<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NO. 0-21841
3DX TECHNOLOGIES INC.
(Exact name registrant as specified in Charter
DELAWARE 76-0386601
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
12012 WICKCHESTER, SUITE 250
HOUSTON, TEXAS 77079
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 579-3398
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING
----- -----------
Common Stock, par value $0.01 per share 8,913,909 shares as of August 14, 1998
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<PAGE>
3DX TECHNOLOGIES INC.
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Balance Sheet
June 30, 1998 (unaudited) and December 31, 1997.................. 3
Statement of Operations for the
Three Months Ended June 30, 1998 and 1997 (unaudited)............ 4
Statement of Operations for the
Six Months Ended June 30, 1998 and 1997 (unaudited).............. 5
Statement of Changes in Common Stockholders' Equity
for the Year Ended December 31, 1997 and for the Six Months
Ended June 30, 1998 (unaudited)...................................6
Statement of Cash Flows for the
Six Months Ended June 30, 1998 and 1997 (unaudited).............. 7
Notes to Financial Statements (unaudited)........................ 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................15
Item 2. Changes in Securities and Use of Proceeds........................15
Item 3. Defaults Upon Senior Securities..................................15
Item 4. Submission of Matters to a Vote of Security Holders..............15
Item 5. Other Information................................................16
Item 6. Exhibits and Reports on Form 8-K.................................16
SIGNATURES................................................................18
Index to Exhibits........................................................ 19
<PAGE>
<TABLE>
<CAPTION>
3DX TECHNOLOGIES INC.
BALANCE SHEET
ASSETS
JUNE 30, DECEMBER 31,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................. $ 1,564,655 $ 1,568,091
Accounts receivable.................................................... 936,324 1,181,083
Prepaid expenses....................................................... 89,874 110,681
-------------- -------------
Total current assets................................................. 2,590,853 2,859,855
-------------- -------------
Property and equipment:
Oil and gas properties, full-cost method:
Evaluated............................................................ 30,886,779 22,521,673
Unevaluated.......................................................... 6,717,349 10,098,698
Technical interpretation equipment..................................... 2,737,358 2,605,439
Other property and equipment........................................... 273,780 273,780
------------- -------------
40,615,266 35,499,590
Less accumulated depletion, depreciation and amortization.............. (24,470,413) (17,127,846)
-------------- -------------
16,144,853 18,371,744
Other assets.............................................................. 68,545 78,041
------------- --------------
$18,804,251 $ 21,309,640
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 2,855,723 $ 1,713,209
Accrued liabilities.................................................... 564,554 1,778,543
Borrowings on credit agreement......................................... 2,000,000 -
----------- -------------
Total current liabilities............................................ 5,420,277 3,491,752
----------- -------------
Stockholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized,
8,913,909 and 7,225,462 shares issued and outstanding,
respectively......................................................... 89,139 72,255
Paid-in capital........................................................ 39,739,094 38,085,357
Deferred compensation.................................................. (225,913) (512,132)
Accumulated deficit.................................................... (26,218,346) (19,827,592)
------------ ------------
Total stockholders' equity........................................... 13,383,974 17,817,888
----------- ------------
$18,804,251 $ 21,309,640
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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<TABLE>
<CAPTION>
3DX TECHNOLOGIES INC.
STATEMENT OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED JUNE 30,
1998 1997
---- ----
<S> <C> <C>
Revenues:
Oil and gas................................................... $ 1,211,038 $ 649,706
Interest and other............................................ 7,495 241,140
------------ ----------
Total revenues.............................................. 1,218,533 890,846
------------ ----------
Costs and expenses:
Lease operating............................................... 76,772 62,525
Production taxes.............................................. 86,500 40,995
Impairment of oil and gas properties.......................... 4,329,687 -
Depletion, depreciation, and amortization of oil and gas
properties............................................... 1,085,014 526,592
Interest expense............................................ 6,199 -
General and administrative.................................... 488,362 721,208
----------- -----------
Total costs and expenses.................................... 6,072,534 1,351,320
----------- -----------
Net loss applicable to common stockholders....................... $(4,854,001) $ (460,474)
=========== ===========
Basic and diluted net loss per common share...................... $(0.63) $(0.06)
=========== ===========
Weighted average number of common shares outstanding............. 7,704,795 7,216,265
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
3DX TECHNOLOGIES INC.
