING STOCKHOLDERS OF 3DX. . . . . . . . . . . . . . . . . . . . . . . . .7
ARTICLE II.
REPRESENTATIONS AND WARRANTIES
OF 3DX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
2.1 REPRESENTATIONS AND WARRANTIES OF 3DX . . . . . . . . . . . . . . . . . . . . .7
2.1.1 ORGANIZATION AND STANDING. . . . . . . . . . . . . . . . . . . . . . 7
2.1.2 AGREEMENT AUTHORIZED AND ITS EFFECT ON OTHER OBLIGATIONS.. . . . . . 7
2.1.3 CAPITALIZATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.1.4 REPORTS AND FINANCIAL STATEMENTS.. . . . . . . . . . . . . . . . . . 8
2.1.5 LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
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2.1.6 ABSENCE OF CERTAIN CHANGES AND EVENTS . . . . . . . . . . . . . . .9
2.1.6.1 FINANCIAL CHANGE. . . . . . . . . . . . . . . . . . . . .9
2.1.6.2 PROPERTY DAMAGE . . . . . . . . . . . . . . . . . . . . .9
2.1.6.3 DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . .9
2.1.6.4 CAPITALIZATION CHANGE . . . . . . . . . . . . . . . . . .9
2.1.6.5 LABOR DISPUTES. . . . . . . . . . . . . . . . . . . . . .9
2.1.6.6 OTHER MATERIAL CHANGES. . . . . . . . . . . . . . . . . .9
2.1.7 COMPLIANCE WITH OTHER LAWS. . . . . . . . . . . . . . . . . . . . .9
2.1.8 FINDER'S FEE . . . . . . . . . . . . . . . . . . . . . . . . . . .10
2.1.9 INVESTIGATIONS; LITIGATION . . . . . . . . . . . . . . . . . . . .10
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
OF ESENJAY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.1 REPRESENTATIONS AND WARRANTIES OF ESENJAY. . . . . . . . . . . . . . . . 10
3.1.1 ORGANIZATION AND STANDING . . . . . . . . . . . . . . . . . . . . 10
3.1.2 AGREEMENT AUTHORIZED AND ITS EFFECT ON OTHER OBLIGATIONS. . . . . 10
3.1.3 CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.1.4 REPORTS AND FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . 11
3.1.5 LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.1.6 ABSENCE OF CERTAIN CHANGES AND EVENTS . . . . . . . . . . . . . . 12
3.1.6.1 FINANCIAL CHANGE. . . . . . . . . . . . . . . . . . . . .12
3.1.6.2 PROPERTY DAMAGE . . . . . . . . . . . . . . . . . . . . .12
3.1.6.3 DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . .12
3.1.6.4 CAPITALIZATION CHANGE . . . . . . . . . . . . . . . . . .12
3.1.6.5 LABOR DISPUTES. . . . . . . . . . . . . . . . . . . . . .12
3.1.6.6 OTHER MATERIAL CHANGES. . . . . . . . . . . . . . . . . .12
3.1.7 COMPLIANCE WITH OTHER LAWS . . . . . . . . . . . . . . . . . . . 12
3.1.8 FINDER'S FEE. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.1.9 INVESTIGATIONS; LITIGATION. . . . . . . . . . . . . . . . . . . . 13
3.1.10 NO REQUIRED REDEMPTION OF ESNJ-CP STOCK . . . . . . . . . . . . . 13
ARTICLE IV.
OBLIGATIONS PENDING EFFECTIVE DATE. . . . . . . . . . . . . . . . . . . . . . 13
4.1 AGREEMENTS OF ESENJAY AND 3DX. . . . . . . . . . . . . . . . . . . . . . 13
4.1.1 MAINTENANCE OF PRESENT BUSINESS. . . . . . . . . . . . . . . . . .13
4.1.2 MAINTENANCE OF PROPERTIES. . . . . . . . . . . . . . . . . . . . .13
4.1.3 MAINTENANCE OF BOOKS AND RECORDS . . . . . . . . . . . . . . . . .14
4.1.4 COMPLIANCE WITH LAW. . . . . . . . . . . . . . . . . . . . . . . .14
4.1.5 INSPECTION OF EACH MERGING CORPORATION . . . . . . . . . . . . . .14
4.2 ADDITIONAL AGREEMENTS OF ESENJAY AND 3DX . . . . . . . . . . . . . . . . 14
4.2.1 JOINT PROXY STATEMENT/PROSPECTUS . . . . . . . . . . . . . . . . .14
4.2.2 NOTICE OF MATERIAL DEVELOPMENTS . . . . . . . . . . . . . . . . . 14
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4.2.3 BEST EFFORTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.2.4 PARTICIPATION IN OPERATIONS . . . . . . . . . . . . . . . . . . . 15
4.3 ADDITIONAL AGREEMENTS OF 3DX . . . . . . . . . . . . . . . . . . . . . . 15
4.3.1 PROHIBITION OF CERTAIN EMPLOYMENT CONTRACTS. . . . . . . . . . . .16
4.3.2 PROHIBITION OF CERTAIN LOANS . . . . . . . . . . . . . . . . . . .16
4.3.3 PROHIBITION OF CERTAIN COMMITMENTS . . . . . . . . . . . . . . . .16
4.3.4 DISPOSAL OF ASSETS . . . . . . . . . . . . . . . . . . . . . . . .16
4.3.5 MAINTENANCE OF INSURANCE . . . . . . . . . . . . . . . . . . . . .16
4.3.6 NO AMENDMENT TO CERTIFICATE OF INCORPORATION, ETC. . . . . . . . .16
4.3.7 NO ISSUANCE, SALE, OR PURCHASE OF SECURITIES . . . . . . . . . . .16
4.3.8 PROHIBITION ON DIVIDENDS . . . . . . . . . . . . . . . . . . . . .17
4.3.9 STOCKHOLDERS' MEETING. . . . . . . . . . . . . . . . . . . . . . .17
4.3.10 SUPPLEMENTAL FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . .17
4.3.11 3DX ACQUISITION PROPOSALS. . . . . . . . . . . . . . . . . . . . .17
4.3.11.1 NO SOLICITATION. . . . . . . . . . . . . . . . . . . . .17
4.3.12 PROFESSIONAL SERVICES . . . . . . . . . . . . . . . . . . . . . . 18
4.4 ADDITIONAL AGREEMENTS OF ESENJAY . . . . . . . . . . . . . . . . . . . . 18
4.4.1 STOCKHOLDERS' MEETING . . . . . . . . . . . . . . . . . . . . . . 18
4.4.2 LISTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.4.3 APPROVAL AND FILING OF THE CERTIFICATE OF DESIGNATIONS. . . . . . 19
4.4.4 DIRECTORS AND OFFICERS INSURANCE . . . . . . . . . . . . . . . . .19
ARTICLE V.
CONDITIONS PRECEDENT TO OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . 19
5.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF 3DX . . . . . . . . . . . . . . . 19
5.1.1 REPRESENTATIONS AND WARRANTIES OF ESENJAY TRUE AT EFFECTIVE DATE. 19
5.1.2 NO MATERIAL LITIGATION . . . . . . . . . . . . . . . . . . . . . .20
5.1.3 OPINION OF ESENJAY COUNSEL . . . . . . . . . . . . . . . . . . . .20
5.1.4 STOCKHOLDER APPROVAL . . . . . . . . . . . . . . . . . . . . . . .20
5.1.5 CONSENT OF CERTAIN PARTIES IN PRIVITY WITH ESENJAY . . . . . . . .20
5.1.6 FAIRNESS OPINION . . . . . . . . . . . . . . . . . . . . . . . . .21
5.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF ESENJAY . . . . . . . . . . . . . 21
5.2.1 REPRESENTATIONS AND WARRANTIES OF 3DX TRUE AT EFFECTIVE DATE . . .21
5.2.2 NO MATERIAL LITIGATION . . . . . . . . . . . . . . . . . . . . . .21
5.2.3 OPINION OF 3DX'S COUNSEL . . . . . . . . . . . . . . . . . . . . .21
5.2.4 STOCKHOLDER APPROVAL . . . . . . . . . . . . . . . . . . . . . . .22
5.2.5 CONSENT OF CERTAIN PARTIES IN PRIVITY WITH 3DX . . . . . . . . . .22
5.2.6 EMPLOYEES OF 3DX . . . . . . . . . . . . . . . . . . . . . . . . .22
5.2.7 UNEXERCISED 3DX OPTIONS. . . . . . . . . . . . . . . . . . . . . .22
5.2.8 WAIVER OF ANTI-DILUTION ADJUSTMENT . . . . . . . . . . . . . . . .22
5.2.9 VOTING AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . .23
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ARTICLE VI.
TERMINATION AND ABANDONMENT . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.1 TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.1.1 BY MUTUAL CONSENT. . . . . . . . . . . . . . . . . . . . . . . . .23
6.1.2 BY ESENJAY BECAUSE OF CONDITIONS PRECEDENT . . . . . . . . . . . .23
6.1.3 BY ESENJAY BECAUSE OF MATERIAL ADVERSE CHANGE. . . . . . . . . . .23
6.1.4 BY 3DX BECAUSE OF CONDITIONS PRECEDENT . . . . . . . . . . . . . .23
6.1.5 BY 3DX BECAUSE OF MATERIAL ADVERSE CHANGE. . . . . . . . . . . . .23
6.1.7 BY ESENJAY OR 3DX BECAUSE OF LEGAL PROCEEDINGS . . . . . . . . . .24
6.1.8 BY ESENJAY OR 3DX IF MERGER NOT EFFECTIVE BY SEPTEMBER 15, 1999. .24
6.1.9 BY ESENJAY OR 3DX BECAUSE OF DUE DILIGENCE . . . . . . . . . . . .24
6.2 TERMINATION BY BOARD OF DIRECTORS. . . . . . . . . . . . . . . . . . . . 24
6.3 EFFECT OF TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.4 WAIVER OF CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.5 EXPENSE ON TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.5.1 FAILURE TO OBTAIN SHAREHOLDER APPROVAL . . . . . . . . . . . . . .25
6.5.2 ACCEPTANCE OF SUPERIOR 3DX TRANSACTION PROPOSALS . . . . . . . . .25
6.5.3 FAILURE TO RECOMMEND TO STOCKHOLDERS OR WITHDRAWAL OF FAIRNESS
OPINION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
6.5.4 PAYMENT OF TRANSACTION EXPENSES OR TERMINATION FEE . . . . . . . .25
6.5.5 EXCLUSIVE REMEDY . . . . . . . . . . . . . . . . . . . . . . . . .25
ARTICLE VII.
ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
7.1 INDEMNIFICATION BY 3DX AS TO JOINT PROXY STATEMENT/PROSPECTUS. . . . . . 25
7.2 INDEMNIFICATION BY ESENJAY AS TO JOINT PROXY STATEMENT/PROSPECTUS. . . . 26
ARTICLE VIII.
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.1. ENTIRETY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.2. COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.3. NOTICES AND WAIVERS. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.4. TERMINATION OF REPRESENTATIONS, WARRANTIES, ETC. . . . . . . . . . . . . 27
8.5. TABLE OF CONTENTS AND CAPTIONS . . . . . . . . . . . . . . . . . . . . . 27
8.6. SUCCESSORS AND ASSIGNS . . . . . . . . . . . . . . . . . . . . . . . . . 27
8.7. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
8.8. APPLICABLE LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
8.9. PUBLIC ANNOUNCEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 28
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<PAGE>
PLAN AND AGREEMENT OF MERGER
PLAN AND AGREEMENT OF MERGER, dated as of May 11, 1999, among Esenjay
Exploration, Inc., a Delaware corporation ("Esenjay" or the "Surviving
Corporation") and 3DX Technologies Inc., a Delaware corporation ("3DX").
Esenjay and 3DX are hereinafter collectively referred to as the "Merging
Corporations."
W I T N E S S E T H:
WHEREAS, Esenjay is a corporation duly organized and validly existing under
the laws of the State of Delaware, with its registered office at 1209 Orange
Street, Wilmington, Delaware 19801 and its principal executive office at 500
North Water Street, Suite 1100 S., Corpus Christi, Texas 78471;
WHEREAS, the authorized capital stock of Esenjay consists of 5,000,000
shares of cumulative convertible preferred stock, $.01 par value, of which at
March 31, 1999, no shares were issued or outstanding; and 40,000,000 shares of
common stock, par value $.01 per share ("Esenjay Common Stock"), of which at
March 31, 1999, 15,784,834 shares were issued and outstanding, and an additional
94,001 shares were reserved for issuance in conjunction with various employee
benefit plans, and an additional 1,259,584 shares are issuable on the exercise
of various warrant agreements with exercise prices ranging from $7.20 to $21.73
per share; at the same date, no shares of Esenjay Common Stock were held in
Esenjay's treasury;
WHEREAS, 3DX is a corporation duly organized and validly existing under the
laws of the State of Delaware, with its registered office at 1013 Centre Road,
Wilmington, Delaware 19801 and the principal executive office at 12012
Wickchester, Suite 250, Houston, Texas 77079;
WHEREAS, the authorized capital stock of 3DX consists of 1,000,000 shares
of preferred stock, par value $.01 per share, of which at March 31, 1999 no
shares were issued or outstanding; and 20,000,000 shares of common stock, par
value $.01 per share (the "3DX Common Stock"), of which at March 31, 1999,
9,685,761 shares were issued and outstanding; at the same date, and an
additional 780,944 shares were reserved for issuance in conjunction with various
employee benefit plans; at the same date, no shares of 3DX Common Stock were
held in 3DX's treasury; and
WHEREAS, the respective boards of directors of Esenjay and 3DX deem it
desirable and in the best interests of their respective corporations and their
respective stockholders that 3DX be merged into Esenjay, pursuant to the
provisions of Section 251 of the General Corporation Law of the State of
Delaware, in exchange for the consideration herein provided, and have proposed,
declared advisable, and approved such merger pursuant to this Plan and Agreement
of Merger (the "Agreement"), which Agreement has been duly approved by
resolutions of the respective boards of directors of Esenjay and 3DX;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, and in order to set forth the terms
and conditions of the merger, the mode of carrying the same into effect, the
manner and basis of converting the presently outstanding
<PAGE>
shares of 3DX Common Stock into either shares of Esenjay Common Stock or
shares of ESNJ-CP Stock (as hereinafter defined), and such other details and
provisions as are deemed necessary or proper, the parties hereto agree as
follows:
ARTICLE I.
MERGER
1.1 SURVIVING CORPORATION. Subject to the adoption and approval of this
Agreement by the requisite vote of the stockholders of each of the Merging
Corporations and to the other conditions hereinafter set forth, Esenjay and 3DX
shall be, upon the Effective Date of the merger as defined in Paragraph 1.3
hereof, merged into a single surviving corporation, which shall be Esenjay, one
of the Merging Corporations, which shall continue its corporate existence and
remain a Delaware corporation governed by and subject to the laws of that state.
1.2 STOCKHOLDER APPROVAL. This Agreement shall be submitted for adoption
and approval by the stockholders of each of the Merging Corporations in
accordance with their respective certificates of incorporation and the
applicable laws of the State of Delaware at separate meetings called and held
for such purpose.
1.3 EFFECTIVE DATE. The merger shall become effective upon the filing by
Esenjay of a Certificate of Merger with the Secretary of State of the State of
Delaware in accordance with Section 251(c) of the General Corporation Law of the
State of Delaware. The date upon which the merger shall become effective is
referred to in this Agreement as the "Effective Date."
