<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 9, 1999.
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------------
ESENJAY EXPLORATION, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 73-1421000
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
</TABLE>
500 NORTH WATER STREET, SUITE 1100 S.
CORPUS CHRISTI, TEXAS 78471
(361) 883-7464
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------------
DAVID B. CHRISTOFFERSON
SENIOR VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL
ESENJAY EXPLORATION, INC.
500 DALLAS, SUITE 2920
HOUSTON, TEXAS 77002
(713) 739-7100
(Address, including zip code, and telephone number, including
area code of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
SAMUEL N. ALLEN BRYAN W. BAKER
PORTER & HEDGES, L.L.P. GARDERE, WYNNE, SEWELL & RIGGS, L.L.P.
700 LOUISIANA, 35TH FLOOR 1000 LOUISIANA, SUITE 3400
HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77002
(713) 226-0600 (713) 276-5500
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the registration statement becomes effective and the
satisfaction or waiver of all other conditions to the merger, pursuant to the
Plan and Agreement of Merger, dated as of May 11, 1999, described in the
enclosed Proxy Statement/Prospectus.
------------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING AGGREGATE AMOUNT OF
REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share (1) (1) (4) (4)
Preferred Stock, par value $.01 per share (2) (2) (4) (4)
Common Stock, par value $.01 per share (3) (3) (3) (3)
Total $6,017,504.06(4) $1,672.87
</TABLE>
(1) Relates to an indeterminate number of shares of Common Stock that may be
issued upon primary issuance. A minimum of 1,645,814 shares and maximum of
3,291,627 shares of Common Stock may be issued.
(2) Relates to an indeterminate number of shares of Preferred Stock that may be
issued upon primary issuance. A maximum of 1,945,052 shares of Preferred
Stock may be issued.
(3) Relates to an indeterminate number of shares of Common Stock that may be
issued upon conversion of the Preferred Stock. No additional consideration
will be received for the Common Stock issuable upon conversion of the
Preferred Stock and, accordingly, pursuant to Rule 457(i) no registration
fee is required.
(4) In accordance with Rule 457(f)(1), the maximum aggregate offering price was
calculated based upon a maximum of 10,697,785 shares of 3DX Common Stock to
be cancelled in the merger and an average bid/asked price on June 3, 1999 of
$0.5625 per share.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a)OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[ESENJAY LOGO]
[3DX LOGO]
To the Stockholders of Esenjay Exploration, Inc. and 3DX Technologies Inc.:
The boards of directors of Esenjay Exploration, Inc. and 3DX Technologies
Inc. have each unanimously agreed to merge the two companies, and recommend that
their stockholders approve the merger. The merger is intended to create a
larger, more diversified, financially stronger and more cost efficient
enterprise.
Under the terms of the merger agreement, 3DX stockholders will have their
choice of exchanging their 3DX common stock for either Esenjay common stock,
Esenjay preferred stock, or a combination of the two. Esenjay stockholders will
continue to own their existing shares of Esenjay common stock after the merger.
In addition, if the merger is approved, Esenjay's board of directors will be
increased by one member to represent the interests of the holders of the
preferred stock.
The companies' boards of directors believe the following benefits will be
realized in the merger:
- the resulting combined company should have greater revenues and debt
capacity than either company alone, which may increase the combined
company's ability to grow reserves through exploration and development of
a greater number of prospects using internally generated funds;
- the resulting combined company will have a potentially greater access to
capital, lower cost of capital, increased flexibility in capital
allocation and added resilience against fluctuations in commodity prices;
- because businesses and assets of Esenjay and 3DX are highly complementary
in key areas, the merger will result in larger interests in common
properties;
- the resulting combined company will have a business vision that relies on
high-technology based 3-D seismic data to select exploration prospects.
The dates, times and places of the meetings are as follows:
<TABLE>
<S> <C>
For Esenjay stockholders: For 3DX stockholders:
July , 1999 July , 1999
10:00 a.m. Central Daylight Time 10:00 a.m. Central Daylight Time
500 Dallas, Suite 2920 12012 Wickchester, Suite 250
Houston, Texas 77002 Houston, Texas 77097
</TABLE>
YOUR VOTE IS VERY IMPORTANT. WE CAN ONLY COMPLETE THE MERGER IF THE HOLDERS
OF A MAJORITY OF THE ISSUED AND OUTSTANDING SHARES OF COMMON STOCK OF BOTH
ESENJAY AND 3DX APPROVE THE MERGER. WHETHER OR NOT YOU PLAN TO ATTEND YOUR
MEETING, PLEASE TAKE THE TIME TO VOTE BY COMPLETING AND MAILING THE ENCLOSED
PROXY CARD TO US. IF YOU DATE AND MAIL YOUR PROXY CARD WITHOUT INDICATING HOW
YOU WANT TO VOTE, YOUR PROXY WILL BE COUNTED IN FAVOR OF CONSUMMATION OF THE
MERGER; HOWEVER, FAILURE TO DELIVER A PROXY CARD OR ABSTAINING FROM VOTING WILL
HAVE THE SAME EFFECT AS VOTING AGAINST THE MERGER.
<TABLE>
<S> <C>
- -------------------------------------------- --------------------------------------------
David W. Berry C. Eugene Ennis
CHAIRMAN OF THE BOARD OF DIRECTORS CHAIRMAN OF THE BOARD OF DIRECTORS
ESENJAY EXPLORATION, INC. 3DX TECHNOLOGIES INC.
</TABLE>
<PAGE>
ESENJAY EXPLORATION, INC.
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDER
TO BE HELD ON JULY , 1999
------------------------
To the Stockholders of Esenjay Exploration, Inc.:
The annual meeting of the holders of common stock of Esenjay Exploration,
Inc., a Delaware corporation, will be held at 10:00 a.m. Central Daylight Time,
on July , 1999 at the offices of Esenjay Exploration, 500 Dallas, Suite 2920,
Houston, Texas 77002. At the Esenjay annual meeting, the holders of common stock
will:
1. Elect three class II directors whose terms will expire 2002;
2. Consider and vote upon a proposal to approve and adopt the Plan and
Agreement of Merger, dated as of May 11, 1999, between Esenjay and 3DX
Technologies Inc., a Delaware corporation, relating to the merger of 3DX
with and into Esenjay, with Esenjay surviving the merger; and
3. Transact such other business as may properly come before the annual
meeting or any adjournments or postponements thereof.
The board of directors has fixed the close of business on July , 1999 as
the record date for determining which stockholders are entitled to notice of,
and to vote at, the annual meeting or any adjournments or postponements thereof.
Only those stockholders of record on that date will be entitled to notice and to
vote at the special meeting. Complete lists of these stockholders will be
available for examination at Esenjay's offices, at 500 North Water, Suite 1100
S, Corpus Christi, Texas 78471, during normal business hours by any holder of
Esenjay's common stock, for any purpose relevant to the annual meeting, for a
period of ten days prior to the annual meeting.
Esenjay's board of directors approved and recommends that you vote for the
election of the three Class II directors and for the approval and adoption of
the merger agreement and the merger. The vote of the board of directors was a
unanimous vote of those directors voting, with two directors abstaining due to
an overlapping ownership interest of affiliates of the two directors in 3DX,
which overlapping ownership may have been perceived as a conflict of interest. A
plurality of the votes present at the annual meeting is required for the
election of the director nominees. However, the affirmative vote of the holders
of a majority of the outstanding shares of Esenjay common stock is required to
approve and adopt the merger agreement and the merger. IF YOU DO NOT SEND IN
YOUR PROXY OR VOTE AT THE ANNUAL MEETING, OR IF YOU ABSTAIN FROM VOTING, IT WILL
HAVE THE SAME EFFECT AS IF YOU VOTED AGAINST THE MERGER.
Holders of Esenjay common stock, even if they expect to be present at the
annual meeting, are requested to sign, vote and date the enclosed proxy and
return it promptly in the enclosed envelope. Any stockholder giving a proxy has
the power to revoke it any time before the annual meeting. Stockholders who are
present at the annual meeting may withdraw their proxies and vote in person.
By Order of the Board of Directors,
--------------------------------------
David B. Christofferson
CORPORATE SECRETARY
July , 1999
<PAGE>
3DX TECHNOLOGIES INC.
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY , 1999
---------------------
To the Stockholders of 3DX Technologies Inc.:
A special meeting of the holders of common stock of 3DX Technologies Inc., a
Delaware corporation, will be held at 10:00 a.m. Central Daylight Time, on July
, 1999 at 3DX's corporate offices located at 12012 Wickchester, Suite 250,
Houston, Texas 77097. At the 3DX special meeting, the holders of common stock of
3DX will:
1. Consider and vote upon a proposal to approve and adopt the Plan and
Agreement of Merger, dated as of May 11, 1999, between 3DX and Esenjay
Exploration Inc., a Delaware corporation, relating to the merger of 3DX
with and into Esenjay, with Esenjay surviving the merger; and
2. Transact such other business as may properly come before the special
meeting or any adjournments or postponements thereof.
The board of directors has fixed the close of business on July , 1999 as
the record date for determining which stockholders are entitled to notice of,
and to vote at, the special meeting or any adjournments or postponements
thereof. Only those stockholders of record on that date will be entitled to
notice of and to vote at the special meeting. Complete lists of these
stockholders will be available for examination at the offices of 3DX, at 12012
Wickchester, Suite 250, Houston, Texas, during normal business hours by any
holder of 3DX common stock, for any purpose relevant to the special meeting, for
a period of ten days before the special meeting.
The board of directors of 3DX unanimously approved and recommends that you
vote for the approval and adoption of the merger agreement. The affirmative vote
of the holders of a majority of all issued and outstanding shares of 3DX common
stock is required to approve and adopt the merger agreement and the merger. IF
YOU DO NOT SEND IN YOUR PROXY OR VOTE AT THE SPECIAL MEETING, OR IF YOU ABSTAIN
FROM VOTING, IT WILL HAVE THE SAME EFFECT AS IF YOU VOTED AGAINST THE MERGER.
Holders of 3DX common stock, even if they expect to be present at the
special meeting, are requested to sign, vote and date the enclosed proxy and
return it promptly in the enclosed envelope. Any stockholder giving a proxy has
the power to revoke it any time before the special meeting. Stockholders who are
present at the special meeting may withdraw their proxies and vote in person.
By Order of the Board of Directors,
--------------------------------------
Russell L. Allen
CORPORATE SECRETARY
July , 1999
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 9, 1999.
THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT OFFER THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SEC IS EFFECTIVE. THIS PROXY STATEMENT/PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
ESENJAY EXPLORATION, INC.
3DX TECHNOLOGIES INC.
PROXY STATEMENT
FOR MEETINGS OF STOCKHOLDERS
TO BE HELD ON JULY , 1999
---------------------
ESENJAY EXPLORATION, INC.
PROSPECTUS
UP TO 1,903,037 SHARES OF SERIES A CONVERTIBLE PREFERRED STOCK
UP TO 8,746,651 SHARES OF COMMON STOCK
---------------------
This proxy statement/prospectus is being furnished to the stockholders of
Esenjay Exploration, Inc., a Delaware corporation, and the stockholders of 3DX
Technologies Inc., a Delaware corporation, in connection with the solicitation
of proxies by the board of directors of Esenjay and the board of directors of
3DX for use at their meetings of stockholders to be held on July 22, 1999, at
the time and places and for the purposes specified in the accompanying notices
of meeting, and at any adjournments or postponements thereof. This proxy
statement/prospectus also is being used in connection with the distribution of
shares of Esenjay's Series A preferred stock, par value $.01 per share, and
Esenjay's common stock, par value $.01 per share, in connection with the
proposed merger of 3DX with and into Esenjay.
At the meetings, Esenjay's stockholders and 3DX's stockholders will be asked
to consider and act upon a proposal to approve and adopt the Plan and Agreement
of Merger dated as of May 11, 1999 between Esenjay and 3DX relating to the
merger of 3DX with and into Esenjay with Esenjay surviving the merger; and
Additionally, Esenjay's stockholders will be asked to consider and act upon
the election of three class II director nominees.
A stockholder of either company may revoke a proxy by (i) delivering to the
appropriate company written notice of revocation; (ii) delivering to the
appropriate company a proxy signed on a later date; or (iii) voting in person at
the stockholders meeting.
Esenjay's common stock is currently traded on the Nasdaq Small Cap Market
under the symbol "ESNJ."
Esenjay's Series A preferred stock is redeemable by Esenjay for $1.925 per
share in cash, and if not redeemed, is convertible into a minimum of one or a
maximum of 3.75 shares of Esenjay common stock or $1.65 per share in cash
approximately one year after the merger. Before this offering, there was no
established trading market for Esenjay's preferred stock. However, Esenjay
intends to list the preferred stock on the over-the-counter bulletin board.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 11 IN THIS PROSPECTUS.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE
SECURITIES OR DETERMINED THAT THIS PROXY STATEMENT/ PROSPECTUS IS ACCURATE OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS ILLEGAL.
This Proxy Statement/Prospectus is dated July , 1999 and
first mailed to Esenjay and 3DX stockholders on July , 1999.
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Esenjay and 3DX file annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any reports,
statements or other information we file at the SEC's public reference room at
450 Fifth Street, N.W., Washington, D.C. 20549, or at the SEC's public reference
rooms in New York, New York and Chicago, Illinois. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. Esenjay's
and 3DX's filings with the SEC are also available to the public from commercial
document retrieval services and at the website maintained by the SEC at
HTTP://WWW.SEC.GOV/.
Esenjay has filed a registration statement on Form S-4 to register with the
SEC the preferred stock and common stock to be issued to 3DX's stockholders in
the merger and upon conversion of the preferred stock. This document is a part
of that registration statement and constitutes a prospectus of Esenjay in
addition to being a joint proxy statement of both Esenjay and 3DX. As allowed by
SEC rules, this document does not contain all the information you can find in
the registration statement or the exhibits to the registration statement.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows Esenjay to "incorporate by reference" information into this
document, which means that it can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is deemed to be part of this document, except for any
information superseded by information in this document. This document
incorporates by reference the documents set forth below that Esenjay has
previously filed with the SEC. These documents contain important information
about Esenjay.
Esenjay's Annual Report on Form 10-KSB/A for the fiscal year ending December
31, 1998 as filed on April 30, 1999; and Esenjay's Quarterly Report on Form
10-QSB for the first quarter of 1999 ending March 31, 1999 as filed on May 20,
1999, are incorporated by reference in this proxy statement/prospectus. A COPY
OF EACH OF THESE REPORTS ARE ENCLOSED WITH THIS PROXY STATEMENT/PROSPECTUS.
Also, these documents will be available upon request from David B.
Christofferson, Corporate Secretary of Esenjay, 500 Dallas Street, Suite 2920,
Houston, Texas 77002, telephone number (713) 739-7100.
All documents filed by Esenjay pursuant to Section 13(a), 13(c), 14, or
15(d) of the Exchange Act of 1934 after the date of this proxy
statement/prospectus and before the consummation of the merger and related
transactions shall be deemed to be incorporated by reference in this proxy
statement/prospectus and to be a part hereof from the date of filing of such
documents. All information appearing in this proxy statement/prospectus is
qualified in its entirety by the information and financial statements (including
the notes thereto) appearing in the documents incorporated by reference herein.
Any statement contained in a document incorporated or deemed to be
incorporated by reference shall be modified or superseded, for purposes of this
proxy statement/prospectus, to the extent that a statement contained therein or
in any subsequently filed document that is deemed to be incorporated modifies or
supersedes any such statement. Any statement so modified or superseded shall not
be deemed, except as so modified or superseded, to constitute a part of this
proxy statement/prospectus.
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
WHERE YOU CAN FIND MORE INFORMATION................................................... i
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE..................................... i
SUMMARY............................................................................... 1
SUMMARY FINANCIAL INFORMATION......................................................... 7
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS............................. 10
RISK FACTORS.......................................................................... 11
THE MERGER............................................................................ 20
DESCRIPTION OF MERGER AGREEMENT....................................................... 37
UNAUDITED PRO FORMA FINANCIAL STATEMENTS.............................................. 42
DESCRIPTION OF 3DX.................................................................... 46
PROJECTS, BUSINESS RELATIONSHIPS AND TECHNOLOGY....................................... 48
OIL AND GAS RESERVES.................................................................. 53
SELECTED FINANCIAL DATA............................................................... 58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 59
LIQUIDITY AND CAPITAL RESOURCES....................................................... 63
ELECTION OF DIRECTORS OF ESENJAY EXPLORATION, INC..................................... 71
EXHIBIT A--PLAN AND AGREEMENT OF MERGER............................................... A-1
EXHIBIT B--CERTIFICATE OF DESIGNATIONS OF THE SERIES A CONVERTIBLE PREFERRED STOCK.... B-1
EXHIBIT C--FAIRNESS OPINION OF HARRIS WEBB & GARRISON, INC............................ C-1
EXHIBIT D--SECTION 262 OF DELAWARE GENERAL CORPORATION LAW............................ D-1
</TABLE>
ii
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND MAY NOT
CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO FULLY UNDERSTAND THE
MERGER AND FOR A MORE DETAILED DESCRIPTION OF THE LEGAL TERMS OF THE MERGER AND
THE TERMS OF THE SERIES A CONVERTIBLE PREFERRED STOCK YOU SHOULD READ CAREFULLY
THIS ENTIRE DOCUMENT AND THE DOCUMENTS REFERRED TO IN "WHERE YOU CAN FIND MORE
INFORMATION" ON PAGE I. THE PLAN AND AGREEMENT OF MERGER IS INCLUDED AS EXHIBIT
A TO THIS PROXY STATEMENT/PROSPECTUS, AND THE CERTIFICATE OF DESIGNATIONS OF THE
SERIES A CONVERTIBLE PREFERRED STOCK IS INCLUDED AS EXHIBIT B.
INTRODUCTION
This proxy statement/prospectus relates to the meetings of stockholders to
be held by Esenjay Exploration, Inc., a Delaware corporation, and 3DX
Technologies Inc., a Delaware corporation. At these meetings, the Esenjay
stockholders and 3DX stockholders will consider and vote upon a proposal to
approve and adopt a Plan and Agreement of Merger dated as of May 11, 1999
between Esenjay and 3DX.
STOCKHOLDER MEETINGS
Esenjay's annual meeting will be held at its offices located at One Allen
Center, 500 Dallas, Suite 2920, Houston, Texas, on Thursday, July , 1999, at
10:00 a.m., Central Daylight Time. The record date for stockholders of Esenjay
entitled to notice of and to vote at Esenjay's annual meeting is July , 1999.
In addition to voting on approval of the merger, Esenjay's stockholders will
elect three class II directors whose terms will expire 2002. The holders of
Esenjay's common stock are entitled to one vote per share on each matter
presented to the stockholders.
3DX's special meeting will be held at its corporate offices located at 12012
Wickchester, Suite 250, Houston, Texas, on Thursday, July , 1999, at 10:00
a.m., Central Daylight Time. The record date for stockholders of 3DX entitled to
notice of and to vote at 3DX's special meeting is July , 1999. The holders of
3DX's common stock are entitled to one vote per share on each matter presented
to the stockholders.
THE MERGER
MERGER. If the merger is approved and adopted by Esenjay's stockholders and
3DX's stockholders, and the merger is consummated, 3DX will be merged into
Esenjay with Esenjay being the surviving corporation.
If the merger is consummated, 3DX stockholders will have their choice of
either of the following forms of merger consideration, or a combination of both:
- 3.25 shares of issued and outstanding 3DX common stock for one share of
Esenjay common stock; or
- 2.75 shares of issued and outstanding 3DX common stock for one share of
Esenjay Series A Convertible Preferred Stock.
In order to limit potential negative Federal income tax consequences for
Esenjay, 3DX and 3DX stockholders, if holders of an aggregate of more than 50%
of the shares of 3DX common stock elect to receive preferred stock in the
merger, the amount electing to receive preferred stock will be pro rated so that
an aggregate of only 50% of the total shares of 3DX common stock will be
converted into preferred stock, with the other shares of 3DX common stock being
converted into Esenjay common stock.
OWNERSHIP OF ESENJAY. As of March 31, 1999, Esenjay had 15,784,834 shares
of common stock issued and outstanding, and no issued or outstanding shares of
preferred stock. As of March 31, 1999, 3DX had 9,685,761 shares of common stock
issued and outstanding and, at the same date, an additional 1,012,024 shares
were reserved for issuance in conjunction with the various employee benefit
plans and under other
1
<PAGE>
agreements as disclosed in the merger agreement. Assuming the shares reserved
for issuance by 3DX were issued in the form of common stock prior to the closing
of the merger, there would be a total of 10,697,785 shares of 3DX common stock
participating in the merger. Assuming that 50% of the 3DX shares were converted
into Esenjay common stock and 50% of the 3DX shares were converted into
preferred stock, each share of which preferred stock ultimately converted into
one share of Esenjay common stock, the current 3DX stockholders would then own
18.4% of Esenjay and the current Esenjay stockholders would then own 81.6% of
Esenjay. Exact ownership will be affected by the number of current 3DX
stockholders who actually elect to receive common stock and those who actually
elect to receive preferred stock, as well as the ultimate disposition of the
preferred stock pursuant to its provisions and characteristics of the preferred
stock as described in the following paragraph.
THE SERIES A PREFERRED STOCK. The preferred stock is dividend bearing only
to the extent that it would participate in any common stock dividends as if it
had been converted into one share of common stock and has no voting rights other
than the right to elect one director to serve on Esenjay's board of directors so
long as any shares of the preferred stock remain issued and outstanding. For a
period of one year from the effective date of the merger, Esenjay may, at its
sole discretion, redeem any or all of the preferred stock at a price of $1.925
per share plus accumulated and unpaid dividends, if any. Generally, thirteen
calendar months after the effective date of the merger, each share of preferred
stock will automatically convert into one share of Esenjay common stock.
However, if the average trading price of Esenjay common stock during the twelfth
calendar month after the effective date of the merger is less than $1.875, the
holders of the preferred stock may elect optional conversion. If a holder of
preferred stock elects optional conversion, Esenjay may convert each share of
preferred stock into either:
- a number of shares of Esenjay common stock equal to $1.875 divided by the
average trading price of Esenjay's common stock during the twelfth
calendar month after the effective date of the merger, to a maximum of
3.75 shares; or
- $1.65 in cash per share of preferred stock.
If a holder of preferred stock does not exercise its right to optional
conversion, each share of preferred stock will automatically be converted into
one share of Esenjay common stock on the first day of the fourteenth calendar
month after the effective date of the merger.
The preferred stock will not be as liquid as Esenjay's common stock because
the preferred stock will not be quoted for trading on the Nasdaq Small-Cap
Market or listed for trading on any national stock exchange; however, Esenjay
intends to post the preferred stock on the Nasdaq Bulletin Board System. There
can be no assurance that there will be an active market to buy or sell preferred
stock. Furthermore, because of Esenjay's right to redeem the preferred stock,
the upside potential of the preferred stock is limited.
THE PARTIES. Esenjay Exploration, Inc. is an independent energy company
engaged in the exploration for and development of natural gas and oil. Esenjay
has assembled an inventory of 39 technology enhanced natural gas and oil
exploration projects along the Texas and Louisiana Gulf Coast. These exploration
projects include substantial interests in 28 projects Esenjay acquired from
Esenjay Petroleum Corporation and Aspect Resources LLC pursuant to an
Acquisition Agreement and Plan of Exchange. Esenjay, Esenjay Petroleum and
Aspect have spent several years identifying and evaluating many of the
exploration projects. Each of the exploration projects differs in scope and
character and consists of one or more types of assets, such as 3-D seismic data,
leasehold positions, lease options, working interests in leases, royalty
interests or other mineral rights.
Esenjay's headquarters are located at 500 North Water, Suite 1100 S, Corpus
Christi, Texas 78471, and its telephone number is (361) 883-7464.
3DX is a knowledge-based oil and gas exploration company whose strategic
focus is the use of 3-D seismic imaging and other advanced technologies in the
search for commercial quantities of hydrocarbons.
2
<PAGE>
3DX enters into arrangements that enable it to combine its expertise and
exploration capabilities with the operating skills of other oil and gas
companies. 3DX participates in selected exploration projects as a non-operating
working interest owner, sharing both risks and rewards with its partners. 3DX
commenced operations in January 1993 to take advantage of perceived
opportunities emerging from changes in the domestic oil and gas industry,
including the divestiture of domestic oil and gas properties, advances in
technology and the outsourcing of specialized technical capabilities. By
reducing drilling risk through 3-D imaging and analysis, 3DX seeks to improve
the expected return on investment in its oil and gas projects.
3DX has developed a screening process that it applies to all projects that
it considers. The screening process, adapted continually to incorporate 3DX's
ongoing experience, is designed to produce a balanced portfolio of projects that
have reliable and experienced operating partners, are conducive to the
application of advanced 3-D technology, have significant upside potential and
may be extended into exploration trends.
3DX's headquarters are located at 12012 Wickchester, Suite 250, Houston,
Texas 77097, and its telephone number (281) 579-3398.
REASONS FOR THE MERGER. Esenjay and 3DX both are in the business of
exploration and development of natural gas and oil based on 3-D seismic imaging
and other advanced technologies. Esenjay's board of directors and 3DX's board of
directors each believe that the merger will result in significant benefits
including management synergies, expansion of available 3-D seismic and other
technology, and administrative cost savings.
REPRESENTATIONS AND WARRANTIES. The specific obligations of Esenjay and 3DX
to consummate the merger and related transactions are subject to the accuracy of
certain representations and warranties of each party set forth in the merger
agreement.
CONDITIONS PRECEDENT TO CLOSING
The obligations of Esenjay and 3DX to consummate the merger are subject to
the satisfaction of certain conditions including that the favorable opinion of
Harris Webb & Garrison, Inc., as to the fairness, from a financial point of
view, of the consideration to be paid by Esenjay in the merger, shall not have
been withdrawn at the effective date of the merger. Furthermore, the
stockholders of both companies must approve the merger.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated by mutual consent of the parties or
by either Esenjay or 3DX individually if:
- any condition precedent to the merger has not been met by either party;
- there has been a material adverse change (as defined in the merger
agreement) in the business of the other party;
- any legal action regarding the merger has been brought by any federal or
state government entity; or
- the merger has not been consummated by September 15, 1999.
TERMINATION FEE
3DX must pay Esenjay a termination fee plus Esenjay's expenses if 3DX fails
to consummate the merger because of:
- failure to obtain approval of 3DX's stockholders to the merger;
3
<PAGE>
- acceptance of a BONA FIDE proposal from a third party that 3DX's board of
directors determines to be clearly and unambiguously more favorable to
3DX's stockholders;
- the withdrawal of the opinion of Harris Webb & Garrison, Inc. relating to
the fairness, from a financial point of view, of the consideration to be
paid by Esenjay;
- 3DX's board of directors modifies or withdraws its recommendation in favor
of the merger; or
- 3DX solicits or accepts a competing acquisition or merger offer.
MANAGEMENT AFTER THE MERGER
If the merger is approved by the stockholders of Esenjay and 3DX and the
merger is consummated, the persons named in the merger agreement will be the
directors of Esenjay until their successors are elected and qualified. The
directors named in the merger agreement include all of Esenjay's current
directors and one director that has been designated by 3DX as the director to be
elected by the holders of the preferred stock. The director elected by the
holders of the preferred stock will serve until his successor has been elected
and qualified under the terms of the Certificate of Designations or until no
shares of the preferred stock remain issued and outstanding. After consummation
of the merger, the headquarters of Esenjay will remain located at 500 North
Water, Suite 1100 S, Corpus Christi, Texas 78471.
FAIRNESS OPINION
Harris Webb & Garrison, Inc. has delivered an opinion, dated May 11, 1999,
to the board of directors of 3DX to the effect that as of the date of the
opinion and based upon and subject to certain matters stated in the opinion, the
merger consideration is fair from a financial point of view to 3DX. The full
text of the fairness opinion, which sets forth the assumptions and matters
considered and limitations on the review undertaken, is attached to this proxy
statement/prospectus as EXHIBIT C, and should be read carefully and in its
entirety.
FEDERAL INCOME TAX PURPOSES
The merger is intended to be tax-free to Esenjay, 3DX and their respective
stockholders under the Internal Revenue Code. We strongly urge you to consult
your tax advisor to determine your particular United States federal, state,
local or foreign income tax consequences resulting from the merger, with respect
to your individual circumstances.
ACCOUNTING TREATMENT
The merger will be accounted for as a purchase. Esenjay will be treated as
the acquiror of 3DX's business and as a result, the total value of the Esenjay
shares issued in the merger will be allocated and recorded based upon the
estimated fair values of the net assets of 3DX.
RIGHTS OF DISSENTING STOCKHOLDERS
Pursuant to Delaware General Corporation Law, any holder of 3DX common stock
(i) who files a demand for appraisal in writing before the vote taken at the 3DX
Special Meeting and (ii) whose shares are not voted in favor of the merger, will
be entitled to appraisal rights under Section 262 of the Delaware General
Corporation Law.
BOARD RECOMMENDATIONS
The boards of directors of each of Esenjay and 3DX have approved the merger
agreement and recommend the adoption of the merger agreement by the Esenjay and
3DX stockholders. In evaluating the merger, the board of directors of each of
Esenjay and 3DX considered many factors, including the factors
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<PAGE>
set forth in "The Merger--Esenjay's Reason's for the Merger" and "--3DX's
Reasons for the Merger" beginning on page 18.
EFFECTIVE DATE
The merger will become effective on the filing of the certificate of merger
with the Secretary of the State of Delaware. The certificate of merger will be
filed as soon as practicable after all conditions to the obligations of Esenjay
and 3DX to consummate the merger have been satisfied or waived.
RISK FACTORS
Stockholders of both 3DX and Esenjay should carefully evaluate the matters
set forth under "Risk Factors" beginning on page 11 of this proxy
statement/prospectus.
ELECTION OF DIRECTORS
NOMINEES. Three persons have been nominated for election at Esenjay's
annual meeting as class II directors to hold office until 2002 or until their
successors have been elected and qualified.
EFFECTIVE APPROVAL OF THE MERGER. If the merger is approved and
consummated, the persons named in the merger agreement will become the directors
of Esenjay until their successors are elected and qualified. These persons
include one nominee to represent the holders of the preferred stock. If the
merger is not approved, the person designated to represent the holders of the
preferred stock will not become a director. The persons receiving the greatest
number of votes for election as class II directors at the annual meeting will be
elected as class II directors and Esenjay's board of directors otherwise will
not be affected.
VOTE REQUIRED
The affirmative vote of the holders of a majority of issued and outstanding
shares of Esenjay common stock and a majority of the issued and outstanding 3DX
common stock is required to approve the merger agreement.
2,408,414 shares of 3DX common stock (representing 22.5% of the amount of
the 3DX shares anticipated to be outstanding as of the time of the merger) are
currently owned by, or are expected to be owned at the time of the merger by,
officers and directors of 3DX and their affiliates. All of these shares are
subject to voting agreements pursuant to which the holders have agreed to vote
their shares in favor of the merger.
9,533,367 shares of the Esenjay common stock (representing 60.4% of the
amount of the Esenjay shares outstanding as of the time of the merger) are owned
by two of Esenjay's shareholders. All of these shares are subject to voting
agreements pursuant to which the holders have agreed to vote their shares in
favor of the merger.
SINCE A MAJORITY OF THE OUTSTANDING SHARES OF BOTH ESENJAY AND 3DX ARE
REQUIRED FOR APPROVAL OF THE MERGER (RATHER THAN A MAJORITY OF THE SHARES
REPRESENTED AT THE MEETINGS), FAILURE TO VOTE OR AN ABSTENTION FROM VOTING WILL
HAVE THE SAME EFFECT AS VOTING AGAINST THE MERGER.
A plurality of the votes present at the Esenjay annual meeting is required
for the election of the director nominees.
REGULATORY MATTERS
Esenjay and 3DX are not aware of any governmental or regulatory requirements
for consummation of the merger other than compliance with applicable state
corporate laws, federal and state securities laws and federal antitrust laws.
5
<PAGE>
MARKET PRICE DATA
3DX common stock is traded on the over-the-counter market. On May 11, 1999,
the last day before the public announcement of the execution of the merger
agreement, the closing bid price of the 3DX common stock as reported, was $0.25
per share. On July , 1999, the closing per share bid price of the 3DX common
stock was $0. . Esenjay common stock is traded on the Nasdaq SmallCap Market.
No shares of Esenjay preferred stock are currently outstanding, although it is
anticipated that following the merger they will be listed for trading on the
over-the-counter market. On May 11, 1999, the last day before the public
announcement of the execution of the merger agreement, the closing price of the
Esenjay common stock as reported, was $2.375 per share. On July , 1999, the
closing per share bid price of the Esenjay common stock was $ .
Stockholders are urged to obtain current price information for the 3DX common
stock and the Esenjay common stock in connection with their consideration of the
merger.
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<PAGE>
SUMMARY FINANCIAL INFORMATION
The following historical consolidated financial information of Esenjay and
3DX has been derived from their respective historical consolidated financial
statements and should be read in conjunction with the separate consolidated
financial statements and notes thereto located elsewhere in this proxy
statement/ prospectus or incorporated herein by reference. The selected
historical consolidated financial information is not necessarily indicative of
results to be expected after the merger is consummated.
ESENJAY EXPLORATION, INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
--------------------- --------------------
1998 1997 1999 1998
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................................... $ 1,716 $ 909 $ 1,511 $ (17)
---------- --------- --------- ---------
Cost and expenses:
Production and exploration costs..................................... 11,624 3,065 1,063 60
Depletion, depreciation and amortization............................. 1,523 316 619 54
Amortization of unproved properties.................................. 6,937 -- 2,383 --
Impairment of oil and gas properties................................. 5,832 349 -- --
Interest expense..................................................... 620 61 123 19
General and administrative........................................... 4,501 2,072 1,404 459
---------- --------- --------- ---------
Net loss............................................................... (29,321) (4,954) (4,081) (609)
Cumulative preferred stock dividend.................................... 48 103 -- 25
---------- --------- --------- ---------
Basic and diluted net loss per common and common stock equivalent...... $ (29,369) $ (5,057) $ (4,081) $ (634)
---------- --------- --------- ---------
---------- --------- --------- ---------
Net loss per common and common stock equivalent........................ $ (2.97) $ (3.07) $ (0.26) $ (0.38)
---------- --------- --------- ---------
---------- --------- --------- ---------
Weighted average common shares outstanding............................. 9,882 1,646 15,785 1,656
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31,
1999
----------
<S> <C>
BALANCE SHEET DATA:
Working capital (deficit)......................................................... $ (9,455)
Property and equipment, net....................................................... 53,960
Total assets...................................................................... 61,755
Long-term debt (excluding current maturities)..................................... 13,868
Stockholders' equity.............................................................. 31,241
</TABLE>
7
<PAGE>
3DX TECHNOLOGIES INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
--------------------- --------------------
1998 1997 1999 1998
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................................................. $ 4,599 $ 3,631 $ 568 $ 871
--------- ---------- --------- ---------
Costs and expenses:
Lease operating..................................................... 732 437 85 172
Impairment of oil and gas properties................................ 7,864 9,061 991 878
Depletion, depreciation & amortization.............................. 3,545 2,636 593 659
General and administrative and other(a)............................. 2,047 2,533 384 699
--------- ---------- --------- ---------
Total costs and expense........................................... 14,188 14,667 2,053 2,408
--------- ---------- --------- ---------
Net loss.............................................................. (9,589) (11,036) (1,485) (1,537)
--------- ---------- --------- ---------
--------- ---------- --------- ---------
Basic and diluted net loss per common share........................... $ (1.15) $ (1.53) $ (0.16) $ (0.21)
--------- ---------- --------- ---------
--------- ---------- --------- ---------
Weighted average number of common shares outstanding.................. 8,328 7,194 9,380 7,272
--------- ---------- --------- ---------
--------- ---------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH
31,
-----------
1999
-----------
<S> <C>
BALANCE SHEET DATA:
Working Capital.................................................................... $ 519
Property and equipment, net........................................................ 9,243
Total assets....................................................................... 11,274
Borrowings on Credit Agreement..................................................... 750
Stockholder's equity (deficit)..................................................... $ 9,076
</TABLE>
- ------------------------
(a) As discussed in Note 2 to the 3DX December 31, 1998 financial statements,
rental income has been reflected as a reduction of general and
administrative expenses in all periods presented.
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<PAGE>
ESENJAY AND 3DX COMBINED SELECTED PRO FORMA FINANCIAL INFORMATION
The selected unaudited combined pro forma consolidated historical financial
information has been derived from the unaudited pro forma financial statements
appearing elsewhere in this proxy statement/ prospectus and should be read in
conjunction with those statements and notes thereto. The pro forma information
is not necessarily indicative of the results that would have been obtained if
the merger had been consummated on January 1, 1998 (in the case of the statement
of operations data) or on March 31, 1999 (in the case of the balance sheet
data), or that may be obtained in the future.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1998 1999
------------ ----------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................................................................... $ 6,315 $ 2,079
Cost and Expenses:
Production and exploration costs............................................... 14,027 1,594
Depletion, depreciation and amortization....................................... 3,851 1,201
Impairment of oil and gas properties........................................... 5,832 0
Amortization of unproved properties............................................ 6,937 2,383
Interest Expense............................................................... 633 124
General & administrative expenses.............................................. 6,536 1,787
------------ -------
Net loss......................................................................... $ (31,501) $ (5,010)
Cumulative preferred stock dividend.............................................. 48 0
------------ -------
Net income (loss) applicable to common shareholders.............................. $ (31,549) $ (5,010)
------------ -------
------------ -------
Basis and diluted net loss per common and common stock equivalent................ $ (2.36) $ (0.26)
------------ -------
------------ -------
Weighted average common shares outstanding....................................... 13,371 19,274
------------ -------
------------ -------
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
AS OF MARCH 31,
1999
---------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Working capital (deficit).................................................... $ (8,935)
Property and equipment, net.................................................. 61,258
Total assets................................................................. 71,085
Long-term debt (excluding current maturities)................................ 14,618
Stockholders' equity......................................................... 38,373
</TABLE>
9
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The statements made in this prospectus or in the documents we have
incorporated by reference that are not statements of historical fact are
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate" or "believe," or similar terminology.
The forward-looking statements include discussions about business strategy
and expectations concerning market position, future operations, seismic,
drilling or exploration operations, profitability, liquidity and capital
resources, and statements concerning the integration into our business of the
operations we have acquired. The forward-looking statements also include our
expectations concerning the anticipated benefits and risks of the merger.
Although we believe that the expectations in such statements are reasonable, we
cannot give any assurance that those expectations will be correct, and we cannot
give any assurance that any of the anticipated benefits to us from the merger
will be realized or that the risks to investors in the merger will not occur.
We caution you not to place undue reliance on these forward-looking
statements, which speak only as of the date of this prospectus.
Uncertainties are inherent in estimating quantities of proved oil and
natural gas reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond Esenjay's and 3DX's
control. Reserve engineering is a subjective process of estimating underground
accumulations of oil and natural gas that cannot be measured in an exact way,
and the accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment. As
a result, estimates made by different engineers often vary from one another. In
addition, results of drilling, testing and production after the date of an
estimate may justify revisions of such estimate and such revisions, if
significant, would change the schedule of any further production and development
drilling. Accordingly, reserve estimates generally are different from quantities
of oil and natural gas that ultimately are recovered. Drilling and exploration
plans are subject to modification based upon seismic analysis, drilling results,
production results, and capital availability. Capital availability may also be
affected by many factors including market conditions and exploration results.
Additional important factors that could cause actual results to differ
materially from Esenjay's and 3DX's expectations are disclosed elsewhere in this
proxy statement/prospectus.
All subsequent written and oral forward-looking statements attributable to
the companies or persons acting on their behalf are expressly qualified in their
entirety by such factors.
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<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN DETERMINING
WHETHER TO VOTE TO APPROVE THE MERGER AND THE RESULTING ISSUANCE OF THE SHARES
OF ESENJAY COMMON STOCK OR PREFERRED STOCK IN EXCHANGE FOR 3DX COMMON STOCK.
RISK FACTORS RELATING TO THE MERGER
WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE ESENJAY AND 3DX, AND WE MAY NOT
REALIZE EXPECTED COST SAVINGS. We may encounter difficulties in integrating the
previously separate organizations and operations of Esenjay and 3DX. The
management of the combined company will have to devote substantial attention and
resources to the integration of the two companies. The diversion of management's
attention and any difficulties it encounters in the transition and integration
processes could have an adverse effect on the revenues, levels of expenses and
operating results of the combined company. The combined company may also
experience operational interruptions or the loss of key employees, customers or
suppliers. As a result, we may not realize any of the anticipated benefits of
the merger.
THE VALUE OF ESENJAY COMMON STOCK THE 3DX STOCKHOLDERS WILL RECEIVE MAY
DECREASE BETWEEN NOW AND THE COMPLETION OF THE MERGER. Because the market price
of Esenjay common stock is subject to fluctuation, the value at the time of the
merger of the consideration to be received by the 3DX stockholders will depend
on the market price of Esenjay common stock at that time, which may be lower
than the market price of Esenjay common stock on the day the merger was
announced, and the value of the Esenjay common stock may further fluctuate the
day that Esenjay preferred stock is converted into Esenjay common stock.
