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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For Annual and Transition Reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 1998
OR
[ ] 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 of registrant as specified in its charter)
DELAWARE 76-0386601
(State of Incorporation) (IRS Employer Identification
Number)
12012 WICKCHESTER, SUITE 250, HOUSTON, TEXAS 77079
(Address of principal executive office) ( Zip Code)
Registrant's telephone number, including area code: (281) 579-3398
Securities registered pursuant to Section 12(b) of the Exchange Act:
(None)
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $0.01 par value
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the common stock held by non-affiliates of
the registrant was approximately $2,604,000 on March 12, 1999 based upon the
closing sale price of common stock on such date of $0.406 per share on the
NASDAQ National Market. As of March 12, 1999, the registrant had 9,379,209
shares of common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference to
the Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders which will be filed with the Securities and Exchange Commission on
or before April 30, 1999.
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TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS................................................1
ITEM 2. PROPERTIES..............................................7
ITEM 3. LEGAL PROCEEDINGS......................................11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................11
ITEM 6. SELECTED FINANCIAL DATA................................11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.....19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.....19
ITEM 11. EXECUTIVE COMPENSATION.................................19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.............................................19
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K....................................20
SIGNATURES..............................................................22
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. BECAUSE SUCH STATEMENTS
INCLUDE RISKS AND UNCERTAINTIES, ACTUAL RESULTS, EVENTS AND CIRCUMSTANCES COULD
DIFFER MATERIALLY FROM THOSE EXPRESSED IN OR IMPLIED BY 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 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 OBTAIN ADDITIONAL SOURCES OF FUNDING TO FULLY
IMPLEMENT ITS EXPLORATION AND DEVELOPMENT PROGRAM. 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.
PART I
ITEM 1. BUSINESS.
THE COMPANY
3DX Technologies Inc. ("the Company") is an independent oil and gas
company that explores, develops and produces oil and gas from the onshore and
offshore Gulf Coast region of the United States. Started in 1993, 3DX recognized
a niche for technical expertise due to the increasing use of 3-D seismic as an
exploration tool for the onshore areas of the United States. The Company focuses
on technically advanced reservoir imaging and applied technology in the search
of commercial hydrocarbons with a core competency in the application and
utilization of 3-D seismic. The Company participates in selected exploration
projects as a non-operating working interest owner, sharing both the risk and
rewards with its partners. By reducing drilling risk through 3-D imaging and
analysis, the Company expects its return on investment to exceed industry
standards.
STRATEGY
The Company's goal is to grow with an "educated drill bit" by increasing
the proven reserve base and production rate to generate additional cash flow. To
realize its goal, 3DX's business strategy includes:
FOCUS ON THE EXPERTISE OF 3D IMAGING AND ANALYSIS
The Company focuses all of its technical resources on obtaining the best
possible subsurface image to reduce exploration risk and identify the most
effective location and target for each prospect. By focusing on the technical
issues of a 3-D project, the Company relies on the strategic relationships with
its partners to provide other core needs, such as drilling operations.
MAINTAIN AND SUPPORT TECHNOLOGICALLY ADVANCED EXPLORATIONISTS
The quality and interpretation of information derived from 3-D imaging is
often dependent on the Company's ability to retain and develop creative,
experienced geoscientists and engineers. In order to capitalize on the
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intellectual resources, the Company is committed to motivate the technical staff
by providing and utilizing the most advanced imaging and analytical technology
available on the market. Additionally, the Company offers each employee an
incentive with options to purchase common stock.
EMPHASIZE TECHNICAL ADVANTAGES AND NICHES
The Company's internal seismic processing capabilities are a competitive
advantage over similar size companies. With internal processing, the Company has
developed the process of 3DXPRESS. 3DXPRESS is an innovative technique used in
exploration that improves the quality of seismic data and significantly
compresses the traditional time frame for acquisition through interpretation.
This process allows analysis of 3-D data while the survey is being conducted,
giving the Company's explorationists the ability to ensure data quality and
steer data collection toward areas where prospects are more likely to exist.
Utilizing this technology, the Company has proven its capability to image and
analyze projects for potential drilling sites more rapidly and accurately than
with traditional methods.
FOCUS EXPLORATION PROJECTS IN THE UNITED STATES GULF COAST
The Company has been involved in projects both domestically and
internationally, spreading its technical expertise to many parts of the world.
3DX re-directed its focus to the Gulf Coast area of the United States during
1998. By focusing on the Gulf Coast, the Company participates in projects in
which they have an established knowledge base and track record. Additionally,
these opportunities can lead to core areas for the Company. With a focus on
knowledge based areas, the Company also believes the probability of success in
its program will be higher. Finally, with an emphasis on the U.S. Gulf Coast,
the Company will have a focus on projects that can deliver a shorter cycle time
to positive cash flow.
SELECTIVE PROJECT PARTICIPATION, PARTNERING AND DRILLING EFFORTS
The Company's project screening process continually adapts the criteria to
select projects that are likely to maximize the return on its capital
investments and continually builds a balanced portfolio. The Company's selection
criteria favor projects which (i) are managed by reliable and successful
operating partners; (ii) are located on properties to which 3-D imaging can be
effectively applied to evaluate the primary geologic risk; (iii) have prospect
repeatability or upside potential; (iv) have projected rates of return which
make the production of hydrocarbons economically attractive.
BALANCE BETWEEN GROWTH AND CASH FLOW
The Company believes that a key to achieving long-term viability is growth
based on an expanding cash flow. By committing its talents and resources to
expanding the proven reserve base and hydrocarbon production rate, the Company
will develop the cash flow necessary to sustain future growth.
PROJECTS, BUSINESS RELATIONSHIPS AND TECHNOLOGY
PROJECT GENERATION AND BUSINESS RELATIONSHIPS
By its participation in multiple projects, many with multiple partners,
the Company has been able to build upon a knowledge base outside of 3DX, create
a resource for future opportunities and generate a partner base for 3DX's
internal generated projects. The Company has also undertaken the initiative to
bring geologic consultants into the Company to support the geophysical skills.
This has already proven beneficial with the Hall Ranch Project in Karnes County,
Texas, providing an integrated interpretation and better understanding of the
remaining drilling opportunities.
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TECHNOLOGY
The Company maintains an extensive computer facility to support its
oil-finding activities. A Silicon Graphics Power Challenge provides the
large-scale computing capacity to support real-time data processing and imaging.
A network of nine workstations, functioning in a client-server environment,
provides the framework for synthesis of the geological, geophysical and
engineering data into an integrated image of the subsurface. The principal
supplier of the software used by the Company for both data processing and
interpretation is Landmark Graphics Corporation and its subsidiaries. In
addition, the Company owns licenses for certain geological and geophysical
applications including Hampson-Russell Software, Inc., Paradigm Geophysical,
Inc., Interpretative Imaging and Petrosoft Inc.
SIGNIFICANT PROPERTIES AND ACTIVITIES
During 1998, 3DX undertook an evaluation of its core producing properties
and the focus of its exploration activities. Some of the exploration plays were
located outside the Gulf Coast of the United States including international
plays in offshore West Africa, carbonate plays in Florida and deepwater plays in
the Gulf of Mexico. In some cases, the prospect opportunities were associated
with high drilling and operating costs, a long cycle time to positive cash flow
or limited technical knowledge in the area. The Company undertook the task of
reducing its exposure in the high cost projects and non-core properties. The
results of this effort were two-fold. First, it provided the Company with needed
cash. Second, it allowed the Company to participate in seven drilling
opportunities at no cost to 3DX. This was accomplished by selling and converting
working interest to a carried interest on selected projects while preserving
significant interest for upside potential.
HALL RANCH PROJECT, KARNES COUNTY, TEXAS
The Hall Ranch Project has become one of the core areas for the Company.
After two drilling successes in the area, the Company looks forward to drilling
an additional key prospect in 1999. 3DX has a twenty-five percent (25%) working
interest in Hall Ranch.
GILLOCK PROJECT, GALVESTON COUNTY, TEXAS
In 1998, the Company participated in the Gillock Project, a sixty (60)
mile shoot in the area of southern Galveston County. This project covers several
prolific Frio fields and is in the vicinity of the recent Eagle Point Vicksburg
discovery in Galveston Bay. The Company took a fifteen (15%) working interest
and applied the 3DXPRESS process to the project. Results from the interpretation
have added sixteen (16) new prospects to 3DX's inventory with drilling beginning
in the second quarter of 1999.
FOUR ISLE DOME PROJECT, TERREBONNE PARISH, LOUISIANA
The impact and integration of 3-D seismic on an existing field is clearly
demonstrated by the Four Isle Dome Project. A proprietary 3-D was shot on the
dome in 1996, which identified new fault blocks and updip potential to
production. 3DX participated in two successful wells during 1998 with a combined
production rate of 33 million cubic feet of gas per day (MMCFG/D) and over 700
barrels of condensate per day (BC/D). This is the highest production rate for
the field since 1982. 3DX own a five- percent (5%) working interest in the
project.
SMITH POINT 3-D PROJECT, CHAMBERS COUNTY, TEXAS
The drilling evaluation phase on the Smith Point 3-D Project in Chambers
County, Texas was started in 1998. In April 1998, 3DX elected to farmout fifty
percent (50%) of its working interest in the project. This resulted in 3DX
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retaining a 7.5% working interest (after payout) of the first three (3)
prospects drilled. During 1998, two of the three prospects were drilled with one
success and the third well will spud in the second quarter of 1999.
RAMROD 3-D PROJECT, MATAGORDA COUNTY, TEXAS
By late 1997, 3DX established a significant discovery on its Ramrod
property in Matagorda County, Texas. The St. George #1 well had sustained flow
rates of 8 MMCFG/D and 140 BC/D. Deeper potential was recognized on the property
and in November 1998, 3DX elected to sell one half (50%) of its interest in the
property for cash and a one hundred percent (100%) carry on a 15,500'
exploration well. Based on the drilling results from the new well (St. Andrew
#1), 3DX elected to sell its remaining interest in the project.
REPUBLIC OF COTE D'IVOIRE
Through a partnership for technical services, 3DX established a position
in two offshore blocks in offshore Cote d'Ivoire. This area is located off the
West Coast of Africa. In August 1998, 3DX converted a ten percent (10%) working
interest to a two and one half percent (2.5%) carried interest through a sale
transaction and stock trade with the operator. The result of the transaction
gives 3DX a carry on all drilling costs for two wells, one in Block 24 (drilled
during 1998) and the remaining test well on Block 202 which is anticipated to
spud in 1999.
SUNNILAND TREND PROJECT, FLORIDA
In 1996, through a joint partnership with the operator, 3DX acquired an
eight percent (8%) working interest in exchange for technical expertise and
support on the Sunniland Trend. One well was drilled in the Raccoon Point
prospect area during 1998 and was non-economic. Due to poor drilling results,
high operating and development costs and low oil prices, the Company elected to
sell its interest and exit the play at the end of 1998. This sale represents a
continuing divestment of non-core properties in the 3DX portfolio.
REGULATION
The Company's operations are subject to numerous federal, state and local
laws and regulations governing the discharge of materials into the environment
or otherwise relating to environmental protection. Public interest in the
protection of the environment has increased dramatically in recent years.
Offshore drilling in certain areas has been opposed by environmental groups and,
in certain areas, has been restricted. The Company believes that the trend of
more expansive and stricter environmental legislation and regulations will
continue. To the extent laws are enacted or other governmental action is taken
which prohibit or restrict onshore and offshore drilling or impose environmental
protection requirements that result in increased costs to the oil and gas
industry in general, the business and prospects of the Company could be
adversely affected.