1.4 NAME AND CONTINUED CORPORATE EXISTENCE OF SURVIVING CORPORATION.
1.4.1 NAME AND EXISTENCE. On the Effective Date, the identity,
existence, purposes, powers, objects, franchises, rights, and immunities of
Esenjay, the surviving corporation of the merger, shall continue unaffected
and unimpaired by the merger, and the corporate identity, existence,
purposes, powers, objects, franchises, rights, and immunities of 3DX shall
be wholly merged into Esenjay, the Surviving Corporation, and Esenjay shall
be fully vested therewith. Accordingly, on the Effective Date, the
separate existence of 3DX, except insofar as continued by statute, shall
cease.
1.4.2 FEDERAL INCOME TAX TREATMENT OF MERGER. The merger is
intended to qualify as and, subject to the requirements of Section
368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code"),
shall be characterized as a "reorganization" as defined in Section
368(a)(1)(A) of the Code.
1.5 DELAWARE LAW GOVERNS AND ESENJAY CERTIFICATE OF INCORPORATION, AS
AMENDED AND RESTATED, SURVIVES. The laws of Delaware shall continue to govern
the Surviving Corporation. On the Effective Date, the Certificate of
Incorporation of Esenjay (the "Certificate of Incorporation")
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shall be the certificate of incorporation of the Surviving Corporation until
further amended in the manner provided by law.
1.6 BYLAWS OF SURVIVING CORPORATION. Effective as of the Effective Date,
the bylaws of Esenjay (the "Bylaws") shall be the bylaws of the Surviving
Corporation until altered, amended, or repealed, or until new bylaws shall be
adopted in accordance with the provisions of law, the Certificate of
Incorporation and the Bylaws.
1.7 DIRECTORS OF SURVIVING CORPORATION. The incumbent directors of
Esenjay immediately before the Effective Date shall continue to hold their
respective positions on the board of directors of the Surviving Corporation from
and after the Effective Date, and until their successors are duly elected and
qualify in accordance with the Certificate of Incorporation and Bylaws of the
Surviving Corporation. In addition to the incumbent directors, C. Eugene Ennis
shall become a director on the Effective Date for a term expiring at the annual
meeting in the year 2001, and until his successor is duly elected and qualified
in accordance with the Certificate of Incorporation and Bylaws of the Surviving
Corporation; it being understood that Mr. Ennis will be serving as the director
that holders of the ESNJ-CP Stock are entitled to elect pursuant to Section 4.2
of the Certificate of Designations of the Series A Convertible Preferred Stock
of Esenjay (the "ESNJ-CP Stock") in the form attached hereto as Appendix I
("Certificate of Designations") and as such director, Mr. Ennis' term will
terminate immediately upon there being no shares of ESNJ-CP Stock remaining
outstanding.
1.8 OFFICERS OF SURVIVING CORPORATION. The incumbent officers of Esenjay
immediately before the Effective Date shall continue to hold their respective
offices of the Surviving Corporation from and after the Effective Date, and
until their successors are duly elected and qualify in accordance with the
Certificate of Incorporation and Bylaws of the Surviving Corporation.
1.9 VACANCIES. On or after the Effective Date, if a vacancy shall exist
for any reason in the board of directors or in any of the offices of the
Surviving Corporation, such vacancy shall be filled in the manner provided in
the Certificate of Incorporation or Bylaws of the Surviving Corporation.
1.10 CAPITAL STOCK OF SURVIVING CORPORATION. The authorized number of
shares of capital stock of the Surviving Corporation, and the par value,
designations, preferences, rights, and limitations thereof, and the express
terms thereof, shall be as set forth in the Certificate of Incorporation and the
Certificate of Designations.
1.11 CONVERSION OF SECURITIES UPON MERGER.
1.11.1 GENERAL. The manner and basis of converting the issued and
outstanding shares of the capital stock of 3DX into shares of the capital
stock of Esenjay shall be as hereinafter set forth in this Paragraph 1.11.
The Esenjay Common Stock or ESNJ-CP Stock (defined in Paragraph 1.11.2.2)
into which the 3DX Common Stock is converted hereunder is hereinafter
referred to collectively as the "Merger Consideration."
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1.11.2 CONVERSION OF 3DX COMMON STOCK. In connection with casting
their votes to approve this Agreement and the merger contemplated hereby at
the meeting of shareholders of 3DX Common Stock, each holder of 3DX Common
Stock will have the option of electing to choose the form of Merger
Consideration into which they desire 3DX Common Stock to be converted in
the merger. On the Effective Date, at the option of each holder of 3DX
Common Stock under the terms and conditions more fully described below:
1.11.2.1 CONVERSION INTO ESENJAY COMMON STOCK. Each 3.25 shares
of 3DX Common Stock then issued and outstanding and held by holders of
3DX Common Stock electing to receive Esenjay Common Stock in the
merger under this Paragraph 1.11.2.1, without any action on the part
of the holders thereof, shall automatically become and be converted
into one fully paid and nonassessable share of registered Esenjay
Common Stock; or
1.11.2.2 CONVERSION INTO PREFERRED STOCK. Each 2.75 shares of
3DX Common Stock then issued and outstanding and held by holders of
3DX Common Stock electing to receive preferred stock in the merger
under this Paragraph 1.11.2.2, without any action on the part of the
holders thereof, shall automatically become and be converted into one
fully paid and nonassessable registered share of ESNJ-CP Stock.
1.11.2.3 EFFECT OF FAILURE TO ELECT MERGER CONSIDERATION. The
shares of 3DX Common Stock held by holders who fail to make an
election to receive either Esenjay Common Stock under
Paragraph 1.11.2.1 or ESNJ-CP Stock under Paragraph 1.11.2.2 in the
merger, without any action on the part of such holders of 3DX Common
Stock, shall automatically become and be converted into fully paid and
nonassessable shares of registered Esenjay Common Stock under the
terms of Paragraph 1.11.2.1.
1.11.2.4 3DX OPTIONS. Esenjay shall not either assume 3DX's
rights and obligations with respect to issued and outstanding 3DX
options or substitute Esenjay options for such 3DX options. As a
result, under the terms of all currently issued and outstanding 3DX
options, all issued and outstanding options to purchase 3DX Common
Stock either shall have (i) been exercised to be effective as of or
before the Effective Date or (ii) terminated in accordance with their
terms as of or immediately prior to the merger contemplated hereby.
1.11.3 LIMITATION ON ISSUANCE OF ESNJ-CP STOCK. If, based on the
election of the holders of 3DX Common Stock under Paragraph 1.11.2.1 and
1.11.2.2, more than 50% of the shares of 3DX Common Stock issued and
outstanding on the Effective Date would be converted into ESNJ-CP Stock,
then the number of shares of ESNJ-CP Stock issuable as Merger Consideration
will be reduced to a number that would result in no more than 50% of the
3DX Common Stock being converted into ESNJ-CP Stock. Under such
circumstances, each holder of 3DX Common Stock who has elected to receive
ESNJ-CP Stock as Merger Consideration will receive as Merger Consideration
a combination of ESNJ-
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CP Stock and Esenjay Common Stock, with each 3DX stockholder electing to
receive ESNJ-CP Stock receiving a pro rata portion of the total number
of shares of Esenjay Common Stock to be issued under this Paragraph
1.11.3, with such pro rata portion being based upon the ratio of the
number of shares of 3DX Common Stock such stockholder has elected to
convert to ESNJ-CP Stock to the total number of shares of 3DX Common
Stock to be so converted.
1.11.4 EXCHANGE OF 3DX COMMON STOCK CERTIFICATES. Commencing on
the Effective Date, each holder of an outstanding certificate or
certificates theretofore representing shares of 3DX Common Stock may
surrender the same to an exchange agent (the "Exchange Agent") designated
by Esenjay (which may be Esenjay's transfer agent), and such holder shall
be entitled upon such surrender to receive in exchange therefor a
certificate or certificates representing the number of whole shares of
Esenjay Common Stock or ESNJ-CP Stock into which the shares of 3DX Common
Stock theretofore represented by the certificate or certificates so
surrendered shall have been converted. However, before surrender, each
outstanding certificate representing issued and outstanding 3DX Common
Stock shall be deemed, for all purposes, only to evidence ownership of the
number of whole shares of Esenjay Common Stock or ESNJ-CP Stock into which
such shares have been so converted.
1.11.5 EXCHANGE PROCEDURES. As soon as practicable after the
Effective Date, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately before the Effective Date
represented outstanding shares of 3DX Common Stock (the "Certificates")
that were converted (the "Converted Shares") into the right to receive
shares of Esenjay Common Stock or ESNJ-CP Stock, as applicable (together,
the "Esenjay Shares") (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon actual delivery of the Certificates to the Exchange
Agent) and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing Esenjay Shares.
Upon surrender of a Certificate to the Exchange Agent (or to such other
agent or agents as may be appointed prior to the merger by agreement of
Esenjay and 3DX), together with a duly executed letter of transmittal and
such other documents as the Exchange Agent shall require, the holder of
such Certificate shall be entitled to receive in exchange therefor a
certificate representing that number of whole Esenjay Shares which such
holder has the right to receive. In the event of a transfer of ownership
of Converted Shares which is not registered in the transfer records of
Esenjay or 3DX, as the case may be, a certificate representing the proper
number of Esenjay Shares may be issued to a transferee if the Certificate
representing such Converted Shares is presented to the Exchange Agent,
accompanied by all documents required to evidence and effect such transfer
and by evidence satisfactory to the Exchange Agent that any applicable
stock transfer taxes have been paid. If any Certificate shall have been
lost, stolen, mislaid or destroyed, upon receipt of (i) an affidavit of
that fact from the holder claiming such Certificate to be lost, stolen,
mislaid or destroyed, (ii) such bond, security or indemnity as the
Surviving Corporation or the Exchange Agent may reasonably require, and
(iii) any other documentation necessary to evidence and effect the bona
fide exchange thereof, the Exchange Agent shall issue to such holder a
certificate representing the number
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of Esenjay Shares into which the shares represented by such lost,
stolen, mislaid or destroyed Certificate shall have been converted.
1.12 ESENJAY FRACTIONAL SHARES. No certificates for fractional share
interests of Esenjay Common Stock or ESNJ-CP Stock will be issued. All such
fractional share interests will be rounded to the nearest whole share of Esenjay
Common Stock or ESNJ-CP Stock. If more than one Certificate representing 3DX
Common Stock is surrendered by a 3DX stockholder, the number of full shares of
Esenjay Common Stock or ESNJ-CP Stock into which such 3DX Common Stock will be
converted pursuant to the merger will be computed on the basis of the aggregate
number of shares of 3DX Common Stock represented by all such Certificates.
1.13 3DX'S TRANSFER BOOKS CLOSED. Upon the Effective Date, the stock
transfer books of 3DX shall be deemed closed, and no transfer of any
certificates theretofore representing shares of 3DX shall thereafter be made or
consummated.
1.14 ASSETS AND LIABILITIES OF MERGING CORPORATIONS BECOME THOSE OF
SURVIVING CORPORATION. On the Effective Date, all rights, privileges, powers,
immunities, and franchises of each of the Merging Corporations, both of a public
and private nature, and all property, real, personal, and mixed, and all debts
due on whatever account, as well as stock subscriptions and all other choses or
things in action, and all and every other interest of or belonging to or due to
either of the Merging Corporations, shall be taken by and deemed to be
transferred to and shall be vested in the Surviving Corporation without further
act or deed, and all such rights, privileges, powers, immunities, and
franchises, property, debts, choses or things in action, and all and every other
interest of each of the Merging Corporations shall be thereafter as effectually
the property of the Surviving Corporation as they were of the respective Merging
Corporations, and the title to any real or other property, or any interest
therein, whether vested by deed or otherwise, in either of the Merging
Corporations, shall not revert or be in any way impaired by reason of the
merger, PROVIDED, HOWEVER, that all rights of creditors and all liens upon any
properties of each of the Merging Corporations shall be preserved unimpaired,
and all debts, liabilities, restrictions, obligations, and duties of the
respective Merging Corporations, including without limitation all obligations,
liabilities and duties as lessee under any existing lease, shall thenceforth
attach to the Surviving Corporation and may be enforced against and by it to the
same extent as if such debts, liabilities, duties, restrictions and obligations
had been incurred or contracted by it. Any action or proceeding pending by or
against either of the Merging Corporations may be prosecuted to judgment as if
the merger had not taken place, or the Surviving Corporation may be substituted
in place of either of the Merging Corporations.
1.15 CONVEYANCES TO SURVIVING CORPORATION. The Merging Corporations hereby
agree, respectively, that from time to time, as and when requested by the
Surviving Corporation, or by its successors and assigns, they will execute and
deliver or cause to be executed and delivered, all such deeds, conveyances,
assignments, permits, licenses and other instruments, and will take or cause to
be taken such further or other action as the Surviving Corporation, its
successors or assigns, may deem necessary or desirable to vest or perfect in or
confirm to the Surviving Corporation, its successors and assigns, title to and
possession of all the property, rights, privileges, powers,
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immunities, franchises, and interests referred to in this Paragraph 1.15 and
otherwise carry out the intent and purposes of this Agreement.
1.16 ACCOUNTING TREATMENT. The assets and liabilities of the Merging
Corporations shall be taken up on the books of the Surviving Corporation in
accordance with generally accepted accounting principles, and the capital
surplus and retained earnings accounts of the Surviving Corporation shall be
determined, in accordance with generally accepted accounting principles, by the
board of directors of the Surviving Corporation. Nothing herein shall prevent
the board of directors of the Surviving Corporation from making any future
changes in its accounts in accordance with law.
1.17 UNCLAIMED MERGER CONSIDERATION. Subject to any contrary provision of
governing law, all consideration deposited with the Exchange Agent or held by
Esenjay for the payment of the consideration into which the outstanding shares
of 3DX Common Stock shall have been converted, and remaining unclaimed for one
year after the Effective Date, shall be paid or delivered to Esenjay; and the
holder of any unexchanged certificate or certificates which before the Effective
Date represented shares of 3DX Common Stock shall thereafter look only to
Esenjay for exchange or payment thereof upon surrender of such certificate or
certificates to Esenjay.
1.18 DISSENTING STOCKHOLDERS OF 3DX. 3DX (or Esenjay on behalf of 3DX)
agrees that, if the merger contemplated hereby becomes effective, it will
promptly pay to any dissenting stockholder of 3DX the amount, if any, to which
such holder is entitled under the provisions of Section 262 of the Delaware
General Corporation Law, PROVIDED such dissenter acts in strict compliance with
such provisions.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES
OF 3DX
2.1 REPRESENTATIONS AND WARRANTIES OF 3DX. 3DX represents and warrants as
follows:
2.1.1 ORGANIZATION AND STANDING. 3DX is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Delaware, has full requisite corporate power and authority to
carry on its business as it is currently conducted, and to own and operate
the properties currently owned and operated by it, and is duly qualified or
licensed to do business and is in good standing as a foreign corporation
authorized to do business in all jurisdictions in which the character of
the properties owned or the nature of the business conducted by it would
make such qualification or licensing necessary, except where the failure to
be so qualified or licensed would not have a material adverse effect on the
financial condition, properties or business of 3DX.
2.1.2 AGREEMENT AUTHORIZED AND ITS EFFECT ON OTHER OBLIGATIONS.
Upon approval of this Agreement by the shareholders of 3DX, the
consummation of the transactions contemplated hereby will have been duly
and validly authorized by all necessary corporate
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action on the part of 3DX, and this Agreement will be a valid and
binding obligation of 3DX enforceable against 3DX (subject to normal
equitable principles) in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
debtor relief or similar laws affecting the rights of creditors
generally. At the Effective Date, the consummation of the merger
contemplated by this Agreement will not conflict with or result in a
violation or breach of any term or provision of, nor constitute a
default under (i) the certificate of incorporation or bylaws of 3DX or
(ii) except as set forth on SCHEDULE 2.1.2, any obligation, indenture,
mortgage, deed of trust, lease, contract or other agreement to which 3DX
or any of its subsidiaries is a party or by which any of them or their
properties are bound, other than such violations, breaches or defaults
as would not result in any material adverse change in the financial
condition, properties or businesses of 3DX and its subsidiaries taken as
a whole.