THE ESENJAY PREFERRED STOCK IS SUBJECT TO LIQUIDITY RISKS AND HAS LIMITED
UPSIDE POTENTIAL. The Esenjay preferred stock to be issued in the merger is
anticipated to be listed on Nasdaq's Bulletin Board System. There can be no
assurance that a holder of preferred stock will be able to sell it. Furthermore,
because of Esenjay's right to redeem the preferred stock at a fixed price, the
upside potential for the preferred stock could be limited.
ESENJAY MAY NOT HAVE THE CASH FOR THE REDEMPTION OR CONVERSION OF THE
PREFERRED STOCK. Esenjay's credit agreements restrict its ability to redeem
stock for cash either pursuant to its optional redemption right or pursuant to
the holder's optional conversion rights. There can be no assurance that Esenjay
will have the liquidity or will be able to obtain the necessary consents of its
lenders to make a cash payment to holders of the preferred stock.
RISK FACTORS RELATING TO THE COMBINED COMPANY
VOLATILE OIL AND NATURAL GAS PRICES MAY ADVERSELY AFFECT OUR FINANCIAL
RESULTS. Prices of oil and natural gas have historically been volatile.
Decreases in oil and natural gas prices will adversely affect the combined
company's revenues, results of operations, cash flows and proved reserves.
If the oil and gas industry experiences significant prolonged future price
decreases, the combined company may be unable to generate sufficient cash flow
from operations to make planned capital expenditures. Revenue, profitability and
future rate of growth are substantially dependent upon the prevailing prices of,
and demand for, oil and natural gas. Our ability to maintain or increase our
borrowing capacity and to obtain additional capital on attractive terms also is
dependent upon oil and gas prices. All of our sales of oil and natural gas are
made in the spot market or pursuant to contracts based on spot market prices.
Hedging agreements that limit our exposure to decreases in oil and gas prices
also limit our ability to realize the benefits of increased oil and gas prices.
MARKETABILITY OF OUR PRODUCTION MAY BE LIMITED. The marketability of our
production depends upon the availability and capacity of gas gathering systems,
pipelines and processing facilities. Federal and state regulation of oil and gas
production and transportation, general economic conditions and changes in
11
<PAGE>
supply and demand all could adversely affect our ability to produce and market
oil and natural gas. If market factors were to change dramatically, the
financial impact on us could be substantial. The availability of markets and the
volatility of product prices are beyond our control and represent a significant
risk.
THE COMBINED COMPANY MAY INCUR ADDITIONAL IMPAIRMENT OF PROPERTIES' CARRYING
VALUES. Accounting rules require that the combined company periodically review
the carrying value of its oil and gas properties for possible impairment. The
combined company may be required to reduce the carrying value of its oil and gas
properties based on specific market factors and circumstances at the time of
prospective impairment reviews, and continue the evaluation of development
plans, production data, economics and other factors, as appropriate. An
impairment constitutes a charge to earnings that does not impact the combined
company's cash flow from operating activities. However, an impairment does
impact the amount of the combined company's stockholders' equity.
OUR BUSINESS IS SUBJECT TO SUBSTANTIAL GOVERNMENTAL REGULATION. Oil and gas
operations are subject to various United States federal, state and local
governmental laws and regulations that change from time to time in response to
economic or political conditions. Matters subject to regulation include:
- discharge permits for drilling operations;
- drilling and abandonment bonds;
- reports concerning operations, the spacing of wells, and unitization and
pooling of properties;
- environmental protection; and
- taxation.
From time to time, regulatory agencies have imposed price controls and
limitations on production by restricting the rate of flow of oil and gas wells
below actual production capacity in order to conserve supplies of oil and gas.
In addition, the production, handling, storage, transportation and disposal of
oil and gas, by-products thereof and other substances and materials produced or
used in connection with oil and gas operations are subject to regulation under
laws and regulations primarily relating to protection of human health and the
environment. Failure to comply with these laws and regulations may result in the
assessment of administrative, civil, and criminal penalties, as well as
injunctive relief. The combined company also may be subject to substantial
clean-up costs for any toxic or hazardous substance that may exist under any of
its current properties or properties that it has owned or operated in the past.
Although Esenjay and 3DX believe they are in substantial compliance with all
applicable laws and regulations, the requirements imposed by these laws and
regulations are frequently changed and subject to interpretation.
OUR COSTS TO COMPLY WITH ENVIRONMENTAL LAWS COULD BECOME SIGNIFICANT. The
trend toward stricter standards in environmental legislation and regulation is
likely to continue. For instance, legislation has been proposed in Congress from
time to time that would reclassify certain crude oil and natural gas exploration
and production wastes as "hazardous wastes," which would make the reclassified
wastes subject to much more stringent handling, disposal and clean-up
requirements. If this legislation were to be enacted, it could have a
significant impact on our operating costs, as well as the oil and gas industry
in general. The combined company could incur substantial costs to comply with
environmental laws and regulations, and we are unable to predict the ultimate
cost of compliance with these requirements or their effect on our production.
Environmental and other governmental regulations have increased the costs to
plan, design, drill, install, operate and abandon oil and natural gas wells and
other facilities of the combined company. Each company individually has expended
and the combined company will expend significant resources, both financial and
managerial, to comply with environmental regulations and permitting
requirements. Increasingly strict environmental laws, regulations and
enforcement policies, and claims for damages to property,
12
<PAGE>
employees, other persons and the environment resulting from our operations,
could cause the combined company to incur substantial costs and liabilities in
the future.
ESTIMATES OF OIL AND GAS RESERVES MAY CHANGE. The calculations of proved
reserves of crude oil and natural gas included in this document are only
estimates. The process of estimating oil and gas reserves is complex, requiring
significant decisions and assumptions in the evaluation of available geological,
geophysical, engineering and economic data for each reservoir. As a result,
these estimates are inherently imprecise. Actual future production, oil and gas
prices, revenues, taxes, development expenditures, operating expenses and
quantities of recoverable oil and gas reserves may vary substantially from our
estimates. Any significant variance in these assumptions could materially affect
the estimated quantity and value of reserves set forth in this proxy
statement/prospectus. In addition, the proved reserve information may be subject
to downward or upward revision based upon production history, results of future
exploration and development, prevailing oil and gas prices and other factors,
many of which will be beyond the combined company's control. Actual production,
revenues, taxes, development expenditures and operating expenses with respect to
the combined company's reserves will likely vary from the estimates used, and
such variances may be material.
Approximately 42.39% of Esenjay's and none of 3DX's total proved reserves at
December 31, 1998 were undeveloped, which are by their nature less certain than
proved developed reserves. Recovery of these reserves will require significant
capital expenditures and successful drilling operations. The reserve data set
forth in Esenjay's financial data assumes that substantial capital expenditures
will be required to develop the reserves. Although cost and reserve estimates
attributable to oil and gas reserves have been prepared in accordance with
industry standards, no assurance can be given that the estimated costs are
accurate, that development will occur as scheduled or that the results will be
as estimated.
The present value of future net revenues referred to in this proxy
statement/prospectus should not be construed as the current market value of the
estimated oil and gas reserves attributable to our properties. In accordance
with applicable SEC requirements, the estimated future net cash flows from
proved reserves generally are based on prices and costs as of the date of the
estimate, whereas actual future prices and costs may be materially higher or
lower. Actual future net cash flows also will be affected by increases in
consumption by gas purchasers and changes in governmental regulations or
taxation. The timing of actual future net cash flows from proved reserves, and
thus their actual present value, will be affected by the timing of both the
production and the incurrence of expenses in connection with the development and
production of oil and gas properties. In addition, the 10% discount factor,
which the SEC requires to be used in calculating discounted future net cash
flows for reporting purposes, is not necessarily the most appropriate discount
factor.
THE COMBINED COMPANY WILL CONTINUE TO FACE STRONG COMPETITION. There is
strong competition relating to all aspects of the oil and natural gas industry,
and in particular in the exploration and development of new oil and natural gas
reserves. We compete with major integrated and independent gas and oil companies
for the acquisition of desirable gas and oil properties and leases, for the
equipment and labor required to develop and operate these properties, and in the
marketing of natural gas to end-users. Many of these competitors have financial
and other resources substantially greater than ours. In addition, many of our
larger competitors may be better able to respond to factors that affect the
demand for oil and natural gas production, such as changes in worldwide oil and
natural gas prices and levels of production, the cost and availability of
alternative fuels and the application of government regulations. We also compete
in attracting and retaining technical personnel, including geologists,
geophysicists and other specialists. There can be no assurance we will be able
to attract or retain technical personnel in the future.
THE COMBINED COMPANY MAY NOT BE ABLE TO REPLACE RESERVES. Without
successful exploration, development or acquisition activities, the combined
company's reserves and revenues will decline over time. Exploration, the
continuing development of reserves and acquisition activities will require
significant expenditures. If our cash flow from operations is not sufficient for
this purpose, we may not be able to
13
<PAGE>
obtain the necessary funds. The inability to replace reserves could reduce the
amount of credit available to us since the maximum amount of borrowing capacity
available under our revolving credit facility will be based, at least in part,
on the estimated quantities of our proved reserves.
THE COMBINED COMPANY IS NOT LIKELY TO PAY DIVIDENDS. Neither 3DX nor
Esenjay pays dividends on its common stock. Furthermore, Esenjay does not
anticipate paying dividends in the near future. Esenjay is restricted under the
terms of its bank credit agreement from making distributions of any type with
respect to any class of its capital stock unless it meets certain financial
covenants. Esenjay currently does not meet all of the financial requirements
and, unless it receives a waiver from such tests, is restricted under the terms
of the bank credit agreement from making any dividend payments or other
distribution with respect to any class of its capital stock.
THE COMBINED COMPANY WILL ENCOUNTER SIGNIFICANT EXPLORATION RISKS INCLUDING
RISKS RELATED TO ITS HEAVY RELIANCE ON 3-D SEISMIC TECHNOLOGIES AND COMPUTER
AIDED EXPLORATION. Exploratory drilling is a speculative activity, and there
can be no assurance as to the success of our drilling program. Both Esenjay's
and 3DX's strategy is to enhance the value of exploration projects through the
use of 3-D seismic and computer aided exploration technologies, with an emphasis
on direct hydrocarbon detection technologies. These technologies create computer
generated 3-D displays of subsurface geological formations that enable our
explorationists to detect seismic anomalies and structural features that are not
apparent in 2-D seismic surveys. However, these technologies require greater
pre-drilling expenditures than traditional drilling strategies. Even when fully
used and properly interpreted, 3-D seismic data and visualization techniques
only assist geoscientists in identifying subsurface structures and hydrocarbon
indicators, and do not conclusively allow the interpreter to know if
hydrocarbons will in fact be present in such structures. Exploratory drilling
and, to a lesser extent, development drilling involve a high degree of risk that
no commercial production will be obtained or that the production will be
insufficient to recover drilling and completion costs. The costs of drilling,
completing and operating wells are uncertain. Our future drilling operations may
be curtailed, delayed or canceled as a result of numerous factors, including
title problems, weather conditions, compliance with governmental requirements
and shortages or delays in the delivery of equipment. Furthermore, completion of
a well does not assure a profit on the investment or a recovery of drilling,
completion and operating costs.
ESENJAY HAS A HISTORY OF LOSSES AND WORKING CAPITAL DEFICITS. For the years
ended December 31, 1997 and 1998, Esenjay had net losses of $4,953,803 and
$29,321,347. We had a net loss of $4,081,478 for the three months ended March
31, 1999. Our accumulated deficit as of March 31, 1999 was $46,568,341. On a pro
forma basis for the year ended December 31, 1998 and the three months ended
March 31, 1999, we had net losses of $31,500,732 and $5,009,759 respectively.
Even if the combined company generates substantial cash flow, we could continue
to generate losses for financial reporting purposes under our successful efforts
accounting procedures.
THE COMBINED COMPANY WILL REQUIRE SUBSTANTIAL CAPITAL TO FUND ITS
EXPLORATION AND DEVELOPMENT PROJECTS. Esenjay has made and intends to make
substantial capital expenditures in connection with the exploration and
development of its gas and oil properties. Esenjay must obtain approval of this
transaction from its lender prior to closing. Historically, it has funded its
capital expenditures through a combination of internally generated funds, equity
and long-term debt financing, and short-term financing arrangements. Based on
its current operations, Esenjay anticipates that its capital expenditures
through the end of 1999 will be funded from:
- the availability of credit under Esenjay's bank credit agreement and other
credit facilities;
- sales of promoted interests in the exploration projects to industry
partners; and
- if the foregoing financing sources are inadequate, the sale of interests
in Esenjay's assets to unaffiliated third parties.
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The availability of credit under the bank credit agreement is subject to
several variables, such as the level of production from existing wells, prices
of gas and oil and Esenjay's success in locating and producing new reserves. Our
cash generated from operations and borrowing capacity will not be sufficient to
fund our exploration budget in full. Therefore, unless Esenjay finds additional
sources of capital it will be required to seek additional sources of capital to
fund its capital expenditure budget, sell interests in its exploration projects,
or curtail its drilling program. There can be no assurance that funds available
to Esenjay will be sufficient for it to carry out its proposed plans.
MORTGAGES ON GAS AND OIL PROPERTIES AND CREDIT AGREEMENT COVENANTS AND
RESTRICTIONS LIMIT THE COMBINED COMPANY'S ABILITY TO BORROW ADDITIONAL
FUNDS. Esenjay has granted to Bank of America NT&SA a mortgage on substantially
all of its proved developed gas and oil properties to secure repayment under the
bank credit agreement. In addition, Esenjay granted a mortgage to Bank of
America NT&SA as collateral agent on behalf of itself and Duke Energy Financial
Services on substantially all of the company's other proven and unproven gas and
oil properties to secure loans from Bank of America NT&SA and Duke Energy
Financial Services. The party providing financing for the Starboard Project has
been granted an overriding royalty interest in the Starboard Project properties.
Repayment of this financing will be made only from the proceeds of the
overriding royalty interest, but such payments are secured by a mortgage on the
Starboard Project properties. These liens limit Esenjay's ability to borrow
additional funds. The amount of borrowings under the bank credit agreement is
based on the maintenance of adequate natural gas and oil reserves to support the
amount borrowed. Should the estimated proved natural gas and oil reserves or the
price to be received for these reserves decline below the required reserve
value, Esenjay would be required either to accelerate payment, repay a specified
amount of the borrowings so as to have adequate reserve value to support the
borrowing, or provide additional collateral for the loan. A failure by Esenjay
to comply with the covenants and restrictions contained in the credit
agreements, or to obtain a waiver to such covenants and restrictions, will
constitute a default under the terms of the bank credit agreement and the
Starboard Project Financing, resulting in the indebtedness under all of those
credit arrangements becoming immediately due and payable and enabling the
lenders to foreclose against the collateral for the loans.
At March 31, 1999, Esenjay's tangible net worth as calculated pursuant to
the credit agreement with Bank of America NT&SA was $31,241,110. This tangible
net worth amount violated a covenant in the credit agreement with Bank of
America NT&SA. Bank of America NT&SA has waived noncompliance with this covenant
through June 30, 1999. Esenjay and Bank of America NT&SA have been in
discussions, both recognizing that the covenant as initially established did not
give adequate consideration to the effects of Esenjay's successful efforts
method of accounting on the future book value of its properties, in particular
the accounting treatment that Esenjay 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 acquisitions. As such, Bank
of America NT&SA has agreed with Esenjay in concept to reduce the tangible net
worth requirement to an amount not in excess of $25,000,000, subject to approval
of Bank of America NT&SA'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, Esenjay would be in noncompliance of this
provision and will seek alternative long-term financing arrangements. Esenjay
expects Bank of America NT&SA to approve the modification.
Further, as of March 31, 1999, Esenjay's current ratio was 0.6939 and
Esenjay's interest coverage ratio was (0.7006) to 1, both of which violated the
covenants in the credit agreement. Bank of America NT&SA has waived said
noncompliance at March 31, 1999. Esenjay believes it has improved its current
ratio and its interest coverage ratio since March 31, 1999 significantly.
Although Esenjay 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 Bank of America NT&SA did not grant such waivers, if
needed, Esenjay would be in noncompliance of the covenants and would seek
alternative financing arrangements.
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TITLE TO THE COMBINED COMPANY'S UNDEVELOPED OIL AND GAS LEASES MAY BE
SUBJECT TO REVIEW. Title to Esenjay's oil and gas leases, including those
acquired from 3DX, will not be examined until drill sites are selected. As is
customary in the industry in the case of undeveloped properties, little
investigation of record title is made at the time of acquisition other than a
preliminary review of local records. Although title will be examined before
drilling on a site commences, as is customary in the industry, we do not intend
to purchase title insurance, and there can be no assurance that losses relating
to any lease will not result from title defects, defects in the assignment of
leasehold rights or prior encumbrances.
THE COMBINED COMPANY FACES SUBSTANTIAL COMPETITION FOR OIL AND GAS LEASES
AND SEISMIC PERMITS. Substantial competition exists for oil and gas leases and
there can be no assurance Esenjay will be able to acquire the oil and gas leases
it seeks. Similar competition exists for seismic permits without which 2-D and
3-D seismic surveys cannot be conducted. There can be no assurance Esenjay can
obtain the permits necessary to conduct seismic surveys it may desire to
conduct. The seismic permitting risk can be greater in the State of Louisiana,
where current law requires permits from owners of at least an undivided 80%
interest in each tract over which a seismic survey is proposed to be conducted.
OUR CERTIFICATE OF INCORPORATION PROVIDES FOR THE INDEMNIFICATION OF OUR
OFFICERS AND DIRECTORS AND LIMITS THEIR LIABILITY. Esenjay's Certificate of
Incorporation, as permitted by Delaware law, eliminates in some circumstances
the monetary liability of Esenjay's directors for breach of their fiduciary duty
as directors. In those circumstances Esenjay's directors will not be liable to
Esenjay or its stockholders for breach of such duty. The Certificate of
Incorporation also provides that Esenjay shall indemnify its directors and
officers to the full extent permitted by Delaware law.
RISK FACTORS SPECIFIC TO ESENJAY
ESENJAY IS CONTROLLED BY TWO PRINCIPAL STOCKHOLDERS. Esenjay Petroleum
currently owns approximately 32.7% and Aspect currently owns approximately 27.7%
of Esenjay's issued and outstanding common stock. Following the merger, Esenjay
Petroleum and Aspect will own approximately 26.8% and 22.6% respectively of
Esenjay's issued and outstanding common stock assuming 50% of 3DX common stock
elects Esenjay preferred stock and the ultimate conversion of each share of
preferred stock into one share of Esenjay common stock. Therefore, each of
Esenjay Petroleum and Aspect are in a position to substantially influence the
outcome of stockholder votes on the election of directors and other matters.
Moreover, Esenjay Petroleum and Aspect together have sufficient voting power to
control the approval of any matter brought before Esenjay's stockholders.
Esenjay Petroleum and Aspect have entered into an agreement to vote their common
stock in favor of the merger. In addition, if Esenjay Petroleum or Aspect were
to sell a significant number of their shares of common stock in the public
market, the prevailing market price of the common stock could be adversely
affected.
SEVERAL ESENJAY DIRECTORS HAVE CONFLICTS OF INTEREST. Michael E. Johnson
and Charles J. Smith each own 50% of Esenjay Petroleum common stock and Alex M.
Cranberg owns a controlling interest in Aspect. Their respective relationships
with Esenjay Petroleum and Aspect create conflicts of interest with their
serving as directors of Esenjay.
Aspect has retained a substantial interest in many of the projects that
Aspect transferred to Esenjay, and Aspect has the right to acquire oil and gas
interests in areas adjacent to those covered by Esenjay's exploration projects.
Aspect's participation in these additional exploration projects creates a
conflict of interest with Esenjay. Aspect will not participate in any
exploration project in the areas of mutual interest created pursuant to the
acquisition agreement. In addition, Aspect and Esenjay have entered into an
agreement that for a period of three years beginning May 19, 1998, before
selling any projects that Aspect owns now or may own during the three year
period in certain defined counties surrounding the exploration projects, Aspect
will first offer to sell the project to Esenjay at a price and on terms
identical to those initially offered to third party purchasers. Nonetheless,
Aspect may continue to participate in oil and gas exploration activities outside
the areas established by the acquisition agreement and the areas adjacent
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thereto. Aspect is not obligated to offer Esenjay a participation in those
projects, and Aspect will be in competition with Esenjay to that extent.
Aspect has been involved in several exploration programs with 3DX and Alex
M. Cranberg was instrumental in arranging the June 3, 1998 private stock
offering pursuant to which 3DX sold approximately $2,200,000 of 3DX common
stock. This transaction is described in footnote 8 to 3DX's December 31, 1998
financial statements attached hereto. In the June 3, 1998 private offering, Mr.
Cranberg's wife, Susan Morrice, and a corporation she controls, Minnowburn
Corporation, purchased 344,480 shares of 3DX common stock. According to 3DX's
records, Ms. Morrice currently owns 175,867 shares of 3DX common stock and
Minnowburn Corporation owns 369,202 shares of 3DX common stock.
ESENJAY ENCOUNTERS RISKS IN ITS HEDGING ACTIVITIES. In order to manage our
exposure to price risks in the marketing of oil and natural gas, Esenjay has in
the past and expects to continue to enter into oil and gas hedging arrangements.
These arrangements may include futures contracts on the New York Mercantile
Exchange, fixed price delivery contracts and financial swaps. These hedging
arrangements may apply to only a portion of our production and provide only
partial price protection against a decline in natural gas prices. While intended
to reduce the effects of volatility of the price of oil and natural gas, such
transactions may limit potential gains if oil and natural gas prices rise
substantially over the price established by the hedging transaction. In
addition, these transactions may expose us to the risk of financial loss in
certain circumstances, including instances in which:
- production is less than expected;
- there is a widening of price differentials between delivery points for our
production and the delivery point assumed in the arrangement;
- the counter parties to our hedge contracts fail to perform under the
contracts; or
- a sudden, unexpected event has a material impact on oil or natural gas
prices.
Esenjay's only current swap arrangement is required by our credit agreement
with Bank of America NT&SA. In October of 1998, Esenjay 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 net to the wellhead 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 net to the
wellhead for the period beginning November 1998 and ending in October 1999. Both
of these swap agreements were supplemented in December 1998 when Esenjay 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 net to the wellhead
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 net to the wellhead for the period beginning November 1999
and ending in October 2000. As a result of the foregoing transactions, Esenjay
has 4,700 MMBtu's per day of its Gulf Coast natural gas production hedged
through October 2000.
ESENJAY DEPENDS ON KEY PERSONNEL WHO DO NOT HAVE EMPLOYMENT
AGREEMENTS. Esenjay's business is dependent upon the performance of certain of
its executive officers. Esenjay has not entered into employment agreements with
these executive officers. There can be no assurance Esenjay will be able to
enter into any such employment agreements or otherwise retain such officers.
Furthermore, Esenjay does not maintain key-man life insurance on any of our
employees.
THE MARKET PRICE OF ESENJAY'S COMMON STOCK COULD BE ADVERSELY AFFTECTED BY
SALES OF SUBSTANTIAL AMOUNTS OF COMMON STOCK IN THE PUBLIC MARKET OR THE
PERCEPTION THAT SUCH SALES COULD OCCUR. As of March 31, 1999, Esenjay had a
total of 15,784,834 shares of common stock outstanding, 15,769,934 of which are
freely tradeable without restriction or further registration under the
Securities Act. In addition, 14,900 shares of common stock issued under
Esenjay's 401-k Plan are "Restricted Securities" within the meaning of
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Rule 144 under the Securities Act of 1933 and may not be sold in the absence of
registration under the Securities Act of 1933, unless an exemption from
registration is available.
Approximately 1,262,918 shares of common stock are issuable upon the
exercise of existing options and warrants with exercise prices ranging from
$7.20 to $21.73 per share and 210,667 shares are issuable upon the exercise of
additional existing options and warrants with exercise prices ranging from $1.96
to $3.78. All of such shares have been or may be registered for resale pursuant
to registration rights agreements.
The sale of a material number of the shares of common stock eligible for
resale without restriction in the public markets or that will be eligible for
resale without restriction upon registration pursuant to applicable registration
rights agreements could have a material adverse effect on the trading price of
Esenjay's common stock.
ESENJAY MAY ENCOUNTER YEAR 2000 COMPLIANCE ISSUES. Esenjay 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, Esenjay undertook a
corporate-wide initiative designed to assess the impact of the Year 2000 issue
on software and hardware utilized in Esenjay's operations.
Esenjay's initiative is to be conducted in these phases: assessment,
implementation and testing. During the assessment phase, Esenjay completed a
comprehensive inventory of all "mission critical" systems and equipment. Many of
Esenjay's systems include hardware and packaged software purchased from large
vendors who have represented that these systems are already Year 2000 compliant.
Esenjay relies on other producers and transmission companies to conduct its
basic operations. Should any third party with which Esenjay has a material
relationship fail, the impact could impair Esenjay'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
Esenjay's assessment phase, Esenjay will address the most reasonably likely
worst-case scenarios and potential costs.
The majority of Esenjay's technical applications are not date sensitive.
However, if such modifications are not adequate or do not operate properly, the
Year 2000 issue could have a material impact on Esenjay. Of those applications
that are date sensitive, most have recently been, or are currently being,
upgraded. Esenjay intends to complete the testing of Year 2000 modifications
during the third quarter of 1999. Esenjay has not established a contingency plan
but intends to formulate one to address unavoidable risks, including those
discussed above. Esenjay expects to have the contingency plan formulated by
mid-1999.
Esenjay'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 Esenjay's operations and have
not represented a material expense to Esenjay. Esenjay 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
Esenjay's financial condition.
DISCRETIONARY ISSUANCE OF PREFERRED STOCK AND OTHER ANTI-TAKEOVER PROVISIONS
INHIBIT A CHANGE OF CONTROL OF ESENJAY. Esenjay's certificate of incorporation
authorizes the issuance of preferred stock with such designations, rights and
preferences as may be determined from time to time by the board of directors.
Accordingly, the board of directors is empowered, without stockholder approval,
to issue preferred stock with dividend, liquidation, conversion, voting or other
rights that could adversely affect the voting power or other rights of holders
of the common stock. In the event of issuance, the preferred stock could be
used, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of Esenjay, which could have the effect of
discouraging bids for Esenjay and, thereby, prevent stockholders from receiving
the maximum value for their shares.
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In addition to the provision for the issuance of preferred stock, Esenjay's
certificate of incorporation and bylaws include several other provisions that
may have the effect of inhibiting a change of control of Esenjay. These include
a classified board of directors, no stockholder action by written consent and
advance notice requirements for stockholder proposals and director nominations.
These provisions may discourage a party from making a tender offer for or
otherwise attempting to obtain control of Esenjay. Moreover, as a Delaware
corporation, Esenjay is subject to the provisions of the Delaware General
Corporation Law that could make it difficult or tend to discourage attempts to
acquire Esenjay. Delaware law includes provisions that are intended to encourage
persons considering unsolicited tender offers or other unilateral takeover
proposals to negotiate with Esenjay's board of directors rather than pursue non-
negotiated takeover attempts.
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THE MERGER
THE FOLLOWING DISCUSSION SETS FORTH A DESCRIPTION OF CERTAIN MATERIAL TERMS
AND CONDITIONS OF THE MERGER. THE DESCRIPTION OF THE MERGER IS QUALIFIED BY, AND
SUBJECT TO, THE MORE COMPLETE INFORMATION SET FORTH IN THE PLAN AND AGREEMENT OF
MERGER, WHICH IS ATTACHED HERETO AS EXHIBIT A, AND THE STATEMENT OF ESENJAY
EXPLORATION, INC. ESTABLISHING THE DESIGNATIONS, PREFERENCES, LIMITATIONS AND
RELATIVE RIGHTS OF ITS SERIES A CONVERTIBLE PREFERRED STOCK, WHICH IS ATTACHED
HERETO AS EXHIBIT B, BOTH OF WHICH ARE INCORPORATED HEREIN BY REFERENCE.
GENERAL DESCRIPTION OF THE MERGER.
On May 11, 1999, Esenjay and 3DX entered into the Plan and Agreement of
Merger. If the merger is approved by the stockholders of both companies and is
consummated, 3DX will be merged into Esenjay with Esenjay being the surviving
company. The merger will be effective when Esenjay files a Certificate of Merger
with the Secretary of State of the State of Delaware. On the effective date of
the merger, and without any further action by the stockholders, the following
events will occur:
- 3DX will cease to exist as a separate entity, except as required to
continue by statute;
- The existing directors of Esenjay will continue in their positions with
the addition of C. Eugene Ennis as a director of Esenjay representing the
holders of the preferred stock;
- The incumbent officers of Esenjay before the effective date shall continue
in their respective offices until their successors are duly elected and
qualified; and
- holders of 3DX common stock will have their choice of either of the
following forms of merger consideration or a combination thereof:
- 3.25 shares of issued and outstanding 3DX common stock for one share of
Esenjay common stock; or
- 2.75 shares of issued and outstanding 3DX common stock for one share of
Esenjay Series A Convertible Preferred Stock.
If holders of an aggregate of more than 50% of the shares of 3DX common
stock elect to receive preferred stock in the merger, the amount electing to
receive preferred stock will be pro rated so that an aggregate of only 50% of
the total shares of 3DX common stock will be converted into preferred stock,
with the other shares of 3DX common stock being converted into Esenjay common
stock.
BACKGROUND
In August 1998, 3DX began exploring possibilities for an additional capital
infusion or for a possible sale or merger of 3DX. The 3DX board of directors
determined that either a significant additional capital infusion or a strategic
combination resulting in a larger company was necessary for 3DX to compete
effectively in the conditions facing the oil and gas industry. From August 1998
to March 1999, representatives from 3DX met with 18 different merger candidates,
including Esenjay. 3DX met with 10 additional parties throughout this period to
explore alternative financing transactions in lieu of a merger or sale.
Discussions with sources of additional capital were ultimately abandoned due to
the high cost of capital and the resulting severe dilution that would be
suffered by 3DX's shareholders.
3DX initially met with Esenjay to discuss a possible merger on August 20,
1998 in a meeting suggested by Mr. Alex Cranberg. Mr. Cranberg is a director of
Esenjay. Mr. Cranberg is also the President of Aspect, which has been involved
in several exploration programs with 3DX. Mr. Cranberg was instrumental in
arranging the June 3, 1998 private stock offering pursuant to which 3DX sold
approximately $2,200,000 of 3DX common stock. This transaction is described in
footnote 8 to 3DX's December 31, 1998 financial statements attached hereto. In
the June 3, 1998 private offering, Mr. Cranberg's wife, Susan Morrice, and a
corporation she controls, Minnowburn Corporation, purchased 344,480 shares of
3DX common stock.
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According to 3DX's records, Ms. Morrice currently owns 175,867 shares of 3DX
common stock and Minnowburn Corporation owns 369,202 shares of 3DX common stock.
Several prospective merger partners were allowed access to information about
3DX and its properties in order to further evaluate a proposed transaction.
After several weeks of discussions, on November 2, 1998 3DX signed a letter of
intent to merge with Fortune Natural Resources Corporation. In December 1998,
3DX learned that Fortune's expected source of financing to complete the merger
transaction as originally proposed had been withdrawn. 3DX notified Fortune that
it was unwilling to extend the letter of intent and confirmed its termination by
a letter to Fortune and a press release dated January 4, 1999. 3DX then reopened
discussions with Esenjay and several other candidates.
On February 17, 1999, Esenjay made a presentation on a proposed merger to
the 3DX board of directors. After several discussions between the companies in
the following weeks, 3DX presented an offer to Esenjay on March 5, 1999. Esenjay
made a counter-offer to 3DX on March 11, 1999, at which time the board of
directors of 3DX determined to begin developing a mutually acceptable merger
agreement. 3DX, Esenjay, and their respective financial and legal advisors began
negotiating the terms of the merger agreement on March 26, 1999 and
substantially completed their negotiations by May 3, 1999. Meanwhile, 3DX
continued discussions with other merger candidates, with one other candidate
continuing to propose possible merger terms until just prior to 3DX's May 5,
1999 board of directors meeting.
After being presented with an oral opinion from Harris Webb & Garrison, Inc.
on the fairness of the proposed merger, the 3DX board of directors approved the
merger agreement on May 5, 1999.
The merger agreement was approved by the board of directors of Esenjay on
May 4, 1999. The vote of the board of directors was a unanimous vote of those
directors voting. Two directors, Alex Cranberg and Alex Campbell, abstained from
voting because they are also officers of Aspect and affiliates of Aspect own 3DX
common stock. Mr. Cranberg and Mr. Campbell felt that the overlapping ownership
may have been perceived as a conflict of interest. The merger agreement was
signed on May 11, 1999 and was publicly announced on May 12, 1999.
In connection with the execution of the merger agreement, the officers and
directors of 3DX executed voting agreements covering shares owned by them and
certain of their affiliates. 2,408,414 shares of 3DX common stock (representing
22.5% of the amount of the 3DX shares anticipated to be outstanding as of the
time of the merger) are currently owned by, or are expected to be owned at the
time of the merger by, officers and directors of 3DX and their affiliates.
Esenjay obtained voting agreements from Esenjay Petroleum and Aspect in which
they agree to vote in favor of the merger. Esenjay's voting agreements require
Esenjay Petroleum and Aspect to vote their 9,533,367 shares of Esenjay common
stock (or approximately 60.4% of Esenjay's outstanding shares) for the merger.
ESENJAY'S REASONS FOR MERGER
Both Esenjay and 3DX are in the business of exploring for and producing
natural gas and oil through the use of 3-D seismic and computer aided
exploration technologies. Esenjay's board of directors learned that 3DX was
seeking a merger candidate or capital infusion and entered discussions with 3DX
in August 1998 which terminated upon the announcement by 3DX of its intent to
merge with Fortune Natural Resources Corporation. After 3DX's proposed
transaction with Fortune was terminated, Esenjay's board of directors confirmed
that a potential merger with 3DX could be in Esenjay's best interest due to each
Company's complimentary business focuses. Esenjay believes consummating the
merger is in its best interest for a number of reasons, in particular, the
following:
- Esenjay and 3DX have interests in some of the same exploration projects,
including interests in seismic data in those exploration projects;
therefore, consummation of the merger will increase the combined Company's
interest in these projects, thereby giving the combined company greater
control over their operation and development;
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- 3DX currently owns interests in exploration projects in which Esenjay does
not have an interest, but which Esenjay believes can be value additions to
its project inventory;
- the merger of Esenjay and 3DX results in the acquisition by Esenjay of
interests in exploration assets at attractive prices, including interests
in proven developed natural gas and oil properties;
- the increased asset base resulting from the merger may result in access to
capital to which Esenjay might not otherwise find available and access to
capital at more attractive financing costs;
- certain key professional technical personnel at 3DX may remain on the
staff of the combined company, thereby expanding its array of professional
exploration personnel;
- Esenjay expects that the merger will result in cost savings due to the
elimination of redundant facilities and personnel;
- the structure of the merger, which is intended to be tax-free to Esenjay
and its stockholders; and
- Esenjay has received an opinion from an independent investment firm that
the merger will be fair to Esenjay and its stockholders, despite conflicts
of interest that may arise due to the overlapping ownership by certain
shareholders of Esenjay common stock and 3DX common stock.
The foregoing discussion of the information and factors that were given
weight by Esenjay's board of directors is not exhaustive. In view of the variety
of factors considered, the Esenjay board of directors did not deem it useful to,
and did not assign relative weights to, the various factors considered in
reaching its conclusion. Instead, it conducted an overall analysis of the
factors described above, including thorough discussions with and questioning of
Esenjay's management and outside legal and financial advisors, as well as
discussions with 3DX's management. In considering these factors, individual
directors may have given different weights to different factors.
3DX'S REASONS FOR MERGER
For the reasons described in "Background of the Merger", the 3DX board of
directors and management have been pursuing a merger or other financing
transaction since August 1998. The auditor's report relating to 3DX's audited
balance sheet as of December 31, 1998 and 1997 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998 contains an explanatory
paragraph as to 3DX's ability to continue as a going concern. If the merger with
Esenjay is not closed, 3DX will be required to explore other possibilities for
additional capital infusions or for possible sale or merger of the company.
There can be no assurance that such attempts would be successful. 3DX's recent
delisting from The NASDAQ SmallCap Market will exacerbate the difficulty in
pursuing additional capital.
The 3DX board of directors has determined that the proposed merger with
Esenjay is fair to, and in the best interest of, 3DX and its stockholders.
Accordingly, the 3DX board has unanimously approved the merger and recommends
that the 3DX stockholders vote "for" approval and adoption of the merger and the
merger agreement.
The failure of 3DX's shareholders to approve the merger with Esenjay could
have a severe negative impact upon 3DX. In order to secure Esenjay's agreement
to the terms of the merger agreement, 3DX was required to agree to pay a
termination fee in certain circumstances, including the failure of 3DX's
stockholders to approve the merger. The board of 3DX acceded to Esenjay's demand
for a termination fee in this circumstance after concluding that this
transaction was likely to be approved by 3DX's stockholders, and a negative vote
was only likely to occur if a superior offer emerged. However, in the event the
stockholders of 3DX do not approve the merger and no superior offer for 3DX has
been made, 3DX will owe Esenjay a termination fee of $250,000 and be required to
reimburse Esenjay's fees and expenses in connection with the proposed
transaction. This will have a material adverse effect on 3DX's liquidity and
will make the need for a merger, sale or other financing transaction more acute.
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The principal reasons favoring the proposed merger with Esenjay considered
by 3DX's board of directors are as follows:
- The ratio at which shares of 3DX common stock will be exchanged for shares
of Esenjay common stock in the merger was determined to be fair to holders
of 3DX common stock from a financial point of view by management and 3DX's
financial advisor, Harris Webb & Garrison, Inc.
- 3DX shareholders will have the opportunity to elect to receive Esenjay
preferred stock, which is designed to provide some protection from
downward movement in the Esenjay common stock price during the year
following the merger.
- The structure of the merger, which is intended to be a tax-free
transaction for federal income tax purposes.
- The merger is intended to provide holders of 3DX common stock with the
opportunity to receive a significant premium over current market prices
for 3DX common stock.
In addition to these factors, 3DX's board of directors considered a number
of operational and financial efficiencies resulting from the combination of the
two companies, including the following:
- The merger is intended to result in a combined company whose common stock
will trade on the Nasdaq Small Cap market in substantially greater dollar
volumes than that of 3DX alone, thereby providing greater liquidity for
3DX shareholders.
- The merger is intended to result in a combined company with greater
discretionary cash flow and debt capacity than 3DX alone. This will
increase the combined company's ability to grow reserves through
exploration and development of a greater number of prospects using
internally generated funds.
- The merger is intended to result in a combined company with a greater
access to capital, lower cost of capital, increased flexibility in capital
allocation and added resilience against fluctuations in commodity prices.
- The businesses and assets of Esenjay and 3DX are highly complementary in
key areas and will result in larger interests in properties.
- The merger is intended to create an organization with operating
efficiencies by combining common interests in onshore Gulf Coast
properties, consolidation of the corporate offices of the two companies
and elimination of the fixed costs of one of the two public companies.
- The merger will result in a combined entity with a business vision similar
to 3DX's, which relies on high-technology based 3D seismic data to select
exploration prospects.
The foregoing discussion of the information and factors that were given weight
by 3DX's board of directors is not exhaustive. In view of the variety of factors
considered, the 3DX board of directors did not deem it useful to, and did not,
assign relative weights to the various factors considered in reaching its
conclusion. Instead it conducted an overall analysis of the factors described
above, including thorough discussions with and questioning of 3DX's management
and outside legal and financial advisors. In considering these factors,
individual directors may have given different weights to different factors.
CERTIFICATE OF DESIGNATIONS FOR SERIES A PREFERRED STOCK
RANKING. With respect to distributions upon liquidation, dissolution or
winding up, the Series A preferred stock ranks:
- junior to any future series of preferred stock designated to be senior to
Series A preferred stock;
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<PAGE>
- equal to any future series of preferred stock designated to be equal in
ranking to the Series A preferred stock; and
- senior to Esenjay's common stock and any future series of preferred stock
designated to be subordinate to the Series A preferred stock.
As long as any Series A preferred stock remains outstanding, any future
series or class of stock issued by Esenjay, other than common stock, shall
specify its ranking relative to the Series A preferred stock. Esenjay may issue
additional preferred stock; provided, however, that two-thirds of the members of
the board of directors voting must approve the issuance of preferred stock to
Aspect and its affiliates or to Esenjay Petroleum and its affiliates.
DIVIDENDS. Holders of Series A preferred stock are entitled to receive
dividends as if each of their shares of preferred stock had been fully converted
into one share of Esenjay common stock.
LIQUIDATION PREFERENCE. In the event Esenjay files voluntary or involuntary
bankruptcy or otherwise winds up, holders of Series A preferred stock will
receive the greater of either $1.875 per share or the amount to be received by
the holders of common stock had each share of Series A preferred stock been
converted into one share of common stock. Holders of Series A preferred stock
will receive their liquidation distribution before any holders of common stock
or future series of preferred stock that rank junior to the Series A preferred
stock. After payment of the full amount of the liquidating distribution to which
they are entitled, the holders of shares of the Series A preferred stock will
not be entitled to any further distribution of Esenjay's assets. Neither a
consolidation, merger or other business combination of Esenjay with or into
another corporation or other entity, nor a sale, lease, or exchange or transfer
of all or part of Esenjay's assets for cash, securities or other property will
be considered a liquidation, dissolution or winding up of Esenjay.
