<PAGE>
As filed with the Securities and Exchange Commission on August 10, 1999.
Registration No. 333-80243
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------------
ESENJAY EXPLORATION, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 73-1421000
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
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:
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
===============================================================================
<PAGE>
ESENJAY EXPLORATION, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDER
TO BE HELD ON AUGUST __, 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 August __, 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 August __,
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
August __, 1999
<PAGE>
3DX TECHNOLOGIES INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST __, 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 August __, 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 August __,
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
August __, 1999
<PAGE>
Subject to completion, dated August __, 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.
===============================================================================
[ESENJAY LOGO] ESENJAY EXPLORATION, INC. [3DX LOGO]
3DX TECHNOLOGIES INC.
Proxy Statement
For Meetings of Stockholders
To Be Held on August __, 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
---------------------------
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.
If the merger is approved, 3DX will cease to exist as a separate
company and will be merged into Esenjay. 3DX stockholders will make an
election as to whether they want to receive Esenjay common stock, Esenjay
preferred stock or a combination of the two in exchange for their 3DX shares.
No more than 50% of the 3DX shares can be converted into Esenjay preferred
stock. Therefore, if the 3DX stockholders' elections would result in more
than 50% of the 3DX shares being converted into preferred stock, the number
of shares of Esenjay preferred stock issued would be prorated. Conversion,
automatic redemption and optional redemption terms of the preferred stock are
set forth in this proxy statement/prospectus.
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 between Esenjay and 3DX relating to the merger of 3DX
into Esenjay. Additionally, Esenjay's stockholders will be asked to consider
and act upon the election of three class II director nominees.
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 the 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 record date for both Esenjay stockholders and 3DX stockholders to
vote at their respective meetings is August __, 1999.
Esenjay's common stock is currently traded on the Nasdaq Small Cap
Market under the symbol "ESNJ." Esenjay intends to list the preferred stock on
the NASDAQ bulletin board.
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.
This Proxy Statement/Prospectus is dated August __, 1999 and first mailed
to Esenjay and 3DX stockholders on August __, 1999.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 14 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.
===============================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
SUMMARY .........................................................................................................3
SUMMARY FINANCIAL INFORMATION....................................................................................10
RISK FACTORS.....................................................................................................14
WHERE YOU CAN FIND MORE INFORMATION..............................................................................22
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE................................................................22
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS........................................................23
THE MERGER.......................................................................................................24
DESCRIPTION OF MERGER AGREEMENT..................................................................................53
UNAUDITED PRO FORMA FINANCIAL STATEMENTS.........................................................................59
DESCRIPTION OF 3DX...............................................................................................65
PROJECTS, BUSINESS RELATIONSHIPS AND TECHNOLOGY..................................................................67
Oil and Gas Reserves.............................................................................................72
SELECTED FINANCIAL DATA..........................................................................................76
Management's Discussion and Analysis of Financial Condition and Results of Operations............................78
Liquidity and Capital Resources..................................................................................82
ELECTION OF DIRECTORS OF ESENJAY EXPLORATION, INC................................................................90
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
Exhibit E - Fairness Opinion of Cornerstone Ventures L.P........................................................E-1
</TABLE>
<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 22. 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. and 3DX Technologies Inc. at which
the Esenjay stockholders and 3DX stockholders will consider and vote upon a
proposal to approve and adopt a Plan and Agreement of Merger between Esenjay
and 3DX. If the merger is approved, 3DX will cease to be a separate company
and 3DX's stockholders will become holders of Esenjay's common stock,
preferred stock or a combination of common stock and preferred stock.
STOCKHOLDER MEETINGS
Esenjay's annual meeting will be held at its offices located at One Allen
Center, 500 Dallas, Suite 2920, Houston, Texas, on __________, August __, 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 August
___, 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 _________, August __, 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 August ___, 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:
- - one share of Esenjay common stock for each 3.25 shares of issued and
outstanding 3DX common stock; or
- - one share of Esenjay series A convertible preferred stock for each 2.75
shares of issued and outstanding 3DX common 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 agreements as
3
<PAGE>
disclosed in the merger agreement. Assuming the shares reserved for issuance
by 3DX were issued in the form of common stock before 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 under the
provisions and characteristics of the preferred stock as described in the
following paragraph.
THE SERIES A PREFERRED STOCK. Set forth below is a summary of the most
important features of the series A preferred stock:
Dividends:..........None, except if dividends are paid on the common stock, the
preferred stock must receive the same dividend based on one
share of preferred stock being equal to one share of common
stock.
Voting Rights:......Holders of the preferred stock can elect one director as
long as any shares of preferred stock remain outstanding.
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.
Automatic
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.
4
<PAGE>
Optional 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 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
under the optional conversion provisions set forth
above.
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. Esenjay,
Esenjay Petroleum Corporation and Aspect Resources LLC 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. 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.
5
<PAGE>
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;
- 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
6
<PAGE>
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 OPINIONS
Cornerstone Ventures, L.P. has delivered to Esenjay's board of directors
a written opinion dated June 18, 1999 to the effect that as of the date of
the opinion and based upon and subject to certain matters stated in the
opinion, the terms of the merger are fair from a financial point of view to
the stockholders of Esenjay. At the direction of Esenjay's board of
directors, Cornerstone limited the scope of their review to documents
regarding the merger, financial statements of both companies and material
regarding oil and gas properties owned by each company. Cornerstone was not
requested to and did not perform detailed comparative or market analyses. The
full text of Cornerstone's fairness opinion is attached to this proxy
statement/prospectus as EXHIBIT E.
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
According to Delaware General Corporation Law, any holder of 3DX common
stock who files a demand for appraisal in writing before the vote taken at
the 3DX Special Meeting and 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 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.
7
<PAGE>
RISK FACTORS
Stockholders of both 3DX and Esenjay should carefully evaluate the matters
set forth under "Risk Factors" beginning on page 14 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 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. These shares represent 22.5% of the amount of the 3DX
shares anticipated to be outstanding as of the time of the merger. All of these
shares are subject to voting agreements in which the holders have agreed to vote
their shares in favor of the merger.
9,533,367 shares of the Esenjay common stock are owned by two of Esenjay's
stockholders. These shares represent 60.4% of the amount of the Esenjay shares
outstanding as of the time of the merger. All of these shares are subject to
voting agreements in which the holders have agreed to vote their shares in favor
of the merger. Therefore, approval of the merger by Esenjay's stockholders is
assured by these voting agreements.
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.
REVOCATION OF PROXY
A stockholder of either company may revoke a proxy by:
- delivering to the appropriate company written notice of revocation;
- delivering to the appropriate company a proxy signed on a later date;
or
- voting in person at the stockholders meeting.
8
<PAGE>
CHOICE OF MERGER CONSIDERATION AND EXCHANGE OF SHARES
At the time 3DX stockholders vote their shares at the special meeting,
either by proxy or in person, the 3DX stockholders will elect the form of merger
consideration they desire to receive if the merger is consummated. 3DX
stockholders should indicate their choice of merger consideration whether or not
they vote in favor of the merger. Following the consummation of the merger, 3DX
stockholders will receive a letter of transmittal instructing them how to
exchange their certificates of 3DX common stock for certificates of Esenjay
stock. No certificates for Esenjay stock will be issued without Esenjay's
receipt of the executed letter of transmittal and 3DX stock certificate.
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.
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 August __, 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
NASDAQ Bulletin Board.
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 August __, 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.
9
<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 accompanying notes located elsewhere in this proxy
statement/prospectus or incorporated by reference in this proxy
statement/prospectus. 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>
THREE MONTHS
YEAR ENDED 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>
10
<PAGE>
3DX TECHNOLOGIES INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------
<TABLE>
THREE MONTHS
YEAR ENDED 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 (1)............. 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>
BALANCE SHEET DATA: AS OF
MARCH 31,
1999
-------------
<S> <C>
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>
(1) 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.
11
<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 accompanying notes. 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
THREE MONTHS YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
----------------- ------------------
1999 1998
----------------- ------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ................................................................. $ 2,078,569 $ 6,315,147
Cost and Expenses:
Production and exploration costs...................................... 1,593,450 14,027,496
Depletion, depreciation and amortization.............................. 1,200,977 3,850,679
Impairment of oil and gas properties.................................. 990,809 13,695,560
Amortization of unproved properties................................... 2,383,000 6,937,300
Interest Expense...................................................... 124,210 632,968
General & administrative expenses..................................... 1,786,691 6,535,412
----------------- ------------------
Net loss.................................................................. (6,000,568) (39,364,268)
----------------- ------------------
Cumulative preferred stock dividend....................................... -- 48,136
----------------- ------------------
Net income (loss) applicable to common stockholders....................... $ (6,000,568) $ (39,412,404)
================= ==================
Basis and diluted net loss per common and common stock equivalent......... $ (0.30) $ (2.86)
================= ==================
Weighted average common shares outstanding................................ 19,674,938 13,772,331
================= ==================
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
AS OF MARCH 31,
1999
----------------------
<S> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................................. $ (8,935,285)
Property and equipment, net............................................... $ 61,906,791
Total assets.............................................................. $ 71,733,190
Long-term debt (excluding current maturities)............................. $ 14,618,394
Stockholders' equity...................................................... $ 39,021,316
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA
AS OF DECEMBER 31,
1998 (1)
----------------------
<S> <C>
RESERVE INFORMATION:
Proved Reserves (Mcfe).................................................... 16,788,000
Future net cash flows..................................................... $ 23,982,000
Standardized measure of discounted future net cash flows.................. $ 18,302,000
</TABLE>
- ----------------------
(1) Amounts reflect the combined reserve information of Esenjay and 3DX.
13
<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
LIMITATIONS ON MERGER CONSIDERATION
IF A 3DX STOCKHOLDER FAILS TO VOTE ON THE MERGER AND THE MERGER IS
APPROVED, THAT 3DX STOCKHOLDER WILL RECEIVE COMMON STOCK AS MERGER CONSIDERATION
EVEN IF THAT 3DX STOCKHOLDER WOULD RATHER RECEIVE PREFERRED STOCK.
Similarly, if a 3DX stockholder votes against the merger and the merger is
consummated, a 3DX stockholder will receive common stock in the merger unless:
- the 3DX stockholder elected to receive preferred stock either on the
proxy card or at the special meeting; or
- the 3DX stockholder elects to exercise his dissenters rights.
Therefore, the failure to vote in the merger or voting against the merger could
result in a 3DX stockholder not receiving the form of consideration that 3DX
stockholder would like to receive.
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 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 THE CONSIDERATION THE 3DX STOCKHOLDERS WILL RECEIVE MAY
DECREASE BETWEEN NOW AND THE COMPLETION OF THE MERGER.
If the merger is approved, each 3DX stockholder opting to receive Esenjay
common stock in the merger will receive consideration fixed at one share of
Esenjay common stock for each 3.25 shares of 3DX common stock. The value of the
Esenjay common stock received by the 3DX stockholders will depend on the market
price of Esenjay common stock, which may be lower than the market price of
Esenjay common stock on the day the merger was announced. The value of the
Esenjay common stock may further fluctuate the day that Esenjay preferred stock
is converted into Esenjay common stock. The value of the preferred stock issued
to 3DX stockholders also will be subject to fluctuation. Even though holders of
the preferred stock will have the right to convert it into common stock if the
average daily trading price during the twelfth month after effective date of the
merger should fall below $1.875, the number of shares of common stock issuable
on that conversion is capped at 3.75 shares. Moreover, Esenjay will have the
right to redeem the preferred stock for $1.925 per share. Esenjay would have an
economic incentive to redeem the preferred stock if the value of the Esenjay
common stock into which the preferred stock could be converted exceeded $1.925
per share. Therefore, holders of preferred stock may be limited in the upside
value of the preferred stock.
THE ESENJAY PREFERRED STOCK IS SUBJECT TO LIQUIDITY RISKS AND HAS LIMITED
UPSIDE POTENTIAL.
14
<PAGE>
Even though 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. Also, if a
stockholder elects optional conversion, there is a cap of a maximum of 3.75
shares of Esenjay common stock for each share of Esenjay preferred stock
converted. For instance, if the average daily trading price of Esenjay common
stock during the twelfth calendar month after the effective date of the merger
is $0.10, holders of the preferred stock electing optional conversion into
common stock would be entitled to receive 18.75 shares of common stock absent
the 3.75 share cap.
ESENJAY MAY NOT HAVE THE CASH FOR THE REDEMPTION OR CONVERSION OF THE
PREFERRED STOCK.
Esenjay's credit agreements provide that without the lenders' consent,
Esenjay cannot redeem any of its securities for cash. This restriction in
Esenjay's credit agreements may restrict Esenjay's ability to redeem the
preferred stock for cash under either Esenjay's optional redemption right or 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 would 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. Our ability to maintain or
increase our borrowing capacity and to obtain additional capital on attractive
terms also will be dependent upon oil and gas 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 availability of markets and the volatility of product prices are beyond
our control and represent a significant risk. 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 supply
and demand all could adversely affect our ability to produce and market oil and
natural gas.
THE COMBINED COMPANY MAY INCUR ADDITIONAL IMPAIRMENT OF PROPERTIES'
CARRYING VALUES.
Accounting rules will 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. An impairment constitutes a charge to earnings
that does not have an impact on the combined company's cash flow from operating
activities. The reduction in the carrying values of our oil and gas properties
could result in violations of financial covenants in our credit agreements. In
addition, a reduction in the carrying values of our oil and gas properties could
result in the recognition of noncash losses on our financial statements that
would have an impact on the amount of our stockholders' equity. These financial
statement consequences could project a negative image of Esenjay to the
investing community and could have an adverse effect on the trading price of our
securities.
OUR BUSINESS IS SUBJECT TO SUBSTANTIAL GOVERNMENTAL REGULATION.
15
<PAGE>
Our oil and gas operations are subject to the risk that 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, oil and gas by-products 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.