2.1.3 CAPITALIZATION. The authorized capitalization of 3DX
consists of 1,000,000 shares of preferred stock, $.01 par value, of which
at March 31, 1999 no shares were issued or outstanding; and 20,000,000
shares of common stock, par value $.01 per share, of which at March 31,
1999, 9,685,761 shares were issued and outstanding; at the same date, and
an additional 780,944 shares were reserved for issuance in conjunction with
various employee benefit plans; at the same date, no shares of 3DX Common
Stock were held in 3DX's treasury. Other than as disclosed in the 3DX
Report (defined below), there exist no outstanding options, subscriptions,
warrants, calls, or similar commitments to purchase, issue or sell or to
convert any securities or obligations into any of the authorized or issued
capital stock of 3DX or any securities or obligations convertible into or
exchangeable for such capital stock. Under the terms of all currently
issued and outstanding 3DX employee stock options, all issued and
outstanding options to purchase 3DX Common Stock either will have (i) been
exercised to be effective as of or before the Effective Date or
(ii) terminated in accordance with their terms as of or immediately prior
to the merger.
2.1.4 REPORTS AND FINANCIAL STATEMENTS. 3DX has previously made
available to Esenjay true and complete copies of (i) all annual reports
filed with the Securities and Exchange Commission (the "Commission")
pursuant to the Securities Exchange Act of 1934 (the "Exchange Act") since
December 31, 1996, (ii) 3DX's annual, quarterly and other reports filed
with the Commission since December 31, 1998, (iii) all definitive proxy
solicitation materials filed with the Commission since December 31, 1996
and (iv) any registration statements (other than those relating to employee
benefit plans) declared effective by the Commission since December 31,
1996. All of the foregoing items are listed in SCHEDULE 2.1.4. The
consolidated financial statements of 3DX's most recent report on Form 10-K
(the "3DX Report") were prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods
involved and fairly present the consolidated financial position for 3DX and
its consolidated subsidiaries as of the dates thereof and the consolidated
results of their operations and changes in financial position for the
periods then ended; and the 3DX Report did not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Since December
31, 1996, 3DX has filed with the Commission all material
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reports, registration statements and other material filings required to
be filed with the Commission under the rules and regulations of the
Commission.
2.1.5 LIABILITIES. 3DX does not have any liabilities or
obligations, either accrued, absolute, contingent, or otherwise, or have
any knowledge of any potential liabilities or obligations, which would
materially adversely affect the value and conduct of the business of 3DX,
other than those (i) reflected or reserved against in the December 31, 1998
audited consolidated balance sheet of 3DX, (ii) incurred in the ordinary
course of business since December 31, 1998, (iii) disclosed in 3DX's
filings with the Commission (as set forth on SCHEDULE 2.1.4), or (iv) set
forth on SCHEDULE 2.1.5 hereto.
2.1.6 ABSENCE OF CERTAIN CHANGES AND EVENTS. Except as set forth
in SCHEDULE 2.1.6 hereto, other than as a result of the transactions
contemplated by this Agreement, since December 31, 1998, there has not
been:
2.1.6.1 FINANCIAL CHANGE. Any material adverse change in the
financial condition, backlog, operations, assets, liabilities or
business of 3DX;
2.1.6.2 PROPERTY DAMAGE. Any material damage, destruction, or
loss to the business or properties of 3DX (whether or not covered by
insurance);
2.1.6.3 DIVIDENDS. Any declaration, setting aside, or payment of
any dividend or other distribution in respect of the 3DX Common Stock,
or any direct or indirect redemption, purchase or any other
acquisition by 3DX of any such stock;
2.1.6.4 CAPITALIZATION CHANGE. Any change in the capital stock
or in the number of shares or classes of 3DX's authorized or
outstanding capital stock as described in Paragraph 2.1.3;
2.1.6.5 LABOR DISPUTES. Any labor dispute (other than routine
grievances); or
2.1.6.6 OTHER MATERIAL CHANGES. Any other event or condition
particularly pertaining to and adversely affecting the operations,
assets or business of 3DX (other than events or conditions which are
of a general or industry-wide nature and of general public knowledge)
which would constitute a material adverse change.
2.1.7 COMPLIANCE WITH OTHER LAWS. 3DX is not in violation of
or in default with respect to, or in alleged violation of or alleged
default with respect to, any applicable law or any applicable rule,
regulation, or any writ or decree of any court or any governmental
commission, board, bureau, agency, or instrumentality, or delinquent
with respect to any report required to be filed with any governmental
commission, board, bureau, agency or instrumentality, except for
violations which, either singly or in the aggregate, do not and are not
expected to result in a material adverse change in the financial
condition, properties or business of 3DX.
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2.1.8 FINDER'S FEE. All negotiations relative to this Agreement and
the transactions contemplated hereby have been carried on by 3DX and its
counsel directly with Esenjay and its counsel, without the intervention of
any other person as the result of any act of 3DX, and so far as is known to
3DX, without the intervention of any other person in such manner as to give
rise to any valid claim against any of the parties hereto for a brokerage
commission, finder's fee or any similar payments.
2.1.9 INVESTIGATIONS; LITIGATION. No investigation or review by any
governmental entity with respect to 3DX or any of the transactions
contemplated by this Agreement is pending or, to the best of 3DX's
knowledge, threatened, nor has any governmental entity indicated to 3DX an
intention to conduct the same. There is no action, suit or proceeding
pending or, to the best of 3DX's knowledge, threatened against or affecting
3DX at law or in equity, or before any federal, state, municipal or other
governmental department, commission, board, bureau, agency or
instrumentality, which either individually or in the aggregate, does or is
likely to result in any material adverse change in the financial condition,
properties or businesses of 3DX.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
OF ESENJAY
3.1 REPRESENTATIONS AND WARRANTIES OF ESENJAY. Esenjay represents and
warrants as follows:
3.1.1 ORGANIZATION AND STANDING. Esenjay is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Delaware, has full requisite corporate power and authority to
carry on its business as it is currently conducted, and to own and operate
the properties currently owned and operated by it, and is duly qualified or
licensed to do business and is in good standing as a foreign corporation
authorized to do business in all jurisdictions in which the character of
the properties owned or the nature of the business conducted by it would
make such qualification or licensing necessary, except where the failure to
be so qualified or licensed would not have a material adverse effect on the
financial condition, properties or business of Esenjay.
3.1.2 AGREEMENT AUTHORIZED AND ITS EFFECT ON OTHER OBLIGATIONS. Upon
approval of this Agreement by the stockholders of Esenjay, the issuance of
the Esenjay Common Stock and ESNJ-CP Stock and the consummation of the
transactions contemplated hereby, will have been duly and validly
authorized by all necessary corporate action on the part of Esenjay, and
this Agreement will be a valid and binding obligation of Esenjay
enforceable against Esenjay (subject to normal equitable principles) in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, debtor relief or similar laws
affecting the rights of creditors generally. On the filing of the
Certificate of Designations with the Secretary of State of the State of
Delaware, the Certificate of
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Designations will be a valid and binding obligation of Esenjay
enforceable against Esenjay (subject to normal equitable principles) in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, debtor relief or similar laws
affecting the rights of creditors generally. At the Effective Date, the
consummation of the merger contemplated by this Agreement, the filing of
the Certificate of Designations and the issuance of the Esenjay Common
Stock and ESNJ-CP Stock will not conflict with or result in a violation
or breach of any term or provision of, nor constitute a default under
(i) the certificate of incorporation or bylaws of Esenjay or (ii) any
obligation, indenture, mortgage, deed of trust, lease, contract or other
agreement to which Esenjay or any of its subsidiaries is a party or by
which any of them or their properties are bound, other than such
violations, breaches or defaults as would not result in any material
adverse change in the financial condition, properties or businesses of
Esenjay and its subsidiaries taken as a whole.
3.1.3 CAPITALIZATION. The authorized capitalization of Esenjay
consists of 5,000,000 authorized shares of cumulative convertible preferred
stock, $.01 par value, of which no shares were issued and outstanding as of
March 31, 1999; and 40,000,000 shares of common stock, par value $.01 per
share, of which at March 26, 1999, 15,784,834 shares were issued and
outstanding; at the same date, and an additional 94,001 shares were
reserved for issuance in conjunction with various employee benefit plans,
and an additional 1,259,584 shares are issuable on the exercise of various
warrant agreements with exercise prices ranging from $7.20 to $21.73 per
share; at the same date, no shares of Esenjay Common Stock were held in
Esenjay's treasury. Other than as set forth above or in the Esenjay Report
(defined below), there exist no outstanding options, subscriptions,
warrants, calls, or similar commitments to purchase, issue or sell or to
convert any securities or obligations into any of the authorized or issued
capital stock of Esenjay or any securities or obligations convertible into
or exchangeable for such capital stock. At the Effective Date, sufficient
shares of ESNJ-CP Stock will be designated pursuant to the Certificate of
Designations, the shares of ESNJ-CP Stock to be issued in the merger
contemplated hereby will be duly authorized, validly issued, fully paid,
and non-assessable, and sufficient shares of Esenjay Common Stock will be
reserved for issuance upon conversion of the ESNJ-CP.
3.1.4 REPORTS AND FINANCIAL STATEMENTS. Esenjay has previously made
available to 3DX true and complete copies of (i) all annual reports filed
with the Commission pursuant to the Exchange Act since December 31, 1996,
(ii) Esenjay's annual, quarterly and other reports filed with the
Commission since December 31, 1998, (iii) all definitive proxy solicitation
materials filed with the Commission since December 31, 1996 and (iv) any
registration statements (other than those relating to employee benefit
plans) declared effective by the Commission since December 31, 1996. All
of the foregoing items are listed in SCHEDULE 3.1.4. The consolidated
financial statements of Esenjay's most recent report on Form 10-K (the
"Esenjay Report") were prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods
involved and fairly present the consolidated financial position for Esenjay
and its consolidated subsidiaries as of the dates thereof and the
consolidated results of their operations and changes in financial position
for the periods then ended; and the Esenjay Report did not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or
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necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. Since December 31, 1996,
Esenjay has filed with the Commission all material reports, registration
statements and other material filings required to be filed with the
Commission under the rules and regulations of the Commission.
3.1.5 LIABILITIES. Esenjay does not have any liabilities or
obligations, either accrued, absolute, contingent, or otherwise, or have
any knowledge of any potential liabilities or obligations, which would
materially adversely affect the value and conduct of the business of
Esenjay, other than those (i) reflected or reserved against in the
December 31, 1998 audited consolidated balance sheet of Esenjay,
(ii) incurred in the ordinary course of business since December 31, 1998,
(iii) disclosed in Esenjay's filings with the Commission (as set forth on
SCHEDULE 3.1.4), or (iv) set forth on SCHEDULE 3.1.5 hereto.
3.1.6 ABSENCE OF CERTAIN CHANGES AND EVENTS. Except as set forth in
SCHEDULE 3.1.6. hereto, other than as a result of the transactions
contemplated by this Agreement, since December 31, 1998, there has not
been:
3.1.6.1 FINANCIAL CHANGE. Any material adverse change in the
financial condition, backlog, operations, assets, liabilities or
business of Esenjay;
3.1.6.2 PROPERTY DAMAGE. Any material damage, destruction, or
loss to the business or properties of Esenjay (whether or not covered
by insurance);
3.1.6.3 DIVIDENDS. Any declaration, setting aside, or payment of
any dividend or other distribution in respect of the common stock of
Esenjay, or any direct or indirect redemption, purchase or any other
acquisition by Esenjay of any such stock;
3.1.6.4 CAPITALIZATION CHANGE. Any change in the capital stock
or in the number of shares or classes of Esenjay's authorized or
outstanding capital stock as described in Paragraph 3.1.3;
3.1.6.5 LABOR DISPUTES. Any labor dispute (other than routine
grievances); or
3.1.6.6 OTHER MATERIAL CHANGES. Any other event or condition
known to Esenjay particularly pertaining to and adversely affecting
the operations, assets or business of Esenjay (other than events or
conditions which are of a general or industry-wide nature and of
general public knowledge) which would constitute a material adverse
change.
3.1.7 COMPLIANCE WITH OTHER LAWS. Esenjay is not in violation of
or in default with respect to, or in alleged violation of or alleged
default with respect to any applicable law or any applicable rule,
regulation, or any writ or decree of any court or any governmental
commission, board, bureau, agency, or instrumentality, or delinquent with
respect to any
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report required to be filed with any governmental commission, board,
bureau, agency or instrumentality, except for violations which, either
singly or in the aggregate, do not and are not expected to result in a
material adverse change in the financial condition, properties or
business of Esenjay.
3.1.8 FINDER'S FEE. All negotiations relative to this Agreement and
the transactions contemplated hereby have been carried on by Esenjay and
its counsel directly with 3DX and its counsel, without the intervention of
any other person as the result of any act of Esenjay, and so far as is
known to Esenjay, without the intervention of any other person in such
manner as to give rise to any valid claim against any of the parties hereto
for a brokerage commission, finder's fee or any similar payments.
3.1.9 INVESTIGATIONS; LITIGATION. No investigation or review by any
governmental entity with respect to Esenjay or any of the transactions
contemplated by this Agreement is pending or, to the best of Esenjay's
knowledge, threatened, nor has any governmental entity indicated to Esenjay
an intention to conduct the same. There is no action, suit or proceeding
pending or, to the best of Esenjay's knowledge, threatened against or
affecting Esenjay at law or in equity, or before any federal, state,
municipal or other governmental department, commission, board, bureau,
agency or instrumentality, which either individually or in the aggregate,
does or is likely to result in any material adverse change in the financial
condition, properties or businesses of Esenjay.
3.1.10 NO REQUIRED REDEMPTION OF ESNJ-CP STOCK. There are no plans,
arrangements, or agreements that effectively require or are intended to
compel Esenjay to redeem the ESNJ-CP Stock pursuant to Section 5.1 of the
Certificate of Designations.
ARTICLE IV.
OBLIGATIONS PENDING EFFECTIVE DATE
4.1 AGREEMENTS OF ESENJAY AND 3DX. Each of Esenjay and 3DX agrees that
from the date hereof to the Effective Date, it will:
4.1.1 MAINTENANCE OF PRESENT BUSINESS. Other than as contemplated
by this Agreement, operate its business only in the usual, regular, and
ordinary manner so as to maintain the goodwill it now enjoys and, to the
extent consistent with such operation, use all reasonable efforts to
preserve intact its present business organization, keep available the
services of its present officers and employees, and preserve its
relationships with customers, suppliers, jobbers, distributors, and others
having business dealings with it;
4.1.2 MAINTENANCE OF PROPERTIES. At its expense, maintain all of
its property and assets in customary repair, order, and condition,
reasonable wear and use and damage by fire or unavoidable casualty
excepted;
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4.1.3 MAINTENANCE OF BOOKS AND RECORDS. Maintain its books of
account and records in the usual, regular, and ordinary manner, in
accordance with generally accepted accounting principles applied on a
consistent basis;
4.1.4 COMPLIANCE WITH LAW. Duly comply in all material respects
with all laws applicable to it and to the conduct of its business; and
4.1.5 INSPECTION OF EACH MERGING CORPORATION. Permit the other
party hereto, and their officers and authorized representatives, during
normal business hours, to inspect its records and to consult with its
officers, employees, attorneys, and agents for the purpose of determining
the accuracy of the representations and warranties hereinabove made and the
compliance with covenants contained in this Agreement. Esenjay and 3DX
each agrees that it and its officers and representatives shall hold all
data and information obtained with respect to the other party hereto in
confidence and each further agrees that it will not use such data or
information or disclose the same to others, except to the extent such data
or information either are, or become, published or a matter of public
knowledge.