VOTING. The holders of the Series A preferred stock will have no voting
rights except as described below or as required by law. In exercising any vote,
each outstanding share of Series A preferred stock will be entitled to one vote.
Shares held by Esenjay or any entity controlled by Esenjay shall have no voting
rights.
As long as any shares of Series A 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 Esenjay's board of directors. Any
vacancy on the board of directors caused by the death or resignation of the
director representing the Series A preferred stock shall be filled at the next
annual meeting of the stockholders of Esenjay. However, the board of directors
shall promptly appoint any qualified person designated in writing by the holders
of more than 50% of the then outstanding Series A preferred stock to fill such
vacancy. The term of office of the director designated by the holders of the
Series A preferred stock will terminate immediately upon there being no shares
of Series A preferred stock outstanding.
So long as Series A preferred stock is outstanding, Esenjay shall not,
without the affirmative vote of the holders of at least 66 2/3% of all
outstanding shares of Series A preferred stock, voting separately as a class:
- amend, alter or repeal any provision of the certificate of incorporation
or the bylaws of Esenjay so as to adversely affect the designations,
preferences, limitations and relative rights of the Series A preferred
stock;
- effect any reclassification of the Series A preferred stock; or
- amend, alter or repeal any provision of the Certificate of Designations;
however, Esenjay may make technical, corrective, administrative or similar
changes that do not, individually or in the aggregate, adversely affect
the rights or preferences of the holders of shares of Series A preferred
stock.
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<PAGE>
REDEMPTION. For a period of one year from the effective date of the merger
and at its sole option, Esenjay may redeem any or all of the Series A preferred
stock at a price of $1.925 per share plus accumulated and unpaid dividends, if
any.
No holder of Series A preferred stock shall have any right to require
Esenjay to redeem any or all of the shares of Series A preferred stock.
OPTIONAL CONVERSION. If Esenjay has not exercised its optional redemption
right and the average trading price of Esenjay common stock during the twelfth
calendar month after the effective date of the merger is less than $1.875, the
holders of Series A preferred stock may elect for optional conversion. If a
holder of Series A preferred stock elects optional conversion, Esenjay may
choose, at its sole option, to convert each electing share of Series A preferred
stock into either:
- a number of shares of Esenjay common stock equal to $1.875 divided by the
average trading price of Esenjay's common stock during the twelfth
calendar month after the effective date of the merger, to a maximum of
3.75 shares; or
- $1.65 in cash per share of preferred stock.
AUTOMATIC CONVERSION. Each share of Series A preferred stock that remains
issued and outstanding shall be automatically converted into one share of
Esenjay common stock:
- on the first day of the thirteenth calendar month after the effective date
of the merger, if the average trading price of Esenjay common stock during
the twelfth calendar month after the effective date of the merger is
greater than, or equal to, $1.875; or
- on the first day of the fourteenth calendar month after the effective date
of the merger if the average trading price of Esenjay common stock during
the twelfth calendar month after the effective date of the merger is less
than $1.875 and the Series A preferred stock is not converted pursuant to
the optional conversion provisions set forth above.
ADJUSTMENTS TO CONVERSION PRICE. The conversion price will be subject to
adjustment in certain events, including:
- the issuance of stock as a dividend on the common stock;
- subdivisions or combinations of the common stock;
- the issuance to all holders of common stock of certain rights or warrants
to subscribe for or purchase common stock at a price less than current
market price and such rights or warrants expire within 45 days after the
record date for determining stockholders entitled to receive them; or
- the distribution to all holders of common stock of evidences of
indebtedness of Esenjay or cash (excluding ordinary cash dividends), other
assets or rights or warrants to subscribe for or purchase any securities
(other than those referred to above).
No adjustment in the conversion price will be required until cumulative
adjustments aggregate 1% or more of the conversion price as last adjusted;
however, any adjustment not made shall be carried forward.
Esenjay may increase the number of shares into which each share of Series A
preferred stock can be converted by any amount for any period of at least 20
days, in which case Esenjay shall give at least 15 days notice of such increase.
Additionally, Esenjay may make such increases in the number of shares into which
each share of Series A preferred stock can be converted as the board of
directors of Esenjay deems advisable to avoid or diminish any income tax to
holders of common stock resulting from any dividend distribution of stock or
issuance of rights or warrants or from any event treated as such for income tax
purposes.
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<PAGE>
Holders of outstanding Series A preferred stock will be entitled to convert
their shares of preferred stock into the same consideration received by holders
of Esenjay common stock in the event that:
- Esenjay merges with or into another entity;
- Esenjay sells or transfers all or substantially all of its assets; or
- Esenjay initiates any compulsory share exchange in which Esenjay common
stock is converted into other securities, cash or other property.
OTHER PROVISIONS. Esenjay shall reserve and keep available out of its
authorized but unissued shares of common stock sufficient shares of common stock
to effect conversion of the shares of Series A preferred stock. Upon issuance by
Esenjay, all shares of common stock that may be issued upon conversion of the
shares of Series A preferred stock will be validly issued, fully paid and
nonassessable and free from all taxes, liens and charges with respect to the
issuance. The holders of shares of Series A preferred stock are not entitled to
any preemptive or subscription rights in respect of any securities of Esenjay.
OPINION OF 3DX FINANCIAL ADVISOR
Harris Webb & Garrison, Inc. was retained by the board of directors of 3DX
to render an opinion to the board as to the fairness from a financial point of
view of the consideration to be received by the stockholders in the merger. On
May 11, 1999, pursuant to 3DX's request, Harris Webb & Garrison delivered its
written opinion to the board of directors of 3DX to the effect that, as of the
date of the opinion, the consideration to be received by stockholders of 3DX in
the merger was fair to such stockholders from a financial point of view. Harris
Webb & Garrison has consented to the use of its name and the fairness opinion in
this prospectus. A copy of the Harris Webb & Garrison fairness opinion is
included as EXHIBIT C to this prospectus.
The summary of the fairness opinion set forth in this proxy
statement/prospectus is qualified in its entirety by reference to the full text
of such opinion. Stockholders are urged to read the opinion in its entirety for
assumptions made, procedures followed, other matters considered and limits of
the review by Harris Webb & Garrison. In arriving at its opinion, Harris Webb &
Garrison considered a possible range of fair value with respect to the shares,
and made its determination as to the fairness of the consideration based on the
financial and comparative analyses described below.
The Harris Webb & Garrison fairness opinion was prepared for the board of
directors of 3DX and is directed only to the fairness, from a financial point of
view, as of May 11, 1999, of the consideration to be received by stockholders in
the merger. The Harris Webb & Garrison fairness opinion does not constitute a
recommendation to any stockholder as to how to vote on the merger. In addition,
Harris Webb & Garrison was not asked to opine as to, and its opinion does not
address, the underlying business decision of the board of directors of 3DX to
proceed with or to effect the merger, nor did Harris Webb & Garrison participate
in the determination of the terms of the merger.
In connection with rendering its opinion, Harris Webb & Garrison, among
other things:
- reviewed the merger agreement in its substantially final form;
- reviewed Esenjay's Annual Reports on Form 10-KSB/A for the fiscal year
ended December 31, 1998 and 3DX's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 and Quarterly Report on Form 10-Q for
the period ended March 31, 1999;
- reviewed the report prepared by Ryder Scott Company Petroleum Engineers,
along with certain operating and financial information provided to Harris
Webb & Garrison by management of 3DX relating to 3DX's properties,
business and prospects;
- discussed the Ryder Scott Report with representatives of Ryder Scott;
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<PAGE>
- met with certain members of 3DX's senior management to discuss their
operations, historical financial statements and future prospects;
- reviewed certain operating and financial information, including
projections, provided to Harris Webb & Garrison by management of Esenjay
relating to its properties, business and prospects, including a reserve
report prepared by Netherland, Sewell & Associates, Inc.;
- reviewed the historical prices and trading volumes of 3DX and Esenjay
common stock;
- reviewed publicly-available financial data and stock market performance
data of companies deemed generally comparable to 3DX;
- reviewed the terms of recent acquisitions of publicly-held oil and gas
assets and entities deemed generally comparable to 3DX; and
- conducted such other studies, analyses, inquiries and investigations as it
deemed appropriate.
In rendering its opinion, Harris Webb & Garrison assumed, without
independent verification, the accuracy, completeness and fairness of all
financial and other information that was available to it from public sources or
that was provided to it by 3DX, Esenjay, Ryder Scott, Netherland, Sewell or
their representatives. Harris Webb & Garrison relied upon the assurances of 3DX
and Esenjay that they have no actual knowledge of any facts that would make
information they provided to Harris Webb & Garrison incomplete or misleading.
Stockholders are cautioned, however, that the valuations concerning 3DX
contained in the Ryder Scott report and the information regarding 3DX and
Esenjay's future prospects provided to Harris Webb & Garrison by 3DX and Esenjay
are based on numerous variables and assumptions that are inherently uncertain.
These include, without limitation, general economic conditions and competitive
conditions within the oil and gas industry and that the inclusion of such
information should not be regarded as an indication that 3DX, Esenjay or any
persons who received such information consider it other than an estimate of
future events. These financial projections are not publicly available, to Harris
Webb & Garrison's knowledge, and have not been disseminated to any party other
than Harris Webb & Garrison.
The fairness opinion is necessarily based on economic, market, financial and
other conditions as they existed on, and on the information made available to it
as of, the date of the opinion. It should be understood that, although
subsequent developments may affect its opinion, except as agreed upon by 3DX,
Harris Webb & Garrison does not have any obligation to update, revise or
reaffirm its opinion.
In arriving at its opinion, Harris Webb & Garrison did not perform any
independent appraisal of the assets of 3DX or Esenjay. In analyzing the value of
proved reserves of 3DX, Harris Webb & Garrison relied substantially on the
evaluations of Ryder Scott Company in the Ryder Scott Report. Harris Webb &
Garrison also reviewed reserve evaluations prepared by management of 3DX and
Esenjay prepared at the request of Harris Webb & Garrison near May 1, 1999.
While Harris Webb & Garrison viewed these evaluations as important to their
fairness analysis, Harris Webb & Garrison did not view them as conclusive as to
the value of 3DX, but rather one of many indications of value analyzed by Harris
Webb & Garrison.
The following is a summary of the most significant factors considered and
the principal financial analyses performed by Harris Webb & Garrison to arrive
at its opinion dated May 11, 1999.
- VALUE RANGE COMPARISON. Harris Webb & Garrison's fairness analysis was
primarily that the estimated fair market value range of "value received"
by a public stockholder was within a range of value reasonably equivalent
to or somewhat greater than the estimated fair market value range of
"value surrendered."
- DISCOUNTED CASH FLOW ANALYSIS CONTAINED IN THE RYDER SCOTT REPORT AND
UPDATED REPORTS PREPARED BY MANAGEMENT OF 3DX. Harris Webb & Garrison
considered the present value of the future cash flows
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<PAGE>
that the proved reserves of 3DX could be expected to generate after
approximately May 1, 1999 based on these reserve reports.
- ANALYSIS OF CERTAIN OTHER PUBLICLY-HELD OIL AND GAS ENTITIES. Harris Webb
& Garrison compared selected operating and financial ratios for 3DX to
corresponding data and ratios for selected oil and gas entities whose
securities are publicly held and which Harris Webb & Garrison believed
were comparable in certain respects to 3DX. These entities were selected
for comparison as they are oil and gas entities with similar properties
and business characteristics to 3DX. Harris Webb & Garrison calculated the
market capitalization and market value for each of the following publicly
traded companies: Brigham Exploration Company, Edge Petroleum Corporation,
Fortune Natural Resources Corporation, Parallel Petroleum Corporation,
Patina Oil & Gas Corporation and Texoil, Inc. For this purpose, Harris
Webb & Garrison defined "market capitalization" as "the market value of
the relevant company's common equity plus total debt less excess cash and
cash equivalents." Harris Webb & Garrison calculated the market
capitalization of each of the comparable companies as a multiple of each
such company's December 31, 1998 proved reserves, the latest twelve months
earnings (as of December 31, 1999) before interest, taxes, depreciation,
depletion, amortization, impairments and exploration costs ("EBITDX") and
the present value of future net revenues of proved reserves (before taxes)
discounted at 10% (SEC method pricing). The multiples yielded by such
calculations for the comparable companies were (i) with respect to proved
reserves, between $0.52 per Mcfe and $1.25 per Mcfe, (ii) with respect to
the latest twelve months EBITDX, between 3.9x and 7.4x and (iii) with
respect to the SEC PV 10% value, between 86% and 158%. Applying these
multiples to 3DX yielded a value range of $2.9 to $6.4 million for 100% of
3DX.
Because of the inherent differences between the businesses, operations and
the prospects of 3DX and the businesses, operations and prospects of the
comparable companies and the recent significant changes in the oil and gas
markets, Harris Webb & Garrison believed that it was inappropriate to, and
therefore did not, give significant weight to the quantitative results of
this analysis of comparable companies.
- COMPARABLE CONVERTIBLE PREFERRED STOCKS. Harris Webb & Garrison reviewed
22 publicly traded convertible preferred stocks and compared yield and
conversion premiums to the new preferred stock. None of the 22 companies,
however, was very comparable to Esenjay and thus Harris Webb & Garrison
gave little weight to this analysis.
- COMPARABLE TRANSACTIONS. Harris Webb & Garrison reviewed certain recent
transactions, but none were believed significantly comparable to the
merger to provide meaningful analysis.
In addition to the financial analyses set forth above, Harris Webb &
Garrison considered a number of qualitative factors in arriving at its opinion,
including without limitation, the following:
- the potential capital appreciation of the Esenjay common stock and the
potential for new proved reserves for Esenjay;
- the potential protection available if the preferred stock is elected as
consideration in the merger;
- the greater number and diversity of properties of Esenjay resulting from
the merger; and
- the priority of the liquidation preference of the preferred stock with
respect to Esenjay common stock.
The summary set forth above is not a complete description of the analyses
performed by Harris Webb & Garrison. Preparation of the fairness opinion
involved various determinations as to the most appropriate and relevant methods
of financial analysis and the application of these methods to the particular
circumstances. Notwithstanding the separate factors summarized above, Harris
Webb & Garrison believes that its analyses must be considered as a whole and
that selecting portions of its analyses and the factors considered by it,
without considering all analyses and factors, would create an incomplete view
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<PAGE>
of the evaluation process underlying its fairness opinion. In performing its
analyses, Harris Webb & Garrison made numerous assumptions with respect to oil
and gas industry performance, market prices for oil and gas and economic
conditions and other matters. The analyses performed by Harris Webb & Garrison
are not necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses.
The board of directors of 3DX selected Harris Webb & Garrison as its
financial advisor because Harris Webb & Garrison is a regionally recognized
investment banking firm with substantial experience in assignments similar to
that undertaken with regard to evaluating the merger. As part of its investment
banking business, Harris Webb & Garrison is regularly engaged in the valuation
of business and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes.
Pursuant to an engagement letter with 3DX, Harris Webb & Garrison will be
paid $25,000 from 3DX for rendering the fairness opinion. 3DX has also agreed to
reimburse Harris Webb & Garrison for its reasonable out-of-pocket expenses,
including the reasonable fees and expenses of its legal counsel, and to
indemnify Harris Webb & Garrison against certain liabilities arising out of or
in connection with the services rendered by Harris Webb & Garrison under the
engagement, including liabilities under federal securities laws. The terms of
the fee arrangement with Harris Webb & Garrison, which are customary in
transactions of this nature, were negotiated at arms length between 3DX and
Harris Webb & Garrison.
RECOMMENDATION OF ESENJAY'S BOARD OF DIRECTORS
The board of directors of Esenjay recommends a vote FOR approval and
adoption of the merger. A vote of at least a majority of all outstanding Esenjay
common stock is required to approve the merger. The merger proposal will be
voted upon at the annual meeting of stockholders of Esenjay. Failure to approve
the merger will result in the abandonment by Esenjay of the merger and 3DX's
nominee will not become a member of the board of directors. Abstentions and
broker non-votes will have the effect of a vote against the merger.
RECOMMENDATION OF 3DX'S BOARD OF DIRECTORS
The board of directors of 3DX recommends a vote FOR approval and adoption of
the merger. A vote of at least a majority of all outstanding 3DX common stock is
required to approve the merger. The merger proposal will be voted upon at the
special meeting of stockholders of 3DX. Failure to approve the merger will
result in the abandonment by 3DX of the merger, 3DX's nominee will not be
elected to the board of directors of Esenjay and 3DX may be required to pay
Esenjay's reasonable costs and expenses incurred in negotiating and implementing
the merger plus a $250,000 termination fee. Abstentions and broker non-votes
will have the effect of a vote against the merger.
MANAGEMENT
Upon consummation of the merger, Esenjay's board of directors will consist
of the eight existing directors and C. Eugene Ennis, who has been designated by
3DX to serve as the Esenjay director representing the preferred stock. All of
Esenjay's current executive officers will retain their positions.
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<PAGE>
COMPARISON OF STOCKHOLDERS' RIGHTS
<TABLE>
<CAPTION>
ESENJAY 3DX
----------------------------------------- -----------------------------------------
<S> <C> <C>
Authorized Capital 40,000,000 shares of Common Stock, $.01 20,000,000 shares of Common Stock, $.01
par value par value
5,000,000 shares of Preferred Stock, $.01 1,000,000 shares of Preferred Stock, $.01
par value par value
Preferred Stock May be issued from time to time in one or May be issued from time to time in one or
more series as determined by the board of more series as determined by the board of
directors. Terms of each series to be set directors. Terms of each series to be set
by resolution of the board of directors. by resolution of the board of directors.
Board of Directors No less than four nor more than fourteen No less than three nor more than nine
directors as determined by the board of directors as determined by the board of
directors. Board is divided into three directors. Board is divided into three
classes serving three year terms with as classes serving three year terms with as
nearly equal a number of directors in nearly equal a number of directors in
each class as possible. Currently have each class as possible.
eight members. Directors may be removed
with or without cause by a majority vote
of stockholders.
Indemnification Officers and directors indemnified Officers and directors indemnified
against personal liability to the fullest against personal liability to the fullest
extent allowed by Delaware law. extent allowed by Delaware law.
Compromise or Agreement by In the event of bankruptcy, Not applicable.
Corporation with Creditor reorganization or dissolution, if
or Stockholders creditors or stockholders of three-
fourths of the value of such class agrees
to any compromise or agreement sanctioned
by the court as necessary, the agreement
or compromise will bind the entire class.
Action by Stockholders Any action required or permitted to be Any action required or permitted to be
taken by stockholders must be effected at taken by stockholders must be effected at
an annual or special meeting of the an annual or special meeting of the
stockholders. stockholders.
Annual Meeting Time and place to be set by the board of Time and place to be set by the board of
directors. directors. If not set by the board of
directors, the annual meeting will be
held on the second Tuesday of May at
10:00 a.m. at the corporate office.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
ESENJAY 3DX
----------------------------------------- -----------------------------------------
<S> <C> <C>
Special Meetings May be called at any time by a majority May be called at any time by the board of
of the board of directors or by the directors or the President. Time and
stockholders owning 10% in the aggregate place to be set by the board of
amount of issued and outstanding shares directors.
of common stock. Time and place to be set
in the meeting notice.
Notice of Meetings Written notice stating the date, time, Written notice stating the date, time,
place and purpose for which the special place and purpose for which the special
meeting is called shall be given to meeting is called shall be given to
stockholders entitled to vote at least stockholders entitled to vote at least
ten days but not more than sixty days ten days but not more than sixty days
before the meeting date. before the meeting date.
Quorum A quorum consists of holders of a A quorum consists of holders of a
majority of outstanding shares of each majority of outstanding shares of each
class of stock entitled to vote at the class of stock entitled to vote at the
meeting either present or represented by meeting either present or represented by
proxy. proxy.
Voting May vote in person or by proxy. Except as otherwise provided, each
Directors are elected by a plurality of stockholder shall be entitled to one vote
votes cast at the meeting. All other for each share of capital stock
items require majority of the votes cast registered in the stockholder's name on
at the meeting. the books of 3DX. Proxies are allowed if
in writing and are revocable.
Voting need not be by written ballot.
Votes on ballots must be signed by the
stockholder or stockholder's proxy and
state the number of shares voted.
Directors are elected by a plurality of
votes cast at the meeting. All other
items require a majority of the votes
cast at the meeting.
Inspectors The board of directors may appoint one or The board of directors may appoint one or
more inspectors. If not appointed by the more inspectors. If not appointed by the
board of directors, inspectors may be board of directors, inspectors may be
appointed by the person presiding at the appointed by the person presiding at the
meeting and shall be appointed upon meeting and shall be appointed upon
request of any stockholder entitled to request of any stockholder entitled to
vote at the meeting. vote at the meeting.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
ESENJAY 3DX
----------------------------------------- -----------------------------------------
<S> <C> <C>
Business at Stockholders To properly bring business before a To properly bring business before a
Meetings meeting of the stockholders, a meeting of the stockholders, a
stockholder must give written notice to stockholder must give written notice to
the secretary of Esenjay not less than 40 the secretary of 3DX not less than 80
days prior to the meeting. The notice days prior to the first anniversary of
must set forth a brief description of the the prior year's annual meeting. The
business, the name and address of the notice must set forth a brief description
stockholder proposing such business, the of the business, the name and address of
class and number of shares held by the the stockholder proposing such business,
stockholder proposing the business and the class and number of shares held by
any material interests the stockholder the stockholder proposing the business
has in the business proposed. and any material interests the
stockholder has in the business proposed.
Fiscal year The fiscal year begins on the 1st day of The fiscal year is determined by the
January and ends on the 31st day of board of directors.
December.
</TABLE>
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion summarizes the opinion of Porter & Hedges, L.L.P.
as to the material federal income tax consequences of the merger. This
discussion is based upon the Internal Revenue Code of 1986 ("Code"), as amended,
the regulations promulgated under the Code, Internal Revenue Service rulings,
and judicial and administrative rulings in effect as of the date hereof, all of
which are subject to change, possibly with retroactive effect. This discussion
does not address all aspects of federal income taxation that may be relevant to
a stockholder in light of the stockholder's particular circumstances or to those
3DX stockholders subject to special rules, such as stockholders who are not
citizens or residents of the United States, financial institutions, tax-exempt
organizations, insurance companies, dealers in securities, stockholders who
acquired their 3DX common stock pursuant to the exercise of options or similar
derivative securities or otherwise as compensation or stockholders who hold
their 3DX common stock as part of a straddle or conversion transaction. This
discussion assumes that 3DX stockholders hold their respective shares of 3DX
common stock as capital assets within the meaning of Section 1221 of the Code.
This discussion assumes the absence of certain changes in the existing facts
and relies on assumptions, representations and covenants made by 3DX, Esenjay
and others, including those contained in certificates of officers of 3DX and
Esenjay. If any of these factual assumptions is inaccurate, the tax consequences
of the merger could differ from those described here. The opinions regarding the
tax-free nature of the merger neither bind the IRS nor preclude the IRS from
adopting a contrary position. Neither 3DX nor Esenjay intends to obtain a ruling
from the IRS with respect to the tax consequences of the merger.
FEDERAL INCOME TAX CONSEQUENCES TO 3DX AND ESENJAY. Neither Esenjay nor 3DX
will recognize gain or loss for federal income tax purposes as a result of the
merger.
FEDERAL INCOME TAX CONSEQUENCES TO ESENJAY STOCKHOLDERS. Holders of Esenjay
common stock will not recognize any gain or loss for federal income tax purposes
as a result of the merger.
FEDERAL INCOME TAX CONSEQUENCES TO 3DX STOCKHOLDERS. Except as provided
below, holders of shares of 3DX common stock will (i) not recognize any gain or
loss for federal income tax purposes as a result of the exchange of their shares
of 3DX common stock for Esenjay common stock or preferred stock in the merger
and (ii) have a tax basis in the Esenjay common stock received in the merger
equal to the tax basis
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of the 3DX common stock surrendered in the merger. The 3DX stockholders' holding
period with respect to the Esenjay common stock or preferred stock received in
the merger will include the holding period of the 3DX common stock surrendered
in the merger.
SPECIAL CONSIDERATIONS FOR 3DX STOCKHOLDERS ELECTING TO RECEIVE PREFERRED
STOCK--POSSIBLE DIVIDEND TREATMENT. Generally, except to the extent received
for declared and unpaid dividends, the redemption of all or a portion of a
holder's preferred stock for cash would result in capital gain or loss equal to
the difference between the amount of cash received and the stockholder's tax
basis in the preferred stock redeemed. Such gain or loss would be long-term
capital gain or loss if the holding period for the preferred stock were to
exceed one year. A redemption of shares of preferred stock by Esenjay for cash
may be treated, however, as a distribution taxable as a dividend to redeemed
stockholders to the extent of Esenjay's current or accumulated earnings and
profits unless under the rules of section 302 of the Code, the redemption (i)
results in a "complete termination" of the stockholder's interest in Esenjay
(within the meaning of section 302(b)(3) of the Code) which would include
ownership of both common and preferred stock, (ii) is "substantially
disproportionate" with respect to the holder or (iii) is "not essentially
equivalent to a dividend." Shares considered to be owned by the holder by reason
of the constructive ownership rules set forth in section 318 of the Code, as
well as shares actually owned, will be taken into account. Although the matter
is not entirely free from doubt, based on legislative history of section 302 and
existing IRS rulings, because there will be no proportional relationship between
the holdings of common stock and preferred stock, the redemption of a
stockholder's preferred stock for cash will be treated as "not essentially
equivalent to a dividend" if taking into account the stockholder's actual and
constructive stock ownership, (a) the stockholder's relative stock interest in
Esenjay is minimal, (b) the stockholder is not able to exercise control over
Esenjay's affairs, and (c) the redemption causes a reduction in the holder's
proportionate interest of Esenjay.
SPECIAL CONSIDERATIONS FOR 3DX STOCKHOLDERS ELECTING TO RECEIVE PREFERRED
STOCK--REDEMPTION PREMIUM. Certain tax consequences may apply to a 3DX
stockholder who elects to receive preferred stock in the merger if the preferred
stock is classified as "preferred stock" for purposes of section 305(c) of the
Code. Whether the Esenjay preferred stock meets the Section 305(c) test, is
subject to uncertainty. The discussion in the immediately following paragraph
assumes that the preferred stock meets the requirements of Section 305(c).
Because the preferred stock may be redeemed by Esenjay at a price higher
than its issue price, the IRS could take the position that a 3DX stockholder who
elects to receive preferred stock is treated as having received a dividend from
Esenjay in an amount equal to the excess, if any, of the redemption price of the
preferred stock over the fair market value of the 3DX common stock exchanged for
the preferred stock. If a 3DX stockholder is treated as having received such a
dividend, then a portion of the dividend must be included in the stockholder's
gross income as ordinary income in each taxable year preceding the redemption.
However, the excess of the redemption price of the preferred stock over its fair
market value will not be treated as a dividend if it is more likely than not
that no redemption will occur. Whether the IRS would conclude that redemption is
more likely than not to occur is subject to uncertainty. A "safe harbor" exists,
however, whereby redemption is not more likely than not to occur if three
requirements are met: (i) the stockholder is not "related" to Esenjay under the
rules contained in section 267(b) or 707(b) of the Internal Revenue Code (after
substituting "20 percent" for "50 percent" in those sections); (ii) Esenjay has
no plans, arrangements, or agreements that effectively require or are intended
to compel it to redeem the preferred stock; and (iii) Esenjay's exercise of its
right to redeem the preferred stock will not reduce the yield on the preferred
stock. Esenjay has represented that the latter two requirements of this safe
harbor are met. Determining whether a 3DX stockholder is "related" to Esenjay
will depend upon each stockholder's specific facts and 3DX stockholders should
consult their tax advisors to determine whether they may be "related" to Esenjay
for purposes of the first requirement of the safe harbor.
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SPECIAL CONSIDERATIONS FOR 3DX STOCKHOLDERS ELECTING TO RECEIVE PREFERRED
STOCK--SECTION 306 STOCK. The Internal Revenue Service could take the position
that the Preferred Stock received by the 3DX shareholders pursuant to the Merger
is "section 306 stock." The Company believes that the Preferred Stock is not
"section 306 stock" because the receipt of such stock by 3DX shareholders will
not be "substantially the same as the receipt of a stock dividend." If the
Preferred Stock were determined to be section 306 stock, the entire amount paid
the 3DX shareholders in a redemption of such stock could be taxable as ordinary
income to the extent of Esenjay's earnings and profits at the time of the
redemption, with any excess treated as a recovery of capital gain or a recovery
of basis. In a disposition of such stock other than by redemption, ordinary
income treatment would be based on Esenjay's earnings and profits at the time of
the Merger. Because the effects of a disposition of section 306 stock depend on
each stockholder's particular facts, 3DX stockholders contemplating an election
to receive Preferred Stock should consult their tax advisors.
WE INTEND THIS DISCUSSION TO PROVIDE ONLY A SUMMARY OF THE MATERIAL FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER. WE DO NOT INTEND THAT IT BE A COMPLETE
ANALYSIS OR DESCRIPTION OF ALL POTENTIAL FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER. IN ADDITION, WE DO NOT ADDRESS TAX CONSEQUENCES THAT MAY VARY WITH, OR
ARE CONTINGENT UPON, INDIVIDUAL CIRCUMSTANCES. MOREOVER, WE DO NOT ADDRESS ANY
NON-INCOME TAX OR ANY FOREIGN, STATE OR LOCAL TAX CONSEQUENCES OF THE MERGER.
ACCORDINGLY, WE STRONGLY URGE YOU TO CONSULT YOUR TAX ADVISOR TO DETERMINE YOUR
PARTICULAR UNITED STATES FEDERAL, STATE, LOCAL OR FOREIGN INCOME OR OTHER TAX
CONSEQUENCES RESULTING FROM THE MERGER, WITH RESPECT TO YOUR INDIVIDUAL
CIRCUMSTANCES.
ACCOUNTING TREATMENT
The merger will be accounted for using the purchase method of accounting.
Esenjay will be treated as the acquiror of 3DX's business and as a result, the
total value of Esenjay shares issued in the merger will be allocated and
recorded based upon the estimated fair values of the net assets of 3DX. See
Esenjay's Unaudited Pro Forma Financial Statements appearing elsewhere in this
proxy statement/prospectus setting forth a description of the adjustments
expected to be recorded to 3DX's financial statements.
BUSINESS COMBINATIONS WITH INTERESTED PARTIES
Section 203 of the Delaware General Corporation Law limits "business
combinations" between corporations and interested persons, which definition
would include 3DX with respect to Esenjay following the consummation of the
merger. However, the statute exempts business combinations with interested
stockholders who become stockholders in a transaction approved by the board of
directors. The board of directors of Esenjay and 3DX approved the merger on May
11, 1999. Accordingly, this statute will not apply to 3DX in connection with the
merger.
RIGHTS OF DISSENTING STOCKHOLDERS OF 3DX
SECTION 262 OF DGCL IS REPRINTED IN ITS ENTIRETY AS EXHIBIT D TO THIS PROXY
STATEMENT/PROSPECTUS. THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF
THE LAW RELATING TO APPRAISAL RIGHTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO EXHIBIT D. THIS DISCUSSION AND EXHIBIT D SHOULD BE REVIEWED
CAREFULLY BY ANY 3DX STOCKHOLDER WHO WISHES TO EXERCISE STATUTORY APPRAISAL
RIGHTS OR WHO WISHES TO PRESERVE THE RIGHT TO DO SO, AS FAILURE TO COMPLY WITH
THE PROCEDURES SET FORTH HEREIN OR THEREIN WILL RESULT IN THE LOSS OF APPRAISAL
RIGHTS.
A holder of record of 3DX common stock as of the record date who makes the
demand described below with respect to such shares, who continuously is the
record holder of such shares through the effective date of the merger, who
otherwise complies with the statutory requirements of section 262 of DGCL and
who neither votes in favor of the merger nor consents thereto in writing may be
entitled to an appraisal by the Delaware Court of Chancery of the fair value of
its shares of 3DX common stock. Except as set forth herein, stockholders of 3DX
will not be entitled to appraisal rights in connection with the merger.
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Under section 262, where a merger is to be submitted for approval at a
meeting of stockholders not less than 20 days before the meeting, each
constituent corporation must notify each of the holders of its stock for which
appraisal rights are available that such appraisal rights are available and
include in each such notice a copy of section 262.
3DX stockholders who desire to exercise their appraisal rights must not vote
in favor the merger and must deliver a separate written demand for appraisal to
3DX before the vote by the stockholders of 3DX on the merger. A demand for
appraisal must be executed by or on behalf of the stockholder of record and must
reasonably inform 3DX of the identity of the stockholder of record and that such
record stockholder intends thereby to demand appraisal of the 3DX common stock.
A person having a beneficial interest in shares of 3DX common stock that are
held of record in the name of another person, such as a broker, fiduciary or
other nominee, must act promptly to cause the record holder to follow the steps
summarized herein properly and in a timely manner to perfect whatever appraisal
rights are available. If the shares of 3DX common stock are owned of record by a
person other than the beneficial owner, including a broker, fiduciary (such as a
trustee, guardian or custodian) or other nominee, such demand must be executed
by or for the record owner. If the shares of 3DX common stock are owned of
record by more than one person, as in a joint tenancy or tenancy in common, such
demand must be executed by or for all joint owners. An authorized agent,
including an agent for two or more joint owners, may execute the demand for
appraisal for a stockholder of record; however, the agent must identify the
record owner and expressly disclose the fact that, in exercising the demand,
such person is acting as agent for the record owner.
A record owner, such as a broker, fiduciary or other nominee, who holds
shares of 3DX common stock as a nominee for others, may exercise appraisal
rights with respect to the shares held for all or less than all beneficial
owners of shares as to which such person is the record owner. In such case, the
written demand must set forth the number of shares covered by such demand. Where
the number of shares is not expressly stated, the demand will be presumed to
cover all shares of 3DX common stock outstanding in the name of such record
owner.
A stockholder who elects to exercise appraisal rights, if available, should
mail or deliver his, her or its written demand to: 3DX at 12012 Wickchester,
Houston, Texas 77079.
The written demand for appraisal should specify the stockholder's name and
mailing address, the number of shares of 3DX common stock owned, and that the
stockholder is thereby demanding appraisal of its shares. A vote against the
merger will not itself constitute such a demand. Within ten days after the
effective date of the merger, the surviving corporation must provide notice of
the effective date of the merger to all stockholders who have complied with
section 262.
Within 120 days after the effective date of the merger, either the surviving
corporation or any stockholder who has complied with the required conditions of
section 262 may file a petition in the Delaware Court, with a copy served on the
surviving corporation in the case of a petition filed by a stockholder,
demanding a determination of the fair value of the shares of all dissenting
stockholders. Accordingly, 3DX stockholders who desire to have their shares
appraised should initiate any petitions necessary for the perfection of their
appraisal rights within the time periods and in the manner prescribed in section
262. If appraisal rights are available, within 120 days after the effective date
of the merger, any stockholder who has theretofore complied with the applicable
provisions of section 262 will be entitled, upon written request, to receive
from the surviving corporation a statement setting forth the aggregate number of
shares of 3DX common stock not voting in favor of the merger and with respect to
which demands for appraisal were received by 3DX and the number of holders of
such shares. Such statement must be mailed within 10 days after the written
request therefor has been received by the surviving corporation.
If a petition for an appraisal is timely filed and assuming appraisal rights
are available, at the hearing on such petition, the Delaware Court will
determine which stockholders, if any, are entitled to appraisal rights. The
Delaware Court may require the stockholders who have demanded an appraisal for
their shares
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and who hold stock represented by certificates to submit their certificates of
stock to the Register in Chancery for notation thereon of the pendency of the
appraisal proceedings; and if any stockholder fails to comply with such
direction, the Delaware Court may dismiss the proceedings as to such
stockholder. Where proceedings are not dismissed, the Delaware Court will
appraise the shares of 3DX common stock owned by such stockholders, determining
the fair value of such shares exclusive of any element of value arising from the
accomplishment or expectation of the Merger, together with a fair rate of
interest, if any, to be paid upon the amount determined to be the fair value. In
determining fair value, the Delaware Court is to take into account all relevant
factors. In WEINBERGER V UOP INC., the Delaware Supreme Court discussed the
factors that could be considered in determining fair value in an appraisal
proceeding, stating that "proof of value by any techniques or methods which are
generally considered acceptable in the financial community and otherwise
admissible in court" should be considered, and that "fair price obviously
requires consideration of all relevant factors involving the value of a
company." The Delaware Supreme Court stated that in making this determination of
fair value, the court must consider market value, asset value, dividends,
earnings prospects, the nature of the enterprise and any other facts
ascertainable as of the date of the merger that throw light on future prospects
of the merged corporation. In WEINBERGER, the Delaware Supreme Court stated that
"elements of future value, including the nature of the enterprise, which are
known or susceptible of proof as of the date of the merger and not the product
of speculation, may be considered." Section 262; HOWEVER, provides that fair
value is to be "exclusive of any element of value arising from the
accomplishment or expectation of the merger."
The cost of the appraisal proceeding may be determined by the Delaware Court
and taxed against the parties as the Delaware Court deems equitable in the
circumstances. Upon application of a dissenting stockholder of 3DX, the Delaware
Court may order that all or a portion of the expenses incurred by any dissenting
stockholder in connection with the appraisal proceeding, including, without
limitation, reasonable attorney's fees and the fees and expenses of experts, be
charged pro rata against the value of all shares of stock entitled to appraisal.
Any holder of shares of 3DX common stock who has duly demanded appraisal in
compliance with section 262 will not, after the effective date of the merger, be
entitled to vote for any purpose any shares subject to such demand or to receive
payment of dividends or other distributions on such shares, except for dividends
or distributions payable to stockholders of record at a date before the
effective date of the merger.
At any time within 60 days after the effective date of the merger, any
stockholder will have the right to withdraw such demand for appraisal; after
this period, the stockholder may withdraw such demand for appraisal only with
the consent of the surviving corporation. If no petition for appraisal is filed
with the Delaware Court within 120 days after the effective date of the merger,
stockholders' rights to appraisal shall cease. Any stockholder may withdraw such
stockholder's demand for appraisal by delivering to the surviving corporation a
written withdrawal of his or her demand for appraisal and acceptance of the
merger, except that (i) any such attempt to withdraw made more than 60 days
after the effective date of the merger will require written approval of the
surviving corporation and (ii) no appraisal proceeding in the Delaware Court
shall be dismissed as to any stockholder without the approval of the Delaware
Court, and such approval may be conditioned upon such terms as the Delaware
Court deems just.
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DESCRIPTION OF MERGER AGREEMENT
THE FOLLOWING DESCRIBES THE MATERIAL TERMS OF THE MERGER AGREEMENT. THE FULL
TEXT OF THE MERGER AGREEMENT IS ATTACHED AS EXHIBIT A TO THIS DOCUMENT AND IS
INCORPORATED BY REFERENCE IN THIS DOCUMENT. WE ENCOURAGE YOU TO READ THE ENTIRE
MERGER AGREEMENT.
STRUCTURE OF SURVIVING COMPANY AND TIMING AT THE MERGER
The merger agreement provides for the merger of 3DX with and into Esenjay,
with Esenjay surviving the merger. Once the merger has become effective, 3DX
will no longer exist as a separate entity. All of 3DX's operations, assets and
liabilities will belong to Esenjay.
The merger will become effective when Esenjay files a certificate of merger
with the Secretary of State of the State of Delaware. Esenjay expects this
filing to occur as soon as practicable after the last condition precedent to the
merger set forth in the merger agreement has been satisfied or waived.
CONVERSION OF 3DX COMMON STOCK
Under the terms of the merger agreement, 3DX stockholders will have their
choice of either of the following forms of merger consideration or a combination
of both:
- 3.25 shares of issued and outstanding 3DX common stock for one share of
Esenjay common stock; or
- 2.75 shares of issued and outstanding 3DX common stock for one share of
Esenjay Series A convertible preferred stock.
Any 3DX stockholder who fails to make an election will automatically receive
Esenjay common stock in exchange for its 3DX common stock. If holders of an
aggregate of more than 50% of the shares of 3DX common stock elect to receive
preferred stock in the merger, the amount electing to receive preferred stock
will be pro rated so that an aggregate of only 50% of the total shares of 3DX
common stock will be converted into preferred stock, with the other shares of
3DX common stock being converted into Esenjay common stock. Any fractional
shares of preferred stock will be rounded to the nearest whole share. Generally,
each share of preferred stock is convertible into one share of Esenjay common
stock. A description of the preferred stock is set forth in this proxy
statement/prospectus under the caption "The Merger--Certificate of
Designations."
ESENJAY BOARD OF DIRECTORS AND OFFICERS
The merger agreement provides that holders of preferred stock will be
entitled to elect one representative to Esenjay's board of directors as long as
any shares of preferred stock remain issued and outstanding. 3DX's board of
directors has designated C. Eugene Ennis to serve in this position immediately
upon the effective date of the merger.
The existing officers of Esenjay immediately prior to the effective date
shall continue in their positions with the combined company after the effective
date of merger.
