-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I3cNspwQ1jaBBy57FmX31ikHGqdGBBMSXxiXycYx0iZeW2aHuFyaiDE/JF6iH3MF FM4TxjgawukNLscVXz3iRw== 0000912057-96-027740.txt : 19961202 0000912057-96-027740.hdr.sgml : 19961202 ACCESSION NUMBER: 0000912057-96-027740 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19961127 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: 3DX TECHNOLOGIES INC CENTRAL INDEX KEY: 0000915518 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 760386601 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-14473 FILM NUMBER: 96673120 BUSINESS ADDRESS: STREET 1: 12012 WICKCHESTER STREET 2: SUITE 250 CITY: HOUSTON STATE: TX ZIP: 77084 BUSINESS PHONE: 7135793398 MAIL ADDRESS: STREET 1: 12012 WICKCHESTER STREET 2: SUITE 250 CITY: HOUSTON STATE: TX ZIP: 77079 S-1/A 1 S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 27, 1996 REGISTRATION NO. 333-14473 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------ 3DX TECHNOLOGIES INC. (Exact name of registrant as specified in its charter) DELAWARE 1311 76-0386601 (State or other jurisdiction (Primary standard industrial (I.R.S. employer of classification code number) identification incorporation or organization) no.)
12012 WICKCHESTER, SUITE 250 HOUSTON, TEXAS 77079 (713) 579-3398 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------------ C. EUGENE ENNIS PRESIDENT AND CHIEF EXECUTIVE OFFICER 3DX TECHNOLOGIES INC. 12012 WICKCHESTER, SUITE 250 HOUSTON, TEXAS 77079 (713) 579-3398 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ Copies to: ANDREA J. CORCORAN, ESQ. G. MICHAEL O'LEARY, ESQ. KELLEY DRYE & WARREN LLP ANDREWS & KURTH LLP TWO STAMFORD PLAZA 4200 TEXAS COMMERCE TOWER 281 TRESSER BOULEVARD 600 TRAVIS STREET STAMFORD, CONNECTICUT 06901 HOUSTON, TEXAS 77002 (203) 324-1400 (713) 220-4200 ------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / _____________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / _____________ If delivery of the prospectus is expected to be made pursuant to Rule 434 under the Securities Act of 1933, please check the following box. / / ------------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM AGGREGATE OFFERING AMOUNT OF TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE(1)(2) Common Stock, par value $.01 per share................................ $50,885,120 $15,420
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933. (2) Of such total registration fee, the amount of $13,068 has been previously paid. ------------------------------ The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 3DX TECHNOLOGIES INC. CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS IN PART I OF FORM S-1
FORM S-1 ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS - ----------------------------------------------------------------------- ------------------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus.................................... Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus..... Additional Information; Outside Back Cover Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges............................................... Prospectus Summary; Risk Factors 4. Use of Proceeds............................................. Prospectus Summary; Use of Proceeds 5. Determination of Offering Price............................. Outside Front Cover Page; Underwriting 6. Dilution.................................................... Dilution 7. Selling Security Holders.................................... Principal and Selling Stockholders 8. Plan of Distribution........................................ Outside Front Cover Page; Underwriting 9. Description of Securities to be Registered.................. Outside Front Cover Page; Prospectus Summary; Dividend Policy; Description of Capital Stock; Shares Eligible For Future Sale 10. Interests of Named Experts and Counsel...................... Experts 11. Information with Respect to the Registrant (a) Description of Business.......................... Prospectus Summary; Business (b) Description of Property.......................... Business (c) Legal Proceedings................................ Business (d) Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters........................................ Dividend Policy; Description of Capital Stock (e) Financial Statements............................. Index to Financial Statements (f) Selected Historical Financial Data............... Selected Financial Data (g) Supplementary Financial Information.............. Prospectus Summary; Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations (h) Management's Discussion and Analysis of Financial Condition and Results of Operations............ Management's Discussion and Analysis of Financial Condition and Results of Operations (i) Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............ Not Applicable (j) Directors and Executive Officers................. Management (k) Executive Compensation........................... Management (l) Security Ownership of Certain Beneficial Owners and Management................................. Principal Stockholders; Shares Eligible For Future Sale (m) Certain Relationships and Related Transactions... Certain Transactions 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.................................. Not Applicable
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. 2,949,862 SHARES [LOGO] 3DX TECHNOLOGIES INC. - ------------------------------------------ COMMON STOCK Of the 2,949,862 shares of Common Stock, par value $0.01 per share ("Common Stock"), of 3DX Technologies Inc., a Delaware corporation (the "Company" or "3DX Technologies"), offered hereby, 2,500,000 shares are being sold by the Company and 449,862 shares are being sold by Landmark Graphics Corporation (the "Selling Stockholder"). See "Principal and Selling Stockholders." Prior to this offering (the "Offering"), there has been no public market for the Common Stock of the Company. It is estimated that the initial public offering price will be between $13 and $15 per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholder. SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON STOCK OFFERED HEREBY. --------------------- The shares of Common Stock have been approved for quotation on the Nasdaq National Market under the symbol "TDXT," subject to official notice of issuance. -------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE UNDERWRITING PROCEEDS TO PROCEEDS TO TO PUBLIC DISCOUNT (1) COMPANY (2) SELLING STOCKHOLDER Per Share..... $ $ $ $ Total (3)..... $ $ $ $
(1) The Company and the Selling Stockholder have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting Offering expenses payable by the Company estimated to be $ . (3) The Company has granted the Underwriters a 30-day option to purchase up to an aggregate of 442,480 additional shares of Common Stock, at the Price to Public, less the Underwriting Discount, solely to cover over-allotments, if any. If the Underwriters exercise such option in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." -------------------------- The shares of Common Stock are offered subject to receipt and acceptance by the Underwriters, to prior sale and to the Underwriters' right to reject any order in whole or in part and to withdraw, cancel or modify the offer without notice. It is expected that delivery of the shares of Common Stock will be made at the office of Howard, Weil, Labouisse, Friedrichs Incorporated, Energy Centre, 1100 Poydras Street, Suite 3500, New Orleans, Louisiana, or through the facilities of The Depository Trust Company, on or about , 1996. -------------------------- HOWARD, WEIL, LABOUISSE, FRIEDRICHS PETRIE PARKMAN & CO. INCORPORATED The date of this Prospectus is , 1996. ------------------------ IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY AND SHOULD BE READ IN CONJUNCTION WITH THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED AND GIVES EFFECT TO A REVERSE SPLIT (THE "REVERSE SPLIT") OF THE COMMON STOCK AT A RATIO OF 0.517-TO-1 TO BE EFFECTED IMMEDIATELY PRIOR TO THE CONSUMMATION OF THE OFFERING. SEE THE "GLOSSARY OF CERTAIN OIL AND GAS TERMS" APPEARING ELSEWHERE HEREIN FOR DEFINITIONS OF CERTAIN TERMS USED IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE CAPTION "RISK FACTORS." THE COMPANY 3DX Technologies is a knowledge-based oil and gas exploration company whose core competence and strategic focus is the utilization of 3-D seismic imaging and other advanced technologies in the search for commercial quantities of hydrocarbons. The Company only 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 carefully 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. The Company has developed a rigorous screening process that it applies to all projects that it considers. The screening process, which is adapted continually to incorporate the Company's ongoing experience, is designed to produce a balanced portfolio of projects that have reliable and experienced operating partners, are conducive to the application of advanced 3-D technology, have significant upside potential and may be extended into exploration trends. The Company's current portfolio includes 11 active operator partners and 23 exploration projects, primarily located onshore and near shore within the Gulf Coast region from south Texas to southern Florida. Although the Company has no current plan to expand its geographic focus beyond the Gulf Coast region, the Company will pursue opportunities that may become available in other select geographic areas as its capital resources increase. The Company believes that it can effectively and efficiently participate in an increasing number of concurrent projects by continually improving its techniques for acquiring and analyzing data. One example of such an improvement is the Company's 3DXPRESS process, an innovative exploration technique that improves the quality of seismic data and significantly compresses the time frame traditionally required for acquisition, processing, imaging and analysis. This process allows analysis of 3-D data while the seismic survey is being conducted, giving the Company's explorationists the ability to ensure data quality and to steer data collection toward more promising prospective areas. Utilizing this technology, the Company has been able to image and analyze an increased number of projects concurrently and to identify potential drilling sites more rapidly and accurately. Since its formation, the Company has participated in the drilling of 31 gross wells that have been drilled based on the Company's site and target depth recommendations. Twenty of these wells were successful and discovered estimated proved reserves of 40.3 Bcfe (2.8 Bcfe net to the Company's interest), of which 27.0 Bcfe (2.1 Bcfe net to the Company's interest) were discovered during the first nine months of 1996. The Company currently expects to participate in the drilling of between 35 and 40 wells during 1997, although the number of wells may increase as additional projects are added to the Company's portfolio. The Company believes that the disciplined approach it utilizes to select its partners and projects, together with its technological expertise, will result in improved exploration success and project economics. This success should position the Company to acquire larger working interests in an increased number of exploration projects. 3 THE OFFERING Shares of Common Stock Offered: By the Company (1).............. 2,500,000 By the Selling Stockholder...... 449,862 Total....................... 2,949,862 Shares of Common Stock Outstanding (1)(2): Before the Offering............. 4,505,049 After the Offering.............. 7,005,049 Use of proceeds................... The net proceeds of the shares of Common Stock sold in the Offering by the Company, estimated to be approximately $31.8 million (approximately $36.7 million if the Underwriters' over-allotment option is exercised in full), will be used by the Company for (i) capital expenditures to fund the Company's exploration and development program; (ii) redemption of all of the issued and outstanding shares of the Company's Redeemable Preferred Stock, Series B, $0.01 par value per share (the "Series B Preferred Stock") and payment of all accrued but unpaid dividends on the Company's Senior Redeemable Convertible Preferred Stock, Series C, $0.01 par value per share (the "Series C Preferred Stock") prior to the conversion thereof; and (iii) general corporate purposes including expenses associated with hiring additional personnel. See "Use of Proceeds." Nasdaq National Market symbol..... TDXT
- ------------------------ (1) Excludes 442,480 shares of Common Stock subject to issuance pursuant to the over-allotment option granted to the Underwriters. See "Underwriting." (2) Gives effect to the Transactions defined below, but excludes 1,501,813 shares of Common Stock reserved for issuance upon exercise of stock options which may be granted under the 1994 Stock Option Plan, as amended (the "Stock Option Plan"), of which options to purchase 794,479 shares of Common Stock, exercisable at prices ranging from $0.19 to $11.20 per share, have been granted and are outstanding as of the date hereof. See "Management--Stock Option Plan." THE TRANSACTIONS The following transactions (collectively, the "Transactions") will be effected in connection with the consummation of the Offering: (i) the redemption immediately after the closing of this Offering of all issued and outstanding shares of the Series B Preferred Stock (including the effects of a $309,711 redemption premium recorded against accumulated deficit which adjusts the Series B Preferred Stock carrying value to the liquidation price of $100 per share, and (ii) the conversion, prior to giving effect to the Reverse Split, of each of (x) the 266,224 shares of Series C Preferred Stock issuable upon exercise of certain outstanding warrants (the "Series C Preferred Stock Warrants") and (y) the 2,662,241 shares of Series C Preferred Stock issued and outstanding as of the date of this Prospectus into 1,514,017 shares of Common Stock, with a total recorded value of $8,711,040 after giving effect to the Reverse Split. See "Risk Factors--Benefits of the Offering to Existing Stockholders." For the pro forma effects of these Transactions on the Company's balance sheet as of September 30, 1996 see the "Prospectus Summary--Summary Historical Financial Data," "Capitalization," "Selected Financial Data," and the Company's Financial Statements. Such Transactions have no effect on reported net loss because they do not change reported revenues and expenses, and no effect on reported pro forma net loss applicable to common stockholder per share because the effects of such Transactions on preferred dividends and accretion have been reflected in the computation of reported net loss per common share. See Note 2 of Notes to Financial Statements. 4 SUMMARY HISTORICAL FINANCIAL DATA The financial information set forth below for the period from inception of operations (January 6, 1993) through December 31, 1993 and for the years ended December 31, 1994 and 1995 is derived from the Financial Statements of the Company, which were audited by Arthur Andersen LLP. The financial information set forth below as of September 30, 1996 and for the nine month periods ended September 30, 1995 and 1996 is derived from unaudited financial statements of the Company which, in the opinion of management, include all adjustments necessary for a fair presentation of the financial condition and results of operations of the Company for such periods. The results of operations for interim periods are not necessarily indicative of a full year's operations. 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 the other financial data included elsewhere in this Prospectus.