STATEMENT OF OPERATIONS
(Unaudited)
SIX MONTHS ENDED JUNE 30,
1998 1997
---- ----
<S> <C> <C>
Revenues:
Oil and gas.................................................. $2,072,415 $ 1,321,976
Interest and other........................................... 17,957 408,143
----------- ----------
Total revenues............................................. 2,090,372 1,730,119
----------- ----------
Costs and expenses:
Lease operating.............................................. 183,621 103,640
Production taxes............................................. 151,175 91,014
Impairment of oil and gas properties......................... 5,208,033 -
Depletion, depreciation, and amortization of oil and gas
properties............................................... 1,744,503 802,697
Interest expense........................................... 14,357 -
General and administrative................................... 1,179,437 1,233,700
--------- ---------
Total costs and expenses................................... 8,481,126 2,231,051
--------- ---------
Net loss applicable to common stockholders...................... $(6,390,754) $ (500,932)
=========== ==========
Basic and diluted net loss per common share..................... $(0.85) $(0.07)
=========== ==========
Weighted average number of common shares outstanding............ 7,489,646 7,164,414
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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<TABLE>
<CAPTION>
3DX TECHNOLOGIES INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited from January 1, 1998 through June 30, 1998)
COMMON STOCK
------------------------ PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
------ ------ ------- ------------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
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................ 176,403 1,764 83,359 - - 85,123
Deferred compensation
related to restricted
stock award............ 50,000 500 97,938 (98,438) - -
Compensation expense
related to restricted
stock award............ - - - 16,407 - 16,407
Compensation expense
related to certain
stock options.......... - - - 115,905 - 115,905
Reversal of compensation
expense for former
employees related to
certain stock options.. - - (628,488) 252,345 - (376,143)
Shares issued for cash
(net of offering costs) 1,462,044 14,620 2,100,928 - 2,115,548
Net Loss.................. - - - (6,390,754) (6,390,754)
------------- ---------- ----------- ------------ -------------- -----------
Balance at June 30, 1998.. 8,913,909 $89,139 $39,739,094 $(225,913) $(26,218,346) $13,383,974
============= ========== =========== ============ ============= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
3DX TECHNOLOGIES INC.
STATEMENT OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................ $(6,390,754) $ (500,932)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depletion, depreciation and amortization................... 2,134,534 1,137,410
Compensation expense related to certain stock options and
restricted stock...................................... (243,831) 275,465
Impairment of oil and gas properties....................... 5,208,033 -
(Increase) decrease in accounts receivable................. 244,759 (190,619)
(Increase) decrease in prepaid expenses.................... 20,807 64,461
Increase (decrease) in accounts payable.................... 118,388 (163,599)
Increase (decrease) in accrued liabilities................. 31,010 (44,064)
----------- -----------
Net cash provided by operating activities....................... 1,122,946 578,121
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties............................. (5,204,630) (9,074,357)
Purchases of technical and other equipment...................... (131,919) (921,918)
Other assets.................................................... 9,496
----------- -----------
-
Net cash provided by (used in) investing activities............. (5,327,053) (9,996,275)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing on credit agreement................................... 2,000,000 -
Common stock proceeds, net of issuance costs.................... 2,115,548 3,799,201
Proceeds from exercise of stock options......................... 85,123 522
------------ -----------
Net cash provided by financing activities....................... 4,200,671 3,799,723
------------ -----------
Net change in cash and cash equivalents............................ (3,436) (5,618,431)
Cash and cash equivalents at beginning of the period............... 1,568,091 17,521,745
----------- -----------
Cash and cash equivalents at end of the period..................... $ 1,564,655 $11,903,314
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The interim financial statements included herein have been prepared by
the Company 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 Technologies Inc.
(the "Company") at June 30, 1998 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, 1998. Reference is made
to the Company's December 31, 1997 audited financial statements, including the
notes thereto. Certain reclassifications have been made to amounts reported in
previous periods to conform to the current presentation.
Statement of Financial Accounting Standards No 130, Reporting
Comprehensive Income ("SFAS 130"), was issued in June 1997, with the adoption
required for fiscal years beginning after December 31, 1997. SFAS 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 quarters ended June 30,
1998 and 1997 there is not a difference between "traditional" net income and
comprehensive net income.
Statement of Financial Accounting Standards No 131, Disclosures About
Segments of an Enterprise and Related Information ("SFAS 131"), 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. The Company has evaluated the applicability of SFAS
131 and has concluded that the Company does not meet the criteria which requires
segment reporting.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement 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. The Statement
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.