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. Esenjay's cost for environmental compliance currently are comparable
to the costs incurred by others in our industry; however, if new environmental
laws or government regulations were adopted or changed, the combined company
could incur substantial additional costs of compliance. We are unable to predict
the ultimate cost of compliance.
ESTIMATES OF OIL AND GAS RESERVES MAY CHANGE.
Actual production, revenues, taxes, development expenditures and operating
expenses with respect to the combined company's reserves will likely vary from
the estimates of proved reserves of crude oil and natural gas included in this
document, and such variances may be material. 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.
Approximately 42% 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. 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. 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.
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, but actual future prices and costs may be materially higher or lower.
16
<PAGE>
The timing of actual future net cash flows from proved reserves, and 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.
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.
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 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. 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. 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.
17
<PAGE>
ESENJAY AND 3DX EACH HAVE A HISTORY OF LOSSES AND WORKING CAPITAL DEFICITS.
Both Esenjay and 3DX have incurred substantial losses, and no assurance can
be given that the combined company will be profitable. For the years ended
December 31, 1997 and 1998, Esenjay had net losses of $4,953,803 and
$29,321,347. Esenjay had a net loss of $4,081,478 for the three months ended
March 31, 1999. Esenjay's 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, Esenjay had net losses of $39,364,268 and
$6,000,568 respectively. For the years ended December 31, 1997 and 1998, 3DX had
net losses of $11,036,144 and $9,588,542. 3DX had a net loss of $1,484,986 for
the three months ended March 31, 1999. 3DX's accumulated deficit as of March 31,
1999 was $30,901,120.
Even if the combined company generates substantial cash flow, it 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.
Historically, Esenjay 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.
Esenjay's credit agreement is a $20,000,000 credit facility with a current
borrowing base of $9,000,000, $8,250,000 of which has been drawn down. The
borrowing base under the credit facility is determined on January 1 and June 30
of each year, and Esenjay has the right to request a redetermination of the
borrowing base one additional time per year. 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. The bank is currently reviewing Esenjay's
and 3DX's reserves in conjunction with the request of Esenjay to increase the
borrowing base.
Esenjay has an estimated capital budget in the third and fourth quarters of
1999 approximating $10-15 million. Esenjay's cash generated from operations and
its committed borrowing capacity will not be sufficient to timely fund most of
the estimated exploration budget. The exploration budget will primarily be
funded by the sales of project interests to industry partners and/or increases
in Esenjay's current credit facilities. If adequate exploration capital is not
available from those sources, Esenjay will be required to either seek sources of
equity funding or curtail its third and fourth quarter 1999 exploration budget.
There can be no assurance that funds available to Esenjay will be sufficient to
carry out its proposed plans. Esenjay does not currently have commitments to
increase its borrowing base under the terms of its credit facility nor does it
currently have contracts with industry partners to provide funding for its
capital expenditures budget.
MORTGAGES ON GAS AND OIL PROPERTIES AND CREDIT AGREEMENT PROVISIONS LIMIT
THE COMBINED COMPANY'S ABILITY TO BORROW ADDITIONAL FUNDS.
Substantially all of Esenjay's oil and gas properties have been pledged to
secure Esenjay's indebtedness under its credit facilities or to secure the
financing relating to specific oil and gas projects. 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
18
<PAGE>
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 other financing agreements, 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.
As of March 31, 1999, Esenjay's current ratio and Esenjay's interest
coverage ratio violated the covenants in the credit agreement. Bank of America
NT&SA has waived noncompliance at March 31, 1999. 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.
TITLE TO THE COMBINED COMPANY'S UNDEVELOPED OIL AND GAS LEASES MAY BE
SUBJECT TO REVIEW.
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. 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.
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 the duty. The Certificate of Incorporation also provides that Esenjay must
indemnify its directors and officers to the full extent permitted by Delaware
law.
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 continue to own a
substantial portion of 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. 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's
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 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 adjacent areas.
Aspect is not obligated to offer Esenjay a participation in those projects, and
Aspect will be in competition with Esenjay to that extent.
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Aspect has been involved in several exploration programs with 3DX.
According to 3DX's records, Mr. Cranberg's wife, Susan Morrice, currently owns
175,867 shares (1.8%) of the issued and outstanding 3DX common stock. Minnowburn
Corporation, a corporation owned by a trust for the benefit of Ms. Morrice, Mr.
Cranberg and members of their family, currently owns 369,202 shares (3.8%) of
the issued and outstanding 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 its credit agreement
with Bank of America NT&SA. Esenjay has 4,700 MMBtu's per day of its Gulf Coast
natural gas production hedged through October 2000. This represents
approximately 82% of Esenjay's average daily production for the five months
ended May 31, 1999 of approximately 5,736 MMBTU per day for its Gulf Coast
natural gas production. In these hedging transactions, Esenjay receives the spot
price for its production and pays or receives the difference in the contractual
fixed price. Therefore, after Esenjay receives the spot price, if the fixed
price is greater than the spot price, Esenjay also receives the difference, but
if the spot price is greater than the fixed price, Esenjay then pays the
difference.
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 AFFECTED BY
SALES OF SUBSTANTIAL AMOUNTS OF COMMON STOCK IN THE PUBLIC MARKET OR THE
PERCEPTION THAT SUCH SALES COULD OCCUR.
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 under the terms of applicable
registration rights agreements could have a material adverse effect on the
trading price of Esenjay's common stock.
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 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.
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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 under the
terms of registration rights agreements.
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 used in Esenjay's operations. Esenjay's
initiative is to be conducted in three phases: assessment, implementation and
testing. During the assessment phase, Esenjay completed a comprehensive
inventory of all "mission critical" systems and equipment.
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.
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
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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.
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 information appearing in this proxy statement/prospectus is qualified
in its entirety by the information and financial statements, including the
accompanying notes, appearing in the documents incorporated by reference in
this proxy statement/prospectus.
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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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THE MERGER
THE FOLLOWING DISCUSSION SETS FORTH A DESCRIPTION OF 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 TO THIS PROXY STATEMENT/PROSPECTUS 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 INTO THIS PROXY STATEMENT/PROSPECTUS 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:
- one share of Esenjay common stock for each 3.25 shares of issued
and outstanding 3DX common stock; or
- one share of Esenjay series A convertible preferred stock for
each 2.75 shares of issued and outstanding 3DX common 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.
BACKGROUND
During the first and second quarter of 1998, 3DX's management
aggressively pursued a capital infusion into 3DX. C. Eugene Ennis, CEO and
President of 3DX during this period of time, initiated contact with Mr. Cranberg
concerning his potential interest in taking an equity position in 3DX. Between
May 11 and May 22, 1998, Mr. Cranberg met with 3DX's management to review
geologic, engineering and economic information concerning 3DX's key exploration
prospects. As a result of the completion of this review, Mr. Cranberg and Mr.
Ennis decided to continue their discussions. On May 26, 1998, Mr. Nowak, CEO and
President of 3DX, and Randy Keys, then Chief Financial Officer at 3DX, met with
Mr. Cranberg in Denver to begin negotiations on the equity infusion transaction.
Follow-up meetings in Denver began on June 1, 1998. By Wednesday, June 3, 1998,
3DX had negotiated a deal with Mr. Cranberg that was presented to the 3DX Board
and to stockholders for approval. Mr. Cranberg brought together multiple
investors to fund a $2,200,000 equity infusion into 3DX. Mr. Cranberg's wife,
Susan Morrice, purchased 111,147 shares of 3DX common stock in the offering.
Minnowburn Corporation, a corporation owned by a trust for the benefit of Ms.
Morrice, Mr. Cranberg and
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members of their family, purchased 233,333 3DX shares. Mr. Cranberg did not
purchase any shares. According to 3DX's records, Ms. Morrice currently owns
175,867 shares (1.8%) of 3DX common stock and Minnowburn currently owns 369,202
shares (3.8%) of the issued and outstanding 3DX common stock.
3DX initially expected that the investment group would purchase
$5,000,000 of its common shares at a purchase price of $1.50 a share. However,
Nasdaq requirements prohibited the issuance of the contemplated number of shares
without prior 3DX stockholder approval. Consequently, the transaction was
structured to provide for an initial purchase of 1,462,044 shares of 3DX common
stock at $1.50 a share, representing an initial investment of approximately
$2,200,000, with the purchasers having an option to purchase another 1,871,290
shares at $1.50 per share sixty days later. The optioned shares represented the
remaining $2,800,000 of the expected $5,000,000 investment. The option was only
exercisable following 3DX stockholder approval or 3DX's receipt of a Nasdaq
exemption from the stockholder approval requirement.
In August 1998, the investors who made the $2,200,000 investment
informed 3DX's management that they would not exercise their option to purchase
the remaining $2,800,000 of 3DX shares due to a general decline in oil and gas
prices and in the market value of the shares of 3DX and of other companies in
the oil and gas sector. 3DX then 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 stockholders.
3DX initially met with Esenjay to discuss a possible merger on August
20, 1998 in a meeting suggested by Mr. Alex Cranberg. Beginning with these
initial discussions and through the negotiation of the terms of the merger,
Esenjay was represented by David W. Berry, chairman of the board of Esenjay,
Alex Campbell, a director of Esenjay, and David B. Christofferson, Esenjay's
senior vice president and chief financial officer. 3DX was represented by C.
Eugene Ennis, chairman of the board of 3DX, Russell Allen, 3DX's vice president
of finance and chief financial officer, and Ronald P. Nowak, 3DX's president.
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. The
letter of intent provided for a proposed merger of 3DX into Fortune, under which
3DX's stockholders would be issued 0.75 shares of Fortune common stock for each
share of 3DX common stock outstanding. In addition, the 3DX stockholders would
be entitled to receive up to an aggregate of 3,862,605 additional Fortune shares
if the proved reserves resulting from the development of 3DX's exploration
prospects during the two year period following the merger exceeded the proved
reserves booked by Fortune during the two year period as a result of its other
prospects. The issuance of additional shares was to be at the rate of one
Fortune common share for each 9 MCFE of proved reserves acquired from 3DX in the
merger. No additional shares would have been issuable if Fortune common shares
traded for an average closing price equaling $3.50 during any 30 day period
before December 31, 2000. The letter of intent stated that Fortune had received
a commitment from a third party investor for funds to be used in the exploration
and development of the 3DX prospects to be acquired by Fortune. The letter of
intent was subject to several contingencies typical for such a transaction, such
as the satisfactory completion of due diligence and the preparation and
execution of definitive agreements. In December 1998, 3DX learned that the third
party investor expected to be Fortune's source of financing for the drilling of
the 3DX prospects had 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 January 25, 1999, David W. Berry, Chairman of the Board for Esenjay,
wrote to Mr. Ennis to renew Esenjay's interest in trying to reach an
accommodation with 3DX under which the two businesses would be combined. Mr.
Berry proposed a transaction in which 3DX would receive Esenjay board
representation and substantially all of 3DX's technical staff would remain with
the combined company. Mr. Berry proposed the
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merger of 3DX into Esenjay with an exchange ratio of one share of Esenjay common
stock and $1.59 in cash for each 5.28 shares of 3DX, for a notional value to the
transaction of approximately $.075 per share for each outstanding share of 3DX.
Alternatively, 3DX stockholders would have the right to receive all Esenjay
stock and no cash by choosing to receive one share of Esenjay common stock for
each 3.167 shares of 3DX common stock, which also gave a notional value to the
proposed transaction of approximately $0.75 per share for each outstanding share
of 3DX. This proposal represented an approximate 2.5 to 1 premium to 3DX
stockholders based upon then current market prices. Mr. Berry also indicated
Esenjay would consider an exchange ratio of one share of Esenjay common stock
and $3.5625 in cash for each 11.875 shares of 3DX common stock, with a possible
increase in compensation to the 3DX stockholders based upon the future
performance of some of 3DX's exploration properties. The terms of the possible
increase were never discussed.
On February 17, 1999, Esenjay made a presentation on a proposed merger to
the 3DX board of directors. The terms proposed to the 3DX board were those
contained in the January 25, 1999 letter. On February 26, 1999, Mr. Nowak
indicated to Mr. Cranberg that the 3:1 ratio that Esenjay offered was not
acceptable and that a 2:1 ratio was more reasonable. Mr. Nowak also discussed
the need to protect the 3DX stockholders if Esenjay's stock lost significant
value. Mr. Cranberg suggested that a 2.5:1 exchange ratio would be a good
compromise and that Esenjay might consider structuring a preferred issued stock
redeemable in the future to protect the 3DX stockholders. Mr. Nowak also had a
similar discussion with Mr. Berry.
On March 2, 1999 Mr. Cranberg wrote Mr. Nowak and suggested that the
exchange ratio be set at 2.5:1 . He also proposed creating a new class of
preferred Esenjay shares convertible into common stock on a 1 to 1 basis at any
time prior to October 31, 2000 and redeemable by the holder for $1.25 a share in
cash, or, at Esenjay's election, $1.50 in Esenjay shares prior to September 31,
2000. Mr. Nowak responded to Mr. Cranberg on March 2, 1999 requesting
clarification on whether the new class of shares would have voting rights and be
listed and registered. Mr. Nowak also maintained that the option to convert the
preferred shares to stock or cash should be a 3DX election and not an Esenjay
election, and Mr. Nowak expressed concern about the ability of Esenjay to
fulfill the conversion for cash 18 months into the future. Mr. Nowak proposed
that the major shareholders of Esenjay guarantee this conversion. Mr. Nowak also
reiterated that the exchange ratio should be closer to 2:1 than 2.5:1.
On March 5, 1999, Mr. Nowak presented a written offer to Esenjay
concerning terms of a merger of 3DX into Esenjay. The proposal involved the
exchange of 100% of the 3DX shares for $0.375 per share in cash and $0.375 in
Esenjay common stock, based on the 20-day average of Esenjay common stock
through March 5, 1999, which was $1.653 per share. 3DX also proposed that 3DX
stockholders be given the opportunity to receive all Esenjay common stock at an
exchange ratio of 2.20 or better. In addition, the proposal provided that one
representative of the 3DX board would join the Esenjay board and that all of the
3DX technical staff would be offered a position with the combined company.