PERIOD FROM INCEPTION OF OPERATIONS (JANUARY 6, 1993) YEAR ENDED DECEMBER NINE MONTH PERIODS THROUGH 31, ENDED SEPTEMBER 30, DECEMBER ---------------------- ---------------------- 31, 1993 1994 1995 1995 1996 ---------- ---------- ---------- ---------- ---------- (UNAUDITED) STATEMENTS OF OPERATIONS DATA: Revenues: Oil and gas......................... $ -- $ 303,836 $ 274,511 $ 202,185 $ 408,459 Rental income....................... 127,034 100,962 58,195 45,563 120,098 Interest and other.................. 7,528 52,817 236,186 125,549 217,678 ---------- ---------- ---------- ---------- ---------- Total revenues.................... 134,562 457,615 568,892 373,297 746,235 Costs and expenses: Lease operating..................... -- 14,225 60,877 31,443 28,463 Production taxes.................... -- 19,812 17,656 12,380 22,764 Impairment of oil and gas properties........................ -- -- 1,627,321 1,477,567 1,476,690 Depletion, depreciation & amortization...................... 65,368 210,347 446,350 287,933 463,573 General and administrative.......... 596,267 598,244 854,072 652,671 704,264 Interest and other.................. 88,006 -- -- -- 289 ---------- ---------- ---------- ---------- ---------- Total costs and expenses.......... 749,641 842,628 3,006,276 2,461,994 2,696,043 ---------- ---------- ---------- ---------- ---------- Net loss from continuing operations... (615,079 ) (385,013) (2,437,384) (2,088,697) (1,949,808) Dividends on preferred stock.......... -- (503,400) (783,700) -- (798,672) Accretion on preferred stock.......... (3,966 ) (30,367) (48,408) (34,681) (41,133) ---------- ---------- ---------- ---------- ---------- Net loss from continuing operations applicable to common stockholders... $(619,045 ) $ (918,780) $(3,269,492) $(2,123,378) $(2,789,613) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Pro forma net loss from continuing operations applicable to common stockholders (unaudited) (1)........ $(2,437,384) $(1,949,808) ---------- ---------- Pro forma primary and fully diluted net loss from continuing operations per share (unaudited)............... $ (0.47) $ (0.38) ---------- ---------- Pro forma weighted average number of common shares outstanding (unaudited) (2)..................... 5,185,472 5,187,043 ---------- ----------
SEPTEMBER 30, 1996 --------------------------------------------------------- (UNAUDITED) PRO FORMA AS ADJUSTED FOR ACTUAL ADJUSTMENTS (3) PRO FORMA OFFERING (4) ---------- --------------- ----------- --------------- BALANCE SHEET DATA: Working Capital...................................... $3,435,650 $ 798,672 $4,234,322 $28,523,550 Property and equipment, net.......................... 4,852,759 4,852,759 4,852,759 Total assets......................................... 8,994,140 798,672 9,792,812 34,082,040 Long-term debt....................................... -- -- -- -- Common Stockholders' (deficit) equity................ $(6,789,729) $ 8,401,329 $1,611,600 $33,386,600
- ------------------------------ (1) Adjusted to eliminate dividends and accretion on the Series B Preferred Stock and Series C Preferred Stock as if the shares of Series B Preferred Stock had been redeemed and the shares of Series C Preferred Stock had been converted into shares of Common Stock as of the beginning of the respective periods. (2) Adjusted for both periods to give effect to the issuance and sale of a sufficient number of shares of Common Stock in the Offering to redeem all the issued and outstanding shares of Series B Preferred Stock. (3) Adjustments required to give effect for the Transactions. as described on page 4. See "--The Transactions." (4) Adjusted to give effect to the Offering and the proposed application of net proceeds therefrom as described in "Use of Proceeds." 5 SUMMARY OPERATING AND RESERVE DATA The following table sets forth certain summary operating data for the Company for the periods indicated:
NINE MONTH PERIODS YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30, ---------------------------------- ---------------------- 1993 1994 1995 1995 1996 ---------- ---------- ---------- ---------- ---------- PRODUCTION DATA (NET): Gas (MMcf).......................... -- 105.1 97.1 73.3 117.8 Oil and condensate (MBbls).......... -- 6.1 6.7 4.5 6.5 Total equivalent (MMcfe)............ -- 141.7 137.3 100.3 156.8 AVERAGE SALES PRICE PER UNIT: Gas (Mcf)........................... -- $ 1.93 $ 1.59 $ 1.63 $ 2.41 Oil and condensate (Bbl)............ -- 16.58 17.89 18.35 19.17 AVERAGE EXPENSES (PER MCFE): Lease operating (1)................. -- $ 0.24 $ 0.57 $ 0.44 $ 0.33 Depletion of oil and gas properties (2)............................... -- 0.64 1.15 0.94 0.81
- ------------------------------ (1) Includes all direct expenses of operating the Company's properties, as well as severance and ad valorem taxes. (2) Excludes depreciation and amortization of technical interpretation equipment, office furniture and equipment and office leasehold improvements, impairments of oil and gas properties and amortization of organization costs. The following table sets forth summary information with respect to the Company's estimated proved oil and gas reserves as of each of the dates indicated, which estimates have been prepared by the Company. Crude oil and condensate are converted to Mcfe on the basis of one barrel of crude oil and condensate to six Mcfe. See "Risk Factors--Uncertainty of Estimates of Oil and Gas Reserves" and "Business--Oil and Gas Reserves."
AT DECEMBER 31, ------------------------------- AT SEPTEMBER 30, 1993 1994 1995 1996 --------- --------- --------- ---------------- ESTIMATED NET PROVED RESERVES DATA: Gas (MMcf).......................... 20 1,237 443 2,169(1) Oil and condensate (MBbls).......... 4 40 41 31(1) Total equivalent (MMcfe)............ 44 1,477 689 2,355 Pre-tax present value of proved reserves discounted at 10%........ $ 60,000 $1,606,000 $ 771,000 $ 2,775,000(1)
- ------------------------------ (1) Estimates of the Company's net proved gas and oil and condensate reserves and related revenue estimates as of September 30, 1996 were prepared by the Company and have been the subject of a reserve report (the "Ryder Scott Reserve Report") prepared by Ryder Scott Company ("Ryder Scott"). A summary report prepared by Ryder Scott is included as Appendix A hereto. RISK FACTORS See "Risk Factors" beginning on page seven for a discussion of certain factors that should be considered by prospective purchasers of the shares of Common Stock offered hereby. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained in this Prospectus under the captions "Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," including statements regarding anticipated capital expenditures, estimates of proved reserves, future rates of production and timing of capital expenditures and regulatory reform, and other statements contained herein regarding matters that are not historical facts, are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, those discussed under "Risk Factors." 6 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION AND FINANCIAL DATA SET FORTH ELSEWHERE IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY. LIMITED OPERATING HISTORY AND SIGNIFICANT HISTORICAL OPERATING LOSSES The Company commenced its operations in 1993 and has only a limited operating history. Potential investors, therefore, have limited historical financial and operating information upon which to base an evaluation of the Company's performance and an investment in shares of Common Stock. For example, the producing wells within exploration projects in which the Company is participating have been on production only for a short period of time. Therefore, estimations with respect to the proved reserves and level of future production attributable to these wells are difficult to determine and there can be no assurance as to the volume of recoverable reserves that will be realized from such wells. The Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in the early stages of their development. As a result of operating expenses, the Company has incurred significant operating and net losses to date. Net losses for 1993, 1994 and 1995 and the nine months ended September 30, 1996 were approximately $615,000, $385,000, $2.4 million and $1.9 million, respectively. At September 30, 1996, the Company had an accumulated deficit of $7.6 million. The development of the Company's business and its participation in an increasingly larger number of projects has required and will continue to require substantial expenditures. The Company's future financial results will depend primarily on its ability to economically locate hydrocarbons in commercial quantities, to provide drilling site and target depth recommendations resulting in profitable productive wells and on the market prices for oil and gas. There can be no assurance that the Company will achieve or sustain profitability or positive cash flows from operating activities in the future. See "--Substantial Capital Requirements and Liquidity," "--Variability of Operating Results," "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Oil and Gas Reserves." VOLATILITY OF OIL AND GAS PRICES Although the Company's primary efforts are focused on reducing the hydrocarbon finding costs in those projects in which it participates, the Company's revenues, profitability, cash flow and future growth are affected by changes in prevailing oil and gas prices. Oil and gas prices have been subject to wide fluctuations in recent years in response to relatively minor changes in the supply and demand for oil and gas, market uncertainty and a variety of additional factors that are beyond the control of the Company, including economic, political and regulatory developments and competition from other sources of energy. It is impossible to predict future oil and gas price movements with any certainty. Currently, the Company does not engage in hedging activities. As a result, the Company may be more adversely affected by fluctuations in oil and gas prices than other industry participants that do engage in such activities. No assurances can be given as to the future level of activity in the oil and gas exploration and development industry and its relationship to the future demand for the expertise offered by the Company. An extended or substantial decline in oil and gas prices could have a material adverse effect on the Company's financial position and results of operations, the volume of oil and gas that may be economically produced by operations of projects in which the Company participates and the Company's access to capital. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Oil and Gas Reserves." RELIANCE ON SIGNIFICANT PARTNERS The Company has in the past and expects in the future to rely extensively upon its existing and future partners to offer opportunities for the Company to participate in exploration projects. To date, all of the Company's oil and gas revenues have been derived from its participation in projects involving four 7 partners. These four partners are Cox & Perkins Exploration, Inc., Browning Oil Company, Prime Energy Management Corporation and Parallel Petroleum Company. The Company's inability to secure future business opportunities generated by these or other partners could limit the Company's ability to fully implement its business plan and could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Significant Business Relationships." NON-OPERATOR STATUS The Company focuses exclusively on providing 3-D imaging and relies upon other project partners to provide and complete all other project operations and responsibilities including land acquisition, drilling, marketing and project administration. As a result, the Company has only a limited ability to exercise control over a significant number of a project's operations or the associated costs of such operations. The success of a project is dependent upon a number of factors which are outside of the Company's area of expertise and project responsibilities. Such factors include: (i) the availability of favorable lease terms and required permitting for projects, (ii) the availability of future capital resources by the Company and the other participants for the purchasing of leases and the drilling of wells, (iii) the approval of other participants to the purchasing of leases and the drilling of wells on the projects and (iv) the economic conditions at the time of drilling, including the prevailing and anticipated prices for oil and gas. The Company's reliance on other project partners and its limited ability to directly control certain project costs could have a material adverse effect on the realization of expected rates of return on the Company's investment in projects. ABILITY TO DISCOVER ADDITIONAL RESERVES The Company's future success is dependent upon its ability to economically locate additional oil and gas reserves in commercial quantities. The Company's ability to do so is dependent upon a number of factors, including its participation in multiple exploration projects and its technological capability to locate oil and gas in commercial quantities. Because the Company does not generate or develop its own projects (except in instances relating to trend plays), relying instead upon other industry participants to do so, no assurances can be given that the Company will have the opportunity to participate in projects which economically produce commercial quantities of hydrocarbons in amounts necessary to meet its business plan or that the projects in which it elects to participate will be successful. Except to the extent that the Company successfully locates commercial quantities of economically recoverable oil and gas, the Company's proved reserves will decline as reserves are produced. There can be no assurance that the Company will be able to discover additional commercial quantities of oil and gas or that the Company's project partners will have success drilling productive wells and acquiring properties at low finding costs. See "--Non-Operator Status" and "Business--Oil and Gas Reserves." SUBSTANTIAL CAPITAL REQUIREMENTS AND LIQUIDITY The Company makes, and will continue to make, substantial capital expenditures for the development, exploration, acquisition and production of oil and natural gas reserves. Historically, the Company has financed these expenditures primarily with proceeds from the sale of its equity securities in private offerings and cash generated by operations. The Company had oil and gas capital expenditures of $2.2 million during 1995 and $2.9 million during the nine months ended September 30, 1996, respectively, and