Statement No. 133 is effective for fiscal years beginning after
June 15, 1999. A company may also implement the Statement as of the beginning of
any fiscal quarter after issuance. Statement No. 133 cannot be applied
retroactively. Statement 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 the
company's election, before January 1, 1998. Based on the Company's current
operations, Statement No. 133 will not impact the Company's disclosure or
reporting.
8
<PAGE>
2. CREDIT AGREEMENT
On December 18, 1997, the Company executed a credit agreement with a
commercial bank. During April 1998, the bank redetermined the borrowing base and
established a current availability of $2 million under the credit agreement.
There were no borrowings during the first quarter of 1998 and $2 million was
borrowed during the second quarter of 1998. As of June 30, 1998, the Company was
not in compliance with certain covenants of the credit agreement pertaining to
minimum working capital and aging of accounts payable. The bank has agreed to
waive these instances of non-compliance through September 30, 1998. In the
absence of an improvement in the Company's working capital and accounts payable
aging, future waivers from the bank will be necessary. The Company has recorded
the borrowings on the credit agreement as a current liability as of June 30,
1998, since there is no assurance that future waivers of events of
non-compliance will be obtained.
3. COMMON STOCK ISSUANCE
On June 10, 1998 the Company 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 the
Company'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 the Company at a special meeting of stockholders
held on August 7, 1998, also grants to the purchasers an option to purchase,
subject to stockholder approval, up to an aggregate of 1,871,290 additional
shares of common stock at a purchase price of $1.50 per share. On August 10,
1998 the option expired unexercised.
The agreement also grants the purchasers the right (1) to receive
certain additional shares of common stock in the event of certain dilutive
issuances at less than $1.50 per share which may be made by the Company
(dilution shares) and (2) to receive additional shares in the event the Company
fails to meet certain timing requirements with respect to the filing and
effectiveness of a resale registration statement (penalty shares).
Under the terms of the agreement the Company has submitted to its
stockholders and they have approved a proposal for the adoption of a
one-for-five reverse stock split with respect to all of the outstanding common
stock of the Company. Such reverse stock split will not be effective until it is
implemented by the Board of Directors of the Company.
The Company has agreed to file a registration statement relating to the
resale of the shares and the option shares, the dilution shares, and the penalty
shares in accordance with the terms of the purchase agreement and to pay the
registration expenses.
4. GENERAL AND ADMINISTRATIVE EXPENSES
During the second quarter of 1998, the Company experienced a downsizing
of its work force. All severence pay, approximately $86,000, associated with
this downsizing has been 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.
9
<PAGE>
5. GOING CONCERN
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As reflected on the accompanying
balance sheet, the Company had a deficit in working capital of approximately
$2.8 million as of June 30, 1998 and had borrowed $2 million, the maximum amount
under its credit facility. To achieve its near-term goals, the Company has been
and will be required to make oil and gas capital expenditures substantially in
excess of its net cash flow from operations in order to acquire, explore and
develop oil and gas properties. Cash outlays for capital expenditures for oil
and gas exploration and development activities during the quarters ended June
30, 1998 and 1997 were $3.1 million and $4.3 million, respectively. Related cash
outlays were $5.2 and $9.1 million for the six month periods ended June 30, 1998
and 1997, respectively. The level of capital spending in 1998 will be dependent
upon the Company's ability to obtain additional sources of funding.
The Company expects that its projected net cash flows from currently
producing properties will be sufficient to fund its cash general and
administrative costs for the remainder of 1998, including technical employee and
related costs which are capitalized under full-cost accounting. The Company's
projections of cash flows from currently producing properties could be adversely
affected by declines in oil and gas prices below current levels and
unanticipated declines in oil and gas production from existing properties.
The Company's business requires substantial oil and gas capital
expenditures. The Company will require additional sources of financing to fund
drilling expenditures on properties currently owned by the Company and, to a
lesser extent, to fund leasehold costs and geological and geophysical costs on
its active exploration projects. The Company 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. The Company 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 the Company 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.
The Company intends to seek additional financing to satisfy its capital
requirements. The Company is currently evaluating other alternatives to obtain
additional equity financing, which include future sales of common or preferred
stock. In the absence of additional financing, the Company anticipates that it
will be required to modify the implementation and timing of its oil and gas
exploration and development capital spending for 1998 and 1999, which
modification could have a material adverse effect on the Company. No assurance
can be given that the Company will be able to obtain additional financing on
terms which would be acceptable to the Company, if at all. The Company's
inability to obtain additional financing would have a material adverse effect on
the Company.
