<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): September 9, 1998
3DX TECHNOLOGIES INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 0-21841 76-0386601
(State of Incorporation) (Commission File Number) (I.R.S. Employer
Identification Number)
12012 Wickchester, Suite 250
Houston, Texas 77079
(Address of Principal Executive Offices, Including Zip Code)
(281) 579-3398
(Registrant's Telephone Number, Including Area Code)
(Former Name or Former Address, if Changed Since Last Report)
- --------------------------------------------------------------------------------
<PAGE>
ITEM 5. OTHER EVENTS.
3DX Technologies Inc. is filing its financial statements for the year
ended December 31, 1997 which have been updated by the inclusion of a new
footnote and an updated auditor's report.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Businesses Acquired. N/A
(b) Pro Forma Financial Information. N/A
(c) Exhibits.
The following exhibits are filed with this Report:
23.1 Consent of Arthur Andersen LLP
99.1 Report of Independent Public Accountants
Balance Sheets as of December 31, 1997 and 1996
Statements of Operations for the three years ended
December 31, 1997
Statements of Changes in Common Stockholders' Equity
for the three years ended December 31, 1997
Statements of Cash Flows for the three years ended
December 31, 1997
Notes to Financial Statements
Supplementary Information - Unaudited
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
3DX TECHNOLOGIES INC.
Date: September 9, 1998 By:/s/ Russell L. Allen
Name: Russell L. Allen
Title: Chief Financial Officer
2
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
23.1 Consent of Arthur Andersen LLP...........................
99.1 Report of Independent Public Accountants................. F-1
Balance Sheets as of December 31, 1997 and 1996.......... F-2
Statements of Operations for the three years ended
December 31, 1997................................... F-3
Statements of Changes in Common Stockholders' Equity for
the three years ended December 31, 1997............. F-4
Statements of Cash Flows for the three years ended
December 31, 1997................................... F-5
Notes to Financial Statements............................ F-6
Supplementary Information - Unaudited.................... F-15
3
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report included in this Current Report on Form 8-K, into the
Company's previously filed Registration Statement on Form S-8 (File No.
333-30187).
ARTHUR ANDERSEN LLP
September 8, 1998
Houston, Texas
<PAGE>
EXHIBIT 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of 3DX Technologies Inc.:
We have audited the accompanying balance sheets of 3DX Technologies Inc. (a
Delaware corporation) as of December 31, 1997 and 1996, and the related
statements of operation, changes in stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of 3DX Technologies Inc. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
As discussed further in Note 11, subsequent to February 25, 1998, the date of
our original report, the Company's capital spending commitments exceeded sources
of financing ultimately arranged during the second quarter and the unaudited
financial statements as of and for the six-month period ended June 30, 1998,
reflected that the Company had incurred losses of $6.4 million and its current
liabilities exceeded its current assets by $2.8 million. These factors, among
others as described in Note 11, create substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 11. The accompanying financial statements do
not include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Houston, Texas
February 25, 1998, except as to
Note 11, which is as of
September 8, 1998
F-1
<PAGE>
3DX TECHNOLOGIES INC.
BALANCE SHEETS
DECEMBER 31,
--------------------------
1997 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents........................ $ 1,568,091 $17,521,745
Accounts receivable.............................. 1,181,083 554,210
Prepaid expenses................................. 110,681 165,095
----------- -----------
Total current assets............................ 2,859,855 18,241,050
----------- -----------
Property and equipment:
Oil and gas properties, full-cost method:
Evaluated....................................... 22,521,673 7,164,397
Unevaluated..................................... 10,098,698 4,403,165
Technical interpretation equipment............... 2,605,439 1,505,534
Other property and equipment..................... 273,780 205,531
----------- -----------
35,499,590 13,278,627
Less accumulated depletion, depreciation and
amortization.................................. (17,127,846) (4,702,296)
----------- -----------
18,371,744 8,576,331
Other assets..................................... 78,041 9,808
----------- -----------
$21,309,640 $26,827,189
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 1,713,209 $ 1,960,984
Accrued liabilities.............................. 1,778,543 292,581
----------- -----------
Total current liabilities....................... 3,491,752 2,253,565
----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000
shares authorized, none issued.................. - -
Common stock, $.01 par value, 20,000,000 shares
authorized, 7,225,462 and 6,841,177 shares
issued and outstanding, respectively............ 72,255 68,412
Paid-in capital.................................. 38,085,357 34,189,700
Deferred compensation............................ (512,132) (893,040)
Accumulated deficit.............................. (19,827,592) (8,791,448)
----------- -----------
Total stockholders' equity...................... 17,817,888 24,573,624
----------- -----------
$21,309,640 $26,827,189
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
3DX TECHNOLOGIES INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Oil and gas............................ $ 3,045,447 $ 851,827 $ 274,511
Interest and other..................... 585,154 247,960 236,186
------------ ----------- -----------
Total revenues....................... 3,630,601 1,099,787 510,697
------------ ----------- -----------
Costs and expenses:
Lease operating........................ 257,291 49,016 60,877
Production taxes....................... 178,952 58,660 17,656
Impairment of oil and gas properties... 9,061,240 1,476,690 1,627,321
Depletion, depreciation, and
amortization......................... 2,636,305 422,839 158,336
General and administrative............. 2,532,957 1,827,946 1,134,882
------------ ----------- -----------
Total costs and expenses............. 14,666,745 3,835,151 2,999,072
------------ ----------- -----------
Net loss................................. (11,036,144) (2,735,364) (2,488,375)
Dividends on preferred stock............. - (520,393) (1,058,956)
Redemption premium on Series B preferred
stock................................ - (365,810) -