plans to incur oil and gas capital expenditures of approximately $2.1 million during the remainder of 1996 and approximately $22.0 million in 1997. Management believes that the Company will have sufficient cash provided by this Offering and by operating activities to fund planned capital expenditures through 1997. However, if operating revenues are lower than the Company anticipates, as a result of lower oil and gas prices, operating difficulties or any other reason, the Company will not have the funds necessary to undertake or complete its 1997 exploration program. There can be no assurance that additional debt or equity financing will be available to meet these requirements. See "Use of Proceeds" and "Management's 8 Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES There are numerous uncertainties inherent in estimating oil and gas reserves and in projecting future rates of production. Petroleum engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact manner. Estimates of economically recoverable oil and gas reserves and of future net cash flows depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effects of regulations by governmental agencies, and assumptions concerning future oil and gas prices, future operating cost, severance and excise taxes, development costs and workover and remedial costs, all which may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of oil and gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of the future net cash flows expected therefrom prepared by different engineers or by the same engineers at different times may vary substantially. Actual production, revenues and expenditures with respect to the Company's reserves will likely vary from estimates, and such variances may be material. See "Business--Oil and Gas Reserves." RISK OF EXPLORATORY DRILLING ACTIVITIES Pursuant to the Company's business plan, the Company's revenues and cash flow will be principally dependent upon the success of the exploratory drilling projects in which the Company participates. The success of such projects is determined by the economical location, development and production of commercial quantities of hydrocarbons. Exploratory drilling is subject to numerous risks, including the risk that no commercially productive oil and gas reservoirs will be encountered. The cost of drilling, completing and operating wells is often uncertain and drilling operations may be curtailed, delayed or canceled as a result of a variety of factors including unexpected formation and drilling conditions, pressure or other irregularities in formations, equipment failures or accidents, as well as weather conditions, compliance with governmental requirements and shortages or delays in the delivery of equipment. In addition, the Company's reliance upon 3-D imaging requires greater pre-drilling expenditures than the alternative forms of more traditional drill site location strategies, including 2-D imaging. For example, in one current project in which the Company is participating, the Company estimates the pre-drilling expenditures attributable to 3-D imaging in identifying an initial exploratory drilling location were $2.25 million. The Company believes that the pre-drilling expenditures which would have been incurred in identifying an initial exploratory drilling location within such project utilizing 2-D imaging would have been approximately $750,000. The inability to successfully locate and drill wells that will economically produce commercial quantities of oil and gas would have a material adverse effect on the Company's business, financial position and results of operations. See "--Non-Operator Status." BENEFITS OF THE OFFERING TO EXISTING STOCKHOLDERS Upon the consummation of the Offering, the Company intends to use approximately $6.7 million or 21% of the net proceeds (18% of the net proceeds if the Underwriters' over-allotment option is exercised in full) for the immediate redemption of all issued and outstanding shares of Series B Preferred Stock and approximately $800,000 or 3% of net the proceeds (2% of the net proceeds if the Underwriters' over-allotment option is exercised in full) to pay accrued but unpaid dividends on the issued and outstanding shares of Series C Preferred Stock, prior to the conversion of such shares into Common Stock. See "Prospectus Summary--The Transactions," "The Company" and "Use of Proceeds." 9 COMPETITION The exploration for and production of oil and gas are highly competitive. Many companies and individuals are engaged in the business of acquiring interests in and developing onshore and near onshore oil and gas properties in the United States. The industry is not dominated by any single competitor or a small number of competitors. The Company competes with a large number of independent, technology-driven service companies and major and independent oil and gas companies for the acquisition of desirable oil and gas properties, as well as for the equipment and expertise required to operate and develop such properties. Many of these competitors have financial and other resources substantially in excess of those available to the Company. Such competitive disadvantages could adversely affect the Company's ability to participate in projects with favorable rates of return. See "Business--Competition." TECHNOLOGICAL CHANGES The oil and gas industry is characterized by rapid and significant technological advancements and introductions of new products and services utilizing new technologies. As new technologies develop, the Company may be placed at a competitive disadvantage, and competitive pressures may force the Company to implement such new technologies at substantial cost. In addition, other oil and gas finding companies may implement new technologies before the Company, and consequently such companies may be able to provide enhanced capabilities and superior quality compared with that which the Company is able to provide. There can be no assurance that the Company will be able to respond to such competitive pressures and implement such technologies on a timely basis or at an acceptable cost. One or more of the technologies currently utilized by the Company or implemented in the future may become obsolete. In such case, the Company's business, financial condition and results of operations could be materially adversely affected. If the Company is unable to utilize the most advanced commercially available technology, the Company's business, financial condition and results of operations could be materially and adversely affected. See "Business--Competition." OPERATING HAZARDS The exploration and development projects in which the Company participates are subject to the usual hazards incident to the drilling of oil and gas wells, such as cratering, explosions, uncontrollable flows of oil, gas or well fluids, fires, pollution and other environmental risks. In addition, the offshore projects are subject to the additional hazards of marine operations, such as capsizing, collision and damage or loss from severe weather. These hazards can cause personal injury and loss of life, severe damage to and destruction of property and equipment, environmental damage and suspension of operations. The Company indirectly, through operator partners, maintains insurance against some, but not all, of the risks described above. See "Business--Operating Hazards and Insurance." COMPLIANCE WITH GOVERNMENTAL REGULATIONS Oil and gas operations are subject to extensive governmental regulation, which may be changed from time to time in response to economic or political conditions. The Company believes that the trend of more expansive and stricter environmental laws and regulations will continue. The implementation of new, or the modification of existing, environmental laws or regulations, including regulations to be promulgated pursuant to the Oil Pollution Act of 1990, could have a material adverse impact on the Company. See "Business--Regulation." VARIABILITY OF OPERATING RESULTS The Company's operating results have in the past and may in the future fluctuate significantly depending upon a number of factors including industry conditions, prices of oil and gas, rate of drilling success, rates of production from completed wells and the timing of capital expenditures. Such variability 10 could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, any failure or delay in the realization of expected cash flows from operating activities could limit the Company's ability to invest and participate in economically attractive projects. See "--Limited Operating History and Significant Historical Operating Losses" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH AND IMPLEMENTATION OF GROWTH STRATEGY The Company's rapid growth has placed, and is expected to continue to place, a significant strain on the Company's financial, technical, operational and administrative resources. As the Company increases its services and enlarges the number of projects it is evaluating or in which it is participating, there will be additional demands on the Company's financial, technical and administrative resources. The failure to continue to upgrade the Company's technical, administrative, operating and financial control systems or the occurrence of unexpected expansion difficulties, including the recruitment and retention of geoscientists and engineers, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Prospect Generation." DEPENDENCE ON KEY PERSONNEL The Company has assembled a team of geologists, geophysicists and engineers who have considerable experience effectively applying 3-D imaging technologies. The Company is dependent upon the knowledge, skills and experience of these experts to provide 3-D imaging and assist the Company in reducing the risks associated with its participation in oil and gas exploration projects. In addition, the success of the Company's business also depends to a significant extent upon the abilities and continued efforts of its management, particularly C. Eugene Ennis, the Company's President and Chief Executive Officer, Peter M. Duncan, Vice President of Technology and Douglas C. Nester, Vice President of Exploration. The Company maintains key man insurance on the lives of each of Messrs. Ennis and Nester and Dr. Duncan in the amounts of $2.0 million, $500,000 and $500,000, respectively. The Company does not have employment agreements with any of its employees. The loss of the services of key management personnel or the Company's technical experts, or the inability to attract additional qualified personnel, could have a material adverse effect on the Company's business, financial condition, results of operations, development efforts and ability to expand. There can be no assurance that the Company will be successful in attracting and retaining such executives, geoscientists and engineers. See "Management--Directors and Executive Officers" and "Management--Geoscientists and Engineers." BROAD DISCRETION OVER USE OF PROCEEDS Approximately $22.0 million, or 69%, of the estimated net proceeds of the Offering has been allocated for capital expenditures to implement the Company's exploration and development program. Due to the number and variability of the factors that will be analyzed before the Company specifically identifies and commits to participate in projects or otherwise apply such net proceeds, the Company will have broad discretion to allocate a significant portion of the net proceeds from the Offering without any action or approval of the Company's stockholders. Accordingly, investors in the Common Stock will not have the opportunity to evaluate the economic, financial and other relevant information that will be considered by the Company in determining the application of such net proceeds. See "Use of Proceeds." ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offering there has been no public market for the Common Stock, and although the Company intends to have the Common Stock listed on the Nasdaq National Market System there can be no assurance that following the Offering an active trading market will develop or be maintained. The initial public offering price of the Common Stock offered hereby will be determined by negotiation between the Company and the representatives of the Underwriters and may bear no relationship to the price at which 11 the Common Stock will trade after completion of the Offering. For factors to be considered in determining the initial public offering price, see "Underwriting." After completion of the Offering, the market price of the Common Stock could be subject to significant fluctuations in response to various factors and events, including the liquidity of the market for the Common Stock, variations in the Company's quarterly operating results, regulatory or other changes in the oil and gas industry generally, announcements of business developments by the Company or its competitors, changes in operating costs and changes in general market conditions. See "--Variability of Operating Results." IMMEDIATE AND SUBSTANTIAL DILUTION At an assumed initial public offering price of $14.00 per share of Common Stock, purchasers of Common Stock in the Offering will experience immediate and substantial dilution of $9.23 per share in net tangible book value of outstanding Common Stock. See "Dilution." SHARES ELIGIBLE FOR FUTURE SALE Future sales of Common Stock by existing stockholders under Rule 144 ("Rule 144") of the Securities Act of 1933, as amended (the "Securities Act"), through the exercise of outstanding registration rights or otherwise, could have an adverse effect on the market price of the Common Stock and the ability of the Company to raise capital in the future. The shares of Common Stock sold in the Offering will be eligible for immediate resale, except to the extent acquired by affiliates of the Company. Commencing 180 days after the effective date of the Registration Statement of which this Prospectus is a part (the "Effective Date"), approximately 2,987,908 additional shares of Common Stock will be eligible for sale in the public market pursuant to Rule 144 upon expiration of lock-up agreements with the Underwriters. The remaining 1,517,140 shares outstanding upon completion of the Offering will be eligible for sale pursuant to Rule 144 upon the expiration of the current two-year holding period. Certain existing stockholders have rights under certain circumstances to require the Company to register a total of 4,501,925 shares of Common Stock commencing 180 days after the effective date of the Registration Statement of which this Prospectus forms a part. See "Description of