Management of the Company continues to be actively engaged in
soliciting new equity investors to provide funding for its capital program. On
June 10, 1998 the Company successfully completed a sale of 1,462,044 shares of
common stock for net proceeds of $2.1 million. Management of the Company
understands that the Company's business requires substantial oil and gas capital
expenditures and that additional financing will be required to completely fund
its capital program. The lack of firm commitments for additional equity
financing at this time, combined with the deficit in working capital, raises
uncertainty about the ability of the Company to continue as a going concern. In
the absence of additional funding, the Company may be required to reduce its
planned level of capital expenditures or pursue other financial alternatives,
which could include a sale or merger of the Company. The financial statements do
not include any adjustments which might result from the outcome of this
uncertainty.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is an 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. The
Company enters into arrangements that enable it to combine its expertise and
exploration capabilities with knowledge based geologic generators and the
operating skills of other oil and gas companies. The Company participates in
selected exploration projects as a non-operating working interest owner, sharing
both risks and rewards with its partners. The Company 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, the Company seeks to improve the expected return on investment in its
oil and gas projects.
As a working interest partner, the Company shares all project costs in
proportion to its working interest percentage. In instances in which exploration
and development activities are unsuccessful, the Company incurs an economic loss
equal to its proportionate share of project costs prior to the time the project
is abandoned. Similarly, the Company incurs an economic loss if the Company's
proportionate share of revenue generated from production is insufficient to
cover the Company's share of project costs.
The Company's future financial results will depend primarily on: (i)
the Company's ability to continue to source and screen potential projects; (ii)
the Company's ability to discover commercial quantities of hydrocarbons; (iii)
the market price for oil and gas; and (iv) the Company's ability to implement
its exploration and development program, which is dependent on the availability
of capital resources. There can be no assurance that the Company 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 the Company will be able to obtain additional funding to increase its
currently limited capital resources.
RESULTS OF OPERATIONS
The following table sets forth certain operating information of the
Company during the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-----------------------------------
1998 1997
---- ----
<S> <C> <C>
PRODUCTION:
Gas (MMcf)............................................ 467.9 296.3
Oil and condensate (MBbls)............................ 10.8 2.7
Total equivalent (MMcfe).............................. 532.7 312.5
AVERAGE SALES PRICE:
Gas (per Mcf)......................................... $2.31 $2.01
Oil and condensate (per Bbl).......................... $11.86 $19.56
AVERAGE EXPENSES (PER MCFE):
Lease operating (1)................................... $0.31 $0.33
Depletion of oil and gas properties................... $2.06 $1.69
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------
1998 1997
---- ----
<S> <C> <C>
PRODUCTION:
Gas (MMcf)............................................ 836.7 521.6
Oil and condensate (MBbls)............................ 17.4 4.7
Total equivalent (Mmcfe).............................. 941.1 549.8
AVERAGE SALES PRICE:
Gas (per Mcf)......................................... $2.22 $2.34
Oil and condensate (per Bbl).......................... $12.59 $21.45
AVERAGE EXPENSES (PER MCFE):
Lease operating (1)................................... $0.36 $0.35
Depletion of oil and gas properties................... $1.87 $1.46
- ---------------------
(1) Includes all direct expenses of operating the Company's properties, as
well as production and ad valorem taxes.
</TABLE>
OIL AND GAS REVENUES. Oil and gas revenues increased to $1,211,038 for the three
months ended June 30, 1998 (the "1998 quarter") from $649,706 for the three
months ended June 30,1997 (the "1997 quarter"). This increase was primarily
attributable to higher oil and gas production levels. Production increased by
over 70% to 532.7 MMcfe for the 1998 quarter, from 312.5 MMcfe for the 1997
quarter. The increased production resulted principally from successful wells
drilled during the latter part of 1997 and the first six months of 1998. The
average sales price for natural gas, which accounted for 88% of equivalent
production during the 1998 quarter, increased by 15% to $2.31 per Mcf from $2.01
per Mcf for the 1997 quarter. The average sales price for oil decreased to
$11.86 per barrel during the 1998 quarter versus $19.56 per barrel for the 1997
quarter.
Oil and gas revenues increased to $2,072,415 for the six months ended
June 30, 1998 (the "1998 period") from $1,321,976 for the six months ended June
30,1997 (the "1997 period"). This increase was primarily attributable to higher
oil and gas production levels. Production increased by over 71% to 941.1 MMcfe
for the 1998 period, from 549.8 MMcfe for the 1997 period. The increased
production resulted principally from successful wells drilled during the latter
part of 1997 and during the 1998 period. The increase in production was offset
slightly by the decrease in average sales price. The average sales price for
natural gas, which accounted for 89% of equivalent production during the 1998
period, decreased by 5% to $2.22 per Mcf from $2.34 per Mcf for the 1997 period.