4.2 ADDITIONAL AGREEMENTS OF ESENJAY AND 3DX. Esenjay and 3DX agree to
take the following actions after the date hereof:
4.2.1 JOINT PROXY STATEMENT/PROSPECTUS. Esenjay and 3DX will
cooperate in the preparation and filing with the Commission of a
registration statement on Form S-4 (the "Registration Statement") in
connection with the registration under the Securities Act of 1933, as
amended (the "Securities Act") of the Merger Consideration to be issued
pursuant to the merger and the Esenjay Common Stock and ESNJ-CP Stock
issuable upon conversion thereof, which Registration Statement shall
contain a Joint Proxy Statement/Prospectus to be mailed by Esenjay and 3DX
to their respective shareholders in connection the vote of such
shareholders with respect to the merger. Each of Esenjay and 3DX shall use
all reasonable efforts to have the Joint Proxy Statement/Prospectus cleared
by the Commission.
4.2.2 NOTICE OF MATERIAL DEVELOPMENTS. Each of Esenjay and 3DX will
promptly notify the other party in writing of any "material adverse change"
in, or any changes which, in the aggregate, could result in a "material
adverse change" in, the consolidated financial condition, business or
affairs of such party, whether or not occurring in the ordinary course of
business. As used in this Agreement, the term "material adverse change"
means any change, event, circumstance or condition (collectively, a
"Change") which when considered with all other Changes would reasonably be
expected to result in a "loss" having the effect of so fundamentally
adversely affecting the business or financial prospects of Esenjay or 3DX,
as the case may be, that the benefits reasonably expected to be obtained by
such party as a result of the merger contemplated by this Agreement would
be jeopardized with relative certainty. The term "loss" shall mean any and
all direct or indirect payments, obligations, assessments, losses, loss of
income, liabilities, fines, penalties, costs and expenses paid or incurred
or more likely than not to be paid or incurred, or diminutions in value of
any kind or character (whether or not known or unknown, conditional or
unconditional, choate or inchoate, liquidated or unliquidated, secured or
unsecured, accrued, absolute, contingent or
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otherwise) that are more likely than not to occur, including without
limitation penalties, interest on any amount payable to a third party as
a result of the foregoing and any legal or other expenses reasonably
incurred or more likely than not to be incurred in connection with
investigating or defending any demands, claims, actions or causes of
action that, if adversely determined, would likely result in losses, and
all amounts paid in settlement of claims or actions; PROVIDED, HOWEVER,
that losses shall be net of any insurance proceeds entitled to be
received from a nonaffiliated insurance company on account of such
losses (after taking into account any costs incurred in obtaining such
proceeds and any increase in insurance premiums as a result of a claim
with respect to such proceeds). In no event shall a change in the
trading price of either the Esenjay Common Stock or the 3DX Common Stock
between the date hereof and the Effective Date, in and of itself,
constitute a material adverse change. The term "loss" shall not include
losses reported on financial statements prepared in accordance with GAAP
that are consistent with prior reported earnings.
4.2.3 BEST EFFORTS. Upon the terms and subject to the conditions
hereof, and subject to the provisions of Section 4.3.11, the parties hereto
agree to use their reasonable best efforts to take, or cause to be taken,
all appropriate action, and to do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Agreement and to cooperate in connection
with the foregoing, including using reasonable best efforts (i) to obtain
any necessary waivers, consents and approvals from other parties to
material notes, licenses, agreements, and other instruments and
obligations; (ii) to obtain any material consents, approvals,
authorizations and permits required to be obtained under any federal, state
or local statute, rule or regulation; (iii) to defend all lawsuits or other
legal proceedings challenging this Agreement or the consummation of the
transactions contemplated hereby; and (iv) promptly to effect all necessary
filings and notifications. In addition, 3DX agrees to use its reasonable
best efforts to obtain a written confirmation of the oral fairness opinion
it has received from an independent investment advisor/banker (the
"Fairness Opinion") that, as of the date of such opinion, this Agreement
and the exchange ratio in the merger are fair, from a financial point of
view, to the holders of 3DX Common Stock. In case at any time after the
Effective Date any further action is necessary or desirable to carry out
the purposes of this Agreement, the proper officers and directors of the
Surviving Corporation on behalf of 3DX and Esenjay shall take all such
action.
4.2.4 PARTICIPATION IN OPERATIONS. If 3DX receives a notice of
proposed operations in connection with a working interest or oil and gas
leases in one of its projects, 3DX will promptly deliver to Esenjay a copy
of the notice of the proposed operation, along with a written notice
informing Esenjay whether 3DX intends to participate in the proposed
operation. If 3DX does not intend to participate in the proposed
operation, and Esenjay gives 3DX written notice that it desires to
participate in the proposed operation, then 3DX will use its best efforts
to arrange for Esenjay to participate at Esenjay's expense in such
operation to the same extent that 3DX would be entitled to participate.
4.3 ADDITIONAL AGREEMENTS OF 3DX. 3DX agrees that from the date hereof to
the Effective Date, it will:
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4.3.1 PROHIBITION OF CERTAIN EMPLOYMENT CONTRACTS. Not enter into
any contracts of employment which (i) cannot be terminated on notice of 14
days or less or (ii) provide for any severance payments or benefits
covering a period beyond the termination date (other than those that
Esenjay has previously approved) except as may be required by law;
4.3.2 PROHIBITION OF CERTAIN LOANS. Not incur any borrowings
except (i) the refinancing of indebtedness now outstanding or additional
borrowings under its existing credit facilities, (ii) the prepayment by
customers of amounts due or to become due for goods sold or services
rendered or to be rendered in the future, (iii) trade payables incurred in
the ordinary course of business, (iv) other borrowings incurred in the
ordinary course of business to finance normal operations or (v) as is
otherwise agreed to in writing by Esenjay;
4.3.3 PROHIBITION OF CERTAIN COMMITMENTS. Not enter into
commitments of a capital expenditure nature or incur any contingent
liability which would exceed $250,000, in the aggregate, except (i) as may
be necessary for the maintenance of existing facilities, machinery and
equipment in good operating condition and repair in the ordinary course of
business, (ii) as may be required by law or (iii) as is otherwise agreed to
in writing by Esenjay;
4.3.4 DISPOSAL OF ASSETS. Not sell, dispose of, or encumber, any
property or assets, except (i) in the ordinary course of business or (ii)
as is otherwise agreed to in writing by Esenjay;
4.3.5 MAINTENANCE OF INSURANCE. Maintain insurance upon all its
properties and with respect to the conduct of its business of such kinds
and in such amounts as is customary in the type of business in which it is
engaged, but not less than that presently carried by it, which insurance
may be added to from time to time in its discretion; PROVIDED, that if
during the period from the date hereof to and including the Effective Date
any of its property or assets are damaged or destroyed by fire or other
casualty, the obligations of Esenjay and 3DX under this Agreement shall not
be affected thereby (subject, however, to the provision that the coverage
limits of such policies are adequate in amount to cover the replacement
value of such property or assets and loss of profits during replacement,
less commercially reasonable deductible, if of material significance to the
assets or operations of 3DX) but it shall promptly notify Esenjay in
writing thereof and proceed with the repair or restoration of such property
or assets in such manner and to such extent as may be approved by Esenjay,
and upon the Effective Date all proceeds of insurance and claims of every
kind arising as a result of any such damage or destruction shall remain the
property of Surviving Corporation;
4.3.6 NO AMENDMENT TO CERTIFICATE OF INCORPORATION, ETC. Not
amend its certificate of incorporation or bylaws or other organizational
documents or merge or consolidate with or into any other corporation or
change in any manner the rights of its capital stock or the character of
its business;
4.3.7 NO ISSUANCE, SALE, OR PURCHASE OF SECURITIES. Except as set
forth on SCHEDULE 4.3.7, not issue or sell, or issue options or rights to
subscribe to, or enter into any
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contract or commitment to issue or sell (upon conversion or otherwise),
any shares of its capital stock or subdivide or in any way reclassify
any shares of its capital stock, or acquire, or agree to acquire, any
shares of its capital stock;
4.3.8 PROHIBITION ON DIVIDENDS. Not declare or pay any dividend
on shares of its capital stock or make any other distribution of assets to
the holders thereof;
4.3.9 STOCKHOLDERS' MEETING. Promptly call and hold a meeting of
stockholders for the purpose of considering and acting upon proposals to
approve the merger contemplated by this Agreement;
4.3.10 SUPPLEMENTAL FINANCIAL STATEMENTS. Deliver to Esenjay,
within 45 days after the end of each fiscal quarter of 3DX beginning
January 1, 1999 and through the Effective Date, unaudited consolidated
balance sheets and related unaudited statements of income, retained
earnings and cash flows as of the end of each fiscal quarter of 3DX, and as
of the corresponding fiscal quarter of the previous fiscal year. 3DX
hereby represents and warrants that such unaudited consolidated financial
statement shall (i) be complete in all material respects except for the
omission of notes and schedules contained in audited financial statements,
(ii) present fairly the financial condition of 3DX as at the dates
indicated and the results of operations for the respective periods
indicated (iii) shall have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis, except as
noted therein and (iv) shall contain all adjustments which 3DX considers
necessary for a fair presentation of its results for each respective fiscal
period.
4.3.11 3DX ACQUISITION PROPOSALS. Not directly or indirectly:
4.3.11.1 NO SOLICITATION. Authorize or permit any of its
respective agents to: (i) solicit, initiate, encourage (including by
way of furnishing information) or take any other action to facilitate,
any inquiry or the making of any proposal which constitutes, or may
reasonably be expected to lead to, any acquisition or purchase of a
substantial amount of assets of, or any equity interest in, 3DX or any
merger, consolidation, business combination, sale of substantially all
assets, sale of securities, recapitalization, liquidation, dissolution
or similar transaction involving 3DX (other than the transactions
contemplated by this Agreement) or any other material corporate
transaction the consummation of which would or could reasonably be
expected to impede, interfere with, prevent or materially delay the
merger contemplated by this Agreement (collectively, "3DX Transaction
Proposals") or agree to or endorse any 3DX Transaction Proposal or
(ii) propose, enter into or participate in any discussions or
negotiations regarding any of the foregoing, or furnish to another
person any information with respect to its business, properties or
assets or any of the foregoing, or otherwise cooperate in any way
with, or assist or participate in, facilitate or encourage, an effort
or attempt by any other person to do or seek any of the foregoing,
PROVIDED, HOWEVER, that the foregoing clauses (i) and (ii) shall not
prohibit 3DX from (A) furnishing information pursuant to an
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appropriate confidentiality letter concerning 3DX and its business,
properties or assets to a third party who has made a Superior 3DX
Transaction Proposal (as defined below), (B) engaging in
discussions or negotiations with such a third party who has made a
Superior 3DX Transaction Proposal or (C) following receipt of a
Superior 3DX Transaction Proposal, taking and disclosing to its
shareholders a position with respect thereto or changing the
recommendation by 3DX's board of directors for the vote of 3DX's
shareholders in favor of this Agreement or the merger contemplated
hereby, but in each case referred to in the foregoing clauses (A)
through (C) only after the board of directors of 3DX concludes in
good faith following advice of its outside counsel that such action
is reasonably necessary for the board of directors of 3DX to comply
with its fiduciary obligations to stockholders under applicable
law. If the board of directors of 3DX receives an 3DX Transaction
Proposal, then 3DX shall immediately inform Esenjay of the terms
and conditions of such proposal and the identity of the person
making it and shall keep Esenjay fully informed of the status and
details of any such 3DX Transaction Proposal and of all steps it is
taking in response to such 3DX Transaction Proposal; PROVIDED THAT
nothing contained in this Paragraph 4.3.11.1 shall prohibit 3DX or
its board of directors from making such disclosure to 3DX's
stockholders which, in the good faith judgment of 3DX's board of
directors, may be required under applicable law. In the event that
3DX receives either a 3DX Transaction Proposal or a Superior 3DX
Transaction Proposal, 3DX shall have 5 business days from the date
of receipt of such proposal to evaluate the proposal and determine
whether it will accept or reject the proposal. For purposes of
this Agreement, the term "Superior 3DX Transaction Proposal" shall
mean a BONA FIDE 3DX Transaction Proposal that the board of
directors of 3DX determines in good faith after consultation with
(and based in part on the advice of) its independent financial
advisors clearly and unambiguously to be more favorable to 3DX's
stockholders than the merger contemplated by this Agreement, is
reasonably capable of being financed and is not subject to any
material contingencies relating to financing.
4.3.12 PROFESSIONAL SERVICES. Effective upon the execution of this
Agreement, and until such time as the merger contemplated hereby has been
consummated or the Agreement has been terminated pursuant to the provisions
of Article VI hereof, 3DX shall make available, at the request of Esenjay,
professional services of the professional geophysicists and reservoir
engineers of 3DX to perform services for the account of Esenjay up to ten
person days per week (a "person day" being equal to one full day's services
from one professional employee). In the event the merger contemplated
hereby is terminated pursuant to the termination provisions of Article VI,
Esenjay agrees to pay 3DX for services rendered pursuant to this paragraph
at a rate of $400.00 per person day plus reasonable expenses.
4.4 ADDITIONAL AGREEMENTS OF ESENJAY. Esenjay agrees that from the date
hereof to the Effective Date, it will:
4.4.1 STOCKHOLDERS' MEETING. Promptly call and hold a meeting of
stockholders for the purpose of considering and acting upon proposals to
(i) approve the merger contemplated
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by this Agreement, (ii) nominate C. Eugene Ennis to be elected to
Esenjay's board of directors as provided in Paragraph 1.7, and (iii)
authorize the issuance of the Esenjay Common Stock and ESNJ-CP Stock to
be issued to 3DX stockholders as described in Paragraph 1.11 above and
APPENDIX I;
4.4.2 LISTING. Take such steps as are required to accomplish, as of
the Effective Date, the quotation of the shares of Esenjay Common Stock to
be issued pursuant to this Agreement on the NASDAQ Small-Cap Market and the
posting on the NASDAQ Bulletin Board System of the shares of ESNJ-CP Stock
to be issued pursuant to this Agreement;
4.4.3 APPROVAL AND FILING OF THE CERTIFICATE OF DESIGNATIONS. Take
all necessary steps to designate ESNJ-CP Stock as a series of its preferred
stock pursuant to the Certificate of Designations, including without
limitation, filing the Certificate of Designations with the Secretary of
State of Delaware.
4.4.4 DIRECTORS AND OFFICERS INSURANCE. At or prior to the
Effective Date, Esenjay will either (i) provide evidence to 3DX that
Esenjay has added directors and officers coverage for the present officers
and directors of 3DX in respect to claims made for acts and/or omissions
prior to the Effective Date, which coverage shall be the same as, or
equivalent to, the coverage then in existence and provided to the directors
and officers of Esenjay, or (ii) provide written consent to 3DX for 3DX to
spend up to an amount equal to $94,000.00 to pay for an extension of 3DX's
current directors and officers insurance policy such that claims made after
the Effective Date for acts and/or omissions prior to the Effective Date
will be covered after the Effective Date. In the event Esenjay elects the
option set forth in (i) above, it agrees that it will provide directors and
officers insurance coverage for the present officers and directors of 3DX
the same as, or equivalent to, coverage it maintains for Esenjay's
directors and officers through at least July 31, 2002.
ARTICLE V.
