<PAGE>
================================================================================
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 SEPTEMBER 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 9,153,909 shares as of
November 13, 1998
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<PAGE>
3DX TECHNOLOGIES INC.
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Balance Sheet
September 30, 1998 (unaudited) and December 31, 1997............. 3
Statement of Operations for the
Three Months Ended September 30, 1998 and 1997 (unaudited)....... 4
Statement of Operations for the
Nine Months Ended September 30, 1998 and 1997 (unaudited)........ 5
Statement of Changes in Common Stockholders' Equity
for the Year Ended December 31, 1997 and for the Nine Months
Ended September 30, 1998 (unaudited)..............................6
Statement of Cash Flows for the
Nine Months Ended September 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..............................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................17
Item 2. Changes in Securities and Use of Proceeds........................17
Item 3. Defaults Upon Senior Securities..................................17
Item 4. Submission of Matters to a Vote of Security Holders..............17
Item 5. Other Information................................................18
Item 6. Exhibits and Reports on Form 8-K.................................18
SIGNATURES .............................................................. 19
Index to Exhibits........................................................ 20
2
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3DX TECHNOLOGIES INC.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................. $ 313,157 $ 1,568,091
Accounts receivable.................................................... 1,376,479 1,181,083
Prepaid expenses....................................................... 53,190 110,681
----------- ------------
Total current assets................................................. 1,742,826 2,859,855
----------- ------------
Property and equipment:
Oil and gas properties, full-cost method:
Evaluated............................................................ 32,914,500 22,521,673
Unevaluated.......................................................... 5,707,603 10,098,698
Technical interpretation equipment..................................... 2,734,150 2,605,439
Other property and equipment........................................... 273,780 273,780
----------- ------------
41,630,033 35,499,590
Less accumulated depletion, depreciation and amortization.............. (27,820,274) (17,127,846)
----------- ------------
13,809,759 18,371,744
Other assets.............................................................. 62,354 78,041
----------- ------------
$15,614,939 $ 21,309,640
=========== ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $2,095,112 $ 1,713,209
Accrued liabilities.................................................... 493,777 1,778,543
Borrowings on credit agreement......................................... 1,800,000 -
----------- ------------
Total current liabilities............................................ 4,388,889 3,491,752
----------- -----------
Stockholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized, 9,153,909
and 7,225,462 shares issued and outstanding, respectively............
91,539 72,255
Paid-in capital........................................................ 40,028,542 38,085,357
Deferred compensation.................................................. (177,021) (512,132)
Accumulated deficit.................................................... (28,717,010) (19,827,592)
------------ -----------
Total stockholders' equity........................................... 11,226,050 17,817,888
----------- -----------
$ 15,614,939 $ 21,309,640
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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3DX TECHNOLOGIES INC.
STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1998 1997
---- ----
<S> <C> <C>
Revenues:
Oil and gas................................................... $ 1,312,869 $ 718,356
Interest and other............................................ 129,561 122,349
----------- ----------
Total revenues.............................................. 1,442,430 840,705
---------- ----------
Costs and expenses:
Lease operating............................................... 105,222 72,042
Production taxes.............................................. 94,719 30,242
Impairment of oil and gas properties......................... 2,157,003 -
Depletion, depreciation, and amortization of oil and gas
properties............................................... 1,023,728 598,946
Interest expense............................................ 7,213 -
General and administrative.................................... 549,920 729,700
----------- ----------
Total costs and expenses.................................... 3,937,805 1,430,930
---------- ---------
Net loss applicable to common stockholders....................... $(2,495,375) $ (590,225)
=========== ==========
Basic and diluted net loss per common share...................... $(0.28) $(0.08)
===== =====
Weighted average number of common shares outstanding............. 9,021,909 7,218,177
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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3DX TECHNOLOGIES INC.
STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
---- ----
<S> <C> <C>
Revenues:
Oil and gas.................................................. $ 3,385,284 $ 2,040,332
Interest and other........................................... 323,726 530,492
----------- -----------
Total revenues............................................. 3,709,010 2,570,824
---------- ----------
Costs and expenses:
Lease operating.............................................. 288,843 175,682
Production taxes............................................. 245,893 121,256
Impairment of oil and gas properties......................... 7,365,036 -
Depletion, depreciation, and amortization of oil and gas
properties............................................... 2,768,231 1,401,643
Interest expense........................................... 21,570 -
General and administrative................................... 1,908,855 1,963,400
----------- ----------
Total costs and expenses................................... 12,598,428 3,661,981
---------- ----------
Net loss applicable to common stockholders...................... $ (8,889,418) $(1,091,157)
============ ==========
Basic and diluted net loss per common share..................... $(1.11) $(0.15)
====== =====
Weighted average number of common shares outstanding............ 8,005,616 7,183,913
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
3DX TECHNOLOGIES INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited from January 1, 1998 through September 30, 1998)
<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,
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............ - - - 28,711 - 28,711
Compensation expense
related to certain
stock options.......... - - - 152,493 - 152,493
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 2,390,376 - 2,407,396
Net Loss.................. - - - - (8,889,418) (8,889,418)
----------- ----------- ------------ ---------- ------------- -----------
Balance at September 30,
1998................... 9,153,909 $91,539 $40,028,542 $(177,021) $(28,717,010) $11,226,050
========== ======= =========== ========== ============= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
3DX TECHNOLOGIES INC.
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................ $(8,889,418) $ (1,091,157)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depletion, depreciation and amortization................... 3,327,392 1,930,068
Compensation expense related to certain stock options and
restricted stock...................................... (194,939) 401,858
Impairment of oil and gas properties....................... 7,365,036 -
(Increase) decrease in accounts receivable................. (195,396) (121,539)
(Increase) decrease in prepaid expenses.................... 57,491 100,584
Increase (decrease) in accounts payable.................... 180,674 (400,045)
Increase (decrease) in accrued liabilities................. (39,767) 188,131
------------- -------------
Net cash provided by operating activities....................... 1,611,073 1,007,900
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties............................. (7,227,822) (15,557,389)
Sales of oil and gas properties................................. 482,320 -
Purchases of technical and other equipment...................... (128,711) (1,165,885)
Other assets.................................................... 15,687 -
------------- --------------
-
Net cash used in investing activities........................... (6,858,526) (16,723,274)
------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on credit agreement................................. 2,000,000 -
Payment on borrowings on credit agreement...................... (200,000) -
Common stock proceeds, net of issuance costs.................... 2,107,396 3,799,201
Proceeds from exercise of stock options......................... 85,123 522
------------ -------------
Net cash provided by financing activities....................... 3,992,519 3,799,723
------------ -------------
Net change in cash and cash equivalents............................ (1,254,934) (11,915,651)
Cash and cash equivalents at beginning of the period............... 1,568,091 17,521,745
------------ -------------
Cash and cash equivalents at end of the period..................... $ 313,157 $ 5,606,094
============ ==========
</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
3DX Technologies, Inc. ("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 the Company at September 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
September 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 ("Statement No. 133"). 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. Statement 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.
Statement No. 133 is effective for fiscal years beginning after June 15,
1999. A company may also implement Statement No. 133 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 an 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. During the third quarter of 1998, borrowings
and the availability were reduced by $200,000. As of September 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 December 31, 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
September 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 filed 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 has agreed 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 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.
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
$2.6 million as of September 30, 1998 including short-term borrowings of $1.8
million. 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 September 30,
1998 and 1997 were $2.0 million and $6.5 million, respectively. Related cash
outlays were $7.2 million and $15.6 million for the nine month periods ended
September 30, 1998 and 1997, respectively. The level of capital spending in the
remainder of 1998 and 1999 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 and through September 30, 1999,
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 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,
which includes two additional exploration wells and one development well in 1998
and up to seventeen exploration and development wells in 1999, as well as lease
acquisition and seismic expenditures. 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
10
<PAGE>
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. (See Note 6.) The financial statements do not include any adjustments
which might result from the outcome of this uncertainty.
6. PROPOSED MERGER
On November 2, 1998 the Company entered into a letter of intent to
merge into Fortune Natural Resources Corporation ("Fortune"), an oil and gas
company listed on the American Stock Exchange. The terms of the merger provide
for the issuance to 3DX stockholders of up to a maximum of 6,965,431 shares of
Fortune common stock - an exchange ratio of .75 share of Fortune common stock
for one share of 3DX common stock. The Company's shareholders could also receive
additional Fortune stock two years after closing, up to a total of approximately
3.9 million shares, if additional reserves attributable to the exploration
properties acquired from the Company contribute disproportionately to the total
of all reserves added by Fortune from all exploration properties.