The Oil Pollution Act of 1990 (the "OPA") and regulations thereunder
impose a variety of requirements on "responsible parties" related to the
prevention of oil spills and liability for damages resulting from such spills in
United States waters. A "responsible party" includes the owner or operator of a
facility or vessel, or the lessee or permittee of the area in which an offshore
facility is located. The OPA assigns liability to each responsible party for oil
removal costs and a variety of public and private damages including natural
resource damages. While liability limits apply in some circumstances, a party
cannot take advantage of liability limits if the spill was caused by gross
negligence or willful misconduct or resulted from violation of a federal safety,
construction or operating regulation. If the party fails to report a spill or to
cooperate fully in the cleanup, liability limits likewise do not apply. Few
defenses exist to the liability imposed by the OPA.
Under the OPA and regulations promulgated thereunder, owners and operators
of "offshore facilities" must satisfy certain financial assurance requirements
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to evidence their ability to cover potential environmental cleanup and
restoration costs. In projects in which the Company has a participating working
interest, the operator partner is responsible for all demonstrations of
financial responsibility including the posting of any indemnity bonds which are
required by applicable governmental regulations. The expenses incurred in the
operator partner's demonstration of financial responsibility are expenses which
are allocated to each project partner based on the respective partner's working
interest.
The OPA also imposes other requirements, such as the preparation of an oil
spill contingency plan. The Company has such a plan in place. Failure to comply
with ongoing requirements or inadequate cooperation during a spill event may
subject a responsible party to civil or criminal enforcement actions.
To complement the OPA, the State of Texas enacted the Oil Spill Prevention
and Response Act ("OSPRA"). The Texas General Land Office ("GLO") is the lead
agency for carrying out OSPRA, and to that end the GLO has promulgated
regulations affecting anyone who owns or operates a vessel or facility that
stores or transfers oil in areas where a spill could reach Texas coastal waters.
In addition, the Outer Continental Shelf Lands Act ("OCSLA") authorizes
regulations relating to safety and environmental protection applicable to
lessees and permittees operating on the Outer Continental Shelf (the "OCS").
Specific design and operational standards may apply to OCS vessels, rigs,
platforms, vehicles and structures. Violations of lease conditions or
regulations issued pursuant to the OCSLA can result in substantial civil and
criminal penalties, as well as potential court injunctions curtailing operations
and the cancellation of leases. Such enforcement liabilities can result from
either governmental or private prosecution.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the legality of the original conduct, on certain classes of persons
that are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
the disposal site or sites where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances found at the
site. Persons who are or were responsible for releases of hazardous substances
under CERCLA may be subject to joint and several liability for the costs of
cleaning up the hazardous substances that have been released into the
environment and for damages to natural resources. Additionally, it is not
uncommon for neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by the hazardous substances
released into the environment. Further, certain oilfield wastes are subject to
the Resource Conservation & Reservation Act ("RCRA") with respect to the
regulation of hazardous wastes. The RCRA regulates the generation,
transportation and disposal of hazardous wastes.
The Texas Railroad Commission has issued rules for management of certain
types of hazardous waste generated in the oilfield. However, until delegation of
the RCRA program to the Railroad Commission, hazardous wastes generated in the
oilfield are regulated by the Texas Natural Resources Conservation Commission.
The Texas Railroad Commission regulates pollution of groundwater and surface
water resulting from exploration, production and development of oil and natural
gas resources.
The Clean Water Act ("CWA") and regulations promulgated thereunder
prohibit the discharge of pollutants into waters of the United States without a
permit pursuant to the National Pollutant Discharge Elimination System ("NPDES")
provisions. The CWA also requires reporting of oil spills to the National
Response Center. The United States Environmental Protection Agency ("EPA") has
issued general NPDES permits for oil and gas platforms in the Gulf of Mexico,
which impose limits on discharges of such things as oil, grease, produced water
and drilling fluids. Onshore platforms may also be subject to the requirement
for NPDES permits for both production discharges and for discharges of
stormwater. In Louisiana, the NPDES permit program has recently been delegated
to the State of Louisiana. In Texas, the NPDES permit program is administered by
the TNRCC. Failure to obtain the proper permit may result in both civil and
criminal penalties as well as an order to cease discharges, which in effect is
an order to shut down production.
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Management believes that the Company is in substantial compliance with
current applicable environmental laws and regulations. Compliance with such laws
and regulations has not historically represented a significant expense for the
Company and management does not foresee the need for material expenditures to
ensure continued compliance with currently existing laws and regulations. Laws
and regulations in these areas are, however, subject to change and there can be
no assurance that future laws or regulations will not have a material adverse
effect on the Company.
OPERATING HAZARDS AND INSURANCE
The oil and gas business involves a variety of operating risks, including
the risk of fire, explosions, blow-out, pipe failure, casing collapse,
abnormally pressured formations and environmental hazards such as oil spills,
gas leaks, ruptures and discharges of toxic gases, the occurrence of any of
which could result in substantial losses to the Company due to injury or loss of
life, severe damage to or destruction of property, natural resources and
equipment, pollution or other environmental damage, clean-up responsibilities,
regulatory investigation and penalties and suspension of operations. In addition
to the foregoing, offshore operations are subject to the additional hazards of
marine operations, such as capsizing, collision and adverse weather and sea
conditions.
The Company maintains insurance coverage against some, but not all,
operating risks. The insurance maintained generally does not cover claims
relating to failure of title to oil and gas leases, trespass during 3-D survey
acquisition or surface damage attributable to seismic operations, business
interruption nor does it protect against loss of revenues due to well failure.
There can be no assurance that any insurance obtained by the Company covering
claims related to worker's compensation, comprehensive general liability for
bodily injury and property damage, comprehensive automobile liability and
pollution, cleanup, underground blowout and evacuation will be adequate to cover
any losses or liabilities which may be incurred within projects in which the
Company participates. The Company cannot predict the continued availability of
insurance coverage or the availability of insurance at premium levels that
justify its purchase. If the Company were unable to procure insurance at an
acceptable cost with respect to each of the projects in which the Company
participates, the occurrence of significant adverse events not fully insured or
indemnified against could materially and adversely affect the Company's
financial condition and operations.
COMPETITION
Competition in the oil and gas industry is intense, particularly with
respect to the acquisition of acreage and capital. The Company's competitors in
the exploration for oil and gas include numerous major and independent oil and
gas companies, smaller, technology-driven service companies, individual
proprietors, drilling and income programs and partnerships. Many of the
Company's competitors possess and employ financial and personnel resources
substantially in excess of those available to the Company and may, therefore, be
able to define, evaluate, bid for and participate in a greater number of oil and
gas properties than the Company. The Company believes that technology,
experience and reliability are the primary elements upon which the Company
competes in the industry. Although the Company believes that it competes
effectively in each of these areas, there can be no assurance that the Company's
ability to attract and invest in high quality projects will not be adversely
affected if its current competitors or new market entrants introduce new
services with better quality technology than those available to the Company.
EMPLOYEES AND INDEPENDENT CONSULTANTS
As of December 31, 1998, the Company had 7 full-time employees including 2
explorationists. The Company believes that its relationship with its employees
is good. None of the Company's employees is covered by a collective bargaining
agreement.
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ITEM 2. PROPERTIES
SIGNIFICANT PROJECTS AND PROPERTIES
The Company's exploration activities are focused in the onshore Gulf Coast
region of the United States, principally in Texas, but also include projects in
Louisiana, Mississippi, and Alabama. Additionally, the Company has exploration
projects offshore in the Gulf of Mexico and internationally in the Republic of
Cote d'Ivoire.
3-D seismic imaging is an effective tool to identify the structural and
stratigraphic features in the Gulf Coast region and provides the Company with an
ability to identify hydrocarbon potential in and around existing fields that
could not be detected with 2-D seismic and earlier exploration techniques. Due
to geologic complexities within the Gulf Coast, it may be possible to identify
multiple prospects within a single project. These prospects typically offer
multiple drilling opportunities with individual wells capable of penetrating
multiple reservoirs.
The extensive drilling history within Gulf Coast trends provides a
powerful subsurface and production database to which seismic data can be
calibrated. This data provides the foundation required to design a seismic
program that optimizes resolution at targeted reservoirs. This subsurface
information, when combined with 3-D seismic data, provides a more accurate
assessment of reservoir quality, productivity, reserve potential and, in some
instances, fluid type.
The major producing areas in which the Company holds an interest are
reflected in the table below as of and for the year ended December 31, 1998:
PROVED RESERVES 1998 PRODUCTION
----------------- ---------------------
GAS OIL GAS OIL
AREA / TREND MMCF MBBL MMCF MBBL
------------ ---- ---- ---- ----
Texas Frio Trend 1,482 27 830 24
Texas Wilcox Trend 1,307 12 140 2
Texas Miocene Trend 471 - 516 -
Other Properties 625 23 392 12
----- --- ----- ---
3,885 62 1,878 38
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GULF COAST AREA
Of the 15 wells drilled in 1998, 14 were in the Gulf Coast area, including
10 in Texas, 2 in Louisiana, and 1 in Florida. All of the Company's 8 successful
wells in 1998 were in the Gulf Coast area.
TEXAS GULF COAST. This area includes both onshore and near-shore properties and
generally extends along the Texas coast for a distance of approximately 100
miles inland from the coastline. Prospective geology in the trend is
characterized by numerous stacked sand formations that were deposited
continuously by river channels and deltas. The trend's primary oil and gas
producing formations include the Miocene, Frio, Vicksburg, Yegua, and Wilcox.
The Company has exploration projects targeting each of these oil and gas
formations from depths of 3,000' to 16,000'. Of the Company's 33 exploration
projects, 20 are in the Texas Gulf Coast area. The Company acquired 120 square
miles of new 3-D seismic data in the Texas Gulf Coast region during 1998. Below
is a discussion of certain of the active exploration projects in this area:
TEXAS MIOCENE TREND. The Company has participated in six projects, with
over 200 square miles of 3-D seismic data in this trend. The Company
currently has nine producing gas wells in the Miocene Trend, in Calhoun
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and Matagorda counties, Texas, at depths between 3,000' and 6,000'. The
Company owns working interests ranging from 15% to 20% in these wells,
which are operated by Prime Operating Company, a subsidiary of PrimeEnergy
Corporation. In addition to these projects, the Company is actively
pursuing additional opportunities in this trend.
TEXAS FRIO TREND. The Company has participated in nine projects, with over
400 square miles of 3-D seismic data in this trend. This includes 120
square miles acquired during 1998. The 1998 new projects are located in
Galveston and Chambers counties, Texas, and have resulted in excess of 15
new exploration prospects added to 3DX's drilling inventory. While the
primary target for these new projects are Frio sands, significant
Vicksburg potential exists within the projects. The Company spud seven
wells for Frio objectives in 1998, three of which were successful, and one
was drilling at December 31, 1998. The Company owns working interests
ranging from 7.5% to 22% in these projects.
TEXAS WILCOX TREND. The Company has four active projects in the Texas
Wilcox Trend, located in Karnes, Lavaca, Goliand, and Dewitt counties,
Texas. These projects cover approximately 140 square miles of 3-D seismic
data. Wilcox objectives have been identified within these projects at
depths of 10,000' to 15,000'. The Company drilled three wells in the trend
during 1998, two of which were successful. 3DX owns working interests
ranging from 12.5% to 25% in these projects.
OTHER PROJECTS
LOUISIANA. The Company has two active exploration projects in Louisiana.
The Four Isle Dome project in Terrebonne Parish, operated by Burlington
Resources, targets Miocene-age sands at depths up to 15,000'. The Company
participated in the sidetrack of one well, and drilling of another during 1998.
Both wells were successful, resulting in a combined rate of over 30 million
cubic feet of gas per day. The Company has a 5% working interest in Four Isle
Dome. The second project area is located in Calcasieu and Jefferson Davis
Parishes. The Company participated in a 14,000' wildcat well during 1998, which
was unsuccessful. 3DX has a 10% working interest in this project.