The average sales price for oil decreased to $12.59 per barrel during the 1998
period versus $21.45 per barrel for the 1997 period.
LEASE OPERATING EXPENSE. Total lease operating expenses, including production
taxes, increased to $163,272 for the 1998 quarter from $103,520 for the 1997
quarter. This increase was primarily attributable to the additional costs of
operating new producing wells and is comparable to the increase in production
during the corresponding periods. Lease operating expenses per Mcfe of
production decreased slightly to $0.31 per Mcfe for the 1998 quarter from $0.33
per Mcfe for the 1997 quarter.
Total lease operating expenses, including production taxes, increased
to $334,796 for the six month 1998 period from $194,654 for the six month 1997
period. This increase was primarily attributable to the additional costs of
operating new producing wells drilled during the latter part of 1997 and into
12
<PAGE>
the 1998 period 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 1998 period from $0.35 per Mcfe for the 1997
period.
DEPLETION, DEPRECIATION AND AMORTIZATION OF OIL AND GAS PROPERTIES. Depletion of
oil and gas properties for the 1998 quarter increased to $1,085,014 from
$526,592 for the 1997 quarter. The increase in depletion of oil and gas
properties resulted from both the increase in oil and gas production during the
1998 period, as discussed above, and an increase in the depletion rate for this
period. Depletion of oil and gas properties per Mcfe for the 1998 quarter
increased to $2.06 per Mcfe, or 22%, from the rate of $1.69 per Mcfe in the
corresponding period in 1997. 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.
Depletion of oil and gas properties for the six month 1998 period
increased to $1,744,503 from $802,697 for the six month 1997 period. The
increase in depletion of oil and gas properties resulted from both the increase
in oil and gas production during the 1998 period, as discussed above, and an
increase in the depletion rate for this period. Depletion of oil and gas
properties per Mcfe for the 1998 period increased to $1.87 per Mcfe, or 28%,
from the rate of $1.46 per Mcfe in the corresponding period in 1997. 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.
IMPAIRMENT OF OIL AND GAS PROPERTIES. Under the rules of the full-cost
accounting method as prescribed by the Securities and Exchange Commission, the
Company is required to compare the net costs of its evaluated properties to the
net present value of its proved reserves, using prices and costs in effect at
the end of each quarterly period. 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.
During 1998, oil and gas impairments of $4.3 million and $5.2 million were
recorded for the quarter and six month periods, respectively, principally as a
result of declines in prices for oil and gas and increased additions to
evaluated property costs. No charge for impairment was recorded during the
corresponding 1997 periods.
INTEREST EXPENSE. Interest expense increased to $6,199 for the 1998 quarter and
$14,357 for the six month 1998 period. No such expenses were incurred for the
corresponding 1997 periods. These expenses represent commitment fees and
amortization of set up costs associated with the credit agreement the Company
executed with a commercial bank in December 1997. The Company borrowed $2
million under the credit agreement during the quarter ended June 30, 1998.
During the second quarter of 1998 the Company capitalized interest in the amount
of $27,000 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 $488,362
for the 1998 quarter from $721,208 for the 1997 quarter. This decrease was
primarily attributable to a downsizing in personnel that occurred during the
second quarter of 1998. The downsizing had the following effects on total
general and administrative expenses; (1) an increase in compensation expense due
to $86,000 in severance pay recorded (2) a decrease in the amount of capitalized
overhead, as the majority of the terminated personnel were from technical
departments, and (3) a decrease in stock option expense to adjust the
amortization of deferred compensation recorded for these employees relating to
stock options issued within one year of the initial public offering. In
addition, there was an increase in overhead recovery received during the second
quarter of 1998 under the informal income-sharing arrangement between the
Company and a seismic processing company under which the Company receives a
percentage of the seismic processing company's gross billings in exchange for
office space and the use of technical equipment provided by the Company.
13
<PAGE>
General and administrative expense, net of costs capitalized to
exploration and development projects, decreased to $1,179,437 for the 1998
period from $1,233,700 for the 1997 period. This decrease was primarily
attributable to a downsizing in personnel that occurred during the second
quarter of 1998. The downsizing had the following effects on total general and
administrative expenses; (1) an increase in compensation expense due to
severance pay recorded (2) a decrease in the amount of capitalized overhead, as
the majority of the terminated personnel were from technical departments, and
(3) a decrease in stock option expense to adjust the amortization of deferred
compensation recorded for these employees relating to stock options issued
within one year of the initial public offering.