CONDITIONS PRECEDENT TO OBLIGATIONS
5.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF 3DX. The obligations of 3DX to
consummate and effect the merger hereunder shall be subject to the satisfaction
of the following conditions, or to the waiver thereof by 3DX in the manner
contemplated by Paragraph 6.4 before the Effective Date:
5.1.1 REPRESENTATIONS AND WARRANTIES OF ESENJAY TRUE AT EFFECTIVE
DATE. The representations and warranties of Esenjay herein contained shall
be, in all material respects, true as of and at the Effective Date with the
same effect as though made at such date, except as affected by transactions
permitted or contemplated by this Agreement; Esenjay shall have performed
and complied, in all material respects, with all covenants required by this
Agreement to be performed or complied with by Esenjay before the Effective
Date; and Esenjay shall have delivered to 3DX a certificate, dated the
Effective Date and signed by its
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chairman of the board or its president, and by its chief financial or
accounting officer, and its secretary, to both such effects.
5.1.2 NO MATERIAL LITIGATION. No suit, action, or other
proceeding shall be pending, or to Esenjay's knowledge, threatened, before
any court or governmental agency in which it will be, or it is, sought to
restrain or prohibit or to obtain damages or other relief in connection
with this Agreement or the consummation of the merger contemplated hereby
or which might result in a material adverse change in the value of the
consolidated assets and business of Esenjay.
5.1.3 OPINION OF ESENJAY COUNSEL. 3DX shall have received a
favorable opinion, dated as of the Effective Date, from Porter & Hedges,
L.L.P., counsel for Esenjay, in form and substance satisfactory to 3DX, to
the effect that (i) Esenjay has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware; (ii) all corporate proceedings required to be taken by or on the
part of Esenjay to authorize the execution of this Agreement and the
implementation of the merger contemplated hereby have been taken; (iii) the
shares of Esenjay Common Stock and ESNJ-CP Stock that are to be delivered
in accordance with this Agreement will, when issued, be validly issued,
fully paid and nonassessable outstanding securities of Esenjay; (iv) this
Agreement and the Certificate of Designations have been duly executed and
delivered by, and are the legal, valid and binding obligation of Esenjay
and are enforceable against Esenjay in accordance with their respective
terms, except as enforceability may be limited by (a) equitable principles
of general applicability or (b) bankruptcy, insolvency, reorganization,
fraudulent conveyance or similar laws affecting the rights of creditors
generally and except that no opinion need be expressed as to the
enforceability of any indemnification provisions of this Agreement; and (v)
except as specified by such counsel (such exceptions to be acceptable to
3DX) such counsel does not know of any material litigation, proceedings, or
governmental investigation pending or threatened against or relating to
Esenjay, any of its subsidiaries, or their respective properties or
businesses in which it is sought to restrain, prohibit or otherwise affect
the consummation of the transactions contemplated by this Agreement. In
rendering such opinion, such counsel may rely upon (i) certificates of
public officials and of officers of Esenjay as to matters of fact and (ii)
the opinion or opinions of other counsel, which opinions shall be
reasonably satisfactory to 3DX, as to matters other than federal or Texas
law.
5.1.4 STOCKHOLDER APPROVAL. The approval of a majority of the
stockholders of 3DX of the merger contemplated by this Agreement, and such
approval shall not have been amended, modified or rescinded on or before
the Effective Date.
5.1.5 CONSENT OF CERTAIN PARTIES IN PRIVITY WITH ESENJAY. The
holders of any material indebtedness of Esenjay, the lessors of any
material property leased by Esenjay, and the other parties to any other
material agreements to which Esenjay is a party shall, when and to the
extent required, have consented to the merger contemplated hereby.
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5.1.6 FAIRNESS OPINION. 3DX shall have received, orally before the
execution of this Agreement and in writing before the filing of the
Registration Statement described in Section 4.2.1, the Fairness Opinion
described in Paragraph 4.2.3, and such Fairness Opinion shall be in full
force and effect without amendment on the Effective Date.
5.1.7 VOTING AGREEMENT. Concurrently with the execution of this
Agreement (i) Esenjay's controlling shareholders, Esenjay Petroleum
Corporation ("EPC") and Aspect Resources LLC ("Aspect"), shall have entered
into a voting agreement (the "Esenjay Voting Agreement") that at Esenjay's
stockholders meeting, any adjournment thereof or any other meeting of the
holders of Esenjay common stock, however called, or in connection with any
written consent of the holders of voting capital stock of Esenjay, they
shall vote, or cause to be voted, all the shares of Esenjay common stock
beneficially owned or controlled by such stockholder (a) in favor of the
merger, the execution and delivery by Esenjay of this agreement and the
approval of the terms of each of the other actions contemplated by this
Agreement and any actions required in furtherance thereof and hereof; (b)
for the related issuance of the Esenjay Common Stock and ESNJ-CP Stock; (c)
for the election of C. Eugene Ennis, or such other qualified person
nominated by 3DX, to serve on the board of directors of Esenjay; and (d)
against any other action that is intended, or could reasonably be expected,
to impede, interfere with, delay, postpone, or materially adversely affect
the merger and the transactions contemplated by this Agreement; and
(ii) the Esenjay Voting Agreement will be in full force and effect as of
the Effective Date.
5.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF ESENJAY. The obligations of
Esenjay to consummate and effect the merger hereunder shall be subject to the
satisfaction of the following conditions, or to the waiver thereof by Esenjay in
the manner contemplated by Paragraph 6.4 before the Effective Date or closing
date.
5.2.1 REPRESENTATIONS AND WARRANTIES OF 3DX TRUE AT EFFECTIVE
DATE. The representations and warranties of 3DX herein contained shall be,
in all material respects, true as of and at the Effective Date with the
same effect as though made at such date, except as affected by transactions
permitted or contemplated by this Agreement; 3DX shall have performed and
complied, in all material respects, with all covenants required by this
Agreement to be performed or complied with by it before the Effective Date;
and 3DX shall have delivered to Esenjay a certificate, dated the Effective
Date and signed by its chairman of the board or its president, and by its
chief financial or accounting officer, and by its secretary to both such
effects.
5.2.2 NO MATERIAL LITIGATION. No suit, action, or other
proceeding shall be pending, or to 3DX's knowledge, threatened, before any
court or governmental agency in which it will be, or it is, sought to
restrain or prohibit or to obtain damages or other relief in connection
with this Agreement or the consummation of the merger contemplated hereby
or which might result in a material adverse change in the value of the
assets and business of 3DX.
5.2.3 OPINION OF 3DX'S COUNSEL. Esenjay shall have received a
favorable opinion, dated the Effective Date, from Gardere, Wynne, Sewell &
Riggs, L.L.P., counsel to 3DX,
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in form and substance satisfactory to Esenjay, to the effect that (i)
3DX has been duly incorporated and is validly existing as a corporation
in good standing under the laws of the State of Delaware; (ii) all
corporate or other proceedings required to be taken by or on the part of
3DX to authorize the execution of this Agreement and the implementation
of the merger contemplated hereby have been taken; (iii) this Agreement
has been duly executed and delivered by, and is the legal, valid and
binding obligation of 3DX and is enforceable against 3DX in accordance
with its terms, except as the enforceability may be limited by (a)
equitable principles of general applicability or (b) bankruptcy,
insolvency, reorganization, fraudulent conveyance or similar laws
affecting the rights of creditors generally and except that no opinion
need be expressed as to the enforceability of any indemnification
provisions of this Agreement; and (iv) except as specified by such
counsel (such exceptions to be acceptable to Esenjay) such counsel does
not know of any material litigation, proceedings or governmental
investigation, pending or threatened against or relating to 3DX or its
properties or businesses in which it is sought to restrain, prohibit or
otherwise affect consummation of the transactions contemplated by this
Agreement. In rendering such opinion, such counsel may rely upon (i)
certificates of public officials and of officers of 3DX as to matters of
fact and (ii) on the opinion or opinions of other counsel, which
opinions shall be reasonably satisfactory to Esenjay, as to matters
other than federal or Texas law.
5.2.4 STOCKHOLDER APPROVAL. At the meeting of stockholders of
Esenjay to be held before the Effective Date, the holders of the requisite
majority of the outstanding shares of Esenjay Common Stock shall have
approved the merger contemplated by this Agreement.
5.2.5 CONSENT OF CERTAIN PARTIES IN PRIVITY WITH 3DX. The holders
of any material indebtedness of 3DX, the lessors of any material property
leased by 3DX, and the other parties to any other material agreements to
which 3DX is a party shall, when and to the extent required, have consented
to the merger contemplated hereby; PROVIDED, HOWEVER that the consent of
3DX's lender under its $750,000 term loan shall not be required if the
terms of such term loan are not amended before the Effective Date.
5.2.6 EMPLOYEES OF 3DX. Esenjay will make employment offers to
all, or substantially all, of 3DX's technical staff. However, acceptance
of such employment offer by the 3DX technical staff is not a condition
precedent to this Agreement.
5.2.7 UNEXERCISED 3DX OPTIONS. All issued and outstanding options
to purchase 3DX Common Stock shall have (i) been exercised to be effective
as of or before the Effective Date or (ii) terminated in accordance with
their terms as of or immediately prior to the merger contemplated hereby.
5.2.8 WAIVER OF ANTI-DILUTION ADJUSTMENT. All persons entitled to
receive, as a result of the transactions contemplated hereby, issuance of
3DX Common Stock after the date hereof pursuant to the provisions of
Section 1.3 of the Common Stock Subscription Agreement, dated as of June 3,
1998, among 3DX and the other parties thereto will have waived all of their
rights to receive such 3DX Common Stock.
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5.2.9 VOTING AGREEMENT. Concurrently with the execution of this
Agreement (i) each of 3DX's officers and directors who own, vote or
represent the owners of 3DX Common Stock (the "3DX Stockholders") shall
enter into a voting agreement (the "3DX Voting Agreements") that at 3DX's
stockholders' meeting, any adjournment thereof or any other meeting of the
holders of 3DX Common Stock, however called, or in connection with any
written consent of the holders of voting capital stock of 3DX, such 3DX
Stockholders shall vote or cause to be voted all of the shares of 3DX
Common Stock beneficially owned or controlled by them (a) in favor of the
merger, the execution and delivery by 3DX of this Agreement and the
approval of the terms of each of the other actions contemplated by this
Agreement and any actions required in furtherance thereof and hereof; and
(b) against any other action that is intended or could reasonably be
expected to impede, interfere with, delay, postpone, or materially
adversely affect the merger and the transactions contemplated by this
Agreement; and (ii) the 3DX Voting Agreements will be in full force and
effect as of the Effective Date. SCHEDULE 5.2.9 lists each such officer
and director entering into a 3DX Voting Agreement and the number of shares
of 3DX Common Stock bound by such agreement.
ARTICLE VI.
TERMINATION AND ABANDONMENT
6.1 TERMINATION. Anything contained in this Agreement to the contrary
notwithstanding, this Agreement may be terminated and the merger contemplated
hereby abandoned at any time (whether before or after the approval and adoption
thereof by the stockholders of 3DX or Esenjay) before the Effective Date:
6.1.1 BY MUTUAL CONSENT. By mutual consent of Esenjay and 3DX.
6.1.2 BY ESENJAY BECAUSE OF CONDITIONS PRECEDENT. By Esenjay, if
any condition set forth in Paragraph 5.2 hereof has not been met and has
not been waived.
6.1.3 BY ESENJAY BECAUSE OF MATERIAL ADVERSE CHANGE. By Esenjay,
if there has been a material adverse change in the financial condition or
business of 3DX since the date of financial statements contained in the
most recent Report referred to in Paragraph 2.1.4 filed with the Commission
under the Exchange Act.
6.1.4 BY 3DX BECAUSE OF CONDITIONS PRECEDENT. By 3DX, if any
condition set forth in Paragraph 5.1 hereof has not been met and has not
been waived.
6.1.5 BY 3DX BECAUSE OF MATERIAL ADVERSE CHANGE. By 3DX, if there
has been a material adverse change in the financial condition or business
of Esenjay since the date of the financial statements contained in the most
recent Report referred to in Paragraph 3.1.4 filed with the Commission
under the Exchange Act.
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6.1.6 By 3DX DUE TO A SUPERIOR 3DX TRANSACTION PROPOSAL. By 3DX
if, before the Effective Date, 3DX's stockholders or board of directors
shall have withdrawn or modified in a manner adverse to Esenjay their
approval of this Agreement or the merger contemplated hereby.
6.1.7 BY ESENJAY OR 3DX BECAUSE OF LEGAL PROCEEDINGS. By either
Esenjay or 3DX if any suit, action, or other proceeding shall be pending or
threatened by the federal or a state government before any court or
governmental agency, in which it is sought to restrain, prohibit, or
otherwise affect the consummation of the merger contemplated hereby.
6.1.8 BY ESENJAY OR 3DX IF MERGER NOT EFFECTIVE BY SEPTEMBER 15,
1999. By either Esenjay or 3DX, if the merger shall not have become
effective on or before September 15, 1999.
6.1.9 BY ESENJAY OR 3DX BECAUSE OF DUE DILIGENCE. By Esenjay or
3DX if in the course of completing their inspections pursuant to Paragraph
4.1.5., information is discovered that would constitute a material adverse
change as that term is defined in Paragraph 4.2.2. Esenjay and 3DX shall
have until 20 calendar days after the execution date of this Agreement (the
"Due Diligence Deadline") to complete their due diligence inspections.
6.2 TERMINATION BY BOARD OF DIRECTORS. An election of Esenjay to
terminate this Agreement and abandon the merger as provided in Paragraph 6.1
shall be exercised on behalf of Esenjay by its board of directors. An election
of 3DX to terminate this Agreement and abandon the merger as provided in
Paragraph 6.1 shall be exercised on behalf of 3DX by its board of directors.
6.3 EFFECT OF TERMINATION. In the event of the termination and
abandonment of this Agreement pursuant to and in accordance with the provisions
of Paragraph 6.1 hereof, this Agreement shall become void and have no effect,
without any liability on the part of any party hereto (or its stockholders or
controlling persons or directors or officers), except as otherwise provided in
this Agreement; PROVIDED, HOWEVER, that no party hereto shall waive any term or
condition hereof, unless in the judgment of the board of directors taking the
action, such waiver will not have a materially adverse effect on the benefits
intended under this Agreement to the stockholders of its corporation.
6.4 WAIVER OF CONDITIONS. Subject to the requirements of any applicable
law, any of the terms or conditions of this Agreement may be waived at any time
by the party which is entitled to the benefit thereof, by action taken by its
board of directors, the executive committee of its board of directors, or its
chief executive officer.
6.5 EXPENSE ON TERMINATION. Except as provided in Sections 6.5.1 through
6.5.5, if the merger contemplated hereby is abandoned pursuant to and in
accordance with the provisions of Paragraph 6.1 hereof, all expenses will be
paid by the party incurring them.
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6.5.1 FAILURE TO OBTAIN SHAREHOLDER APPROVAL. If 3DX abandons
this Agreement due to its failure to obtain the requisite approval of a
majority of its shareholders, then 3DX shall pay all of Esenjay's
reasonable costs and expenses, including legal fees and expenses, costs and
expenses Esenjay incurs in connection with any fairness opinion it receives
from an independent third party with respect to the transactions
contemplated by this Agreement, and other out-of-pocket expenses incurred
in connection with the negotiation and implementation of this Agreement
(collectively, "Transaction Expenses") plus a termination fee equal to
$250,000 (the "Termination Fee").
6.5.2 ACCEPTANCE OF SUPERIOR 3DX TRANSACTION PROPOSALS. If (i) (A)
this Agreement is terminated by 3DX pursuant to Paragraph 6.1.6 hereof or
(B) 3DX shall violate the covenant set forth in Paragraph 4.3.11.1 hereof,
3DX shall pay to Esenjay the Termination Fee plus Esenjay's Transaction
Expenses.
6.5.3 FAILURE TO RECOMMEND TO STOCKHOLDERS OR WITHDRAWAL OF
FAIRNESS OPINION. If 3DX modifies or withdraws its board of directors'
recommendation or stockholders' vote in favor of the transactions
contemplated by this Agreement or if 3DX abandons this Agreement because
the Fairness Opinion has been withdrawn after issuance, 3DX will pay all of
Esenjay's Transaction Expenses plus the Termination Fee.