OFFSHORE GULF OF MEXICO. The Company had two producing properties offshore
in the Gulf of Mexico. The two producing properties, the Cove project at
Matagorda Island Block 487-L and the Hollywood project at East Cameron Block 42,
are considered to be fully developed. The Company elected to sell it's 7% in the
Cove project during 1998, while retaining it's 5% working interest in East
Cameron Block 42. The Company also has a 1% carried interest in 3 exploratory
projects located in the deep water flex trend of the Gulf of Mexico. These
projects have eight-year lease terms which expire in March 2005.
WEST AFRICA. The Company joined its partner, Santa Fe Energy Resources
(Cote d'Ivoire) Ltd., in 1997 to evaluate Block CI-24 and Block CI-202 located
in the offshore waters of The Republic of Cote d'Ivoire, and a 3 million acre
concession offshore Ghana. Late in 1997, the partnership began work on a 400
square kilometer 3-D seismic survey, which was completed during the first
quarter of 1998. After interpreting the 3-D seismic data for the partnership,
the Company converted it's 10% working interest in Block CI-202 and Block CI-24
to a 2.5% carried interest, and elected to exit the offshore Ghana project. The
partnership drilled one exploratory well on Block CI-24 during 1998, which was
unsuccessful.
OIL AND GAS RESERVES
All of the Company's proved reserves described below are located onshore
and offshore Texas and in the Federal waters offshore Louisiana. All of the
Company's proved reserves reflected in the table are proved developed reserves.
The reserve estimates were prepared by the independent engineering consulting
firm Ryder Scott Company Petroleum Engineers. In accordance with applicable
requirements of the Securities and Exchange Commission, the estimated discounted
future net revenues from estimated proved reserves are based on prices and costs
as of the date of the estimate unless such prices or costs are contractually
determined at such date. The Company has not provided any estimates of total
proved reserves, comparable to those disclosed herein, in any reports filed with
federal authorities or agencies other than the Securities and Exchange
Commission.
8
<PAGE>
DECEMBER 31,
------------------------
1998 1997 1996
---- ---- ----
Estimated Net Proved Reserves Data:
Gas (Mmcf) 3,885 3,932 2,464
Oil and condensate (Mbbl) 62 89 32
Total equivalent, converted at 6:1 (Mmcfe) 4,257 4,466 2,656
Pre-tax present value of proved reserves
discounted at 10% (in thousands) $5,782 $7,048 $6,623
Standardized Measure of Discounted Future
Net Cash Flows (in thousands) (1) $5,782 $7,048 $6,623
- --------------
(1) In accordance with statutory requirements of the Securities and Exchange
Commission, these amounts represent the present value of estimated future
net revenues after income taxes discounted at 10%. The present value
amounts are the same before taxes and after projected income taxes as a
result of the Company's substantial net operating loss carryforwards.
The process of estimating proved developed and proved undeveloped oil and
gas reserves is very complex, requiring significant subjective decisions in the
evaluation of available geologic, engineering and economic data for each
reservoir. The data for a given reservoir may change over time as a result of
additional development activity, production history and viability of production
under varying economic conditions. The actual production, revenues, severance
taxes, development and operating expenditures with respect to the Company's
reserves will likely vary from such estimates, and such variances could be
material.
PRODUCTIVE WELLS
At December 31, 1998, 1997 and 1996, the Company held interests in the
following productive wells:
AT DECEMBER 31,
---------------------------------------------------
1998 1997 1996
---------------- --------------- ---------------
GROSS NET GROSS NET GROSS NET
Oil Wells 4 0.66 9 0.54 8 0.31
Gas Wells 22 3.34 21 4.49 11 1.71
Total Wells 26 4.00 30 5.03 19 2.02
== ==== == ==== == ====
The number of gross wells equals the total number of wells in which the
Company owns a working interest. The number of net wells equals the sum of the
Company's fractional working interests owned in gross wells.
9
<PAGE>
OIL AND GAS DRILLING ACTIVITIES
The following table sets forth the gross and net number of productive, dry
and total exploratory and development wells that the Company drilled in each of
1998, 1997, and 1996:
<TABLE>
<CAPTION>
GROSS WELLS NET WELLS
---------------------- -------------------------
PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
EXPLORATORY WELLS
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1998 3 6 9 0.49 0.56 1.05
Year ended December 31, 1997 11 9 20 2.98 1.83 4.81
Year ended December 31, 1996 7 7 14 0.74 0.84 1.58
DEVELOPMENT WELLS
Year ended December 31, 1998 5 - 5 0.36 - 0.36
Year ended December 31, 1997 - 3 3 - 0.48 0.48
Year ended December 31, 1996 3 - 3 0.60 - 0.60
</TABLE>
As of December 31, 1998, the Company was participating in 1 gross (0.20
net) exploratory wells.
PRODUCTION
The following table summarizes the net volumes of oil and gas produced and
sold and the average prices received with respect to such sales from all
properties in which the Company held an interest during 1998, 1997 and 1996,
respectively.
GAS OIL
---------------------- ---------------------
NET AVERAGE NET AVERAGE
PRODUCTION SALES PRODUCTION SALES
(MMCF) PRICE/MCF (MMCF) PRICE/BBL
---------- --------- ---------- ---------
Year ended December 31, 1998 1,877.9 $2.17 37.8 $ 12.20
Year ended December 31, 1997 1,131.8 2.46 14.1 18.54
Year ended December 31, 1996 271.2 2.50 8.5 20.43
Average oil and gas operating expenses per Mcfe including severance and ad
valorem taxes, were $0.35, $0.36, and $0.33 for 1998, 1997 and 1996,
respectively.
ACREAGE
The following table sets forth the developed and undeveloped oil and gas
acreage in which the Company held an interest as of December 31, 1998.
Undeveloped acreage consists of those lease acres on which wells have not been
drilled or completed to a point that would permit the production of commercial
quantities of oil and gas, regardless of whether or not such acreage contains
proved reserves.
DEVELOPED UNDEVELOPED
------------------------ --------------------
GROSS NET GROSS NET
---------- ----------- --------- ----------
Texas............... 9,221 1,441 97,193 22,967
Louisiana........... 325 16 20,081 1,122
Mississippi/Alabama. 82 19 107 44
Offshore Federal.... 1,440 72 - -
International....... - - 162,842 4,071
------ ----- ------- ------
Total............ 11,068 1,548 280,223 28,204
====== ===== ======= ======
10
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company has not been the subject of any legal proceedings since its
organization. There can be no assurance, however, that the Company will not in
the future be involved in litigation incidental to the conduct of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock was traded through March 23, 1999 on the
NASDAQ National Market under the symbol "TDXT". Effective March 24, 1999,
the Company's common stock was traded on the NASDAQ SmallCap Market under the
symbol "TDXTC". The following table sets forth, on a per share basis for the
periods indicated, the high and low prices as quoted by the NASDAQ National
Market since the shares became publicly traded on December 26, 1996. As of
February 17, 1999 there were approximately 70 record holders of the common
stock. See Note 10 in Notes for Financial Statements contained elsewhere
herein regarding the transfer of the Company's securities to The NASDAQ
SmallCap Market.
HIGH LOW
---- ---
1998
Fourth Quarter ended December 31, 1998 $0.72 $0.25
Third Quarter ended September 30, 1998 1.50 0.56
Second Quarter ended June 30, 1998 1.88 1.38
First Quarter ended March 31, 1998 3.72 1.50
1997
Fourth Quarter ended December 31, 1997 $9.25 $2.25
Third Quarter ended September 30, 1997 12.50 8.00
Second Quarter ended June 30, 1997 10.50 7.75
First Quarter ended March 31, 1997 13.13 10.00
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its common
stock since its formation. The Company's current credit agreement prohibits the
payment of cash dividends. The Company does not anticipate paying cash dividends
on its common stock in the foreseeable future. The Company currently intends to
retain any future earnings to finance the expansion and continued development of
its business.
ITEM 6. SELECTED FINANCIAL DATA
The financial information set forth below for the years ended December 31,
1998, 1997, 1996, 1995 and 1994 is derived from the financial statements of the
Company, which were audited by Arthur Andersen LLP. This information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the financial statements of the Company,
the notes related thereto and other financial data included elsewhere in this
Form 10-K.
11
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA: YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues (a):
<S> <C> <C> <C> <C> <C>
Oil and gas............................. $ 4,545 $ 3,046 $ 852 $ 275 $ 304
Interest and other...................... 54 585 248 236 53
------- ------- ------ ------- ------
Total revenues..................... 4,599 3,631 1,100 511 357
Costs and expenses:
Total lease operating................... 732 437 107 79 34
Impairment of oil and gas properties 7,864 9,061 1,477 1,627 -
Depletion, depreciation & amortization.. 3,545 2,636 423 158 91
General and administrative and other (a) 2,047 2,533 1,828 1,135 617
------- ------- ------- ------- ------
Total costs and expenses............... 14,188 14,667 3,835 2,999 742
Net loss ................................. (9,589) (11,036) (2,735) (2,488) (385)
Dividends and accretion on preferred stock - - (941) (1,108) (452)
------- -------- ------- ------- ------
Net loss applicable to common
stockholders............................ $(9,589) $(11,036) $(3,676) $(3,596) $ (837)
======= ======== ======= ======= ======
Basic and diluted net loss per
common share as previously reported..... $ (1.15) $ (1.53) $ (1.16) $ (1.14) $(0.33)
Retroactive effect of change in accounting
principle (b)........................... - - (0.05) (0.06) (0.02)
------- -------- ------- ------- ------
Basic and diluted net loss per common
share................................... $ (1.15) $ (1.53) $ (1.21) $ (1.20) $(0.35)
======= ======== ======= ======= ======
Weighted average number of common
shares outstanding...................... 8,328 7,194 3,042 2,988 2,373
======= ======== ======= ======= =======
STATEMENT OF CASH-FLOW DATA
Net cash provided by (used in) operating
activities.............................. $ 2,484 $ 1,430 $ 615 $ (503) $ 16
Net cash used in investing activities..... 5,960 21,187 5,022 4,113 2,018
Net cash provided by financing activities. 3,356 3,803 16,225 7,876 2,515
activities..............................
BALANCE SHEET DATA: AS OF DECEMBER 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS)
Working capital........................... $ 801 $ (632) $15,987 $ 7,265 $2,103
Property and equipment, net............... 10,866 18,372 8,576 2,935 2,669
Total assets.............................. 13,501 21,310 26,827 10,451 5,197
Series B preferred stock.................. - - - 6,278 5,452
Series C preferred stock.................. - - - 7,904 -
Stockholders' equity (deficit)............ $10,531 $17,818 $24,574 $(4,240) $ (674)
</TABLE>
(a)As discussed in Note 2 to the financial statements, rental income has been
reflected as a reduction of general and administrative expenses in all
periods presented.
(b)As discussed in Note 2 to the financial statements, earnings per share for
periods prior to the Company's initial public offering have been restated to
retroactively reflect the effect of SAB No. 98.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the three years ended December 31, 1998. This
discussion should be read in conjunction with the financial statements of the
Company, the notes thereto and the other financial data included elsewhere in
this Annual Report on Form 10-K.
OVERVIEW
The Company is a knowledge-based oil and gas exploration company whose
core competence and strategic focus is the utilization of 3-D imaging and other
advanced technologies in the search for commercial quantities of hydrocarbons.
The Company enters into arrangements that enable it to combine its expertise and
exploration capabilities with 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 revenues 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 fully 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.