Accretion on preferred stock............. - (54,844) (48,408)
------------ ----------- -----------
Net loss applicable to common
stockholders $(11,036,144) $(3,676,411) $(3,595,739)
============ =========== ===========
Basic and diluted net loss per common
share.................................. $(1.53) $(1.21) $(1.20)
====== ====== ======
Weighted average number of common shares
outstanding............................ 7,193,837 3,042,466 2,987,908
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
3DX TECHNOLOGIES INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK STOCK
---------------- PAID-IN DEFERRED ACCUMULATED SUBSCRIPTIONS
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT RECEIVABLE TOTAL
------ ------ ------- ------------ ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994.......... 2,987,908 $29,879 $ 841,604 $ - $ (1,519,298) $(26,157) $ (673,972)
Principal collections................. - - - - - 36,156 36,156
Shares issued during 1995............. - - - - - (57,755) (57,755)
Accrual of dividends.................. - - - - (1,058,956) - (1,058,956)
Accretion on preferred stock.......... - - - - (48,408) - (48,408)
Deferred compensation related
to certain stock options............ - - 888,855 (888,855) - - -
Compensation expense related
to certain stock options............ - - - 50,991 - - 50,991
Net loss.............................. - - - - (2,488,375) - (2,488,375)
--------- ------- ----------- ------------ ------------ -------- ------------
Balance at December 31, 1995.......... 2,987,908 29,879 1,730,459 (837,864) (5,115,037) (47,756) (4,240,319)
Principal collections................. - - - - - 47,756 47,756
Shares issued upon exercise of
stock options....................... 3,124 31 573 - - - 604
Accrual of dividends.................. - - - - (520,393) - (520,393)
Accretion on preferred stock.......... - - - - (54,844) - (54,844)
Deferred compensation related
to certain stock options............ - - 922,806 (922,806) - - -
Compensation expense related
to certain stock options............ - - - 867,630 - - 867,630
Shares issued in Initial Public
Offering (net of offering costs).... 2,400,000 24,000 23,539,064 - - - 23,563,064
Conversion of Series C
preferred to common stock........... 1,450,145 14,502 7,996,798 - - - 8,011,300
Redemption of Series B
preferred stock..................... - - - - (365,810) - (365,810)
Net loss.............................. - - - - (2,735,364) - (2,735,364)
--------- ------- ----------- ------------ ------------ -------- ------------
Balance at December 31, 1996.......... 6,841,177 68,412 34,189,700 (893,040) (8,791,448) - 24,573,624
Shares issued for over-allotment...... 375,000 3,750 3,796,396 - - - 3,800,146
Shares issued for exercise of
stock options...................... 9,285 93 3,155 - - 3,248
Deferred compensation related
to certain stock options........... - - 96,106 (96,106) - - -
Compensation expense related
to certain stock options............ - - - 477,014 - - 477,014
Net loss.............................. - - - - (11,036,144) - (11,036,144)
--------- ------- ----------- ------------ ------------ -------- ------------
Balance at December 31, 1997.......... 7,225,462 $72,255 $38,085,357 $(512,132) $(19,827,592) $ - $ 17,817,888
========= ======= =========== ============ ============ ======== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
3DX TECHNOLOGIES INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................. $(11,036,144) $ (2,735,364) $ (2,488,375)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depletion, depreciation and
amortization.................... 3,366,242 883,962 446,350
Compensation expense related to
certain stock options.......... 477,014 867,630 50,991
Impairment of oil and gas
properties..................... 9,061,240 1,476,690 1,627,321
Increase in accounts receivable... (626,873) (440,506) (45,485)
(Increase) decrease in prepaid
expenses....................... 54,414 (79,309) (76,188)
Increase (decrease) in accounts
payable........................ (107,291) 388,767 (3,005)
Increase (decrease) in accrued
liabilities.................... 240,963 253,415 (14,540)
------------ ------------ ------------
Net cash provided by (used in)
operating activities............... 1,429,565 615,285 (502,931)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties.. (19,948,293) (6,166,219) (2,185,804)
Sales of oil and gas properties...... - - 480,931
Purchases of technical and other
equipment.......................... (1,168,154) (456,264) (800,573)
Proceeds from (purchases of)
securities held to maturity........ - 1,595,167 (1,595,167)
Other................................ (70,166) 5,000 (12,886)
------------ ------------ ------------
Net cash used in investing activities (21,186,613) (5,022,316) (4,113,499)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock proceeds, net of
issuance costs..................... 3,803,394 23,563,668 -
Series B preferred stock proceeds,
net of issuance costs.............. - - 25,297
Series C preferred stock proceeds,
net of issuance costs.............. - 143,843 7,851,133
Redemption of Series B preferred
stock.............................. - (6,687,100) -
Payment of Series C preferred stock
dividends.......................... - (795,649) -
------------ ------------ ------------
Net cash provided by financing
activities......................... 3,803,394 16,224,762 7,876,430
------------ ------------ ------------
Net change in cash and cash equivalents (15,953,654) 11,817,731 3,260,000
Cash and cash equivalents at beginning
of year.............................. 17,521,745 5,704,014 2,444,014
------------ ------------ ------------
Cash and cash equivalents at end of
the year............................. $ 1,568,091 $ 17,521,745 $ 5,704,014
============ ============ ============
Supplemental Cash Flow Information
Non-cash Transactions:
Dividends declared but not paid.... $ - $ - $ 275,256
Accretion on preferred stock....... - 54,844 48,408
Redemption premium on Series B
preferred stock.................. - 365,810 -
Stock dividend on Series B
preferred stock.................. - - 783,700
Sale of Series C preferred stock
in exchange for promissory notes. - - 57,755
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
3DX Technologies Inc. ("3DX" or the "Company") began operations in January
1993 to offer 3-D seismic imaging and computer-aided exploration capabilities as
a partner to experienced oil and gas operators. The Company combines its 3-D
imaging capabilities with the operator's local knowledge and infrastructure to
evaluate and exploit drilling opportunities. The Company primarily invests in
prospects in the Gulf Coast region of the U.S., where 3-D seismic evaluation and
interpretation is expected to reduce drilling risk. Working interests in major
prospects have ranged from 5% to 40% in property investments to date.