6.5.4 PAYMENT OF TRANSACTION EXPENSES OR TERMINATION FEE. 3DX
agrees that the Termination Fee plus Esenjay's Transaction Expenses is a
reasonable determination, in light of the uncertainty and difficulty of
ascertaining the exact amount thereof, of the loss that Esenjay would
actually sustain in respect of one of the events described in Paragraph
6.5.1 and Paragraph 6.5.2. Any party required to pay Transaction Expenses
and/or a Termination Fee pursuant to this Section 6.5 shall pay such
Transaction Expenses and/or Termination Fee to the party entitled thereto
by wire transfer in immediately available funds promptly, but in no event
later than two business days after the date of the abandonment or
termination.
6.5.5 EXCLUSIVE REMEDY. The payment of Transaction Expenses and
the Termination Fee shall be the sole remedy of any party hereto in
connection with the abandonment of this Agreement by the other party in any
of the circumstances described in this Section 6.5. Nothing in this
Section 6.5 limits any party's rights to indemnification under Article 7 of
this Agreement.
ARTICLE VII.
ADDITIONAL AGREEMENTS
7.1 INDEMNIFICATION BY 3DX AS TO JOINT PROXY STATEMENT/PROSPECTUS. 3DX
agrees to indemnify and hold harmless Esenjay and its officers and directors and
each person who controls Esenjay within the meaning of Section 15 of the
Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") against any and all losses, claims, damages, or
liabilities, joint or several, to which any of them may become subject under the
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Securities Act, the Exchange Act or any other statute or common law, and to
reimburse them for any legal or other expenses incurred by them in connection
with investigating any claims and defending any actions, to the extent such
losses, claims, damages, liabilities, or actions arise out of or are based upon
(i) any false, misleading or untrue statement or alleged false, misleading or
untrue statement of a material fact, insofar as it relates to 3DX, contained in
the Joint Proxy Statement/Prospectus in the form mailed to the stockholders of
Esenjay or (ii) the omission or alleged omission to state in the Joint Proxy
Statement/Prospectus a material fact required to be stated therein or necessary
to make the statements therein not misleading, and insofar as the same relates
to 3DX.
7.2 INDEMNIFICATION BY ESENJAY AS TO JOINT PROXY STATEMENT/PROSPECTUS.
Esenjay agrees to indemnify and hold harmless 3DX and its officers and directors
and each person who controls 3DX within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act against any and all losses,
claims, damages, or liabilities, joint or several, to which any of them may
become subject under the Securities Act, the Exchange Act or any other statute
or common law, and to reimburse them for any legal or other expenses incurred by
them in connection with investigating any claims and defending any actions, to
the extent such losses, claims, damages, liabilities, or actions arise out of or
are based upon (i) any false, misleading or untrue statement or alleged false,
misleading or untrue statement of a material fact, insofar as it relates to
Esenjay contained in the Joint Proxy Statement/Prospectus in the form mailed to
the stockholders of 3DX or (ii) the omission or alleged omission to state in the
Joint Proxy Statement/Prospectus a material fact required to be stated therein
or necessary to make the statements therein not misleading, and insofar as the
same relates to Esenjay.
ARTICLE VIII.
MISCELLANEOUS
8.1. ENTIRETY. This Agreement and the Confidentiality Agreements dated
August 25, 1998 and August 26, 1998, between Esenjay and 3DX embody the entire
agreement between the parties with respect to the subject matter hereof, and all
prior agreements between the parties with respect thereto are hereby superseded
in their entirety.
8.2. COUNTERPARTS. Any number of counterparts of this Agreement may be
executed and each such counterpart shall be deemed to be an original instrument,
but all such counterparts together shall constitute but one instrument.
8.3. NOTICES AND WAIVERS. Any notice or waiver to be given to any party
hereto shall be in writing and shall be delivered by courier, sent by facsimile
transmission or first class registered or certified mail, postage prepaid.
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IF TO ESENJAY
Addressed to: With a copy to:
Esenjay Exploration, Inc. Porter & Hedges, L.L.P.
500 Dallas, Suite 2920 700 Louisiana, 35th Floor
Houston, Texas 77002 Houston, Texas 77210-4744
Attention: David B. Christofferson Attention: Samuel N. Allen
Facsimile: (713) 739-7124 Facsimile:` (713) 226-0229
IF TO 3DX
Addressed to: With a copy to:
3DX Technologies Inc. Gardere Wynne Sewell & Riggs, L.L.P.
12012 Wickchester, Suite 250 1000 Louisiana, 34th Floor
Houston, Texas 77079 Houston, Texas 77002
Attention: Russell L. Allen Attention: Bryan W. Baker
Facsimile: (281) 579-9227 Facsimile: (713) 276-6754
Any communication so addressed and mailed by first-class registered
or certified mail, postage prepaid, shall be deemed to be received on the third
business day after so mailed, and if delivered by courier or facsimile to such
address, upon delivery during normal business hours on any business day.
8.4. TERMINATION OF REPRESENTATIONS, WARRANTIES, ETC. The
respective representations and warranties contained in Articles II and III shall
expire with, and be terminated and extinguished by, the merger pursuant to this
Agreement at the time of the consummation thereof on the Effective Date. This
Paragraph 8.4 shall have no effect upon any other right or obligation of the
parties in connection with this Agreement or otherwise, whether to be exercised
or performed before or after the Effective Date.
8.5. TABLE OF CONTENTS AND CAPTIONS. The table of contents and
captions contained in this Agreement are solely for convenient reference and
shall not be deemed to affect the meaning or interpretation of any article,
section, or paragraph hereof.
8.6. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and shall inure to the benefit of and be enforceable by the successors and
assigns of the parties hereto.
8.7. SEVERABILITY. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction to be invalid,
void, or unenforceable, the remainder of the terms, provisions, covenants and
restrictions shall remain in full force and effect and shall in no way be
affected, impaired or invalidated. It is hereby stipulated and declared to be
the intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such which may
be hereafter declared invalid, void or unenforceable.
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8.8. APPLICABLE LAW. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Texas (except
to the extent that the form and content of the Certificate of Merger and the
consequences of the filing thereof shall be governed by the general corporation
law of the State of Delaware).
8.9. PUBLIC ANNOUNCEMENTS. The parties agree that before the
Effective Date that they shall consult with each other before the making of any
public announcement regarding the existence of this Agreement, the contents
hereof or the transactions contemplated hereby, and to obtain the prior approval
of the other party as to the content of such announcement, which approval shall
not be unreasonably withheld. However, the foregoing shall not apply to any
announcement or written statement which, upon the written advice of counsel, is
required by law to be made, except that the party required to make such
announcement shall, whenever practicable, consult with and solicit prior
approval from such other party concerning the timing and content of such legally
required announcement or statement before it is made.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be signed in their respective corporate names by their respective duly
authorized representatives, all as of the day and year first above written.
THE PARTIES TO THE MERGER CONTEMPLATED BY THIS AGREEMENT:
3DX TECHNOLOGIES, INC.
By: /s/ Ronald P. Nowak
----------------------------------------
Ronald P. Nowak, PRESIDENT
ESENJAY EXPLORATION, INC.
By: /s/ Michael E. Johnson
-----------------------------------
Michael E. Johnson, PRESIDENT
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APPENDIX I
STATEMENT
OF
ESENJAY EXPLORATION, INC.
ESTABLISHING THE DESIGNATIONS, PREFERENCES,
LIMITATIONS AND RELATIVE RIGHTS OF ITS
SERIES A CONVERTIBLE PREFERRED STOCK
Pursuant to Section 151 of the Delaware General Corporation Law, Esenjay
Exploration, Inc., a corporation organized and existing under the Delaware
General Corporation Law (the "Company"),
DOES HEREBY CERTIFY that pursuant to the authority conferred upon the Board
of Directors by the Certificate of Incorporation, as amended, of the Company,
and pursuant to Section 151 of the Delaware General Corporation Law, the Board
of Directors, at a meeting duly held on _______________, 1999, duly adopted a
resolution providing for the issuance of a series of _______ shares of Series A
Convertible Preferred Stock, which resolution is and reads as follows:
RESOLVED, that pursuant to the authority expressly granted to and
invested in the Board of Directors of Esenjay Exploration, Inc. (the
"Company") by the provisions of the Certificate of Incorporation of
the Company, as amended, a series of the preferred stock, par value
$.01 per share, of the Company be, and it hereby is, established; and
FURTHER RESOLVED, that the series of preferred stock of the
Company be, and it hereby is, given the distinctive designation of
"Series A Convertible Preferred Stock"; and
FURTHER RESOLVED, that the Series A Convertible Preferred Stock
shall consist of _______ shares; and
FURTHER RESOLVED, that the Series A Convertible Preferred Stock
shall have the powers and preferences, and the relative,
participating, optional and other rights, and the qualifications,
limitations, and restrictions thereon set forth below:
<PAGE>
Section 1. DESIGNATION OF SERIES; RANK. The shares of such series
shall be designated as the "Series A Convertible Preferred Stock" (the
"Convertible Preferred Stock") and the number of shares initially
constituting such series shall be up to _________. The Convertible Preferred
Stock, with respect to distributions upon liquidation, dissolution or winding
up, ranks (i) junior to any series of preferred stock of the Company the
terms of which specifically provide that such series ranks senior to the
Convertible Preferred Stock (the "Senior Stock"), (ii) PARI PASSU with any
other series of preferred stock of the Company the terms of which
specifically provide that such series ranks PARI PASSU with the Convertible
Preferred Stock (the "Parity Stock") and (iii) senior to the common stock,
par value $.01 per share, of the Company ("Common Stock") and any series of
preferred stock the terms of which specifically provide that such series
ranks junior and subordinate to the Convertible Preferred Stock (the "Junior
Stock"). So long as any shares of Convertible Preferred Stock remain
outstanding, the Company's Certificate of Incorporation shall specify that
any other class or series of stock issued, other than Common Stock, is either
Senior Stock, Parity Stock or Junior Stock. The Convertible Preferred Stock
shall be subject to the creation of Senior Stock, Parity Stock and Junior
Stock; PROVIDED, HOWEVER, that the Company shall not issue any Senior Stock
or Parity Stock to Aspect Resources LLC or its affiliates or Esenjay
Petroleum Corporation or its affiliates without the affirmative vote of
two-thirds of the Company's then existing board of directors who cast votes
on the issuance of such Senior Stock or Parity Stock.
Section 2. DIVIDENDS The holders of Convertible Preferred Stock shall
be entitled to receive dividends paid on the Common Stock as if each share of
Convertible Preferred Stock held by such holders had been fully converted
into one share of Common Stock (the number of shares of Common Stock into
which each share of Convertible Preferred Stock is deemed to be convertible
is referred to herein as the "Conversion Price").
Section 3. LIQUIDATION PREFERENCE
3.1 DISTRIBUTION AMOUNT. In the event of a voluntary or
involuntary liquidation, dissolution or winding up of the Company, the
holders of shares of the Convertible Preferred Stock are entitled to receive
out of the assets of the Company available for distribution to shareholders,
before any distribution of assets is made to holders of Common Stock or any
other stock ranking junior to the Convertible Preferred Stock as to
liquidation, a liquidating distribution as to each share in an amount equal
to the greater of (i) $1.875 or (ii) an amount equal to the liquidating
distribution paid to the holders of the number of shares of Common Stock into
which such share of Convertible Preferred Stock is deemed to be convertible
at the Conversion Price, plus accumulated and unpaid dividends, if any. The
holders of Convertible Preferred Stock and any Parity Stock hereafter issued
that rank on a parity as to liquidation rights with the Convertible Preferred
Stock will be entitled to share ratably, in accordance with the respective
preferential amounts payable on such stock, in any liquidating distribution
that is not sufficient to pay in full the aggregate of the amounts payable
thereon. Neither a consolidation, merger or other business combination of
the Company with or into another corporation or other entity nor a sale,
lease, or exchange or transfer of all or part of the Company's assets for
cash, securities or other property will be considered a liquidation,
dissolution or winding up of the Company.
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3.2 NON-CASH DISTRIBUTIONS. If any of the assets of the Company
are to be distributed other than in cash under this Section 3, then the Board
of Directors of the Company shall promptly engage independent competent
appraisers to determine the value of the assets to be distributed to the
holders of shares of the Convertible Preferred Stock. The Company shall,
upon receipt of such appraiser's valuation, give prompt written notice to
each holder of shares of Convertible Preferred Stock of the appraiser's
valuation.
Section 4. VOTING
4.1 VOTING RIGHTS. The holders of the Convertible Preferred
Stock will have no voting rights except as described in this Section 4 or as
required by law. In exercising any such vote, each outstanding share of
Convertible Preferred Stock will be entitled to one vote, excluding shares
held by the Company or any entity controlled by the Company, which shares
shall have no voting rights.
4.2 ELECTION OF DIRECTORS. For so long as any shares of the
Convertible Preferred Stock remain issued and outstanding, the holders
thereof, voting separately as a class, shall have the right to elect one
director to serve on the Company's Board of Directors. The Company shall
cause to be nominated as a candidate for such director position any person
that, at least 60 calendar days before any meeting (i) is designated in
writing by a holder of Convertible Preferred Stock, (ii) who agrees in
writing to serve if elected and (iii) who provides the Company with a
reasonable description of his personal and business background and
qualifications to serve as a director of the Company; PROVIDED, HOWEVER, that
the Company may refuse to cause any person to be so nominated if, based on a
review of such person's qualifications, the Board of Directors reasonably
concludes that such person is unfit to serve as director of the Company.
From and after such appointment (i) such director shall serve until the next
annual meeting of the shareholders of the Company and until his successor has
been elected and qualifies and (ii) at each annual meeting of the
shareholders of the Company, the Convertible Preferred Stock, voting as a
single class, shall be entitled to elect one director of the Company.
Cumulative voting by holders of Convertible Preferred Stock is prohibited.
Any vacancy on the Board of Directors caused by the death or resignation of a
director so elected or appointed shall be filled at the next annual meeting
of the shareholders of the Company, PROVIDED, HOWEVER, that the Board of
Directors shall promptly appoint to fill such vacancy any qualified person
designated in writing by the holders of more than 50% of the then outstanding
Convertible Preferred Stock. The term of office of the director designated
by the holders of the Convertible Preferred Stock will terminate immediately
upon there being no shares of Convertible Preferred Stock remaining
outstanding.
4.3 AMENDMENTS TO ARTICLES AND BYLAWS. So long as Convertible
Preferred Stock is outstanding, the Company shall not, without the
affirmative vote of the holders of at least 66-2/3% of all outstanding shares
of Convertible Preferred Stock, voting separately as a class (i) amend, alter
or repeal any provision of the certificate of incorporation or the bylaws of
the Company so as to adversely affect the designations, preferences,
limitations and relative rights of the Convertible Preferred Stock or (ii)
effect any reclassification of the Convertible Preferred Stock.
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4.4 AMENDMENT OF RIGHTS OF CONVERTIBLE PREFERRED STOCK. The
Company shall not, without the affirmative vote of the holders of at least
66-2/3% of all outstanding shares of Convertible Preferred Stock, amend,
alter or repeal any provision of this Statement of Designations, PROVIDED,
HOWEVER, that the Company may, by any means authorized by law and without any
vote of the holders of shares of Convertible Preferred Stock, make technical,
corrective, administrative or similar changes in this Statement of
Designations that do not, individually or in the aggregate, adversely affect
the rights or preferences of the holders of shares of Convertible Preferred
Stock.