13
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating information of the
Company during the periods indicated:
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997 1996
---- ---- ----
PRODUCTION:
Gas (MMcf) 1,877.9 1,131.8 271.2
Oil and condensate (Mbbls) 37.8 14.1 8.5
Total equivalent, converted at 6:1 (Mmcfe) 2,104.8 1,216.2 322.2
6:1 (Mmcfe)
AVERAGE SALES PRICE:
Gas (per Mcf) $ 2.17 $2.46 $ 2.50
Oil and condensate (per Bbl) 12.20 18.54 20.43
AVERAGE EXPENSES (PER MCFE):
Lease operating (1) $ 0.35 $0.36 $ 0.33
Depletion of oil and gas properties 1.68 2.17 1.31
- -------------
(1) Includes all lease operating expenses and taxes attributable to the
Company's properties, including production and ad valorem taxes.
OIL AND GAS REVENUES. Oil and gas revenues increased to $4,544,690 for the year
ended December 31, 1998 (the "1998 period") from $3,045,447 for the year ended
December 31, 1997 (the "1997 period"). This increase was attributable to higher
oil and gas production levels. Production increased by over 73% to 2,104.8 Mmcfe
for the 1998 period, from 1,216.2 Mmcfe for the 1997 period. The increased
production resulted from successful wells drilled during the latter part of 1997
and throughout the year in 1998. The average sales price for natural gas, which
accounted for 89% of equivalent production during the 1998 period, decreased by
12% to $2.17 per Mcf from $2.46 per Mcf for the 1997 period. The average sales
price for oil decreased to $12.20 per barrel during the 1998 period versus
$18.54 per barrel for the 1997 period.
Oil and gas revenues increased to $3,045,447 for the 1997 period from
$851,827 for the year ended December 31, 1996 (the "1996 period"). This increase
was primarily attributable to higher oil and gas production levels. Production
increased by over 277% to 1,216.2 Mmcfe for the 1997 period, from 322.2 Mmcfe
for the 1996 period. The increased production resulted from successful wells
drilled during the last three months of 1996 and throughout the year in 1997.
The number of productive wells in which the Company owned an interest increased
to 30 (5.03 net) at the end of the 1997 period from 19 (2.02 net) at the end of
the 1996 period. The average sales price for natural gas, which accounted for
93% of equivalent production during the 1997 period, decreased by 2% to $2.46
per Mcf from $2.50 per Mcf for the 1996 period. The average sales price for oil
decreased to $18.54 per barrel during the 1997 period versus $20.43 per barrel
for the 1996 period.
LEASE OPERATING EXPENSES. Total lease operating expenses, including production
taxes, increased to $731,749 for the 1998 period from $436,243 for the 1997
period. This increase was primarily attributable to the additional costs of
operating new producing wells drilled throughout the latter part of 1997 and
into the 1998 period and is comparable to the increase in production during the
corresponding periods. Lease operating expenses per Mcfe of production decreased
to $0.35 per Mcfe for the 1998 period from $0.36 per Mcfe for the 1997 period.
Total lease operating expenses, including production taxes, increased to
$436,243 for the 1997 period from $107,676 for the 1996 period. This increase
was primarily attributable to the additional costs of operating new producing
wells drilled during the last three months of 1996 and throughout the year in
14
<PAGE>
1997 and is comparable to the increase in production during the corresponding
periods. Lease operating expenses per Mcfe of production increased slightly to
$0.36 per Mcfe for the 1997 period from $0.33 per Mcfe for the 1996 period.
DEPLETION, DEPRECIATION AND AMORTIZATION EXPENSE. Depletion of oil and gas
properties for the 1998 period increased to $3,545,328 from $2,636,305 for the
1997 period. The increase in depletion of oil and gas properties resulted
primarily from the increase in oil and gas production during the 1998 period, as
discussed above. Depletion of oil and gas properties per Mcfe for the 1998
period decreased to $1.68 per Mcfe, or 23%, from the rate of $2.17 per Mcfe in
the corresponding period in 1997. The decrease in the rate resulted from greater
net additions to oil and gas reserves than the net additions to evaluated oil
and gas property costs relative to the existing depletion rate per Mcfe.
Depletion of oil and gas properties for the 1997 period increased to
$2,636,305 from $422,839 for the 1996 period. The increase in depletion of oil
and gas properties resulted from both the increase in oil and gas production
during the 1997 period, as discussed above, and an increase in the depletion
rate for this period. Depletion of oil and gas properties per Mcfe for the 1997
period increased to $2.17 per Mcfe, or 66%, from the rate of $1.31 per Mcfe in
the corresponding period in 1996. The increase in the rate resulted from greater
additions to evaluated oil and gas property costs than the additions to oil and
gas reserves relative to the existing depletion rate per Mcfe. This was
principally the result of the costs of unsuccessful wells drilled in 1997.
IMPAIRMENT OF OIL AND GAS PROPERTIES. Under the rules of the full-cost
accounting method as prescribed by the Securities and Exchange Commission, 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. Oil
and gas impairment charges recorded during 1998 were $7,863,536. The impairments
recorded were principally the result of increased additions to evaluated
property costs and the decline in oil and gas prices being received by the
Company on December 31, 1998 as compared to December 31, 1997.
Oil and gas impairment charges recorded during 1997 were $9,061,240, all
of which were attributable to the fourth quarter ended December 31, 1997. This
writedown results principally from the significant decline in oil and gas prices
being received by the Company on December 31, 1997 as compared to September 30,
1997, and a relatively large investment in three unsuccessful exploratory wells,
all of which were evaluated in the fourth quarter of 1997.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense, net of
costs capitalized to exploration and development projects, decreased 20% to
$2,033,756 for the 1998 period from $2,532,474 for the 1997 period. This
decrease was primarily attributable to a downsizing in personnel that occurred
during the second quarter of 1998. The downsizing had the following effects on
total general and administrative expenses: (1) an increase in compensation
expense due to severance pay recorded, (2) a decrease in the amount of
capitalized overhead, as the majority of the terminated personnel were from
technical departments, and (3) a decrease in stock option expense to adjust the
amortization of deferred compensation recorded for these employees relating to
stock options issued within one year of the initial public offering. The 1997
amount represented a 39% increase from $1,827,946 incurred during the year ended
December 31, 1996. The increase was primarily a result of personnel costs
associated with hiring which occurred during 1997 and increased professional
fees and other costs associated with being a public company, offset by a
decrease in the amount of $390,616 relating to the amortization of deferred
compensation expense.
INTEREST AND OTHER INCOME. Interest and other income decreased 91% to $53,984
for the 1998 period from $585,154 for the comparable period during 1997. This
decrease is primarily a result of a substantially lower balance of short-term
investments during the 1998 period. The 1997 amount represents a 136% increase
from the $247,960 earned during the comparable 1996 period. This increase
reflects interest income on the higher level of short-term investments during
1997 as a result of investment of the proceeds of the Company's initial public
offering.
15
<PAGE>
NET LOSS. As a result of the foregoing, the Company's net loss decreased to
$9,588,542 for the 1998 period from $11,036,144 for the 1997 period. The
significant factors which caused the decrease in net loss were the increase in
revenues and the decrease in impairment of oil and gas properties, with a slight
offset from the increase in depletion, depreciation and amortization of oil and
gas properties. The net loss for the 1997 period increased from the net loss of
$3,676,411 in the 1996 period. The most significant factor which caused the
increase in net loss was the impairment of oil and gas properties recorded under
full-cost accounting rules.
INCOME TAXES. The Company recorded a valuation allowance against the estimated
amount of deferred tax assets for which realization is uncertain. The Company
reviews the valuation allowance at the end of each quarter and makes
adjustments, as necessary, if it is determined that it is more likely than not
that the deferred tax assets will be realized. As of December 31, 1998, the
Company had tax net operating loss carryforwards ("NOL's") of approximately
$11.7 million which begin to expire in 2008. As a result of the recent stock
transactions, including the initial public offering, there is a yearly
limitation placed on the Company's utilization of its NOL's under Section 382 of
the Internal Revenue Code of 1986, as amended. See Note 5 to the financial
statements of the Company included elsewhere herein.
LIQUIDITY AND CAPITAL RESOURCES
See further discussion of these issues under Note 3, "Going Concern" in
Notes to Financial Statements contained elsewhere herein.
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 has made and will be required to make oil and gas capital
expenditures substantially in excess of its net cash flow from operations in
order to complete the exploration and development of its existing properties.
The company will also need to acquire exploration prospects and find additional
oil and gas reserves in order for its asset base not to be depleted by current
oil and gas production. Cash outlays for capital expenditures for oil and gas
exploration and development activities for the years ended December 31, 1998,
1997, and 1996 were $8.7 million, $19.9 million, and $6.2 million, respectively.
The level of capital spending in 1999 and thereafter will be highly dependent
upon the Company's ability to obtain additional capital. The Company expects
that its projected net cash flows from currently producing properties will be
sufficient to fund its general and administrative expenditures through December
31, 1999, including technical employee and related costs which are capitalized
under full-cost accounting. However, such projected cash flows could be
adversely affected by declines in oil and gas prices and unanticipated declines
in oil and gas production from existing properties. This raises substantial
doubt about the Company's ability to pay its obligations as they become due.
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 made payments of $200,000 and $600,000,
during the third and fourth quarters of 1998, respectively, and an additional
payment of $450,000 in the first quarter of 1999. The maximum amount currently
16
<PAGE>
available for borrowing under the credit facility is $750,000. 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 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 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. In accordance with
full-cost accounting rules, no gain or loss was recorded from the sales. In the
first quarter of 1999, the Company sold all of the remaining interest in the
Ramrod project for $600,000. As of December 31, 1998, the Company had working
capital of approximately $801,000.
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's 1999 expenditure plans currently include up to eleven exploratory
and development wells and various lease and seismic data acquisitions. 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.
Management of the Company continues to seek financing for its capital
program from a variety of sources. The Company is actively soliciting new common
or preferred equity investors, which could lead to a sale of all or a
substantial portion of the Company's equity interests to a merger partner. The
Company could also seek additional debt financing, although it has no additional
borrowings currently available under its credit agreement. The Company also
recently sold interests in oil and gas properties to help fund its capital
program, and will consider additional property sales, although no such sales are
imminent. No assurance can be given that the Company will be able to obtain
additional financing by these or other means on terms that would be acceptable
to the Company. The Company's inability to obtain additional financing would
have a material adverse effect on the Company. Without raising additional
capital, the Company anticipates that it will be required to limit or defer its
planned oil and gas exploration and development program, which could adversely
affect the recoverability and ultimate value of the Company's oil and gas
properties. The Company may also be required to pursue other financial
alternatives, which could include a sale or merger of the Company.
Management intends to pursue exploration and development opportunities to
the extent additional capital becomes available in the current oil and gas
environment. However, the uncertainties about the Company's future cash flows
and the lack of firm commitments to attract additional capital at this time
raise substantial doubt about the ability of the Company to continue as a going
concern. The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
17
<PAGE>
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.
YEAR 2000
Many computer software systems were structured to use a two-digit date
field meaning that they will not be able to properly recognize dates in the Year
2000. As a result, computer systems and software may need to be upgraded to
comply with such "Year 2000" requirements. Significant uncertainty exists
concerning the potential effects associated with such compliance as systems that
do not properly recognize such information could generate erroneous data or
cause a system to fail.
As of December 31, 1998, the Company has assessed the expected impact of
the date change in the Year 2000 on the software programs used in its
operations. The majority of the Company's technical applications are not date
sensitive. The applications that do have date sensitive aspects, including the
Company's accounting software, have either been updated to compensate for the
date change in the Year 2000 or are currently being updated by the software
vendors. The Company believes that any disruption caused from a third party's
inability to be Year 2000 compliant will not be material to its operations.