The Company was initially funded by its three founding stockholders and by
Landmark Graphics Corporation (Landmark), a Houston company which is a leading
supplier of interactive computer-aided exploration systems used by geoscientists
to analyze subsurface data in the process of exploring for and producing
petroleum reserves. The three founding stockholders of 3DX were formerly
employed by Landmark.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OIL AND GAS PROPERTIES
3DX accounts for its oil and gas properties using the full-cost method.
All costs associated with the acquisition, exploration and development of oil
and gas properties, including such costs as leasehold acquisition costs,
geological and geophysical expenditures, dry hole costs and tangible and
intangible development costs, are capitalized as incurred. Included in
capitalized costs for 1997, 1996 and 1995 are general and administrative costs
of $1,962,691, $1,146,722, and $618,614, respectively. Such capitalized costs
include payroll and related costs of exploration department personnel which are
directly attributable to the Company's current exploration and development
activities. Other costs, such as office and facilities costs, technical
equipment maintenance, depreciation and support and communication costs are also
capitalized to the extent they are attributed to the Company's oil and gas
property acquisition and exploration activities and would not otherwise be
incurred if such activities were not being undertaken.
Dispositions of proved oil and gas properties are reported as adjustments
to capitalized costs, with gains and losses not recognized unless such
adjustments would significantly alter the relationship between capitalized costs
and estimated proved oil and gas reserves.
The evaluated costs of oil and gas properties plus estimated future
development and dismantlement costs (including plugging, abandonment and
site-restoration costs) are charged to operations as depreciation, depletion,
and amortization using the unit-of-production method based on the ratio of
current production to estimated proved recoverable oil and gas reserves. The
Company excludes unevaluated property costs from the depreciation, depletion and
amortization calculations until proved reserves have been discovered or a
determination of impairment has been made. Unevaluated properties are evaluated
for impairment on a property-by-property basis.
Impairment of capitalized costs of oil and gas properties is determined
for each cost center on a country-by-country basis. For each cost center, to the
extent that capitalized costs of oil and gas properties, net of related
accumulated depreciation, depletion and amortization and any related deferred
income taxes, exceed the future net revenues of estimated proved oil and gas
reserves, discounted at 10% and net of any income tax effects, plus the lower of
cost or fair value of unevaluated properties, such excess costs are charged to
operations as an impairment of oil and gas properties. Writedowns of $9,061,240,
$1,476,690 and $1,627,321 were recorded during 1997, 1996 and 1995,
respectively.
Other property and equipment, consisting of technical interpretation
equipment and related software and office furniture, equipment and leasehold
improvements are recorded at cost. Depreciation is determined on a straight-line
basis over the estimated useful lives of the assets, which range from three to
five years. Depreciation of other property and equipment totaled $728,005,
$459,189 and $288,014 for 1997, 1996 and 1995, respectively, and is included in
general and administrative expenses.
F-6
<PAGE>
ACCOUNTING FOR INCOME TAXES
The Company provides deferred income taxes at the balance sheet date for
the estimated tax effects of differences in the tax basis of assets and
liabilities and their financial statement carrying amounts.
NATURAL GAS REVENUES
Natural gas revenues are recorded using the sales method, whereby the
Company recognizes natural gas revenues based on the amount of gas sold to
product purchasers on its behalf. The Company has no material gas imbalances.
RENTAL INCOME
The Company has an informal income-sharing arrangement with a seismic
processing company whereby 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. The Company's share of billings
under this arrangement amounted to $264,651, $229,556, and $58,195 in 1997, 1996
and 1995, respectively, and is reflected as a reduction of the Company's general
and administrative expenses.
NET LOSS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," which establishes new computation, presentation, and disclosure
requirements for earnings per share for public companies. The statement is
effective for financial statements issued for periods ending after December 15,
1997. In connection with this new statement, the Securities and Exchange
Commission issued Staff Accounting Bulletin (SAB) No. 98, which prescribes a new
accounting treatment for the impact on earnings per share of "nominal issuances"
of common stock and common stock options issued within one year prior to the
filing of a registration statement for an initial public offering of common
stock. Under the prior rules, common stock options having a nominal exercise
price issued within one year of an initial public offering were required to be
reflected retroactively in the computation of earnings per share for all periods
even if the effect was antidilutive. Under SAB No. 98, these common stock
options are only required to be reflected in earnings per share if the effect is
dilutive. The Company has restated all prior periods to reflect this change in
accounting principle. The effect of this change is presented in the following
table:
Years ended December 31,
------------------------
1997 1996 1995
---- ---- ----
Basic and diluted net loss per common
share, as previously reported......... $(1.53) $(1.16) $(1.14)
Retroactive effect of change in
accounting principle.................. - (0.05) (0.06)
------ ------ ------
Basic and diluted net loss per common
share................................. $(1.53) $(1.21) $(1.20)
====== ====== ======
The computation of basic and diluted net loss per common share was based
entirely on the weighted average common shares outstanding. Stock options which
are potentially dilutive were excluded from the net loss per common share
calculation in each of the years presented as the effect would have been
antidilutive. See Note 7 for the number of stock options outstanding.
STATEMENTS OF CASH FLOWS
For the purposes of the statements of cash flows, the Company considers
all highly liquid investments purchased with original maturities of three months
or less to be cash equivalents.
F-7
<PAGE>
CONCENTRATION OF CREDIT RISK
All of the Company's receivables are due from oil and gas producing
companies located in the United States. The Company has not experienced any
significant credit losses related to its receivables.