Section 5. REDEMPTION
5.1 OPTIONAL REDEMPTION.
(a) For a period of one year from the Effective Date (as
defined in Paragraph 1.3 of the Plan and Agreement of Merger of Esenjay
Exploration, Inc. and 3DX Technologies, Inc. dated May __, 1999), the Company
shall have the right to redeem any or all of the outstanding shares of
Convertible Preferred Stock at a per share redemption price (the "Redemption
Price") equal to $1.925, plus all accumulated but unpaid dividends, if any.
(b) No sinking fund shall be established for the Convertible
Preferred Stock.
(c) Notice of any proposed redemption of shares of Convertible
Preferred Stock shall be mailed by means of first class mail, postage
prepaid, addressed to the holders of record of the shares of Convertible
Preferred Stock to be redeemed, at their respective addresses then appearing
on the books of the Company, at least 20, but not more than 60 days before
the date fixed for such redemption (herein referred to as the "Redemption
Date"). Each such notice shall specify (i) the Redemption Date, (ii) the
Redemption Price, (iii) the place for payment and for delivering the stock
certificate(s) and transfer instrument(s) in order to collect the Redemption
Price and (iv) the number of shares, and the class or series of, Convertible
Preferred Stock to be redeemed. Any notice mailed in such manner shall be
conclusively deemed to have been duly given when mailed whether or not such
notice is in fact received. If less than all the outstanding shares of
Convertible Preferred Stock are to be redeemed, the Company will select those
to be redeemed PRO RATA, by lot or in such other manner determined by the
Board of Directors. In order to facilitate the redemption of the shares of
Convertible Preferred Stock, the Board of Directors may fix a record date for
determination of holders of Convertible Preferred Stock to be redeemed, which
date shall not be more than 60 and less than 10 days before the Redemption
Date with respect thereto.
(d) The holder of any shares of Convertible Preferred Stock
that are redeemed shall not be entitled to receive payment of the Redemption
Price for such shares until such holder shall cause to be delivered to the
place specified in the notice given with respect to such redemption (i) the
certificate(s) representing such shares of Convertible Preferred Stock, and
(ii) transfer instrument(s) satisfactory to the Company and sufficient to
transfer such shares of Convertible Preferred Stock to the Company free of
any adverse interest. No interest shall accrue on the Redemption Price of
any share of Convertible Preferred Stock after its Redemption Date.
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(e) At the close of business on the Redemption Date for any
share of Convertible Preferred Stock to be redeemed, such share shall
(provided the Redemption Price of such share has been paid or properly
provided for) be deemed to cease to be outstanding and all rights of any
person other than the Company in such share shall be extinguished on the
Redemption Date for such share except for the right to receive the Redemption
Price, without interest, for such share in accordance with the provisions of
this Section 5, subject to applicable escheat laws.
(f) If any shares of Convertible Preferred Stock shall be
converted into Common Stock pursuant to Section 6, then (i) the Company shall
not have the right to redeem such shares, and (ii) any funds that shall be
been deposited for the payment of the Redemption Price for such shares shall
be returned to the Company immediately after such conversion.
5.2 NO MANDATORY REDEMPTION. Except as expressly set forth
herein, no holder of Convertible Preferred Stock shall have any right to
require the Company to redeem any or all of the shares of Convertible
Preferred Stock.
Section 6. CONVERSION RIGHTS
6.1 OPTIONAL CONVERSION.
(a) If the average Closing Price (defined in Section 6.4(e)) of
the Common Stock for each trading day beginning on the first day of the
twelfth calendar month following the Effective Date and ending on the last
day of the twelfth calendar month following the Effective Date (the "Average
Closing Price") is less than $1.875 (the "Base Conversion Price") per share,
then at any time during the period beginning the first day of the thirteenth
calendar month following the Effective Date and ending on the last day of the
thirteenth calendar month following the Effective Date, a holder of
Convertible Preferred Stock may cause the Company to convert all or any
portion of his Convertible Preferred Stock into the consideration described
below. The conversion price per share (the "Optional Conversion Price") for
all such shares of Convertible Preferred Stock shall be, at the Company's
option, either (i) a number of shares of Common Stock determined by dividing
$1.875 by the Average Closing Price, to a maximum of 3.75 shares of Common
Stock (the "Maximum Optional Conversion Shares") for each share of
Convertible Preferred Stock converted, with the total shares of Common Stock
to be issued to any holder of Convertible Preferred Stock to be rounded to
the nearest whole share; or (ii) $1.65 in cash (the "Cash Conversion Amount")
for each share of Convertible Preferred Stock converted.
(b) If the Average Closing Price is less than $1.875 per share,
then the Company shall, no later than the third business day following the
first day of the thirteenth calendar month following the Effective Date, mail
to each holder of Convertible Preferred Stock, at its expense, a notice
setting forth (i) the Average Closing Price, (ii) whether the Company has
elected to issue Common Stock or cash to any holder exercising its rights
under Section 6.1(a), and (iii) a statement that the shares of Convertible
Preferred Stock will automatically convert to Common Stock without
5
<PAGE>
further notice on the first day of the fourteenth calendar month following
the Effective Date unless converted before that time.
6.2 AUTOMATIC CONVERSION. On (i) the first day of the
thirteenth calendar month following the Effective Date, if the Average
Closing Price is greater than or equal to the Base Conversion Price; or (ii)
the first day of the fourteenth calendar month following the Effective Date
if the Average Closing Price is less than the Base Conversion Price and the
holder has not elected to convert under Section 6.1(a), each share of
Convertible Preferred Stock then outstanding shall, immediately and
automatically, without further notice, be converted into one share of Common
Stock, as adjusted pursuant to Section 6.4; provided, however, that such
automatic conversion shall not be made during the occurance and continuance
of an Event of Bankruptcy or any liquidation thereunder. As used herein,
"Event of Bankruptcy" shall have occurred if the Company shall have commenced
a voluntary case or other proceeding seeking liquidation, reorganization or
other relief with respect to itself or its debts under any bankruptcy,
insolvency or other similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian or other similar
official of it or any substantial part of its property, or shall have
consented to any such relief or to the appointment of or taking possession by
any such official in an involuntary case or other proceeding commenced
against it; or if an involuntary case or other proceeding shall have been
commenced against the Company seeking liquidation, reorganization or other
relief with respect to it or its debts under any bankruptcy, insolvency or
other similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of it or
any substantial part of its property (PROVIDED, HOWEVER, the Event of
Bankruptcy shall not be deemed to be continuing if such involuntary case or
other proceeding shall have been dismissed); or if an order for relief shall
be entered against the Company under the federal bankruptcy laws as now or
hereafter in effect.
6.3 MECHANICS OF CONVERSION.
(a) No fractional share of Common Stock shall be issued upon
conversion of shares of Convertible Preferred Stock, and in lieu thereof, the
holder shall receive, at the Company's option, either a number of whole
shares of Common Stock determined by rounding the number of shares of Common
Stock so issuable to the nearest whole share or an amount of cash equal to
the value of such fractional share of Common Stock based on the Closing Price
of the Common Stock on the day before the conversion. Before any holder of
shares of Convertible Preferred Stock shall be entitled to convert his
Convertible Preferred Stock into shares of Common Stock (or if Section
6.1(a)(ii) applies, cash), he shall surrender the certificate or certificates
therefor, duly endorsed for each share of Convertible Preferred Stock to be
converted, at the office of the Company or of any transfer agent for the
Company, and he shall give at least three business days' prior written notice
to the Company at such office (i) that he elects to convert his Convertible
Preferred Stock, and (ii) shall state therein his name or the name or names
of his nominees in which he wishes the certificate or certificates for shares
of Common Stock to be issued and, if the conversion is pursuant to Section
6.1(a)(ii), the person or persons he wishes to receive any cash. The Company
shall, as soon as practicable thereafter, but not later three business days,
issue and deliver at such office to
6
<PAGE>
such holder of shares, or to his nominee or nominees, a certificate or
certificates for the number of shares of Common Stock to which he shall be
entitled, or the cash to which he is entitled, as the case may be. Except as
set forth in this Section 6, such conversion shall be deemed to have been
made immediately before the close of business on the day of the delivery of
the certificate for the shares of Convertible Preferred Stock and the person
or persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders
of such shares of Common Stock on such date. Upon conversion of only a
portion of the number of shares of Convertible Preferred Stock represented by
a certificate so surrendered for conversion, the Company shall issue and
deliver to the holder a balance certificate representing the number of
unconverted shares of Convertible Preferred Stock.
(b) If more than one certificate representing shares of
Convertible Preferred Stock shall be surrendered for conversion at one time
by the same holder, the number of full shares issuable or the amount of cash
payable upon conversion thereof shall be computed on the basis of the
aggregate number of shares of Convertible Preferred Stock represented by such
certificates, or the specified portions thereof to be converted, so
surrendered.
6.4 ADJUSTMENTS TO REDEMPTION PRICE, CONVERSION PRICE AND
OPTIONAL CONVERSION PRICE. The Redemption Price, Conversion Price and
Optional Conversion Price shall be adjusted from time to time as follows:
(a) In case the Company shall hereafter (i) pay a dividend or
make a distribution on its Common Stock in shares of Common Stock, (ii)
subdivide its outstanding shares of Common Stock into a greater number of
shares, or (iii) combine its outstanding shares of Common Stock into a
smaller number of shares, the Redemption Price and Conversion Price in effect
immediately before such action shall be adjusted so that the holder of any
share thereafter surrendered for conversion shall be entitled to receive the
number of shares of Common Stock or other capital stock of the Company that
he would have owned immediately following such action had such share been
redeemed or converted immediately prior thereto. An adjustment made pursuant
to this subsection (a) shall become effective immediately after the record
date in the case of a dividend or distribution and shall become effective
immediately after the effective date of a subdivision or combination.
(c) In case the Company shall hereafter issue rights or warrants
to holders of its outstanding shares of Common Stock generally entitling them
(for a period expiring within 45 days after the record date mentioned below)
to subscribe for or purchase shares of Common Stock at a price per share less
than the Closing Price per share of the Common Stock on the record date
mentioned below, the Redemption Price and Conversion Price shall be adjusted
so that the Redemption Price and Conversion Price shall equal the price
determined by multiplying the Redemption Price and Conversion Price in effect
immediately before the date of issuance of such rights or warrants by a
fraction of which the denominator shall be the Closing Price on such record
date minus the discount to such Closing Price with respect to the exercise of
such rights or warrants, and of which the numerator shall be the Closing
Price on such record date. Such adjustment shall
7
<PAGE>
become effective immediately after the record date for the determination of
shareholders entitled to receive such rights or warrants.
(c) In case the Company shall hereafter distribute to holders of
its outstanding Common Stock generally evidences of its indebtedness or
assets (excluding any cash dividend paid from retained earnings of the
Company and dividends or distributions payable in stock for which adjustment
is made pursuant to subsection (a) above) or rights or warrants to subscribe
to securities of the Company (excluding those referred to in subsection (b)
above), then in each such case the Conversion Price of the shares of Common
Stock shall be adjusted so that the Conversion Price shall equal the price
determined by multiplying the Conversion Price in effect immediately before
the date of such distribution by a fraction of which the denominator shall be
the current market price per share (determined as provided below) of the
Common Stock on the record date mentioned below less the then fair market
value (as determined by the Board of Directors, whose determination shall be
conclusive and shall be described in a statement filed with any conversion
agent) of the portion of the evidences of indebtedness or assets so
distributed to the holder of one share of Common Stock or of such
subscription rights or warrants applicable to one share of Common Stock, and
of which the numerator shall be such current market price per share of Common
Stock. Such adjustment shall become effective immediately after the record
date for the determination of shareholders entitled to receive such
distribution.
(d) In the case of any optional conversion pursuant to Section
6.1(a), the calculation of the number of shares of Common Stock issuable or
the amount of cash payable upon such conversion, shall be made after
adjusting the Base Conversion Price, the Maximum Optional Conversion Shares
and the Cash Conversion Amount pursuant to the provisions of paragraphs
6.4(a), (b) and (c).
(e) For the purpose of any computation under subsection (b), (c)
and (d) above, the current mark et price per share of the Common Stock on any
date shall be deemed to be the Closing Price.
(f) The term "Closing Price," means (i) the last sale price of
the Common Stock reported on the NASDAQ Small-Cap Market, (ii) the last sale
price regular way for the Common Stock as reported in the consolidated
transaction reporting system of any stock exchange on which the Common Stock
may then be listed for trading, or (iii) if the Common Stock is not quoted on
the NASDAQ Small-Cap Market or is not listed for trading on a national
securities exchange, the closing bid price is published by NASDAQ (or, if
such prices are not so published by NASDAQ, the average of the high and low
bid prices for the Common Stock each trading day, as furnished by any New
York Stock Exchange member firm selected from time to time by the Company for
such purpose).
(g) In the case of any reclassification of the Common Stock
(other than a change in par value or a change from par value to no par value
or from no par value to par value), any consolidation of the Company with, or
merger of the Company with or into, any other person, any
8
<PAGE>
merger of any person into the Company (other than a merger that does not
result in any reclassification of, or change in, the outstanding shares of
Common Stock), any sale or transfer of all or substantially all of the assets
of the Company (other than a sale-leaseback, collateral assignment, mortgage
or other similar financing transaction), or any compulsory share exchange
whereby the Common Stock is converted into other securities, cash or other
properties, then each share of Convertible Preferred Stock shall thereafter
be convertible into the number of shares of stock or other securities, cash
or other property to which a holder of the number of shares of Common Stock
into which such share of Convertible Preferred Stock might have been
converted immediately before such merger or conveyance would have been
entitled upon such merger or conveyance; PROVIDED, HOWEVER, that if the
Company and another entity consummate a merger in which the Company is not
the surviving entity and the holders of the Convertible Preferred Stock would
receive securities as consideration in such merger, then the Company will
redeem all issued and outstanding shares of Convertible Preferred Stock
unless such securities to be received by the holders thereof as merger
consideration contain the same rights and preferences as the Convertible
Preferred Stock.
(h) Notwithstanding the foregoing provisions, no adjustment in
the Conversion Price will be made until all accumulated adjustments to the
Conversion Price are equal to 1% or more of the Conversion Price immediately
preceding the date of the most recent prior adjustment. Any adjustments to
the Conversion Price not made effective shall be carried forward and added to
the next adjustment to the Conversion Price. All calculations shall be made
to the nearest cent or to the nearest 1/100th of a share, as the case may be.
Anything in this Section to the contrary notwithstanding, the Company shall
be entitled to make such increases in the Conversion Price, in addition to
those required hereby, as the Company in its discretion shall determine to be
advisable in order that any stock dividend, subdivision of shares,
distribution or rights to purchase stock or securities, or distribution of
securities convertible into or exchangeable for stock hereafter made by the
Company to its shareholders shall not be taxable.
(i) The Company may from time to time increase the Conversion
Price by any amount for any period of not fewer than 20 consecutive days, in
which case the Company shall give at least 15 days advance written notice of
such increase to all holders of the shares of Convertible Preferred Stock.
The Company may, in its sole discretion, make such increases in the
Conversion Price, in addition to those set forth in this Section 6, as the
Board of Directors of the Company deems advisable to avoid or diminish any
income tax to holders of shares of the Common Stock as a result of any cash
distribution of stock or issuance or rights or warrants to purchase shares of
the Common Stock or as a result of any other event which results in increased
income tax to the holders of shares of the Common Stock.
6.5 TRANSFER COSTS. The Company shall pay any and all
documentary stamp and other transaction taxes attributable to the issuance or
delivery of shares of Common Stock upon conversion of any shares of
Convertible Preferred Stock; PROVIDED, HOWEVER, that the Company shall not be
required to pay any tax that may be payable in respect of any transfer
involved in the issue or delivery of shares of Common Stock in a name other
than that of the holder of the Convertible
9
<PAGE>
Preferred Stock to be converted and no such issue or delivery shall be made
unless and until the person requesting such issue or delivery had paid to the
Company the amount of any such tax or has established, to the satisfaction of
the Company, that such tax has been paid.