The letter of intent has been approved by the board of directors of
both entities. The transaction is conditioned upon, among other things, the
preparation and approval of a definitive merger agreement and the consent of the
shareholders of both companies.
7. LISTING ON NASDAQ
In September 1998, the Company received a letter from The Nasdaq Stock
Market, Inc. notifying the Company that it failed to maintain a closing bid
price of greater than or equal to $1.00 and that the Company's common stock
failed to maintain a market value of public float greater than or equal to $5
million, as required by Nasdaq rules. If the Company is unable to demonstrate
compliance with the $1.00 minimum bid price requirement on or before December
14, 1998, the Company's common stock will be delisted at the opening of business
on December 16, 1998. In such an event, trading on the common stock would be
conducted in the over-the-counter market on an electronic bulletin board
established for securities that do not meet the listing requirements for Nasdaq,
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 that $5.00 per share, it may be classified as a "penny stock". Commission
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 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)(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. If the common
stock were subject to the rules on penny stocks, the market liquidity for the
common stock could be severely adversely affected.
11
<PAGE>
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 SEPTEMBER 30,
--------------------------------
1998 1997
---- ----
<S> <C> <C>
PRODUCTION:
Gas (MMcf)............................................ 568.1 291.7
Oil and condensate (MBbls)............................ 11.5 4.2
Total equivalent (MMcfe).............................. 637.1 316.9
AVERAGE SALES PRICE:
Gas (per Mcf)......................................... $2.07 $2.20
Oil and condensate (per Bbl).......................... $11.77 $18.13
AVERAGE EXPENSES (PER MCFE):
Lease operating (1)................................... $0.31 $0.32
Depletion of oil and gas properties................... $1.61 $1.89
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
PRODUCTION:
Gas (MMcf)............................................ 1,404.8 821.0
Oil and condensate (MBbls)............................ 28.9 9.1
Total equivalent (MMcfe).............................. 1,578.2 875.6
AVERAGE SALES PRICE:
Gas (per Mcf)......................................... $2.16 $2.27
Oil and condensate (per Bbl).......................... $12.26 $19.42
AVERAGE EXPENSES (PER MCFE):
Lease operating (1)................................... $0.34 $0.34
Depletion of oil and gas properties................... $1.75 $1.60
</TABLE>
(1) Includes all direct expenses of operating the Company's properties, as well
as production and ad valorem taxes.
OIL AND GAS REVENUES. Oil and gas revenues increased to $1,312,869 for the three
months ended September 30, 1998 (the "1998 quarter") from $718,356 for the three
months ended September 30,1997 (the "1997 quarter"). This increase was primarily
attributable to higher oil and gas production levels. Production increased by
over 101% to 637.1 MMcfe for the 1998 quarter, from 316.9 MMcfe for the 1997
quarter. The increased production resulted principally from successful wells
drilled during the latter part of 1997 and the first nine months of 1998. The
average sales price for natural gas, which accounted for 89% of equivalent
production during the 1998 quarter, decreased by 6% to $2.07 per Mcf from $2.20
per Mcf for the 1997 quarter. The average sales price for oil decreased to
$11.77 per barrel during the 1998 quarter versus $18.13 per barrel for the 1997
quarter.
Oil and gas revenues increased to $3,385,284 for the nine months ended
September 30, 1998 (the "1998 period") from $2,040,332 for the nine months ended
September 30,1997 (the "1997 period"). This increase was primarily attributable
to higher oil and gas production levels. Production increased by over 80% to
1,578.2 MMcfe for the 1998 period, from 875.6 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 $2.16 per Mcf from $2.27 per Mcf for the
1997 period. The average sales price for oil decreased to $12.26 per barrel
during the 1998 period versus $19.42 per barrel for the 1997 period.
LEASE OPERATING EXPENSE. Total lease operating expenses, including production
taxes, increased to $199,941 for the 1998 quarter from $102,284 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 $0.32
per Mcfe for the 1997 quarter.
Total lease operating expenses, including production taxes, increased
to $534,736 for the nine month 1998 period from $296,938 for the nine 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
the 1998 period and is comparable to the increase in production during the
corresponding periods. Lease operating expenses per Mcfe of production remained
flat at $0.34 per Mcfe for the 1998 period as compared to the 1997 period.