Capital Stock--Registration Rights," "Shares Eligible for Future Sale" and "Underwriting." The Securities and Exchange Commission (the "Commission") has proposed amendments to Rule 144 which would reduce the holding period required for shares subject to Rule 144 to become eligible for resale on the public market. This proposal, if adopted, would increase the number of shares of the Company's Common Stock eligible for immediate resale following the expiration of lock-up agreements. ANTI-TAKEOVER CONSIDERATIONS Prior to completion of the Offering, the Company's Restated Certificate of Incorporation, filed with the office of the Secretary of State of the State of Delaware on July 26, 1995 (the "Certificate of Incorporation") and Amended and Restated By-laws (the "Bylaws") will be amended and restated to include certain provisions that are intended to enhance the likelihood of continuity and stability in the composition of the Company's Board of Directors. These provisions may have the effect of delaying, deterring or preventing a future takeover or change in control of the Company unless such takeover or change in control is approved by the Company's Board of Directors, even though such a transaction may offer the holders of Common Stock the opportunity to sell their stock at a price above the prevailing market price. Such provisions may also render the removal of directors and management more difficult. Specifically, the Certificate of Incorporation and Bylaws, as the case may be, will be amended to provide for a classified Board of Directors serving staggered, three-year terms and certain advance notice requirements for stockholder nominations of candidates for election to the Company's Board of Directors and certain other stockholder proposals. Such provisions could limit the price that certain persons might be willing to pay in the future for shares of Common Stock. In addition, prior to completion of the Offering, the Certificate of Incorporation will be amended and restated to authorize the Board of Directors of the 12 Company to issue from time to time, without any further action of stockholders, up to one million shares of Preferred Stock (as defined herein), on such terms and with such rights, designations, preferences, qualifications, limitations and restrictions as the Board of Directors may determine. The issuance of such Preferred Stock, depending upon the rights, designations, preferences, qualifications, limitations and restrictions thereof, may have the effect of delaying, deterring or preventing a change in control of the Company or may otherwise adversely affect the interests of holders of Common Stock. Further, certain provisions of the Delaware General Corporation Law (the "DGCL") prevent certain stockholders from engaging in business combinations with the Company, subject to certain exceptions. See "Description of Capital Stock--Preferred Stock," "Description of Capital Stock--Certain Provisions of the Certificate of Incorporation and Bylaws" and "Description of Capital Stock--Delaware Anti-Takeover Law." 13 THE COMPANY 3DX Technologies is a knowledge-based oil and gas exploration company whose core competence and strategic focus is the utilization of 3-D seismic imaging and other advanced technologies in the search for commercial quantities of hydrocarbons. The Company was founded by C. Eugene Ennis, Peter M. Duncan and Douglas C. Nester and began 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. Since its organization, the Company has acquired working interests (generally ranging from 5% to 20%, although the Company has increased its working interest in certain selected exploration trends) in 29 projects and has found 40.3 Bcfe (2.8 Bcfe net to the Company's interest), of which 27.0 Bcfe (2.1 Bcfe net to the Company's interest) was found during the first nine months of 1996. During its initial phase of operations in 1993 and 1994, the Company pursued projects in west Texas and other domestic onshore areas. Although drilling results from these projects were favorable, the Company generally held small interests in such projects and ultimately determined that the Gulf Coast would provide the Company with a greater opportunity for the development of its business plan. Since that time the Company has focused its efforts in the Gulf Coast region. Additionally, as a result of its initial experiences, the Company has developed a unique method of evaluating business opportunities, assembled a team of experienced explorationists and created innovative exploration techniques based on advanced technology to enable it to identify and participate in economically attractive projects. The Company believes that its technological expertise together with increased capital resources will enable the Company to further implement its business plan and growth strategy and achieve its operational and financial goals. The Company was initially capitalized in January 1993 through (i) the issuance and sale of 768,117 shares of Common Stock to the Company's three founders and (ii) the issuance of 100,000 shares of Convertible Preferred Stock, Series A, par value $0.01 per share ("Series A Preferred Stock"), to Landmark Graphics Corporation ("Landmark Graphics") for total consideration valued by the parties at $500,000. The issued and outstanding shares of Series A Preferred Stock were subsequently exchanged by Landmark Graphics for 329,003 shares of Common Stock. Thereafter, in November 1993 and October 1994 the Company raised additional capital in the amount of $5.4 million through the sale of units ("Units"), each Unit consisting of one share of Series B Preferred Stock and 30.22 shares of Common Stock. Additional capital in the amount of $8.0 million was raised by the Company in a private placement of Series C Preferred Stock during the third quarter of 1995. The Company's largest stockholders include Citi Growth Fund L.P., R. Chaney & Partners-1993 L.P., Centennial Associates, L.P. and each of the founders, all of which have invested in both the Units and the Series C Preferred Stock, and NationsBanc Capital Corporation, Metropolitan Life Insurance Company and Centennial Energy Partners, L.P., all of which have invested exclusively in Series C Preferred Stock. See "Principal Stockholders." The Company's principal executive offices are located at 12012 Wickchester, Suite 250, Houston, Texas. Its telephone number is (713) 579-3398. 14 USE OF PROCEEDS The net proceeds to be received by the Company from the sale of the shares of Common Stock offered hereby, after deducting estimated underwriting discounts and commissions and estimated expenses of the Offering, are estimated to be approximately $31.8 million ($36.7 million if the Underwriters' over-allotment option is exercised in full). Of the net proceeds of the Offering to be received by the Company, the Company intends to use (i) approximately $22.9 million to fund the Company's exploration and development program, (ii) approximately $7.5 million to redeem all of the issued and outstanding shares of Series B Preferred Stock and to pay accrued but unpaid dividends on the Series C Preferred Stock and (iii) the remainder for general corporate purposes, including expenses associated with hiring additional personnel. Specifically, during 1997, the Company intends to apply the net proceeds of the Offering in connection with budgeted oil and gas exploration and development expenditures which relate to estimated costs expected to be incurred as follows: (i) $14.5 million in projects within the Texas Gulf Coast trend; (ii) $4.1 million in projects within the Mississippi/Alabama trend; (iii) $1.0 million in projects within the Sunniland trend; and (iv) $3.3 million in projects located in South Louisiana. The budgeted expenditures relate to costs incurred in connection with the acquisition of land and seismic data, the interpretation of seismic data and the drilling of exploratory and development wells. No assurances can be given however that actual expenditures will not vary significantly from such budgeted amounts. Because of the number and variability of factors that determine the Company's use of the net proceeds of the Offering, management will retain a significant amount of discretion over their application. There can be no assurance that such application will not vary substantially from the Company's plans described above. In addition, there can be no assurance that the Company will be able to generate or raise sufficient capital to enable it to realize fully all of its strategic objectives. See "Risk Factors--Substantial Capital Requirements and Liquidity" and "Risk Factors--Broad Discretion Over Use of Proceeds." Pending application of the net proceeds of the Offering, the Company expects that it will invest such funds in interest-bearing accounts or in United States government securities or other short term interest bearing investment grade securities. DIVIDEND POLICY The Company has not declared or paid any cash dividends on its Common Stock since its formation and does not presently anticipate paying any 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. The future payment of cash dividends on the Common Stock will be within the sole discretion of the Company's Board of Directors and will depend upon the earnings, capital requirements and financial position of the Company, applicable requirements of the DGCL, general economic conditions and other factors considered relevant by the Company's Board of Directors. 15 DILUTION The Company's pro forma net tangible book value as of September 30, 1996 was approximately $1.6 million or $0.36 per share. Pro forma net tangible book value per share represents the total amount of tangible assets of the Company, less the total amount of liabilities of the Company, divided by the number of shares of Common Stock outstanding on a fully diluted basis. All of the amounts below give effect to the Transactions. After giving effect to the sale by the Company of the 2,500,000 shares of Common Stock pursuant to the Offering at an assumed initial public offering price of $14.00 per share, less estimated underwriting discounts and commissions and estimated expenses of the Offering payable by the Company, and the application of the estimated net proceeds therefrom, the Company's pro forma net tangible book value as of September 30, 1996 would have been approximately $33.4 million, or $4.77 per share of Common Stock. This represents an immediate increase in net tangible book value of $4.41 per share to existing stockholders and an immediate dilution in net tangible book value of $9.23 per share to new investors purchasing shares of Common Stock in the Offering (based upon an assumed offering price of $14 per share). The following tables provide the computation of pro forma net tangible book value and illustrate this dilution on a per share basis to the new investors:
AMOUNT -------------------------- COMMON SHARES TOTAL PER SHARE --------------- ------------- ----------- Actual net tangible book value at September 30, 1996..................... 2,991,032 $ (6,792,134) $ (2.27) Conversion of all issued and outstanding shares of Series C Preferred Stock.................................................................. 1,376,379 7,912,368 Exercise and conversion of Series C Preferred Stock Warrants............. 137,638 798,672 Premium incurred on redemption of all issued and outstanding shares of Series B Preferred Stock............................................... (309,711) --------------- ------------- Pro forma net tangible book value at September 30, 1996.................. 4,505,049 1,609,195 $ 0.36 Net Offering proceeds.................................................... 2,500,000 31,775,000 --------------- ------------- Pro forma net tangible book value at September 30, 1996 after the Offering............................................................... 7,005,049 $ 33,384,195 $ 4.77 Assumed initial public offering price per share of Common Stock.......... $ 14.00 Pro forma net tangible book value per share of Common Stock at September 30, 1996................................................... $ 0.36 Increase in net tangible book value per share attributable to net proceeds of the Offering............................................. 4.41 --------------- Pro forma net tangible book value per share after giving effect to the Offering............................................................... 4.77 ------------- Immediate dilution in net tangible book value per share of Common Stock to new investors....................................................... $ 9.23 ------------- -------------
The following table sets forth, on a pro forma basis as of September 30, 1996, the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid by existing stockholders and by new investors in this Offering at an assumed initial public offering price of $14.00 per share before deducting the estimated underwriting discounts and commissions and estimated expenses of the Offering payable by the Company:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE --------------------- ------------------------ PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ---------- --------- ------------- --------- ----------- Existing stockholders............................ 4,505,049 64.3% $ 9,696,294 21.7% $ 2.15 New investors.................................... 2,500,000 35.7% 35,000,000 78.3% 14.00 ---------- --------- ------------- --------- Total........................................ 7,005,049 100.0% $ 44,696,294 100.0% 6.38 ---------- --------- ------------- --------- ---------- --------- ------------- ---------
The above tables exclude options to purchase 794,479 shares of Common Stock at exercise prices ranging from $0.19 to $11.20, which have been granted under the Stock Option Plan and are outstanding as of the date hereof and assume no exercise of the Underwriters' over-allotment option. See "Management--Stock Option Plan." 16 CAPITALIZATION The following table sets forth each of the historical capitalization of the Company as of September 30, 1996 and the pro forma and as adjusted capitalization of the Company after giving effect to the Transactions and the issuance and sale of the shares of Common Stock by the Company pursuant to the Offering at an assumed initial public offering price of $14.00 per share and the application of the estimated net proceeds from the Offering as described in "Use of Proceeds." This table should be read in conjunction with the Financial Statements of the Company, the notes thereto and the other financial data included elsewhere in this Prospectus.