MAJOR CUSTOMERS
Operators for producing oil and gas wells in which the Company holds
working interests sold the Company's share of oil and gas production to three
major customers during the years ended December 31, 1997, 1996 and 1995. Sales
to one customer represented 63% and 58% of oil and gas revenues in 1997 and
1996, respectively. During 1995, sales to two customers represented 79% of oil
and gas revenues.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
account payable and accrued liabilities are short-term in nature and approximate
fair value.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Oil and
gas reserve estimates, which are the basis for units-of-production depletion and
impairment of oil and gas properties, are inherently imprecise and are expected
to change as future information becomes available.
PRIOR YEAR RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current presentation.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS 130 establishes
standards for reporting and displaying of comprehensive income and its
components. SFAS No. 131 establishes standards for the way that public
enterprises report information about operating segments and related information
in interim and annual financial statements. SFAS 130 and 131 are effective for
periods beginning after December 15, 1997. These two statements will not have
any effect on the Company's 1997 financial position or results of operations.
Management is presently evaluating what, if any, additional disclosures may be
required when these two statements are implemented.
3. INCOME TAXES
Significant components of the Company's deferred tax liabilities and
assets are as follows:
December 31,
----------------------
1997 1996
---- ----
Deferred tax liability:
Exploration and development
expenditures deducted for tax
and capitalized for books...... $ 981,479 $ (325,812)
Other items, net................ (70,968) (54,872)
----------- -----------
Total deferred tax liability 910,511 (380,684)
----------- -----------
Deferred tax assets:
Net operating loss carryforwards 3,803,419 2,039,546
Other items, net................ 836,151 126,517
----------- -----------
Total deferred tax assets... 4,639,570 2,166,063
Less: Valuation allowance....... (5,550,081) (1,785,379)
----------- -----------
Net deferred tax assets........... (910,511) 380,684
----------- -----------
Net deferred tax liability........ $ - $ -
=========== ===========
F-8
<PAGE>
The Company did not record any current or deferred income tax provision or
benefit in any of the periods presented. The Company's provision for income
taxes differs from the amount computed by applying the statutory rate due
principally to the valuation allowance recorded against its deferred tax asset
account relating to net operating tax loss carryforwards. Management believes
that such allowance is necessary until there is greater assurance that the net
operating tax loss carryforwards can be utilized.
The Company has recorded a valuation allowance against its deferred tax
assets in each year to reflect the estimated portion for which realization is
uncertain. As of December 31, 1997, the Company had tax net operating loss
carryforwards of approximately $11.2 million which begin to expire in 2008. As a
result of recent stock transactions, including the initial public offering, the
Company's utilization of its net operating losses under Section 382 of the
Internal Revenue Code is limited.
4. CREDIT AGREEMENT
On December 18, 1997, the Company executed a credit agreement with a
commercial bank. The credit agreement expires on June 30, 2002 and provides for
total borrowings of $25 million, subject to availability under a borrowing base
calculation which is redetermined on a quarterly basis. The credit agreement,
which is secured by substantially all of the Company's producing oil and gas
properties, had a current availability of $3.0 million under Tranche A of the
agreement as of December 31, 1997. There was no availability under Tranche B.
Tranche A advances carry an interest rate, at the Company's option, of either
the London Interbank Offered Rate ("LIBOR") plus 2% or the lender's prime rate.
Tranche B advances carry an interest rate of either LIBOR plus 4% or the
lender's prime rate plus 2%. The credit agreement contains restrictions on
dividends and additional liens and indebtedness and requires the maintenance of
a minimum current ratio and net worth, each as defined in the credit agreement.
There were no borrowings under the credit agreement during the year ended
December 31, 1997.
5. MANDATORILY REDEEMABLE PREFERRED STOCK
SERIES B
In November 1993, the Company issued 29,000 Series B equity units at $100
per unit, for total proceeds before offering costs of $2,900,000. In October
1994, the Company issued 25,000 additional Series B equity units at $100 per
unit, for total proceeds before offering costs of $2,500,000. Each equity unit
consisted of one share of redeemable Series B preferred stock, par value $.01
per share ("Series B Preferred Stock"), at $94.1558 per share and 30.215 shares
of common stock, par value $.01 per share, at $0.19 per share. The Series B
Preferred Stock carried a redemption value of $100 per share. The difference
between the sales price and the redemption value was subject to pro-rata
accretion which was charged to retained earnings, such that the book value of
each share of Series B Preferred Stock would equal $100 at the required
mandatory redemption in two installments commencing in November 2002. The Series
B Preferred Stock also carried a cumulative annual dividend, payable on December
31 of each year, of $12.50 per share if paid in cash or .13276 shares of Series
B Preferred Stock if paid in stock. All dividends were paid in additional shares
of Series B Preferred Stock. Series B equity units totaling $1,025,000, or 19%
of the total proceeds of the offering, were sold to related parties, consisting
of officers of the Company, consultants and Landmark. Additionally, units
totaling $3,032,000, or 56%, were sold to two investors and their affiliates,
each of which required the right to designate one member of the Board of
Directors of the Company.
In connection with the initial public offering which was completed on
December 26, 1996 (see Note 6), all of the issued and outstanding shares of
Series B Preferred Stock were redeemed. The unamortized redemption premium of
$365,810 was charged to the Company's accumulated deficit.
F-9
<PAGE>
SERIES C
During the period from July 26, 1995 through September 25, 1995, the
Company sold a total of 2,662,241 shares of senior redeemable convertible Series
C preferred stock, par value $.01 per share ("Series C Preferred Stock"), at
$3.00 per share, for total proceeds before offering costs of $7,986,723. The
Series C Preferred Stock carried a cumulative dividend at an annual rate of $.24
per share if paid in cash or .08 shares of Series C Preferred Stock if paid in
stock, payable or accruing quarterly, commencing on December 31, 1995. Unpaid
dividends earned interest at an annual interest rate of 8%. During the year
ended December 31, 1996, the Company paid accrued dividends on Series C
Preferred Stock of $795,649. Shares totaling $925,515, or 12% of the total
proceeds, were sold to related parties, including consultants to and officers of
the Company, as well as two directors and their affiliates. Additionally, one
investor purchased shares totaling $3,999,999, or 50% of the offering, on the
condition that it be given the right to designate one member of the Company's
Board of Directors.