The Company believes that it will not be required to make any material
expenditures to address the Year 2000 problem as it relates to its existing
systems. To date, costs incurred to address Year 2000 compliance have been
internal in nature and have been charged to income as incurred. Such costs have
been funded from cash provided by operating activities. However, uncertainty
exists concerning the potential costs and effects associated with any Year 2000
compliance, and the Company intends to continue to make efforts to ensure that
third parties with whom it has relationships are Year 2000 compliant. The
Company is not aware of any information technology projects that have been
delayed due to the Year 2000 compliance program.
The Company's goal has been to ensure that all of the critical systems and
processes which are under the direct control of the Company remain functional.
However, because certain systems and processes may be interrelated with systems
outside of the control of the Company, there can be no assurance that all
implementations will be successful. The Company believes that most, if not all,
of the Year 2000 risk to the Company will come from third parties, primarily oil
and gas operators, pipelines, banking institutions, governmental entities,
communications systems providers and similar entities. The Company does not
operate any oil and gas properties and relies minimally on the software of third
parties, which consists primarily of purchased or leased operating system,
analysis, accounting and seismic programs. These programs have been determined
to be either Year 2000 compliant or capable of Year 2000 compliance with little
cost to the Company.
There can be no assurance that unexpected Year 2000 compliance problems of
either the Company or its vendors, customers and service providers would not
materially and adversely affect the Company's business, financial condition or
operating results. The Company will continue throughout 1999 to consider the
likelihood of a material business interruption due to the Year 2000 issue.
OTHER
In connection with stock options granted within one year prior to the
initial filing of the registration statement relating to the initial public
offering, the Company recorded deferred compensation expense based on the
difference between the option exercise price and the fair value of the Company's
common stock at the date of grant, using the $11.00 per share initial public
18
<PAGE>
offering price as an estimate of the fair value. Such deferred compensation is
being amortized as additional compensation expense over the vesting period for
the options. As of December 31, 1998, the Company had unamortized deferred
compensation of $136,304 which will be charged to expense during the next three
years. The Company has elected not to adopt the fair value accounting of
Statement of Financial Accounting Standards No. 123, "Accounting For Stock Based
Compensation", for employees and continues to account for these plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees".
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are incorporated under
Item14 in Part IV of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10 TO 13 INCLUSIVE.
These items have been omitted in accordance with the general
instructions to Form 10-K Annual Report. The Registrant will file with the
Securities and Exchange Commission in April 1999, pursuant to Regulation 14A, a
definitive proxy statement that will involve the election of directors. The
information required by these items will be included in such proxy statement and
are incorporated herein by reference.
19
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS:
INDEX TO FINANCIAL STATEMENTS PAGE
Report of Independent Public Accountants................. F-1
Balance Sheets as of December 31, 1998 and 1997........ F-2
Statements of Operations for the three years ended F-3
December 31, 1998.........................................
Statements of Changes in Stockholders' Equity for the
three
years ended December 31, 1998..................... F-4
Statements of Cash Flows for the three years ended F-5
December 31, 1998.........................................
Notes to Financial Statements.......................... F-6
Supplementary Information - Unaudited.................. F-19
(A)(2) FINANCIAL STATEMENT SCHEDULES:
Not applicable
(A)(3) EXHIBITS:
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
11.1* Computation of Earnings per Share
23.1* Consent of Arthur Andersen LLP
23.2* Consent of Ryder Scott Company
24.1* Power of Attorney (included on signature page)
27.1* Financial Data Schedule for December 31, 1998 (for SEC use only)
27.2* Financial Data Schedule for December 31, 1997 (restated) (for SEC use
only)
27.3* Financial Data Schedule for December 31, 1996 (restated) (for
SEC use only)
- -------------
* filed herewith
20
<PAGE>
(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.
21
<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.
By: /s/ Russell L. Allen
------------------------------------
Vice President, Finance, Chief
Financial Officer and Secretary
Know All Men By These Presents, that each individual whose signature
appears below hereby constitutes and appoints Ronald P. Nowak and Russell L.
Allen and each of them individually, his true and lawful agent, proxy and
attorney-in-fact, with full power of substitution and resubstitution, for him in
his name, place and stead, in any and all capacities, to (i) act on, sign and
file with the Securities and Exchange Commission any and all amendments to this
report together with all schedules and exhibits thereto, (ii) act on, sign and
file with the Securities and Exchange Commission any exhibits to this report,
(iii) act on, sign and file such certificates, instruments, agreements and other
documents as may be necessary or appropriate in connection therewith and (iv)
take any and all actions which may be necessary or appropriate in connection
therewith, granting unto such agents, proxies and attorneys-in-fact and each of
them individually, full power and authority to do and perform each and every act
and thing necessary or appropriate to be done, as fully for all intents and
purposes as he might or could do in person, hereby approving, ratifying and
confirming all that such agents, proxies and attorneys-in-fact, any of them or
any of his or their substitute or substitutes may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
DATE SIGNATURE TITLE(S)
---- --------- --------
March 23, 1999 /s/ Ronald P. Nowak President and Chief Executive
-------------------------- Officer (Principal Executive
Ronald P. Nowak Officer)
March 23, 1999 /s/ Russell L. Allen Vice President, Finance and
-------------------------- Chief Financial Officer
Russell L. Allen (Principal Financial and
Accounting Officer)
March 23, 1999 /s/ Jon W. Bayless Director
--------------------------
Jon W. Bayless
22
<PAGE>
March 23, 1999 /s/ Charles E. Edwards Director
--------------------------
Charles E. Edwards
March 23, 1999 /s/ C. Eugene Ennis Chairman of the Board
--------------------------
C. Eugene Ennis
March 23, 1999 /s/ C.D. Gray Director
--------------------------
C.D. Gray
March 23, 1999 /s/ Douglas C. Williamson Director
--------------------------
Douglas C. Williamson
23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board
of Directors of 3DX Technologies Inc.:
We have audited the accompanying balance sheets of 3DX Technologies Inc. (a
Delaware corporation) as of December 31, 1998 and 1997, and the related
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of 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, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the uncertainties about the Company's ability to pay its
obligations when they become due and the lack of firm commitments to attract
additional capital raise substantial doubt about the ability of the Company to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 3. The accompanying financial statements do not include
any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern
Houston, Texas
March 22, 1999 ARTHUR ANDERSEN LLP
F-1
<PAGE>
3DX TECHNOLOGIES INC.
BALANCE SHEETS
DECEMBER 31,
--------------------------
1998 1997
ASSETS
Current assets:
Cash and cash equivalents........................ $ 1,447,756 $ 1,568,091
Accounts receivable.............................. 1,039,331 1,181,083
Prepaid expenses................................. 83,892 110,681
----------- -----------
Total current assets............................ 2,570,979 2,859,855
----------- -----------
Property and equipment:
Oil and gas properties, full-cost method:
Evaluated....................................... 32,664,307 22,521,673
Unevaluated..................................... 4,450,731 10,098,698
Technical interpretation equipment............... 2,734,149 2,605,439
Other property and equipment..................... 273,780 273,780
----------- -----------
40,122,967 35,499,590
Less accumulated depletion, depreciation and
amortization................................... (29,256,556) (17,127,846)
------------ -----------
10,866,411 18,371,744
Other assets..................................... 63,771 78,041
----------- -----------
$13,501,161 $21,309,640
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 1,301,828 $ 1,713,209
Accrued liabilities.............................. 468,028 1,778,543
----------- -----------
Total current liabilities....................... 1,769,856 3,491,752
----------- -----------
Borrowings on credit agreement .................. 1,200,000 -
----------- -----------
Total liabilities .......................... 2,969,856 3,491,752
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000
shares authorized, none issued.................. - -
Common stock, $.01 par value, 20,000,000 shares
authorized, 9,379,209 and 7,225,462 shares
issued and outstanding, respectively............ 93,792 72,255
Paid-in capital.................................. 39,989,951 38,085,357
Deferred compensation............................ (136,304) (512,132)
Accumulated deficit.............................. (29,416,134) (19,827,592)
----------- -----------
Total stockholders' equity...................... 10,531,305 17,817,888
----------- -----------
$13,501,161 $21,309,640
=========== ===========
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,
-------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Oil and gas............................. $ 4,544,690 $ 3,045,447 $ 851,827
Interest and other...................... 53,984 585,154 247,960
----------- ----------- -----------
Total revenues........................ 4,598,674 3,630,601 1,099,787
----------- ----------- -----------
Costs and expenses:
Lease operating......................... 411,875 257,291 49,016
Production taxes........................ 319,874 178,952 58,660
Impairment of oil and gas properties.... 7,863,536 9,061,240 1,476,690
Depletion, depreciation, and
amortization of oil and gas properties 3,545,328 2,636,305 422,839
Interest expense ....................... 12,847 483 -
General and administrative.............. 2,033,756 2,532,474 1,827,946
----------- ----------- -----------
Total costs and expenses.............. 14,187,216 14,666,745 3,835,151
----------- ----------- -----------
Net loss.................................. (9,588,542) (11,036,144) (2,735,364)
Dividends on preferred stock.............. - - (520,393)
Redemption premium on Series B preferred
stock................................... - - (365,810)
Accretion on preferred stock.............. - - (54,844)
----------- ----------- -----------
Net loss applicable to common stockholders $(9,588,542) $(11,036,144) $(3,676,411)
=========== ============= ===========
Basic and diluted net loss per common share $(1.15) $(1.53) $(1.21)
======= ====== ======
Weighted average number of common shares 8,328,429 7,193,837 3,042,466
outstanding............................. ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
3DX TECHNOLOGIES INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK STOCK
----------------- PAID-IN DEFERRED ACCUMULATED SUBSCRIPTIONS
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT RECEIVABLE TOTAL
------ ------ ------- ------------ ----------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1995............ 2,987,908 29,879 1,730,459 (837,864) (5,115,037) (47,756) (4,240,319)
Principal collections. - - - - - 47,756 47,756
Shares issued upon
exercise of stock
options............. 3,124 31 573 - - - 604
Accrual of dividends.. - - - - (520,393) - (520,393)
Accretion on preferred
stock............... - - - - (54,844) - (54,844)
Deferred compensation
related to certain
stock options....... - - 922,806 (922,806) - - -
Compensation expense
related to certain
stock options....... - - - 867,630 - - 867,630
Shares issued in
Initial Public
Offering (net of
offering costs)..... 2,400,000 24,000 23,539,064 - - - 23,563,064
Conversion of Series C
preferred to common
stock............... 1,450,145 14,502 7,996,798 - - - 8,011,300
Redemption of Series B
preferred stock..... - - - - (365,810) - (365,810)
Net loss.............. - - - - (2,735,364) - (2,735,364)
--------- ------- ----------- --------- ------------ -------- -----------
Balance at December
31, 1996............ 6,841,177 68,412 34,189,700 (893,040) (8,791,448) - 24,573,624
Shares issued for
over-allotment...... 375,000 3,750 3,796,396 - - - 3,800,146
Shares issued for
exercise of stock
options............. 9,285 93 3,155 - - 3,248
Deferred compensation
related to certain
stock options....... - - 96,106 (96,106) - - -
Compensation expense
related to certain
stock options....... - - - 477,014 - - 477,014
Net loss.............. - - - - (11,036,144) (11,036,144)
--------- ------- ----------- --------- ------------ -------- -----------
Balance at December
31, 1997............ 7,225,462 72,255 38,085,357 (512,132) (19,827,592) - 17,817,888
Shares issued for
exercise of stock
options............. 401,703 4,017 127,226 - - - 131,243
Deferred compensation
related to
restricted stock
award............... 50,000 500 97,938 (98,438) - - -
Compensation expense
related to
restricted stock
award............... - - - 41,016 - - 41,016
Compensation expense
related to certain
stock options....... - - - 180,905 - - 180,905
Reversal of
compensation expense
for former employees
related to certain
stock options ...... - - (628,488) 252,345 - - (376,143)
Shares issued (net of
offering costs) .... 1,702,044 17,020 2,307,918 - - - 2,324,938
Net loss ............. - - - - (9,588,542) - (9,588,542)
--------- ------- ----------- --------- ------------ -------- -----------
Balance at December
31, 1998............ 9,379,209 $93,792 $39,989,951 $(136,304) $(29,416,134) $ - $10,531,305
========= ======= =========== ========= ============ ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
3DX TECHNOLOGIES INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................ $(9,588,542) $(11,036,144) $(2,735,364)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depletion, depreciation and
amortization....................... 4,265,174 3,366,242 883,962
Compensation related to certain
stock options..................... (154,222) 477,014 867,630
Impairment of oil and gas properties. 7,863,536 9,061,240 1,476,690
(Increase) decrease in accounts
receivable........................ 141,752 (626,873) (440,506)
(Increase) decrease in prepaid
expenses.......................... 26,789 54,414 (79,309)
Increase (decrease) in accounts
payable........................... (5,460) (107,291) 388,767
Increase (decrease) in accrued
liabilities....................... (65,516) 240,963 253,415
----------- ------------ -----------
Net cash provided by operating
activities............................ 2,483,511 1,429,565 615,285
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties..... (8,414,172) (19,948,293) (6,166,219)
Sales of oil and gas properties......... 2,568,585 - -
Purchases of technical and other
equipment.............................. (128,710) (1,168,154) (456,264)
Proceeds from securities held to
maturity ............................. - - 1,595,167
Other assets ........................... 14,270 (70,166) 5,000
----------- ------------ -----------
Net cash used in investing activities... (5,960,027) (21,186,613) (5,022,316)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on credit agreement ....... 2,000,000 - -
Payment on borrowings on credit
agreement .......................... (800,000) - -
Common stock proceeds, net of issuance
costs.................................. 2,024,938 3,800,146 23,563,064
Proceeds from exercise of stock
options ............................ 131,243 3,248 604
Series C preferred stock proceeds, net
of issuance costs..................... - - 143,843
Redemption of Series B preferred stock.. - - (6,687,100)
Payment of Series C preferred stock
dividends............................. - - (795,649)
----------- ------------ -----------
Net cash provided by financing
activities............................ 3,356,181 3,803,394 16,224,762
----------- ------------ -----------
Net change in cash and cash equivalents... (120,335) (15,953,654) 11,817,731
Cash and cash equivalents at beginning of
year.................................... 1,568,091 17,521,745 5,704,014
----------- ------------ -----------
Cash and cash equivalents at end of the
year.................................... $ 1,447,756 $ 1,568,091 $17,521,745
=========== ============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION
NON-CASH TRANSACTIONS:
Accretion on preferred stock.......... - - 54,844
Redemption premium on Series B
preferred stock.................... - - 365,810
Issuance of common stock for reduction
of accounts payable ............... 300,000 - -
Transfer of property interest for
reduction of accounts payable ..... 655,407 - -
The accompanying notes are an integral part of these financial statements.