EXCHANGE OF 3DX COMMON STOCK CERTIFICATES
Beginning on the effective date, each holder of outstanding 3DX common stock
may exchange their stock certificates for a certificate representing the number
of whole shares of Esenjay preferred stock or common stock into which their
shares of 3DX common stock shall be converted. However, after the effective
date, issued and outstanding 3DX common stock certificates shall only evidence
ownership of the number of whole shares of Esenjay preferred stock or common
stock into which such shares have been converted. Upon the effective date, the
stock transfer books of 3DX shall be closed, and no transfer of any certificates
representing shares of 3DX shall be made.
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REPRESENTATIONS AND WARRANTIES
In the merger agreement, both Esenjay and 3DX have made various
representations and warranties relating to certain issues, including the
following:
- the valid organization and continued good standing of the companies;
- the merger agreement will be a duly authorized, valid and binding
agreement when approved by stockholders;
- the financial statements and reports filed with the SEC are accurate and
fairly represent the financial condition of each company;
- the absence of any undisclosed liabilities;
- the absence of any material change since December 31, 1998; and
- the compliance with all laws, regulations and court orders.
In addition, Esenjay has represented and warranted that it has no plans or
agreements which would effectively require or compel Esenjay to exercise its
right to redeem the preferred stock. These representations and warranties of
both Esenjay and 3DX will expire on the effective date.
CONDUCT OF BUSINESS BEFORE THE EFFECTIVE DATE
From the date Esenjay and 3DX executed the merger agreement until the
effective date of the merger, both companies are required to conduct their
business only in the ordinary course and consistent with past practice and
industry standard practices. The companies agreed to use reasonable efforts to
preserve their present business organization, employees and officers, and
relationships with customers and suppliers. The companies have also agreed to
promptly notify each other of any change or event which could reasonably be
expected to jeopardize the other party's ability to obtain the expected benefits
of the merger. Both Esenjay and 3DX have agreed to use their reasonable best
efforts to take all appropriate and necessary action to consummate the merger.
Additionally, during the period from the execution of the merger agreement
until the effective date, 3DX agrees to take the following actions:
- not enter into any employment contracts;
- not incur any indebtedness outside the ordinary course of business;
- not commit to capital expenditures in an aggregate amount in excess of
$250,000;
- not dispose of assets, other than in the ordinary course of business;
- maintain insurance at least at present levels;
- not amend its certificate of incorporation, by-laws or rights of capital
stock;
- except for certain specified issuances, not issue, sell or acquire any
shares of its capital stock;
- not declare or pay any dividends or distributions on capital stock;
- promptly call and hold a stockholders' meeting to approve the merger;
- deliver quarterly unaudited financial statements to Esenjay;
- not authorize or permit its agents to:
- solicit or encourage any inquiry or proposal that could lead to a
merger, combination or other transaction which could interfere with,
prevent or delay the merger of 3DX with Esenjay; or
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- propose, participate or co-operate with any other person seeking such a
merger, combination or other transaction unless 3DX's board of
directors concludes in good faith, after consultation with its
financial advisors, that the alternative proposal is a BONA FIDE offer
that is clearly and unambiguously more favorable to 3DX's stockholders
than the merger described in this prospectus; and
- make the professional services of 3DX's professional geophysicists and
reservoir engineers available to Esenjay for up to a total of ten full
person days per week.
During this same period, Esenjay agrees to take the following actions:
- promptly call and hold a stockholders' meeting to:
- approve the merger;
- elect C. Eugene Ennis to the board of directors; and
- authorize the preferred stock and the issuance of common stock or
preferred stock to 3DX stockholders;
- take the necessary actions to have the preferred stock listed on the
Nasdaq Bulletin Board System and have the common stock to be issued quoted
on the Nasdaq Small-Cap Market;
- take the steps necessary to designate the Series A preferred stock,
including filing the Certificate of Designations with the Secretary of
State of Delaware; and
- either:
- add directors and officers insurance coverage for 3DX's existing
directors and officers to Esenjay's existing insurance policy; or
- consent to 3DX spending up to $94,000 to pay for an extension to 3DX's
directors and officers insurance policy to cover claims made after the
effective date of the merger.
CONDITIONS TO THE MERGER
CONDITIONS TO THE OBLIGATIONS OF EACH PARTY. The obligations of both
Esenjay and 3DX are subject to the completion of the following conditions:
- the representations and warranties made by both companies are true as of
the effective date;
- no legal action relating to the merger is pending or threatened;
- the legal counsel for each company has provided a favorable opinion
satisfactory to the other company;
- the majority of stockholders of each company have approved the merger;
- the companies have obtained any required consents to the merger from:
- holders of the companies' material debt (other than 3DX's lender Bank
of America);
- lessors of property leased by the companies; and
- and parties to other material contracts.
CONDITIONS TO THE OBLIGATIONS OF ESENJAY. The obligation of Esenjay to
consummate the merger is further subject to the satisfaction of the following
conditions:
- all options to purchase 3DX common stock have been:
- exercised as of or before the effective date; or
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- terminated under the terms of the option as of or immediately before
the effective date;
- waiver of the right to receive 3DX common stock by all persons entitled to
receive such stock pursuant to the anti-dilution provisions of the 3DX
Common Subscription Agreement dated June 3, 1998;
- make employment offers to certain of 3DX's technical staff; and
- 3DX obtaining voting agreements from its officers and directors stating
that they will vote their shares:
- in favor of the merger;
- in favor of the related issuance of preferred stock;
- in favor of electing C. Eugene Ennis to Esenjay's board of directors;
and
- against any other action that would delay or impede the consummation of
the merger.
CONDITIONS TO THE OBLIGATIONS OF 3DX. The obligation of 3DX to consummate
the merger is further subject to the satisfaction of the following conditions:
- obtain a written fairness opinion from an independent investment
advisor/banker that the merger agreement and exchange ratio are fair, from
a financial point of view, to the 3DX stockholders, which shall not have
been withdrawn;
- Esenjay obtaining a voting agreement from their controlling stockholders
stating that they will vote their shares:
- in favor of the merger;
- in favor of the related issuance of preferred stock;
- in favor of electing C. Eugene Ennis to Esenjay's board of directors;
and
- against any other action which would delay or impede the consummation
of the merger.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated at any time before the effective
date, whether before or after approval by the boards of directors or
stockholders of Esenjay or 3DX:
- by the mutual consent of Esenjay and 3DX;
- by Esenjay if:
- any condition on Esenjay's obligation to consummate the merger has not
been met and has not been waived by Esenjay;
- there has been a material adverse change in the financial condition of
3DX since the date of 3DX's most recent financial statements filed with
the SEC; or
- if before the effective date, 3DX's stockholders or board of directors
has withdrawn their approval of the merger in a manner adverse to
Esenjay.
- by 3DX if:
- any condition on 3DX's obligation to consummate the merger has not been
met and has not been waived by 3DX; or
- there has been a material adverse change in the financial condition of
Esenjay since the date of Esenjay's most recent financial statements
filed with the SEC.
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- by either Esenjay or 3DX if:
- any legal proceeding is threatened or pending that seeks to restrain,
prohibit or otherwise affect consummation of the merger; or
- the effective date has not occurred on or before September 15, 1999.
EFFECT OF TERMINATION. If the merger agreement is terminated for one of the
reasons stated above, the merger agreement becomes void without any liability on
the part of the parties, including stockholders, controlling persons, directors
and officers, except as otherwise provided for.
WAIVER OF CONDITIONS. The board of directors, executive committee of the
board of directors, or the chief executive officer of either Esenjay or 3DX may
waive any term of the merger agreement benefiting that company.
EXPENSES ON TERMINATION. If the merger agreement is terminated in
accordance with the termination provisions, all expenses will be paid by the
company incurring them, except:
- if 3DX terminates the merger agreement because it failed to obtain
stockholder approval, then it will pay all of Esenjay's reasonable costs
and expenses, including legal fees, incurred in connection with
negotiating and implementing the merger agreement, plus a termination fee
of $250,000;
- if 3DX terminates the agreement because it accepts a superior offer or
violates its covenant against soliciting offers from other persons, 3DX
will pay all of Esenjay's reasonable costs and expenses, including legal
fees, incurred in connection with negotiating and implementing the merger
agreement, plus a $250,000 termination fee;
- if Esenjay terminates the merger agreement because 3DX:
- modifies or withdraws its board of directors' recommendation or
stockholders' vote; or
- the written fairness opinion is withdrawn after it was issued,
3DX will pay all of Esenjay's reasonable costs and expenses, including
legal fees, incurred in connection with negotiating and implementing the
merger agreement, plus a $250,000 termination fee.
3DX agrees that the $250,000 termination fee plus all of Esenjay's reasonable
expenses, including legal fees, is a reasonable approximation of the loss
Esenjay would actually sustain if 3DX terminates the agreement for failing to
obtain stockholder approval, accepting a superior offer, or failing to recommend
to stockholders to approve the merger. The payment of reasonable expenses and
the termination fee is the exclusive remedy for termination of the merger
agreement in the circumstances giving rise to the obligation. However, this
exclusive remedy does not limit the right to indemnification discussed below.
INDEMNIFICATION FOR STATEMENTS IN PROXY STATEMENT PROSPECTUS. Both Esenjay
and 3DX agree to indemnify each other against any claims based upon false or
misleading statements about itself or any omissions to state information in this
proxy statement/prospectus. This indemnification applies to the other company,
its officers, its directors, and each person who controls the other company
within the meaning of Section 15 of the Securities Act of 1933 or Section 20 of
the Exchange Act of 1934. Such indemnification extends to losses, claims,
damages, legal fees and other expenses incurred to investigate or defend against
such claims.
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UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following financial statements set forth unaudited pro forma financial
information which is presented to give effect to the merger. The merger will be
accounted for as a purchase in accordance with generally accepted accounting
principles. 3DX utilizes the full cost method of accounting for oil and gas
activities. Esenjay utilizes the successful efforts method of accounting for oil
and gas activities.
The historical financial information for the year ended December 31, 1998 is
derived from Esenjay's and 3DX's respective audited consolidated financial
statements. The unaudited pro forma consolidated statements of operations
information for the year ended December 31, 1998 and for the three months ended
March 31, 1999 combine Esenjay's and 3DX's historical information as adjusted to
give effect to the merger between Esenjay and 3DX as if the merger had occurred
on January 1, 1998. The unaudited pro forma consolidated balance sheet as of
March 31, 1999 gives effect to the merger between Esenjay and 3DX as if the
merger had occurred on March 31, 1999.
The unaudited pro forma financial information is not necessarily indicative
of the results of operations or the financial position which would have occurred
had the merger been consummated at January 1, 1998, nor are they necessarily
indicative of future results of operations or financial position. The unaudited
pro forma financial information should be read in conjunction with the
historical consolidated financial statements of 3DX included elsewhere in this
proxy statement/prospectus and the Esenjay historical consolidated financial
statements incorporated by reference in this document. See "Where You Can Find
More Information."
ESENJAY EXPLORATION, INC.
UNAUDITED PROFORMA BALANCE SHEET
MARCH 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
ESENJAY 3DX PRO FORMA MARCH 31,
HISTORICAL HISTORICAL ADJUSTMENTS 1999
------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C>
Cash............................... $ 515,092 $ 784,355 $ 1,299,447
Accounts receivable, net of
allowance for doubtful
accounts......................... 4,564,250 1,082,178 5,646,428
Prepaid and other expenses......... 1,269,995 101,061 1,371,056
Receivables from affiliates........ 841,264 -- 841,264
------------- ------------- ---------------- -------------
Total current assets............. 7,190,601 1,967,594 9,158,195
Oil and gas properties............. 70,935,974 39,955,134 $(30,986,004)(b) 77,960,972
(9,075,988)(a)
7,131,856(a)
Other property and equipment....... 1,461,691 273,780 1,735,471
------------- ------------- ---------------- -------------
72,397,665 40,228,914 (32,930,136) 79,696,443
Less accumulated dd&a.............. (18,438,002) (30,986,004) 30,986,004(b) (18,438,002)
------------- ------------- ---------------- -------------
Property and equipment, net...... 53,959,663 9,242,910 (1,944,132) 61,258,441
Other assets....................... 604,433 63,771 668,204
------------- ------------- ---------------- -------------
Total other assets............... 604,433 63,771 668,204
------------- ------------- ---------------- -------------
Total assets....................... $ 61,754,697 $ 11,274,275 $ (1,944,132) $ 71,084,840
------------- ------------- ---------------- -------------
------------- ------------- ---------------- -------------
Accounts payable................... $ 5,531,132 $ 956,148 $ 6,487,280
Accounts payable to affiliate,
net.............................. 4,281,750 -- 4,281,750
Revenue distribution payable....... 3,669,924 -- 3,669,924
Accrued expenses................... 1,202,387 492,139 1,694,526
Current portion of long-term
debt............................. 1,960,000 -- 1,960,000
------------- ------------- ---------------- -------------
Total current liabilities........ 16,645,193 1,448,287 18,093,480
Long-term debt..................... 12,640,000 750,000 13,390,000
Non-recourse debt.................. 864,000 -- 864,000
Accrued interest on non-recourse
debt............................. 364,394 -- 364,394
------------- ------------- ---------------- -------------
Total liabilities................ 30,513,587 2,198,287 32,711,874
Common stock, $.01 par value....... 157,849 93,994 (93,994)(a) 193,508
35,659(a)
Deferred compensation.............. (110,523) 110,523(a) 0
Paid in capital.................... 77,651,602 39,993,637 (39,993,637)(a) 84,747,799
7,096,197(a)
Retained deficit................... (46,568,341) (30,901,120) 30,901,120(a) (46,568,341)
------------- ------------- ---------------- -------------
Total shareholders' equity....... 31,241,110 9,075,988 (1,944,132) 38,372,966
------------- ------------- ---------------- -------------
Total liabilities and
shareholders' equity........... $ 61,754,697 $ 11,274,275 $ (1,944,132) $ 71,084,840
------------- ------------- ---------------- -------------
------------- ------------- ---------------- -------------
</TABLE>
42
<PAGE>
ESENJAY EXPLORATION, INC.
UNAUDITED PROFORMA STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
ESENJAY 3DX PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------ --------------- ------------
<S> <C> <C> <C> <C>
Oil & gas revenues................. $ 964,245 $ 554,943 $ 1,519,188
Gain on commodities transactions... 190,849 -- 190,849
Gain on sale of assets............. 271,652 -- 271,652
Operating fees..................... 63,734 -- 63,734
Other revenues..................... 20,522 12,624 33,146
------------ ------------ --------------- ------------
Total revenues................... 1,511,002 567,567 2,078,569
------------ ------------ --------------- ------------
Lease operating expenses........... 253,971 44,879 298,850
Production taxes................... 63,793 40,451 104,244
Depletion, depreciation and
amortization..................... 619,000 592,771 $ (10,794)(c) 1,200,977
Amortization of unproved
properties....................... 2,383,000 2,383,000
Impairment of oil and gas
properties....................... 990,809 (990,809)(d) 0
Exploration costs--geological &
geophysical...................... 745,458 444,898(e) 1,190,356
Interest expense................... 123,286 924 124,210
General & administrative........... 1,403,972 382,719 1,786,691
------------ ------------ --------------- ------------
Total expenses................... 5,592,480 2,052,553 (556,705) 7,088,328
------------ ------------ --------------- ------------
Net income (loss).................. $ (4,081,478) $ (1,484,986) $ 556,705 $ (5,009,759)
------------ ------------ --------------- ------------
------------ ------------ --------------- ------------
Net loss per common and common
stock equivalent................. $ (0.26) $ (0.26)
------------ ------------
------------ ------------
Weighted average number of shares
outstanding...................... 15,784,834 19,273,734
------------ ------------
------------ ------------
</TABLE>
43
<PAGE>
ESENJAY EXPLORATION, INC.
UNAUDITED PROFORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ESENJAY 3DX PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
Oil & gas revenues................. $ 1,372,002 $ 4,544,690 $ 5,916,692
Loss on commodities transactions... (113,911) -- (113,911)
Gain on sale of assets............. 5,375 -- 5,375
Unrealized gain on commodity
transactions..................... 128,936 -- 128,936
Operating fees..................... 282,020 -- 282,020
Other revenues..................... 42,051 53,984 96,035
------------- ------------ --------------- -------------
Total revenues................... 1,716,473 4,598,674 6,315,147
------------- ------------ --------------- -------------
Lease operating expenses........... 270,881 411,875 682,756
Production taxes................... 95,728 319,874 415,602
Transportation & gathering......... 1,719 -- 1,719
Depletion, depreciation and
amortization..................... 1,522,771 3,545,328 $ (1,217,420)(c) 3,850,679
Amortization of unproved
properties....................... 6,937,300 -- 6,937,300
Impairment of oil and gas
properties....................... 5,832,024 7,863,536 (7,863,536)(d) 5,832,024
Exploration costs--geological &
geophysical...................... 5,882,307 -- 1,671,799(e) 7,554,106
Exploration costs--dry hole........ 5,213,930 -- 5,213,930
Delay rentals...................... 159,383 -- 159,383
Interest expense................... 620,121 12,847 632,968
General & administrative........... 4,501,656 2,033,756 6,535,412
------------- ------------ --------------- -------------
Total expenses................... 31,037,820 14,187,216 (7,409,157) 37,815,879
------------- ------------ --------------- -------------
Net income (loss).................. (29,321,347) (9,588,542) 7,409,157 (31,500,732)
Preferred stock dividends.......... 48,136 -- 48,136
------------- ------------ --------------- -------------
Net income (loss) applicable to
common stockholders.............. $ (29,369,483) $ (9,588,542) $ 7,409,157 $ (31,548,868)
------------- ------------ --------------- -------------
------------- ------------ --------------- -------------
Net Loss per common and common
stock equivalents................ $ (2.97) $ (2.36)
------------- -------------
------------- -------------
Weighted average number of shares
outstanding...................... 9,882,227 13,371,127
------------- -------------
------------- -------------
</TABLE>
44
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO UNAUDITED PROFORMA FINANCIAL STATEMENTS
(a) Assumes the issuance of 3,565,928 shares of Esenjay Exploration, Inc. common
stock at $2.00 per share in exchange for all of the outstanding common stock
(9,685,791), the shares issued as part of this merger (231,080) plus common
stock equivalents (780,944) expected to be converted upon consummation of
the merger. This assumes 50% of the total outstanding 3DX shares are
initially exchanged for Esenjay common stock and the remainder are exchanged
for Esenjay preferred stock, and each share of the Esenjay preferred stock
is ultimately converted into one share of Esenjay common stock. In
connection with the merger, all of the equity of 3DX is eliminated and the
assets and liabilities assumed are recorded at their estimated fair values
in relation to the total value of consideration received.
(b) As part of the recording of the assets and liabilities recorded, the
accumulated DD&A of 3DX is offset against oil and gas properties.
(c) Pro Forma depletion, depreciation and amortization of 3DX for the year ended
December 31, 1998 and for the three months ended March 31, 1999 amounted to
$2,327,908 and $581,977, respectively. These amounts were calculated using
production rates for the related period and the allocated fair market value
of the oil and gas properties acquired from 3DX, utilizing the successful
efforts method of accounting.
(d) Represents the elimination of the full cost ceiling writedown as the assets
were acquired at their fair value as of the beginning of the period
presented.
(e) Internal costs related to exploration and development activities and
geological and geophysical costs for the year ended December 31, 1998 and
the three months ended March 31, 1999 amounted to $1,671,799 and $444,898,
respectively. These amounts are expensed under the successful efforts method
of accounting, whereas they had been capitalized by 3DX under the full cost
method of accounting.
45
<PAGE>
DESCRIPTION OF 3DX
THE COMPANY
3DX is an independent oil and gas company that explores, develops and
produces oil and gas from the onshore and offshore Gulf Coast region of the
United States. Started in 1993, 3DX recognized a niche for technical expertise
due to the increasing use of 3-D seismic as an exploration tool for the onshore
areas of the United States. 3DX focuses on technically advanced reservoir
imaging and applied technology in the search of commercial hydrocarbons with a
core competency in the application and utilization of 3-D seismic. 3DX
participates in selected exploration projects as a non-operating working
interest owner, sharing both the risk and rewards with its partners. By reducing
drilling risk through 3-D imaging and analysis, 3DX expects its return on
investment to exceed industry standards.
STRATEGY
3DX's goal is to grow with an "educated drill bit" by increasing the proven
reserve base and production rate to generate additional cash flow. To realize
its goal, 3DX's business strategy includes:
FOCUS ON THE EXPERTISE OF 3-D IMAGING AND ANALYSIS. 3DX focuses all of its
technical resources on obtaining the best possible subsurface image to reduce
exploration risk and identify the most effective location and target for each
prospect. By focusing on the technical issues of a 3-D project, 3DX relies on
the strategic relationships with its partners to provide other core needs, such
as drilling operations.
MAINTAIN AND SUPPORT TECHNOLOGICALLY ADVANCED EXPLORATIONISTS. The quality
and interpretation of information derived from 3-D imaging is often dependent on
3DX's ability to retain and develop creative, experienced geoscientists and
engineers. In order to capitalize on these intellectual resources, 3DX is
committed to motivate the technical staff by providing and utilizing the most
advanced imaging and analytical technology available on the market.
Additionally, 3DX offers each employee an incentive with options to purchase
common stock.
EMPHASIZE TECHNICAL ADVANTAGES AND NICHES. 3DX's internal seismic
processing capabilities are a competitive advantage over similar size companies.
With internal processing, 3DX has developed the process of 3DXpress. 3DXpress is
an innovative technique used in exploration that improves the quality of seismic
data and significantly compresses the traditional time frame for acquisition
through interpretation. This process allows analysis of 3-D data while the
survey is being conducted, giving 3DX's explorationists the ability to ensure
data quality and steer data collection toward areas where prospects are more
likely to exist. Utilizing this technology, 3DX has proven its capability to
image and analyze projects for potential drilling sites more rapidly and
accurately than with traditional methods.
FOCUS EXPLORATION PROJECTS IN THE UNITED STATES GULF COAST. 3DX has been
involved in projects both domestically and internationally, spreading its
technical expertise to many parts of the world. 3DX re-directed its focus to the
Gulf Coast area of the United States during 1998. By focusing on the Gulf Coast,
3DX participates in projects in which it has an established knowledge base and
track record. Additionally, these opportunities can lead to core areas for 3DX.
With a focus on knowledge based areas, 3DX also believes the probability of
success in its program will be higher. Finally, with an emphasis on the U.S.
Gulf Coast, 3DX will have a focus on projects that can deliver a shorter cycle
time to positive cash flow.
SELECTIVE PROJECT PARTICIPATION, PARTNERING AND DRILLING EFFORTS. 3DX's
project screening process continually adapts the criteria to select projects
that are likely to maximize the return on its capital investments and
continually builds a balanced portfolio. 3DX's selection criteria favor projects
which:
- are managed by reliable and successful operating partners;
- are located on properties to which 3-D imaging can be effectively applied
to evaluate the primary geologic risk;
46
<PAGE>
- have prospect repeatability or upside potential;
- have projected rates of return which make the production of hydrocarbons
economically attractive.
BALANCE BETWEEN GROWTH AND CASH FLOW. 3DX believes that a key to achieving
long-term viability is growth based on an expanding cash flow. By committing its
talents and resources to expanding the proven reserve base and hydrocarbon
production rate, 3DX will develop the cash flow necessary to sustain future
growth.
47
<PAGE>
PROJECTS, BUSINESS RELATIONSHIPS AND TECHNOLOGY
PROJECT GENERATION AND BUSINESS RELATIONSHIPS
By its participation in multiple projects, many with multiple partners, 3DX
has been able to build upon a knowledge base outside of 3DX, create a resource
for future opportunities and generate a partner base for 3DX's internally
generated projects. 3DX has also undertaken the initiative to bring geologic
consultants into 3DX to support the geophysical skills. This has already proven
beneficial with the Hall Ranch Project in Karnes County, Texas, providing an
integrated interpretation and better understanding of the remaining drilling
opportunities.
TECHNOLOGY
3DX maintains an extensive computer facility to support its oil-finding
activities. A Silicon Graphics Power Challenge provides the large-scale
computing capacity to support real-time data processing and imaging. A network
of nine workstations, functioning in a client-server environment, provides the
framework for synthesis of the geological, geophysical and engineering data into
an integrated image of the subsurface. The principal supplier of the software
used by 3DX for both data processing and interpretation is Landmark Graphics
Corporation and its subsidiaries. In addition, 3DX owns licenses for certain
geological and geophysical applications including Hampson-Russell Software,
Inc., Paradigm Geophysical, Inc., Interpretative Imaging and Petrosoft Inc.
SIGNIFICANT PROPERTIES AND ACTIVITIES
During 1998, 3DX undertook an evaluation of its core producing properties
and the focus of its exploration activities. Some of the exploration plays were
located outside the Gulf Coast of the United States including international
plays in offshore West Africa, carbonate plays in Florida and deepwater plays in
the Gulf of Mexico. In some cases, the prospect opportunities were associated
with high drilling and operating costs, a long cycle time to positive cash flow
or limited technical knowledge in the area. 3DX undertook the task of reducing
its exposure in the high cost projects and non-core properties. The results of
this effort were two-fold. First, it provided 3DX with needed cash. Second, it
allowed 3DX to participate in seven drilling opportunities at no cost to 3DX.
This was accomplished by selling and converting working interest to a carried
interest on selected projects while preserving significant interest for upside
potential.
In April 1999, 3DX closed an agreement with Esenjay whereby 3DX sold its
interest in five non-producing prospect areas, including leasehold interests and
3-D seismic data, for $200,000 cash and additionally farmed out one half of its
interest in the Hall Ranch and Gillock projects in return for partial
reimbursement of leasehold costs and a carry through completion of the first
well in Hall Ranch and the first four wells in the Gillock project. 3DX received
$150,000 at closing and will receive an additional $50,000 on completion of
certain assignments. This transaction was entered independently of the merger
agreement and the proposed merger.
HALL RANCH PROJECT, KARNES COUNTY, TEXAS. The Hall Ranch Project has become
one of the core areas for 3DX. After two drilling successes in the area, 3DX
looks forward to drilling an additional key prospect in 1999. 3DX has a twelve
and one-half percent (12.5%) working interest in Hall Ranch.
GILLOCK PROJECT, GALVESTON COUNTY, TEXAS. In 1998, 3DX participated in the
Gillock Project, a sixty (60) mile shoot in the area of southern Galveston
County. This project covers several prolific Frio fields and is in the vicinity
of the recent Eagle Point Vicksburg discovery in Galveston Bay. 3DX took a
fifteen (15%) working interest and applied the 3DXpress process to the project.
Results from the interpretation have added additional prospects to 3DX's
inventory with drilling beginning in the second quarter of 1999. As discussed
above, 3DX farmed out one-half of its interest to Esenjay in April 1999.
48
<PAGE>
FOUR ISLE DOME PROJECT, TERREBONNE PARISH, LOUISIANA. The impact and
integration of 3-D seismic on an existing field is clearly demonstrated by the
Four Isle Dome Project. A proprietary 3-D survey was shot on the dome in 1996,
which identified new fault blocks and updip potential to production. 3DX
participated in two successful wells during 1998 with a combined production rate
of 33 million cubic feet of gas per day (MMCFG/D) and over 700 barrels of
condensate per day (BC/D). This is the highest production rate for the field
since 1982. 3DX owns a five- percent (5%) working interest in the project.
SMITH POINT 3-D PROJECT, CHAMBERS COUNTY, TEXAS. The drilling evaluation
phase on the Smith Point 3-D Project in Chambers County, Texas was started in
1998. In April 1998, 3DX elected to farmout fifty percent (50%) of its working
interest in the project. This resulted in 3DX retaining a 7.5% working interest
(after payout) of the first three (3) prospects drilled. During 1998, two of the
three prospects were drilled with one success. In 1999, the third well was
completed as a successful well.
RAMROD 3-D PROJECT, MATAGORDA COUNTY, TEXAS. By late 1997, 3DX established
a significant discovery on its Ramrod property in Matagorda County, Texas. The
St. George #1 well had sustained flow rates of 8 MMCFG/D and 140 BC/D. Deeper
potential was recognized on the property and in November 1998, 3DX elected to
sell one half (50%) of its interest in the property for cash and a one hundred
percent (100%) carry on a 15,500' exploration well. Based on the drilling
results from the new well (St. Andrew #1), 3DX elected to sell its remaining
interest in the project.
REPUBLIC OF COTE D'IVOIRE. Through a partnership for technical services,
3DX established a position in two offshore blocks in offshore Cote d'Ivoire.
This area is located off the West Coast of Africa. In August 1998, 3DX converted
a ten percent (10%) working interest to a two and one half percent (2.5%)
carried interest through a sale transaction and stock trade with the operator.
The result of the transaction gives 3DX a carry on all drilling costs for two
wells, one in Block 24 (drilled during 1998) and the remaining test well on
Block 202 which is anticipated to spud in 1999.
SUNNILAND TREND PROJECT, FLORIDA. In 1996, through a joint partnership with
the operator, 3DX acquired an eight percent (8%) working interest in exchange
for technical expertise and support on the Sunniland Trend. One well was drilled
in the Raccoon Point prospect area during 1998 and was non-economic. Due to poor
drilling results, high operating and development costs and low oil prices, 3DX
elected to sell its interest and exit the play at the end of 1998. This sale
represents a continuing divestment of non-core properties in the 3DX portfolio.
REGULATION
3DX's operations are subject to numerous federal, state and local laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. Public interest in the
protection of the environment has increased dramatically in recent years.
Offshore drilling in certain areas has been opposed by environmental groups and,
in certain areas, has been restricted. 3DX believes that the trend of more
expansive and stricter environmental legislation and regulations will continue.
To the extent laws are enacted or other governmental action is taken which
prohibit or restrict onshore and offshore drilling or impose environmental
protection requirements that result in increased costs to the oil and gas
industry in general, the business and prospects of 3DX could be adversely
affected.
THE OIL POLLUTION ACT OF 1990. The Oil Pollution Act of 1990 (the "OPA")
and regulations thereunder impose a variety of requirements on "responsible
parties" related to the prevention of oil spills and liability for damages
resulting from such spills in United States waters. A "responsible party"
includes the owner or operator of a facility or vessel, or the lessee or
permittee of the area in which an offshore facility is located. The OPA assigns
liability to each responsible party for oil removal costs and a variety of
public and private damages including natural resource damages. While liability
limits apply in some circumstances, a party cannot take advantage of liability
limits if the spill was caused by gross negligence or willful misconduct or
resulted from violation of a federal safety, construction or operating
regulation. If the party fails to report
49
<PAGE>
a spill or to cooperate fully in the cleanup, liability limits likewise do not
apply. Few defenses exist to the liability imposed by the OPA.
Under the OPA and regulations promulgated thereunder, owners and operators
of "offshore facilities" must satisfy certain financial assurance requirements
to evidence their ability to cover potential environmental cleanup and
restoration costs. In projects in which 3DX has a participating working
interest, the operator partner is responsible for all demonstrations of
financial responsibility including the posting of any indemnity bonds which are
required by applicable governmental regulations. The expenses incurred in the
operator partner's demonstration of financial responsibility are expenses which
are allocated to each project partner based on the respective partner's working
interest.
The OPA also imposes other requirements, such as the preparation of an oil
spill contingency plan. 3DX has such a plan in place. Failure to comply with
ongoing requirements or inadequate cooperation during a spill event may subject
a responsible party to civil or criminal enforcement actions.
THE OIL SPILL PREVENTION AND RESPONSE ACT. To complement the OPA, the State
of Texas enacted the Oil Spill Prevention and Response Act ("OSPRA"). The Texas
General Land Office ("GLO") is the lead agency for carrying out OSPRA, and to
that end the GLO has promulgated regulations affecting anyone who owns or
operates a vessel or facility that stores or transfers oil in areas where a
spill could reach Texas coastal waters.
THE OUTER CONTINENTAL SHELF LANDS ACT. The Outer Continental Shelf Lands
Act ("OCSLA") authorizes regulations relating to safety and environmental
protection applicable to lessees and permittees operating on the Outer
Continental Shelf (the "OCS"). Specific design and operational standards may
apply to OCS vessels, rigs, platforms, vehicles and structures. Violations of
lease conditions or regulations issued pursuant to the OCSLA can result in
substantial civil and criminal penalties, as well as potential court injunctions
curtailing operations and the cancellation of leases. Such enforcement
liabilities can result from either governmental or private prosecution.
THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY
ACT. The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the legality of the original conduct, on certain classes of persons
that are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
the disposal site or sites where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances found at the
site. Persons who are or were responsible for releases of hazardous substances
under CERCLA may be subject to joint and several liability for the costs of
cleaning up the hazardous substances that have been released into the
environment and for damages to natural resources. Additionally, it is not
uncommon for neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by the hazardous substances
released into the environment.
THE RESOURCE CONSERVATION & RESERVATION ACT. Certain oilfield wastes are
subject to the Resource Conservation & Reservation Act ("RCRA") with respect to
the regulation of hazardous wastes. The RCRA regulates the generation,
transportation and disposal of hazardous wastes. The Texas Railroad Commission
has issued rules for management of certain types of hazardous waste generated in
the oilfield. However, until delegation of the RCRA program to the Railroad
Commission, hazardous wastes generated in the oilfield are regulated by the
Texas Natural Resources Conservation Commission ("TNRCC"). The Texas Railroad
Commission regulates pollution of groundwater and surface water resulting from
exploration, production and development of oil and natural gas resources.
THE CLEAN WATER ACT. The Clean Water Act ("CWA") and regulations
promulgated thereunder prohibit the discharge of pollutants into waters of the
United States without a permit pursuant to the National Pollutant Discharge
Elimination System ("NPDES") provisions. The CWA also requires reporting of oil
spills to the National Response Center. The United States Environmental
Protection Agency
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<PAGE>
("EPA") has issued general NPDES permits for oil and gas platforms in the Gulf
of Mexico, which impose limits on discharges of such things as oil, grease,
produced water and drilling fluids. Onshore platforms may also be subject to the
requirement for NPDES permits for both production discharges and for discharges
of stormwater. In Louisiana, the NPDES permit program has recently been
delegated to the State of Louisiana. In Texas, the NPDES permit program is
administered by the TNRCC. Failure to obtain the proper permit may result in
both civil and criminal penalties as well as an order to cease discharges, which
in effect is an order to shut down production.
Management believes that 3DX is in substantial compliance with current
applicable environmental laws and regulations. Compliance with such laws and
regulations has not historically represented a significant expense for 3DX and
management does not foresee the need for material expenditures to ensure
continued compliance with currently existing laws and regulations. Laws and
regulations in these areas are, however, subject to change and there can be no
assurance that future laws or regulations will not have a material adverse
effect on 3DX.
OPERATING HAZARDS AND INSURANCE
The oil and gas business involves a variety of operating risks, including
the risk of fire, explosions, blow-out, pipe failure, casing collapse,
abnormally pressured formations and environmental hazards such as oil spills,
gas leaks, ruptures and discharges of toxic gases, the occurrence of any of
which could result in substantial losses to 3DX due to injury or loss of life,
severe damage to or destruction of property, natural resources and equipment,
pollution or other environmental damage, clean-up responsibilities, regulatory
investigation and penalties and suspension of operations. In addition to the
foregoing, offshore operations are subject to the additional hazards of marine
operations, such as capsizing, collision and adverse weather and sea conditions.
3DX maintains insurance coverage against some, but not all, operating risks.
The insurance maintained generally does not cover claims relating to failure of
title to oil and gas leases, trespass during 3-D survey acquisition or surface
damage attributable to seismic operations, business interruption nor does it
protect against loss of revenues due to well failure. There can be no assurance
that any insurance obtained by 3DX covering claims related to worker's
compensation, comprehensive general liability for bodily injury and property
damage, comprehensive automobile liability and pollution, cleanup, underground
blowout and evacuation will be adequate to cover any losses or liabilities which
may be incurred within projects in which 3DX participates. 3DX cannot predict
the continued availability of insurance coverage or the availability of
insurance at premium levels that justify its purchase. If 3DX were unable to
procure insurance at an acceptable cost with respect to each of the projects in
which 3DX participates, the occurrence of significant adverse events not fully
insured or indemnified against could materially and adversely affect 3DX's
financial condition and operations.
COMPETITION
Competition in the oil and gas industry is intense, particularly with
respect to the acquisition of acreage and capital. 3DX's competitors in the
exploration for oil and gas include numerous major and independent oil and gas
companies, smaller, technology-driven service companies, individual proprietors,
drilling and income programs and partnerships. Many of 3DX's competitors possess
and employ financial and personnel resources substantially in excess of those
available to 3DX and may, therefore, be able to define, evaluate, bid for and
participate in a greater number of oil and gas properties than 3DX. 3DX believes
that technology, experience and reliability are the primary elements upon which
3DX competes in the industry. Although 3DX believes that it competes effectively
in each of these areas, there can be no assurance that 3DX's ability to attract
and invest in high quality projects will not be adversely affected if its
current competitors or new market entrants introduce new services with better
quality technology than those available to 3DX.
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<PAGE>
EMPLOYEES
As of March 31, 1999, 3DX had six full-time employees. 3DX believes that its
relationship with its employees is good. None of 3DX's employees is covered by a
collective bargaining agreement.
SIGNIFICANT PROJECTS AND PROPERTIES
3DX's exploration activities are focused in the onshore Gulf Coast region of
the United States, principally in Texas, but also include projects in Louisiana,
Mississippi, and Alabama. Additionally, 3DX has exploration projects offshore in
the Gulf of Mexico and internationally in the Republic of Cote d'Ivoire.
3-D seismic imaging is an effective tool to identify the structural and
stratigraphic features in the Gulf Coast region and provides 3DX with an ability
to identify hydrocarbon potential in and around existing fields that could not
be detected with 2-D seismic and earlier exploration techniques. Due to geologic
complexities within the Gulf Coast, it may be possible to identify multiple
prospects within a single project. These prospects typically offer multiple
drilling opportunities with individual wells capable of penetrating multiple
reservoirs.
The extensive drilling history within Gulf Coast trends provides a powerful
subsurface and production database to which seismic data can be calibrated. This
data provides the foundation required to design a seismic program that optimizes
resolution at targeted reservoirs. This subsurface information, when combined
with 3-D seismic data, provides a more accurate assessment of reservoir quality,
productivity, reserve potential and, in some instances, fluid type.
The major producing areas in which 3DX holds an interest are reflected in
the table below as of and for the year ended December 31, 1998:
<TABLE>
<CAPTION>
PROVED RESERVES 1998 PRODUCTION
---------------- ----------------
GAS OIL GAS OIL
AREA/TREND MMCF MBBL MMCF MBBL
- ----------------------------------- ------- ------ ------- ------
<S> <C> <C> <C> <C>
Texas Frio Trend................... 1,482 27 830 24
Texas Wilcox trend................. 1,307 12 140 2
Texas Miocene Trend................ 471 -- 516 --
Other Properties................... 625 23 392 12
-- --
------- -------
3,885 62 1,878 38
-- --
-- --
------- -------
------- -------
</TABLE>
GULF COAST AREA
Of the 15 wells drilled in 1998, 14 were in the Gulf Coast area, including
10 in Texas, 2 in Louisiana, and 1 in Florida. All of 3DX's 8 successful wells
in 1998 were in the Gulf Coast area.
TEXAS GULF COAST. This area includes both onshore and near-shore properties
and generally extends along the Texas coast for a distance of approximately 100
miles inland from the coastline. Prospective geology in the trend is
characterized by numerous stacked sand formations that were deposited
continuously by river channels and deltas. The trend's primary oil and gas
producing formations include the Miocene, Frio, Vicksburg, Yegua, and Wilcox.
3DX has exploration projects targeting each of these oil and gas formations from
depths of 3,000 feet to 16,000 feet. 3DX acquired 120 square miles of new 3-D
seismic data in the Texas Gulf Coast region during 1998. Below is a discussion
of certain of the active exploration projects in this area:
TEXAS MIOCENE TREND. 3DX has participated in six projects, with over 200
square miles of 3-D seismic data in this trend. 3DX currently has nine producing
gas wells in the Miocene Trend, in Calhoun and
52
<PAGE>
Matagorda counties, Texas, at depths between 3,000 feet and 6,000 feet. 3DX owns
working interests ranging from 15% to 20% in these wells, which are operated by
Prime Operating Company, a subsidiary of PrimeEnergy Corporation. In addition to
these projects, 3DX is actively pursuing additional opportunities in this trend.
TEXAS FRIO TREND. 3DX has participated in nine projects, with over 400
square miles of 3-D seismic data in this trend. This includes 120 square miles
acquired during 1998. The 1998 new projects are located in Galveston and
Chambers counties, Texas, and have resulted in additional exploration prospects
added to 3DX's drilling inventory. While the primary target for these new
projects are Frio sands, significant Vicksburg potential exists within the
projects. 3DX spud seven wells for Frio objectives in 1998, three of which were
successful, and one was drilling at December 31, 1998. 3DX owns working
interests ranging from 3.75% to 22% in these projects.
TEXAS WILCOX TREND. 3DX has four active projects in the Texas Wilcox Trend,
located in Karnes, Lavaca, Goliad, and Dewitt counties, Texas. These projects
cover approximately 140 square miles of 3-D seismic data. Wilcox objectives have
been identified within these projects at depths of 10,000 feet to 15,000 feet.
3DX drilled three wells in the trend during 1998, two of which were successful.
3DX owns working interests ranging from 12.5% to 25% in these projects.