Each share of Series C Preferred Stock was convertible into one share of
common stock. Subsequent to the reverse stock split in October 1996, each share
was convertible into .517 shares of common stock. The Series C Preferred Stock
could be automatically converted to common stock upon the occurrence of certain
conversion events, including the successful completion of an initial public
offering of the Company's common stock if certain pricing and other criteria
were met. The Series C preferred stock also contained a mandatory-redemption
feature under which the stock could be redeemed, at the option of at least 67%
of the holders, at the $3.00 per share liquidation value in two installments
commencing in November 2002.
In October 1995, the Board of Directors granted the holder of each share
of Series C Preferred Stock a warrant to purchase additional shares equal to 10%
of the shares owned by such holder, at an exercise price of $3.00 per share.
Such shares were exercisable at any time until the earlier of (a) five years
from the date of issuance and (b) the effective date of an initial public
offering of the Company's securities. No value was assigned to these warrants as
the computed value of the warrants using the Black-Scholes model was zero.
In connection with the Initial Public Offering which was completed on
December 26, 1996, all of the issued and outstanding shares of Series C
Preferred Stock, and all outstanding Series C Preferred Stock warrants were
converted into common stock.
STOCK SUBSCRIPTIONS RECEIVABLE
Certain officers and directors of the Company purchased Series B equity
units and Series C Preferred Stock for promissory notes, which are reflected as
an offset to equity in the accompanying financial statements. The promissory
notes were full recourse and carried interest at a fixed rate of 6% per annum.
The notes from the Company's officers were collateralized by certain vested
stock options the individuals held from their former employer. The principal and
accrued interest on all notes for the purchase of equity securities of the
Company were paid off as of December 31, 1996.
The following table summarizes the 1996 and 1995 activity of Series B and
Series C Preferred Stock:
<PAGE>
REDEEMABLE PREFERRED STOCK
-----------------------------------------
SERIES B SERIES C
----------------- -------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Balance at December 31, 1994.. 59,034 $5,451,522 - $ -
Shares issued during 1995..... - - 2,662,241 7,986,723
Offering costs................ - (860) - (87,834)
Accrual of dividends.......... 7,837 783,700 - -
Accretion to redemption value. - 43,464 - 4,944
Balance at December 31, 1995.. 66,871 6,277,826 2,662,241 7,903,833
Accretion to redemption value. - 43,464 - 11,380
Redemption premium............ - 365,810
Redemption of Series B
preferred.................. (66,871) (6,687,100) - -
Exercise of outstanding
warrants
For cash.................. - - 32,029 96,087
Under cashless tender..... - - 110,653 -
Conversion to common stock.... - - (2,804,923) (8,011,300)
Balance at December 31, 1996.. - - - -
F-10
<PAGE>
6. STOCKHOLDERS' EQUITY
In May 1995, the stockholders approved a 10-for-1 stock split of the
Company's common stock. In October 1996, the stockholders approved a reverse
stock split whereby holders of common stock received .517 shares of common stock
for every share previously owned. All references in this report to number of
common shares outstanding reflect stock splits retroactively to inception of the
Company.
On December 26, 1996, the Company completed an initial public offering for
the sale of 2,400,000 shares of common stock at $11.00 per share, less offering
costs. In January 1997, the Company's underwriters exercised their 30-day
over-allotment option to purchase 375,000 additional shares of common stock at
the offering price of $11.00 per share, less underwriting discounts and
commissions. Total proceeds to the Company from the initial public offering, net
of offering costs, were approximately $27.4 million.
7. STOCK OPTIONS
In June 1994, the Board of Directors approved the 1994 Stock Option Plan
(the "Plan") for employees, officers, directors and certain consultants of the
Company. The ten year options vest over four years for employees, 25% at the end
of each of the first two years and monthly over the last 24 months. For
directors and consultants, the options vest 50% at the end of the first year and
25% at the end of the second and third years. Certain of these options are
eligible for accelerated vesting upon a change of control of the Company. The
Company has reserved a total of 2,004,937 shares of common stock for issuance
under this Plan, of which 611,778 shares were available for grant as of December
31, 1997. The following table summarizes option balances and activity for the
Plan:
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
----------------------------------------------------------------
Options outstanding, December 31, 1994..... 438,783 $ 0.22
Granted.................................... 248,160 0.56
Exercised.................................. - -
Canceled................................... - -
----------------------------------------------------------------
Options outstanding, December 31, 1995..... 686,943 0.34
Granted.................................... 267,806 1.52
Exercised.................................. (3,124) 0.19
Canceled................................... (157,146) 0.57
----------------------------------------------------------------
Options outstanding, December 31, 1996..... 794,479 0.70
Granted.................................... 628,656 10.33
Exercised.................................. (9,285) 0.35
Canceled................................... (33,100) 5.03
----------------------------------------------------------------
Options outstanding, December 31, 1997..... 1,380,750 $ 4.98
----------------------------------------------------------------
----------------------------------------------------------------
Exercisable options -
December 31, 1995....................... 109,696 $0.22
December 31, 1996....................... 344,396 0.28
December 31, 1997....................... 554,183 0.56
----------------------------------------------------------------
F-11
<PAGE>
WEIGHTED WEIGHTED WEIGHTED
RANGE OF OPTIONS AVERAGE AVERAGE OPTIONS AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/97 LIFE (YRS) PRICE AT 12/31/97 PRICE
--------------------------------------------------------------------
$0.19 to $0.58 734,693 7.02 $ 0.37 537,897 $ 0.32
$7.79 to $11.88 646,057 9.40 $ 10.23 16,286 $ 8.30
Total 1,380,750 8.14 $ 4.98 554,183 $ 0.56
In connection with stock options granted within one year of the initial
public offering, the Company recorded deferred compensation as additional paid
in capital with a corresponding offset to stockholders' equity. The amount of
deferred compensation is based on the difference between the option exercise
price and the $11.00 per share initial public offering common stock price for
those options. Deferred compensation is being amortized as compensation expense
over the option vesting period, and totaled $477,014, $867,630 and $50,991
during the years ended December 31, 1997, 1996 and 1995, respectively.