In a letter dated March 9, 1999 from Mr. Berry to Mr. Nowak, Esenjay
responded to the offer of March 5, 1999 with the following proposed terms:
- One share of registered non-dividend bearing Esenjay convertible
preferred for each 2.5 shares of 3DX common stock.
- Each preferred share would be convertible through March 31, 2000
into one share of registered Esenjay common stock.
- In addition, the 3DX stockholders could make Esenjay redeem the
preferred for, at Esenjay's option,$1.50 in cash or the number of
Esenjay common shares equal to 1.875 divided by the average
Esenjay share closing price in the month of March, 2000, not to
exceed 3.75.
- All preferred would convert into common stock on a 1 to 1 basis
on May 1, 2000.
- The preferred holders would have the right to elect one Esenjay
director; and
- Esenjay would make offers of employment to substantially all of
the 3DX technical staff.
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3DX, Esenjay, and their respective legal advisors began negotiating the
terms of the merger agreement on March 26, 1999. On April 7, 1999 3DX retained
Harris Webb & Garrison, Inc. to advise it of the fairness to its stockholders of
the financial terms of the proposed merger.
On April 14, 1999, Mr. Berry, Mr. Johnson, and Mr. Cranberg of Esenjay met
with Mr. Ennis, Mr. Nowak, and Mr. Allen of 3DX and Esenjay informed 3DX that
because of Esenjay's recent success in their drilling program the exchange ratio
would have to be changed to 3.5 to 1. Mr. Ennis informed Esenjay that this was
unacceptable.
On April 21, 1999, Mr. Cranberg proposed the following deal structure:
- Straight swap of 3.25 3DX shares for each Esenjay common share;
or
- Swap 2.75 shares of 3DX common stock for one share of a new
class of Esenjay preferred with the terms as set out in the
current transaction.
Meanwhile, 3DX continued discussions with other merger candidates, with
one other candidate continuing to propose possible merger terms until just
before 3DX's May 5, 1999 board of directors meeting. In addition to the Esenjay
and Fortune offers, 3DX received the following five additional written offers:
- September 30, 1998: A new Canadian company would be formed to
acquire the other candidate at a ratio of one common share for
one common share and acquire 3DX for one unit (consisting of one
common share plus one warrant to purchase one common share for
US$2.00 in a twelve month period after the merger) for one common
share of 3DX. Based on the trading prices of 3DX and the other
candidate at the time, 3DX valued the common shares in the new
company at approximately $0.60 to $0.62 per 3DX share.
- October 2, 1998: A payment of $0.65 per share of 3DX in the form
of common stock of the offeror plus a contingent value payment in
the future based on the increase, if any, in the value of former
3DX properties.
- January 25, 1999: The offeror would purchase up to $5,000,000 of
newly issued 3DX common stock at the arithmetic average of
closing prices for the twenty trading days before the offer, or
$0.3062 per 3DX share.
- January 26, 1999: The offeror offered a ratio of one to one
share of 3DX, plus a $0.75 stock purchase warrant exercisable
within two years. Based upon the trading value of the
offeror's common shares at the time, 3DX valued the offeror's
common share offer at $0.3125 per 3DX share.
- April 27, 1999: The offeror would issue one common and one new
preferred share for each 7.75 shares of 3DX. Each preferred
share would pay a dividend equal to a royalty from the
undeveloped properties of 3DX. Based upon the trading value of
the offeror's common shares at the time, 3DX
valued the common share offer at $0.40 per 3DX share.
Each of the offers described above, other than the January 25, 1999
offer to purchase 3DX shares for cash, included warrants, preferred shares, or
price adjustment components that represented contingent value to 3DX's
stockholders based upon the future performance of either the potential
acquiror's common stock or 3DX's exploration prospects. The non-contingent
portion of each offer provided at most a nominal premium to the 3DX stockholders
over the then current 3DX market price, and in 3DX's management view, captured
only the value of 3DX's proved oil and gas reserves and otherwise gave no value
to 3DX's portfolio of exploration prospects. The offers each contained
significant risks to 3DX's stockholders because the 3DX stockholder would only
capture the additional value if 3DX's exploration success added additional value
to the merged entity, and as a result 3DX did not place significant weight on
the contingent payment proposals and did not try to place a dollar value on the
contingent payments.
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The only offer before Esenjay's that satisfied 3DX's management and
board was from Fortune Natural Resources. While Fortune's offer used a
contingent payment mechanism to capture additional value, Fortune supplemented
it with a $5,000,000 capital commitment to drill 3DX's exploration properties.
This insured the 3DX stockholders the opportunity to see their properties
drilled and tested in a post-merger entity. When Fortune lost its commitment for
the $5,000,000, 3DX's management terminated the letter of intent as described
above.
The January 25, 1999 offer to inject additional equity would have
resulted in the then current 3DX stockholders owning less than half of 3DX after
the sale. 3DX rejected the offer because it would have resulted in the
corresponding dilution of the existing stockholders at a price 3DX's management
believed was less than was otherwise obtainable in a sale or merger transaction.
In addition to the five written offers described above, 3DX had
discussions with four other companies about the possibility of a merger or
acquisition. In August of 1998, 3DX was approached by a potential acquiror
interested in purchasing all of 3DX's shares. 3DX and the potential acquiror
initiated due diligence, but the parties terminated discussions before any
discussion of a potential valuation for 3DX's shares. Discussions were
terminated when 3DX's management expressed to the potential acquiror its view
that any offer which considered only 3DX's proved reserves and did not place
value on 3DX's exploration prospects would not be favorably received.
Also in August of 1998, 3DX was approached by another exploration
company interested in a merger. The offeror prepared an evaluation of each
company's value and a summary of the comparison. The comparison indicated a
potential value for 3DX shares of between $0.86 and $1.15, which represented a
significant premium to 3DX's then market value of $0.75 per common share.
However, the other company unilaterally determined to terminate discussions
based upon its view that the merger would be too dilutive of its existing
shareholders.
In October of 1998, 3DX and a potential offeror discussed a possible
merger which would have resulted in a per share valuation of each 3DX share of
$0.81, representing a significant premium to 3DX's then market value of $0.31
per share. The parties began conducting a review of each other's key properties
and reserve base, but the potential offeror unilaterally terminated discussions
after informing 3DX that it needed to resolve certain internal issues before
proceeding with a merger.
In February of 1999, 3DX was approached by a potential offeror which
proposed discussing a merger involving the consolidation of multiple companies.
The company did preliminary due diligence on 3DX but made no offer to 3DX. The
initial information provided by the potential offeror valued 3DX at
approximately $0.25 per share, which was significantly less than the then market
price of $0.34 per 3DX share. 3DX conducted limited due diligence into the
potential acquiror, but the discussions never gave rise to a formal offer and
were eventually terminated by the potential acquiror as it pursued other
candidates.
The terms set forth in Mr. Cranberg's April 21, 1999 proposal were
incorporated into a draft merger agreement which was presented to the boards of
directors of 3DX and Esenjay. 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, which
own 3DX common stock. Mr. Cranberg and Mr. Campbell felt that the overlapping
ownership could 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 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. These shares represent 22.5%
of the amount of the 3DX shares anticipated to be outstanding as of the time of
the merger. 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. Since
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Esenjay Petroleum and Aspect own in excess of a majority of the outstanding
Esenjay common stock, these voting agreements assure that Esenjay's stockholders
will approve 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;
- 3DX currently owns interests in exploration projects in which Esenjay
does not have an interest, but which Esenjay believes can be valuable
additions to its project inventory;
- the merger of Esenjay and 3DX results in the acquisition by Esenjay of
interests in additional exploration assets, including interests in
proven developed natural gas and oil properties;
- since credit lines and credit terms extended to oil and gas companies
traditionally are made by reference to a borrowing base established by
the value of the borrower's oil and gas assets, 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;
- the elimination of duplicative overhead and the regulatory burdens and
costs associated with operating two separate entities. Although Esenjay
has not conducted a detailed analysis concerning the specific cost
savings expected, Esenjay expects that the merger will result in cost
savings due to the elimination of redundant facilities, costs
associated with 3DX being public, and redundant personnel; and
- the structure of the merger, which is intended to be tax-free to
Esenjay and its stockholders.
The foregoing discussion of the information and factors that were given
weight by Esenjay's board of directors is not exhaustive, but it does include a
discussion of the factors Esenjay's board of directors believed were material in
determining to pursue the merger. 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.
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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 stockholders 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.
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 stockholders 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; however, Esenjay's ability to redeem the
preferred stock could limit the ability of 3DX stockholders to fully
share in any increase in Esenjay's stock price.
- 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. As of the date the merger was announced, that
premium was $0.2452, or 56%, based on a trading price of 3DX common
stock of $0.4375, and of Esenjay common stock of $2.2188.
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:
- 3DX believes the merger may 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 stockholders.
- 3DX believes the merger may result in a combined company with greater
discretionary cash flow and debt capacity than 3DX alone. This should
increase the combined company's ability to grow reserves through
exploration and development of a greater number of prospects using
internally generated funds.
- 3DX believes the merger may 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.
- 3DX believes the businesses and assets of Esenjay and 3DX are highly
complementary in key areas and will result in larger interests in
properties.
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- 3DX believes the merger may create an organization with greater
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.
- 3DX believes 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, but it does include a
discussion of the factors 3DX's board of directors believed were material in
determining to pursue the merger. 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;
- 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
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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.
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;
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- 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.
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 ESENJAY'S FINANCIAL ADVISOR
On March 30, 1999, Esenjay's board of directors retained Cornerstone
Ventures, L.P. to render an opinion as to the fairness of the financial terms of
the merger to stockholders of Esenjay. Esenjay's board of directors requested
the fairness opinion to assure itself that it had satisfied its fiduciary duties
to Esenjay's stockholders in light of the potential conflict of interest of two
of Esenjay's directors. Alex M. Cranberg owns a controlling interest in Aspect.
Alex M. Cranberg and Alex B. Campbell are employed by Aspect. Their respective
relationships with Aspect create conflicts of interest with their serving as
directors of Esenjay. Both Mr. Cranberg and Mr. Campbell abstained from voting
on Esenjay's acquisition of 3DX. The fairness opinion was intended to be solely
for the use of the board of directors. At the direction of Esenjay's board of
directors, the scope of Cornerstone's opinion was limited to the review of the
documents and information listed in detail below. Given the limited scope of the
review and intended use of the fairness opinion, Cornerstone's review was not as
broad in scope as traditional fairness opinions.
On June 18, 1999, Cornerstone delivered its written opinion to Esenjay's
board of directors to the effect that, as of the date of the opinion, the terms
of the merger are fair from a financial point of view to the stockholders of
Esenjay. Cornerstone has consented to the use of its name and the fairness
opinion in this proxy statement/prospectus. A copy of the Cornerstone fairness
opinion is included as EXHIBIT E to this proxy statement/prospectus.
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The summary of the Cornerstone fairness opinion set forth in this proxy
statement/prospectus is qualified in its entirety by reference to the full text
of the opinion. Stockholders are urged to read this opinion in its entirety for
assumptions made, procedures followed, other matters considered and limits of
the review by Cornerstone.
The Cornerstone fairness opinion was prepared for the board of directors of
Esenjay and is directed only to the fairness, from a financial point of view, as
of June 18, 1999, of the consideration to be paid by Esenjay to the 3DX
stockholders in the merger. The Cornerstone fairness opinion does not constitute
a recommendation to any stockholder as to how to vote on the merger. In
addition, Cornerstone was not asked to opine to, and its opinion does not
address, the underlying business decision of the board of directors of Esenjay
to proceed with the merger, nor did Cornerstone participate in the determination
of the terms of the merger.
In connection with rendering its opinion, Cornerstone reviewed, among other
things:
- the Plan and Agreement of Merger executed May 11, 1999;
- the Voting Agreements for certain directors and officers of both
Esenjay and 3DX;
- certain financial information regarding the Esenjay
and 3DX; and
- detailed materials regarding the oil and gas properties owned by each
company, including geologic and seismic based maps, seismic data, lease
maps, etc.
In addition, Cornerstone attended meetings in which the properties were reviewed
with certain of the Esenjay's technical and financial personnel.
In preparing this opinion, Cornerstone relied upon the accuracy and
completeness of, and did not independently verify the business, financial and
other information obtained from outside sources.
At the time the agreement was entered into, Esenjay had outstanding
15,784,834 shares of common stock that are traded on the NASDAQ Small Cap Market
and 3DX had outstanding 9,685,761 shares that are traded OTC Bulletin Board.
Neither company's shares are actively traded. In addition to the reported
outstanding shares, 3DX had recently issued 231,080 shares to employees as
compensation. Also, directors and employees of 3DX hold stock options for
780,944 shares, with an average exercise price of $.33 per share. On a fully
diluted basis, 3DX has 10,697,785 outstanding shares. According to the merger
agreement, the stock options have to be exercised before the closing of the
merger. At the time of the agreement's execution, Esenjay's shares were trading
for approximately $2.25 per share and 3DX's shares were trading for
approximately $.38 per share. The resulting market capitalization for the two
companies, on a fully diluted basis, was $35.5 million for Esenjay and $4.1
million for 3DX. The aggregate equity value of the two companies amounted to
approximately 90% Esenjay and 10% 3DX. Both companies are development stage
companies with most of their assets in the form of undeveloped exploration
projects. Because of this, Cornerstone considered neither company's report of
operating results meaningful for valuation purposes. That fact, coupled with the
fact that the common stock of both companies are held by relatively few
institutions and individuals, suggested to Cornerstone that the companies'
market capitalization may not be reflective of their intrinsic or true value,
either in absolute or in relative terms. Therefore, in order to determine the
fairness of the proposed transaction, Cornerstone determine it could not rely
exclusively or heavily on market capitalizations, and thus found it necessary to
undertake an estimate of the value of each company's assets and residual equity.