OTHER PROJECTS
LOUISIANA. 3DX has two active exploration projects in Louisiana. The Four
Isle Dome project in Terrebonne Parish, operated by Burlington Resources,
targets Miocene-age sands at depths up to 15,000 feet. 3DX participated in the
sidetrack of one well and drilling of another during 1998. Both wells were
successful, resulting in a combined rate of over 30 million cubic feet of gas
per day. 3DX has a 5% working interest in Four Isle Dome. The second project
area is located in Calcasieu and Jefferson Davis Parishes. 3DX participated in a
14,000 feet wildcat well during 1998, which was unsuccessful. 3DX has a 10%
working interest in this project.
OFFSHORE GULF OF MEXICO. 3DX had two producing properties offshore in the
Gulf of Mexico. The two producing properties, the Cove project at Matagorda
Island Block 487-L and the Hollywood project at East Cameron Block 42, are
considered to be fully developed. 3DX elected to sell it's 7% in the Cove
project during 1998, while retaining it's 5% working interest in East Cameron
Block 42. 3DX also has a 1% carried interest in 3 exploratory projects located
in the deep water flex trend of the Gulf of Mexico. These projects have
eight-year lease terms which expire in March 2005.
WEST AFRICA. 3DX joined its partner, Santa Fe Energy Resources (Cote
d'Ivoire) Ltd., in 1997 to evaluate Block CI-24 and Block CI-202 located in the
offshore waters of The Republic of Cote d'Ivoire, and a 3 million acre
concession offshore Ghana. Late in 1997, the partnership began work on a 400
square kilometer 3-D seismic survey, which was completed during the first
quarter of 1998. After interpreting the 3-D seismic data for the partnership,
3DX converted it's 10% working interest in Block CI-202 and Block CI-24 to a
2.5% carried interest, and elected to exit the offshore Ghana project. The
partnership drilled one exploratory well on Block CI-24 during 1998, which was
unsuccessful.
OIL AND GAS RESERVES
All of 3DX's proved reserves described below are located onshore and
offshore Texas and in the Federal waters offshore Louisiana. All of 3DX's proved
reserves reflected in the table are proved developed reserves. The reserve
estimates were prepared by the independent engineering consulting firm Ryder
Scott Company Petroleum Engineers. In accordance with applicable requirements of
the SEC, the estimated discounted future net revenues from estimated proved
reserves are based on prices and costs as of the date of the estimate unless
such prices or costs are contractually determined at such date. 3DX has
53
<PAGE>
not provided any estimates of total proved reserves, comparable to those
disclosed herein, in any reports filed with federal authorities or agencies
other than the SEC.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Estimated Net Proved Reserves Data:
Gas (Mmcf)......................................................................... 3,885 3,932 2,464
Oil and condensate (Mbbl).......................................................... 62 89 32
Total equivalent, converted at 6:1 (Mmcfe)......................................... 4,257 4,466 2,656
Pre-tax present value of proved reserves discounted at 10% (in thousands)............ $ 5,782 $ 7,048 $ 6,623
Standardized Measure of Discounted Future Net Cash Flows (in thousands)(1)........... $ 5,782 $ 7,048 $ 6,623
</TABLE>
- ------------------------
(1) In accordance with statutory requirements of the SEC, these amounts
represent the present value of estimated future net revenues after income
taxes discounted at 10%. The present value amounts are the same before taxes
and after projected income taxes as a result of 3DX's substantial net
operating loss carryforwards.
The process of estimating proved developed and proved undeveloped oil and
gas reserves is very complex, requiring significant subjective decisions in the
evaluation of available geologic, engineering and economic data for each
reservoir. The data for a given reservoir may change over time as a result of
additional development activity, production history and viability of production
under varying economic conditions. The actual production, revenues, severance
taxes, development and operating expenditures with respect to 3DX's reserves
will likely vary from such estimates, and such variances could be material.
PRODUCTIVE WELLS
At December 31, 1998, 1997 and 1996, 3DX held interests in the following
productive wells:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
GROSS NET GROSS NET NET NET
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Oil Wells.......................... 4 0.66 9 0.54 8 0.31
Gas Wells.......................... 22 3.34 21 4.49 11 1.71
-- -- --
------- ------- -------
Total Wells...................... 26 4.00 30 5.03 19 2.02
-- -- --
-- -- --
------- ------- -------
------- ------- -------
</TABLE>
The number of gross wells equals the total number of wells in which 3DX owns
a working interest. The number of net wells equals the sum of 3DX's fractional
working interests owned in gross wells.
54
<PAGE>
OIL AND GAS DRILLING ACTIVITIES
The following table sets forth the gross and net number of productive, dry
and total exploratory and development wells that 3DX drilled in each of 1998,
1997, and 1996:
<TABLE>
<CAPTION>
GROSS WELLS NET WELLS
----------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
---------- --- ----- ---------- ---- -----
EXPLORATORY WELLS
Year ended December 31, 1998..... 3 6 9 0.49 0.56 1.05
Year ended December 31, 1997..... 11 9 20 2.98 1.83 4.81
Year ended December 31, 1996..... 7 7 14 0.74 0.84 1.58
DEVELOPMENT WELLS
Year ended December 31, 1998..... 5 -- 5 0.36 -- 0.36
Year ended December 31, 1997..... -- 3 3 -- 0.48 0.48
Year ended December 31, 1996..... 3 -- 3 0.6 -- 0.6
</TABLE>
As of December 31, 1998, 3DX was participating in 1 gross (0.20 net)
exploratory wells.
PRODUCTION
The following table summarizes the net volumes of oil and gas produced and
sold and the average prices received with respect to such sales from all
properties in which 3DX held an interest during 1998, 1997 and 1996,
respectively.
<TABLE>
<CAPTION>
GAS OIL
------------------------ --------------------------
NET AVERAGE NET AVERAGE
PRODUCTION SALES PRODUCTION SALES
(MMCF) PRICE/MCF (MMCF) PRICE/BBL
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1998..................................... 1,877.9 $ 2.17 37.8 $ 12.20
Year ended December 31, 1997..................................... 1,131.8 $ 2.46 14.1 $ 18.54
Year ended December 31, 1996..................................... 271.2 $ 2.50 8.5 $ 20.43
</TABLE>
Average oil and gas operating expenses per Mcfe including severance and ad
valorem taxes, were $0.35, $0.36, and $0.33 for 1998, 1997 and 1996,
respectively.
ACREAGE
The following table sets forth the developed and undeveloped oil and gas
acreage in which 3DX held an interest as of December 31, 1998. Undeveloped
acreage consists of those lease acres on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and gas, regardless of whether or not such acreage contains proved
reserves.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
-------------------- --------------------
GROSS NET GROSS NET
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Texas.................................................. 9,221 1,441 97,193 22,967
Louisiana.............................................. 325 16 20,081 1,122
Mississippi/Alabama.................................... 82 19 107 44
Offshore Federal....................................... 1440 72 -- --
International.......................................... -- -- 162,842 4,071
--------- --------- --------- ---------
Total................................................ 11,068 1,548 280,223 28,204
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
55
<PAGE>
LEGAL PROCEEDINGS
3DX has not been the subject of any legal proceedings since its
organization. There can be no assurance, however, that 3DX will not in the
future be involved in litigation incidental to the conduct of its business.
MARKET FOR 3DX'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In September 1998, 3DX received a letter from The Nasdaq Stock Market, Inc.
notifying 3DX that it failed to maintain a closing bid price of greater than or
equal to $1.00 and that 3DX's common stock failed to maintain a market value of
public float greater than or equal to $5 million, as required by Nasdaq rules.
3DX met with officials from The Nasdaq Stock Market, Inc. on February 12, 1999,
at which time 3DX presented several alternatives to regain compliance with the
minimum bid price and market value of public float requirements. On March 22,
1999, The Nasdaq Stock Market Inc. responded to the meeting with the decision to
transfer the listing of 3DX's securities to The Nasdaq SmallCap Market
("SmallCap"), effective with the open of business on March 24, 1999, pursuant to
the following exception. On or before April 5, 1999, 3DX must evidence a minimum
closing bid price of $1.00 per share for a minimum of ten consecutive trading
days. In order to fully comply with the terms of this exception, 3DX must be
able to demonstrate compliance with all requirements for continued listing on
SmallCap. Accordingly, effective, March 24, 1999, the trading symbol of 3DX's
securities was changed from TDXT to TDXTC. As 3DX was unable to comply with the
requirement, at the close of business on April 7, 1999, 3DX's securities were
removed from conditional listing on SmallCap. Trading of the common stock is now
conducted in the over-the-counter market. As a result, a holder of the common
stock may find it more difficult to dispose of or to obtain accurate price
quotations about the common stock.
When common stock is not listed on Nasdaq and has a market price of less
than $5.00 per share, it may be classified as a "penny stock". SEC regulations
define a "penny stock" to be any non-Nasdaq equity security that has a market
price of less than $5.00 per share, subject to certain exceptions. For any
transaction involving a penny stock, unless exempt, the rules require delivery,
prior to any transaction in a penny stock, of a disclosure schedule prepared by
the SEC relating to the penny stock market. Disclosure is also required to be
made about commissions payable to both the broker-dealer and the registered
representative and to provide current quotations for the securities. Finally,
monthly statements are required to be sent disclosing recent price information
for the penny stock held in the account and information on the limited market in
penny stocks.
The shares are subject to Section 15(b)(6) of the Securities Exchange Act of
1934 which gives the SEC the authority to prohibit any person that is engaged in
unlawful conduct while participating in a distribution of a penny stock from
associating with a broker-dealer or participating in a distribution of a penny
stock, if the SEC finds that such a restriction would be in the public interest.
Because the common stock is subject to the rules on penny stocks, the market
liquidity for the common stock could be severely adversely affected.
The listed quotations for periods after April 7, 1999 reflect interdealer
prices, without retail mark-up, mark-down or commissions, and may not
necessarily represent actual transactions.
56
<PAGE>
The following table sets forth the high and low sales price (or, in the
period after April 7, 1999, bid price) for 3DX common stock for the periods
indicated.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1999
Second Quarter (through June 3, 1999).................................... $ 0.56 $ 0.10
First Quarter ended March 31, 1999....................................... $ 0.72 $ 0.25
1998
Fourth Quarter ended December 31, 1998................................... $ 0.72 $ 0.25
Third Quarter ended September 30, 1998................................... $ 1.50 $ 0.56
Second Quarter ended June 30, 1998....................................... $ 1.88 $ 1.38
First Quarter ended March 31, 1998....................................... $ 3.72 $ 1.50
1997
Fourth Quarter ended December 31, 1997................................... $ 9.25 $ 2.25
Third Quarter ended September 30, 1997................................... $ 12.50 $ 8.00
Second Quarter ended June 30, 1997....................................... $ 10.50 $ 7.75
First Quarter ended March 31, 1997....................................... $ 13.13 $ 10.00
</TABLE>
The listed quotations reflect interdealer prices, without retail mark-up,
mark-down or commissions, and may not necessarily represent actual transactions.
DIVIDEND POLICY
3DX has not declared or paid any cash dividends on its common stock since
its formation. 3DX's current credit agreement prohibits the payment of cash
dividends. 3DX does not anticipate paying cash dividends on its common stock in
the foreseeable future. 3DX currently intends to retain any future earnings to
finance the expansion and continued development of its business.
57
<PAGE>
SELECTED FINANCIAL DATA
The financial information set forth below for the three months ended March
31, 1999 and 1998 and the years ended December 31, 1998, 1997, 1996, 1995 and
1994 is derived from the financial statements of 3DX. This information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the financial statements of 3DX, the notes
related thereto and other financial data included elsewhere in this proxy
statement/prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------ --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994 1999 1998
--------- ---------- --------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues(a):
Oil and gas............................ $ 4,545 $ 3,046 $ 852 $ 275 $ 304 $ 555 $ 861
Interest and other..................... 54 585 248 236 53 13 10
--------- ---------- --------- --------- --------- --------- ---------
Total Revenues....................... 4,599 3,631 1,100 511 357 568 871
--------- ---------- --------- --------- --------- --------- ---------
Costs and Expenses:
Lease operating........................ 732 437 107 79 34 85 172
Impairment of oil and gas properties... 7,864 9,061 1,477 1,627 -- 991 878
Depletion, depreciation &
amortization......................... 3,545 2,636 423 158 91 593 659
General and administrative and
other(a)............................. 2,047 2,533 1,828 1,135 617 384 699
--------- ---------- --------- --------- --------- --------- ---------
Total costs and expense.............. 14,188 14,667 3,835 2,999 742 2,053 2,408
--------- ---------- --------- --------- --------- --------- ---------
Net loss................................. (9,589) (11,036) (2,735) (2,488) (385) (1,485) (1,537)
Dividends and accretion on preferred
stock.................................. -- -- (941) (1,108) (452) -- --
--------- ---------- --------- --------- --------- --------- ---------
Net loss applicable to common
stockholders........................... $ (9,589) $ (11,036) $ (3,676) $ (3,596) $ (837) $ (1,485) $ (1,537)
--------- ---------- --------- --------- --------- --------- ---------
--------- ---------- --------- --------- --------- --------- ---------
Basic and diluted net loss per common
share as previously reported........... $ (1.15) $ (1.53) $ (1.16) $ (1.14) $ (0.33) $ (0.16) $ (0.21)
Retroactive effect of change in
accounting principle(b)................ -- -- (0.05) (0.06) (0.02) -- --
--------- ---------- --------- --------- --------- --------- ---------
Basic and diluted net loss per common
share.................................. $ (1.15) $ (1.53) $ (1.21) $ (1.20) $ (0.35) $ (0.16) $ (0.21)
--------- ---------- --------- --------- --------- --------- ---------
--------- ---------- --------- --------- --------- --------- ---------
Weighted average number of common shares
outstanding............................ 8,328 7,194 3,042 2,988 2,373 9,380 7,272
--------- ---------- --------- --------- --------- --------- ---------
--------- ---------- --------- --------- --------- --------- ---------
STATEMENT OF CASH--FLOW DATA
Net cash provided by (used in) operating
activities............................. $ 2,484 $ 1,430 $ 615 $ (503) $ 16 $ 169 $ 535
Net cash used in investing activities.... 5,960 21,187 5,022 4,113 2,018 386 1,961
Net cash provided by (used in) financing
activities............................. 3,356 3,803 16,225 7,876 2,515 (446) 13
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------------------------------------- --------------------
1998 1997 1996 1995 1994 1999 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................. $ 801 $ (632) $ 15,987 $ 7,265 $ 2,103 $ 519 $ (3,784)
Property and equipment, net............... 10,866 18,372 8,576 2,935 2,669 9,243 20,077
Total assets.............................. 13,501 21,310 26,827 10,451 5,197 11,274 21,312
Borrowings on Credit Agreement............ 1,200 -- -- -- -- 750 --
Series B preferred stock.................. -- -- -- 6,278 5,452 -- --
Series C preferred stock.................. -- -- -- 7,904 -- -- --
Stockholder's equity (deficit)............ $ 10,531 $ 17,818 $ 24,574 $ (4,240) $ (674) $ 9,076 $ 16,370
</TABLE>
- ------------------------
(a) As discussed in Note 2 to the 3DX's December 31, 1998 financial statements,
rental income has been reflected as a reduction of general and
administrative expenses in all periods presented.
(b) As discussed in Note 2 to the 3DX's December 31, 1998 financial statements,
earnings per share for periods prior to 3DX's initial public offering have
been restated to retroactively reflect the effect of SAB No. 98.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following is a discussion of the financial condition and results of
operations of 3DX for the three years ended December 31, 1998 and the three
months ended March 31, 1999 and 1998. This discussion should be read in
conjunction with the financial statements of 3DX, the notes thereto and the
other financial data. The discussion includes forward-looking information
concerning 3DX's future plans, financial condition, liquidity and capital
resources. If the merger with Esenjay is consummated, 3DX's plans will not be
implemented and the financial condition of the combined company will be
materially different.
OVERVIEW. 3DX is a knowledge-based oil and gas exploration company whose
core competence and strategic focus is the utilization of 3-D imaging and other
advanced technologies in the search for commercial quantities of hydrocarbons.
3DX enters into arrangements that enable it to combine its expertise and
exploration capabilities with the operating skills of other oil and gas
companies. 3DX participates in selected exploration projects as a non-operating
working interest owner, sharing both risks and rewards with its partners. 3DX
commenced operations in January 1993 to take advantage of perceived
opportunities emerging from changes in the domestic oil and gas industry,
including the divestiture of domestic oil and gas properties, advances in
technology and the outsourcing of specialized technical capabilities. By
reducing drilling risk through 3-D imaging and analysis, 3DX seeks to improve
the expected return on investment in its oil and gas projects.
As a working interest partner, 3DX shares all project costs in proportion to
its working interest percentage. In instances in which exploration and
development activities are unsuccessful, 3DX incurs an economic loss equal to
its proportionate share of project costs prior to the time the project is
abandoned. Similarly, 3DX incurs an economic loss if 3DX's proportionate share
of revenues generated from production is insufficient to cover 3DX's share of
project costs.
3DX's future financial results will depend primarily on:
- 3DX's ability to continue to source and screen potential projects;
- 3DX's ability to discover commercial quantities of hydrocarbons;
- the market price for oil and gas; and
- 3DX's ability to fully implement its exploration and development program,
which is dependent on the availability of capital resources.
59
<PAGE>
There can be no assurance that 3DX will be successful in any of these respects,
that the prices of oil and gas prevailing at the time of production will be at a
level allowing for profitable production, or that 3DX will be able to obtain
additional funding to increase its currently limited capital resources.
3DX does not and has not engaged in any hedging transactions to reduce its
risks arising from changes in oil and gas prices or from interest rate
fluctuations.
RESULTS OF OPERATIONS. The following table sets forth certain operating
information of 3DX during the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
PRODUCTION:
Gas (MMcf)................................................................ 281.1 368.8
Oil and condensate (MBbls)................................................ 5.8 6.6
Total equivalent (MMcfe).................................................. 315.9 408.3
AVERAGE SALES PRICE:
Gas (per Mcf)............................................................. $ 1.77 $ 2.09
Oil and condensate (per Bbl).............................................. $ 9.63 $ 13.78
AVERAGE EXPENSES (PER MCFE):
Lease operating(1)........................................................ $ 0.27 $ 0.42
Depletion of oil and gas properties....................................... $ 1.88 $ 1.62
</TABLE>
- ------------------------
(1) Includes all direct expenses of operating 3DX's properties, as well as
production and ad valorem taxes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
PRODUCTION:
Gas (MMcf).................................................... 1,877.9 1,131.8 271.2
Oil and condensate (Mbbls).................................... 37.8 14.1 8.5
Total equivalent (Mmcfe)...................................... 2,104.8 1,216.2 322.2
AVERAGE SALES PRICE:
Gas (per Mcf)................................................. $ 2.17 $ 2.46 $ 2.50
Oil and condensate (per Bbl).................................. $ 12.20 $ 18.54 $ 20.43
AVERAGE EXPENSES (PER MCFE):
Lease operating(1)............................................ $ 0.35 $ 0.36 $ 0.33
Depletion of oil and gas properties........................... $ 1.68 $ 2.17 $ 1.31
</TABLE>
- ------------------------
(1) Includes all lease operating expenses and taxes attributable to 3DX's
properties, including production and ad valorem taxes.
OIL AND GAS REVENUES. Oil and gas revenues decreased to $554,943 for the
three months ended March 31, 1999 (the "1999 quarter") from $861,377 for the
three months ended March 31, 1998 (the "1998 quarter"). The decrease was
primarily attributable to lower oil and gas production levels. Production
decreased by over 23% to 315.9 MMcfe for the 1999 quarter, from 408.3 MMcfe for
the 1998 quarter. The decreased production resulted principally from the sale of
producing properties during the third and fourth quarter of 1998 and first
quarter of 1999. These properties represented approximately 20% and 34% of the
oil and gas production, respectively, for the 1998 quarter. The decrease in
production was partially offset by successful wells which began production
during the second and third quarters of 1998. The average sales price for
natural gas, which accounted for 89% of equivalent production during the 1999
quarter,
60
<PAGE>
decreased by 15% to $1.77 per Mcf from $2.09 per Mcf for the 1998 quarter. The
average sales price for oil decreased to $9.63 per barrel during the 1999
quarter versus $13.78 per barrel for the 1998 quarter.
Oil and gas revenues increased to $4,544,690 for the year ended December 31,
1998 (the "1998 period") from $3,045,447 for the year ended December 31, 1997
(the "1997 period"). This increase was attributable to higher oil and gas
production levels. Production increased by over 73% to 2,104.8 Mmcfe for the
1998 period, from 1,216.2 Mmcfe for the 1997 period. The increased production
resulted from successful wells drilled during the latter part of 1997 and
throughout the year in 1998. The average sales price for natural gas, which
accounted for 89% of equivalent production during the 1998 period, decreased by
12% to $2.17 per Mcf from $2.46 per Mcf for the 1997 period. The average sales
price for oil decreased to $12.20 per barrel during the 1998 period versus
$18.54 per barrel for the 1997 period.
Oil and gas revenues increased to $3,045,447 for the 1997 period from
$851,827 for the year ended December 31, 1996 (the "1996 period"). This increase
was primarily attributable to higher oil and gas production levels. Production
increased by over 277% to 1,216.2 Mmcfe for the 1997 period, from 322.2 Mmcfe
for the 1996 period. The increased production resulted from successful wells
drilled during the last three months of 1996 and throughout the year in 1997.
The number of productive wells in which 3DX owned an interest increased to 30
(5.03 net) at the end of the 1997 period from 19 (2.02 net) at the end of the
1996 period. The average sales price for natural gas, which accounted for 93% of
equivalent production during the 1997 period, decreased by 2% to $2.46 per Mcf
from $2.50 per Mcf for the 1996 period. The average sales price for oil
decreased to $18.54 per barrel during the 1997 period versus $20.43 per barrel
for the 1996 period.
LEASE OPERATING EXPENSES. Total lease operating expenses, including
production taxes, decreased to $85,330 for the 1999 quarter from $171,524 for
the 1998 quarter. This decrease was primarily attributable to the sale of
producing properties with a partial offset from the additional costs of
operating new producing wells. Lease operating expenses per Mcfe of production
decreased to $0.27 per Mcfe for the 1999 quarter from $0.42 per Mcfe for the
1998 quarter.
Total lease operating expenses, including production taxes, increased to
$731,749 for the 1998 period from $436,243 for the 1997 period. This increase
was primarily attributable to the additional costs of operating new producing
wells drilled throughout the latter part of 1997 and into the 1998 period and is
comparable to the increase in production during the corresponding periods. Lease
operating expenses per Mcfe of production decreased to $0.35 per Mcfe for the
1998 period from $0.36 per Mcfe for the 1997 period.
Total lease operating expenses, including production taxes, increased to
$436,243 for the 1997 period from $107,676 for the 1996 period. This increase
was primarily attributable to the additional costs of operating new producing
wells drilled during the last three months of 1996 and throughout the year in
1997 and is comparable to the increase in production during the corresponding
periods. Lease operating expenses per Mcfe of production increased slightly to
$0.36 per Mcfe for the 1997 period from $0.33 per Mcfe for the 1996 period.
DEPLETION, DEPRECIATION AND AMORTIZATION EXPENSE. Depletion of oil and gas
properties for the 1999 quarter decreased to $592,771 from $659,489 for the 1998
quarter. The decrease in depletion of oil and gas properties resulted primarily
from the reduction in oil and gas producing properties during the 1999 period,
as discussed above, with a partial offset from the change in the depletion rate
for this period. Depletion of oil and gas properties per Mcfe for the 1999
quarter increased to $1.88 per Mcfe, or 16%, from the rate of $1.62 per Mcfe in
the corresponding period in 1998. The increase in the rate resulted from a
reduction in proved reserves due to the sale of the Ramrod project (see
"Liquidity and Capital Resources").
Depletion of oil and gas properties for the 1998 period increased to
$3,545,328 from $2,636,305 for the 1997 period. The increase in depletion of oil
and gas properties resulted primarily from the increase in
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<PAGE>
oil and gas production during the 1998 period, as discussed above. Depletion of
oil and gas properties per Mcfe for the 1998 period decreased to $1.68 per Mcfe,
or 23%, from the rate of $2.17 per Mcfe in the corresponding period in 1997. The
decrease in the rate resulted from greater net additions to oil and gas reserves
than the net additions to evaluated oil and gas property costs relative to the
existing depletion rate per Mcfe.
Depletion of oil and gas properties for the 1997 period increased to
$2,636,305 from $422,839 for the 1996 period. The increase in depletion of oil
and gas properties resulted from both the increase in oil and gas production
during the 1997 period, as discussed above, and an increase in the depletion
rate for this period. Depletion of oil and gas properties per Mcfe for the 1997
period increased to $2.17 per Mcfe, or 66%, from the rate of $1.31 per Mcfe in
the corresponding period in 1996. The increase in the rate resulted from greater
additions to evaluated oil and gas property costs than the additions to oil and
gas reserves relative to the existing depletion rate per Mcfe. This was
principally the result of the costs of unsuccessful wells drilled in 1997.
IMPAIRMENT OF OIL AND GAS PROPERTIES. Under the rules of the full-cost
accounting method as prescribed by the Securities and Exchange Commission, 3DX
is required to compare the net costs of its evaluated properties to the net
present value of its proved reserves, using the prices and costs in effect at
the end of each quarterly period unless 3DX believes that post period prices are
more representative of what might be received in future periods. If such
evaluated costs, net of accumulated depreciation, depletion and amortization,
exceed the present value of proved reserves, an impairment charge is required to
writedown those excess costs. At March 31, 1999, 3DX recognized oil and gas
impairments of $990,809, using post period pricing increases. Using March 31,
1999 prices, 3DX would have recognized an oil and gas impairment of $1,860,429.
During the 1998 quarter, an oil and gas impairment of $878,346 was recorded. The
writedown for the 1999 period was principally a result of mechanical
difficulties in the wellbores of certain wells in the Ramrod project in
Matagorda county, Texas which resulted in the sale of the remaining interest in
the project.
Oil and gas impairment charges recorded during 1998 were $7,863,536. The
impairments recorded were principally the result of increased additions to
evaluated property costs and the decline in oil and gas prices being received by
3DX on December 31, 1998 as compared to December 31, 1997.
Oil and gas impairment charges recorded during 1997 were $9,061,240, all of
which were attributable to the fourth quarter ended December 31, 1997. This
writedown results principally from the significant decline in oil and gas prices
being received by 3DX on December 31, 1997 as compared to September 30, 1997,
and a relatively large investment in three unsuccessful exploratory wells, all
of which were evaluated in the fourth quarter of 1997.
INTEREST EXPENSE. Interest expense decreased to $924 for the 1999 quarter
from $8,166 for the 1998 quarter. These expenses represent commitment fees and
amortization of set up costs associated with the credit agreement 3DX executed
with a commercial bank in December 1997. 3DX had outstanding borrowings of
$750,000 under the credit agreement at March 31, 1999. 3DX capitalized interest
of approximately $20,000 during the 1999 quarter relating to unusually
significant investments in unproved properties.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense, net
of costs capitalized to exploration and development projects, decreased to
$382,719 for the 1999 quarter from $691,075 for the 1998 quarter. This decrease
was primarily attributable to the reduction in personnel that occurred during
the second quarter of 1998.
General and administrative expense, net of costs capitalized to exploration
and development projects, decreased 20% to $2,033,756 for the 1998 period from
$2,532,474 for the 1997 period. This decrease was primarily attributable to a
downsizing in personnel that occurred during the second quarter of 1998. The
downsizing had the following effects on total general and administrative
expenses: (1) an increase in
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<PAGE>
compensation expense due to severance pay recorded, (2) a decrease in the amount
of capitalized overhead, as the majority of the terminated personnel were from
technical departments, and (3) a decrease in stock option expense to adjust the
amortization of deferred compensation recorded for these employees relating to
stock options issued within one year of the initial public offering. The 1997
amount represented a 39% increase from $1,827,946 incurred during the year ended
December 31, 1996. The increase was primarily a result of personnel costs
associated with hiring which occurred during 1997 and increased professional
fees and other costs associated with being a public company, offset by a
decrease in the amount of $390,616 relating to the amortization of deferred
compensation expense.
INTEREST AND OTHER INCOME. Interest and other income increased slightly to
$12,624 for the 1999 quarter from $10,462 for the 1998 quarter. 3DX maintained
an equivalent level of short term investments during both quarters.
Interest and other income decreased 91% to $53,984 for the 1998 period from
$585,154 for the comparable period during 1997. This decrease is primarily a
result of a substantially lower balance of short-term investments during the
1998 period. The 1997 amount represents a 136% increase from the $247,960 earned
during the comparable 1996 period. This increase reflects interest income on the
higher level of short-term investments during 1997 as a result of investment of
the proceeds of 3DX's initial public offering.
NET LOSS. As a result of the foregoing, 3DX's net loss decreased to
$1,484,986 for the 1999 quarter from $1,536,761 for the 1998 quarter. The most
significant factors which caused the decrease in net loss were the reduction in
general and administrative expenses as discussed above.
3DX's net loss decreased to $9,588,542 for the 1998 period from $11,036,144
for the 1997 period. The significant factors which caused the decrease in net
loss were the increase in revenues and the decrease in impairment of oil and gas
properties, with a slight offset from the increase in depletion, depreciation
and amortization of oil and gas properties. The net loss for the 1997 period
increased from the net loss of $3,676,411 in the 1996 period. The most
significant factor which caused the increase in net loss was the impairment of
oil and gas properties recorded under full-cost accounting rules.
INCOME TAXES. 3DX recorded a valuation allowance against the estimated
amount of deferred tax assets for which realization is uncertain. 3DX reviews
the valuation allowance at the end of each quarter and makes adjustments, as
necessary, if it is determined that it is more likely than not that the deferred
tax assets will be realized. As of December 31, 1998, 3DX had tax net operating
loss carryforwards ("NOL's") of approximately $11.7 million which begin to
expire in 2008. As a result of the recent stock transactions, including the
initial public offering, there is a yearly limitation placed on 3DX's
utilization of its NOL's under Section 382 of the Internal Revenue Code of 1986,
as amended. See Note 5 to the financial statements of 3DX included elsewhere
herein.
LIQUIDITY AND CAPITAL RESOURCES
See further discussion of these issues under Note 2 to the 3DX March31, 1999
financial statements, "Going Concern".
3DX has made and will be required to make oil and gas capital expenditures
substantially in excess of its net cash flow from operations in order to
complete the exploration and development of its existing properties. 3DX will
also need to acquire exploration prospects and find additional oil and gas
reserves in order for its asset base not to be depleted by current oil and gas
production. Cash outlays for capital expenditures for oil and gas exploration
and development activities for the quarters ended March 31, 1999 and 1998 were
$993,913 and $1,845,431, respectively. The level of capital spending in 1999 and
thereafter
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will be highly dependent upon 3DX's ability to obtain additional capital. 3DX
expects that its projected net cash flows from currently producing properties
will be sufficient to fund its general and administrative expenditures through
December 31, 1999, including technical employee and related costs which are
capitalized under full-cost accounting. However, such projected cash flows could
be adversely affected by declines in oil and gas prices and unanticipated
declines in oil and gas production from existing properties. This raises
substantial doubt about 3DX's ability to pay its obligations as they become due.
On December 18, 1997, 3DX executed a credit agreement with a commercial
bank, the borrowing capacity of which was set at $2.0 million in April 1998.
During the quarter ended June 30, 1998 3DX borrowed $2.0 million under the
credit agreement and made payments of $200,000 and $600,000, during the third
and fourth quarters of 1998, respectively, and an additional payment of $450,000
in the first quarter of 1999. The maximum amount currently available for
borrowing under the credit facility is $750,000. The borrowing capacity is a
function of the value of 3DX's proved oil and gas reserves, and is redetermined
on a semi-annual basis. The credit agreement is secured by substantially all of
3DX's oil and gas properties and contains restrictions on dividends and
additional liens and indebtedness and requires the maintenance of a minimum
current ratio and net worth, each as defined in the credit agreement.
As a result of 3DX's periodic review of each of its oil and gas exploration
and development properties and its available capital, 3DX has occasionally sold
partial interests in specific oil and gas projects to other investors to reduce
its total investment commitment to such projects. In accordance with full-cost
accounting rules, no gain or loss has been recognized on these transactions. In
September 1998, 3DX sold one of its properties located in Cove Field, Texas for
approximately $440,000 (of which $200,000 was used to reduce the balance of
borrowings on 3DX's bank credit agreement). In November 1998, 3DX closed a sale
of 50% of its working interest in the Ramrod project in Matagorda county, Texas.
Proceeds to 3DX from this sale were $2 million and were used to reduce accounts
payable and the bank loan. In the first quarter of 1999, 3DX sold all of the
remaining interest in the Ramrod project for $600,000. As of March 31, 1999, 3DX
had working capital of approximately $519,000.
3DX will require additional sources of financing to fund drilling
expenditures on properties currently owned by 3DX and to fund leasehold costs
and geological and geophysical costs on its active exploration projects. 3DX's
1999 expenditure plans currently include up to twelve exploratory and
development wells and various lease and seismic data acquisitions. 3DX generally
has the right, but not the obligation, to participate for its percentage
interest in drilling wells and can decline to participate if it does not have
sufficient capital resources at the time such drilling operations are proposed.
3DX can also potentially transfer its right to participate in drilling wells in
exchange for cash, a reversionary interest, or some combination thereof. To
recover its investment in unevaluated properties, it is necessary for 3DX to
either participate in drilling which finds commercial oil and gas production and
produce such reserves or receive sufficient value through the sale or transfer
of all or a portion of its interests.
In April 1999, 3DX closed an agreement with Esenjay whereby 3DX sold its
interest in five non-producing prospect areas, including leasehold interests and
3D seismic data, for $200,000 cash and additionally farmed out one half of its
interest in the Hall Ranch and Gillock projects in return for partial
reimbursement of leasehold costs and a carry through completion of the first
well in Hall Ranch and the first four wells in the Gillock project. 3DX received
$150,000 at closing and will receive an additional $50,000 on completion of
certain assignments. This transaction with Esenjay was negotiated independently
of the merger transaction.
If the merger is not closed, management of 3DX will continue to seek
financing for its capital program from a variety of sources. 3DX's inability to
obtain additional financing would have a material adverse effect on 3DX. Without
raising additional capital, 3DX anticipates that it will be required to limit or
defer its planned oil and gas exploration and development program, which could
adversely affect the recoverability and ultimate value of 3DX's oil and gas
properties.
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Management intends to pursue exploration and development opportunities to
the extent additional capital becomes available in the current oil and gas
environment. However, the uncertainties about 3DX's future cash flows and the
lack of firm commitments to attract additional capital at this time raise
substantial doubt about the ability of 3DX to continue as a going concern. The
accompanying financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should 3DX be unable to continue
as a going concern.
EFFECTS OF INFLATION AND CHANGES IN PRICE
3DX's results of operations and cash flows are affected by changing oil and
gas prices. If the price of oil and gas increases (decreases), there could be a
corresponding increase (decrease) in the operating cost that 3DX is required to
bear for operations, as well as an increase (decrease) in revenues.
IMPACT OF THE YEAR 2000
Many of the world's computer systems, including those embedded in process
control equipment, currently record years in a two-digit format. On January 1,
2000, all hardware and software which use the two year convention could fail or
create erroneous data because of an inability to properly interpret dates beyond
1999 (the Y2K issue).
The Company's assessment of the Y2K issues that could affect its operations
is not complete. However, based on information assembled to date, the Company
believes that most, if not all, of the Y2K risk to the Company, if any, will
come from third parties, primarily oil and gas operators, pipelines, banking
institutions, governmental entities, communications systems providers and
similar entities.
The Company does not operate any oil and gas properties and relies minimally
on the software of third parties, which consists primarily of purchased or
leased operating system, analysis, accounting and seismic programs. These
programs have been determined to be either Y2K compliant or capable of Y2K
compliance with little cost to the Company.
The Company will continue to assess the ability and timeliness of third
parties becoming Y2K compliant, but presently believes that any cost to the
Company will be minimal.
OTHER
In connection with stock options granted within one year prior to the
initial filing of the registration statement relating to the initial public
offering, 3DX recorded deferred compensation expense based on the difference
between the option exercise price and the fair value of 3DX's common stock at
the date of grant, using the $11.00 per share initial public offering price as
an estimate of the fair value. Such deferred compensation is being amortized as
additional compensation expense over the vesting period for the options. As of
December 31, 1998, 3DX had unamortized deferred compensation of $136,304 which
will be charged to expense during the next three years. 3DX has elected not to
adopt the fair value accounting of Statement of Financial Accounting Standards
No. 123, "Accounting For Stock Based Compensation", for employees and continues
to account for these plans under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees".
DIRECTORS WHO WILL BECOME DIRECTORS OF ESENJAY
The only directors or executive officers of 3DX who will serve as a director
or executive officer of Esenjay after the merger will be C. Eugene Ennis, who
will serve as a director of Esenjay.
Mr. Ennis, age 55, has served as Chairman of the Board of 3DX since 1998.
Mr. Ennis served as 3DX's President and Chief Executive Officer from 3DX's
inception in December 1992 until June 1998. Since August 1998, Mr. Ennis has
been a director of Object Reservoir, a supplier of software tools for the
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petroleum industry. Mr. Ennis has been Chief Executive Officer of Object
Reservoir since January 1999. From September 1984 to December 1992, Mr. Ennis
was President, Chief Executive Officer and a director and from October 1990 to
December 1992 was also Chairman of the Board of Directors of Landmark Graphics
Corporation ("Landmark"), a provider of interdisciplinary interpretation tools
for the petroleum industry. Mr. Ennis holds a Bachelor of Science in electrical
engineering from the University of Houston and began his career in 1969 as a
design engineer in the Geophysical Products Division of Texas Instruments where
he was employed until 1984.
COMPENSATION OF DIRECTORS
Directors of 3DX who are not employees are entitled to receive a fee in the
amount of $750 for every meeting of the Board of Directors which such director
attends in person or by telephone and a fee of $500 for each meeting of a
committee of the Board of Directors held separately which such director attends
in person or by telephone. Beginning in 1998, the non-employee directors waived
their right to receive fees for attending meetings. Directors who are employees
of 3DX do not receive any additional compensation for their services as
directors. All directors are reimbursed for out-of-pocket expenses incurred in
connection with their service as directors. Under the Stock Option Plan, 3DX
may, from time to time, and in the discretion of the Board of Directors, grant
stock options to directors.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
awarded, earned or paid for services rendered in all capacities by Mr. Ennis
during the past three fiscal years. The table also identifies the principal
capacity in which Mr. Ennis served 3DX during 1998.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
---------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
---------------------- STOCK AWARDS UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) OPTIONS (#) COMPENSATION ($)
- ----------------------------------- ---- ---------- --------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
C. Eugene Ennis.................... 1998 143,118 -- -- 100,000(a) --
President, Chief Executive 1997 171,875 -- -- --
Officer(b) and Chairman of the 1996 150,000 -- -- -- --
Board
</TABLE>
- ------------------------
(a) Issued in 1997 and canceled and reissued in 1998.
(b) Mr. Ennis served as President and Chief Executive Officer through May 1998.
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REPORT ON REPRICING OF OPTIONS
It was determined by the Human Resource Committee during 1998 that the
options held by directors, executive officers and employees no longer
represented an incentive, as the market price of the stock had dropped below the
exercise price of the options. Therefore, it was determined that the options,
including those held by Mr. Ennis, should be repriced in line with the current
market value.
<TABLE>
<CAPTION>
TEN-YEAR OPTION REPRICINGS
---------------------------------------------- LENGTH OF
NUMBER OF MARKET ORIGINAL TERM
SECURITIES PRICE OF EXERCISE REMAINING AT
UNDERLYING STOCK AT PRICE AT NEW DATE OF
DATE OF OPTIONS TIME OF TIME OF EXERCISE REPRICING
NAME REPRICING REPRICED REPRICING REPRICING PRICE (MONTHS)
- ----------------------------------- --------- ---------- --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
C. EUGENE ENNIS ................... 04/20/98 100,000 $1.625 $11.000 $ 1.625(1) 111
Chairman of the Board
</TABLE>
- ------------------------
(1) In January 1999, the Human Resource Committee decided to reprice, at $0.3125
(the market price at the time), the currently outstanding options dated
April 20, 1998.
STOCK OPTION PLAN
In January1994, 3DX adopted the Stock Option Plan under which
"non-qualified" stock options ("NQSOs") to acquire shares of Common Stock may be
granted to directors of and consultants to 3DX and incentive stock options
("ISOs") to acquire shares of Common Stock may be granted to employees and
directors who are also employees of 3DX.
Currently, the Stock Option Plan provides for the issuance of up to a
maximum of 2,004,937 shares of Common Stock and is administered by the Human
Resources Committee. Under the Stock Option Plan, the option price of any ISO
may not be less than the fair market value of a share of Common Stock on the
date on which the option is granted. The option price of an NQSO may be less
than the fair market value on the date the NQSO is granted if the Human
Resources Committee so determines, but may not in any event be less than 85% of
such fair market value. An ISO may not be granted to a "ten percent stockholder"
(as such term is defined in Section 422A of the Internal Revenue Code of 1986,
as amended) unless the exercise price is at least 110% of the fair market value
of the Common Stock at the time of grant and the option must be exercised within
five years. Options granted pursuant to the Stock Option Plan are evidenced by a
written agreement executed by 3DX and the grantee, containing the terms,
provisions and conditions of the grant. Stock options may not be assigned or
transferred during the lifetime of the holder except as may be required by law.