Unamortized deferred compensation as of December 31, 1997 amounted to $512,132.
In October 1995, the FASB issued SFAS No. 123. SFAS No. 123 is a new
standard of accounting for stock-based compensation and establishes a fair value
method of accounting for awards granted after December 31, 1995 under stock
compensation plans. The Company has elected to continue accounting for employee
stock options under Accounting Principles Board Opinion No. 25. Had the Company
elected to apply SFAS No. 123, the estimated effects on net income and earnings
per share resulting from grants made after December 31, 1994 would have been as
follows:
1997 1996 1995
---- ---- ----
Net loss attributable to common
stockholders:
As reported................... $(11,036,144) $(3,676,411) $(3,595,739)
Pro forma..................... (11,587,856) (3,391,345) (3,588,257)
Basic and diluted earnings per
share:
As reported................... $ (1.53) $ (1.21) $ (1.20)
Pro forma..................... (1.61) (1.11) (1.20)
--------------------------------------------------------------------------
Pro forma assumptions:
Risk free interest rate:
Maximum.................... 6.72% 6.68% 5.98%
Minimum.................... 5.91% 5.35% 5.59%
Expected option life:
Maximum.................... 4.5 years 4.5 years 5.0 years
Minimum.................... 3.7 years 3.7 years 4.6 years
--------------------------------------------------------------------------
Weighted average fair value of
options granted during the year $6.39 $8.95 $3.72
--------------------------------------------------------------------------
Volatility factor................ .703 - -
--------------------------------------------------------------------------
Volatility was not considered in the calculation of option values prior to
December 26, 1996, as the Company was not publicly traded.
F-12
<PAGE>
8. SAVINGS PLAN
The Company's employees participated, prior to January 1, 1998, in
Landmark's 401-K employee savings plan (the Plan), which became effective upon
inception of the Company. The Plan covers substantially all employees and
entitles them to contribute up to 16% of their annual compensation, subject to
limitations imposed by the Internal Revenue Code. The Company did not make any
contributions to the Plan on behalf of employees during any of the years
presented. Effective January 1, 1998, the Company established a separate
employee savings plan exclusively for its employees with substantially the same
terms and provisions as the previous Plan.
9. RELATED PARTIES
Prior to the Company's initial public offering of common stock in December
1996, Landmark was the beneficial owner of greater than 5% of the issued and
outstanding Common Stock and was considered a related party. In connection with
its initial capitalization, the Company entered into a Technical Services
Agreement with Landmark pursuant to which Landmark agreed to grant to the
Company ongoing licenses to use Landmark software as Landmark first made such
software available to its customers. In addition, the agreement provides for a
strategic alliance between Landmark and the Company, which enables the Company
to request, and requires Landmark to deliver, enhancements and modifications to
existing Landmark software and, in certain instances, to develop new software
for use in the Company's oil and gas exploration efforts. In exchange for such
rights, the Company has agreed to serve as an alpha test site for software
developed by Landmark. During 1997, 1996 and 1995, the Company purchased
technical equipment and software, supplies and hardware maintenance from
Landmark in the amounts of $645,109, $267,007 and $521,128, respectively.
In addition, the Company and Landmark were also parties to an informal
arrangement pursuant to which the Company's employees participated in Landmark's
medical insurance plan, life insurance plans and 401(k) employee savings plan.
The Company reimburses Landmark for the costs of providing these benefits,
together with an administrative fee. Effective January 1, 1998, the Company
ceased to participate in this informal arrangement and established separate
benefit plans exclusively for its employees.
In April 1995, the Company sold 66.67% of its working interest in the
Double Diamond Jones Ranch prospect to a group of individual investors who are
stockholders in the Company through a limited partnership. Proceeds from the
sale, which represented both the estimated fair market value of the interest
sold as well as 3DX's proportionate cost to date on the prospect, amounted to
$480,931. No gain or loss was recorded on this transaction.
10. COMMITMENTS
In March 1995, the Company entered into a 5-year office lease agreement.
Future minimum payments under this non-cancelable office lease are as follows at
December 31, 1997:
1998.................................... $ 94,633
1999.................................... 94,633
2000.................................... 15,772
Total minimum lease payments............ $205,038
Rental expense under this office lease amounted to $94,633, $94,633 and
$83,919 during the years ended December 31, 1997, 1996 and 1995, respectively.
F-13
<PAGE>
11. RECENT DEVELOPMENTS - GOING CONCERN UNCERTAINTY
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. During 1998, the Company made capital
spending commitments with the contractual understanding that it had $5.0 million
of available borrowing capacity under its credit agreement and the expectation
that it would be successful in obtaining additional capital through the sale of
property interests and additional equity offerings.
In April 1998, the bank, based on their assessment of the Company's proved
reserves at December 31, 1997, reduced the Company's available borrowing
capacity to $2.0 million, all of which had been borrowed as of June 30, 1998.
Also, the Company has not yet sold any of its interests in oil and gas
properties.