Cornerstone previously provided Esenjay with an assessment of the fair
market value of its exploration assets in an opinion dated January 23, 1998. In
that opinion, Cornerstone estimated the value of those projects to be
approximately $64.0 million. Over the last sixteen months, portions of those
projects have been converted into proved oil and gas reserves and additional
analysis and evaluation has been conducted to add potential exploration value to
the projects. Cornerstone estimated that the additional evaluation has added
sufficient value to offset that portion of the exploration assets that have been
converted to proved reserves. Cornerstone still estimated the fair market value
of those exploration projects to be $64.0 million. In addition, Cornerstone
determined that Esenjay's proved reserves have an estimated fair market value of
$12.5 million, so that its total asset value is estimated to be $76.5 million.
Offsetting the asset value is a negative working capital of $11.0 million and
other long term liabilities of $8.7 million. Cornerstone estimated the net
estimated fair market value of Esenjay's equity was $56.8 million.
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3DX has an ownership in some of the same exploration projects as Esenjay,
namely Hall Ranch and Gillock. Based on Cornerstone's estimate of value for
those projects for Esenjay, Cornerstone estimated 3DX's value in those projects
to be $2.5 million. 3DX has a minor interest in two other exploration projects,
the value of which Cornerstone estimated to be approximately $0.8 million. 3DX
has proved oil and gas reserves with an estimated value of $5.8 million and
working capital of $0.8 million. In addition, the exercise of its outstanding
stock options would result in approximately $.3 million in consideration.
Therefore, Cornerstone estimated 3DX's total assets to have a value of $10.2
million and it has no long term liabilities. As a result, Cornerstone estimated
the fair market value of 3DX's equity to be $10.2 million.
Cornerstone estimated the aggregate fair market value of the equity of the
two companies to be $67.0 million, 84% of which is made up by Esenjay and 16% by
3DX.
If all 3DX stockholders elect to receive Esenjay common stock, the merger
would result in 19,076,460 common shares outstanding on a fully diluted basis,
made up of 3,291,626 or 17.2% being held by the 3DX stockholders and 15,784,834
or 82.8% being held by Esenjay stockholders. These relative holdings are very
close to Cornerstone's calculated fair market values, and are well within the
range Cornerstone believed supported the fairness of the transaction.
Accordingly, Cornerstone considered the transaction fair to the Esenjay
stockholders to the extent that the 3DX stockholders elect common stock.
Cornerstone's analysis of the preferred stock option indicated that under most
circumstances it is more favorable to the Esenjay stockholders than the common
stock option. In fact, Cornerstone has been unable to identify a scenario where
the preferred stock option would be clearly or substantially less favorable to
the Esenjay stockholders than the common stock option. Therefore, Cornerstone
also considered the preferred stock option to be fair to the Esenjay
stockholders.
Based upon and subject to this analysis and such other matters as
Cornerstone considered relevant, it was Cornerstone's opinion that the terms of
the acquisition of 3DX are fair from a financial point of view to the
stockholders 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, in response 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 the stockholders of 3DX
in the merger was fair to the 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 prospectus is
qualified in its entirety by reference to the full text of the 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 the
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 to, and its opinion
does not address, the underlying business decision of the board of directors of
3DX to proceed with 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;
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- 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 reserve report prepared by Ryder Scott Company Petroleum
Engineers relating to 3DX's reserves as of December 31, 1998;
- reviewed certain operating and financial information provided to
Harris Webb & Garrison by the management of 3DX relating to 3DX's
properties, business and prospects;
- discussed the Ryder Scott Report with representatives of Ryder Scott;
- met with members of 3DX's senior management to discuss their
operations, historical financial statements and future prospects;
- reviewed 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. as of January 1,
1999, an updated reserve report prepared by the management of Esenjay
as of May 1, 1999, and an estimated prospect valuation schedule
prepared by the management of Esenjay as of May 1, 1999;
- 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. The inclusion of this information
should not be regarded as an indication that 3DX, Esenjay or any persons who
received the information consider it to be anything other than an estimate of
future events. These financial projections are not to Harris Webb & Garrison's
knowledge, publicly available, 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 the management of 3DX and
Esenjay prepared at the request of Harris Webb & Garrison on or about May 1,
1999. While Harris Webb & Garrison viewed these evaluations as important to
their fairness analysis,
36
<PAGE>
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.
Set forth below in tabular format is a summary of the principal financial
analyses performed by Harris Webb & Garrison to arrive at its opinion dated May
11, 1999. Following the table is a summary description of each a financial
analysis, as well as the material factors considered by Harris, Webb & Garrison
in rendering its opinion:
SUMMARY OF RESULTS OF FINANCIAL ANALYSES
VALUE OF 3DX COMMON STOCK
-------------------------
<TABLE>
<CAPTION>
ANALYSIS VALUE VALUE PER SHARE
- -------------- ----------------- -----------------
<S> <C> <C>
Discounted Cash Flow
Ryder Scott Reserve Report at December 31, 1998............. $5.8 million N/A
3DX Management Reserve Estimate at March 31, 1999........... $3.1 million N/A
Adjusted Book Value at March 31, 1999.......................... $4.1 million $ 0.30
Net Asset Value Near April 29, 1999............................ $ 4.5 - $5.3 $ 0.42 - 0.50
million
Comparable Company Ratios*..................................... $0.7 - $12.6 $ 0.06 - $1.14
million
</TABLE>
* Values represent implied equity values.
VALUE OF ESENJAY COMMON STOCK
-----------------------------
<TABLE>
<CAPTION>
IMPLIED VALUE
PER 3DX
ANALYSIS VALUE PER SHARE COMMON SHARE
- -------------- ----------------- ----------------
<S> <C> <C>
Recent Market Price............................................ $ 2.43 $ 0.75
Adjusted Book Value on or about April 30, 1999................. $ 1.87 $ 0.58
</TABLE>
VALUE OF ESENJAY CONVERTIBLE PREFERRED STOCK
--------------------------------------------
<TABLE>
<CAPTION>
IMPLIED VALUE PER
VALUE PER SHARE, 3DX COMMON
ANALYSIS AS ADJUSTED SHARE
- ------------ ---------------- --------------------
<S> <C> <C>
Possible Outcomes............................................. $ 1.65 - $2.06 $ 0.60 - $ 0.75
</TABLE>
- - 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
greater than the estimated fair market value range of "value surrendered."
Harris Webb & Garrison's primary logic for evaluating the fairness of the
proposed merger to the stockholders of 3DX was to:
- estimate a reasonable range for the current fair market value per
share of 100% of the common shares of 3DX;
- estimate a reasonable range for the current fair market value of the
Esenjay common stock and the new Esenjay preferred stock to be issued
by Esenjay in exchange for the 3DX common stock;
- determine that the range of the estimated value for 3.25 shares of 3DX
common stock being surrendered was probably not more than the
estimated fair market value of one share of Esenjay common stock being
received for each 3.25 shares of 3DX common stock; and
37
<PAGE>
- determine that the range of the estimated value for 2.75 shares of 3DX
common stock being surrendered was probably not more than the estimated
fair market value of the new share of Esenjay preferred stock being
received for each 2.75 shares of 3DX common stock.
Harris Webb & Garrison estimated the fair market value of 100% of 3DX at a
range of $0.38-$0.50 per common share based upon Harris Webb & Garrison's
analysis of 3DX's adjusted book value as of March 31, 1999 and 3DX's net asset
value near April 29, 1999 based upon varying assumptions.
The adjusted book value analysis involved a downward adjustment of the book
value of 3DX's oil and gas properties from $9.2 million to $4.3 million. The
$9.2 million value reflects the net book value of 3DX's reserves according to
3DX's March 31, 1999 financial statements. The $4.3 million value was the value
of 3DX's oil and gas properties as set forth in Ryder Scott's reserve report as
of December 31, 1998, adjusted to reflect the sale of a property since the time
of the report. This yielded an adjusted stockholders' equity of $4.1 million, or
$0.38 per share on a fully diluted basis.
Harris Webb & Garrison's analysis of 3DX's net asset value near April 29,
1999 included three cases: Case A, Case B and Case C. The assumptions used in
and the results of each of the three cases were as follows:
Case A: - All book values of 3DX assets and liabilities
were adjusted to estimated fair market values on or
about April 29, 1999 based upon information prepared
by 3DX's management;
- proved developed producing reserves were valued at
$4.9 million, the same value attributed to such
reserves by Ryder Scott as of December 31, 1998;
- proved developed non-producing reserves were valued
at $887,000, the same value attributed to such
reserves by Ryder Scott as of December 31, 1998 using
flat prices--$2.16 per mcf of gas and $9.65 per
barrel of oil-- and a 10% annual discount factor;
- probable and possible reserves were attributed no
value; and
- the value of reserves was reduced by $1.5 million due
to the sale of a property between year-end 1998 and
April 29, 1999.
- This resulted in an estimated value of $4.9 million
or $0.46 per share.
Case B: - Used the same assumptions as Case A, except that
the value of proved developed non-producing reserves
was discounted 50% to $443,000. A 50% discount factor
was used based upon Harris Webb & Garrison's
discussions with various oil and gas industry
executives.
- This resulted in an estimated value of $4.5 million
or $0.42 per share.
Case C: - All book values of 3DX assets and liabilities
were adjusted to estimated fair market values near
April 29, 1999 based upon information prepared by
3DX's management;
- proved developed reserves--producing and
non-producing--were valued at $3.1 million, the same
value attributed to such reserves by 3DX's management
as of March 31, 1999 using flat prices--$2.00 per mcf
or mcf equivalent--and a 10% annual discount factor;
and
- probable and possible reserves were valued at $1.5
million, which was 10% of the value attributed to
such reserves by 3DX's management as of March 31,
1999. A 10% discount factor was used based upon the
belief of 3DX's management that a purchaser would pay
0%-33% of the estimated value of such prospects.
38
<PAGE>
- This resulted in an estimated value of $5.3 million
or $0.50 per share.
After determining a range for the value of 3DX's common stock using the
above analyses, Harris Webb & Garrison estimated the fair market value for one
share of Esenjay common stock at $2.4375 or $0.75 per 3DX common share based
upon Esenjay's public market price on April 29, 1999. Although Harris Webb &
Garrison considered the recent market price of Esenjay's common stock to be the
best indicator of the value of that stock, Harris Webb & Garrison also noted
that the stock's book value on December 31, 1998 was $2.24 per share. Harris
Webb & Garrison also estimated the stock's adjusted book value per share as of
April 30, 1999 at $1.87 per share after substantial reductions in reserve values
based upon information provided by Esenjay's management to attempt to properly
consider the risk of unproved or non-producing reserves. Harris Webb & Garrison
did not consider such an analysis to be more reliable than considering the
public market price of Esenjay's common stock.
Harris Webb & Garrison then estimated the fair market value of Esenjay's new
preferred stock at $1.65-$2.06 per share or $0.60-$0.75 of value being exchanged
for each share of 3DX based upon the exchange ratio of 2.75 3DX common shares
for each share of Esenjay's new preferred stock. Harris Webb & Garrison
estimated the fair market value of Esenjay's new preferred stock based upon six
possible future cases, each of which would yield the value indicated:
A. The preferred stock is redeemed by Esenjay for $1.925 per share in ten
months, yielding a value of $1.925 per preferred share or $0.70 per 3DX
common share originally exchanged;
B. The preferred stock is converted into Esenjay common stock after 12
months and sold at $2.75 per common share, yielding a value of $2.75
per preferred share or $1.00 per 3DX common share originally exchanged;
C. The preferred stock is converted into Esenjay common stock after 12
months and sold at $3.00 per common share, yielding a value of $3.00
per preferred share or $1.09 per 3DX common share originally exchanged;
D. The preferred stock is converted into Esenjay common stock after 12
months and sold at $2.25 per common share, yielding a value of $2.25
per preferred share or $0.82 per 3DX common share originally exchanged;
E. The preferred stock is put to Esenjay for $1.65 in cash after 12
months, yielding a value of $1.65 per preferred share or $0.60 per 3DX
common share originally exchanged; and
F. The preferred stock is put to Esenjay for 1.875 shares of Esenjay
common stock after 12 months, assuming Esenjay's common stock is
trading for $1.00 per share, yielding a value of $1.875 per preferred
share or $0.68 per 3DX common share originally exchanged.
Harris Webb & Garrison assumed that each of the above cases had an equal
probability of occurring. Averaging the value indicated by the six cases yielded
an average value of $2.24 per preferred share, or $0.82 per 3DX common share
originally exchanged. Because these values could not be obtained for twelve
months for cases B through F, Harris Webb & Garrison considered that the average
value of $2.30 for these cases should be reduced by approximately 10% to an
average value of approximately $2.06. Harris Webb & Garrison believed the 10%
discount rate represented a reasonable rate of return that an investor could
expect over a twelve-month period from alternative investments. With Case A
having a value of $1.93 and a relatively high probability, Harris Webb &
Garrison estimated the range of probable fair market value to be $1.93 - $2.06,
or $0.70 - $0.75 per 3DX common share.
Harris Webb & Garrison also considered that Esenjay's preferred stock might
trade below the $1.93 - $2.06 fair market value range because of its expected
thin market. Thus, Harris Webb & Garrison expanded the downside of its range to
$1.65, which is 17.5% below the mid-point of $2.00, 15% below the low end of
$1.93 and equal to the "put" option at $1.65 in cash per preferred share
considered by Harris Webb & Garrison as Case E. A range of $1.65 - $2.06
translates into a range of $0.60 - $0.75 per common share of 3DX via the 2.75x
exchange ratio.