6.6 CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Redemption Price, Conversion Price or
Optional Conversion Price pursuant to this Section 6, the Company at its
expense, shall promptly compute such adjustment or readjustment in accordance
with the terms hereof and furnish to each holder of shares of Convertible
Preferred Stock, a certificate setting forth such adjustment or readjustment
and showing in detail the facts upon which such adjustment or readjustment is
based. The Company shall, upon the written request at any time of any holder
of shares of Convertible Preferred Stock, furnish or cause to be furnished to
such holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Conversion Price in effect and (iii) the number of
shares of Common Stock that would be received by the holder upon conversion
of shares of Convertible Preferred Stock.
6.7 COMMON RESERVED. The Company shall reserve and keep
available out of its authorized but unissued shares of Common Stock such
number of shares of Common Stock as shall from time to time be sufficient to
effect conversion of the shares of Convertible Preferred Stock.
6.8 STATUS OF SHARES. All shares of Common Stock that may be
issued upon conversion of the shares of Convertible Preferred Stock will,
upon issuance by the Company, be validly issued, fully paid and nonassessable
and free from all taxes, liens and charges with respect to the issuance
thereof and free from preemptive rights.
Section 7. STATUS OF REACQUIRED SHARES OF CONVERTIBLE PREFERRED STOCK.
Shares of Convertible Preferred Stock issued and reacquired by the Company
(including, without limitation, shares of Convertible Preferred Stock that
have been converted into shares of Common Stock) shall not be reissued by the
Company as shares of Convertible Preferred Stock but shall have the status of
authorized and unissued shares of Preferred stock, undesignated as to series,
subject to later issuance.
Section 8. PREEMPTIVE RIGHTS. The holders of shares of Convertible
Preferred Stock are not entitled to any preemptive or subscription rights in
respect of any securities of the Company.
Section 9. NOTICES. Any notice required hereby to be given to the
holders of shares of Convertible Preferred Stock shall be deemed given if
deposited in the United States mail, postage prepaid, and addressed to each
holder of record at his address appearing on the books of the Company.
10
<PAGE>
IN WITNESS WHEREOF, the Company has caused this statement to be duly
executed by its President this ____ day of ______________, 1999.
ESENJAY EXPLORATION, INC.
By:
-------------------------------------------
Michael E. Johnson, PRESIDENT
11
<PAGE>
SCHEDULE 3.1.4
REPORTS AND FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
FORM TYPE FORM DESCRIPTION DATE FILED
- -------------------------------------------------------------------------------
<S> <C> <C>
10KSB40/A Annual Report 4/30/99
- -------------------------------------------------------------------------------
10KSB Annual Report 4/15/99
- -------------------------------------------------------------------------------
NT 10-K Extension Annual Report Extension 4/1/99
- -------------------------------------------------------------------------------
424B1 Prospectuses 7/17/98
- -------------------------------------------------------------------------------
SB-2/A Registration Statement 7/16/98
- -------------------------------------------------------------------------------
8-A12B/A Registration Statement 7/14/98
- -------------------------------------------------------------------------------
SB-2 Registration Statement 6/3/98
- -------------------------------------------------------------------------------
424A Prospectuses 5/29/98
- -------------------------------------------------------------------------------
SB-2 Registration Statement 5/26/98
- -------------------------------------------------------------------------------
DEFS14A Proxy Statement 4/24/98
- -------------------------------------------------------------------------------
DEFS14A Proxy Statement 9/30/97
- -------------------------------------------------------------------------------
DEF14A Proxy Statement 4/30/97
- -------------------------------------------------------------------------------
DEF14A Proxy Statement 4/30/97
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
SCHEDULE 3.1.5.
LIABILITIES
None.
<PAGE>
SCHEDULE 3.1.6.
CERTAIN CHANGES AND EVENTS
FINANCIAL CHANGE
None.
PROPERTY DAMAGE
None.
DIVIDENDS
None.
CAPITALIZATION CHANGE
None.
LABOR DISPUTES
None.
OTHER MATERIAL CHANGES
None.
<PAGE>
SCHEDULES TO
PLAN AND AGREEMENT OF MERGER
OF
ESENJAY EXPLORATION, INC.
AND
3DX TECHNOLOGIES, INC.
SCHEDULE 2.1.2
EFFECT OF AGREEMENT ON OTHER OBLIGATIONS
1. The consummation of the Merger will create an Event of Default pursuant
to the terms of 3DX's Credit Agreement dated December 18, 1997 with
certain financial institutions and NationsBank of Texas, N.A. as Agent.
SCHEDULE 2.1.4
REPORTS TO THE COMMISSION
Form Date Filed
---- ----------
10-K 03-28-1997
10-K 03-31-1998
10-K/A 04-30-1997
10-K/A 11-03-1998
10-K405 03-26-1999
10-K/A 04-30-1999
10-Q 05-15-1997
10-Q 08-14-1997
10-Q 11-14-1997
10-Q 05-20-1998
10-Q 08-14-1998
10-Q 11-13-1998
424B3 11-17-1998
<PAGE>
Form Date Filed
---- ----------
424B4 12-23-1996
8-A12G 12-09-1996
8-K 06-16-1998
8-K 09-09-1998
8-K 11-10-1998
8-K 01-12-1999
8-K 04-09-1999
DEF 14A 05-21-1997
DEF 14A 04-29-1998
DEFS14A 07-21-1998
NT 10-Q 05-18-1998
PRE 14A 05-08-1997
PRES14A 07-08-1998
S-1 10-18-1996
S-1/A 11-27-1996
S-1/A 12-16-1996
S-1/A 12-19-1996
S-3 09-09-1998
S-3/A 10-30-1998
S-3/A 11-12-1998
S-8 06-27-1997
2
<PAGE>
SCHEDULE 2.1.5
LIABILITIES
1. Pursuant to the Letter Agreement dated February 2, 1998, between 3DX
and Mr. Ronald P. Nowak (the "Nowak Agreement"), 3DX is liable to pay
certain sums to Mr. Nowak if his employment is terminated without cause.
The Nowak Agreement has been amended to provide for a lump sum payment
of such sums to be made immediately prior to the Effective Date.
2. 3DX sold its Ramrod prospect in the first quarter of 1999. In connection
therewith 3DX suffered a non-cash "ceiling test write down" of
approximately $1,600,000.
SCHEDULE 2.1.6
CERTAIN CHANGES
1. 3DX has entered into Retention Agreements with its employees other
than Ronald Nowak in forms substantially identical to the drafts previously
furnished to Esenjay.
2. The Nowak Agreement was amended as described in disclosure 1 of
Schedule 2.1.5.
3. See disclosure 2 in Schedule 2.1.5.
4. 3DX issued 286,408 shares of 3DX Common Stock after December 31,
1998, pursuant to the terms of the Subscription Agreement mentioned in
Section 5.2.8 of the Plan and Agreement of Merger (the "Subscription
Agreement").
5. See disclosures in Schedule 4.3.7.
6. The Professional Services Agreement dated June 8, 1998 between Mr.
Allen and 3DX (the "Allen Agreement") was amended to provide for payment of
amounts accruing after December 31, 1998 in cash rather than shares of 3DX
Common Stock.
SCHEDULE 4.3.7
SALE OF SECURITIES
Prior to the Effective Time, 3DX may be required to issue shares of its
common stock as follows:
1. Up to 780,944 shares may be issued upon exercise of employee stock
options.
2. The vesting 50,000 shares will accelerate pursuant to a Restricted
Stock Award executed in connection with the Nowak Agreement.
3
<PAGE>
3. 225,080 shares will be issuable to Mr. Russell Allen under the terms
of the Allen Agreement.
4. 6000 shares remain issuable under the Subscription Agreement.
SCHEDULE 5.2.9
VOTING AGREEMENTS
<TABLE>
<CAPTION>
Officer or Director Number of Shares
------------------- ----------------
<S> <C>
Ronald P. Nowak 50,000
Russell L. Allen 225,080
Jon W. Bayless 754,195*
C. Eugene Ennis 289,411
Charles E. Edwards 17,001
Douglas C. Williamson
(NationsBanc Capital) 721,903
</TABLE>
- ------------
* Includes 727,477 owned by CitiGrowth Fund and 26,718 owned individually
4
<PAGE>
VOTING AGREEMENT
FOR
3DX OFFICERS AND DIRECTORS
The undersigned hereby agrees that at the stockholders meeting
(the "3DX Meeting") of 3DX Technologies, Inc. ("3DX") to be held in
connection with the approval of the Merger Agreement dated as of
May__, 1999 (the "Merger Agreement") between 3DX and Esenjay
Exploration, Inc. ("Esenjay"), and the merger contemplated thereby
(the "Merger"), any adjournment thereof or any other meeting of the
holders of 3DX Common Stock, however called, or in connection with
any written consent of the holders of voting capital stock of 3DX,
the undersigned shall vote, or cause to be voted, all the shares of
3DX Common Stock owned by the undersigned (the "Existing Shares"),
and together with any shares of 3DX Common Stock that become
Beneficially Owned (as defined below) or controlled by the
undersigned after the date hereof and before the termination of
this Agreement, whether upon the exercise of options, warrants or
rights, the conversion or exchange of convertible or exchangeable
securities, or by means of purchase, dividend, distribution or
otherwise (hereinafter collectively, the "Shares"); PROVIDED,
HOWEVER, that in the event of a stock dividend or distribution, or
any change in the outstanding capital stock of 3DX by reason of any
stock dividend, split-up, recapitalization, combination, exchange
of shares or the like, the term "Shares" shall be deemed to refer
to and include the Shares as well as all such stock dividends and
distributions and any shares into which or for which any or all of
the Shares may be changed or exchanged, Beneficially Owned or
controlled by the undersigned (i) in favor of the Merger, the
execution and delivery by 3DX of the Merger Agreement and the
approval of the terms of each of the other actions contemplated by
the Merger Agreement and any actions required in furtherance
thereof; and (ii) against any other action that is intended or
could reasonably be expected to impede, interfere with, delay,
postpone or materially adversely affect the Merger and the
transactions contemplated
<PAGE>
by the Merger Agreement. The undersigned will not enter into any agreement
or understanding with any person the effect of which would be inconsistent or
violative of the provisions and agreements contained in the Merger Agreement.
For purposes of this Agreement, "Beneficially Owned" or "Beneficial
Ownership" with respect to any securities shall mean "beneficial ownership"
of such securities as determined pursuant to Rule 13d-3 under the Securities
Exchange Act of 1934, as amended, including pursuant to any agreement
arrangement or understanding whether or not in writing.
This agreement is intended solely to apply to the exercise by the
undersigned in his capacity as a stockholder of rights attaching to ownership
of the Shares, and if the undersigned is also a director of 3DX, nothing
herein shall be deemed to apply to, or to limit the discretion of the
undersigned with respect to any action which may be taken or omitted by him
acting in his fiduciary capacity as director of 3DX.
In Witness Whereof, the undersigned has set forth his hand this ___ day
of May, 1999.
By: /s/ Ronald P. Nowak
---------------------------------
Ronald P. Nowak
2
<PAGE>
VOTING AGREEMENT
FOR
ESENJAY PETROLEUM CORPORATION
AND
ASPECT RESOURCES, LLC
The undersigned hereby agrees that at the stockholders meeting (the
"Esenjay Meeting") of Esenjay Exploration, Inc. ("Esenjay") to be held in
connection with the approval of the Merger Agreement dated as of May __, 1999
(the "Merger Agreement") between Esenjay and 3DX Technologies, Inc. ("3DX"), and
the merger contemplated thereby (the "Merger"), any adjournment thereof or any
other meeting of the holders of Esenjay Common Stock, however called, or in
connection with any written consent of the holders of voting capital stock of
Esenjay, the undersigned shall vote, or cause to be voted, all the shares of
Esenjay Common Stock owned by the undersigned (the "Existing Shares"), and
together with any shares of Esenjay Common Stock that become Beneficially Owned
(as defined below) or controlled by the undersigned after the date hereof and
before the termination of this Agreement, whether upon the exercise of options,
warrants or rights, the conversion or exchange of convertible or exchangeable
securities, or by means of purchase, dividend, distribution or otherwise
(hereinafter collectively, the "Shares"); PROVIDED, HOWEVER, that in the event
of a stock dividend or distribution, or any change in the outstanding capital
stock of Esenjay by reason of any stock dividend, split-up, recapitalization,
combination, exchange of shares or the like, the term "Shares" shall be deemed
to refer to and include the Shares as well as all such stock dividends and
distributions and any shares into which or for which any or all of the Shares
may be changed or exchanged, Beneficially Owned or controlled by the undersigned
(i) in favor of the Merger, the execution and delivery by Esenjay of the Merger
Agreement and the approval of the terms of each of the other actions
contemplated by the Merger Agreement and any actions required in furtherance
thereof; (ii) for the related issuance of the Esenjay Common Stock
<PAGE>
and ESNJ-CP Stock (as defined in the Merger Agreement); (iii) for the
election of C. Eugene Ennis or such other qualified person nominated by 3DX
to serve on the board of directors of Esenjay; and (iii) against any other
action that is intended or could reasonably be expected to impede, interfere
with, delay, postpone or materially adversely affect the Merger and the
transactions contemplated by the Merger Agreement. The undersigned will not
enter into any agreement or understanding with any person the effect of which
would be inconsistent or violative of the provisions and agreements contained
in the Merger Agreement. For purposes of this Agreement, "Beneficially Owned"
or "Beneficial Ownership" with respect to any securities shall mean
"beneficial ownership" of such securities as determined pursuant to Rule
13d-3 under the Securities Exchange Act of 1934, as amended, including
pursuant to any agreement arrangement or understanding whether or not in
writing.
IN WITNESS WHEREOF, the undersigned has set forth his hand this ___ day of
May, 1999.
ESENJAY PETROLEUM CORPORATION
By: /s/ Michael E. Johnson
-------------------------------------------
ASPECT RESOURCES, LLC
By ITS MANAGER, ASPECT MANAGEMENT CORP.
By: /s/ W.A. Williams, V.P.
-------------------------------------------
2
<PAGE>
EXHIBIT 11 TO FORM 10QSB
ESENJAY EXPLORATION, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------------------------------
1999 1998
---------------------- ----------------------
<S> <C> <C>
BASIC AND DILUTED EARNINGS PER SHARE
Weighted average common shares
Outstanding.............................. 15,784,834 1,655,984
---------------------- ----------------------
Basic and diluted (loss) per share........... $ (0.26) $ (.38)
---------------------- ----------------------
---------------------- ----------------------
EARNINGS FOR BASIC AND DILUTED
COMPUTATION
Net loss..................................... $ (4,081,478) $ (608,588)
Preferred share dividends.................... --- (25,788)
---------------------- ----------------------
Net loss to common shareholders
(Basic and diluted loss per share computation) $ (4,081,478) $ (634,376)
---------------------- ----------------------
---------------------- ----------------------
</TABLE>
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 515,092
<SECURITIES> 0
<RECEIVABLES> 4,933,386
<ALLOWANCES> (369,136)
<INVENTORY> 0
<CURRENT-ASSETS> 7,190,601
<PP&E> 72,397,665
<DEPRECIATION> (18,438,002)
<TOTAL-ASSETS> 61,754,697
<CURRENT-LIABILITIES> 16,645,193
<BONDS> 12,640,000
0
0
<COMMON> 157,849
<OTHER-SE> 31,241,110
<TOTAL-LIABILITY-AND-EQUITY> 61,754,697
<SALES> 964,245
<TOTAL-REVENUES> 1,511,002
<CGS> 0
<TOTAL-COSTS> 5,469,194
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 123,286
<INCOME-PRETAX> (4,081,478)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,081,478)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,081,478)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