AS OF SEPTEMBER 30, 1996 ------------------------------------------------------------- PRO FORMA AS ADJUSTED FOR HISTORICAL ADJUSTMENTS(3) PRO FORMA OFFERING(4) ------------- -------------- ------------- --------------- Cash and cash equivalents......................... $ 3,762,208 $ 798,672 $ 4,560,880 $ 28,850,108 ------------- -------------- ------------- --------------- ------------- -------------- ------------- --------------- Long-term debt.................................... $ -- $ -- $ -- $ -- ------------- -------------- ------------- --------------- ------------- -------------- ------------- --------------- Mandatorily Redeemable Preferred Stock, Series B, $0.01 par value; 200,000 shares authorized, 66,871 issued and outstanding, historical; no shares issued and outstanding, as adjusted....... 6,377,389 309,711 6,687,100 -- Senior Mandatorily Redeemable Convertible Preferred Stock, Series C, $0.01 par value; 3,300,000 shares authorized, 2,662,241 issued and outstanding, historical; no shares issued and outstanding, as adjusted......................... 7,912,368 (7,912,368) -- -- Common Stockholders' deficit: Common Stock, $0.01 par value; 12,000,000 shares authorized, 2,991,032 shares issued and outstanding, historical; 20,000,000 shares authorized, 7,005,049 shares issued and outstanding, as adjusted(1)...................... 29,910 15,140 45,050 70,050 Paid-in capital (net)(2).......................... 777,291 8,695,900 9,473,191 41,223,191 Accumulated deficit............................... (7,596,930) (309,711) (7,906,641) (7,906,641) ------------- -------------- ------------- --------------- Common stockholders' (deficit) equity............. (6,789,729) 8,401,329 1,611,600 33,386,600 ------------- -------------- ------------- --------------- Total capitalization............................ $ 7,500,028 $ 798,672 $ 8,298,700 $ 33,386,600 ------------- -------------- ------------- --------------- ------------- -------------- ------------- ---------------
- ------------------------ (1) Excludes 1,501,813 shares of Common Stock reserved for issuance upon the exercise of stock options which may be granted under the Stock Option Plan, of which options to purchase 794,479 shares of Common Stock have been granted and are outstanding as of the date hereof. See "Management-- Stock Option Plan." Upon consummation of the Offering, the Company's authorized capital will consist of a total of 21,000,000 shares of capital stock, which will be comprised of 20,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock, par value $0.01 per share (the "Preferred Stock"). (2) Net of notes receivable from the sale of shares of Common Stock in the amount of $16,448. (3) Adjustments required to give effect for the Transactions as described on page 4. See "Prospectus Summary--The Transactions." (4) Adjusted to give effect to the Offering and the proposed application of net proceeds therefrom to redeem the issued and outstanding shares of Series B Preferred Stock and pay accrued but unpaid dividends on the issued and outstanding shares of Series C Preferred Stock as described in "Use of Proceeds." 17 SELECTED FINANCIAL DATA The financial information set forth below as of December 31, 1993 and for the period from inception of operations (January 6, 1993) through December 31, 1993 and as of and for the years ended December 31, 1994 and 1995 is derived from the Financial Statements of the Company, which were audited by Arthur Andersen LLP. The financial information set forth below as of September 30, 1996 and for the nine month periods ended September 30, 1995 and 1996 is derived from unaudited financial statements of the Company which, in the opinion of management, include all adjustments necessary for a fair presentation of the financial condition and results of operations of the Company for such periods. The results of operations for interim periods are not necessarily indicative of a full year's operations. 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 the other financial data included elsewhere in this Prospectus.
PERIOD FROM INCEPTION OF OPERATIONS YEAR ENDED NINE MONTH PERIODS (JANUARY 6, 1993) DECEMBER 31, ENDED SEPTEMBER 30, THROUGH ------------------------- -------------------------- DECEMBER 31, 1993 1994 1995 1995 1996 ----------------- ----------- ------------ ------------ ------------ (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues: Oil and gas.............................. $ -- $ 303,836 $ 274,511 $ 202,185 $ 408,459 Rental income............................ 127,034 100,962 58,195 45,563 120,098 Interest and other....................... 7,528 52,817 236,186 125,549 217,678 ----------------- ----------- ------------ ------------ ------------ Total revenues......................... 134,562 457,615 568,892 373,297 746,235 Costs and expenses: Lease operating.......................... -- 14,225 60,877 31,443 28,463 Production taxes......................... -- 19,812 17,656 12,380 22,764 Impairment of oil and gas properties..... -- -- 1,627,321 1,477,567 1,476,690 Depletion, depreciation & amortization... 65,368 210,347 446,350 287,933 463,573 General and administrative............... 596,267 598,244 854,072 652,671 704,264 Interest and other....................... 88,006 -- -- -- 289 ----------------- ----------- ------------ ------------ ------------ Total costs and expenses............... 749,641 842,628 3,006,276 2,461,994 2,696,043 ----------------- ----------- ------------ ------------ ------------ Net loss from continuing operations........ (615,079) (385,013) (2,437,384) (2,088,697) (1,949,808) Dividends on preferred stock............... -- (503,400) (783,700) -- (798,672) Accretion on preferred stock............... (3,966) (30,367) (48,408) (34,681) (41,133) ----------------- ----------- ------------ ------------ ------------ Net loss from continuing operations applicable to common stockholders......... $ (619,045) $ (918,780) $ (3,269,492) $ (2,123,378) $ (2,789,613) ----------------- ----------- ------------ ------------ ------------ ----------------- ----------- ------------ ------------ ------------ Pro forma net loss from continuing operations applicable to common stockholders (unaudited) (1).............. $ (2,437,384) $ (1,949,808) ------------ ------------ ------------ ------------ Pro forma primary and fully diluted net loss from continuing operations per share (unaudited)............................... $ (0.47) $ (0.38) ------------ ------------ ------------ ------------ Pro forma weighted average number of common shares outstanding (unaudited) (2)........ 5,185,472 5,187,043 ------------ ------------ ------------ ------------
18
SEPTEMBER 30, 1996 ----------------------------------------------------------- DECEMBER 31, (UNAUDITED) -------------------------------------- PRO FORMA AS ADJUSTED FOR 1993 1994 1995 ACTUAL ADJUSTMENTS(3) PRO FORMA OFFERING(4) ----------- ----------- ------------ ------------ -------------- ------------ --------------- BALANCE SHEET DATA: Working capital...... $ 2,003,266 $ 2,102,586 $ 7,264,763 $ 3,435,650 $ 798,672 $ 4,234,322 $ 28,523,550 Property and equipment, net..... 635,696 2,669,177 2,935,093 4,852,759 -- 4,852,759 4,852,759 Total assets......... 2,791,694 5,196,795 10,450,504 8,994,140 798,672 9,792,812 34,082,040 Accrued dividends.... -- -- -- 798,672 -- 798,672 -- Long-term debt....... -- -- -- -- -- -- -- Series B Preferred Stock.............. 2,630,825 5,518,487 6,344,791 6,377,389 309,711 6,687,100 -- Series C Preferred Stock.............. -- -- 7,903,833 7,912,368 (7,912,368) -- -- Common Stockholders' equity(deficit).... $ 16,365 $ (740,937) $ (4,032,028) $ (6,789,729) $ 8,401,329 $ 1,611,600 $ 33,386,600
- ------------------------ (1) Adjusted to eliminate dividends and accretion on the issued and outstanding shares of Series B Preferred Stock and Series C Preferred Stock as if the shares of Series B Preferred Stock had been redeemed and the shares of Series C Preferred Stock had been converted into shares of Common Stock as of the beginning of the respective periods. (2) Adjusted for both periods to give effect to the issuance and sale of a sufficient number of shares of Common Stock in the Offering to redeem all the issued and outstanding shares of Series B Preferred Stock. (3) Adjustments required to give effect for the Transactions as described on page 4. See "Prospectus Summary--The Transactions." (4) Adjusted to give effect to the Offering and the proposed application of net proceeds therefrom as described in "Use of Proceeds." 19 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 nine months ended September 30, 1995 and 1996 and the three years ended December 31, 1993, 1994 and 1995. This discussion should be read in conjunction with the Financial Statements of the Company, the notes related thereto and the other financial data included elsewhere in this Prospectus. OVERVIEW 3DX Technologies 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 only 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 carefully 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. The working interest acquired by the Company in any project is determined through negotiations among the Company and its prospective partners prior to the Company's commitment to participate. The percentage working interest which the Company seeks to acquire varies with each project and is dependent upon the project's anticipated costs, risk and potential return. During the course of the project, the Company's working interest is subject to change as a result of negotiated cost and working interest sharing arrangements, the terms of which are known to the Company prior to its commitment to participate. Pre-drilling expenditures incurred in oil and gas exploration projects include costs related to the acquisition of land and seismic data, interpretation of seismic data, and the expenses incurred in drilling exploratory and development wells. The amounts of such expenditures vary with each project depending principally on the amount and nature of the acreage involved. In addition, costs attributable to the acquisition of seismic data through the utilization of 3-D imaging technologies may be greater than those which would be incurred if 2-D imaging technologies were utilized. However, the data acquired through the use of 3-D imaging technologies are generally believed to be of a quality which are substantially better than that which are available utilizing 2-D imaging technologies. By using such higher quality information as the basis for certain decisions regarding future project operations, the Company believes that it may avoid unnecessary drilling expenditures which it might otherwise have incurred had it relied upon 2-D imaging technologies. 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 a loss equal to its proportionate share of project costs prior to the time the project is abandoned. Similarly, the Company will incur a loss if the Company's proportionate share of revenue generated from production is insufficient to cover the Company's share of project costs. During 1993, the Company commenced its business operations and initiated participation as a working interest partner in two projects, the Bright Falcon project and the Fausse Pointe project. See "Business--Significant Projects and Properties." The Company did not have oil and gas revenues during 1993. To finance its operations and acquire funds for capital expenditures, the Company sold equity securities through private placement offerings raising approximately $3.4 million. See "The Company." During 1994, the Company acquired working interests in seven projects and successfully drilled and completed seven gross wells. The Company's oil and gas revenues in 1994 totaled $304,000. To supplement 20 operating revenues and enable it to continue to implement its exploration program, the Company raised additional capital in the approximate amount of $2.5 million through a private placement of its equity securities in October 1994. See "The Company." During 1995, the Company continued to expand its operating activities by acquiring working interests in six additional projects and successfully drilling and completing two gross wells. The Company recognized total oil and gas revenues in the amount of $275,000 during 1995. Through a private placement, the Company raised additional capital in the approximate amount of $7.9 million to finance continued capital expenditures in connection with the further implementation of its exploration and development program. During the nine months ended September 30, 1996, the Company recognized oil and gas revenues totaling $408,000 and owned working interests in 21 projects, 11 of which were acquired during this period. During the nine months ended September 30, 1996, the Company drilled and completed eight gross successful wells. The Company intends to use approximately $22.9 million of net proceeds from this Offering for capital expenditures to increase the number of projects in which it is participating and to enable the Company to acquire working interests larger than the working interest percentages the Company has had the available capital to acquire in the past. See "Use of Proceeds." The Company currently anticipates that it will participate in the drilling of between 35 and 40 gross wells during 1997, although the number of wells may increase as additional projects are added to the Company's portfolio. However, there can be no assurance that such wells will be drilled and if drilled that such wells will be successful. See "Risk Factors--Risks of Exploratory Drilling Activities." 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. 