Harris Webb & Garrison noted that the entire range of $0.60-$0.75 of "value
received" was greater than the $0.38- $0.50 range of "value given up," which
indicated that the exchange was fair to the common stockholders of 3DX from a
financial point of view. Harris Webb & Garrison also noted that the mid-point of
$0.675 for value received was a
39
<PAGE>
premium of 53% over the mid-point of $0.44 for value given up, representing a
significant premium to the stockholders of 3DX.
- - DISCOUNTED CASH FLOW ANALYSIS CONTAINED IN THE RYDER SCOTT REPORT AND
UPDATED REPORTS PREPARED BY THE MANAGEMENT OF 3DX. Harris Webb & Garrison
considered the present value of the future cash flows that the proved
reserves of 3DX could be expected to generate after approximately May 1,
1999 based on these reserve reports. The Ryder Scott reserve report
estimated the discounted present value of net future cash flows from 3DX's
proved developed reserves to be $5.8 million as of December 31, 1998. The
management of 3DX estimated the discounted present value of net future
cash flows from 3DX's proved developed reserves to be $3.1 million as of
March 31, 1999. The management of 3DX stated to Harris Webb & Garrison that
it believed that there had been no material change in 3DX's reserves since
March 31, 1999. Both Ryder Scott and the management of 3DX used a discount
rate of 10% and assumed flat prices.
With respect to Ryder Scott's reserve report, Harris Webb & Garrison
discussed the nature of 3DX's reserves with Ryder Scott and noted that values
of oil and gas reserves, even in detailed independent reserve reports, can be
highly uncertain. Harris Webb & Garrison used the results of these discounted
cash flow analyses in its estimation of the adjusted book value and net asset
value of 3DX, as described above.
- - 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 publicly traded oil and gas
entities in the exploration and production industry. The companies were:
- Brigham Exploration Company;
- Edge Petroleum Corporation;
- Fortune Natural Resources Corporation;
- Parallel Petroleum Corporation;
- Patina Oil & Gas Corporation; and
- Texoil, Inc.
Harris, Webb & Garrison analyzed the market value of the capitalization at
each of the exploration and production companies as a multiple of selected
financial data. 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, 1998) 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
40
<PAGE>
PV-10"). Harris, Webb & Garrison's analysis of the exploration and production
companies yielded the following ranges:
<TABLE>
<CAPTION>
PROVED
RESERVES EBITDX SEC PV-10
------------ -------------- -------------
(per
thousand
cubic feet
equivalent)
<S> <C> <C> <C>
High............................................................. $ 1.25 7.4x 158%
Low.............................................................. $ 0.52 3.9x 86%
</TABLE>
41
<PAGE>
Applying these multiples to 3DX yielded an enterprise value range of $1.4
million to $13.3 million for 100% of 3DX, or an equity value range of $0.7
million to $12.6 million or $0.06-$1.14 per common share on a fully diluted
basis. The mid-point of this range was $0.60 per common share of 3DX, which was
11% less than $0.675, the mid-point of the $0.60-$0.75 range of estimated fair
market value of the merger consideration to be received for each 3DX common
share in the merger.
The variance of these ratios resulted in a wide range of implied
values for 3DX. Harris Webb & Garrison believed that these ratios would not
have been as important to a potential buyer of 3DX because the reserve
information upon which these ratios are based consist only of publicly
available information concerning proved reserves, most of which is current
only as of December 31, 1998, with no information concerning possible or
probable reserves. Instead, Harris Webb & Garrison believed that a potential
buyer would place much greater importance on the Ryder Scott reserve report
and 3DX management's estimates of reserves, including the fair market value
of possible and probable reserves in estimating the fair market value of 3DX.
As a result, 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 16
publicly traded convertible preferred stocks and compared yield and conversion
premiums to the new preferred stock. The 16 convertible preferred stocks and the
corresponding yields and conversion premiums are set forth below:
<TABLE>
<CAPTION>
9/30/98 9/30/98
PRICE PRICE OF ANNUAL CONVERSION PRICE OF CONVERSION
NAME AT ISSUE PFD. PFD. DIV. YIELD PRICE OF PFD. COMMON PREMIUM
- --------- ---------- --------- ----------- -------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Beazer Homes USA $25.00 $28.50 $2.00 7% $19.05 $20.63 -8%
Cellnet Funding $25.00 $17.25 $1.75 10% $13.64 $6.00 127%
Echo Star Communications $50.00 $60.75 $3.38 6% $24.38 $24.00 2%
Dura Automotive Systems $25.00 $24.00 $1.88 8% $42.87 $25.88 66%
Environmental Systems $25.00 $17.50 $1.75 10% $28.00 $10.81 159%
First Security $52.50 $30.31 $3.15 10% $1.28 $16.75 -92%
Global Thermo $2.16 $3.00 $0.22 7% $0.54 $0.98 -45%
Hecla Mining Co. $50.00 $42.00 $3.50 8% $15.55 $5.06 207%
Metro Media Ind. $50.00 $22.75 $3.64 16% $15.00 $3.88 287%
North Coast Energy $10.00 $7.75 $1.00 13% $1.74 $0.94 85%
Perimi Corp $25.00 $17.25 $2.13 12% $37.76 $6.94 444%
PDK Labs Inc. $10.00 $4.50 $0.49 11% $23.33 $3.63 543%
Reckson Associates $25.00 $21.88 $1.91 9% $28.51 $23.50 21%
Titan Corp $10.00 $11.94 $1.00 8% $30.00 $5.25 471%
USA Biomass Corp. $10.00 $9.75 $0.90 9% $5.39 $2.81 92%
US Restaurant Props. $25.00 $24.94 $1.93 8% $26.64 $25.44 5%
42
<PAGE>
Mean 10% 148%
High 16% 543%
Low 6% -92%
Medium 9% 88%
</TABLE>
None of the 16 convertible preferred stocks, however, was very
comparable to that of Esenjay given the fact that Esenjay's new
preferred shares will have no yield and a unique put feature. Harris
Webb & Garrison gave little weight to this analysis.
- - COMPARABLE TRANSACTIONS. Harris Webb & Garrison reviewed five selected
transactions:
- Hicks, Muse, Tate & Furst, Inc. affiliate's purchase of convertible
preferred shares of Triton Energy Limited;
- Enron Capital & Trade Resources Corp.'s purchase of cumulative
convertible preferred stock of Costilla Energy, Inc.;
- Enron Corp.'s purchase of debt and equity securities from Brigham
Exploration Company;
- Universal Resources, Corp.'s acquisition of properties from H S
Resources; and
- Pogo Producing's acquisition of Arch Petroleum.
Harris Webb & Garrison did not consider the reserves in any of these
acquisitions to be very comparable to 3DX. Moreover, up-to-date (I.E.,
near April 30, 1999) reserve information was not available for such
assets. Consequently, Harris Webb & Garrison did not make any
calculations of ratios involved in these transactions, and Harris Webb &
Garrison did not believe that a buyer of 3DX's assets would have given
any significant weight to such an analysis.
In addition to the financial analyses set forth above, Harris Webb &
Garrison considered a number of additional factors in arriving at its
opinion. Harris Webb & Garrison believes that these factors, while less
susceptible to quantitative analysis, are relevant to an assessment of
the value, from a financial point of view, of the consideration to be
received by 3DX stockholders in the merger. These factors include,
without limitation, the following:
- The management of Esenjay informed Harris Webb & Garrison that
Esenjay has a large number of drilling opportunities which it
believes are capable of adding significant quantities of proved
reserves. If Esenjay is able to add reserves in a cost
effective manner, the price of its common stock should
increase, assuming oil and gas prices remain at current levels.
An increase in Esenjay's common stock price would effectively
increase the value received by a 3DX stockholder assuming he
continues to hold the Esenjay common shares after the merger.
- The put option of the preferred stock that may be issued in
the merger offers a 3DX stockholder greater protection against
a decrease in the value of Esenjay. If Esenjay's common stock
trades for an average amount of less than $1.875 per share
based upon average daily closing prices for the twelfth month
after the effective date of the merger, a holder of the
preferred stock would have the right to put each share of
preferred stock to Esenjay for $1.65 in cash or an amount of
Esenjay common stock worth $1.875 based upon the average
closing price of the common stock during the twelfth month.
- Esenjay has an inventory of over 35 natural gas projects along
the Texas and Louisiana Gulf Coast as compared to approximately
17 projects owned by 3DX in the Gulf Coast Region. The combined
company in which 3DX stockholders would own stock would have a
greater number of properties in several different areas.
43
<PAGE>
- The preferred stock that may be issued in the merger has a
liquidation preference, which means that a holder of preferred
stock has the right, subject to the certificate of designation
of the preferred stock, to be paid the liquidation amount prior
to a common stockholder receiving any money in the case of a
bankruptcy or liquidation.
The summary set forth above is a materially complete description of the
analyses performed by Harris Webb & Garrison, and reflects all of the major
factors that Harris, Webb & Garrison considered. 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 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. Those assumptions that Harris, Webb & Garrison
believes to be material and unique to its analysis are set forth in the
description of those analyses set forth above. The analyses performed by Harris
Webb & Garrison are not necessarily indicative of actual values or future
results, which may be significantly more or significantly less favorable than
the analyses suggest.
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 businesses 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.
According to the terms of an engagement letter with 3DX, Harris Webb &
Garrison will be paid $25,000 by 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. However,
indemnification of liabilities under the federal securities laws may be
unenforceable on public policy grounds. The terms of the fee arrangement with
Harris Webb & Garrison, which are customary in transactions of this nature, were
negotiated at arm's 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.
44
<PAGE>
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.
COMPARISON OF STOCKHOLDERS' RIGHTS
<TABLE>
<CAPTION>
ESENJAY 3DX
------- ---
<S> <C> <C>
Authorized Capital............ 40,000,000 shares of Common Stock, 20,000,000 shares of Common Stock,
$.01 par value $.01 par value
5,000,000 shares of Preferred Stock, $.01 1,000,000 shares of Preferred Stock,
par value $.01 par value
Preferred Stock............... May be issued from time to time in one May be issued from time to time in
or more series as determined by the one or more series as determined by
board of directors. Terms of each series the board of directors. Terms of each
to be set by resolution of the board of series to be set by resolution of the
directors. 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
directors. Board is divided into three of directors. Board is divided into
classes serving three year terms with as three classes serving three year terms
nearly equal a number of directors in with as nearly equal a number of
each class as possible. Esenjay's board of directors in each class as possible.
directors currently has eight members. 3DX's board of directors currently
Directors may be removed with or has six members.
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 In the event of bankruptcy, Not applicable.
Agreement by Corporation reorganization or dissolution, if creditors
with Creditor or or stockholders of three-fourths of the
Stockholders.................. 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
taken by stockholders must be effected at be taken by stockholders must be
an annual or special meeting of the effected at an annual or special
stockholders. meeting of the stockholders.
Annual Meeting................ Time and place to be set by the board of Time and place to be set by the board
directors. of 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.
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<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
of the board of directors or by the board of directors or the President.
stockholders owning 10% in the Time and place to be set by the board
aggregate amount of issued and of directors.
outstanding shares 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
meeting is called shall be given to special meeting is called shall be
stockholders entitled to vote at least ten given to stockholders entitled to vote
days but not more than sixty days before at least ten days but not more than
the meeting date. sixty days 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
proxy. by proxy.
Voting........................ May vote in person or by proxy. Except as otherwise provided, each
stockholder shall be entitled to one
Directors are elected by a plurality of vote for each share of capital stock
votes cast at the meeting. All other registered in the stockholder's name
items require a majority of the votes cast on the books of 3DX. Proxies are
at the meeting. 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 The board of directors may appoint
or more inspectors. If not appointed by one or more inspectors. If not
the board of directors, inspectors may be appointed by the board of directors,
appointed by the person presiding at the inspectors may be appointed by the
meeting and shall be appointed upon person presiding at the meeting and
request of any stockholder entitled to shall be appointed upon request of
vote at the meeting. any stockholder entitled to vote at the
meeting.
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<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
the secretary of Esenjay not less than 40 to the secretary of 3DX not less than
days prior to the meeting. The notice 80 days prior to the first anniversary
must set forth a brief description of the of the prior year's annual meeting.
business, the name and address of the The notice must set forth a brief
stockholder proposing such business, the description of the business, the name
class and number of shares held by the and address of the stockholder
stockholder proposing the business and proposing such business, the class
any material interests the stockholder has and number of shares held by the
in the business proposed. stockholder proposing the business
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, and currently
December. begins on the 1st day of January and
ends on the 31st day of 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, as amended, the
regulations promulgated under the Code, Internal Revenue Service rulings, and
judicial and administrative rulings in currently in effect, 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 by 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 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 and
Esenjay, 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:
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- 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
- have a tax basis in the Esenjay common stock received in the
merger equal to the tax basis 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. The Internal Revenue Service could
take the position that a redemption for cash of the Esenjay preferred stock
received by the 3DX stockholders is treated as a dividend, instead of a sale, to
the extent that Esenjay has current or accumulated earnings and profits in the
year of the redemption. The amount of the dividend would be the entire amount
received by a stockholder in the redemption and would be taxed as ordinary
income. If the redemption is treated as a sale, on the other hand, the amount
received by the stockholder in the redemption, minus the stockholder's tax basis
in redeemed stock, would be taxed as capital gain. Whether a redemption will be
treated as a dividend depends on the application of the rules of section 302(b)
of the Code, which, in turn, depends on each stockholder's specific facts, as
outlined in the next three paragraphs.
If a redemption is "not essentially equivalent to a dividend," the
redemption will not be treated as a dividend. Although not entirely free from
doubt owing to the lack of precision in the tests, a redemption of Esenjay
preferred stock should be "not essentially equivalent to a dividend" if:
- the stockholder's relative stock interest in Esenjay is minimal;
- the stockholder is not able to exercise control over Esenjay's
affairs; and
- the redemption causes a reduction in the stockholder's proportionate
interest in Esenjay.