INTEREST AND OTHER INCOME. Interest and other income decreased to $7,495 for the
1998 quarter from $241,140 for the 1997 quarter. The six month 1998 period
decreased to $17,957, from $408,143 for the six month 1997 period. The Company
had a substantially higher balance of short term investments during 1997 from
the proceeds of the initial public offering.
NET LOSS. As a result of the foregoing, the Company's net loss increased to
$4,854,001 for the 1998 quarter from $460,474 for the 1997 quarter. The most
significant factors which caused the increase in net loss was the increase in
impairment of oil and gas properties and depletion, depreciation and
amortization with a slight offset due to the decrease in general and
administrative expense as detailed above.
The Company's net loss increased to $6,390,754 for the six month 1998
period from $500,932 for the six month 1997 period. The significant factors
affecting the six month period comparison were the increase in impairment of oil
and gas properties and depletion, depreciation and amortization as detailed
above.
LIQUIDITY AND CAPITAL RESOURCES
See further discussion of these issues under Note 5 to the financial
statements, "Going Concern."
To date, net cash provided by operating activities has been limited and
the Company has funded its oil and gas exploration activities principally
through cash provided by the sale of equity securities. On December 26, 1996,
the Company consummated an initial public offering of common stock which
provided approximately $23.6 million in proceeds, net of offering expenses. In
January 1997, the Company's underwriters exercised their over-allotment option
to purchase 375,000 additional shares of common stock, resulting in additional
net proceeds to the Company of approximately $3.8 million. Approximately $7.5
million of the proceeds of the initial public offering was used to redeem all
the issued and outstanding shares of the Series B preferred stock and to pay
accrued dividends on the issued and outstanding Series C preferred stock. The
balance of the net proceeds was designated to fund the Company's exploration and
development capital expenditures and for general corporate purposes, including
expenses associated with hiring additional personnel.
The Company's business requires substantial oil and gas capital
expenditures. To achieve its near-term goals, the Company has been and will be
required to make oil and gas capital expenditures substantially in excess of its
net cash flow from operations in order to acquire, explore and develop oil and
gas properties. Cash outlays for capital expenditures for oil and gas
exploration and development activities during the quarters ended June 30, 1998
and 1997 were $3.1 million and $4.3 million, respectively. Related cash outlays
were $5.2 and $9.1 million for the six month periods ended June 30, 1998 and
1997, respectively. The level of capital spending in 1998 will be dependent upon
the Company's ability to obtain additional sources of funding.
14
<PAGE>
As of June 30, 1998, the Company had a deficit in working capital of
approximately $2.8 million. On December 18, 1997, the Company 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 the Company
borrowed $2.0 million under the credit agreement. Such amount is the maximum
amount currently available for borrowing under the credit facility. The
borrowing capacity is a function of the value of the Company's proved oil and
gas reserves, and is redetermined on a semi-annual basis. The bank is currently
conducting a scheduled redetermination. Although the Company increased its
proved reserves as a result of successful drilling operations during the quarter
ended June 30, 1998, the bank has not concluded whether it will increase the
borrowing capacity at this time. The credit agreement is secured by
substantially all of the Company'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 of June 30, 1998, the Company was not in compliance with
certain covenants of the credit agreement pertaining to minimum working capital
and aging of accounts payable. The bank has agreed to waive these instances of
non-compliance through September 30, 1998. In the absence of an improvement in
the Company's working capital and accounts payable aging, future waivers from
the bank will be necessary.
As a result of the Company's periodic review of each of its oil and gas
exploration and development properties and its available capital, the Company
has occasionally sold partial interests in specific oil and gas projects to
other investors to reduce its total investment commitment to such projects. No
gain or loss has been recognized on these transactions. The Company is currently
reviewing its portfolio to identify properties to be marketed to industry
partners for cash consideration, reversionary working interests or some
combination thereof. Such interests may consist of both producing wells and
future drilling locations. There can be no assurance, however, that the Company
will be able to sell any such interests, or that the terms of such potential
sales would be acceptable to the Company.
The Company expects that its projected net cash flows from currently
producing properties will be sufficient to fund its cash general and
administrative costs for the remainder of 1998, including technical employee and
related costs which are capitalized under full-cost accounting. The Company's
projections of cash flows from currently producing properties could be adversely
affected by declines in oil and gas prices below current levels or anticipated
seasonal lows and unanticipated declines in oil and gas production from existing
properties.