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. See "Risk Factors--Limited Operating History and Significant Historical Operating Losses," "Risk Factors--Volatility of Oil and Gas Prices," "Risk Factors--Ability to Discover Additional Reserves," "Risk Factors--Substantial Capital Requirements and Liquidity" and "Risk Factors--Risks of Exploratory Drilling Activities." In connection with the implementation of its exploration and development program, the Company intends to use a portion of the net proceeds of the Offering to expand its technical and support staff. As a result, the Company anticipates that its general and administrative expenses will increase in 1997. Further, the Company anticipates incurring additional legal, administrative and accounting costs in future periods as a result of the Company becoming a publicly-held company. The Company uses the full-cost method of accounting for its oil and gas properties. Under this method, all acquisition, exploration and development costs, including certain general and administrative costs that are directly attributable to the Company's acquisition, exploration and development activities, are capitalized in a "full-cost pool" as incurred. The Company records depletion of its full-cost pool using the unit of production method. To the extent that such capitalized costs in the full-cost pool (net of depreciation, depletion and amortization and related deferred taxes) exceed the present value (using a 10% discount rate) of estimated future net after-tax cash flows from proved oil and gas reserves, such excess costs are charged to operations. Once incurred, a write-down of oil and gas properties is not reversible at a later date. The Company incurred such charges in the aggregate amount of $1.6 million and $1.5 million for the year ended December 31, 1995 and the nine months ended September 30, 1996, respectively, as a result of a determination that the Company's aggregate investment in developed and abandoned projects exceeded the present value of the Company's proved reserves as of December 31, 1995 and as of March 31, 1996 and June 30, 1996. The Company believes that its increasingly stringent criteria for project selection which result in participation in higher quality projects, its geographic focus in the Gulf Coast Region, its increasing base of knowledge and experience, its ability to acquire unpromoted working 21 interests and its participation in a larger number of projects have made the probability of future impairment writedowns less likely. However, no assurance can be given that future impairment writedowns, which may be material in amount, will not be incurred by the Company. The Company has recorded a valuation allowance against the estimated amount of deferred tax assets for which realization is uncertain. The Company will review the valuation allowance at the end of each quarter and will make adjustments if it is determined that it is more likely than not that the deferred tax assets will be realized. As of December 31, 1995, the Company had tax net operating loss carryforwards ("NOL's") of $3,642,000 which begin to expire in 2008. As a result of this Offering, there may be a limitation placed on the Company's utilization of its NOL's by Section 382 of the Internal Revenue Code of 1986, as amended. See Notes 3 and 13 to the Financial Statements of the Company included elsewhere herein. RESULTS OF OPERATIONS The following table sets forth certain operating information of the Company during the periods indicated:
NINE MONTH PERIODS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------- -------------------- 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- PRODUCTION: Gas (MMcf)...................................................... -- 105.1 97.1 73.3 117.8 Oil and condensate (MBbls)...................................... -- 6.1 6.7 4.5 6.5 Total equivalent (MMcfe)........................................ -- 141.7 137.3 100.3 156.8 AVERAGE SALES PRICE: Gas (per Mcf)................................................... -- $ 1.93 $ 1.59 $ 1.63 $ 2.41 Oil and condensate (per Bbl).................................... -- 16.58 17.89 18.35 19.17 AVERAGE EXPENSES (PER MCFE): Lease operating (1)............................................. -- $ 0.24 $ 0.57 $ 0.44 $ 0.33 Depletion of oil and gas properties (2)......................... -- 0.64 1.15 0.94 0.81
- ------------------------ (1) Includes all direct expenses of operating the Company's properties, as well as severance and ad valorem taxes. (2) Excludes depreciation and amortization of technical interpretation equipment, office furniture and equipment and office leasehold improvements, impairments of oil and gas properties and amortization of organization costs. NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1995 OIL AND GAS REVENUES. Oil and gas revenues increased by 102% to $408,000 for the nine months ended September 30, 1996 from $202,000 for the same period of 1995. Of this increase, $114,000, or 55%, was attributable to an increase in production and $92,000, or 45%, was attributable to an increase in the average sales price for natural gas and oil. Production increased by 56% to approximately 156.8 MMcfe for the nine months ended September 30, 1996, from 100.3 MMcfe for the comparable 1995 period. The increased production reflected production for the entire nine months ended September 30, 1996 from the successful wells drilled during the last six months of 1995. In addition, production for the nine months ended September 30, 1996 included production from a well completed in June 1996 and four successful wells completed in a single project during July and August 1996. The average sales prices for oil increased 4% to $19.17 during the nine months ended September 30, 1996 from $18.35 for the comparable 1995 22 period. The average sales price for natural gas increased by 48% to $2.41 per Mcf for the nine months ended September 30, 1996 from $1.63 per Mcf for the comparable 1995 period. LEASE OPERATING EXPENSE. Lease operating expense increased by 16% to $51,000 for the nine months ended September 30, 1996 from $44,000 for the comparable 1995 period. This increase was primarily attributable to the increase in 1996 production. Lease operating expense per Mcfe decreased by 25% to $0.33 for the nine months ended September 30, 1996 from $0.44 for the comparable 1995 period. Substantially all of the decrease in lease operating expense per Mcfe was the result of the successful completion of four wells within a single project during July and August 1996. These wells had lower lease operating costs per Mcfe than wells from which production had been obtained in the comparable prior period. The lower lease operating expense per Mcfe of the four wells completed during July and August 1996 relate principally to the nature and location of the completed wells. These four wells are producing from onshore, shallow, highly permeable gas sands and produce relatively small amounts of water, so there are negligible treating or disposal costs associated with such wells. These completed wells require no artificial lift or compression so that the power and maintenance costs associated with such wells are minimal. Additionally, the highly permeable nature of the producing zones results in relatively high production rates, which lowers all fixed expenses associated with production from these wells on a per Mcfe basis. By contrast, wells completed in prior periods, in general, have had higher expenses due to the need for artificial lift and/or compression associated with producing these wells. Also, many of the wells have produced water in addition to hydrocarbons, resulting in additional expenses for treatment and disposal of such fluid. Although the Company is unable to predict with certainty the lease operating expense per Mcfe that may be incurred in the future, the Company does not anticipate that such expenses on a per Mcfe basis will be in amounts less than those which were incurred during the nine months ended September 30, 1996. DEPLETION, DEPRECIATION AND AMORTIZATION EXPENSE. The major components of depletion, depreciation and amortization are depletion of oil and gas properties and administrative depreciation and amortization. Depletion of oil and gas properties for the nine months ended September 30, 1996 increased by 34% to $126,000 from $94,000 for the comparable period in 1995. The increase in depletion of oil and gas properties resulted from the increase in oil and gas production. Depletion of oil and gas properties per Mcfe for the nine months ended September 30, 1996 declined by 14% to $0.81 from $0.94 due to an increase in reserves at a faster rate in 1996 than the Company's full cost pool of capitalized costs. Depreciation and amortization of technical interpretation equipment, office furniture and equipment and office leasehold improvements increased 74% to $337,000 for the nine months ended September 30, 1996 from $194,000 for the comparable 1995 period. This increase was primarily attributable to the acquisition of additional technical interpretation equipment and software with an approximate cost of $422,000 during the nine months ended September 30, 1996. IMPAIRMENT OF OIL AND GAS PROPERTIES. Oil and gas impairment charges recorded as of March 31, 1996 and June 30, 1996 totaled approximately $1.5 million, primarily as a result of completion of the evaluation of two prospects which had poor drilling results during these periods. The addition of the total investment in these prospects to evaluated costs resulted in impairment charges under the Company's accounting policy for oil and gas properties. As described in Note 2 to the Financial Statements. The Company incurred similar oil and gas impairment charges during the nine months ended September 30, 1995 of approximately $1.5 million, as a result of completion of the evaluation of two prospects which had poor drilling results during these periods and the downward revision of oil and gas reserve estimates in 1995. 23 As a result of the completion of four wells in July and August 1996 and the related increase in the Company's estimate of proved reserves, the present value (using a 10% discount rate) of estimated future net after-tax cash flow from proved oil and gas reserves exceeded the Company's aggregate investment in developed and abandoned projects by approximately $800,000 as of September 30, 1996. GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense, net of overhead capitalized to exploration and development projects, increased by 8% to $704,000 for the nine months ended September 30, 1996 from $653,000 for the comparable 1995 period. This increase was primarily attributable to increased compensation expense for new employees. RENTAL INCOME. Rental income increased by 161% to $120,000 for the nine months ended September 30, 1996 from $46,000 for the comparable 1995 period. The Company derives rental income pursuant to an agreement to exchange use of certain of the Company's technical and office equipment by an independent seismic processing company for a percentage of the gross fee billings of such seismic processing company. As a result, the rental income recognized by the Company varies significantly from period to period. INTEREST AND OTHER INCOME. Interest and other income increased by 73% to $218,000 for the nine months ended September 30, 1996 from $126,000 for the comparable 1995 period, primarily as a result of an increase in short-term investments made with the proceeds of the sale of Series C Preferred Stock. NET LOSS. As a result of the foregoing, the Company's net loss decreased by 10% to $1.9 million for the nine months ended September 30, 1996 from $2.1 million for the comparable 1995 period. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 OIL AND GAS REVENUES. Oil and gas revenues decreased by 10% to $275,000 for the year ended December 31, 1995 from $304,000 for the comparable 1995 period. Of this decrease, $9,000 or 31% was attributable to a decrease in production and $20,000 or 69% was attributable to a decrease in the average sales price for gas. Production decreased by 3% to 137.3 MMcfe for the year ended December 31, 1995 from 141.7 MMcfe for the comparable 1994 period, primarily as a result of a decline during 1995 in production from certain wells in the Bright Falcon project as compared to 1994. The reduction in revenue attributable to a decline in production from this particular project was partially offset by new production from other wells completed in the last six months of 1995. The average sales price for oil increased by 8% to $17.89 per Bbl during the year ended December 31, 1995 from $16.58 per Bbl during the year ended December 31, 1994. The average sales price for gas decreased by 18% to $1.59 per Mcf during the year ended December 31, 1995 from $1.93 per Mcf during the year ended December 31, 1994. LEASE EXPENSE. Lease operating expense for the year ended December 31, 1995 increased by 132% to $79,000 from $34,000 for the year ended December 31, 1994. This increase was primarily attributable to workovers and higher lease operating expenses relating to producing wells on the Bright Falcon project. Lease expense per Mcfe increased to $0.57 during the year ended December 31, 1995 from $0.24 for the comparable 1994 period. Substantially all of the increase in lease operating expense per Mcfe was related to the workovers and higher lease operating expenses described above. DEPLETION, DEPRECIATION AND AMORTIZATION EXPENSE. Depletion of oil and gas properties for the year ended December 31, 1995 increased 74% to $158,000 from $91,000 for the prior year. Depletion per Mcfe for the year ended December 31, 1995 increased 80% to $1.15 from $0.64 for the prior year. The increases in both total depletion and depletion per Mcfe were the result of a downward revision in the amount of 909 Mcfe in the Company's oil and gas reserves in 1995. Depreciation and amortization of technical interpretation equipment, office furniture and equipment and office leasehold improvements increased by 140% to $288,000 during the year ended December 31, 1995 from $120,000 for the comparable 1994 period. This increase was due primarily to the acquisition 24 during 1995 of additional technical interpretation equipment and software with an approximate cost of $620,000. IMPAIRMENT OF OIL AND GAS PROPERTIES. The Company incurred oil and gas property impairment charges during 1995 of $1.6 million. No such charges were incurred in 1994. The 1995 charges resulted from the Company's determination that its investment in developed and abandoned projects exceeded the present value of the Company's proved reserves at December 31, 1995. GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense, which is net of overhead capitalized to projects, increased by 43% to $854,000 for the year ended December 31, 1995 from $598,000 in the comparable 1994 period. This increase was primarily attributable to compensation expense for new employees. RENTAL INCOME. Rental income decreased by 43% to $58,000 for the year ended December 31, 1995 from $101,000 for the comparable 1994 period. This decrease is attributable to a decrease during 1995 in the gross fee billings of the seismic processing company which utilizes certain of the Company's technical and office equipment. The Company earns rental income by exchanging use of its equipment for a percentage of the seismic processing company's gross fee billings. INTEREST AND OTHER INCOME. Interest and other income increased to $236,000 for the year ended December 31, 1995 from $53,000 for the comparable 1994 period, as a result of an increase in short-term investments made with the proceeds from the sale of Series C Preferred Stock. NET LOSS. As a result of the foregoing, the Company's net loss increased to $2.4 million for the year ended December 31, 1995 from $385,000 for the year ended December 31, 1994. YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 OIL AND GAS REVENUES AND EXPENSES. Oil and gas revenues were $304,000 for the year ended December 31, 1994. Production during 1994 was 141.7 MMcfe. No oil and gas revenues, operating expenses or depletion of oil and gas properties were recognized by the Company in 1993. Depreciation and amortization of technical interpretation equipment, office furniture and equipment and office leasehold improvements increased by 85% to $120,000 for the year ended December 31, 1994 from $65,000 for the comparable 1993 period. This increase was primarily attributable to the acquisition during 1994 of additional technical interpretation equipment with an approximate cost of $227,000. RENTAL INCOME. Rental income decreased by 20% to $101,000 for the year ended December 31, 1994 from $127,000 for the comparable 1993 period. INTEREST AND OTHER INCOME. Interest and other income increased to $53,000 for year ended December 31, 1994 from $8,000 during the comparable 1993 period. This increase is primarily attributable to the short term investment of the proceeds of the sale of the Units. NET LOSS. Primarily as a result of the foregoing, the Company's net loss decreased by 37% to $385,000 for 1994 from $615,000 for the comparable 1993 period. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1996, the Company had working capital in the amount of $3.4 million. To date, the Company has funded its oil and gas exploration activities principally through cash provided by the sale of equity securities. The Company's net loss of $1.9 million for the nine months ended September 30, 1996 included non-cash expenses aggregating $1.9 million comprising impairment of oil and gas properties in the amount of 25 $1.5 million and depreciation and amortization of technical and other equipment in the amount of $464,000. Net cash used in investing activities for the nine months ended September 30, 1996 was $1.8 million. The acquisition, exploration and development of oil and gas properties in the amount of $2.9 million was the principal use of cash in the Company's investing activities. The principal source of cash from the Company's investing activities was the maturity of debt securities totaling $1.6 million. The Company has no outstanding long-term debt and is not a party to any debt or collateral-based lending arrangements. The Company has never utilized commodity swaps for its oil and gas production and it does not anticipate doing so in the foreseeable future. In addition, the Company has not entered into any hedging transactions and has no current intention to do so in the future. The development of the Company's business has in the past required substantial oil and gas capital expenditures. To meet its goal, the Company in the future will be required to make oil and gas capital expenditures substantially in excess of historical levels to acquire, explore and develop oil and gas properties. See "Risk Factors--Substantial Capital Requirements and Liquidity." Capital expenditures for oil and gas exploration and production activities during 1993, 1994, and 1995, and for the nine months ended September 30, 1996, were $0.8 million, $1.8 million, $2.2 million and $2.9 million, respectively. Capital expenditures for oil and gas exploration for the three months ended December 31, 1996 are expected to be approximately $2.1 million and budgeted capital expenditures for the Company's oil and gas exploration and production activities during 1997, assuming completion of this Offering, are currently estimated to be approximately $22.9 million. See "Risk Factors--Broad Discretion over Use of Proceeds" and "Use of Proceeds." As a result of the Company's periodic review of each of its portfolio of oil and gas exploration and development properties and its available capital, the Company has on two occasions sold partial interests in specific oil and gas projects to other investors to reduce its total investment commitment to such projects. In each such instance, the Company sold one-half and two-thirds of its working interests in such projects, respectively, in exchange for proceeds in an amount approximating one-half and two-thirds of the costs incurred by the Company in connection with such projects, respectively. No gain or loss was recognized on either transaction. Although the Company presently has no current commitment to sell all or any portion of its working interests, such sales could be used as a source of liquidity by the Company in the future. The Company expects that its available cash, expected cash flows from operating activities, and the proceeds from the Offering will be sufficient to meet its financial obligations and fund its planned exploration and drilling activities for the short term (which is considered by the Company to be the twelve months following the consummation of the Offering), PROVIDED, that (i) there are no significant declines in oil and gas prices below current levels or anticipated seasonal lows, (ii) there are no significant declines in oil and gas production from existing properties other than declines in production currently anticipated based on engineering estimates of the decline curves associated with such properties and (iii) the Company is able to discover and produce commercial quantities of oil and gas and within the time frame the Company has predicted. The Company intends to satisfy its long-term liquidity requirements from a combination of expected cash flow generated from operations, borrowings from financial institutions (which may be secured by the Company's oil and gas reserves) and from future public or private offerings of equity and/or debt securities. For liquidity purposes, the Company considers "long-term" to be the second, third and fourth twelve month periods following the consummation of the Offering. In the event the cash flows from the Company's operating activities and the net proceeds from the Offering are not sufficient to fund development and exploration expenditures, or results from developmental drilling are not as successful as anticipated, the Company will be required to modify the implementation of its operating strategy unless additional financing is available. There can be no assurance such financing 26 would be available on terms which would be acceptable to the Company. See "Risk Factors--Substantial Capital Requirements and Liquidity." 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. Inflation has had a minimal effect on the Company. OTHER In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 ("SFAS No. 121") regarding accounting for the impairment of long-lived assets. The Company adopted SFAS No. 121 effective January 1, 1996. However, such adoption did not affect the primary test of asset recoverability because the Company's oil and gas properties are accounted for under the full cost method of accounting, as discussed in Note 2 to the Financial Statements of the Company. The adoption of SFAS No. 121 had no effect on the Company's results of operations for the nine month period ended September 30, 1996. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"). SFAS No. 123 is a new standard of accounting for stock-based compensation and establishes a fair value method of accounting for awards granted after December 31, 1995 under stock compensation plans. SFAS No. 123 encourages, but does not require, companies to adopt the fair value method of accounting in place of the existing method of accounting for stock-based compensation whereupon compensation costs are recognized only in situations where stock compensation plans award intrinsic value to recipients at the date of grant. The Company has elected not to adopt the fair value accounting of SFAS No. 123 and continues to account for these plans under APB Opinion No. 25, under which no compensation costs have been recognized. 27 BUSINESS OVERVIEW 3DX Technologies is a knowledge-based oil and gas exploration company whose core competence and strategic focus is the utilization of 3-D seismic imaging and other advanced technologies in the search for commercial quantities of hydrocarbons. The Company only 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 carefully 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. The Company has developed a rigorous screening process that it applies to all projects that it considers. The screening process, adapted continually to incorporate the Company's ongoing experience, is designed to produce a balanced portfolio of select projects that have reliable and experienced operating partners, are conducive to the application of advanced 3-D technology, have significant upside potential and may be extended into exploration trends. The Company's current portfolio includes 11 active operator partners and 23 exploration projects primarily located onshore and near shore within the Gulf Coast region from south Texas to southern Florida. Although the Company has no current plan to expand its geographic focus beyond the Gulf Coast region, the Company will pursue opportunities that may become available in other select geographic areas as its capital resources increase. The Company believes that it can effectively and efficiently participate in an increasing number of concurrent projects by continually improving its techniques for acquiring and analyzing data. One example of such an improvement is the Company's 3DXPRESS process, an innovative exploration technique that improves the quality of seismic data and significantly compresses the time frame traditionally required for acquisition, processing, imaging and analysis. This process allows analysis of 3-D data while the seismic survey is being conducted, giving the Company's explorationists the ability to ensure data quality and steer data collection toward more promising prospective areas. Utilizing this technology, the Company has been able to image and analyze a larger number of projects concurrently and to identify potential drilling sites more rapidly and accurately. Since its formation, the Company has participated in the drilling of 31 gross wells that have been drilled based on the Company's site and target depth recommendations. Twenty of these wells were successful and discovered estimated proved reserves of 40.3 Bcfe (2.8 Bcfe net to the Company's interest), of which 27.0 Bcfe (2.1 Bcfe net to the Company's interest) were discovered during the first nine months of 1996. The Company currently expects to participate in the drilling of between 35 and 40 wells during 1997, although the number of wells may increase as additional projects are added to the Company's portfolio. The Company believes that the disciplined approach it utilizes to select its projects, together with its technological expertise will result in improved exploration success and project economics. This success should position the Company to acquire larger working interests in an increasing number of exploration projects. STRATEGY The Company's goal is to increase its proved reserves, production and cash flow by quickly, accurately and economically locating commercial quantities of hydrocarbons for itself and its partners. To reach its goal, the Company is pursuing a business strategy that includes the following principal elements: FOCUSING OPERATIONAL EFFORTS EXCLUSIVELY ON THE COMPANY'S EXPERTISE IN 3-D IMAGING AND ANALYSIS. The Company focuses all of its technical resources on obtaining the best possible subsurface image and on 28 identifying the most effective location and target depth for each prospective well. To allow it to focus its efforts exclusively on 3-D imaging and analysis, the Company relies on its project partners to undertake the project's other operating functions, including land acquisition, drilling and marketing. The Company believes that its methods of applying 3-D imaging and analytical technology provide it with knowledge and information superior to that produced by companies engaged in many aspects of finding and producing oil and gas. Although 3-D seismic technology is now routinely used in oil and gas exploration projects, the Company believes that its focus, experience and innovative methods of applying the technology provide it with advantages in extracting useful information from seismic and other data. DEVELOPING AND SUPPORTING A TEAM OF TECHNOLOGICALLY SOPHISTICATED EXPLORATIONISTS. The Company believes that the quality of information obtained from its application of 3-D imaging is dependent to a large extent on its ability to capitalize on the intelligence, acquired knowledge and creativity of the experienced geoscientists and engineers it employs. These experts have broad expertise and experience from their collective participation in over 300 3-D seismic projects in diverse geologic trends throughout the world. To allow the Company to capitalize fully on the intellectual resources offered by such experts, the Company's administrative operations and infrastructure are directed toward providing tools and support to the Company's technical specialists. To enhance its ability to recruit, retain and motivate such experts, the Company is committed to providing its oil and gas finding geoscientists and engineers with the most advanced imaging and analytical technology commercially available and awards options to purchase Common Stock to each of its experts and other employees. MAINTAINING A RESEARCH PROGRAM TO DEVELOP INNOVATIVE APPLICATION TECHNIQUES INVOLVING ADVANCED EXPLORATION TECHNOLOGY. The Company relies upon its ongoing research to continually develop and adapt technology that the Company believes will enable it to retain its position as a leading high technology exploration company. For example, through its research efforts, the Company has developed the 3DXPRESS process. The Company's 3DXPRESS process is an innovative technique used in exploration that improves the quality of seismic data and significantly compresses the time frame traditionally required for acquisition, processing, imaging and analysis. 