</TABLE>
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's interests in oil and gas ventures are proportionately consolidated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OIL AND GAS PROPERTIES
3DX accounts for its oil and gas properties using the full-cost method.
All costs associated with the acquisition, exploration and development of oil
and gas properties, including such costs as leasehold acquisition costs,
geological and geophysical expenditures, dry hole costs and tangible and
intangible development costs, are capitalized as incurred. Included in
capitalized costs for 1998, 1997 and 1996 are $1,253,906, $1,962,691, and
$1,146,722, respectively of payroll and related costs of exploration department
personnel which are directly attributable to 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. The internal
costs capitalized do not include any costs related to production, general
corporate overhead, or similar activities.
Dispositions of proved oil and gas properties are reported as adjustments
to capitalized costs, with gains and losses not recognized unless such
adjustments would significantly alter the relationship between capitalized costs
and estimated proved oil and gas reserves. In 1998, the Company sold its
interests in certain properties for total cash proceeds of $2,568,585. In March
1999. The Company sold its remaining interest in a property for proceeds of
$450,000.
The evaluated costs of oil and gas properties plus estimated future
development and dismantlement costs are charged to operations as depletion,
depreciation and amortization using the unit-of-production method based on the
ratio of current production to estimated proved recoverable oil and gas
reserves. The Company excludes unevaluated property costs from the depletion,
depreciation, and amortization calculations until proved reserves have been
discovered or a determination of impairment has been made. Unevaluated
properties are assessed for impairment on a property-by-property basis.
Impairment of capitalized costs of oil and gas properties is determined
for each cost center on a country-by-country basis. For each cost center, to the
extent that capitalized costs of oil and gas properties, net of related
accumulated depreciation, depletion and amortization and any related deferred
income taxes, exceed the future net revenues of estimated proved oil and gas
reserves, discounted at 10% and net of any income tax effects, plus the lower of
cost or fair value of unevaluated properties, such excess costs are charged to
operations as an impairment of oil and gas properties. Oil and gas impairment
charges recorded during 1998 were $7,863,536. The impairments recorded were
principally the result of increased additions to evaluated property costs and
the decline in oil and gas prices being received by the Company on December 31,
1998.
F-6
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Oil and gas impairment charges recorded during 1997 were $9,061,240, all
of which were attributable to the fourth quarter ended December 31, 1997. This
writedown results principally from the significant decline in oil and gas prices
being received by the Company on December 31, 1997 and a relatively large
investment in three unsuccessful exploratory wells all of which were evaluated
in the fourth quarter of 1997.
Technical interpretation equipment and related software and other property
and equipment, consisting of office furniture, equipment and leasehold
improvements are recorded at cost. Depreciation is determined on a straight-line
basis over the estimated useful lives of the assets, which range from three to
five years. Depreciation of other property and equipment totaled $719,846,
$728,005, and $459,189 for 1998, 1997 and 1996, respectively, and is included in
general and administrative expenses.
ACCOUNTING FOR INCOME TAXES
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 $301,304, $264,651, and $229,556 in 1998,
1997 and 1996, 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:
F-7
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31,
------------------------
1998 1997 1996
---- ---- ----
Basic and diluted net loss per common
share, as previously reported .......... $(1.15) $(1.53) $(1.16)
Retroactive effect of change in
accounting principle.................... - - (0.05)
------ ------ ------
Basic and diluted net loss per common
share ............................. $(1.15) $(1.53) $(1.21)
====== ====== ======
The computation of basic and diluted net loss per common share was based
entirely on the weighted average common shares outstanding. Stock options which
are potentially dilutive were excluded from the net loss per common share
calculation in each of the years presented as the effect would have been
antidilutive. See Note 9 for the number of stock options outstanding.
STATEMENTS OF CASH FLOWS
For the purposes of the statements of cash flows, the Company considers
all highly liquid investments purchased with original maturities of three months
or less to be cash equivalents.
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 gas production to four major
customers during 1998 with one customer accounting for 31% of the Company's 1998
oil and gas revenues and the remaining three customers each accounting for 13%
to 15% of 1998 oil and gas revenues. Sales to one customer represented 63% and
58% of oil and gas revenues in 1997 and 1996, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities are short-term in nature and
approximate fair value.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Oil and
gas reserve estimates, which are the basis for units-of-production depletion and
impairment of oil and gas properties, are inherently imprecise and are expected
to change as future information becomes available.
F-8
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
PRIOR YEAR RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current presentation.
ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income", was issued in June 1997,
with the adoption required for fiscal years beginning after December 31, 1997.
SFAS No. 130 requires the presentation of an additional income measure (termed
"comprehensive income"), which adjusts traditional net income for certain items
that previously were only reflected as direct charges to equity. For the years
ended December 31, 1998, 1997 and 1996 there is not a difference between
"traditional" net income and comprehensive net income.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", was issued in June 1997, establishing standards for public
business enterprises to report information about operating segments and related
information in interim and annual financial statements. The Company has
evaluated the applicability of SFAS No. 131 and has concluded that the Company
does not meet the criteria which require segment reporting as the Company has
only one operating segment.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.
A company may also implement SFAS No. 133 as of the beginning of any fiscal
quarter after issuance. SFAS No. 133 cannot be applied retroactively. SFAS No.
133 must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997 and, at the company's election,
before January 1, 1998. Based on the Company's current operations, SFAS No. 133
will not impact the Company's disclosure or reporting.
3. GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company expects that its projected
net cash flows from currently producing properties will be sufficient to fund
its projected minimum levels of general and administrative expenditures through
December 31, 1999, including technical employee and related costs which are
capitalized under full-cost accounting. However, these projections do not
consider any cash expenditures which could be required by the Company's planned
capital and exploration program discussed below. Available cash could also be
limited by declines in oil and gas prices and unanticipated declines in oil and
gas production from existing properties. These matters could adversely affect
the Company's ability to pay its obligations as they become due.
F-9
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The Company has made and will be required to make oil and gas capital
expenditures substantially in excess of its net cash flow from operations in
order to complete the exploration and development of its existing properties.
The company will also need to acquire exploration prospects and find additional
oil and gas reserves in order for its asset base not to be depleted by current
oil and gas production. The level of capital spending in 1999 and thereafter
will be highly dependent upon the Company's ability to obtain additional
capital.
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's 1999 expenditure plans currently include up to eleven exploratory
and development wells and various lease and seismic data acquisitions. 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.
Management of the Company continues to seek financing for its capital
program from a variety of sources. The Company is actively soliciting new common
or preferred equity investors, which could lead to a sale of all or a
substantial portion of the Company's equity interests to a merger partner. The
Company could also seek additional debt financing, although it has no additional
borrowings currently available under its credit agreement. The Company also
recently sold interests in oil and gas properties to help fund its capital
program, and will consider additional property sales, although no such sales are
imminent. No assurance can be given that the Company will be able to obtain
additional financing by these or other means on terms that would be acceptable
to the Company. The Company's inability to obtain additional financing would
have a material adverse effect on the Company. Without raising additional
capital, the Company anticipates that it will be required to limit or defer its
planned oil and gas exploration and development program, which could adversely
affect the recoverability and ultimate value of the Company's oil and gas
properties. The Company may also be required to pursue other financial
alternatives, which could include a sale or merger of the Company.
Management intends to pursue exploration and development opportunities to
the extent additional capital becomes available in the current oil and gas
environment. However, the uncertainties about the Company's future cash flows
and the lack of firm commitments to attract additional capital at this time
raise substantial doubt about the ability of the Company to continue as a going
concern. The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
4. 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. The Company met with officials from The
Nasdaq Stock Market, Inc. on February 12, 1999, at which time the Company
F-10
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
presented several alternatives to regain compliance with the minimum bid price
and market value of public float requirements. On March 22, 1999, The Nasdaq
Stock Market Inc. responded to the meeting with the decision to transfer the
listing of the Company's securities to The Nasdaq SmallCap Market, effective
with the open of business on March 24, 1999, pursuant to the following
exception. On or before April 5, 1999, the Company must evidence a minimum
closing bid price of $1.00 per share for a minimum of ten consecutive trading
days. In order to fully comply with the terms of this exception, the Company
must be able to demonstrate compliance with all requirements for continued
listing on The Nasdaq SmallCap Market. Accordingly, effective, March 24, 1999,
the trading symbol of the Company's securities was changed from TDXT to TDXTC.
The "C" will be removed from the symbol when The Nasdaq Stock Market Inc. has
confirmed compliance with the terms of the exception and all other criteria
necessary for continued listing. In the event the Company is unable to meet the
terms of this exception, the Company's securities will be delisted from The
Nasdaq Stock Market. If delisted, trading of the common stock would be conducted
in the over-the-counter market or in what are commonly referred to as the "pink
sheets". As a result, a holder of the common stock could find it more difficult
to dispose of or to obtain accurate quotations of the price of the common stock.