13
<PAGE>
DEPLETION, DEPRECIATION AND AMORTIZATION OF OIL AND GAS PROPERTIES. Depletion of
oil and gas properties for the 1998 quarter increased to $1,023,728 from
$598,946 for the 1997 quarter. The increase in depletion of oil and gas
properties resulted primarily from the increase in oil and gas production during
the 1998 period, as discussed above, with a slight offset in the depletion rate
for this period. Depletion of oil and gas properties per Mcfe for the 1998
quarter decreased to $1.61 per Mcfe, or 15%, from the rate of $1.89 per Mcfe in
the corresponding period in 1997. The decrease in the rate resulted from greater
additions to evaluated oil and gas reserves than the net additions to oil and
gas property costs relative to the existing depletion rate per Mcfe.
Depletion of oil and gas properties for the nine month 1998 period
increased to $2,768,231 from $1,401,643 for the nine month 1997 period. The
increase in depletion of oil and gas properties resulted from the increase in
oil and gas production during the 1998 period, as discussed above. Depletion of
oil and gas properties per Mcfe for the 1998 period increased to $1.75 per Mcfe,
or 9%, from the rate of $1.60 per Mcfe in the corresponding period in 1997. The
increase in the rate resulted from greater net 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 SEC, 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 $2.2 million and $7.4 million were recorded over the three month
and nine month periods ending September 30, 1998. The impairments recorded were
principally the result of increased additions to evaluated property costs. No
charge for impairment was recorded during the corresponding 1997 periods.
INTEREST EXPENSE. Interest expense increased to $7,213 for the 1998 quarter and
$21,570 for the nine 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 had outstanding
borrowings of $1.8 million under the credit agreement at September 30, 1998. The
Company capitalized interest in the amount of $46,000 and $73,000 during the
quarter and year to date periods ended September 30, 1998, respectively,
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 $549,920
for the 1998 quarter from $729,700 for the 1997 quarter. This decrease was
attributable to a downsizing in personnel that occurred during the second
quarter of 1998. The downsizing also resulted in a significantly lower level of
capitalized overhead during the 1998 quarter.
General and administrative expense, net of costs capitalized to
exploration and development projects, decreased to $1,908,855 for the 1998
period from $1,963,400 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.
14
<PAGE>
INTEREST AND OTHER INCOME. Interest and other income increased to $129,561 for
the 1998 quarter from $122,349 for the 1997 quarter. The nine month 1998 period
decreased to $323,726, from $530,492 for the nine 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
$2,495,375 for the 1998 quarter from $590,225 for the 1997 quarter. The most
significant factors which caused the increase in net loss were the impairment
and increase in depletion, depreciation, and amortization of oil and gas
properties recorded with a slight offset due to the increase in oil and gas
revenues as detailed above.
The Company's net loss increased to $8,889,418 for the nine month 1998
period from $1,091,157 for the nine month 1997 period. The significant factors
affecting the nine month period comparison were the increase in impairment of
oil and gas properties and depletion, depreciation and amortization, with a
slight offset due to increase oil and gas revenues 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 September 30,
1998 and 1997 were $2.0 million and $6.5 million, respectively. Related cash
outlays were $7.2 million and $15.6 million for the nine month periods ended
September 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.
As of September 30, 1998, the Company had a deficit in working capital
of approximately $2.6 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 and repaid $200,000
during the third quarter of 1998. The maximum amount currently available for
borrowing under the credit facility is $1.8 million. 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 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 September 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 December 31, 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.
15
<PAGE>
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. In September 1998, the
Company 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 the company's bank credit agreement). In accordance with full-cost
accounting rules, no gain or loss was recorded on this sale of oil and gas
property. In November, 1998, the Company closed a sale of 50% of its working
interest in the Ramrod project in Matagorda county, Texas. Proceeds to the
Company from this sale were $2 million and were used to reduce accounts payable
and the bank loan. No gain or loss was recorded from the sale.
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 and through September 30, 1999,
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.
IMPACT OF THE YEAR 2000
Many of the world's computer systems, including those embedded in
process control equipment, currently record years in a two-digit format. On
January 1, 2000, all hardware and software which use the two year convention
could fail or create erroneous data because of an inability to properly
interpret dates beyond 1999 (the Y2K issue).