The Company intends to seek additional financing to satisfy its capital
requirements. The Company is currently evaluating other alternatives to obtain
additional equity financing, which include future sales of common or preferred
stock. In the absence of additional financing, the Company anticipates that it
will be required to modify the implementation and timing of its oil and gas
exploration and development capital spending for 1998 and 1999, which
modification could have a material adverse effect on the Company. No assurance
can be given that the Company will be able to obtain additional financing on
terms which would be acceptable to the Company, if at all. The Company's
inability to obtain additional financing would have a material adverse effect on
the Company.
EFFECTS OF INFLATION AND CHANGES IN PRICE
The Company'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
the Company is required to bear for operations, as well as an increase
(decrease) in revenues. Historically, general price inflation has had a minimal
effect on the Company.
15
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item is not applicable to the Registrant.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Actual results, events and circumstances could
differ materially from those set forth in such statements due to various
factors. Such factors include the possibility that the drilling of wells in
projects in which the Company has a working interest may be delayed or
abandoned, actual rates of production may not reach anticipated levels and
opportunities for the Company to acquire future working interests in additional
projects on terms considered reasonable to the Company may be limited or
unavailable, changing economic, regulatory and competitive conditions, other
technological developments and other risks and uncertainties, including those
set forth herein. The Company's future financial results will depend primarily
on: (i) the Company's ability to continue to source and screen potential
projects; (ii) the Company's ability to discover commercial quantities of
hydrocarbons; (iii) the market price for oil and gas; and (iv) the Company's
ability to implement its exploration and development program, which is dependent
on the availability of capital resources. There can be no assurance that the
Company will be successful in any of these respects or that the prices of oil
and gas prevailing at the time of production will be at a level allowing for
profitable production, or that the Company will be able to obtain additional
funding to increase its currently limited capital resources.
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not Applicable.
(b) Not Applicable.
(c) On June 10, 1998, the Company sold an aggregate of 1,462,044 shares
of Common Stock to one sophisticated investor and 13 accredited investors in
reliance upon Section 4(2) of the Securities Act of 1933, as amended, resulting
in net proceeds to the Company in the approximate amount of $2.2 million.
(d) Not Applicable.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On June 5, 1998, the 1998 Annual Meeting of Stockholders of the
Company (the "Meeting") was held at the Company's principal executive offices in
Houston, Texas.
(b) Not Applicable.
16
<PAGE>
(c)(1) At the Meeting, the election of five nominees for director of
the Company, constituting all of the members of the Company's Board of
Directors, was held. Each nominee was proposed by the Board of Directors and an
incumbent director. The shares so present, in person or by proxy at the Meeting,
were voted in the following manner for the election of each of such nominees,
each of whom are identified below:
<TABLE>
<CAPTION>
Number of Percentage of Number of
SHARES VOTED FOR VOTES CAST FOR SHARES WITHHELD
---------------- -------------- ---------------
<S> <C> <C> <C>
C. Eugene Ennis 4,719,817 99.1% 38,477
Jon W. Bayless 4,722,902 99.2 35,392
Charles E. Edwards 4,723,402 99.2 34,892
C.D. Gray 4,722,202 99.2 36,092
Douglas C. Williamson 4,612,281 96.9 146,013
</TABLE>
(2) At the Meeting, the proposal to ratify the selection of Arthur
Andersen LLP as the Company's independent accountant for the Company's 1998
fiscal year was approved with 4,756,996 votes cast for, 6,313 votes cast
against, 985 votes abstaining and zero broker non-votes.
(d) Not Applicable.
ITEM 5 OTHER INFORMATION
Submission of Stockholder Proposals and Discretionary Voting Authority
Proposals submitted by stockholders of the Company for inclusion in the
proxy statement relating to the Company's 1999 Annual Meeting of
Stockholders must be received by the Company on or before December 31,
1999. Additionally, notice of proposals which are intended to be
presented by stockholders at the Company's 1999 Annual Meeting of
Stockholders must be received by the Company on or before March 17,
1999. However, if the date of the Company's 1999 Annual Meeting of
Stockholders is either prior to May 6, 1999 or after July 3, 1999,
proposals submitted by stockholders for inclusion in the proxy
statement relating to the Company's 1999 Annual Meeting of Stockholders
must be received by the Company a reasonable time before the Company
begins to print and mail its proxy materials. Additionally, notice of
proposals stockholders intend to present at the meeting must be
received by the Company no later than the close of business on the
tenth day following the day on which notice of the date of the meeting
was mailed.