To make the foregoing determinations, a stockholder's directly-owned shares and
shares that the stockholder owns constructively under the rules of section 318
of the Code must be considered. The rules of constructive ownership are complex
and can produce unexpected results, and depend on each stockholder's specific
facts. Stockholders intending to rely on a redemption as "not essentially
equivalent to a dividend" should consult their tax advisors in
this regard.
If a redemption is "substantially disproportionate" with respect to a
stockholder, the redemption will not be treated as a dividend. To satisfy the
substantially disproportionate rule, the stockholder, immediately after the
redemption, must:
- own less than 50% of the voting power of Esenjay;
- own less than 80% of his percentage ownership of voting stock
immediately before the redemption; and
- own less than 80% of his percentage ownership of common stock
before the redemption.
As in the case of the "not essentially equivalent to a dividend" test, a
stockholder is considered to own shares constructively under the rules of
section 318 of the Code. Thus, stockholders intending to rely on a redemption as
being "substantially disproportionate" should consult their tax advisors.
If a redemption results in a "complete termination" of the
stockholder's interest in Esenjay, the redemption will not be treated as a
dividend. A complete termination would require termination of the stockholder's
holdings of both Esenjay common and preferred stock. As in the case of the
preceding two paragraphs, a stockholder is considered to own shares
constructively under the rules of section 318 of the Code.
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Thus, stockholders intending to rely on a redemption being "substantially
disproportionate" should consult their tax advisors.
SPECIAL CONSIDERATIONS FOR 3DX STOCKHOLDERS ELECTING TO RECEIVE
PREFERRED STOCK--REDEMPTION PREMIUM. Because the Esenjay preferred stock is
subject to redemption at a price higher than its issue price, the Internal
Revenue Service could take the position that the receipt of preferred stock by
the 3DX stockholders results in those stockholders having received a dividend
taxable as ordinary income. The amount of this dividend would
be equal to the excess of:
- the redemption price of the preferred stock over;
- the fair market value of the 3DX common stock exchanged for the
preferred stock.
A portion of this dividend would be taxable as ordinary income to the
stockholders in each taxable year until the redemption occurs. As discussed in
the next paragraph, this dividend treatment will not occur if certain "safe
harbor" requirements are met.
Under a "safe harbor" rule, if:
- a stockholder is not "related" to Esenjay;
- Esenjay has no plans, arrangements, or agreements that
effectively require or are intended to compel it to redeem
the preferred stock; and
- Esenjay's exercise of its right to redeem the preferred stock
will not reduce the yield on the preferred stock, then the
dividend treatment discussed in the preceding paragraph will not
apply.
Esenjay has represented that the latter two safe harbor requirements are met.
With respect to the first requirement, because a determination as to whether a
3DX stockholder is "related" to Esenjay depends on each stockholder's specific
facts, 3DX stockholders intending to rely on the safe harbor requirements should
consult their tax advisors to determine whether they may be "related" to
Esenjay.
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 stockholders in the merger
is "section 306 stock." Esenjay intends to treat the preferred stock as not
"section 306 stock" because it believes the receipt of the stock by 3DX
stockholders 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 to the 3DX stockholders in a cash redemption of the preferred
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 capital
gain or a recovery of basis. In a disposition of the 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 in this regard.
SPECIAL CONSIDERATIONS FOR 3DX STOCKHOLDERS ELECTING TO RECEIVE
PREFERRED STOCK -- NONQUALIFIED PREFERRED STOCK. The Internal Revenue Service
could take the position that the preferred stock received by the 3DX
stockholders in the merger is "nonqualified preferred stock." Esenjay does not
believe the preferred stock is "nonqualified preferred stock" and will not treat
it as such. If the preferred stock were determined to be nonqualified preferred
stock, then the stockholders receiving preferred stock would recognize taxable
gain, if any, to the extent of the value of the preferred stock received. A
stockholder would have recognizable gain if the fair market value of his 3DX
stock on the day of the merger exceeded his tax basis in such stock.
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
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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.
GOVERNMENT AND REGULATORY APPROVALS
GOVERNMENTAL APPROVALS. Other than the filing of a Certificate of
Merger with the Secretary of State of Delaware, no consent, approval or
authorization of, or filing a registration with, any governmental or regulatory
authority, or any other person or entity is required to be made or obtained by
Esenjay or 3DX in connection with the merger.
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.
HOW TO ELECT FORM OF MERGER CONSIDERATION
The proxy card enclosed for 3DX stockholders includes an item for the
election of the form of merger consideration that the stockholder will receive
if the merger is approved by 3DX stockholders and subsequently consummated.
Whether a 3DX stockholder votes in favor of the merger or against the merger, it
should also select the form of merger consideration it wishes to receive in the
event the merger is consummated. Selecting a form of merger consideration will
have no effect if the merger is not consummated. However, as stated in the
merger agreement, a holder of 3DX common stock who fails to make an election or
vote its shares will automatically have its shares converted into Esenjay common
stock. Therefore, the only way that a holder of 3DX common stock may receive
Esenjay preferred stock is to make an election to receive preferred stock on the
proxy card or at the special meeting.
EXCHANGE OF SHARES
Esenjay will appoint an exchange agent to handle the exchange of 3DX
stock certificates in the merger for the form of merger consideration previously
chosen by the holder of 3DX common stock. Soon after the closing, the exchange
agent will send to each holder of 3DX stock a letter of transmittal for use in
the exchange and instructions explaining how to surrender 3DX stock certificates
to the exchange agent. Holders of 3DX stock who surrender their certificates to
the exchange agent, together with a properly completed letter of transmittal,
will receive the appropriate merger consideration. Holders of unexchanged shares
of 3DX stock will not be entitled to receive any dividends or other
distributions payable by Esenjay after the closing until their certificates are
surrendered.
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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 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 BELOW OR IN EXHIBIT D 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 to the merger 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 below, stockholders
of 3DX will not be entitled to appraisal rights in connection with the merger.
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 below 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 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
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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 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
for the list 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 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:
- one share of Esenjay common stock for each 3.25 shares of issued
and outstanding 3DX common stock; or
- one share of Esenjay Series A convertible preferred stock 2.75
shares of issued and outstanding 3DX common stock.
Any 3DX stockholder who fails to make an election will automatically
receive Esenjay common stock in exchange for its 3DX common 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. 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
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stock transfer books of 3DX shall be closed, and no transfer of any certificates
representing shares of 3DX shall be made.
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;
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- 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
- 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;
55
<PAGE>
- 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
- 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 under 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.
56
<PAGE>
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.
- 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 benefitting 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;
57
<PAGE>
- 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.
58
<PAGE>
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 and 3DX's respective audited consolidated
financial statements. The unaudited pro forma consolidated statement 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."
59
<PAGE>
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) 78,609,322
(1,295,782)(a)
Other property and equipment................ 1,461,691 273,780 1,735,471
--------------- --------------- --------------- ---------------
72,397,665 40,228,914 (32,281,786) 80,344,793
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 (1,295,782) 61,906,791
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 $ (1,295,782) $ 71,733,190
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
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) 196,750
38,901 (a) --
Deferred compensation....................... -- (110,523) 110,523 (a) --
Paid in capital............................. 77,651,602 39,993,637 (39,993,637)(a) 85,392,907
7,741,305 (a)
Retained deficit............................ (46,568,341) (30,901,120) 30,901,120 (a) (46,568,341)
--------------- --------------- --------------- ---------------
Total stockholders' equity......... 31,241,110 9,075,988 (1,295,782) 39,021,316
--------------- --------------- --------------- ---------------
Total liabilities and stockholders'
equity............................. $ 61,754,697 $ 11,274,275 $ (1,295,782) $ 71,733,190
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Book value per common share................. $ 1.98 $ 0.97 $ 1.98
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</TABLE>
60
<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
Exploration costs-geological & geophysical...... 745,458 -- 444,898 (d) 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 2,052,553 434,104 8,079,137
---------------- ---------------- -------------- --------------
Net loss........................................ (4,081,478) (1,484,986) (434,104) (6,000,568)
Net loss applicable to common stockholders $ (4,081,478) $ (1,484,986) $ (434,104) $ (6,000,568)
---------------- ---------------- -------------- --------------
---------------- ---------------- -------------- --------------
Net loss per common and common stock
equivalent $ $ (0.16) $
(0.26) (0.30)
---------------- ---------------- --------------
---------------- ---------------- --------------
Common stock dividend per common
and common stock equivalent.................. $ -- $ --
$ --
---------------- ---------------- --------------
---------------- ---------------- --------------
Weighted average number of shares outstanding 15,784,834 9,380,328 19,674,938(e)
---------------- ---------------- --------------
---------------- ---------------- --------------
</TABLE>
61
<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 13,695,560
Exploration costs - geological &
geophysical............................. 5,882,307 -- 1,671,799 (d) 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 14,187,216 454,379 45,679,415
--------------- ---------------- -------------- -----------------
Net loss (29,321,347) (9,588,542) (454,379) (39,364,268)
Preferred stock dividends................. 48,136 -- 48,136
Net loss applicable to common
stockholders............................ $(29,369,483) $ (9,588,542) $ ( 454,379) $(39,412,404)
--------------- ---------------- -------------- -----------------
--------------- ---------------- -------------- -----------------
Net Loss per common and common
stock equivalents....................... $ (2.97) $ (1.15) $ (2.86)
--------------- ---------------- -----------------
Common stock dividend per common
and common stock equivalent.............. $ -- $ -- $ --
--------------- ---------------- -----------------
--------------- ---------------- -----------------
Weighted average number of shares
outstanding............................. 9,882,227 8,328,429 13,772,331(e)
--------------- ---------------- -------------- -----------------
--------------- ---------------- -------------- -----------------
</TABLE>
62
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO UNAUDITED PROFORMA FINANCIAL STATEMENTS
(a) Assumes the issuance of 3,890,104 shares of Esenjay Exploration, Inc.
common stock at $2.00 per share in exchange for all of the outstanding
common stock (9,685,761), additional shares subsequently issued by 3DX
that are unrelated to this merger (231,080) plus common stock equivalents
(780,944) expected to be converted upon consummation of the merger. This
assumes 100% of the total outstanding 3DX common shares and equivalents
are exchanged for Esenjay common stock and no shares are being exchanged
for Esenjay preferred 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. The following calculation shows the number of
Esenjay shares issued and the total consideration given to 3DX assuming
the issuance of 0% preferred stock, 25% preferred stock and 50% preferred
stock.
<TABLE>
<CAPTION>
100% 75% COMMON 50% COMMON
COMMON STOCK 25% PREFERRED 50% PREFERRED
----------------- ------------------ ----------------
<S> <C> <C> <C>
3DX common stock......................................... 9,685,761 9,685,761 9,685,761
Shares issued subsequent to March 31, 1999............... 231,080 231,080 231,080
Common stock equivalents assumed to convert in
Merger................................................. 780,944 780,944 780,944
----------------- ------------------ ----------------
Total 3DX shares to exchange........................ 10,697,785 10,697,785 10,697,785
Exchange ratio........................................... 2.75 2.87 3.00
----------------- ------------------ ----------------
Esenjay shares issued.................................... 3,890,104 3,728,015 3,565,928
Fair value of Esenjay stock (1).......................... $ $ $
2.00 2.00 2.00
----------------- ------------------ ----------------
Fair value of consideration given........................ $ 7,780,206 $ 7,456,029 $ 7,131,856
----------------- ------------------ ----------------
----------------- ------------------ ----------------
</TABLE>
- ----------------------
(1) Stock price near the date of initial filing was approximately $2.00
per share.
63
<PAGE>
(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. The
basis in oil and gas properties acquired from 3DX was determined as
follows:
<TABLE>
<S> <C>
Fair value of net assets received:
Cash.................................................. $ 784,355
Accounts receivable................................... 1,082,178
Prepaid expenses...................................... 101,061
Other property........................................ 273,780
Other assets.......................................... 63,771
Accounts payable...................................... (956,148)
Accrued expenses...................................... (492,139)
Long-term debt........................................ (750,000)
-------------------
Fair value of non oil and gas net assets................... 106,858
Remaining basis allocated to oil and gas properties(1)..... 7,673,348
-------------------
Total fair value of consideration received (see note a).... $ 7,780,206
-------------------
-------------------
</TABLE>
(c) Depletion, depreciation and amortization ("DDA") 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 fair
market value of the oil & gas properties acquired from 3DX, utilizing
the successful efforts method of accounting. The historical DDA rates
of Esenjay for the year ended December 31, 1998 and for the three
months ended March 31, 1999 were $2.16 per mcfe and $1.01 per mcfe,
respectively. The historical DDA rates of 3DX for the year ended
December 31, 1998 and for the three months ended March 31, 1999 were
$1.68 per mcfe and $1.88 per mcfe, respectively. On a pro forma
basis, the DDA rates were $1.37 and $1.30 for the year ended
December 31, 1998 and for the three months ended March 31, 1999,
respectively.
(d) 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 previously capitalized by 3DX under the full cost method of
accounting.
Full cost write-downs recorded by 3DX were $7,863,536 and $990,809
for the year ended December 31, 1998 and for the three months ended
March 31, 1999, respectively. The amounts are not included in the
pro forma adjustments.
(e) The weighted average shares outstanding used in calculating basic
and diluted earnings per share on a pro forma basis was calculated
as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 1999 DECEMBER 31, 1998
------------------ -------------------
<S> <C> <C>
Historical Esenjay weighted average shares outstanding........... 15,784,834 9,882,227
Shares issued to 3DX (see note a)................................ 3,890,104 3,890,104
------------------ -------------------
19,674,938 13,772,331
------------------ -------------------
------------------ -------------------
</TABLE>
- ----------------------
(1) Amount includes technical interpretation eqipment.
64
<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 increase its 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;
65
<PAGE>
- are located on properties to which 3-D imaging can be effectively
applied to evaluate the primary geologic risk;
- 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.
66
<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. The sale and farm out transaction was
entered with Esenjay independently of the merger agreement, and would have
been entered by 3DX whether or not the merger agreement had been entered.