The Company's assessment of the Y2K issues that could affect its
operations is not complete. However, based on information assembled to date, the
Company believes that most, if not all, of the Y2K risk to the Company, if any,
will come from third parties, primarily oil and gas operators, pipelines,
banking institutions, governmental entities, communications systems providers
and similar entities.
The Company does not operate any oil and gas properties and relies
minimally on the software of third parties, which consists primarily of
16
<PAGE>
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.
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 and 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
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On August 7, 1998, a Special Meeting of Stockholders was held
at the Company's principal executive offices in Houston,
Texas.
(b) Not Applicable
17
<PAGE>
(c) (1) At the Meeting, the proposal to approve the Common Stock
Subscription Agreement, dated as of June 3, 1998 and the
transactions contemplated thereby was approved with 4,003,183
votes cast for, 65,148 votes cast against and 15,900 votes
abstaining.
(2) At the Meeting, the proposal to authorize the issuance and
sale of up to 1,871,290 additional shares of Common Stock
pursuant to the terms of an option granted to the Purchasers
or in transactions privately negotiated by management of the
Company with such other investors as the Company and
Purchasers may agree was approved with 4,003,183 votes cast
for, 65,148 votes cast against and 15,900 votes abstaining.
(3) At the Meeting, the proposal to authorize certain
amendments to the Company's Restated Certificate of
Incorporation, as amended, to effect a one-for-five reverse
stock split of the issued and outstanding Common Stock was
approved with 5,592,568 votes cast for, 281,398 votes cast
against and 12,900 votes abstaining.
(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,
1998. 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 be 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.
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
September 30, 1998
(b) Reports on Form 8-K
Current Report on Form 8-K filed with the Securities and Exchange
Commission on September 9, 1998.
Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 10, 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: November 13, 1998 By: /s/ Ronald P. Nowak
-------------------------------------
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 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 nine month period
ended September 30, 1998
<PAGE>
EXHIBIT 11.1
CALCULATION OF NET LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1998 1997
---- ----
<S> <C> <C>
Net loss attributable to common shareholders............ $(2,495,375) $(590,225)
============ ==========
Weighted average shares outstanding..................... 9,021,909 7,218,177
========= =========
Basic and diluted net loss per common share............. $(0.28) $(0.08)
======= =======
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Net loss attributable to common shareholders............ $(8,889,418) $(1,091,157)
============ ============
Weighted average shares outstanding..................... 8,005,616 7,183,913
========= =========
Basic and diluted net loss per common share............. $(1.11) $(0.15)
======= =======
</TABLE>
CALCULATION OF WEIGHTED AVERAGE SHARES OUTSTANDING
<TABLE>
<CAPTION>
THREE MONTH NINE 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 1/25/97 375,000 375,000 342,033
Exercise of stock option 6/27/97 2,000 2,000 703
------------ ------------ -------------
Common shares, September 30, 1997 7,218,177 7,218,177 7,183,913
============ ============ =============
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 30,727
Exercise of stock option 01/13/98 3,876 3,876 3,706
Restricted stock award 03/06/98 50,000 50,000 38,278
Exercise of stock option 04/09/98 35,966 35,966 23,055
Exercise of stock option 05/13/98 1,938 1,938 1,001
Sale of shares for cash 06/10/98 1,462,044 1,462,044 605,168
Exercise of stock option 06/11/98 96,506 96,506 39,592
Exercise of stock option 06/12/98 6,462 6,462 2,627
Issuance of shares 08/21/98 240,000 108,000 36,000
---------- ---------- -----------
Common shares, September 30, 1998 9,153,909 9,021,909 8,005,616
========== ========== ===========
</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
SEPTEMBER 30, 1998. THIS SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 313,157
<SECURITIES> 0
<RECEIVABLES> 1,376,479
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,742,826
<PP&E> 41,630,033
<DEPRECIATION> 27,820,274
<TOTAL-ASSETS> 15,614,939
<CURRENT-LIABILITIES> 4,388,889
<BONDS> 0
0
0
<COMMON> 91,539
<OTHER-SE> 11,134,511
<TOTAL-LIABILITY-AND-EQUITY> 15,614,939
<SALES> 3,385,284
<TOTAL-REVENUES> 3,709,010
<CGS> 534,736
<TOTAL-COSTS> 12,598,428
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (8,889,418)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,889,418)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,889,418)
<EPS-PRIMARY> (1.11)
<EPS-DILUTED> (1.11)
</TABLE>