17
<PAGE>
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Computation of Earnings per Share
27. Financial Data Schedule for the six month period ended June
30, 1998
99.1 Common Stock Subscription Agreement dated as of June 3,
1998 by and among the Company and the purchasers named
therein (incorporated by reference to the Form 8-K filed by
the Company on June 16, 1998).
(b) Reports on Form 8-K
In connection with the execution and delivery by the Company of a
Common Stock Subscription Agreement dated as of June 3, 1998, and
the consummation on June 10, 1998 of certain transactions
contemplated thereby, including the issuance of 1,462,044 shares
of Common Stock in consideration of proceeds in the approximate
amount of $2.2 million, the Company filed a Form 8-K pursuant to
Item 5 thereof on June 16, 1998. No financial statements were
filed or required to be filed in connection with such Form 8-K. No
other reports on Form 8-K were filed during the three months ended
June 30, 1998.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
3DX TECHNOLOGIES INC.
(Registrant)
Date: AUGUST 14, 1998 By: /s/ Ronald P. Nowak
--------------- --------------------------------------
President and Chief Executive Officer
(Principal Executive Officer)
Date: AUGUST 14, 1998 By: /s/ Russell L. Allen
-------------- -------------------------------------
Vice President of Finance
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
19
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
11.1 Computation of Earnings per Share.
27 Financial Data Schedule for the six month period ended June
30, 1998
99.1 Common Stock Subscription Agreement dated as of June 3,
1998 by and among the Company and the purchasers named
therein (incorporated by reference to the Form 8-K filed by
the Company on June 16, 1998).
<PAGE>
EXHIBIT 11.1
CALCULATION OF NET LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
------------------------------------------
1998 1997
---- ----
<S> <C> <C>
Net loss attributable to common shareholders............ $(4,854,001) $(460,474)
============ ==========
Weighted average shares outstanding..................... 7,704,795 7,216,265
========= =========
Basic and diluted net loss per common share............. $(0.63) $(0.06)
======= =======
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------
1998 1997
---- ----
<S> <C> <C>
Net loss attributable to common shareholders............ $(6,390,754) $(500,932)
============ ==========
Weighted average shares outstanding..................... 7,489,646 7,164,414
========= =========
Basic and diluted net loss per common share............. $(0.85) $(0.07)
======= =======
</TABLE>
CALCULATION OF WEIGHTED AVERAGE SHARES OUTSTANDING
<TABLE>
<CAPTION>
THREE MONTH SIX MONTH
PERIOD PERIOD
ACTUAL WEIGHTED WEIGHTED
ISSUE DATE SHARES AVERAGE AVERAGE
---------- ------ ----------- --------
<S> <C> <C> <C> <C>
Common shares, December 31, 1996 6,841,177 6,841,177 6,841,177
Issuance of over-allotment shares 1/25/97 375,000 375,000 323,193
Exercise of stock option 6/27/97 2,000 88 44
---------- --------- ---------
Common shares, June 30, 1997 7,218,177 7,216,265 7,164,414
========== ========= =========
Common shares, December 31, 1997 7,225,462 7,225,462 7,225,462
Exercise of stock option 01/09/98 31,655 31,655 30,256
Exercise of stock option 01/13/98 3,876 3,876 3,619
Restricted stock award 03/06/98 50,000 50,000 32,320
Exercise of stock option 04/09/98 35,966 32,804 16,493
Exercise of stock option 05/13/98 1,938 1,044 525
Sale of shares for cash 06/10/98 1,462,044 337,395 169,629
Exercise of stock option 06/11/98 96,506 21,210 10,664
Exercise of stock option 06/12/98 6,462 1,349 678
--------- --------- ---------
Common shares, June 30, 1998 8,913,909 7,704,795 7,489,646
========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF 3DX TECHNOLOGIES INC. FOR THE PERIOD ENDED
JUNE 30, 1998. THIS SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,564,655
<SECURITIES> 0
<RECEIVABLES> 936,324
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,590,853
<PP&E> 40,615,266
<DEPRECIATION> 24,470,413
<TOTAL-ASSETS> 18,804,251
<CURRENT-LIABILITIES> 5,420,277
<BONDS> 0
0
0
<COMMON> 89,139
<OTHER-SE> 13,294,835
<TOTAL-LIABILITY-AND-EQUITY> 18,804,251
<SALES> 2,072,415
<TOTAL-REVENUES> 2,090,372
<CGS> 334,796
<TOTAL-COSTS> 8,481,126
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,390,754)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,390,754)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,390,754)
<EPS-PRIMARY> (0.85)
<EPS-DILUTED> (0.85)
</TABLE>