Such delisting could have an adverse effect on the market price and overall
marketability of the common stock.
If the common stock is not listed on Nasdaq and has a market price of less
than $5.00 per share, it may be classified as a "penny stock". SEC regulations
define a "penny stock" to be any non-Nasdaq equity security that has a market
price of less than $5.00 per share, subject to certain exceptions. For any
transaction involving a penny stock, unless exempt, the rules require delivery,
prior to any transaction in a penny stock, of a disclosure schedule prepared by
the 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.
F-11
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
5. INCOME TAXES
Significant components of the Company's deferred tax liabilities and
assets are as follows:
DECEMBER 31,
------------------------
1998 1997
Deferred tax liability:
Exploration and development expenditures
deducted for tax and capitalized for books...... $(2,016,743 $ (981,479)
Other items, net.................................. (173,101) (70,968)
----------- ----------
Total deferred tax liability (2,189,844) (1,052,447)
Deferred tax assets:
Net operating loss carryforwards 3,979,073 3,803,419
Other items, net................ 2,330,587 836,151
---------- ----------
Total deferred tax assets... 6,309,660 4,639,570
Less: Valuation allowance....... (4,119,816) (3,587,123)
Net deferred tax assets........... 2,189,844 1,052,447
---------- ----------
Net deferred tax liability........ $ - $ -
========== ==========
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, 1998, the Company had tax net operating loss
carryforwards of approximately $11,703,000 which begin to expire in 2008. As a
result of recent stock transactions, including the initial public offering, the
Company's utilization of its net operating losses is limited under Section 382
of the Internal Revenue Code.
6. CREDIT AGREEMENT
On December 18, 1997, the Company executed a credit agreement with a
commercial bank which provides for advances under a borrowing base periodically
determined by the Bank and set initially at $5 million. The credit agreement
expires on December 31, 2000. During April 1998, the bank redetermined the
borrowing base and established an availability of $2 million which was reduced
to $1.2 million in November 1998. The credit agreement is secured by
substantially all of the Company's producing oil and gas properties. Advances
carry an interest rate, at the Company's option, of either the London Interbank
Offered Rate ("LIBOR") plus 2% or the lender's base rate. The credit agreement
contains restrictions on dividends and additional liens and indebtedness and
requires the maintenance of a minimum current ratio and net worth, each as
defined in the credit agreement. At December 31, 1998, the outstanding balance
under this credit agreement was $1.2 million at a weighted average interest rate
of 7.3 percent. There were no borrowings under the credit agreement during the
year ended December 31, 1997. In March 1999, the Company used the proceeds from
a sale of an interest in oil and gas properties to pay down its outstanding
balance to $750,000.
F-12
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
7. MANDATORILY REDEEMABLE PREFERRED STOCK
SERIES B
In November 1993, 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 8), all of the issued and outstanding shares of
Series B Preferred Stock were redeemed. The unamortized redemption premium of
$365,810 was charged to the Company's accumulated deficit.
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%
F-13
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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 activity of Series B and Series C
Preferred Stock:
REDEEMABLE PREFERRED STOCK
-------------------------------------------
SERIES B SERIES C
------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
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.. - $ - - $ -
======= ========= ========== ==========
8. 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.
F-14
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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 granted to the purchasers an option to purchase,
subject to stockholder approval, up to an aggregate of 1,871,290 additional
shares of common stock at a purchase price of $1.50 per share. On August 10,
1998, the option expired unexercised.
The agreement also grants the purchasers the right (1) to receive
additional shares of common stock in the event of certain dilutive issuances at
less than $1.50 per share which may be made by 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). A potentially dilutive issuance under
this agreement occurred in the last quarter of 1998 which could result in an
additional 292,408 shares of the Company's common stock being issued under the
anti-dilution provisions of the agreement.
Under the terms of the June 3, 1998 agreement, the Company's stockholders
approved a proposal for the adoption of a one-for-five reverse stock split with
respect to all of the outstanding common stock of the Company. Such reverse
stock split will not be effective until it is implemented by the Board of
Directors of the Company.
In August 1998, the Company issued 240,000 shares of common stock to an
operating partner in satisfaction of an account payable on the Company's books
to that operating partner.
Included in accrued liabilities at December 31, 1998 is $137,880 due to a
consultant to the Company. Under the terms of the consulting agreement, this
amount is to be paid in the Company's common stock at the average closing price
in effect when the services were performed. The amount of common shares to be
issued to satisfy the liability at December 31, 1988 is 225,000 shares.
9. STOCK OPTIONS
In June 1994, the Board of Directors approved the 1994 Stock Option Plan
(the "Plan") for employees, officers, directors and certain consultants of 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 1,700,783 shares of common stock for issuance
under this Plan, of which 764,421 shares were available for grant as of December
31, 1998. The following table summarizes option balances and activity for the
Plan:
F-15
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
--------------------------------------------------------
Options outstanding, December 31,
1995........................... 686,943 $0.34
Granted.......................... 267,806 1.52
Exercised........................ (3,124) 0.19
Canceled......................... (157,146) 0.57
--------------------------------------------------------
Options outstanding, December 31,
1996........................... 794,479 $0.70
Granted.......................... 628,656 10.33
Exercised........................ (9,285) 0.35
Canceled......................... (33,100) 5.03
--------------------------------------------------------
Options outstanding, December 31,
1997........................... 1,380,750 $4.98
Granted.......................... 1,598,251 2.00
Exercised........................ (401,703) 0.33
Canceled......................... (1,750,894) 4.97
--------------------------------------------------------
Options outstanding, December 31,
1998........................... 826,404 $1.27
--------------------------------------------------------
--------------------------------------------------------
Exercisable options -
December 31, 1996............. 344,396 $ 0.28
December 31, 1997............. 554,183 0.56
December 31, 1998............. 210,844 0.40
--------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF OPTIONS AVERAGE AVERAGE OPTIONS AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/98 LIFE (YRS) PRICE AT 12/31/98 PRICE
--------------------------------------------------------------------------
$0.19 to $0.58 234,163 6.12 $0.36 210,844 $0.40
$1.62 592,241 9.30 $1.63 -
------- -------
Total 826,404 8.40 $1.27 210,844 $0.40
In connection with stock options granted within one year of the initial
public offering, the Company recorded deferred compensation as paid-in capital
with a corresponding offset to stockholders' equity. The amount of deferred
compensation is based on the difference between the option exercise price and
the $11.00 per share initial public offering common stock price for those
options. Deferred compensation is being amortized as compensation expense over
the option vesting period, and totaled $180,905, $477,014 and $867,630 during
the years ended December 31, 1998, 1997 and 1996, respectively. During the third
quarter of 1998, the Company reversed approximately $376,000 of stock option
expense previously recorded for employees who were terminated as of September
30, 1998 and whose stock options were cancelled. Unamortized deferred
compensation as of December 31, 1998 amounted to $136,304.
F-16
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation". SFAS No. 123 is a new standard of accounting for stock-based
compensation and establishes a fair value method of accounting for awards
granted after December 31, 1995 under stock compensation plans. The Company has
elected to continue accounting for employee stock options under Accounting
Principles Board Opinion No. 25 "Accounting For Stock Issued to Employees". 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:
1998 1997 1996
---- ---- ----
Net loss attributable to common
stock:
As reported................... $(9,588,542) $(11,036,144) $(3,676,411)
Pro forma..................... (9,797,089) (11,587,856) (3,391,345)
Basic and diluted earnings per
share:
As reported................... $ (1.15) $ (1.53) $ (1.21)
Pro forma..................... (1.18) (1.61) (1.11)
-------------------------------------------------------------------------
Pro forma assumptions:
Risk free interest rate:
Maximum.................... 5.63% 6.72% 6.68%
Minimum.................... 4.18% 5.91% 5.35%
Expected option life:.........
Maximum.................... 4.5 years 4.5 years 4.5 years
Minimum.................... 3.7 years 3.7 years 3.7 years
-------------------------------------------------------------------------
Weighted average fair value of
options granted during the
year......................... $1.51 $6.39 $8.95
-------------------------------------------------------------------------
Volatility factor................ 1.02 .703 -
-------------------------------------------------------------------------
Volatility was not considered in the calculation of option values prior to
December 26, 1996, as the Company's common stock was not publicly traded.
10. 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.
F-17
<PAGE>
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
11. 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, 1998:
1999.................................... $94,633
2000.................................... 15,772
--------
Total minimum lease payments............ $110,405
========
Rental expense under this office lease amounted to $99,206, $94,633, and
$94,633 during the years ended December 31, 1998, 1997 and 1996, respectively.
F-18
<PAGE>
3DX TECHNOLOGIES INC.
SUPPLEMENTARY INFORMATION - UNAUDITED
QUARTERLY FINANCIAL DATA (UNAUDITED)
The table below sets forth selected unaudited quarterly financial
information for 1998 and 1997:
---------------------------------------------------------------------------
QUARTER ENDED:
---------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER DECEMBER 31
-------- ------- ---------- -----------
1998:
Revenues (a)........... $ 871,839 $ 1,218,533 $ 1,442,430 $ 1,065,872
Net loss (b)........... (1,536,761) (4,854,001) (2,495,375) (702,405)
Net loss applicable to
common stockholders.. (1,536,761) (4,854,001) (2,495,375) (702,405)
Basic and diluted net
loss per common
share(c)............ (0.21) (0.63) (0.28) (0.08)
1997:
Revenues (a)........... $ 839,273 $ 890,846 $ 840,705 $ 1,059,777
Net loss (b)........... (40,458) (460,474) (590,225) (9,944,987)
Net loss applicable to
common stockholders. (40,458) (460,474) (590,225) (9,944,987)
Basic and diluted net
loss per common
share(c) (0.01) (0.06) (0.08) (1.38)
(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 totaling $7,863,536 in 1998, including $4,329,687 and $2,157,003
in the second and third quarters of 1998, respectively, and $9,061,240 in
the fourth quarter of 1997.
(c) Net loss per common share are computed independently for each of the
quarters presented and therefore may not sum to the totals for the year.
F-19
<PAGE>
3DX TECHNOLOGIES INC.
SUPPLEMENTARY INFORMATION - UNAUDITED
CAPITALIZED 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, 1998, 1997 and
1996 were as follows:
1998 1997 1996
---- ---- ----
Evaluated oil and gas properties....... $32,664,307 $22,521,673 $7,164,397
Unevaluated oil and gas properties.... 4,450,731 10,098,698 4,403,165
----------- ----------- ----------
Total capitalized costs............... 37,115,038 32,620,371 11,567,562
Less-accumulated depletion,
depreciation and amortization and
impairments........................ (26,882,267) (15,473,403) (3,775,858)
----------- ----------- ----------
$10,232,771 $17,146,968 $7,791,704
=========== =========== ==========
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, 1998 will be
fully evaluated within the succeeding two-year period.
The following table represents an analysis of remaining unevaluated oil
and gas property costs at December 31, 1998 according to the years in which they
were incurred:
YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
Acquisition costs................ $ 573,841 $1,250,392 $14,161
Exploration costs................ 1,038,090 460,105 107,636
Capitalized Interest............. 78,957 - -
Capitalized Overhead............. 837,278 90,271 -
---------- ---------- --------
Total...................... $2,528,166 $1,800,768 $121,797
========== ========== ========
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,
1998 1997 1996
---- ---- ----
Property acquisition costs-
Proved........................ $ 25,000 $ 70,000 $ -
Unproved...................... 633,112 4,794,238 1,171,217
Exploration costs................ 5,137,353 15,654,152 6,269,266
Development costs................ 1,923,195 534,419 103,210
---------- ----------- ----------
$ 7,718,660 $21,052,809 $7,543,693
=========== =========== ==========
F-20
<PAGE>
3DX TECHNOLOGIES INC.