Neither the proposed merger nor the sale and farm out transaction was
contingent upon the existence or closing of the other transaction. 3DX's
management believes that the terms of the sale and farm out transaction are
at market values and are on terms that would be obtainable in an arm's-length
negotiation with an independent third party. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" for more information.
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 12.5% working interest in Hall Ranch.
GILLOCK PROJECT, GALVESTON COUNTY, TEXAS. In 1998, 3DX participated in
the Gillock Project, a 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 15% working interest and applied the 3DXpress process to the project.
Results from the interpretation have added additional prospects to 3DX's
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<PAGE>
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.
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 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 50% of its working interest in
the project. This resulted in 3DX retaining a 7.5% working interest (after
payout) of the first three 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 50% of its interest in the property for cash and a
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 10% working interest to a 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 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 associated regulations 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 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.
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<PAGE>
Under the OPA and promulgated regulations, 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. The Texas General
Land Office is the lead agency for carrying out Oil Spill Prevention and
Response Act, and to that end the General Land Office 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. Specific design and operational standards may apply to Outer
Continental Shelf vessels, rigs, platforms, vehicles and structures. Violations
of lease conditions or regulations issued under 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. 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 associated regulations
prohibit the discharge of pollutants into waters of the United States without a
permit issued under 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 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 storm
water. 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.
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<PAGE>
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.
SIGNIFICANT CUSTOMERS
In 1998, substantially all of 3DX's oil and gas production was marketed on
the spot market on behalf of 3DX by the operators of the wells. 3DX itself does
not operate any wells and has no contractual relationship with its gas
purchasers. These marketing arrangements are standard in the industry. During
1998 sales to El Paso Energy Marketing Company accounted for 31% of 3DX's oil
and gas revenues, and sales to Dow Hydrocarbons and Resources, Inc., Corpus
Christi Gas Marketing L.P., and Burlington Resources Trading, Inc. each
accounted for 13% to 15% of 1998 oil and gas revenue. Because 3DX sells its
production on the spot market, the loss of any one ultimate purchaser will not
have a significant impact.
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.
EMPLOYEES
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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 Matagorda counties, Texas, at
depths between 3,000 feet and 6,000 feet. 3DX owns working interests ranging
from 15% to
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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
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costs are contractually determined at such date. 3DX has not provided any
estimates of total proved reserves, comparable to those disclosed in the proxy
statement/prospectus, 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 $5,782 $7,048 $6,623
thousands)...................................................................
Standardized Measure of Discounted Future Net Cash Flows (in $5,782 $7,048 $6,623
thousands)...............................................................
</TABLE>
In accordance with statutory requirements of the SEC, the amounts set forth in
the table 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 GROSS 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.
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<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
------------------------------------ --------------------------------------
PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
---------- --- ----- ---------- --- -----
<S> <C> <C> <C> <C> <C> <C>
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
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<PAGE>
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>
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,
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.
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<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.
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
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------ ---------------
1998 1997 1996 1995 1994 1999 1998
------ ------ ------ ---- ---- ---- ----
(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
------ ------ ------ ---- ---- ---- ----
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------------------- ---------------------
1998 1997 1996 1995 1994 1999 1998
-------- --------- -------- -------- ------ -------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
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>
<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.
77
<PAGE>
(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.
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.
78
<PAGE>
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 from $861,377 for the three months ended March
31, 1998. 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, 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.
79
<PAGE>
Oil and gas revenues increased to $4,544,690 for the year ended
December 31, 1998 from $3,045,447 for the year ended December 31, 1997. 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. 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;
- partially 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;
- partially 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 oil and gas
80
<PAGE>
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:
- 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
write down 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
write down 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
write down 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.
81
<PAGE>
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:
- an increase in compensation expense due to severance pay
recorded--$97,000;
- a decrease in the amount of capitalized overhead, as the majority of
the terminated personnel were from technical departments--$709,000;
and
- 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--$376,000.
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 in
this proxy statement/prospectus.
LIQUIDITY AND CAPITAL RESOURCES
See further discussion of these issues under Note 2 to the 3DX March 31,
1999 financial statements, "Going Concern".
82
<PAGE>
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 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. The sale transaction was undertaken in order to improve
3DX's liquidity through the sale of five prospect areas, while the farm out
arrangement was undertaken as a method to finance the drilling of wells on the
Hall Ranch and Gillock prospects. As a result of these transactions, 3DX was not
required to pay its share of the drilling and land costs in the Hall Ranch and
Gillock projects, which 3DX's management estimates would have resulted in
expenses to 3DX of approximately $780,000, but was able to retain half of its
interest in these prospects. Had 3DX not undertaken such a transaction, it
risked being unable to fund its share of the drilling and other costs of these
wells and would have forfeited its entire interest in them as a result. The sale
of the Tidehaven/Blessing project and
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<PAGE>
Thomaston project for $200,000 resulted in 3DX obtaining significant liquidity
to pay its ongoing expenses through the sale of prospects viewed by 3DX's
geologists as being among its less important exploration prospects. 3DX's
management believes that the terms of the sale and farm out arrangement with
Esenjay are at market values and on arm's-length terms and conditions. The sale
and farm out transaction is not contingent upon the closing of the proposed
merger and the execution of the merger agreement was not conditioned on 3DX's
entering the sale and farm out 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.
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 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.
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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
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 $500 for each meeting of a
committee of the Board of Directors held separately which such director attends
in person or by telephone. Beginning in 1998, the non-employee directors waived
their right to receive fees for attending meetings. Directors who are employees
of 3DX do not receive any additional compensation for their services as
directors. All directors are reimbursed for out-of-pocket expenses incurred in
connection with their service as directors. Under the Stock Option Plan, 3DX
may, from time to time, and in the discretion of the Board of Directors, grant
stock options to directors.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
awarded, earned or paid for services rendered in all capacities by Mr. Ennis
during the past three fiscal years. The table also identifies the principal
capacity in which Mr. Ennis served 3DX during 1998.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------- ----------------------------
RESTRICTED SECURITIES
STOCK AWARDS UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) 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 1996 150,000 -- -- -- --
of the 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.
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.
85
<PAGE>
<TABLE>
<CAPTION>
TEN-YEAR OPTION REPRICINGS
------------------------------------------------------------------
LENGTH OF
ORIGINAL
TERM
NUMBER OF REMAININ
SECURITIES MARKET PRICE EXERCISE G AT
UNDERLYING OF STOCK AT PRICE AT DATE OF
DATE OF OPTIONS TIME OF TIME OF NEW 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 January 1994, 3DX adopted the Stock Option Plan under which
"non-qualified" stock options to acquire shares of common stock may be granted
to directors of and consultants to 3DX and incentive stock options 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
the fair market value. An ISO may not be granted to a "ten percent stockholder"
(as that 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:
- in cash;
- 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
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;
- by delivery of a promissory note made by the optionee in a form
approved by 3DX;
- by the assignment of the proceeds of a sale of some or all of the
shares being acquired upon the exercise of the option;
- by the withholding of shares being acquired upon exercise of the option
bearing a fair market value, as determined by the Human Resources
Committee 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
- by any combination of these alternatives.
86
<PAGE>
The Human Resources Committee may at any time or from time to time grant options
that do not permit all of the forms of consideration described above to be used
in payment of the exercise price or that 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 the stock option and the aggregate option price of the
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 of these alternatives.
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 the 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 3DX 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".
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
- each person known to 3DX to own beneficially 5% or more of 3DX's
outstanding shares of common stock,
- each director of 3DX,
- each of the Named Executive Officers, as defined in "Executive
Compensation," and
87
<PAGE>
- 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 SEC that 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 .................................................. 50000 *
Jon W. Bayless.................................................... 754195(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 .................................................. 375592 4.0%
Joseph Schuchardt III ............................................ 189978 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
SEC. 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, 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.
(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.
88
<PAGE>
89
<PAGE>
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 stockholders. 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.
90
<PAGE>
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.
The report of independent petroleum engineers, Netherland Sewell &
Associates, Inc., dated February 16, 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.
91
<PAGE>
INDEX TO 3DX TECHNOLOGIES INC.
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
------------
<S> <C>
Report of Independent Public Accountants...................................................... F-1
Audited Financial 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-17
Unaudited Financial Statements for the three months ended March 31, 1999...................... F-21
Notes to Unaudited Financial Statements for the three months ended March 31, 1999............. F-25
</TABLE>
F-1
<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-2
<PAGE>
3DX TECHNOLOGIES INC.
- -------------------------------------------------------------------------------
BALANCE SHEETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
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-3
<PAGE>
3DX TECHNOLOGIES INC.
- -------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1998 1997 1996
----------------- --------------- ---------------
<S> <C> <C> <C>
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-4
<PAGE>
3DX TECHNOLOGIES INC.
- ------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK STOCK
------------------------ PAID -IN DEFERRED ACCUMULATED SUBSCRIPTION
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-5
<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 655,407 -- --
accounts payable..........................................
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<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-7
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (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 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>
F-8
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
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 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
F-9
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
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
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
F-10
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
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 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
F-11
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
stock were subject to the rules on penny stocks, the market liquidity for the
common stock could be severely adversely affected.
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.
F-12
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
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.
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 date of issuance and (b) the effective
F-13
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
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 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
F-14
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
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 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
NUMBER AVERAGE
OF SHARES EXERCISE 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 --
</TABLE>
F-15
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
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
RANGE OF OPTIONS AVERAGE AVERAGE OPTIONS AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE 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 canceled. 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
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>
F-16
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
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>
F-18
<PAGE>
3DX TECHNOLOGIES INC.
SUPPLEMENTARY INFORMATION -- UNAUDITED (CONTINUED)
- -------------------------------------------------------------------------------
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
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. 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.
F-19
<PAGE>
3DX TECHNOLOGIES INC.
SUPPLEMENTARY INFORMATION -- UNAUDITED (CONTINUED)
- -------------------------------------------------------------------------------
<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>
(1) In 1998, "revisions of previous estimates" for oil was a decrease
primarily because a decline in oil prices caused some of 3DX's minor oil
properties to become uneconomic and thus be removed from 3DX's proved
reserves.
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)
- -------------------------------------------------------------------------------
Changes in standardized measure of discounted future net cash flows:
<TABLE>
<S> <C> <C> <C>
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.
- -------------------------------------------------------------------------------
3DX TECHNOLOGIES INC.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------------ ----------------
(Unaudited)
<S> <C> <C>
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
------------------ ----------------
------------------ ----------------
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
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,
1999 1998
----------------- ---------------
<S> <C> <C>
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.
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
3DX TECHNOLOGIES INC.
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
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.
- -------------------------------------------------------------------------------
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.
F-26
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
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
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 dividends and additional liens and
F-27
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
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 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.
F-28
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
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>
[CORNERSTONE LETTERHEAD]
June 18, 1999
The Board of Directors
Esenjay Exploration Inc.
One Allen Center
500 Dallas Street
Suite 2920
Houston, Texas 77002
Gentlemen:
You have requested our opinion as to the fairness to the shareholders of
Esenjay Exploration Inc. ("Esenjay or the Company") of the financial terms of
the acquisition by merger of 3DX Technologies Inc. ("3DX").
Based on the Plan and Agreement of Merger, executed on May 11, 1999
("Agreement"), shareholders of 3DX are to receive, at their election, either
(i) the issuance of one share of Esenjay common stock for 3.25 shares of 3DX
common stock, or (ii) the issuance of new Esenjay convertible preferred stock
("Preferred") at a ratio of one share of Esenjay Preferred for each 2.75
shares of 3DX common stock. The Preferred is limited to 50% of the total 3DX
shares converted and may be redeemed at Esenjay's sole option during the
first twelve months after the merger at $1.925 per share. If not redeemed
during the first year, each Preferred share will automatically convert into
one share of Esenjay common stock if the average closing price of Esenjay
common is greater than $1.875 during the twelfth month after closing. If the
average closing price of Esenjay common is less than $1.875, the Preferred
holder has the right to "put" the shares to the Company. Esenjay will then
have the right to retire each share of preferred stock for $1.65 in cash or
for common stock with the number of shares of common stock adjusted based
upon a formula set out in the Agreement.
As part of its investment banking services, Cornerstone helps clients
negotiate mergers, acquisitions and divestitures, arranges project and
corporate financing, and furnishes valuations of closely-held companies and
assets. Cornerstone is a member of the National Association of Securities
Dealers (NASD) as a broker/dealer and with respect to investment banking and
private placements of securities. The firm is also registered with the Texas
State Securities Board as a General Dealer and Investment Advisor.
<PAGE>
The Board of Directors
June 18, 1999
Page 2
In connection with the instant opinion, we have reviewed, among other
things, the Agreement, the Voting Agreements for certain directors and
officers of both Esenjay and 3DX, certain financial information regarding the
Esenjay and 3DX, and detailed materials regarding the oil and gas properties
owned by each company, including geologic and seismic based maps, seismic
data, lease maps, etc. In addition, we attended meetings in which the
properties were reviewed with certain of the Company's technical and
financial personnel.
In preparing this opinion, we have relied upon the accuracy and
completeness of, and have not independently verified (other than employing
our own appropriate internal tests of reasonableness and consistency), the
business, financial and other information obtained from outside sources.
At the time the Agreement was entered into, Esenjay had outstanding
15,784,834 shares of common stock that are traded on the NASDAQ and 3DX had
outstanding 9,685,761 shares that are traded OTC Bulletin Board (neither
company's shares are actively traded). In addition to the reported
outstanding shares of 3DX, it had recently issued 231,080 shares to certain
employees as compensation. Also, certain directors and employees of 3DX hold
stock options for 780,944 shares, with an average exercise price of $.33 per
share. On a fully diluted basis, then, 3DX has 10,697,785 shares. Pursuant to
the Agreement the stock options have to be exercised prior to the closing of
the merger. At the time of the Agreement's execution, Esenjay's shares were
trading for approximately $2.25/share and 3DX's shares were trading for
approximately $.38/share. The resulting market capitalization for the two
companies (on a fully diluted basis, was $35.5 million and $4.1 million,
respectively. The aggregate equity value of the two companies amounted to
approximately 90% Esenjay and 10% 3DX. Both companies are development stage
companies with most of their assets in the form of undeveloped exploration
projects. Because of this, neither company's report of operating results is
meaningful for valuation purposes. That fact, coupled with the fact that the
common stock of both companies are held by relatively few institutions and
individuals, suggests that their market capitalization may not be reflective
of their intrinsic or true value, either in absolute or in relative terms.