The maximum term of each stock option is ten years from the date of grant.
For options to qualify as ISOs, the aggregate fair market value, determined
on the date of grant, of the shares with respect to which the ISOs are
exercisable for the first time by the grantee during any calendar year may not
exceed $100,000. Payment by option holders upon exercise of an option may be
made (i) in cash, (ii) by tender to 3DX of shares of 3DX's stock owned by the
optionee having a fair market value, as determined by the Human Resources
Committee (but without regard to any restrictions on transferability applicable
to such stock by reason of federal or state securities laws or agreements with
an underwriter for 3DX), not less than the exercise price, (iii) by delivery of
a promissory note made by the optionee in a form approved by 3DX, (iv) by the
assignment of the proceeds of a sale of some or all of the shares being acquired
upon the exercise of the option, (v) by the withholding of shares being acquired
upon exercise of the option bearing a fair market value, as determined by the
Human Resources Committee (but without regard to any restrictions on
transferability applicable to such stock by reason of federal or state
securities laws or agreements with an underwriter for 3DX), not less than the
exercise price, or (vi) by any combination thereof. The Human Resources
Committee may at any time or from time to time grant options which do not permit
all of the foregoing forms of consideration to be used in payment of the
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exercise price and/or which otherwise restrict the use of one or more forms of
consideration. In addition, the Human Resources Committee, in its sole
discretion, may authorize the surrender by an optionee of all or part of an
unexercised stock option and authorize a payment in consideration thereof of an
amount equal to the difference between the aggregate fair market value of the
Common Stock subject to such stock option and the aggregate option price of such
Common Stock. In the Human Resources Committee's discretion, such payment may be
made in cash, shares of Common Stock with a fair market value on the date of
surrender equal to the payment amount or some combination thereof.
The Stock Option Plan provides that outstanding options vest in their
entirety and become exercisable in the event of certain mergers, consolidations
or sales of all or substantially all of the assets of 3DX, unless the successor
corporation assumes such options. As of December 31, 1998, options to purchase
826,404 shares of Common Stock were outstanding under the Stock Option Plan at
exercise prices ranging from $0.19 to $1.625 per share, with 764,421 option
shares available for grant.
REPORT OF THE HUMAN RESOURCES COMMITTEE OF THE BOARD OF DIRECTORS
The Human Resources Committee of the Board of Directors oversees the
compensation policies applicable to all employees of 3DX, including its
executive officers. The Human Resources Committee also has primary
responsibility for administering stock-based compensation plans of 3DX.
3DX seeks to provide a compensation program which will allow it to attract
and retain highly qualified and motivated employees. Its compensation program is
also designed to enhance stockholder value by providing significant incentives
for employees to achieve 3DX's goals. 3DX is striving to promote an
entrepreneurial environment which encourages all employees to focus on the
continuing long-term growth of 3DX. Specifically, the compensation plan includes
the following components:
BASE SALARY. It is the goal of the Human Resources Committee that the
primary element of compensation result from the achievement of performance-based
objectives which contribute in a meaningful way to long-term stockholder value.
However, 3DX must also provide a base salary and employee benefits which are
competitive with compensation offered by other oil and gas exploration companies
similar to 3DX. The Human Resources Committee expects that base salary will not
exceed the average paid by 3DX's peers.
STOCK OPTION PLAN. The Stock Option Plan is a broad-based stock option plan
covering all employees which is designed to motivate and retain employees and
allow all employees to benefit from performance which enhances long-term
stockholder value. All stock options granted to employees have exercise prices
which equal the fair market value of the Common Stock on the date of grant and
vest ratably over a period of four years. Accordingly, the options provide a
significant incentive for superior long-term performance and continued retention
of employees by 3DX. For stock options awarded to executive officers during
1998, refer to the section "Stock Option Grants".
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of April 15, 1999, there were 9,399,353 shares of Common Stock
outstanding and entitled to vote. The following table sets forth certain
information regarding the beneficial ownership of Common Stock, as of April 15,
1999, by (i) each person known to 3DX to own beneficially 5% or more of 3DX's
outstanding shares of Common Stock, (ii) each director of 3DX, (iii) each of the
Named Executive Officers, as defined in "Executive Compensation", and (iv) all
executive officers and directors of 3DX as a group. The information with respect
to beneficial ownership is based on the most recent filings with the Securities
and Exchange Commission which have been furnished to 3DX by the respective
stockholders of 3DX.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
-------------------------
NUMBER OF
NAME AND ADDRESS(1) SHARES(2) PERCENT
- --------------------------------------------- ------------ -------
<S> <C> <C>
Ronald P. Nowak.............................. 50,000 *
Jon W. Bayless............................... 754,195(3) 8.0%
Charles E. Edwards........................... 25,267(4) *
C. Eugene Ennis.............................. 289,411 3.1%
C.D. Gray.................................... -- *
Douglas C. Williamson........................ 727,073(5) 7.7%
Russell L. Allen............................. -- *
Peter M. Duncan.............................. 375,592 4.0%
Joseph Schuchardt III........................ 189,978 2.0%
All directors and executive officers as a
group (9 persons).......................... 2,411,516 25.7%
CWS Limited-Liability Company ............... 1,172,270 12.5%
One Rockefeller Plaza, 31st Floor
New York, NY 11002
Citi Growth Fund L.P. ....................... 727,477 7.7%
c/o CitiGrowth Funds, Sycamore Partners
989 Lenox Drive
Lawrenceville, New Jersey 08648
BA Capital Company, LP ...................... 721,903 7.7%
901 Main Street
Dallas, Texas 75202
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1% of the outstanding shares of
Common Stock.
(1) Unless otherwise indicated, the address of each stockholder identified in
the table is at the principal executive offices of 3DX at 12012 Wickchester,
Houston, Texas 77079.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission ("Commission"). In computing the number
of shares of Common Stock beneficially owned by a person and the percentage
ownership of that person, shares of Common Stock subject to options and
warrants held by that person that are currently exercisable or exercisable
within 60 days of April 15, 1998 are deemed outstanding. Such shares,
however, are not deemed outstanding for the purposes of computing the
percentage ownership of any other person. Shares of Common Stock issuable
upon exercise of stock options granted pursuant to 3DX's 1994 Stock Option
Plan (the "Stock Option Plan"), which are currently exercisable or
exercisable within 60 days of April 15, 1999, include 20,144 shares for Mr.
Ennis, 5,170 shares for Mr. Bayless, 5,170 shares for Mr. Edwards, 5,170
shares for Mr. Williamson, and 35,654 shares for all directors and executive
officers as a group. Except as indicated in the footnotes hereto, each
stockholder named in the table has sole voting and investment power with
respect to the shares set forth beside such stockholder's name.
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(3) Includes 727,477 shares beneficially owned by Citi Growth Fund L.P. Mr.
Bayless is the sole stockholder and director of Jon W. Bayless Inc., the
general partner of Atlantic Partners L.P., the general partner of Citi
Growth Fund L.P.
(4) Includes 1,200 shares of Common Stock owned by Mr. Edwards' spouse.
(5) Includes 721,903 shares of Common Stock held by BA Capital Investors. Mr.
Williamson is a Managing Director in the Venture Capital Group of BA Capital
Company, LP.
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ELECTION OF DIRECTORS OF ESENJAY EXPLORATION, INC.
NOMINEES
The Esenjay board of directors has nominated the three director candidates
named below. Personal information on each of our nominees is also given below.
All of our nominees currently serve as Esenjay directors. These director
nominees will serve as class II directors, with their terms expiring in 2002. If
a director nominee becomes unavailable before the election, your proxy
authorizes us to vote for a replacement nominee if the board of directors names
one.
DAVID W. BERRY served as President of Esenjay after the incorporation of its
predecessor in August 1988 and until May 14, 1998, and has served as Chairman of
the Board of Directors since 1991. In 1978, he formed Berry Petroleum
Corporation, which was a regional natural gas and oil exploration company. In
1976 he co-founded Vulcan Energy Corporation, a Tulsa, Oklahoma based
exploration and production company. Mr. Berry has served as the State Finance
Chairman of the Oklahoma State Republican Party, as a Trustee for the Oklahoma
Museum of Art and on the United States Senatorial Trust Committee. Mr. Berry is
a member of the Independent Petroleum Association of America.
CHARLES J. SMITH has been a director of Esenjay since May 14, 1998. He has
served as Chairman of Esenjay Petroleum since its formation in 1978. Mr. Smith
serves as chairman of the Executive Committee of Esenjay. Mr. Smith acts as
Esenjay Petroleum's senior land and administrative officer. He was a practicing
attorney specializing in oil and gas law from 1963 to 1987. Before 1963, he was
a petroleum landman for Humble Oil and Refining Company. Mr. Smith received a
BBA in industrial management from the University of Texas and was admitted to
practice law in Texas in 1959 after attending South Texas School of Law and the
completion of off-campus studies.
ALEX B. CAMPBELL has been a director of Esenjay since May 14, 1998. He has
been Vice President of Aspect Management Corporation since August 1996 and is
responsible for land and corporate development and legal issues for Aspect. He
served as landman for Grynberg Petroleum and TXO Production Corp. from 1980 to
1984, focusing on the Rocky Mountain Region, then as division landman for Lario
Oil & Gas Company from 1984 to 1996, where he was responsible for
administration, prospect marketing, contract lease negotiation, exploration
permitting, surface owner negotiations and property acquisition negotiation and
due diligence. He has a BA in business/pre-law from Colorado State University,
and an MBA from Colorado State University.
VOTE REQUIRED
The affirmative vote of the holders of a majority of issued and outstanding
shares of Esenjay common stock and a majority of the issued and outstanding 3DX
common stock is required to approve the merger agreement.
2,408,414 shares of 3DX common stock (representing 22.5% of the amount of
the 3DX shares anticipated to be outstanding as of the time of the merger) are
currently owned by, or are expected to be owned at the time of the merger by,
officers and directors of 3DX and their affiliates. All of these shares are
subject to voting agreements pursuant to which the holders have agreed to vote
their shares in favor of the merger.
9,533,367 shares of the Esenjay common stock (representing 60.4% of the
amount of the Esenjay shares anticipated to be to be outstanding as of the time
of the merger) are currently owned by, and are expected to be owned at the time
of the merger by, two of Esenjay's shareholders. All of these shares are subject
to voting agreements pursuant to which the holders have agreed to vote their
shares in favor of the merger.
71
<PAGE>
SINCE A MAJORITY OF THE OUTSTANDING SHARES OF BOTH ESENJAY AND 3DX ARE
REQUIRED FOR APPROVAL OF THE MERGER (RATHER THAN A MAJORITY OF THE SHARES
REPRESENTED AT THE MEETINGS), FAILURE TO VOTE OR AN ABSTENTION FROM VOTING WILL
HAVE THE SAME EFFECT AS VOTING AGAINST THE MERGER.
A plurality of the votes present at the Esenjay annual meeting is required
for the election of the director nominees.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR EACH OF THE DIRECTOR
NOMINEES.
EXPERTS
The consolidated financial statements of Esenjay as of December 31, 1998 and
1997 and for each of the two years in the period ended December 31, 1998
incorporated by reference in this proxy statement/ prospectus have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein, and have been so included in reliance upon the reports of such
firm given their authority as experts in accounting and auditing.
The financial statements of 3DX as of December 31, 1998 and 1997 and for
each of the three years in the period ended December 31, 1998 have been audited
by Arthur Andersen LLP, independent public accountants, as indicated by their
report with respect thereto, and are included herein, in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
report. Reference is made to said report included herein, which contains an
explanatory fourth paragraph with respect to the existence of substantial doubt
about 3DX's ability to continue as a going concern, as described more fully in
Note 3 to the financial statements.
The report of independent petroleum engineers, Ryder Scott Company Petroleum
Engineers, dated January 27, 1999 is referred to in this proxy
statement/prospectus in reliance upon the authority of said firm as experts in
giving said report.
LEGAL MATTERS
Certain legal matters relating to the validity of the common stock and
preferred stock to be issued in the merger and certain tax matters relating to
the merger have been passed upon by Porter & Hedges, L.L.P., Houston, Texas.
72
<PAGE>
INDEX TO 3DX TECHNOLOGIES INC.
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
-----------
<S> <C>
Report of Independent Public Accountants................................................................ F-1
Audited Finanacial Statements for the year ended December 31, 1998...................................... F-2
Notes to Audited Financial Statements for the year ended December 31, 1998.............................. F-6
Unaudited Supplemental Information...................................................................... F-18
Unaudited Financial Statements for the three months ended March 31, 1999................................ F-22
Notes to Unaudited Financial Statements for the three months ended March 31, 1999....................... F-26
</TABLE>
F-i
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board
of Directors of 3DX Technologies Inc.:
We have audited the accompanying balance sheets of 3DX Technologies Inc. (a
Delaware corporation) as of December 31, 1998 and 1997, and the related
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of 3DX's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of 3DX Technologies Inc. as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that 3DX
will continue as a going concern. As discussed in Note 3 to the financial
statements, the uncertainties about 3DX's ability to pay its obligations when
they become due and the lack of firm commitments to attract additional capital
raise substantial doubt about the ability of 3DX to continue as a going concern.
Management's plans in regard to these matters are also described in Note 3. The
accompanying financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should 3DX be unable to continue
as a going concern.
Houston, Texas
March 22, 1999
ARTHUR ANDERSEN LLP
F-1
<PAGE>
3DX TECHNOLOGIES INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
<S> <C> <C>
1998 1997
-------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents....................................................... $ 1,447,756 $ 1,568,091
Accounts receivable............................................................. 1,039,331 1,181,083
Prepaid expenses................................................................ 83,892 110,681
-------------- --------------
Total current assets........................................................ 2,570,979 2,859,855
-------------- --------------
Property and equipment:
Oil and gas properties, full-cost method:
Evaluated..................................................................... 32,664,307 22,521,673
Unevaluated................................................................... 4,450,731 10,098,698
Technical interpretation equipment.............................................. 2,734,149 2,605,439
Other property and equipment.................................................... 273,780 273,780
-------------- --------------
40,122,967 35,499,590
Less accumulated depletion, depreciation and amortization....................... (29,256,556) (17,127,846)
-------------- --------------
10,866,411 18,371,744
Other assets.................................................................... 63,771 78,041
-------------- --------------
$ 13,501,161 $ 21,309,640
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................................ $ 1,301,828 $ 1,713,209
Accrued liabilities............................................................. 468,028 1,778,543
-------------- --------------
Total current liabilities................................................... 1,769,856 3,491,752
-------------- --------------
Borrowings on credit agreement.................................................. 1,200,000 --
-------------- --------------
Total liabilities........................................................... 2,969,856 3,491,752
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued....... -- --
Common stock, $.01 par value, 20,000,000 shares authorized, 9,379,209 and
7,225,462 shares issued and outstanding, respectively......................... 93,792 72,255
Paid-in capital................................................................. 39,989,951 38,085,357
Deferred compensation........................................................... (136,304) (512,132)
Accumulated deficit............................................................. (29,416,134) (19,827,592)
-------------- --------------
Total stockholders' equity.................................................. 10,531,305 17,817,888
-------------- --------------
$ 13,501,161 $ 21,309,640
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
3DX TECHNOLOGIES INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
------------- -------------- -------------
Revenues:
Oil and gas....................................................... $ 4,544,690 $ 3,045,447 $ 851,827
Interest and other................................................ 53,984 585,154 247,960
------------- -------------- -------------
Total revenues.................................................. 4,598,674 3,630,601 1,099,787
------------- -------------- -------------
Costs and expenses:
Lease operating................................................... 411,875 257,291 49,016
Production taxes.................................................. 319,874 178,952 58,660
Impairment of oil and gas properties.............................. 7,863,536 9,061,240 1,476,690
Depletion, depreciation, and amortization of oil and gas
properties...................................................... 3,545,328 2,636,305 422,839
Interest expenses................................................. 12,847 483 --
General and administrative........................................ 2,033,756 2,532,474 1,827,946
------------- -------------- -------------
Total costs and expenses........................................ 14,187,216 14,666,745 3,835,151
------------- -------------- -------------
Net loss............................................................ (9,588,542) (11,036,144) (2,735,364)
Dividends on preferred stock........................................ -- -- (520,393)
Redemption premium on Series B preferred stock...................... -- -- (365,810)
Accretion and preferred stock....................................... -- -- (54,844)
------------- -------------- -------------
Net loss applicable to common stockholders.......................... $ (9,588,542) $ (11,036,144) $ (3,676,411)
------------- -------------- -------------
------------- -------------- -------------
Basic and diluted net loss per common share......................... $ (1.15) $ (1.53) $ (1.21)
------------- -------------- -------------
------------- -------------- -------------
Weighted average number of common shares outstanding................ 8,328,429 7,193,837 3,042,466
------------- -------------- -------------
------------- -------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
3DX TECHNOLOGIES INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK STOCK
------------------ PAID-IN DEFERRED ACCUMULATED SUBSCRIPTIONS
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT RECEIVABLE TOTAL
--------- ------- ----------- ------------ -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995..... 2,987,908 $29,879 $ 1,730,459 $(837,864) $ (5,115,037) $(47,756) $ (4,240,319)
Principal collections............ -- -- -- -- -- 47,756 47,756
Shares issued upon exercise of
stock options.................. 3,124 31 573 -- -- -- 604
Accrual of dividends............. -- -- -- -- (520,393) -- (520,393)
Accretion on preferred stock..... -- -- -- -- (54,844) -- (54,844)
Deferred compensation related to
certain stock options.......... -- -- 922,806 (922,806) -- -- --
Compensation expense related to
certain stock options.......... -- -- -- 867,630 -- -- 867,630
Shares issued in Initial Public
Offering (net of offering
costs)......................... 2,400,000 24,000 23,539,064 -- -- -- 23,563,064
Conversion of Series C preferred
to common stock................ 1,450,145 14,502 7,996,798 -- -- -- 8,011,300
Redemption of Series B preferred
stock.......................... -- -- -- -- (365,810) -- (365,810)
Net loss......................... -- -- -- -- (2,735,364) -- (2,735,364)
--------- ------- ----------- ------------ -------------- ------------- ------------
Balance at December 31, 1996..... 6,841,177 68,412 34,189,700 (893,040) (8,791,448) -- 24,573,624
Shares issued for
over-allotment................. 375,000 3,750 3,796,396 -- -- -- 3,800,146
Shares issued for exercise of
stock options.................. 9,285 93 3,155 -- -- 3,248
Deferred compensation related to
certain stock options.......... -- -- 96,106 (96,106) -- -- --
Compensation expense related to
certain stock options.......... -- -- -- 477,014 -- -- 477,014
Net loss......................... -- -- -- -- (11,036,144) -- (11,036,144)
--------- ------- ----------- ------------ -------------- ------------- ------------
Balance at December 31, 1997..... 7,225,462 72,255 38,085,357 (512,132) (19,827,592) -- 17,817,888
Shares issued for exercise of
stock options.................. 401,703 4,017 127,226 -- -- -- 131,243
Deferred compensation related to
restricted stock award......... 50,000 500 97,938 (98,438) -- -- --
Compensation expense related to
restricted stock award......... -- -- -- 41,016 -- -- 41,016
Compensation expense related to
certain stock options.......... -- -- -- 180,905 -- -- 180,905
Shares issued (net of offering
costs)......................... 1,702,044 17,020 2,307,918 -- -- -- 2,324,938
Reversal of compensation expense
for former employees related to
certain stock options.......... -- -- (628,488) 252,345 -- -- (376,143)
Net loss......................... -- -- -- -- (9,588,542) -- (9,588,542)
--------- ------- ----------- ------------ -------------- ------------- ------------
Balance at December 31, 1998..... 9,379,209 $93,792 $39,989,951 $(136,304) $ (29,416,134) $ -- $ 10,531,305
--------- ------- ----------- ------------ -------------- ------------- ------------
--------- ------- ----------- ------------ -------------- ------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
3DX TECHNOLOGIES INC.
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $(9,588,542) $(11,036,144) $(2,735,364)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depletion, depreciation and amortization.... 4,265,174 3,366,242 883,962
Compensation related to certain stock
options................................... (154,222) 477,014 867,630
Impairment of oil and gas properties........ 7,863,536 9,061,240 1,476,690
(Increase) decrease in accounts
receivable................................ 141,752 (626,873) (440,506)
(Increase) decrease in prepaid expenses..... 26,789 54,414 (79,309)
Increase (decrease) in accounts payable..... (5,460) (107,291) 388,767
Increase (decrease) in accrued
liabilities............................... (65,516) 240,963 253,415
----------- ------------ -----------
Net cash provided by operating activities....... 2,483,511 1,429,565 615,285
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties............. (8,414,172) (19,948,293) (6,166,219)
Sales of oil and gas properties................. 2,568,585 -- --
Purchases of technical and other equipment...... (128,710) (1,168,154) (456,264)
Proceeds from securities held to maturity....... -- -- 1,595,167
Other assets.................................... 14,270 (70,166) 5,000
----------- ------------ -----------
Net cash used in investing activities........... (5,960,027) (21,186,613) (5,022,316)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on credit agreement.................. 2,000,000 -- --
Payment on borrowings on credit agreement....... (800,000) -- --
Common stock proceeds, net of issuance costs.... 2,024,938 3,800,146 23,563,064
Proceeds from exercise of stock options......... 131,243 3,248 604
Series C preferred stock proceeds, net of
issuance costs................................ -- -- 143,843
Redemption of Series B preferred stock.......... -- -- (6,687,100)
Payment of Series C preferred stock dividends... -- -- (795,649)
----------- ------------ -----------
Net cash provided by financing activities......... 3,356,181 3,803,394 16,224,762
----------- ------------ -----------
Net change in cash and cash equivalents........... (120,335) (15,953,654) 11,817,731
Cash and cash equivalents at beginning of year.... 1,568,091 17,521,745 5,704,014
----------- ------------ -----------
Cash and equivalents at end of the year........... $ 1,447,756 $ 1,568,091 $17,521,745
----------- ------------ -----------
----------- ------------ -----------
SUPPLEMENTAL CASH FLOW INFORMATION
NON-CASH TRANSACTIONS:
Accretion on preferred stock.................... -- -- 54,844
Redemption premium on Series B preferred
stock......................................... -- -- 365,810
Issuance of common stock for reduction of
accounts payable.............................. 300,000 -- --
Transfer of property interest for reduction of
accounts payable.............................. 655,407 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
3DX Technologies Inc. ("3DX" or the "Company") began operations in January
1993 to offer 3-D seismic imaging and computer-aided exploration capabilities as
a partner to experienced oil and gas operators. 3DX combines its 3-D imaging
capabilities with the operator's local knowledge and infrastructure to evaluate
and exploit drilling opportunities. 3DX primarily invests in prospects in the
Gulf Coast region of the U.S., where 3-D seismic evaluation and interpretation
is expected to reduce drilling risk. Working interests in major prospects have
ranged from 5% to 40% in property investments to date. 3DX's interests in oil
and gas ventures are proportionately consolidated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OIL AND GAS PROPERTIES
3DX accounts for its oil and gas properties using the full-cost method. All
costs associated with the acquisition, exploration and development of oil and
gas properties, including such costs as leasehold acquisition costs, geological
and geophysical expenditure, dry hole costs and tangible and intangible
development costs, are capitalized as incurred. Included in capitalized costs
for 1998, 1997 and 1996 are $1,253,906, $1,962,691, and $1,146,722, respectively
of payroll and related costs of exploration department personnel which are
directly attributable to 3DX's current exploration and development activities.
Other costs, such as office and facilities costs, technical equipment
maintenance, depreciation and support, and communication costs are also
capitalized to the extent they are attributed to 3DX's oil and gas property
acquisition and exploration activities and would not otherwise be incurred if
such activities were not being undertaken. The internal costs capitalized do not
include any costs related to production, general corporate overhead, or similar
activities.
Dispositions of proved oil and gas properties are reported as adjustments to
capitalized costs, with gains and losses not recognized unless such adjustments
would significantly alter the relationship between capitalized costs and
estimated proved oil and gas reserves. In 1998, 3DX sold its interests in
certain properties for total cash proceeds of $2,568,585. In March 1999, 3DX
sold its remaining interest in a property for proceeds of $450,000.
The evaluated costs of oil and gas properties plus estimated future
development and dismantlement costs are charged to operations as depletion,
depreciation and amortization using the unit-of-production method based on the
ratio of current production to estimated proved recoverable oil and gas
reserves. 3DX excludes unevaluated property costs from the depletion,
depreciation, and amortization calculations until proved reserves have been
discovered or a determination of impairment has been made. Unevaluated
properties are assessed for impairment on a property-by-property basis.
Impairment of capitalized costs of oil and gas properties is determined for
each cost center on a country-by-country basis. For each cost center, to the
extent that capitalized costs of oil and gas properties, net of related
accumulated depreciation, depletion and amortization and any related deferred
income taxes, exceed the future net revenues of estimated proved oil and gas
reserves, discounted at 10% and net of any income tax effects, plus the lower of
cost or fair value of unevaluated properties, such excess costs are charged to
operations as an impairment of oil and gas properties. Oil and gas impairment
charges recorded during 1998 were $7,863,536. The impairments recorded were
principally the result of increased additions to evaluated property costs and
the decline in oil and gas prices being received by 3DX on December 31, 1998.
F-6
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Oil and gas impairment charges recorded during 1997 were $9,061,240, all of
which were attributable to the fourth quarter ended December 31, 1997. This
writedown results principally from the significant decline in oil and gas prices
being received by 3DX on December 31, 1997 and a relatively large investment in
three unsuccessful exploratory wells all of which were evaluated in the fourth
quarter of 1997.
Technical interpretation equipment and related software and other property
and equipment, consisting of office furniture, equipment and leasehold
improvements are recorded at cost. Depreciation is determined on a straight-line
basis over the estimated useful lives of the assets, which range from three to
five years. Depreciation of other property and equipment totaled $719,846,
$728,005, and $459,189 for 1998, 1997 and 1996, respectively, and is included in
general and administrative expenses.
ACCOUNTING FOR INCOME TAXES
3DX provides deferred income taxes at the balance sheet date for the
estimated tax effects of differences in the tax basis of assets and liabilities
and their financial statement carrying amounts.
NATURAL GAS REVENUES
Natural gas revenues are recorded using the sales method, whereby 3DX
recognizes natural gas revenues based on the amount of gas sold to product
purchasers on its behalf. 3DX has no material gas imbalances.
RENTAL INCOME
3DX has an informal income-sharing arrangement with a seismic processing
company whereby 3DX receives a percentage of the seismic processing company's
gross billings in exchange for office space and the use of technical equipment
provided by 3DX. 3DX's share of billings under this arrangement amounted to
$301,304, $264,651, and $229,556 in 1998, 1997 and 1996, respectively, and is
reflected as a reduction of 3DX's general and administrative expenses.
NET LOSS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," which establishes new computation, presentation, and disclosure
requirements for earnings per share for public companies. The statement is
effective for financial statements issued for periods ending after December 15,
1997. In connection with this new statement, the Securities and Exchange
Commission issued Staff Accounting Bulletin (SAB) No. 98, which prescribes a new
accounting treatment for the impact on earnings per share of "nominal issuances"
of common stock and common stock options issued within one year prior to the
filing of a registration statement for an initial public offering of common
stock. Under the prior rules, common stock options having a nominal exercise
price issued within one year of an initial public offering were required to be
reflected retroactively in the computation of earnings per share for all periods
even if the effect was antidilutive. Under SAB No. 98, these common stock
options are only required to be reflected in earnings
F-7
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
per share if the effect is dilutive. 3DX has restated all prior periods to
reflect this change in accounting principle. The effect of this change is
presented in the following table:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Basic and diluted net loss per common share, as previously
reported........................................................ $ (1.15) $ (1.53) $ (1.16)
Retroactive effect of change in accounting principle.............. -- -- (0.05)
--------- --------- ---------
Basic and diluted net loss per common share....................... $ (1.15) $ (1.53) $ (1.21)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The computation of basic and diluted net loss per common share was based
entirely on the weighted average common shares outstanding. Stock options which
are potentially dilutive were excluded from the net loss per common share
calculation in each of the years presented as the effect would have been
antidilutive. See Note 9 for the number of stock options outstanding.
STATEMENTS OF CASH FLOWS
For the purposes of the statements of cash flows, 3DX considers all highly
liquid investments purchased with original maturities of three months or less to
be cash equivalents.
CONCENTRATION OF CREDIT RISK
All of 3DX's receivables are due from oil and gas producing companies
located in the United States. 3DX has not experienced any significant credit
losses related to its receivables.
MAJOR CUSTOMERS
Operators for producing oil and gas wells in which 3DX holds working
interests sold 3DX's share of gas production to four major customers during 1998
with one customer accounting for 31% of 3DX's 1998 oil and gas revenues and the
remaining three customers each accounting for 13% to 15% of 1998 oil and gas
revenue. Sales to one customer represented 63% and 58% of oil and gas revenues
in 1997 and 1996, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities are short-term in nature and
approximate fair value.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Oil and
gas reserve estimates, which are the basis for units-of-production
F-8
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
depletion and impairment of oil and gas properties, are inherently imprecise and
are expected to change as future information becomes available.
PRIOR YEAR RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current presentation.
ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income", was issued in June 1997,
with the adoption required for fiscal years beginning after December 31, 1997.
SFAS No. 130 requires the presentation of an additional income measure (termed
"comprehensive income"), which adjusts traditional net income for certain items
that previously were only reflected as direct charges to equity. For the years
ended December 31, 1998, 1997 and 1996 there is not a difference between
"traditional" net income and comprehensive net income.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", was issued in June 1997, establishing standards for public
business enterprises to report information about operating segments and related
information in interim and annual financial statements. 3DX has evaluated the
applicability of SFAS No. 131 and has concluded that 3DX does not meet the
criteria which require segment reporting as 3DX has only one operating segment.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement SFAS No. 133 as of the beginning of any fiscal
quarter after issuance. SFAS No. 133 cannot be applied retroactively. SFAS No.
133 must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997 and, at 3DX's election, before
January 1, 1998. Based on 3DX's current operations, SFAS No. 133 will not impact
3DX's disclosure or reporting.
3. GOING CONCERN
The accompanying financial statements have been prepared assuming that 3DX
will continue as a going concern. 3DX expects that its projected net cash flows
from currently producing properties will be sufficient to fund its projected
minimum levels of general and administrative expenditures through December 31,
1999, including technical employee and related costs which are capitalized under
full-cost accounting. However, these projects do not consider any cash
expenditures which could be required by 3DX's planned capital and exploration
program discussed below. Available cash could also be limited by
F-9
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. GOING CONCERN (CONTINUED)
declines in oil and gas prices and unanticipated declines in oil and gas
production from existing properties. These matters could adversely affect 3DX's
ability to pay its obligations as they become due.
3DX has made and will be required to make oil and gas capital expenditures
substantially in excess of its net cash flow from operations in order to
complete the exploration and development of its existing properties. 3DX will
also need to acquire exploration prospects and find additional oil and gas
reserves in order for its asset base not to be depleted by current oil and gas
production. The level of capital spending in 1999 and thereafter will be highly
dependent upon 3DX's ability to obtain additional capital.
3DX will require additional sources of financing to fund drilling
expenditures on properties currently owned by 3DX and to fund leasehold costs
and geological and geophysical costs on its active exploration projects. 3DX's
1999 expenditure plans currently include up to eleven exploratory and
development wells and various lease and seismic data acquisitions. 3DX generally
has the right, but not the obligation, to participate for its percentage
interest in drilling wells and can decline to participate if it does not have
sufficient capital resources at the time such drilling operations are proposed.
3DX can also potentially transfer its right to participate in drilling wells in
exchange for cash, a reversionary interest, or some combination thereof. To
recover its investment in unevaluated properties, it is necessary for 3DX to
either participate in drilling which finds commercial oil and gas production and
produce such reserves or receive sufficient value through the sale or transfer
of all or a portion of its interests.
Management of 3DX continues to seek financing for its capital program from a
variety of sources. 3DX is actively soliciting new common or preferred equity
investors, which could lead to a sale of all or a substantial portion of 3DX's
equity interests to a merger partner. 3DX could also seek additional debt
financing, although it has no additional borrowings currently available under
its credit agreement. 3DX also recently sold interests in oil and gas properties
to help fund its capital program, and will consider additional property sales,
although no such sales are imminent. No assurance can be given that 3DX will be
able to obtain additional financing by these or other means on terms that would
be acceptable to 3DX. 3DX's inability to obtain additional financing would have
a material adverse effect on 3DX. Without raising additional capital, 3DX
anticipates that it will be required to limit or defer its planned oil and gas
exploration and development program, which could adversely affect the
recoverability and ultimate value of 3DX's oil and gas properties. 3DX may also
be required to pursue other financial alternatives, which could include a sale
or merger of 3DX.
Management intends to pursue exploration and development opportunities to
the extent additional capital becomes available in the current oil and gas
environment. However, the uncertainties about 3DX's future cash flows and the
lack of firm commitments to attract additional capital at this time raise
substantial doubt about the ability of 3DX to continue as a going concern. The
accompanying financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should 3DX be unable to continue
as a going concern.
4. LISTING ON NASDAQ
In September 1998, 3DX received a letter from The Nasdaq Stock Market, Inc.
notifying 3DX that it failed to maintain a closing bid price of greater than or
equal to $1.00 and that 3DX's common stock failed to maintain a market value of
public float greater than or equal to $5 million, as required by Nasdaq rules.
3DX met with officials from The Nasdaq Stock Market, Inc. on February 12, 1999,
at which time 3DX
F-10
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LISTING ON NASDAQ (CONTINUED)
presented several alternatives to regain compliance with the minimum bid price
and market value of public float requirements. On March 22, 1999, The Nasdaq
Stock Market Inc. responded to the meeting with the decision to transfer the
listing of 3DX's securities to The Nasdaq SmallCap Market, effective with the
open of business on March 24, 1999, pursuant to the following exception. On or
before April 5, 1999, 3DX must evidence a minimum closing bid price of $1.00 per
share for a minimum of ten consecutive trading days. In order to fully comply
with the terms of this exception, 3DX must be able to demonstrate compliance
with all requirements for continued listing on The Nasdaq SmallCap Market.
Accordingly, effective, March 24, 1999, the trading symbol of 3DX's securities
was changed from TDXT to TDXTC. The "C" will be removed from the symbol when The
Nasdaq Stock Market Inc. has confirmed compliance with the terms of the
exception and all other criteria necessary for continued listing. In the event
3DX is unable to meet the terms of this exception, 3DX's securities will be
delisted from The Nasdaq Stock Market. If delisted, trading of the common stock
would be conducted in the over-the-counter market or in what are commonly
referred to as the "pink sheets". As a result, a holder of the common stock
could find it more difficult to dispose of or to obtain accurate quotations of
the price of the common stock. Such delisting could have an adverse effect on
the market price and overall marketability of the common stock.
If the common stock is not listed on Nasdaq and has a market price of less
than $5.00 per share, it may be classified as a "penny stock". SEC regulations
define a "penny stock" to be any non-Nasdaq equity security that has a market
price of less than $5.00 per share, subject to certain exceptions. For any
transaction involving a penny stock, unless exempt, the rules require delivery,
prior to any transaction in a penny stock, of a disclosure schedule prepared by
the SEC relating to the penny stock market. Disclosure is also required to be
made about commissions payable to both the broker-dealer and the registered
representative and to provide current quotations for the securities. Finally,
monthly statements are required to be sent disclosing recent price information
for the penny stock held in the account and information on the limited market in
penny stocks.
The foregoing required penny stock restrictions will not apply to the common
stock if such securities are quoted on Nasdaq and have certain price and volume
information provided on a current and continuing basis or meet certain minimum
net tangible assets or average revenue criteria. There can be no assurance that
the common stock will qualify for exemption from these restrictions. In any
event, even if shares of the common stock were exempt from such restrictions,
they would remain subject to Section 15(b) (8) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), which gives the SEC the authority to
prohibit any person that is engaged in unlawful conduct while participating in a
distribution of a penny stock from associating with a broker-dealer or
participating in a distribution of a penny stock, if the SEC finds that such a
restriction would be in the public interest. If the common stock were subject to
the rules on penny stocks, the market liquidity for the common stock could be
severely adversely affected.
F-11
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
Significant components of 3DX's deferred tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Deferred tax liability:
Exploration and development expenditures deducted for tax and
capitalized for books....................................... $ (2,016,743) $ (981,479)
Other items, net.............................................. (173,101) (70,968)
------------- -------------
Total deferred tax liability................................ (2,189,844) (1,052,447)
Deferred tax assets:
Net operating loss carryforwards.............................. 3,979,073 3,803,419
Other items, net.............................................. 2,330,587 836,151
------------- -------------
Total deferred tax assets................................... 6,309,660 4,639,570
Less: Valuation allowance..................................... (4,119,816) (3,587,123)
------------- -------------
Net deferred tax assets......................................... 2,189,844 1,052,447
------------- -------------
Net deferred tax liability...................................... $ -- $ --
------------- -------------
------------- -------------
</TABLE>
3DX did not record any current or deferred income tax provision or benefit
in any of the periods presented. 3DX's provision for income taxes differs from
the amount computed by applying the statutory rate due principally to the
valuation allowance recorded against its deferred tax asset account relating to
net operating tax loss carryforwards. Management believes that such allowance is
necessary until there is greater assurance that the net operating tax loss
carryforwards can be utilized.
3DX has recorded a valuation allowance against its deferred tax assets in
each year to reflect the estimated portion for which realization is uncertain.
As of December 31, 1998, 3DX had tax net operating loss carryforwards of
approximately $11,703,000 which begin to expire in 2008. As a result of recent
stock transactions, including the initial public offering, 3DX's utilization of
its net operating losses is limited under Section 382 of the Internal Revenue
Code.
6. CREDIT AGREEMENT
On December 18, 1997, 3DX executed a credit agreement with a commercial bank
which provides for advances under a borrowing base periodically determined by
the Bank and set initially at $5 million. The credit agreement expires on
December 31, 2000. During April 1998, the bank redetermined the borrowing base
and established an availability of $2 million which was reduced to $1.2 million
in November 1998. The credit agreement is secured by substantially all of 3DX's
producing oil and gas properties. Advances carry an interest rate, at 3DX's
option, of either the London Interbank Offered Rate ("LIBOR") plus 2% or the
lender's base rate. The credit agreement contains restrictions on dividends and
additional liens and indebtedness and requires the maintenance of a minimum
current ratio and net worth, each as defined in the credit agreement. At
December 31, 1998, the outstanding balance under this credit agreement was $1.2
million at a weighted average interest rate of-7.3 percent. There were no
borrowings under the credit agreement during the year ended December 31, 1997.
In March 1999, 3DX used the proceeds from a sale of an interest in oil and gas
properties to pay down its outstanding balance to $750,000.
F-12
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. MANDATORILY REDEEMABLE PREFERRED STOCK
SERIES B
In November 1993, 3DX issued 29,000 Series B equity units at $100 per unit,
for total proceeds before offering costs of $2,900,000. In October 1994, 3DX
issued 25,000 additional Series B equity units at $100 per unit, for total
proceeds before offering costs of $2,500,000. Each equity unit consisted of one
share of redeemable Series B preferred stock, par value $.01 per share ("Series
N Preferred Stock"), at $94.1558 per share and 30.215 shares of common stock,
par value $.01 per share, at $0.19 per share. The Series B Preferred Stock
carried a redemption value of $100 per share. The difference between the sales
price and the redemption value was subject to pro-rate accretion which was
charged to retained earnings, such that the book value of each share of Series B
Preferred Stock would equal $100 at the required mandatory redemption in two
installments commencing in November 2002. The Series B Preferred Stock also
carried a cumulative annual dividend, payable on December 31 of each year, of
$12.50 per share if paid in cash or .13276 shares of Series B Preferred Stock if
paid in stock. All dividends were paid in additional shares of Series B
Preferred Stock. Series B equity units totaling $1,025,000, or 19% of the total
proceeds of the offering, were sold to related parties, consisting of officers
of 3DX, consultants and Landmark. Additionally, units totaling $3,032,000, or
56%, were sold to two investors and their affiliates, each of which required the
right to designate one member of the Board of Directors of 3DX.
In connection with the initial public offering which was completed on
December 28, 1998 (see Note 8), all of the issued and outstanding shares of
Series B Preferred Stock were redeemed. The unamortized redemption premium of
$365,810 was charged to 3DX's accumulated deficit.
SERIES C
During the period from July 26, 1995 through September 25, 1995, 3DX sold a
total of 2,662,241 shares of senior redeemable convertible Series C preferred
stock, par value $.01 per share ("Series C Preferred Stock"), at $3.00 per
share, for total proceeds before offering costs of $7,986,723. The Series C
Preferred Stock carried a cumulative dividend at an annual rate of $.24 per
share if paid in cash or .08 shares of Series C Preferred Stock if paid in
stock, payable or accruing quarterly, commencing on December 31, 1995. Unpaid
dividends earned interest at an annual interest rate of 8%. During the year
ended December 31, 1996, 3DX paid accrued dividends on Series C Preferred Stock
of $795,849. Shares totaling $925,515, or 12% of the total proceeds, were sold
to related parties, including consultants to and officers of 3DX, as well as two
directors and their affiliates. Additionally, one investor purchased shares
totaling $3,999,999, or 50% of the offering, on the condition that it be given
the right to designate one member of 3DX's Board of Directors.