SUPPLEMENTARY INFORMATION - UNAUDITED
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, 1998, 1997 and 1996. All of the reserve
quantities reflected in the table below are proved developed reserves.
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
---- ---- ----
OIL (BBLS)
-----------------------------------
Proved reserves at the beginning of
the year............................. 88,751 32,428 41,193
Extensions, discoveries, and other
additions............................ 36,887 43,497 9,797
Revisions of previous estimates........ (16,530) 5,489 (10,079)
Purchases of reserves in place......... - 21,405 -
Sales of reserves in place ............ (9,492) - -
Production............................. (37,802) (14,068) (8,483)
------- ------- -------
Proved reserves at the end of the year 61,814 88,751 32,428
======= ======= =======
GAS (MCF)
-----------------------------------
Proved reserves at the beginning of
the year............................. 3,932,109 2,463,736 442,795
Extensions, discoveries, and other
additions............................ 2,238,515 2,546,337 2,284,482
Revisions of previous estimates........ 463,552 53,855 7,661
Purchases of reserves in place......... - - -
Sales of reserves in place............. (870,789) - -
Production............................. (1,877,938) (1,131,819) (271,202)
---------- ---------- ---------
Proved reserves at the end of the year. 3,885,449 3,932,109 2,463,736
========== ========== =========
F-21
<PAGE>
3DX TECHNOLOGIES INC.
SUPPLEMENTARY INFORMATION - UNAUDITED
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,
-------------------------------
1998 1997 1996
---- ---- ----
Future cash inflow........................ $ 9,000 $10,427 $ 9,354
Future production, development and
abandonment costs...................... (1,781) (2,195) (1,430)
------- ------ ------
Future cash flows before income taxes..... 7,219 8,232 7,924
Future income taxes....................... - - -
Future net cash flows..................... 7,219 8,232 7,924
10% Discount factor....................... (1,437) (1,184) (1,301)
------- ------ ------
Standardized measure of discounted future
net cash flow.......................... $ 5,782 $ 7,048 $ 6,623
======= ======= =======
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS:
Sales of oil, gas and natural gas liquids,
net of production costs................. $(3,813) $(2,609) $ (744)
Extensions, discoveries and other additions 3,113 4,737 6,594
Revisions of previous quantity estimates... 621 124 (200)
Net changes in prices and production costs. (469) (2,468) 173
Accretion of discount...................... 705 662 77
Changes in future development costs........ (24) 60 (82)
Purchases of reserves in place............. - 109 -
Sales of reserves in place................. (1,499) - -
Changes in production rates (timing) and
other................................... 100 (190) 34
------- ------- -------
Net change................................. $(1,266) $ 425 $ 5,852
======== ======= =======
Estimated future cash inflows are computed by applying year-end prices of
oil and gas to year-end quantities of proved reserves. Future price changes are
considered only to the extent provided by contractual arrangements. Estimated
future development and production costs are determined by estimating the
expenditures to be incurred in developing and producing the proved oil and gas
reserves at the end of the year, based on year-end costs and assuming
continuation of existing economic conditions. Estimated future income tax
expense is calculated by applying year-end statutory tax rates to estimated
future pretax net cash flows related to proved oil and gas reserves, less the
tax basis (including net operating loss carryforwards projected to be usable) of
the properties involved.
These estimates were determined in accordance with SFAS No. 69
"Disclosures About Oil and Gas Producing Activities". Because of unpredictable
variances in expenses and capital forecasts, crude oil and gas prices and oil
and gas reserve volume estimates, as well as the statutory pricing and
discounting assumptions used in these cash flow estimates, management believes
the usefulness of this data is limited. These estimates of future net cash flows
do not necessarily represent management's assessment of estimated fair market
value, future profitability or future cash flow to 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, 1998 were approximately $9.65 per
barrel of oil and approximately $2.16 per Mcf of gas. The Company does not have
oil and gas reserves which are committed under long-term oil and gas sales or
hedging contracts.
F-22
<PAGE>
3DX TECHNOLOGIES INC.
SUPPLEMENTARY INFORMATION - UNAUDITED
The standardized measure table as of December 31, 1998 reflects zero
future income taxes because the existing tax basis in evaluated properties
(which approximates $10.7 million) as of that date offsets the entire $7.2
million estimate of undiscounted future net cash inflows before income taxes. As
of December 31, 1998, the Company also had tax net operating loss carryforwards
(which represent additional tax deductions against future cash flows) of
approximately $11.7 million. Accordingly, in total there were more than enough
tax basis and tax loss carryforwards to offset any potential future income taxes
in the standardized measure calculation.
F-23
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
11.1 Computation of Earnings per Share
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Ryder Scott Company
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule for December 31, 1998 (for SEC use only)
27.2 Financial Data Schedule for December 31, 1997 (restated) (for SEC use
only)
27.3 Financial Data Schedule for December 31, 1996 (restated) (for
SEC use only)
<PAGE>
EXHIBIT 11.1
COMPUTATION OF NET LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net Loss................... $(9,588,542) $(11,036,144) $(2,735,364) $(2,488,375) $(385,013)
Preferred B dividend....... - - - (783,700) (421,696)
Preferred B accretion...... - - (43,464) (43,464) (30,367)
Preferred B redemption
premium.................. - - (365,810) - -
Preferred C dividend....... - - (520,393) (275,256) -
Preferred C accretion...... - - (11,380) (4,944) -
----------- ------------ ----------- ----------- ---------
Net loss attributable to
common stock............. $(9,588,542) $(11,036,144) $(3,676,411) $(3,595,739) $(837,076)
=========== ============ =========== =========== =========
Avg. weighted shares....... 8,328,429 7,193,837 3,042,466 2,987,908 2,373,258
========= ========= ========= ========= =========
Basic and diluted net loss
per common share as
reported................. $(1.15) $(1.53) $(1.16) $(1.14) $(0.33)
Retroactive effect of
change in accounting
principle................ - - (0.05) (0.06) (0.02)
----------- ------------ ----------- ----------- ---------
Basic and diluted net loss
per common share......... $(1.15) $(1.53) $(1.21) $(1.20) $(0.35)
========= ========= ========= ========= =========
</TABLE>
<PAGE>
COMPUTATION OF ACTUAL WEIGHTED AVERAGE SHARES OUTSTANDING
ANNUAL
ACTUAL WEIGHTED
ISSUE DATE SHARES AVERAGE
1994 Beginning Balance........... 2,232,530 2,232,530
Common Stock Sales............... 10/24/94 755,378 140,728
--------- ---------
1994 Ending Balance........... 12/31/94 2,987,908 2,373,258
========= =========
1995 Beginning Balance........... 2,987,908 2,987,908
Common Stock Sales...............
- -
1995 Ending Balance........... 12/31/95 2,987,908 2,987,908
========= =========
1996 Beginning Balance........... 2,987,908 2,987,908
Option Exercise.................. 5/15/96 3,124 1,960
Conversion of Series C........... 12/26/96 1,376,379 18,803
Conversion of Series C Warrants.. 12/26/96 73,766 1,008
Shares issued in IPO............. 12/26/96 2,400,000 32,787
--------- ---------
1996 Ending Balance........... 12/31/96 6,841,177 3,042,466
========= =========
1997 Beginning Balance........... 6,841,177 6,841,177
Shares issued for over-allotment. 1/25/97 375,000 350,342
Option Exercise.................. 6/27/97 2,000 1,030
Option Exercise.................. 10/13/97 2,585 567
Option Exercise.................. 11/6/97 4,700 721
--------- ---------
1997 Ending Balance........... 12/31/97 7,225,462 7,193,837
========= =========
1998 Beginning Balance........... 7,225,462 7,225,462
Option Exercise ................. 01/09/98 31,655 30,961
Option Exercise.................. 01/13/98 3,876 3,749
Restricted Stock Award .......... 03/06/98 50,000 41,233
Option Exercise.................. 04/09/98 35,966 26,309
Option Exercise.................. 05/13/98 1,938 1,237
Sale of Shares for Cash ......... 06/10/98 1,462,044 821,148
Option Exercise.................. 06/11/98 96,506 53,938
Option Exercise.................. 06/12/98 6,462 3,594
Issuance of Shares .............. 08/21/98 240,000 87,452
Option Exercise.................. 10/28/98 20,144 3,587
Option Exercise.................. 11/05/98 38,775 6,055
Option Exercise.................. 11/10/98 166,381 23,704
--------- ---------
1998 Ending Balance........... 12/31/98 9,379,209 8,328,429
========= =========
<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 Form 10-K into the Company's previously
filed registration statements on Form S-3 (File No. 333-63119) and Form S-8
(File No. 333-30187).
ARTHUR ANDERSEN LLP
Houston, Texas
March 24, 1999
<PAGE>
EXHIBIT 23.2
(LETTERHEAD OF RYDER SCOTT COMPANY)
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
As independent petroleum engineers, we hereby consent to (a) the use of
our name and references to our firm in the Annual Report on Form 10-K of 3DX
Technologies Inc. for the year ended December 31, 1998 and (b) to the inclusion
of the estimate of proved reserves and present value of the future net revenues
included in our report dated January 27, 1999 in such Annual Report.
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
March 24, 1999
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS OF 3DX TECHNOLOGIES INC., INCLUDED IN ITS
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,447,756
<SECURITIES> 0
<RECEIVABLES> 1,039,331
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,570,979
<PP&E> 40,122,967
<DEPRECIATION> 29,256,556
<TOTAL-ASSETS> 13,501,161
<CURRENT-LIABILITIES> 1,769,856
<BONDS> 0
0
0
<COMMON> 93,792
<OTHER-SE> 10,437,513
<TOTAL-LIABILITY-AND-EQUITY> 13,501,161
<SALES> 4,544,690
<TOTAL-REVENUES> 4,598,674
<CGS> 731,749
<TOTAL-COSTS> 14,187,216
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,588,542)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,588,542)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,588,542)
<EPS-PRIMARY> (1.15)
<EPS-DILUTED> (1.15)
</TABLE>
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
RESTATED FINANCIAL DATA SCHEDULE FOR THE FISCAL YEARS ENDED DECEMBER 31, 1997
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,568,091
<SECURITIES> 0
<RECEIVABLES> 1,181,083
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,859,855
<PP&E> 35,499,590
<DEPRECIATION> 17,127,846
<TOTAL-ASSETS> 21,309,640
<CURRENT-LIABILITIES> 3,491,752
<BONDS> 0
0
0
<COMMON> 72,255
<OTHER-SE> 17,745,633
<TOTAL-LIABILITY-AND-EQUITY> 21,309,640
<SALES> 3,045,447
<TOTAL-REVENUES> 3,630,601
<CGS> 436,243
<TOTAL-COSTS> 14,666,745
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (11,036,144)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,036,144)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,036,144)
<EPS-PRIMARY> (1.53)
<EPS-DILUTED> (1.53)
</TABLE>
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
RESTATED FINANCIAL DATA SCHEDULE FOR THE FISCAL YEARS ENDED DECEMBER 31, 1996
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 17,521,745
<SECURITIES> 0
<RECEIVABLES> 554,210
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 18,241,050
<PP&E> 13,278,627
<DEPRECIATION> 4,702,296
<TOTAL-ASSETS> 26,827,189
<CURRENT-LIABILITIES> 2,253,565
<BONDS> 0
0
0
<COMMON> 68,412
<OTHER-SE> 24,505,212
<TOTAL-LIABILITY-AND-EQUITY> 26,827,189
<SALES> 851,827
<TOTAL-REVENUES> 1,099,787
<CGS> 107,676
<TOTAL-COSTS> 3,835,151
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,735,364)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,735,364)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,735,364)
<EPS-PRIMARY> (1.21)
<EPS-DILUTED> (1.21)
</TABLE>