On June 3, 1998, the Company signed a common stock subscription agreement
for the sale of 1,462,044 shares of its common stock at a purchase price of
$1.50. The agreement also granted the purchasers the option to purchase up to
1,871,290 additional shares of common stock at a per share price of $1.50. On
June 10, 1998 the Company successfully completed the sale of the 1,462,004
shares of common stock for net proceeds of approximately $2.1 million. The
related option to purchase additional shares expired without being exercised.
As of June 30, 1998, the Company was not in compliance with certain
covenants of the credit agreement pertaining to minimum working capital balances
and aging of accounts payable. The bank agreed to waive these instances of
non-compliance through September 30, 1998. As a result of the covenant
violation, the Company had to classify the balance of its long-term debt of $2.0
million as a current liability in the June 30, 1998 unaudited balance sheet.
The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a timely
basis and to comply with the terms of its financing agreement. Based on current
economic conditions, the Company will require sources of capital in addition to
projected cash generated from operations to fund its future capital
expenditures. Management of the Company continues to be actively engaged in
soliciting new investors to provide additional funding for its capital program.
Although the Company has identified potential sources of capital, it does not
currently have any firm commitments from potential investors.
The lack of firm commitments for additional financing, combined with
recurring losses and a deficit in working capital (the unaudited interim
financial statements reflect an additional $6.4 million of losses for the
six-month period ended June 30, 1998 and a working capital deficit of $2.8
million as of June 30, 1998), raise substantial doubt about the ability of the
Company to continue as a going concern. In the absence of additional financing,
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 relating to
the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result from the outcome of this
uncertainty.
QUARTERLY FINANCIAL DATA (UNAUDITED)
The table below sets forth selected unaudited quarterly financial
information for 1997 and 1996:
F-14
<PAGE>
--------------------------------------------------------------------------
QUARTER ENDED:
--------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
1997:
Revenues (a)........... $ 839,273 $ 890,846 $ 840,705 $ 1,059,777
Net loss (b)........... (40,458) (460,474) (590,225) (9,944,987)
Net loss applicable to
common stockholders. (40,458) (460,474) (590,225) (9,944,987)
Basic and diluted net
loss per common
share(c)............ (0.01) (0.06) (0.08) (1.38)
1996:
Revenues (a)............ $ 183,310 $ 169,041 $ 273,786 $ 473,650
Net loss (b)............ (453,139) (1,372,840) (445,590) (463,795)
Net loss applicable to
common stockholders.. (638,434) (1,554,939) (624,496) (858,542)
Basic and diluted net
loss per common share
as reported.......... (0.20) (0.49) (0.20) (0.26)
Retroactive effect of
change in accounting
principle (d)........ (0.01) (0.03) (0.01) (0.01)
Basic and diluted net
loss per common
share(c)............. (0.21) (0.52) (0.21) (0.27)
===== ===== ===== =====
(a) As discussed in Note 2, rental income has been reflected as a reduction of
general and administrative expense in all periods presented.
(b) As discussed in Note 2, the Company recorded a writedown of oil and gas
properties of $9,061,240 in the fourth quarter of 1997, and writedowns
totaling $1,476,690 in 1996, including $1,090,718 in the second quarter of
1996.
(c) Net loss per common share are computed independently for each of the
quarters presented and therefore may not sum to the totals for the year.
(d) As discussed in Note 2, earnings per share amounts for periods prior to the
Company's initial public offering have been restated to retroactively
reflect the effect of SAB No. 98.
F-15
<PAGE>
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
The following table sets forth the Company's results of operations for oil
and gas producing activities for the years ended December 31, 1997, 1996 and
1995.
1997 1996 1995
---- ---- ----
Oil and gas revenues.................. $ 3,045,447 $ 851,827 $ 274,511
Lease operating costs................. 257,291 49,016 60,877
Production taxes...................... 178,952 58,660 17,656
Impairment of oil and gas properties.. 9,061,240 1,476,690 1,627,321
Depletion, depreciation and
amortization....................... 2,636,305 422,839 158,336
----------- ----------- -----------
Loss before income taxes.............. (9,088,341) (1,155,378) (1,589,679)
Income tax expense (credit)........... - - -
----------- ----------- -----------
Net loss.............................. $(9,088,341) $(1,155,378) $(1,589,679)
=========== =========== ===========
Amortization per physical unit of
production (equivalent Mcf of gas,
converted at 6 to 1) ............... $2.17 $1.31 $1.15
===== ===== =====
The results of operations from oil and gas producing activities were
determined in accordance with Statement of Financial Accounting Standards No.
69, "Disclosures About Oil and Gas Producing Activities" ("SFAS No. 69") and,
therefore, do not include corporate overhead, interest and other general income
and expense items.
COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
The aggregate amounts of capitalized costs relating to the Company's oil
and gas producing activities and the related accumulated depletion,
depreciation, and amortization and impairment at December 31, 1997, 1996 and
1995 were as follows:
1997 1996 1995
---- ---- ----
Evaluated oil and gas properties.. $ 22,521,673 $ 7,164,397 $ 2,648,724
Unevaluated oil and gas properties 10,098,698 4,403,165 1,375,145
------------ ----------- -----------
Total capitalized costs........... 32,620,371 11,567,562 4,023,869
Less-accumulated depletion,
depreciation and amortization
and impairments................ (15,473,403) $(3,775,858) $(1,876,329)
------------ ----------- -----------
$ 17,146,968 $ 7,791,704 $ 2,147,540
============ =========== ===========
The costs of unevaluated oil and gas properties consists of projects which
at each date were undergoing exploration or development activities or were
projects on which the Company planned to commence such exploration activities in
the future. The Company will begin to amortize these costs when proved reserves
are established or impairment is determined. The Company believes that
substantially all of the unevaluated properties at December 31, 1997 will be
fully evaluated within the succeeding two-year period.