Each share of Series C Preferred Stock was convertible into one share of
common stock. Subsequent to the reverse stock split in October 1996, each share
was convertible into .517 shares of common stock. The Series C Preferred Stock
could be automatically converted to common stock upon the occurrence of certain
conversion events, including the successful completion of an initial public
offering of 3DX's common stock if certain pricing and other criteria were met.
The Series C preferred stock also contained a mandatory-redemption feature under
which the stock could be redeemed, at the option of at least 67% of the holders,
at the $3.00 per share liquidation value in two installments commencing in
November 2002.
In October 1995, the Board of Directors granted the holder of each share of
Series C Preferred Stock a warrant to purchase additional shares equal to 10% of
the shares owned by such holder, at an exercise price of $3.00 per share. Such
shares were exercisable at any time until the earlier of (a) five years from the
F-13
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. MANDATORILY REDEEMABLE PREFERRED STOCK (CONTINUED)
date of issuance and (b) the effective date of an initial public offering of
3DX's securities. No value was assigned to these warrants as the computed value
of the warrants using the Black-Scholes model was zero.
In connection with the initial public offering which was completed on
December 26, 1996, all of the issued and outstanding shares of Series C
Preferred Stock, and all outstanding Series C Preferred Stock warrants were
converted into common stock.
STOCK SUBSCRIPTIONS RECEIVABLE
Certain officers and directors of 3DX purchased Series B equity units and
Series C Preferred Stock for promissory notes, which are reflected as an offset
to equity in the accompanying financial statements. The promissory notes were
full recourse and carried interest at a fixed rate of 6% per annum. The notes
from 3DX's officers were collateralized by certain vested stock options the
individuals held from their former employer. The principal and accrued interest
on all notes for the purchase of equity securities of 3DX were paid off as of
December 31, 1996.
The following table summarizes the 1996 activity of Series B and Series C
Preferred Stock:
<TABLE>
<CAPTION>
REDEEMABLE PREFERRED STOCK
----------------------------------------------------
SERIES B SERIES C
------------------------ --------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995........... 66,871 $ 6,277,826 2,662,241 $ 7,903,833
Accretion to redemption value.......... -- 43,464 -- 11,380
Redemption premium..................... -- 365,810
Redemption of Series B preferred....... (66,871) (6,687,100) -- --
Exercise of outstanding warrants:
For cash............................. -- -- 32,029 96,087
Under cashless tender................ -- -- 110,653 --
Conversion to common stock............. -- -- (2,804,923) (8,011,300)
--------- ------------- ----------- -------------
Balance at December 31, 1996........... -- $ -- -- $ --
--------- ------------- ----------- -------------
--------- ------------- ----------- -------------
</TABLE>
8. STOCKHOLDERS' EQUITY
In May 1995, the stockholders approved a 10-for-l stock split of 3DX's
common stock. In October 1996, the stockholders approved a reverse stock split
whereby holders of common stock received .517 shares of common stock for every
share previously owned. All references in this report to number of common shares
outstanding reflect stock splits retroactively to inception of 3DX.
On December 26, 1996, 3DX completed an initial public offering for the sale
of 2,400,000 shares of common stock at $11.00 per share, less offering costs. In
January 1997, 3DX's underwriters exercised their 30-day over-allotment option to
purchase 375,000 additional shares of common stock at the offering price of
$11.00 per share, less underwriting discounts and commissions. Total proceeds to
3DX from the initial public offering, net of offering costs, were approximately
$27.4 million.
On June 10, 1998, 3DX entered into a common stock subscription agreement
dated as of June 3, 1998, with certain purchasers that provides for, among other
things, the purchase of an aggregate of 1,462,044
F-14
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
shares of 3DX's common stock at $1.50 per share. Net proceeds from the issuance
of shares on June 10, 1998 amounted to $2.1 million. The agreement, which was
approved by the stockholders of 3DX at a special meeting of stockholders held on
August 7, 1998, also granted to the purchasers an option to purchase, subject to
stockholder approval, up to an aggregate of 1,871,290 additional shares of
common stock at a purchase price of $1.50 per share. On August 10, 1998, the
option expired unexercised.
The agreement also grants the purchasers the right (1) to receive additional
shares of common stock in the event of certain dilutive issuances at less than
$1.50 per share which may be made by 3DX (dilution shares) and (2) to receive
additional shares in the event 3DX fails to meet certain timing requirements
with respect to the filing and effectiveness of a resale registration statement
(penalty shares). A potentially dilutive issuance under this agreement occurred
in the last quarter of 1998 which could result in an additional 292,408 shares
of 3DX's common stock being issued under the anti-dilution provisions of the
agreement.
Under the terms of the June 3, 1998 agreement, 3DX's stockholders approved a
proposal for the adoption of a one-for-five reverse stock split with respect to
all of the outstanding common stock of 3DX. Such reverse stock split will not be
effective until it is implemented by the Board of Directors of 3DX.
In August 1998, 3DX issued 240,000 shares of common stock to an operating
partner in satisfaction of an account payable on 3DX's books to that operating
partner.
Included in accrued liabilities at December 31, 1998 is $137,880 due to a
consultant to 3DX. Under the terms of the consulting agreement, this amount is
to be paid in 3DX's common stock at the average closing price in effect when the
services were performed. The amount of common shares to be issued to satisfy the
liability at December 31, 1988 is 225,000 shares.
9. STOCK OPTIONS
In June 1994, the Board of Directors approved the 1994 Stock Option Plan
(the "Plan") for employees, officers, directors and certain consultants of 3DX.
The ten-year options vest over four years for employees (25% at the end of each
of the first two years and monthly over the last 24 months). For directors and
consultants, the options vest 50% at the end of the first year and 25% at the
end of the second and third years. Certain of these options are eligible for
accelerated vesting upon a change of control of 3DX. 3DX has reserved a total of
1,700,783 shares of common stock for issuance under this
F-15
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS (CONTINUED)
Plan, of which 764,421 shares were available for grant as of December 31, 1998.
The following table summarizes option balances and activity for the Plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
----------- -------------
<S> <C> <C>
Options outstanding, December 31, 1995........................... 686,943 $ 0.34
Granted.......................................................... 267,806 1.52
Exercised........................................................ (3,124) 0.19
Canceled......................................................... (157,146) 0.57
----------- ------
Options outstanding, December 31, 1996........................... 794,479 $ 0.70
Granted.......................................................... 628,656 10.33
Exercised........................................................ (9,285) 0.35
Canceled......................................................... (33,100) 5.03
----------- ------
Options outstanding, December 31, 1997........................... 1,380,750 $ 4.98
Granted.......................................................... 1,598,251 2.00
Exercised........................................................ (401,703) 0.33
Canceled......................................................... (1,750,894) 4.97
----------- ------
Options outstanding, December 31, 1998........................... 826,404 $ 1.27
----------- ------
----------- ------
Exercisable options--
December 31, 1996.............................................. 344,396 $ 0.28
December 31, 1997.............................................. 554,183 0.56
December 31, 1998.............................................. 210,844 0.40
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
OPTIONS AVERAGE AVERAGE OPTIONS AVERAGE
OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/98 LIFE (YRS) PRICE AT 12/31/98 PRICE
- --------------------------------- ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$0.19 to $0.58................... 234,163 6.12 $ 0.36 210,844 $ 0.40
$1.62............................ 592,241 9.30 $ 1.63 --
----------- -----------
Total........................ 826,404 8.40 $ 1.27 210,844 $ 0.40
</TABLE>
In connection with stock options granted within one year of the initial
public offering, 3DX recorded deferred compensation as paid-in capital with a
corresponding offset to stockholders' equity. The amount of deferred
compensation is based on the difference between the option exercise price and
the $11.00 per share initial public offering common stock price for those
options. Deferred compensation is being amortized as compensation expense over
the option vesting period, and totaled $180,905, $477,014 and $867,630 during
the years ended December 31, 1998, 1997 and 1996, respectively. During the third
quarter of 1998, 3DX reversed approximately $376,000 of stock option expense
previously recorded for employees who were terminated as of September 30, 1998
and whose stock options were cancelled. Unamortized deferred compensation as of
December 31, 1998 amounted to $136,304.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation". SFAS No. 123 is a new standard of accounting for stock-based
compensation and establishes a fair value method of accounting for awards
granted after December 31, 1995 under stock compensation plans. 3DX has
F-16
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS (CONTINUED)
elected to continue accounting for employee stock options under Accounting
Principles Board Opinion No. 25 "Accounting For Stock Issued to Employees". Had
3DX elected to apply SFAS No. 123, the estimated effects on net income and
earnings per share resulting from grants made after December 31, 1994 would have
been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- -------------- -------------
<S> <C> <C> <C>
Net loss attributable to common stock:
As reported................................... $ (9,588,542) $ (11,036,144) $ (3,676,411)
Pro forma..................................... (9,797,089) (11,587,856) (3,391,345)
Basic and diluted earnings per share:
As reported................................... $ (1.15) $ (1.53) $ (1.21)
Pro forma..................................... (1.18) (1.61) (1.11)
Pro forma assumptions:
Risk free interest rate:
Maximum..................................... 5.63% 6.72% 6.68%
Minimum..................................... 4.18% 5.91% 5.35%
Expected option life:
Maximum..................................... 4.5 years 4.5 years 4.5 years
Minimum..................................... 3.7 years 3.7 years 3.7 years
Weighted average fair value of options granted
during the year............................... $ 1.51 $ 6.39 $ 8.95
------------- -------------- -------------
Volatility factor............................... 1.02 .703 --
------------- -------------- -------------
</TABLE>
Volatility was not considered in the calculation of option values prior to
December 26, 1996, as 3DX's common stock was not publicly traded.
10. GENERAL AND ADMINISTRATIVE EXPENSES
During the second quarter of 1998, 3DX experienced a downsizing of its work
force. All severance pay, approximately $86,000, associated with this downsizing
was recorded as of June 30, 1998. In addition, stock option expense was
decreased by approximately $376,000 to reverse the amortization of deferred
compensation previously recorded for these employees relating to stock options
issued within one year of the initial public offering.
11. COMMITMENTS
In March 1995, 3DX entered into a 5-year office lease agreement. Future
minimum payments under this non-cancelable office lease are as follows at
December 31, 1998:
<TABLE>
<S> <C>
1999.............................................................. $ 94,633
2000.............................................................. 15,772
---------
Total minimum lease payments...................................... $ 110,405
---------
---------
</TABLE>
Rental expense under this office lease amounted to $99,206, $94,633, and
$94,633 during the years ended December 31, 1998, 1997 and 1996, respectively.
F-17
<PAGE>
3DX TECHNOLOGIES INC.
SUPPLEMENTARY INFORMATION--UNAUDITED
QUARTERLY FINANCIAL DATA (UNAUDITED)
The table below sets forth selected unaudited quarterly financial
information for 1998 and 1997:
<TABLE>
<CAPTION>
QUARTER ENDED:
---------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
1998:
Revenues(a)........................ $ 871,839 $ 1,218,533 $ 1,442,430 $ 1,065,872
Net loss(b)........................ (1,536,761) (4,854,001) (2,495,375) (702,405)
Net loss applicable to common
stockholders..................... (1,536,761) (4,854,001) (2,495,375) (702,405)
Basic and diluted net loss per
common
share(c)......................... (0.21) (0.63) (0.28) (0.08)
1997:
Revenues(a)........................ $ 839,273 $ 890,846 $ 840,705 $ 1,059,777
Net loss(b)........................ (40,458) (460,474) (590,225) (9,944,987)
Net loss applicable to common
stockholders..................... (40,458) (460,474) (590,225) (9,944,987)
Basic and diluted net loss per
common
share(c)......................... (0.01) (0.06) (0.08) (1.38)
</TABLE>
- ------------------------
(a) As discussed in Note 2, rental income has been reflected as a reduction of
general and administrative expense in all periods presented.
(b) As discussed in Note 2, 3DX recorded a writedown of oil and gas properties
totaling $7,863,536 in 1998, including $4,329,687 and $2,157,003 in the
second and third quarters of 1998, respectively, and $9,061,240 in the
fourth quarter of 1997.
(c) Net loss per common share are computed independently for each of the
quarters presented and therefore may not sum to the totals for the year.
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
The aggregate amounts of capitalized costs relating to 3DX's oil and gas
producing activities and the related accumulated depletion, depreciation, and
amortization and impairment at December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------- ------------
<S> <C> <C> <C>
Evaluated oil and gas properties... $ 32,664,307 $ 22,521,673 $ 7,164,397
Unevaluated oil and gas
properties....................... 4,450,731 10,098,698 4,403,165
------------ ------------- ------------
Total capitalized costs............ 37,115,038 32,620,371 11,567,562
Less-accumulated depletion,
depreciation and amortization
and impairments................ (26,882,267) (15,473,403) (3,775,858)
------------ ------------- ------------
$ 10,232,771 $ 17,146,968 $ 7,791,704
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
The costs of unevaluated oil and gas properties consists of projects which
at each date were undergoing exploration or development activities or were
projects on which 3DX planned to commence such exploration activities in the
future. 3DX will begin to amortize these costs when proved reserves are
F-18
<PAGE>
3DX TECHNOLOGIES INC.
SUPPLEMENTARY INFORMATION--UNAUDITED (CONTINUED)
established or impairment is determined. 3DX believes that substantially all of
the unevaluated properties at December 31, 1998 will be fully evaluated within
the succeeding two-year period.
The following table represents an analysis of remaining unevaluated oil and
gas property costs at December 31, 1998 according to the years in which they
were incurred:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
Acquisition costs.................. $ 573,841 $1,250,392 $ 14,161
Exploration costs.................. 1,038,090 460,105 107,636
Capitalized Interest............... 78,957 -- --
Capitalized Overhead............... 837,278 90,271 --
---------- ---------- --------
Total............................ $2,528,166 $1,800,768 $121,797
---------- ---------- --------
---------- ---------- --------
</TABLE>
The following table sets forth the costs incurred in 3DX's oil and gas
property acquisition, exploration and development activities for the years
presented:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Property acquisition costs--
Proved........................... $ 25,000 $ 70,000 $ --
Unproved......................... 633,112 4,794,238 1,171,217
Exploration costs.................. 5,137,353 15,654,152 6,269,266
Development costs.................. 1,923,195 534,419 103,210
---------- ----------- ----------
$7,718,660 $21,052,809 $7,543,693
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
RESERVES
The process of estimating proved developed and proved undeveloped oil and
gas reserves is very complex, requiring significant subjective decisions in the
evaluation of available geologic, engineering and economic data for each
reservoir. The data for a given reservoir may change over time as a result of,
among other things, additional development activity, production history and
viability of production under varying economic conditions. Consequently,
material revisions to existing reserve estimates may occur in the future.
Although every reasonable effort is made to ensure that reserve estimates are
based on the most accurate and complete information possible, the significance
of the subjective decisions required and variances in available data for various
reservoirs make these estimates generally less precise than other estimates
presented in connection with financial statement disclosures.
The following information regarding estimates of 3DX's proved oil and gas
reserves, all located in the United States, is based on reports prepared on
behalf of 3DX by 3DX's independent petroleum engineers.
F-19
<PAGE>
3DX TECHNOLOGIES INC.
SUPPLEMENTARY INFORMATION--UNAUDITED (CONTINUED)
The following tables sets forth the changes in 3DX's total proved reserves for
the years ended December 31, 1998, 1997 and 1996. All of the reserve quantities
reflected in the table below are proved developed reserves.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
---------- ---------- ---------
OIL (BBLS)
---------------------------------
<S> <C> <C> <C>
Proved reserves at the beginning of
the year......................... 88,751 32,428 41,193
Extensions, discoveries, and other
additions........................ 36,887 43,497 9,797
Revisions of previous estimates.... (16,530) 5,489 (10,079)
Purchases of reserves in place..... -- 21,405 --
Sales of reserves in place......... (9,492) -- --
Production......................... (37,802) (14,068) (8,483)
---------- ---------- ---------
Proved reserves at the end of the
year............................. 61,814 88,751 32,428
---------- ---------- ---------
---------- ---------- ---------
<CAPTION>
GAS (MCF)
---------------------------------
<S> <C> <C> <C>
Proved reserves at the beginning of
the year......................... 3,932,109 2,463,736 442,795
Extensions, discoveries, and other
additions........................ 2,238,515 2,546,337 2,284,482
Revisions of previous estimates.... 463,552 53,855 7,661
Purchases of reserves in place..... -- -- --
Sales of reserves in place......... (870,789) -- --
Production......................... (1,877,938) (1,131,819) (271,202)
---------- ---------- ---------
Proved reserves at the end of the
year............................. 3,885,449 3,932,109 2,463,736
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
STANDARD MEASURES OF DISCOUNTED FUTURE NET CASH FLOWS
3DX's standardized measure of discounted future net cash flows, and changes
therein, related to proved oil and gas reserves are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
Future cash inflow............................................. $ 9,000 $ 10,427 $ 9,354
Future production, development and abandonment costs........... (1,781) (2,195) (1,430)
----------- --------- ---------
Future cash flows before income taxes.......................... 7,219 8,232 7,924
Future income taxes............................................ -- -- --
----------- --------- ---------
Future net cash flows.......................................... 7,219 8,232 7,924
10% Discount factor (1,437) (1,184) (1,301)
----------- --------- ---------
Standardized measure of discounted future net cash flow........ $ 5,782 $ 7,048 $ 6,623
----------- --------- ---------
----------- --------- ---------
</TABLE>
F-20
<PAGE>
3DX TECHNOLOGIES INC.
SUPPLEMENTARY INFORMATION--UNAUDITED (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
Changes in standardized measure of discounted future net cash
flows:
Sales of oil, gas and natural gas liquids, net of production
costs........................................................ $ (3,813) $ (2,609) $ (744)
Extensions, discoveries and other additions.................... 3,113 4,737 6,594
Revisions of previous quantity estimates....................... 621 124 (200)
Net changes in prices and production costs..................... (469) (2,468) 173
Accretion of discount.......................................... 705 662 77
Changes in future development costs............................ (24) 60 (82)
Purchases of reserves in place................................. -- 109 --
Sales of reserves in place..................................... (1,499) -- --
Changes in production rates (timing) and other................. 100 (190) 34
----------- --------- ---------
Net change..................................................... $ (1,266) $ (425) $ (5,852)
----------- --------- ---------
----------- --------- ---------
</TABLE>
Estimated future cash inflows are computed by applying year-end prices of
oil and gas to year-end quantities of proved reserves. Future price changes are
considered only to the extent provided by contractual arrangements. Estimated
future development and production costs are determined by estimating the
expenditures to be incurred in developing and producing the proved oil and gas
reserves at the end of the year, based on year-end costs and assuming
continuation of existing economic conditions. Estimated future income tax
expense is calculated by applying year-end statutory tax rates to estimated
future pretax net cash flows related to proved oil and gas reserves, less the
tax basis (including net operating loss carryforwards projected to be usable) of
the properties involved.
These estimates were determined in accordance with SFAS No. 69 "Disclosures
About Oil and Gas Producing Activities." Because of unpredictable variances in
expenses and capital forecasts, crude oil and gas prices and oil and gas reserve
volume estimates, as well as the statutory pricing and discounting assumptions
used in these cash flow estimates, management believes the usefulness of this
data is limited. These estimates of future net cash flows do not necessarily
represent management's assessment of estimated fair market value, future
profitability or future cash flow to 3DX. Management's investment and operating
decisions are based upon reserve estimates that include proved as well as
probable reserves and upon different price and cost assumptions from those used
herein.
The future cash flows presented in the "Standardized Measures of Discounted
Future Net Cash Flows" are based on year-end oil and gas prices for oil and gas
reserves which as of December 31, 1998 were approximately $9.65 per barrel of
oil and approximately $2.16 per Mcf of gas. The Company does not have oil and
gas reserves which are committed under long-term oil and gas sales or hedging
contracts.
The standardized measure table as of December 31, 1998 reflects zero future
income taxes because the existing tax basis in evaluated properties (which
approximates $10.7 million) as of that date offsets the entire $7.2 million
estimate of undiscounted future net cash inflows before income taxes. As of
December 31, 1998, the Company also had tax net operating loss carryforwards
(which represent additional tax deductions against future cash flows) of
approximately $11.7 million. Accordingly, in total there were more than enough
tax basis and tax loss carryforwards to offset any potential future income taxes
in the standardized measure calculation.
F-21
<PAGE>
3DX TECHNOLOGIES INC.
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
-------------- --------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 784,355 $ 1,447,756
Accounts receivable............................................................. 1,082,178 1,039,331
Prepaid expenses................................................................ 101,061 83,892
-------------- --------------
Total current assets........................................................ 1,967,594 2,570,979
-------------- --------------
Property and equipment:
Oil and gas properties, full-cost method:
Evaluated..................................................................... 32,645,847 32,664,307
Unevaluated..................................................................... 4,575,138 4,450,731
Technical interpretation equipment.............................................. 2,734,149 2,734,149
Other property and equipment.................................................... 273,780 273,780
-------------- --------------
40,228,914 40,122,967
Less accumulated depletion, depreciation and amortization....................... (30,986,004) (29,256,556)
-------------- --------------
9,242,910 10,866,411
Other assets...................................................................... 63,771 63,771
-------------- --------------
$ 11,274,275 $ 13,501,161
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 956,148 $ 1,301,828
Accrued liabilities............................................................. 492,139 468,028
-------------- --------------
Total current liabilities................................................... 1,448,287 1,769,856
Borrowings on credit agreement.................................................... 750,000 1,200,000
-------------- --------------
Total liabilities........................................................... 2,198,287 2,969,856
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued...... -- --
Common stock, $.01 par value, 20,000,000 shares authorized, 9,399,353 and
9,379,209 shares issued and outstanding, respectively......................... 93,994 93,792
Paid-in capital................................................................. 39,993,637 39,989,951
Deferred compensation........................................................... (110,523) (136,304)
Accumulated deficit............................................................. (30,901,120) (29,416,134)
-------------- --------------
Total stockholders' equity.................................................. 9,075,988 10,531,305
-------------- --------------
$ 11,274,275 $ 13,501,161
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
3DX TECHNOLOGIES INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------------------
<S> <C> <C>
1999 1998
------------- -------------
Revenues:
Oil and gas....................................................................... $ 554,943 $ 861,377
Interest and other................................................................ 12,624 10,462
------------- -------------
Total revenues................................................................ 567,567 871,839
------------- -------------
Costs and expenses:
Lease operating................................................................... 44,879 106,849
Production taxes.................................................................. 40,451 64,675
Impairment of oil and gas properties.............................................. 990,809 878,346
Depletion, depreciation, and amortization of oil and gas properties............... 592,771 659,489
Interest expense.................................................................. 924 8,166
General and administrative........................................................ 382,719 691,075
------------- -------------
Total costs and expenses...................................................... 2,052,553 2,408,600
------------- -------------
Net loss applicable to common stockholders.......................................... $ (1,484,986) $ (1,536,761)
------------- -------------
------------- -------------
Basic and diluted net loss per common share....................................... $ (0.16) $ (0.21)
------------- -------------
------------- -------------
Weighted average number of common shares outstanding.............................. 9,380,328 7,272,106
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
3DX TECHNOLOGIES INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED FROM JANUARY 1, 1999 THROUGH MARCH 31, 1999)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
---------- --------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997........ 7,225,462 $ 72,255 $ 38,085,357 $ (512,132) $ (19,827,592) $ 17,817,888
Shares issued for exercise of stock
options........................... 401,703 4,017 127,226 -- -- 131,243
Deferred compensation related to
restricted stock award............ 50,000 500 97,938 (98,438) -- --
Compensation expense related to
restricted stock award............ -- -- -- 41,016 -- 41,016
Compensation expense related to
certain stock options............. -- -- -- 180,905 -- 180,905
Reversal of compensation expense for
former employees related to
certain stock options............. -- -- (628,488) 252,345 -- (376,143)
Shares issued (net of offering
costs)............................ 1,702,044 17,020 2,307,918 -- 2,324,938
Net Loss............................ -- -- -- -- (9,588,542) (9,588,542)
---------- --------- ------------- ------------- -------------- -------------
Balance at December 31, 1998........ 9,373,209 93,792 39,989,951 (136,304) (29,416,134) 10,531,305
Shares issued for exercise of stock
options........................... 20,144 202 3,686 -- -- 3,888
Compensation expense related to
restricted stock award............ -- -- -- 12,305 -- 12,305
Compensation expense related to
certain stock options............. -- -- -- 13,476 -- 13,476
Net Loss............................ -- -- -- -- (1,484,986) (1,484,986)
---------- --------- ------------- ------------- -------------- -------------
Balance at March 31, 1999........... 9,393,353 $ 93,994 $ 39,993,637 $ (110,523) $ (30,901,120) $ 9,075,988
---------- --------- ------------- ------------- -------------- -------------
---------- --------- ------------- ------------- -------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
3DX TECHNOLOGIES INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
<S> <C> <C>
1999 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................................... $ (1,484,986) $ (1,536,761)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depletion, depreciation and amortization....................................... 738,639 845,094
Impairment of oil and gas properties........................................... 990,809 878,346
Compensation expense related to certain stock options and restricted stock..... 25,781 76,138
(Increase) decrease in accounts receivable..................................... (42,847) 295,705
(Increase) decrease in prepaid expenses........................................ (17,169) (7,287)
Increase (decrease) in accounts payable........................................ (65,766) 54,169
Increase (decrease) in accrued liabilities..................................... 24,111 (70,153)
------------- -------------
Net cash provided by operating activities........................................ 168,572 535,251
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties.............................................. (993,913) (1,845,431)
Sales of oil and gas properties.................................................. 608,052 --
Purchases of technical and other equipment....................................... -- (117,531)
Other assets..................................................................... -- 1,888
------------- -------------
Net cash used in investing activities............................................ (385,861) (1,961,074)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on borrowings on credit agreement........................................ (450,000) --
Common stock proceeds, net of issuance costs..................................... -- 12,571
Proceeds from exercise of stock options.......................................... 3,888 --
------------- -------------
Net cash provided by (used in) financing activities.............................. (446,112) 12,571
------------- -------------
Net change in cash and cash equivalents............................................ (663,401) (1,413,252)
Cash and cash equivalents at beginning of the period............................... 1,447,756 1,568,091
------------- -------------
Cash and cash equivalents at end of the period..................................... $ 784,355 $ 154,839
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The interim financial statements included herein have been prepared by 3DX
Technologies Inc. ("3DX") in accordance with generally accepted accounting
principles, and are unaudited. In the opinion of management, all necessary
adjustments have been made for a fair presentation of the financial position of
3DX at March 31, 1999 and the results of operations for the interim periods
presented. All such adjustments made are of a normal and recurring nature.
Results of operations for this period are not necessarily indicative of results
to be expected for the year ending December 31, 1999. Reference is made to 3DX's
December 31, 1998 audited financial statements, including the notes thereto.
Certain reclassifications have been made to amounts reported in previous periods
to conform to the current presentation.
OIL AND GAS PROPERTIES
Under the rules of the full-cost accounting method as prescribed by the
Securities and Exchange Commission, 3DX is required to compare the net costs of
its evaluated properties to the net present value of its proved reserves, using
the prices and costs in effect at the end of each quarterly period unless 3DX
believes that post period prices are more representative of what might be
received in future periods. If such evaluated costs, net of accumulated
depreciation, depletion and amortization, exceed the present value of proved
reserves, an impairment charge is required to writedown those excess costs. At
March 31, 1999, 3DX recognized oil and gas impairments of $990,809 using post
period pricing increases. Using March 31, 1999 prices, 3DX would have recognized
an oil and gas impairment of $1,860,429. During the 1998 quarter, an oil and gas
impairment of $878,346 was recorded. The writedown for the 1999 period was
principally a result of mechanical difficulties in the wellbores of certain
wells in the Ramrod project in Matagorda county, Texas which resulted in the
sale of the remaining interest in the project.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. Based on 3DX's current operations, SFAS No. 133 will not
impact 3DX's disclosure or reporting.
2. GOING CONCERN
The accompanying financial statements have been prepared assuming that 3DX
will continue as a going concern. 3DX expects that its projected net cash flows
from currently producing properties will be sufficient to fund its projected
minimum levels of general and administrative expenditures through December 31,
1999, including technical employee and related costs which are capitalized under
full-cost accounting. However, these projections do not consider any cash
expenditures which could be required by 3DX's planned capital and exploration
program discussed below. Available cash could also be limited by
F-26
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. GOING CONCERN (CONTINUED)
declines in oil and gas prices and unanticipated declines in oil and gas
production from existing properties. These matters could adversely affect 3DX's
ability to pay its obligations as they become due.
3DX has made and will be required to make oil and gas capital expenditures
substantially in excess of its net cash flow from operations in order to
complete the exploration and development of its existing properties. 3DX will
also need to acquire exploration prospects and find additional oil and gas
reserves in order for its asset base not to be depleted by current oil and gas
production. The level of capital spending in 1999 and thereafter will be highly
dependent upon 3DX's ability to obtain additional capital.
3DX will require additional sources of financing to fund drilling
expenditures on properties currently owned by 3DX and to fund leasehold costs
and geological and geophysical costs on its active exploration projects. 3DX's
1999 expenditure plans currently include up to twelve exploratory and
development wells and various lease and seismic data acquisitions. 3DX generally
has the right, but not the obligation, to participate for its percentage
interest in drilling wells and can decline to participate if it does not have
sufficient capital resources at the time such drilling operations are proposed.
3DX can also potentially transfer its right to participate in drilling wells in
exchange for cash, a reversionary interest, or some combination thereof. To
recover its investment in unevaluated properties, it is necessary for 3DX to
either participate in drilling which finds commercial oil and gas production and
produce such reserves or receive sufficient value through the sale or transfer
of all or a portion of its interests.
Management of 3DX will continue to seek financing for its capital program
from a variety of sources. 3DX's inability to obtain additional financing would
have a material adverse effect on 3DX. Without raising additional capital, 3DX
anticipates that it will be required to limit or defer its planned oil and gas
exploration and development program, which could adversely affect the
recoverability and ultimate value of 3DX's oil and gas properties.
Management intends to pursue exploration and development opportunities to
the extent additional capital becomes available in the current oil and gas
environment. However, the uncertainties about 3DX's future cash flows and the
lack of firm commitments to attract additional capital at this time raise
substantial doubt about the ability of 3DX to continue as a going concern. The
accompanying financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should 3DX be unable to continue
as a going concern.
3DX has recently entered into a Plan and Agreement of Merger with Esenjay
Exploration, Inc. ("Esenjay") which provides for the merger of 3DX into Esenjay.
See Note 5 of Notes to Financial Statements.
3. CREDIT AGREEMENT
On December 18, 1997, 3DX executed a credit agreement with a commercial bank
which provides for advances under a borrowing base periodically determined by
the Bank and set initially at $5 million. The credit agreement expires on
December 31, 2000. During April 1998, the bank redetermined the borrowing base
and established an availability of $2 million which was reduced to $1.2 million
in November 1998 and to $750,000 in March 1999. The credit agreement is secured
by substantially all of 3DX's producing oil and gas properties. Advances carry
an interest rate, at 3DX's option, of either the London Interbank Offered Rate
("LIBOR") plus 2% or the lender's base rate. The credit agreement contains
restrictions on
F-27
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. CREDIT AGREEMENT (CONTINUED)
dividends and additional liens and indebtedness and requires the maintenance of
a minimum current ratio and net worth, each as defined in the credit agreement.
At March 31, 1999, the outstanding balance under this credit agreement was
$750,000 at an interest rate of 7.0 percent. There were no additional borrowings
under the credit agreement during the first quarter of 1999.
4. LISTING ON NASDAQ
In September 1998, 3DX received a letter from The Nasdaq Stock Market, Inc.
notifying 3DX that it failed to maintain a closing bid price of greater than or
equal to $1.00 and that 3DX's common stock failed to maintain a market value of
public float greater than or equal to $5 million, as required by Nasdaq rules.
3DX met with officials from The Nasdaq Stock Market, Inc. on February 12, 1999,
at which time 3DX presented several alternatives to regain compliance with the
minimum bid price and market value of public float requirements. On March 22,
1999, The Nasdaq Stock Market Inc. responded to the meeting with the decision to
transfer the listing of 3DX's securities to The Nasdaq SmallCap Market
("SmallCap"), effective with the open of business on March 24, 1999, pursuant to
the following exception. On or before April 5, 1999, 3DX must evidence a minimum
closing bid price of $1.00 per share for a minimum of ten consecutive trading
days. In order to fully comply with the terms of this exception, 3DX must be
able to demonstrate compliance with all requirements for continued listing on
SmallCap. Accordingly, effective, March 24, 1999, the trading symbol of 3DX's
securities was changed from TDXT to TDXTC. As 3DX was unable to comply with the
requirement, at the close of business on April 7, 1999 3DX's securities were
removed from conditional listing on SmallCap. Trading of the common stock will
now be conducted in the over-the-counter market. As a result, a holder of the
common stock may find it more difficult to dispose of or to obtain accurate
price quotations about the common stock.
When common stock is not listed on Nasdaq and has a market price of less
than $5.00 per share, it may be classified as a "penny stock". SEC regulations
define a "penny stock" to be any non-Nasdaq equity security that has a market
price of less than $5.00 per share, subject to certain exceptions. For any
transaction involving a penny stock, unless exempt, the rules require delivery,
prior to any transaction in a penny stock, of a disclosure schedule prepared by
the Securities and Exchange Commission ("SEC") relating to the penny stock
market. Disclosure is also required to be made about commissions payable to both
the broker-dealer and the registered representative and to provide current
quotations for the securities. Finally, monthly statements are required to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
The shares are subject to Section 15(b)(6) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), which gives the SEC the authority to
prohibit any person that is engaged in unlawful conduct while participating in a
distribution of a penny stock from associating with a broker-dealer or
participating in a distribution of a penny stock, if the SEC finds that such a
restriction would be in the public interest. Because the common stock is subject
to the rules on penny stocks, the market liquidity for the common stock could be
severely adversely affected.
5. PROPOSED MERGER
On May 11, 1999 the Company entered into a Plan and Agreement of Merger with
Esenjay Exploration, Inc., an oil and gas exploration company listed on the
Nasdaq Small Cap Market. The terms of the merger provide for the issuance of, at
the 3DX shareholder's option, either one share of Esenjay
F-28
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. PROPOSED MERGER (CONTINUED)
common stock for each 3.25 shares of 3DX common stock or one share of a new
Esenjay convertible preferred stock for each 2.75 shares of 3DX common stock.
The preferred stock is redeemable during the first year at $1.925 per share and
automatically converts into one share of Esenjay common if not redeemed during
the first year and the average closing price of Esenjay common stock during the
twelfth month is greater than $1.875. If the average is less than $1.875 the
preferred may be "put" to Esenjay for, at Esenjay's option, either $1.65 per
share or the number of common shares determined by dividing 1.875 by the average
closing price during the twelfth month not to exceed 3.75 shares.
The Plan and Agreement of Merger has been approved by the board of directors
of both companies and is subject to the consent of the shareholders of both
companies and satisfaction of certain other conditions set forth in the Plan and
Agreement of Merger. Voting agreements have been entered into by Esenjay
shareholders accounting for about 61% of the total outstanding shares of Esenjay
and by 3DX shareholders accounting for about 21% of 3DX outstanding shares.
F-29
<PAGE>
EXHIBIT A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLAN AND AGREEMENT OF MERGER
OF
ESENJAY EXPLORATION, INC.
AND
3DX TECHNOLOGIES, INC.
------------------
DATED AS OF MAY 11, 1999
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
ARTICLE I.
MERGER....................................................................................... A-1
1.1 SURVIVING CORPORATION............................................................... A-1
1.2 STOCKHOLDER APPROVAL................................................................ A-2
1.3 EFFECTIVE DATE...................................................................... A-2
1.4 NAME AND CONTINUED CORPORATE EXISTENCE OF SURVIVING CORPORATION..................... A-2
1.4.1 NAME AND EXISTENCE....................................................... A-2
1.4.2 FEDERAL INCOME TAX TREATMENT OF MERGER................................... A-2
DELAWARE LAW GOVERNS AND ESENJAY CERTIFICATE OF INCORPORATION, AS AMENDED AND
1.5 RESTATED, SURVIVES.................................................................. A-2
1.6 BYLAWS OF SURVIVING CORPORATION..................................................... A-2
1.7 DIRECTORS OF SURVIVING CORPORATION.................................................. A-2
1.8 OFFICERS OF SURVIVING CORPORATION................................................... A-2
1.9 VACANCIES........................................................................... A-3
1.10 CAPITAL STOCK OF SURVIVING CORPORATION.............................................. A-3
1.11 CONVERSION OF SECURITIES UPON MERGER................................................ A-3
1.11.1 GENERAL.................................................................. A-3
1.11.2 CONVERSION OF 3DX COMMON STOCK........................................... A-3
1.11.2.1 CONVERSION INTO ESENJAY COMMON STOCK............................ A-3
1.11.2.2 CONVERSION INTO PREFERRED STOCK................................. A-3
1.11.2.3 EFFECT OF FAILURE TO ELECT MERGER CONSIDERATION................. A-3
1.11.2.4 3DX OPTIONS..................................................... A-3
1.11.3 LIMITATION ON ISSUANCE OF ESNJ-CP STOCK.................................. A-3
1.11.4 EXCHANGE OF 3DX COMMON STOCK CERTIFICATES................................ A-4
1.11.5 EXCHANGE PROCEDURES...................................................... A-4
1.12 ESENJAY FRACTIONAL SHARES........................................................... A-4
1.13 3DX'S TRANSFER BOOKS CLOSED......................................................... A-5
ASSETS AND LIABILITIES OF MERGING CORPORATIONS BECOME THOSE OF SURVIVING
1.14 CORPORATION......................................................................... A-5
1.15 CONVEYANCES TO SURVIVING CORPORATION................................................ A-5
1.16 ACCOUNTING TREATMENT................................................................ A-5
1.17 UNCLAIMED MERGER CONSIDERATION...................................................... A-5
1.18 DISSENTING STOCKHOLDERS OF 3DX...................................................... A-5
ARTICLE II.
REPRESENTATIONS AND WARRANTIES OF 3DX........................................................ A-6
2.1 REPRESENTATIONS AND WARRANTIES OF 3DX............................................... A-6
2.1.1 ORGANIZATION AND STANDING................................................ A-6
2.1.2 AGREEMENT AUTHORIZED AND ITS EFFECT ON OTHER OBLIGATIONS................. A-6
2.1.3 CAPITALIZATION........................................................... A-6
2.1.4 REPORTS AND FINANCIAL STATEMENTS......................................... A-6
2.1.5 LIABILITIES.............................................................. A-7
2.1.6 ABSENCE OF CERTAIN CHANGES AND EVENTS.................................... A-7
2.1.6.1 FINANCIAL CHANGE................................................. A-7
2.1.6.2 PROPERTY DAMAGE.................................................. A-7
2.1.6.3 DIVIDENDS........................................................ A-7
2.1.6.4 CAPITALIZATION CHANGE............................................ A-7
2.1.6.5 LABOR DISPUTES................................................... A-7
2.1.6.6 OTHER MATERIAL CHANGES........................................... A-7
2.1.7 COMPLIANCE WITH OTHER LAWS............................................... A-7
2.1.8 FINDER'S FEE............................................................. A-7
2.1.9 INVESTIGATIONS; LITIGATION............................................... A-8
</TABLE>
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ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF ESENJAY.................................................... A-8
3.1 REPRESENTATIONS AND WARRANTIES OF ESENJAY........................................... A-8
3.1.1 ORGANIZATION AND STANDING................................................ A-8
3.1.2 AGREEMENT AUTHORIZED AND ITS EFFECT ON OTHER OBLIGATIONS................. A-8
3.1.3 CAPITALIZATION........................................................... A-9
3.1.4 REPORTS AND FINANCIAL STATEMENTS......................................... A-9
3.1.5 LIABILITIES.............................................................. A-9
3.1.6 ABSENCE OF CERTAIN CHANGES AND EVENTS.................................... A-9
3.1.6.1 FINANCIAL CHANGE................................................. A-9
3.1.6.2 PROPERTY DAMAGE.................................................. A-9
3.1.6.3 DIVIDENDS........................................................ A-10
3.1.6.4 CAPITALIZATION CHANGE............................................ A-10
3.1.6.5 LABOR DISPUTES................................................... A-10
3.1.6.6 OTHER MATERIAL CHANGES........................................... A-10
3.1.7 COMPLIANCE WITH OTHER LAWS............................................... A-10
3.1.8 FINDER'S FEE............................................................. A-10
3.1.9 INVESTIGATIONS; LITIGATION............................................... A-10
3.1.10 NO REQUIRED REDEMPTION OF ESNJ-CP STOCK.................................. A-10
ARTICLE IV.