Therefore, in order to determine the fairness of the proposed transaction, we
could not rely exclusively or heavily on market capitalizations, and thus
found it necessary to undertake an estimate of the value of each company's
assets and residual equity.
<PAGE>
The Board of Directors
June 18, 1999
Page 3
Our firm has previously provided the Company with an assessment of the
fair market value of its exploration assets in an opinion dated January 23,
1998. In that opinion, we estimated the value of those projects to be
approximately $64.0 million. Over the last sixteen months, portions of those
projects have been converted into proved oil and gas reserves and additional
analysis and evaluation has been conducted to add potential exploration value
to the projects. We estimate that the additional evaluation has added
sufficient value to offset that portion of the exploration assets that have
been converted to proved reserves. Today, we still estimate the fair market
value of those exploration projects to be $64.0 million. In addition, we
estimate that the Company's proved reserves have an estimated fair market
value of $12.5 million, so that its total asset value is estimated to be
$76.5 million. Offsetting the asset value is a negative working capital of
$11.0 million and other long term liabilities of $8.7 million. The net
estimated fair market value of the Company's equity, then, is $56.8 million.
3DX has an ownership in some of the same exploration projects as the
Company (namely Hall Ranch and Gillock). Based on our estimate of value for
those projects for Esenjay, we estimate 3DX's value in those projects to be
$2.5 million. 3DX has a minor interest in two other exploration projects, the
value of which we estimate to be approximately $0.8 million. 3DX has proved
oil and gas reserves with an estimated value of $5.8 million and working
capital of $0.8 million. In addition, the exercise of its outstanding stock
options would result in approximately $.3 million in consideration.
Therefore, its total assets are estimated to have a value of $10.2 million
and the company has no long term liabilities. As a result, we estimate the
fair market value of its equity to be $10.2 million.
We estimate the aggregate fair market value of the equity of the two
companies to be $67.0 million, 84% of which is made up by Esenjay and 16% by
3DX.
The primary proposal for the merger would result in 19,076,460 common
shares outstanding (on a fully diluted basis), made up of 3,291,626 or 17.2%
being held by the 3DX shareholders and 15,784,834 or 82.8% being held by
Esenjay shareholders. These relative holdings are very close to our
calculated fair market values, and are well within the range we would
consider to support the fairness of the transaction. Accordingly, we consider
the transaction fair to the Esenjay shareholders to the extent that the 3DX
shareholders elect option (i). Our analysis of option (ii) indicates that
under most circumstances it is more favorable to the Esenjay shareholders
than option (i). In fact, we have been unable to identify a scenario where
option (ii) would be clearly or substantially less favorable to the Esenjay
shareholders than option (i). Therefore, we also consider option (ii) to be
fair to the Esenjay shareholders.
<PAGE>
The Board of Directors
June 18, 1999
Page 4
Based upon and subject to the foregoing and such other matters as we
considered relevant, it is our opinion that the terms of the acquisition of
3DX are fair from a financial point of view to the shareholders of Esenjay.
Very truly yours,
/s/ Cornerstone Ventures, L.P.
CORNERSTONE VENTURES, L.P.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 21. EXHIBITS
The following is a list of all of the exhibits filed as part of this
Registration Statement:
<TABLE>
<CAPTION>
Exhibit
No. Description
--- -----------
<S> <C>
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.
*8(a) Form of tax opinion of Porter & Hedges, L.L.P.
II-1
<PAGE>
Exhibit
No. Description
--- -----------
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).
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).
II-2
<PAGE>
Exhibit
No. Description
--- -----------
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).
23(e) Consent of C. Eugene Ennis presuant to Rule 438.
*23(f) Consent of Netherland Sewell & Associates Inc.
24(a) Power of Attorney (included on signature page).
</TABLE>
- ----------
* Filed herewith
II-3
<PAGE>
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
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 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-4
<PAGE>
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
Amendment No. 1 to 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 August 10, 1999.
ESENJAY EXPLORATION, INC.
By: /s/ Michael E. Johnson
-------------------------------
Michael E. Johnson
President, Chief Executive
Officer and Director
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 10th day of August, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman of the Board
- -------------------------------
David W. Berry
Vice Chairman of the Board
- -------------------------------
Alex M. Cranberg
* President, Chief Executive Officer,
- ------------------------------- and Director
Michael E. Johnson
* Director
- -------------------------------
Charles J. Smith
* Director
- -------------------------------
Alex B. Campbell
Director
- -------------------------------
William D. Dodge
Director
- -------------------------------
Jack P. Randall
* Director
- -------------------------------
Hobart A. Smith
* Senior Vice President, Secretary,
- ------------------------------- General Counsel and Principal Financial Officer
David B. Christofferson
II-5
<PAGE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Vice President, Treasurer, and
- ------------------------------- Principal Accounting Officer
Howard E. Williams
By: /s/ David B. Christofferson
-------------------------------
David B. Christofferson,
Attorney-in-fact
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
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.
*8(a) Form of tax opinion of Porter & Hedges, L.L.P.
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).
II-7
<PAGE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
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).
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).
II-8
<PAGE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
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).
23(e) Consent of C. Eugene Ennis presuant to Rule 438.
*23(f) Consent of Netherland Sewell Associates Inc.
24(a) Power of Attorney (included on signature page).
</TABLE>
- --------------
* Filed herewith
II-9
<PAGE>
, 1999
----------------
Esenjay Exploration, Inc.
500 Dallas, Suite 2920
Houston, Texas 77002
Ladies and Gentlemen:
We have acted as counsel to Esenjay Exploration, Inc., a Delaware
corporation ("ESENJAY") in connection with the transactions described in that
certain Plan and Agreement of Merger (the "MERGER AGREEMENT") dated as of May
11, 1999, among Esenjay and 3DX Technologies, Inc., a Delaware corporation
("3DX").
We have been engaged by Esenjay to render our opinion with respect
to the material United States federal income tax consequences of the merger
(the "MERGER") of 3DX with and into Esenjay, with Esenjay as the surviving
entity, pursuant to the Merger Agreement, on Esenjay, the stockholders of
Esenjay on the Effective Date ("ESENJAY STOCKHOLDERS"), 3DX, and the 3DX
stockholders on the Effective Date ("3DX STOCKHOLDERS"). Pursuant to the
Merger, the 3DX Stockholders can elect to receive either Esenjay Common Stock
and/or ESNJ-CP Stock in exchange for their 3DX Common Stock. All capitalized
terms used herein and not otherwise defined shall have the meanings set forth
in the Agreement.
In connection with rendering this opinion, we have assumed (without
any independent investigation) that:
1. Original documents (including signatures) are authentic,
documents submitted to us as copies conform to the original
documents, and there has been (or will be by the Effective
Date) due execution and delivery of all documents where due
execution and delivery are prerequisites to effectiveness
thereof.
<PAGE>
Esenjay Exploration, Inc.
, 1999
- -----------
Page 2
2. Any statement made in any of the documents referred to herein,
"to the best of the knowledge" of any person or party is
correct without such qualification.
3. All statements, descriptions and representations contained in
any of the documents referred to herein or otherwise made to
us are true and correct in all material respects and no
actions have been (or will be) taken which are inconsistent
with such representations.
In rendering our opinion, we have examined and relied upon the
accuracy and completeness of the facts, information, covenants, statements
and representations contained in originals or copies, certified or otherwise
identified to our satisfaction of (i) the Form S-4 Registration Statement of
Esenjay, (ii) the Merger Agreement, (iii) the factual representations
contained in (a) the Officer's Certificate of Esenjay dated ___________,
1999, and (b) the Officer's Certificate of 3DX dated ___________, 1999, and
(iv) such other documents as we have deemed necessary or appropriate
(collectively, the "OPERATIVE DOCUMENTS"). We have assumed that the facts and
information contained in all the Operative Documents are true, correct and
complete in all material respects as of ___________, 1999, as well as at the
Effective Date.
Our opinion is conditioned on, among other things, (i) the initial
and continuing accuracy of the facts, information, covenants, statements and
representations set forth in the documents referred to above and (ii) the
consummation of the Merger in accordance with the terms of the Merger
Agreement and other Operative Documents.
Based solely on the foregoing, we are of the opinion that the United
States federal income tax consequences of the Merger to Esenjay, the Esenjay
Stockholders, 3DX, and the 3DX Stockholders will be as follows:
1. The Merger will qualify as a "reorganization" within the
meaning of section 368(a)(1)(A) of the Internal Revenue Code
of 1986, as amended (the "CODE").
2. No gain or loss will be recognized by Esenjay with respect to
the Merger.
3. No gain or loss will be recognized by the Esenjay Stockholders
with respect to the Merger.
<PAGE>
Esenjay Exploration, Inc.
, 1999
- -----------
Page 3
4. No gain or loss will be recognized to 3DX with respect to the
Merger.
5. No gain or loss will be recognized by a 3DX Stockholder upon
the conversion of his or her 3DX Common Stock into Esenjay
Common Stock pursuant to the Merger.
6. Although subject to the uncertainty of newly-enacted law, no
gain or loss should be recognized by a 3DX Stockholder upon
the conversion of his or her 3DX Common Stock into ESNJ-CP
Stock pursuant to the Merger.
7. The basis of the Esenjay Common Stock and/or ESNJ-CP Stock
received by each 3DX Stockholder will be the same as the basis
of the 3DX Common Stock in the hands of such 3DX Stockholder
immediately prior to the Merger.
8. The holding period of the Esenjay Common Stock and/or ESNJ-CP
Stock to be received by each 3DX Stockholder will include the
holding period of the 3DX Common Stock exchanged therefor,
provided that the 3DX Common Stock is held as a capital asset
on the date of the exchange.
We participated in the preparation of the discussion set forth in
the Prospectus under the heading "Material Federal Income Tax Consequences of
the Merger," and, except as otherwise provided therein, the legal conclusions
with respect to United States federal income tax matters set forth therein
reflect our opinion and we believe they are accurate and complete in all
material respects.
This opinion does not discuss all aspects of United States federal
income taxation that may be relevant to a 3DX Stockholder in light of his or
her particular circumstances, or to certain types of 3DX Stockholders that
are subject to special treatment under federal income tax laws (including
persons who hold 3DX Common Stock as part of a tax-qualified retirement plan
or straddle or hedge, dealers in securities, traders in securities electing
mark to market, insurance companies, tax exempt organizations, financial
institutions, broker-dealers, foreign corporations, and persons who are not
citizens or residents of the United States). Further, we provide no opinion
with respect to the value of consideration other than Esenjay Common Stock,
if any, received in the Merger (including expense reimbursement amounts), nor
the tax consequences of any transactions undertaken by any 3DX Stockholder
before or after the Effective Date.
<PAGE>
Esenjay Exploration, Inc.
, 1999
- -----------
Page 4
We note that the opinion of counsel has no binding effect or
official status of any kind with the Internal Revenue Service or the courts.
Further, no private letter ruling has been sought from the Internal Revenue
Service on any of the matters discussed. Without impairing the nature of the
opinion given, if there were ultimately an adverse determination as to any of
the United States tax issues discussed herein, Esenjay and/or 3DX and/or the
3DX Stockholders could sustain different tax consequences than are described
herein. Further, our opinion is based upon the Internal Revenue Code of 1986,
regulations promulgated or proposed thereunder and interpretations thereof by
the Internal Revenue Service and the courts, all as of the date hereof. All
of such rules could change with retroactive effect, and our opinion could be
adversely affected or rendered obsolete by any such change. We have no duty,
and do not intend, to update or modify this opinion for changes in the
applicable law, regulations or interpretations occurring after this date.
Similarly, any change in the facts and assumptions stated above, upon which
this opinion is based, could modify our conclusions.
This opinion is furnished solely for the benefit of Esenjay, the
Esenjay Stockholders and the 3DX Stockholders, and is not to be used,
circulated, quoted or otherwise referred to for any purpose without our prior
written consent. Except as set forth above, we express no opinion to any
party as to the tax consequences, whether United States federal, state, local
or foreign, of the Merger. Further we express no opinion to any person as to
the state, local or foreign tax consequences of the Merger. We disclaim any
undertaking to advise you of any subsequent changes of the facts stated or
assumed herein or any subsequent changes in applicable law.
This opinion letter may be filed as an exhibit to the Form S-4
Registration Statement. Furthermore, we consent to the reference to Porter &
Hedges, L.L.P., under the captions "Legal Matters" and "Material Federal
Income Tax Consequences of the Merger." In giving this consent, we do not
hereby admit that we are within the category of persons whose consent is
required under section 7 of the Securities Act of 1933, as amended, or the
rules and regulations of the Securities and Exchange Commission promulgated
thereunder.
Very truly yours,
PORTER & HEDGES, L.L.P.
<PAGE>
Esenjay Exploration, Inc.
, 1999
- -----------
Page 6
<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
August 9, 1999
<PAGE>
EXHIBIT 23(c)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 2 to
Registration Statement No. 333-80243 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 year ended December 31,
1998 and to the reference to us under the heading "Experts" in the Joint Proxy
and Prospectus, which is part of this Registration Statement.
DELOITTE & TOUCHE LLP
Houston, Texas
August 10, 1999
<PAGE>
Exhibit 23(f)
[Letterhead]
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
February 16, 1999 in such statement.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ Danny D. Simmons
--------------------
Danny D. Simmons
Senior Vice President
Houston, Texas
August 9, 1999