F-16
<PAGE>
The following table represents an analysis of remaining unevaluated oil
and gas property costs at December 31, 1997 according to the years in which they
were incurred:
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
Acquisition costs.................. $3,145,580 $ 219,748 $21,525
Exploration costs.................. 5,459,965 1,251,881 -
---------- ---------- -------
Total........................... $8,605,545 $1,471,629 $21,525
========== ========== =======
The following table sets forth the costs incurred in the Company's oil and
gas property acquisition, exploration and development activities for the years
presented:
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
Property acquisition costs-
Proved........................ $ 70,000 $ - $ -
Unproved...................... 4,794,238 1,171,217 490,141
Exploration costs................ 15,654,152 6,269,266 1,611,192
Development costs................
534,419 103,210 -
----------- ---------- ----------
$21,052,809 $7,543,693 $2,101,333
=========== ========== ==========
OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
RESERVES
The process of estimating proved developed and proved undeveloped oil and
gas reserves is very complex, requiring significant subjective decisions in the
evaluation of available geologic, engineering and economic data for each
reservoir. The data for a given reservoir may change over time as a result of,
among other things, additional development activity, production history and
viability of production under varying economic conditions. Consequently,
material revisions to existing reserve estimates may occur in the future.
Although every reasonable effort is made to ensure that reserve estimates are
based on the most accurate and complete information possible, the significance
of the subjective decisions required and variances in available data for various
reservoirs make these estimates generally less precise than other estimates
presented in connection with financial statement disclosures.
The following information regarding estimates of the Company's proved oil
and gas reserves, all located in the United States, is based on reports prepared
on behalf of the Company by the Company's independent petroleum engineers. The
following table sets forth the changes in the Company's total proved reserves
for the years ended December 31, 1997, 1996 and 1995. All of the reserve
quantities reflected in the table below are proved developed reserves.
F-17
<PAGE>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---- ---- ----
Oil (Bbls)
----------------------------------
Proved reserves at the beginning
of the year...................... 32,428 41,193 39,886
Extensions, discoveries, and other
additions........................ 43,497 9,797 26,000
Revisions of previous estimates.... 5,489 (10,079) (18,000)
Purchases of reserves in place..... 21,405 - -
Production......................... (14,068) (8,483) (6,693)
---------- --------- ---------
Proved reserves at the end of the
year............................. 88,751 32,428 41,193
========== ========= =========
Gas (Mcf)
----------------------------------
Proved reserves at the beginning
of the year...................... 2,463,736 442,795 1,236,915
Extensions, discoveries, and other
additions........................ 2,546,337 2,284,482 104,000
Revisions of previous estimates.... 53,855 7,661 (801,000)
Purchases of reserves in place..... - - -
Production......................... (1,131,819) (271,202) (97,120)
---------- --------- ---------
Proved reserves at the end of the
year............................. 3,932,109 2,463,736 442,795
========== ========= =========
STANDARDIZED MEASURES OF DISCOUNTED FUTURE NET CASH FLOWS
The Company's standardized measure of discounted future net cash flows,
and changes therein, related to proved oil and gas reserves are as follows (in
thousands):
DECEMBER 31,
-------------------------------
1997 1996 1995
---- ---- ----
Future cash inflow........................ $10,427 $ 9,354 $ 1,405
Future production, development and
abandonment costs...................... (2,195) (1,430) (329)
------- ------- -------
Future cash flows before income taxes..... 8,232 7,924 1,076
Future income taxes....................... - - -
Future net cash flows..................... 8,232 7,924 1,076
10% Discount factor....................... (1,184) (1,301) (305)
------- ------- -------
Standardized measure of discounted future
net cash flow.......................... $ 7,048 $ 6,623 $ 771
======= ======= =======
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS:
Sales of oil, gas and natural gas liquids,
net of production costs................. $(2,609) $ (744) $ (196)
Extensions, discoveries and other additions 4,737 6,594 349
Revisions of previous quantity estimates... 124 (200) (1,280)
Net changes in prices and production costs. (2,468) 173 (71)
Accretion of discount...................... 662 77 161
Changes in future development costs........ 60 (82) 103
Purchases of reserves in place............. 109 - -
Changes in production rates (timing) and
other................................... (190) 34 99
------- ------- -------
Net change................................. $ 425 $ 5,852 $ (835)
======= ======= =======
F-18
<PAGE>
Estimated future cash inflows are computed by applying year-end prices of
oil and gas to year-end quantities of proved reserves. Future price changes are
considered only to the extent provided by contractual arrangements. Estimated
future development and production costs are determined by estimating the
expenditures to be incurred in developing and producing the proved oil and gas
reserves at the end of the year, based on year-end costs and assuming
continuation of existing economic conditions. Estimated future income tax
expense is calculated by applying year-end statutory tax rates to estimated
future pretax net cash flows related to proved oil and gas reserves, less the
tax basis (including net operating loss carryforwards projected to be usable) of
the properties involved.
These estimates were determined in accordance with SFAS No. 69. Because of
unpredictable variances in expenses and capital forecasts, crude oil and gas
prices and oil and gas reserve volume estimates, as well as the statutory
pricing and discounting assumptions used in these cash flow estimates,
management believes the usefulness of this data is limited. These estimates of
future net cash flows do not necessarily represent management's assessment of
estimated fair market value, future profitability or future cash flow to the
Company. Management's investment and operating decisions are based upon reserve
estimates that include proved as well as probable reserves and upon different
price and cost assumptions from those used herein.
The future cash flows presented in the "Standardized Measures of
Discounted Future Net Cash Flows" are based on year-end oil and gas prices for
oil and gas reserves which as of December 31, 1997 were approximately $16.17 per
barrel of oil and approximately $2.29 per Mcf of gas. The Company does not have
oil and gas reserves which are committed under long-term oil and gas sales or
hedging contracts.
F-19