OBLIGATIONS PENDING EFFECTIVE DATE........................................................... A-10
4.1 AGREEMENTS OF ESENJAY AND 3DX....................................................... A-10
4.1.1 MAINTENANCE OF PRESENT BUSINESS.......................................... A-10
4.1.2 MAINTENANCE OF PROPERTIES................................................ A-11
4.1.3 MAINTENANCE OF BOOKS AND RECORDS......................................... A-11
4.1.4 COMPLIANCE WITH LAW...................................................... A-11
4.1.5 INSPECTION OF EACH MERGING CORPORATION................................... A-11
4.2 ADDITIONAL AGREEMENTS OF ESENJAY AND 3DX............................................ A-11
4.2.1 JOINT PROXY STATEMENT/PROSPECTUS......................................... A-11
4.2.2 NOTICE OF MATERIAL DEVELOPMENTS.......................................... A-11
4.2.3 BEST EFFORTS............................................................. A-12
4.2.4 PARTICIPATION IN OPERATIONS.............................................. A-12
4.3 ADDITIONAL AGREEMENTS OF 3DX........................................................ A-12
4.3.1 PROHIBITION OF CERTAIN EMPLOYMENT CONTRACTS.............................. A-12
4.3.2 PROHIBITION OF CERTAIN LOANS............................................. A-12
4.3.3 PROHIBITION OF CERTAIN COMMITMENTS....................................... A-12
4.3.4 DISPOSAL OF ASSETS....................................................... A-12
4.3.5 MAINTENANCE OF INSURANCE................................................. A-13
4.3.6 NO AMENDMENT TO CERTIFICATE OF INCORPORATION, ETC........................ A-13
4.3.7 NO ISSUANCE, SALE, OR PURCHASE OF SECURITIES............................. A-13
4.3.8 PROHIBITION ON DIVIDENDS................................................. A-13
4.3.9 STOCKHOLDERS' MEETING.................................................... A-13
4.3.10 SUPPLEMENTAL FINANCIAL STATEMENTS........................................ A-13
4.3.11 3DX ACQUISITION PROPOSALS................................................ A-13
4.3.11.1 NO SOLICITATION................................................. A-13
4.3.12 PROFESSIONAL SERVICES.................................................... A-14
4.4 ADDITIONAL AGREEMENTS OF ESENJAY.................................................... A-14
4.4.1 STOCKHOLDERS' MEETING.................................................... A-14
4.4.2 LISTING.................................................................. A-14
</TABLE>
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4.4.3 APPROVAL AND FILING OF THE CERTIFICATE OF DESIGNATIONS................... A-15
4.4.4 DIRECTORS AND OFFICERS INSURANCE......................................... A-15
ARTICLE V.
CONDITIONS PRECEDENT TO OBLIGATIONS.......................................................... A-15
5.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF 3DX.......................................... A-15
5.1.1 REPRESENTATIONS AND WARRANTIES OF ESENJAY TRUE AT EFFECTIVE DATE......... A-15
5.1.2 NO MATERIAL LITIGATION................................................... A-15
5.1.3 OPINION OF ESENJAY COUNSEL............................................... A-15
5.1.4 STOCKHOLDER APPROVAL..................................................... A-16
5.1.5 CONSENT OF CERTAIN PARTIES IN PRIVITY WITH ESENJAY....................... A-16
5.1.6 FAIRNESS OPINION......................................................... A-16
5.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF ESENJAY...................................... A-16
5.2.1 REPRESENTATIONS AND WARRANTIES OF 3DX TRUE AT EFFECTIVE DATE............. A-16
5.2.2 NO MATERIAL LITIGATION................................................... A-16
5.2.3 OPINION OF 3DX'S COUNSEL................................................. A-17
5.2.4 STOCKHOLDER APPROVAL..................................................... A-17
5.2.5 CONSENT OF CERTAIN PARTIES IN PRIVITY WITH 3DX........................... A-17
5.2.6 EMPLOYEES OF 3DX......................................................... A-17
5.2.7 UNEXERCISED 3DX OPTIONS.................................................. A-17
5.2.8 WAIVER OF ANTI-DILUTION ADJUSTMENT....................................... A-17
5.2.9 VOTING AGREEMENT......................................................... A-17
ARTICLE VI.
TERMINATION AND ABANDONMENT.................................................................. A-18
6.1 TERMINATION......................................................................... A-18
6.1.1 BY MUTUAL CONSENT........................................................ A-18
6.1.2 BY ESENJAY BECAUSE OF CONDITIONS PRECEDENT............................... A-18
6.1.3 BY ESENJAY BECAUSE OF MATERIAL ADVERSE CHANGE............................ A-18
6.1.4 BY 3DX BECAUSE OF CONDITIONS PRECEDENT................................... A-18
6.1.5 BY 3DX BECAUSE OF MATERIAL ADVERSE CHANGE................................ A-18
6.1.7 BY ESENJAY OR 3DX BECAUSE OF LEGAL PROCEEDINGS........................... A-18
6.1.8 BY ESENJAY OR 3DX IF MERGER NOT EFFECTIVE BY SEPTEMBER 15, 1999.......... A-18
6.1.9 BY ESENJAY OR 3DX BECAUSE OF DUE DILIGENCE............................... A-18
6.2 TERMINATION BY BOARD OF DIRECTORS................................................... A-18
6.3 EFFECT OF TERMINATION............................................................... A-19
6.4 WAIVER OF CONDITIONS................................................................ A-19
6.5 EXPENSE ON TERMINATION.............................................................. A-19
6.5.1 FAILURE TO OBTAIN SHAREHOLDER APPROVAL................................... A-19
6.5.2 ACCEPTANCE OF SUPERIOR 3DX TRANSACTION PROPOSALS......................... A-19
6.5.3 FAILURE TO RECOMMEND TO STOCKHOLDERS OR WITHDRAWAL OF FAIRNESS OPINION... A-19
6.5.4 PAYMENT OF TRANSACTION EXPENSES OR TERMINATION FEE....................... A-19
6.5.5 EXCLUSIVE REMEDY......................................................... A-19
ARTICLE VII.
ADDITIONAL AGREEMENTS........................................................................ A-19
7.1 INDEMNIFICATION BY 3DX AS TO JOINT PROXY STATEMENT/PROSPECTUS....................... A-19
7.2 INDEMNIFICATION BY ESENJAY AS TO JOINT PROXY STATEMENT/PROSPECTUS................... A-20
</TABLE>
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ARTICLE VIII.
MISCELLANEOUS................................................................................ A-20
8.1. ENTIRETY............................................................................ A-20
8.2. COUNTERPARTS........................................................................ A-20
8.3. NOTICES AND WAIVERS................................................................. A-20
8.4. TERMINATION OF REPRESENTATIONS, WARRANTIES, ETC..................................... A-21
8.5. TABLE OF CONTENTS AND CAPTIONS...................................................... A-21
8.6. SUCCESSORS AND ASSIGNS.............................................................. A-21
8.7. SEVERABILITY........................................................................ A-21
8.8. APPLICABLE LAW...................................................................... A-21
8.9. PUBLIC ANNOUNCEMENTS................................................................ A-21
</TABLE>
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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."
WITNESSETH:
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 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,
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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") 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.
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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."
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
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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-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 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.
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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, 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.
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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 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
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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 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.
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.
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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
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.
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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 hasreviously 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 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);
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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 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;
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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;
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 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
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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:
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;
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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 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
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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 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 THATnothing 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 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;
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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 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
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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.
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.
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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, 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.
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
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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.
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,
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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.
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
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
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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.
IF TO ESENJAY
<TABLE>
<S> <C>
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
</TABLE>
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IF TO 3DX
<TABLE>
<S> <C>
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
</TABLE>
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.
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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EXHIBIT B
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:
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.
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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.
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
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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.
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
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 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
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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 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
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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.
(b) 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 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 market 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,
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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 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 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.
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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.
IN WITNESS WHEREOF, the Company has caused this statement to be duly
executed by its President this day of , 1999.
<TABLE>
<S> <C> <C>
ESENJAY EXPLORATION, INC.
By:
-----------------------------------------
Michael E. Johnson, PRESIDENT
</TABLE>
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<PAGE>
EXHIBIT C
[logo]
G. CLYDE BUCK
MANAGING DIRECTOR
May 11, 1999
PERSONAL AND CONFIDENTIAL
3DX Technologies, Inc.
12012 Wickchester, Suite 250
Houston, Texas 77079-1218
Attention: Mr. Russell L. Allen
Chief Financial Officer
Dear Russell:
You have advised Harris Webb & Garrison, Inc. ("HWG") that Esenjay
Exploration, Inc. ("Esenjay") has proposed to acquire 100% of the outstanding
common stock of 3DX Technologies, Inc. ("3DX") in a merger whereby 3DX
shareholders may elect to receive either (a) one share of Esenjay common stock
for each 3.25 shares of 3DX common stock or (b) one share of convertible
preferred stock of Esenjay for each 2.75 shares of 3DX common stock, provided
that not over 50% of the 3DX shares shall be converted into Esenjay convertible
preferred stock. You have requested that HWG act as financial advisor and issue
an opinion ("Opinion") as to the fairness to the public shareholders of 3DX of
the financial terms of the proposed transaction.
HWG, as part of its investment banking business, is frequently engaged in
the valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements, and valuations for estate, corporate
and other purposes.
In arriving at our opinion, we have, among other things:
1. Reviewed Plan and Agreement of Merger of Esenjay and 3DX dated as of May 11,
1999;
2. Reviewed a draft of Proxy Statement for the Merger dated May 26, 1999;
3. Reviewed a draft dated April 30, 1999 of a "Statement of Esenjay
Exploration, Inc. Establishing the Designations, Preferences, Limitations
and Relative Rights of Its Series A Convertible Preferred Stock";
4. Reviewed a 12/31/98 Net Asset Value Analysis of 3DX prepared by management
of 3DX near 4/1/99;
5. Reviewed an offer letter dated 3/10/99 from Esenjay to 3DX;
6. Reviewed a reserve report as of 12/31/98 for 3DX dated 1/27/99 prepared by
Ryder Scott Company;
7. Reviewed an estimated prospect valuation schedule as of 4/28/99 for 3DX
prepared by management of 3DX;
8. Reviewed a reserve report as of 1/1/99 for Esenjay dated 2/16/99 prepared by
Netherland, Sewell & Associates;
9. Reviewed an updated reserve report as of 5/1/99 for Esenjay prepared by
management of Esenjay;
10. Reviewed an estimated prospect valuation schedule as of 5/1/99 for Esenjay
prepared by management of Esenjay;
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11. Reviewed 3DX's Form 10-Q for the quarterly periods ended 9/30/98 and
3/31/99;
12. Reviewed 3DX's Form 10-K for the year ended 12/31/98;
13. Reviewed 3DX's Annual Report and Form 10-K and Amendment for the year ended
12/31/97;
14. Reviewed Esenjay's Form 10-K for the year ended 12/31/98;
15. Reviewed ProForma adjustments to the 12/31/98 financial statements prepared
by management of Esenjay;
16. Reviewed Esenjay's Form 10-Q for the quarterly period ended 9/30/98;
17. Reviewed a common stock subscription agreement for 3DX dated 6/3/98;
18. Reviewed a public offering prospectus for Esenjay dated 7/16/98;
19. Reviewed compiled notes prepared by Ronald P. Nowak near 4/1/99 describing
3DX's efforts to raise capital or merge 3DX into another entity;
20. Reviewed letters dated 10/30/98, 11/2/98 and 1/26/99 concerning an offer for
3DX from Fortune Natural Resources;
21. Discussed with management of 3DX the outlook for future operating results,
assets and liabilities of both companies, materials in the foregoing
documents, and other matters we considered relevant to our inquiry; and
22. Considered such other information, financial studies, analyses and
investigations as we deemed relevant under the circumstances.
In our review and in arriving at our opinion, we have, with your permission,
(i) not independently verified any of the foregoing information and have relied
upon its being complete and accurate in all material respects, and (ii) not made
an independent evaluation or appraisal of specific assets of 3DX or Esenjay. Our
Opinion is provided to you pursuant to the terms of our engagement letter dated
3/30/99.
Based upon and subject to the foregoing, it is our Opinion that, as of the
date hereof, the consideration to be received pursuant to the proposed
transaction is fair to the public shareholders of 3DX from a financial point of
view.
HARRIS WEBB & GARRISON, INC.
By:/s/ CLYDE BUCK
--------------------------------------------------------------------
G. Clyde Buck
Managing Director
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EXHIBIT D
DELAWARE GENERAL CORPORATION LAW
SECTION 262--APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of stock on
the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in
favor of the merger or consolidation nor consented thereto in writing
pursuant to Section 228 of this title shall be entitled to an appraisal by
the Court of Chancery of the fair value of the stockholder's shares of stock
under the circumstances described in subsections (b) and (c) of this
section. As used in this section, the word "stockholder" means a holder of
record of stock in a stock corporation and also a member of record of a
nonstock corporation; the words "stock" and "share" mean and include what is
ordinarily meant by those words and also membership or membership interest
of a member of a nonstock corporation; and the words "depository receipt"
mean a receipt or other instrument issued by a depository representing an
interest in one or more shares, or fractions thereof, solely of stock of a
corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or series of
stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title, Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange
or designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc.
or (ii) held of record by more than 2,000 holders; and further provided
that no appraisal rights shall be available for any shares of stock of
the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights under
this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to
SectionSection251, 252, 254, 257, 258, 263 and 264 of this title to
accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national
securities exchange or designated as a national market system
security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more
than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph;
or
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d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation party
to a merger effected under Section 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the
assets of the corporation. If the certificate of incorporation contains such
a provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting
of stockholders, the corporation, not less than 20 days prior to the
meeting, shall notify each of its stockholders who was such on the record
date for such meeting with respect to shares for which appraisal rights
are available pursuant to subsection (b) or (c) hereof that appraisal
rights are available for any or all of the shares of the constituent
corporations, and shall include in such notice a copy of this section.
Each stockholder electing to demand the appraisal of such stockholder's
shares shall deliver to the corporation, before the taking of the vote on
the merger or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days
after the effective date of such merger or consolidation, the surviving
or resulting corporation shall notify each stockholder of each
constituent corporation who has complied with this subsection and has not
voted in favor of or consented to the merger or consolidation of the date
that the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section 228 or
Section 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal
rights of the approval of the merger or consolidation and that appraisal
rights are available for any or all shares of such class or series of
stock of such constituent corporation, and shall include in such notice a
copy of this section; provided that, if the notice is given on or after
the effective date of the merger or consolidation, such notice shall be
given by the surviving or resulting corporation to all such holders of
any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after
the effective date of the merger or consolidation, shall, also notify
such stockholders of the effective date of the merger or consolidation.
Any stockholder entitled to appraisal rights may, within twenty days
after the date of mailing of such notice, demand in writing from the
surviving or resulting corporation the appraisal of such holder's shares.
Such demand will be sufficient if it reasonably informs the corporation
of the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of such holder's shares. If such notice
did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a
second notice before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of such
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<PAGE>
constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send such a second notice to all such holders
on or within 10 days after such effective date; provided, however, that
if such second notice is sent more than 20 days following the sending of
the first notice, such second notice need only be sent to each
stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the transfer
agent of the corporation that is required to give either notice that such
notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not more
than 10 days prior to the date the notice is given, provided, that if the
notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation, the
surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the
effective date of the merger or consolidation, any stockholder shall have
the right to withdraw such stockholder's demand for appraisal and to accept
the terms offered upon the merger or consolidation. Within 120 days after
the effective date of the merger or consolidation, any stockholder who has
complied with the requirements of subsections (a) and (d) hereof, upon
written request, shall be entitled to receive from the corporation surviving
the merger or resulting from the consolidation a statement setting forth the
aggregate number of shares not voted in favor of the merger or consolidation
and with respect to which demands for appraisal have been received and the
aggregate number of holders of such shares. Such written statement shall be
mailed to the stockholder within 10 days after such stockholder's written
request for such a statement is received by the surviving or resulting
corporation or within 10 days after expiration of the period for delivery of
demands for appraisal under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register
in Chancery in which the petition was filed a duly verified list containing
the names and addresses of all stockholders who have demanded payment for
their shares and with whom agreements as to the value of their shares have
not been reached by the surviving or resulting corporation. If the petition
shall be filed by the surviving or resulting corporation, the petition shall
be accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper
of general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail
and by publication shall be approved by the Court, and the costs thereof
shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the stockholders
who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in Chancery for
notation thereon of the pendency of the appraisal proceedings; and if any
stockholder fails to comply with such direction, the Court may dismiss the
proceedings as to such stockholder.
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<PAGE>
(h) After determining the stockholders entitled to an appraisal, the Court shall
appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In
determining the fair rate of interest, the Court may consider all relevant
factors, including the rate of interest which the surviving or resulting
corporation would have had to pay to borrow money during the pendency of the
proceeding. Upon application by the surviving or resulting corporation or by
any stockholder entitled to participate in the appraisal proceeding, the
Court may, in its discretion, permit discovery or other pretrial proceedings
and may proceed to trial upon the appraisal prior to the final determination
of the stockholder entitled to an appraisal. Any stockholder whose name
appears on the list filed by the surviving or resulting corporation pursuant
to subsection (f) of this section and who has submitted such stockholder's
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that
such stockholder is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares, together
with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders
of shares represented by certificates upon the surrender to the corporation
of the certificates representing such stock. The Court's decree may be
enforced as other decrees in the Court of Chancery may be enforced, whether
such surviving or resulting corporation be a corporation of this State or of
any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and
the fees and expenses of experts, to be charged pro rata against the value
of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed
within the time provided in subsection (e) of this section, or if such
stockholder shall deliver to the surviving or resulting corporation a
written withdrawal of such stockholder's demand for an appraisal and an
acceptance of the merger or consolidation, either within 60 days after the
effective date of the merger or consolidation as provided in subsection (e)
of this section or thereafter with the written approval of the corporation,
then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of
Chancery shall be dismissed as to any stockholder without the approval of
the Court, and such approval may be conditioned upon such terms as the Court
deems just.
(l) The shares of the surviving or resulting corporation to which the shares of
such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
is or was a director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against reasonable expenses (including attorney's fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him in
connection with such action.
In an action brought to obtain a judgment in the corporation's favor,
whether by the corporation itself or derivatively by a stockholder, the
corporation may only indemnify for reasonable expenses (including attorney's
fees), actually and reasonably incurred in connection with the defense or
settlement of such action, and the corporation may not indemnify for amounts
paid in satisfaction of a judgment or in settlement of the claim. In any such
action, no indemnification may be paid in respect of any claim, issue or matter
as to which such person shall have been adjudged liable to the corporation
except as otherwise approved by the Delaware Court of Chancery or the court in
which the claim was brought. In any other type of proceeding, the
indemnification may extend to judgments, fines and amounts paid in settlement,
actually and reasonably incurred in connection with such other proceeding, as
well as to expenses (including attorney's fees).
The statute permits indemnification if the person seeking indemnification
has acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the corporation and, in the case of criminal
actions or proceedings, the person had no reasonable cause to believe his
conduct was unlawful. The statute contains additional limitations applicable to
criminal actions and to actions brought by or in the name of the corporation.
The determination of whether a person seeking indemnification has met the
required standard of conduct is to be made (1) by a majority vote of a quorum of
disinterested members of the board of directors, (2) by independent legal
counsel in a written opinion, if such a quorum does not exist or if the
disinterested directors so direct, or (3) by the stockholders.
The Certificate of Incorporation and Bylaws of Esenjay require Esenjay to
indemnify Esenjay's directors and officers to the fullest extent permitted under
Delaware law, and to implement provisions pursuant to contractual indemnity
agreements Esenjay has entered into with its directors and executive officers.
Esenjay's Certificate of Incorporation limits the personal liability of a
director to the corporation or its stockholders to damages for breach of the
director's fiduciary duty.
Esenjay has purchased insurance on behalf of its directors and officers
against certain liabilities that may be asserted against, or incurred by, such
persons in their capacities as directors or officers of the registrant, or that
may arise out of their status as directors or officers of the registrant,
including liabilities under the federal and state securities laws.
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ITEM 21. EXHIBITS
The following is a list of all of the exhibits filed as part of the
Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------------
<C> <S>
2(a) Acquisition Agreement and Plan of Exchange dated as of January 19, 1998,
by and among Frontier Natural Gas Corporation, Esenjay Petroleum
Corporation, and Aspect Resources LLC as incorporated by reference to the
Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1997 dated April 6, 1998, wherein the same appears as Exhibit 2.
2(b) First Amendment to Acquisition Agreement and Plan of Exchange dated as of
April 20, 1998, by and among Frontier Natural Gas Corporation, Esenjay
Petroleum Corporation, and Aspect Resources LLC as incorporated by
reference to the Company's Registration Statement number 333-53581 dated
May 21, 1998 wherein the same appeared as Exhibit 10(x).
2(c) Second Amendment to Acquisition Agreement and Plan of Exchange dated as of
May 13, 1998, by and among Frontier Natural Gas Corporation, Esenjay
Petroleum Corporation, and Aspect Resources LLC as incorporated by
reference to the Company's Registration Statement number 333-53581 dated
May 21, 1998 wherein the same appeared as Exhibit 10(y).
2(d) Plan and Agreement of Merger dated as of May 14, 1998, by and between
Esenjay Exploration, Inc., a Delaware corporation, and Frontier Natural
Gas Corporation as incorporated by reference to the Company's Proxy
Statement filed with the Securities and Exchange Commission on April 24,
1998, wherein the same appeared as Appendix F.
2(e)* Plan and Agreement of Merger, dated May 11, 1999 between Esenjay
Exploration, Inc. and 3DX Technologies Inc., attached hereto as Exhibit A.
3(a) Certificate of Incorporation of the Company is incorporated by reference
to the Company's Registration Statement number 333-53581 dated May 21,
1998 wherein the same appeared as Exhibit 3(a).
3(b) By-Laws of the Company as incorporated by reference to the Company's
Registration Statement number 333-53581 dated May 21, 1998 wherein the
same appeared as Exhibit 3(c).
4(a) See Articles V, VI and X of the Company's Certificate of Incorporation and
Articles I, II, V and VI of the Company's By-Laws as provided as Exhibits
3(a) and 3(b) above.
4(b)* Certificate of Designation for Esenjay Series A Convertible Preferred
Stock, attached hereto as Exhibit B.
5* Opinion of Porter & Hedges, L.L.P., with respect to the legality of the
securities filed herewith.
10(a) Contract Settlement Agreement between Frontier Natural Gas Corporation and
David W. Berry dated effective January 1, 1998, as incorporated by
reference to the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1997 dated April 6, 1998, wherein the same appears
as Exhibit 10(b).
10(b) Contract Settlement Agreement between Frontier Natural Gas Corporation and
David B. Christofferson dated effective January 1, 1998, as incorporated
by reference to the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1997 dated April 6, 1998, wherein the same appears
as Exhibit 10(d).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------------
<C> <S>
10(c) $20,000,000 Amended and Restated Credit Agreement dated as of October 13,
1998, between Esenjay Exploration, Inc. as the borrower and Bank of
America NT&SA as the lender, as incorporated by reference to the Company's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998
dated April 14, 1999, wherein the same appears as Exhibit 10(c).
10(d) Credit Agreement by and between Esenjay Exploration, Inc. and Duke Energy
Financial Services, Inc. dated as of January 28, 1999, as currently in
effect, as incorporated by reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1998 dated April 14,
1999, wherein the same appears as Exhibit 10(d).
10(e) Loan Agreement by and between Frontier Natural Gas Corporation and 420
Energy Investments, Inc. dated March 1, 1996, as currently in effect as
incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1995 dated March 29, 1996, wherein
the same appears as Exhibit 10(r).
10(f) Employee Option Plan-1997 as currently in effect as incorporated by
reference to the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1997 dated April 6, 1998, wherein the same appears
as Exhibit 10(o).
10(g) Warrant Agreement between Frontier Natural Gas Corporation and Gaines,
Berland Energy Fund, L.P. dated January 14, 1998, as incorporated by
reference to the Company's Registration Statement number 333-53581 dated
May 21, 1998 wherein the same appeared as Exhibit 10(q).
10(h) Warrant Agreement between Frontier Natural Gas Corporation and Esenjay
Petroleum Corporation dated January 14, 1998, as incorporated by reference
to the Company's Registration Statement number 333-53581 dated May 21,
1998 wherein the same appeared as Exhibit 10(r).
10(i) Warrant Agreement between Frontier Natural Gas Corporation and Aspect
Resources LLC dated January 14, 1998, as incorporated by reference to the
Company's Registration Statement number 333-53581 dated May 21, 1998
wherein the same appeared as Exhibit 10(s).
10(j) Warrant Agreement between Frontier Natural Gas Corporation and Gaines,
Berland Energy Fund, L.P. dated January 23, 1998, as incorporated by
reference to the Company's Registration Statement number 333-53581 dated
May 21, 1998 wherein the same appeared as Exhibit 10(t).
10(k) Warrant Agreement between Frontier Natural Gas Corporation and Esenjay
Petroleum Corporation dated January 23, 1998, as incorporated by reference
to the Company's Registration Statement number 333-53581 dated May 21,
1998 wherein the same appeared as Exhibit 10(u).
10(l) Warrant Agreement between Frontier Natural Gas Corporation and Aspect
Resources LLC dated January 23, 1998, as incorporated by reference to the
Company's Registration Statement number 333-53581 dated May 21, 1998
wherein the same appeared as Exhibit 10(v).
13 Annual Report on Form 10-KSB/A dated April 30, 1999 for the Fiscal Year
ending December 31, 1998.
21 Subsidiaries of the Registrant sd included by reference to Exhibit 21 of
Esenjay's Annual Report on Form 10-KSB/A for fiscal year ended December
31, 1998, dated April 30, 1999.
23(a)* Consent of Arthur Andersen LLP.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------------
<C> <S>
23(b)* Consent of Ryder Scott Company Petroleum Engineers.
23(c)* Consent of Deloitte & Touche LLP.
23(d)* Consent of Porter & Hedges, L.L.P. (included in Exhibit 5 Opinion).
24(a)* Power of Attorney (included on signature page).
99(a)* Esenjay Proxy Card
99(b)* 3DX Proxy Card
</TABLE>
- ------------------------
* Filed herewith
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial BONA FIDE offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
II-4
<PAGE>
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and 3DX being
acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-5
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David W. Berry and David B. Christofferson, and
each of them, either of whom may act without joinder of the other, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and his name, place and stead, in any and all
capacities, to sign any or all pre- and post-effective amendments and
supplements to this Registration Statement, and to file the same, or caused to
be filed the same, with all exhibits thereto and all other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
such attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, and each of them, or the substitute or substitutes
of either of them, may lawfully do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Corpus Christi, State of Texas on June , 1999.
<TABLE>
<S> <C> <C>
ESENJAY EXPLORATION, INC.
By: /s/ MICHAEL E. JOHNSON
-----------------------------------------
Michael E. Johnson
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the th day of June, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
/s/ DAVID W. BERRY
- ------------------------------ Chairman of the Board
David W. Berry
- ------------------------------ Vice Chairman of the Board
Alex M. Cranberg
/s/ MICHAEL E. JOHNSON
- ------------------------------ President, Chief Executive
Michael E. Johnson Officer, and Director
/s/ CHARLES J. SMITH
- ------------------------------ Director
Charles J. Smith
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
/s/ ALEX B. CAMPBELL
- ------------------------------ Director
Alex B. Campbell
- ------------------------------ Director
William D. Dodge
- ------------------------------ Director
Jack P. Randall
/s/ HOBART A. SMITH
- ------------------------------ Director
Hobart A. Smith
Senior Vice President,
/s/ DAVID B. CHRISTOFFERSON Secretary, General
- ------------------------------ Counsel and Principal
David B. Christofferson Financial Officer
/s/ HOWARD E. WILLIAMS Vice President, Treasurer,
- ------------------------------ and Principal Acounting
Howard E. Williams Officer
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- -------------- --------------------------------------------------------------------------------------------------------
<C> <S>
2(a) Acquisition Agreement and Plan of Exchange dated as of January 19, 1998, by and among Frontier Natural
Gas Corporation, Esenjay Petroleum Corporation, and Aspect Resources LLC as incorporated by reference to
the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997 dated April 6,
1998, wherein the same appears as Exhibit 2.
2(b) First Amendment to Acquisition Agreement and Plan of Exchange dated as of April 20, 1998, by and among
Frontier Natural Gas Corporation, Esenjay Petroleum Corporation, and Aspect Resources LLC as
incorporated by reference to the Company's Registration Statement number 333-53581 dated May 21, 1998
wherein the same appeared as Exhibit 10(x).
2(c) Second Amendment to Acquisition Agreement and Plan of Exchange dated as of May 13, 1998, by and among
Frontier Natural Gas Corporation, Esenjay Petroleum Corporation, and Aspect Resources LLC as
incorporated by reference to the Company's Registration Statement number 333-53581 dated May 21, 1998
wherein the same appeared as Exhibit 10(y).
2(d) Plan and Agreement of Merger dated as of May 14, 1998, by and between Esenjay Exploration, Inc., a
Delaware corporation, and Frontier Natural Gas Corporation as incorporated by reference to the Company's
Proxy Statement filed with the Securities and Exchange Commission on April 24, 1998, wherein the same
appeared as Appendix F.
2(e)* Plan and Agreement of Merger, dated May 11, 1999 between Esenjay Exploration, Inc. and 3DX Technologies
Inc., attached hereto as Exhibit A.
3(a) Certificate of Incorporation of the Company is incorporated by reference to the Company's Registration
Statement number 333-53581 dated May 21, 1998 wherein the same appeared as Exhibit 3(a).
3(b) By-Laws of the Company as incorporated by reference to the Company's Registration Statement number
333-53581 dated May 21, 1998 wherein the same appeared as Exhibit 3(c).
4(a) See Articles V, VI and X of the Company's Certificate of Incorporation and Articles I, II, V and VI of
the Company's By-Laws as provided as Exhibits 3(a) and 3(b) above.
4(b)* Certificate of Designation for Esenjay Series A Convertible Preferred Stock, attached hereto as Exhibit
B.
5* Opinion of Porter & Hedges, L.L.P., with respect to the legality of the securities filed herewith.
10(a) Contract Settlement Agreement between Frontier Natural Gas Corporation and David W. Berry dated
effective January 1, 1998, as incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997 dated April 6, 1998, wherein the same appears as Exhibit
10(b).
10(b) Contract Settlement Agreement between Frontier Natural Gas Corporation and David B. Christofferson dated
effective January 1, 1998, as incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997 dated April 6, 1998, wherein the same appears as Exhibit
10(d).
10(c) $20,000,000 Amended and Restated Credit Agreement dated as of October 13, 1998, between Esenjay
Exploration, Inc. as the borrower and Bank of America NT&SA as the lender, as incorporated by reference
to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998 dated April
14, 1999, wherein the same appears as Exhibit 10(c).
10(d) Credit Agreement by and between Esenjay Exploration, Inc. and Duke Energy Financial Services, Inc. dated
as of January 28, 1999, as currently in effect, as incorporated by reference to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1998 dated April 14, 1999, wherein the same
appears as Exhibit 10(d).
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- -------------- --------------------------------------------------------------------------------------------------------
<C> <S>
10(e) Loan Agreement by and between Frontier Natural Gas Corporation and 420 Energy Investments, Inc. dated
March 1, 1996, as currently in effect as incorporated by reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1995 dated March 29, 1996, wherein the same appears
as Exhibit 10(r).
10(f) Employee Option Plan-1997 as currently in effect as incorporated by reference to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1997 dated April 6, 1998, wherein the same
appears as Exhibit 10(o).
10(g) Warrant Agreement between Frontier Natural Gas Corporation and Gaines, Berland Energy Fund, L.P. dated
January 14, 1998, as incorporated by reference to the Company's Registration Statement number 333-53581
dated May 21, 1998 wherein the same appeared as Exhibit 10(q).
10(h) Warrant Agreement between Frontier Natural Gas Corporation and Esenjay Petroleum Corporation dated
January 14, 1998, as incorporated by reference to the Company's Registration Statement number 333-53581
dated May 21, 1998 wherein the same appeared as Exhibit 10(r).
10(i) Warrant Agreement between Frontier Natural Gas Corporation and Aspect Resources LLC dated January 14,
1998, as incorporated by reference to the Company's Registration Statement number 333-53581 dated May
21, 1998 wherein the same appeared as Exhibit 10(s).
10(j) Warrant Agreement between Frontier Natural Gas Corporation and Gaines, Berland Energy Fund, L.P. dated
January 23, 1998, as incorporated by reference to the Company's Registration Statement number 333-53581
dated May 21, 1998 wherein the same appeared as Exhibit 10(t).
10(k) Warrant Agreement between Frontier Natural Gas Corporation and Esenjay Petroleum Corporation dated
January 23, 1998, as incorporated by reference to the Company's Registration Statement number 333-53581
dated May 21, 1998 wherein the same appeared as Exhibit 10(u).
10(l) Warrant Agreement between Frontier Natural Gas Corporation and Aspect Resources LLC dated January 23,
1998, as incorporated by reference to the Company's Registration Statement number 333-53581 dated May
21, 1998 wherein the same appeared as Exhibit 10(v).
13 Annual Report on Form 10-KSB/A dated April 30, 1999 for the Fiscal Year ending December 31, 1998.
21 Subsidiaries of the Registrant as included by reference to Exhibit 21 of Esenjay's Annual Report on Form
10-KSB/A for fiscal year ended December 31, 1998, dated April 30, 1999.
23(a)* Consent of Arthur Andersen LLP.
23(b)* Consent of Ryder Scott Company Petroleum Engineers.
23(c)* Consent of Deloitte & Touche LLP.
23(d)* Consent of Porter & Hedges, L.L.P. (included in Exhibit 5 Opinion).
24(a)* Power of Attorney (included on signature page).
99(a)* Esenjay Proxy Card
99(b)* 3DX Proxy Card
</TABLE>
- ------------------------
* Filed herewith
II-9
<PAGE>
EXHIBIT 5
June 8, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Esenjay Exploration, Inc.: Registration Statement on Form S-4
Gentlemen:
We have acted as counsel to Esenjay Exploration, Inc., a Delaware
corporation (the "Company"), in connection with the registration on Form S-4
(the "Registration Statement") under the Securities Act of 1933, as amended
of (i) the issuance of up to 1,903,037 shares of Series A Convertible
Preferred Stock, par value $.01 per share, of the Company (the "Preferred
Stock"); (ii) the issuance of up to 8,746,651 shares of common stock, par
value $.01 per share, of the Company (the "Common Stock"); and (iii) the
issuance of Common Stock upon the conversion of the Preferred Stock, all in
connection with the merger of the Company with 3DX Technologies Inc. (the
"Merger").
In such capacity, we have examined the certificate of incorporation,
bylaws and corporate proceedings of the Company, and based upon such
examination and having regard for applicable legal principles, it is our
opinion that:
(i) the Preferred Stock issued upon the consummation of the Merger
will be validly issued, fully paid and nonassessable outstanding
shares of the Company's Preferred Stock;
(ii) the Common Stock issued upon the consummation of the Merger will
be validly issued, fully paid and nonassessable outstanding shares
of the Company's Common Stock; and
(iii) the Common Stock issued upon the conversion of the Preferred
Stock, when converted pursuant to the terms and conditions set
forth in the Certificate of Designation of the Series A
Convertible Preferred Stock, will be validly issued, fully paid
and nonassessable outstanding shares of the Company's Common Stock.
<PAGE>
We consent to the use of this opinion as an Exhibit to the Registration
Statement and to the reference to our firm under the heading "Legal Matters"
in the Prospectus included as part of the Registration Statement.
Very truly yours,
---------------------------------
PORTER & HEDGES, L.L.P.
2
<PAGE>
EXHIBIT 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Houston, Texas
June 8, 1999
<PAGE>
[RYDER SCOTT COMPANY LETTERHEAD]
TELEPHONE (713) 651-9191
EXHIBIT 23(b)
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
As independent petroleum engineers, we hereby consent to (a) the use
of our name and references to our firm on Form S-4 Joint Proxy
Statement/Prospectus for the merger of Esenjay Exploration, Inc. and 3DX
Technologies Inc. and (b) to the inclusion of the estimate of proved reserves
and present value of the future net revenues included in our report dated
January 27, 1999 in such statement.
/s/ RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
June 4, 1999
<PAGE>
EXHIBIT 23(c)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this registration
statement of Esenjay Exploration, Inc. on Form S-4 of our report dated
April 14, 1999, appearing in the Annual Report on Form 10-KSB/A of Esenjay
Exploration, Inc., for the years ended December 31, 1998 and 1997, and to
the reference to us under the heading "Experts" in the proxy statement/
prospectus, which is part of this registration statement.
DELOITTE & TOUCHE LLP
Houston, Texas
June 8, 1999
<PAGE>
Exhibit 99(a)
ESENJAY EXPLORATION, INC.
PROXY 500 DALLAS, SUITE 2920
HOUSTON, TEXAS 77002
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR THE ESENJAY
EXPLORATION, INC. ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON JULY ___, 1999
The undersigned shareholder of Esenjay Exploration, Inc. (the "Company")
hereby appoints each of David W. Berry and David B. Christofferson attorneys
and proxies of the undersigned, with full power of substitution, to vote on
behalf of the undersigned at the Esenjay Annual Meeting of Stockholders of
the Company to be held at 500 Dallas, Suite 2920, Houston, Texas 77002, on
July ___, 1999, at 10:00 a.m., central time, and at any adjournments of said
meeting, all of the shares of Esenjay Common Stock which the undersigned may
be entitled to vote.
1. APPROVAL OF THE ESENJAY MERGER RELATING TO THE MERGER OF 3DX TECHNOLOGIES
INC. WITH AND INTO THE COMPANY, WITH THE COMPANY SURVIVING THE MERGER.
/ / FOR / / AGAINST / / ABSTAIN
CONTINUED ON OTHER SIDE
<PAGE>
CONTINUED FROM OTHER SIDE
2. Election (except as indicated below) as class II directors of David W.
Berry, Charles J. Smith and Alex B. Campbell.
/ / For All Nominees / / Withheld from All Nominees / / *Exceptions
(As Marked Below)
TO WITHHOLD THE VOTE FOR ANY NOMINEE, WRITE THAT NOMINEE'S NAME BELOW:
* EXCEPTIONS __________________________________________________________
3. In their discretion, upon such other matters as may properly come before
the meeting; hereby revoking any proxy or proxies regarding such matters
heretofore given by the undersigned.
The board of directors recommends a vote FOR each proposal above and if no
specification is made, the shares will be voted FOR approval of the Esenjay
Merger, the issuance of the Series A Preferred Stock and Common Stock in
connection with the merger, and the election of the three nominees as Class
II directors. The undersigned hereby acknowledges receipt of the Notice of
Annual Meeting of Esenjay Stockholders and the Proxy Statement/Prospectus
furnished herewith.
Dated __________________, 1999
------------------------------
Shareholder's Signature
------------------------------
Shareholder's Signature
Signature should agree with name printed hereon. If Stock is held in the name
of more than one person, EACH joint owner should sign. Executors,
administrators, trustees, guardians, and attorneys should indicate the
capacity in which they sign. Attorneys should submit powers of attorney.
<PAGE>
Exhibit 99(b)
3DX TECHNOLOGIES INC.
PROXY 12012 WICKCHESTER, SUITE 250
HOUSTON, TEXAS 77097
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR THE 3DX
SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON JULY ___, 1999
The undersigned shareholder of 3DX Technologies Inc. (the "Company")
hereby appoints each of Ronald P. Nowak and Russell L. Allen attorneys and
proxies of the undersigned, with full power of substitution, to vote on
behalf of the undersigned at the 3DX Special Meeting of Stockholders of the
Company to be held at 12012 Wickchester, Suite 250, Houston, Texas 77097, on
July ___, 1999, at 10:00 a.m., central time, and at any adjournments of said
meeting, all of the shares of 3DX Common Stock which the undersigned may be
entitled to vote.
1. APPROVAL OF THE 3DX MERGER RELATING TO THE MERGER OF THE COMPANY WITH AND
INTO THE ESENJAY EXPLORATION, INC. WITH ESENJAY SURVIVING THE MERGER.
/ / FOR / / AGAINST / / ABSTAIN
2. In their discretion, upon such other matters as may properly come before
the meeting; hereby revoking any proxy or proxies regarding such matters
heretofore given by the undersigned.
CONTINUED ON OTHER SIDE
<PAGE>
CONTINUED FROM OTHER SIDE
3. In the event that the merger with Esenjay is approved, I hereby elect the
following form of merger consideration:
<TABLE>
<S> <C> <C>
/ / Exchange all of my shares of 3DX Common / / Exchange all of my shares of 3DX Common / / Exchange ___ shares of 3DX
Stock for Esenjay Common Stock Stock for Esenjay Series A Preferred Stock Common Stock for Esenjay
Common Stock and the remaining
shares for Esenjay Series A
Preferred Stock
</TABLE>
The board of directors recommends a vote FOR each proposal above and if no
specification is made, the shares will be voted FOR approval of the 3DX
Merger. The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of 3DX Stockholders and the Proxy Statement/Prospectus furnished
herewith.
Dated __________________, 1999
------------------------------
Stockholder's Signature
------------------------------
Stockholder's Signature
Signature should agree with name printed hereon. If Stock is held in the name
of more than one person, EACH joint owner should sign. Executors,
administrators, trustees, guardians, and attorneys should indicate the
capacity in which they sign. Attorneys should submit powers of attorney.
PLEASE SIGN AND RETURN IN THE ENVELOPE ENCLOSED.