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 more areas where prospects are more likely to exist. Utilizing this technology, the Company has been able to image and analyze a larger number of projects concurrently and identify potential drilling sites more rapidly and accurately. This ability to effect near-real time acquisition, processing and analysis of seismic data allows the Company to achieve optimum data and image quality, resulting in an improved ability to economically locate commercial quantities of hydrocarbons. The Company also believes that its application of emerging technologies, such as migration velocity analysis and depth migration technology, provides the Company with a competitive advantage in its ability to effectively and efficiently locate commercial quantities of hydrocarbons. PURSUING A DISCIPLINED APPROACH TO SELECTIVE PROJECT PARTICIPATION, PARTNERING AND DRILLING EFFORTS. The Company adheres to the strict application of its rigorous screening process and, based on its experience, continually adapts the selection criteria to ensure that the Company participates only in those projects that are likely to maximize the return on its capital investment. The Company considers high quality projects to be projects that: (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 high upside potential; (iv) may be extended into trend plays; and (v) have projected rates of return which make the production of hydrocarbons economically attractive. ACTIVELY MANAGING THE COMPANY'S PORTFOLIO OF OIL AND GAS PROJECTS. The Company has developed and actively manages a balanced portfolio of partners, projects and producing assets having a diverse range of risk/reward ratios. Active portfolio management enables the Company to reduce its exposure to non- geologic project risks such as land acquisition, operator performance and drilling operations that are not mitigated by the application of 3-D imaging and analysis technologies. In addition, the Company believes 29 that aggressive management of its portfolio enables it to maximize its use of available capital by limiting the Company's exposure to any individual exploration project and by allowing it to focus its resources toward trend play opportunities arising from carefully selected projects. In exploration trends, the Company is generally able to obtain a larger working interest than it possessed with respect to its initial project investment. PROJECT SELECTION AND MANAGEMENT METHODOLOGY Successful application of the Company's business plan is dependent upon the Company's participation as an active working interest partner in select high quality projects. The working interest acquired by the Company in any project is determined through negotiation among the Company and its prospective partners prior to the Company's commitment to participate. The percentage working interest which the Company seeks to acquire varies with each project and is dependent upon the project's anticipated costs, risk and potential return. During the course of the project, the Company's working interest is subject to change as a result of negotiated cost and working interest sharing arrangements, the terms of which are known to the Company prior to its commitment to participate. To identify these projects, the Company undertakes a rigorous evaluation of the numerous projects proposed to it by its existing partners and other project generators. The Company engages in the following steps to evaluate, identify and manage high quality projects in which the Company participates. - INITIAL SCREENING. Prior to committing technical resources to the evaluation of a potential project, the Company's business development team reviews both the potential project and its partners to determine if they satisfy certain initial business criteria. During the first nine months of 1996, the Company reviewed 78 potential projects, of which 17 met the Company's basic business initial screening criteria. To evaluate a potential project, the Company considers geographic location, scale, geological model, anticipated drilling prospects, number of pay zones and trend potential and expected project economics. To evaluate a potential partner, the Company considers that partner's financial stability, reputation and record of success in exploration and production activities. - TECHNICAL EVALUATION. If the project satisfies the Company's initial business screening criteria, it is then evaluated by a multidisciplinary team of the Company's technical experts. Such technical evaluation allows the Company to analyze and evaluate further the basic geological model, determine the seismic character of reservoirs within the project site, determine if the application of 3-D imaging technology will adequately address the primary geologic risk, investigate local and regional production trends for target reservoirs, refine its evaluation of project economics and determine if the capital required conforms to the Company's investment guidelines. If the project meets these criteria, the Company will participate in the project, committing its capital, technological resources and 3-D imaging and analytical expertise. - EARTH IMAGING. Once a project is approved for investment, the project team, led by one of the Company's geoscientists or engineers and including representatives of all or substantially all of the project's partners, commences its efforts to create the most accurate subsurface image possible. By integrating 3-D seismic data with other geologic and engineering data, the project team uses the derived subsurface image to model all potential reservoirs within the project's area. The data collection, processing and analysis are managed by the Company to assure its integrity and consistency. - DRILLING DECISION. After the project team completes the earth imaging and analysis of a selected project, the project team determines if the applicable data identify economically attractive drilling opportunities. The economic return expected from drilling must satisfy certain criteria and must be commensurate with the perceived risk. Thereafter, the project team makes recommendations to the partnership regarding drill sites and target depths. 30 - POST-DRILLING APPRAISAL. Subsequent to the drilling of each well in a project, the Company integrates the information it has acquired in the drilling phase with its earth model enabling it to enhance the model based on the best available data and knowledge. As a result, the Company builds an increasing base of knowledge upon which to make future drilling decisions with respect to each project. 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 a loss equal to its proportionate share of project costs prior to the time the project is abandoned. Similarly, the Company will incur a loss if the Company's proportionate share of revenue generated from production is insufficient to cover the Company's share of project costs. The Company believes that its increasingly stringent criteria for project selection which result in participation in higher quality projects, its geographic focus in the Gulf Coast Region, its increasing base of knowledge and experience, and its ability to acquire unpromoted working interests and its participation in a larger number of projects have made the probability of future impairment writedowns less likely. However, no assurance can be given that future impairment writedowns, which may be material in amount, will not be incurred by the Company. PROJECT GENERATION By its participation in multiple projects, many with multiple partners, the Company seeks to demonstrate its ability to improve project economics. Its current partners are its best resource for future high quality projects. The Company believes that its existing partners, which have benefited from the Company's ability to improve project economics by reducing primary geologic risk, will seek such benefits with respect to future projects and will therefore solicit the Company's involvement in such new projects. By participating in projects with partners possessing experience and knowledge in exploration operations that are complementary to the Company's imaging and analytical focus area, the Company believes that it and each project partner receive the benefit of the other's knowledge and expertise while achieving results that are greater than any particular partner might be able to achieve independently. The Company further believes that establishing long-term partner relationships will enhance the flow of prospective opportunities and the quality and stability of the business relationship, as well as reduce significant risks, such as the partner's operating capabilities and financial stability. SIGNIFICANT PROJECTS AND PROPERTIES The Company's exploration activities are currently focused on three Gulf Coast trends, the Texas Gulf Coast trend, the Mississippi/Alabama trend and the Sunniland trend. In addition, the Company pursues select projects in South Louisiana. Geologically, 3-D imaging of the structural and stratigraphic complexities common in the Gulf Coast provides the Company with an ability to identify significant hydrocarbon potential in and around existing fields that could not be detected with 2-D and conventional exploration techniques. Due to geologic complexities within this region, it may be possible to identify multiple prospects within a single project. These prospects typically offer multiple drilling opportunities with individual wells capable of encountering multiple reservoirs. As its capital resources increase, the Company believes it can extend its trend strategy into other select geographic areas where the application of 3-D imaging technology can be utilized to reduce the primary geological risks prior to drilling. Technically, the extensive drilling history within Gulf Coast trends provides a powerful subsurface and production database to which seismic data can be calibrated. These data provide the foundation required to design a seismic program that optimizes resolution at targeted reservoirs. These data, when combined with 3-D seismic data, provide a more accurate assessment of reservoir quality, productivity and reserve potential and in some instances, fluid type. 31 The following sets forth a brief summary of the Company's exploration trend areas and significant projects and properties. Although the Company is aggressively pursuing activities in each of the following areas, there can be no assurance that drilling opportunities will be identified or, if drilled, will be successful. TEXAS GULF COAST TREND In the Texas Gulf Coast trend, the Company anticipates drilling between 20 to 30 gross wells in 1997 with budgeted capital expenditures approximating $10 to $15 million net to the Company's working interest. The Company and its partners control in excess of 93,000 gross acres in this trend. Since February 1996, the Company and its partners have drilled seven wells in the trend, six of which have encountered commercial quantities of oil and gas. The Company has successfully utilized the 3DXPRESS process on 8,400 acres overlying four of these discoveries. At September 30, 1996, production rates for these four wells totaled approximately 9.0 MMcfe/d. The Company is currently utilizing the 3DXPRESS process on three other 3-D imaging programs totaling approximately 143 square miles in the trend. The Company's working interests in this trend currently range from 6% to 40%. The Texas Gulf Coast trend includes both onshore and offshore properties and generally extends along the Texas coast from Houston south to the Mexican border. 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 historical oil and gas producing formations include the Wilcox, Frio, Yegua and Miocene. Certain of the projects the Company is pursuing in the Texas Gulf Coast trend are described below: COVE AND MCPAC FIELDS. The Company proposed and drilled a well with its partner, Bellwether Exploration Company, into a new fault block of the Cove and McPac Fields in August 1996 and discovered commercial quantities of oil and gas in two reservoirs. The well currently is shut-in but is expected to be flowing into existing production facilities by year end. The Company owns a 7% working interest in the well. In addition, the Company has defined a separate prospect adjacent to these fields and currently is evaluating whether to drill a well to test the prospect. The Cove and McPac Fields' acreage is held by production and is located in Matagorda Island Block 487-L, Texas state waters, 96 miles southwest of Houston in 60 feet of water. GILA BEND. The Company joined its partner, Ameritex Ventures, Ltd., in the project in December 1995. Integration of a 16-square mile 3-D seismic survey with the geology and production data resulted in a well being spud in July 1996. This well discovered four distinct pay zones of oil and gas and currently is producing 3.9 MMcfe and 80 Bbls of condensate per day from the first of the four pay zones. The Company and its partners control 3,525 gross acres in Gila Bend, and the Company owns working interests ranging from 6% to 10%. GERONIMO. The Company completed acquisition of a 77-square mile 3-D seismic survey in October 1996 utilizing the 3DXPRESS process in the Geronimo project, which is located in San Patricio County, Texas. Primary target formations include the Frio and Vicksburg sands, which are currently producing in fields in the area. The project area covers approximately 25,000 gross acres in which the Company owns a 15% working interest. The Company's partners in this project include Esenjay Petroleum Corporation ("Esenjay"). BRIGHT FALCON. The Company joined its partner, Cox & Perkins Exploration, Inc. in 1993 in the Bright Falcon project, the Company's first project in the Texas Gulf Coast trend. Since then, the Company and its partner have drilled seven wells, five of which were discoveries. At September 30, 1996, production from three wells in Bright Falcon totaled approximately 700 Mcf/d. The Company currently plans a recompletion of one of these wells in late 1996. The Bright Falcon wells were drilled into Yegua and Frio gas formations after a 26-square mile 3-D seismic survey covering the Lost 32 Bridge-Bright Falcon fields was analyzed by the Company. The project is located in Jackson County, Texas and its acreage is held by production. The Company owns a 17% working interest in this project. MISSISSIPPI/ALABAMA TREND In the Mississippi/Alabama trend, the Company anticipates drilling six to eight gross wells in 1997 with budgeted capital expenditures approximating $4.0 million net to the Company's working interest. The Company and its partner, Esenjay, control over 41,000 gross acres in the trend. The Company completed acquisition of a 3-D seismic survey utilizing the 3DXPRESS process on a 64-square mile area in November 1996. The Company's first well in this trend is expected to spud in December 1996. The Company currently has a working interest of approximately 15% in its properties in the trend. The Mississippi/Alabama trend includes onshore properties and generally extends across a seven-county area from Newton County in southern Mississippi eastward through southern Alabama to the Florida border. Prospective geology in the trend is characterized by discrete occurrences of basement and salt-related features that deform shallower sand formations to create potential structural traps for oil and gas. The primary historical oil and gas producing formations in the trend have been the Cotton Valley, Lower Haynesville, Smackover and Norphlet. SUNNILAND TREND The Company's partner in the Sunniland trend project is Plains Resources, Inc. ("Plains"). As part of its initial exploration of the Sunniland trend in 1997, the Company plans to acquire a 3-D survey utilizing the 3DXPRESS process and to drill a well on a prospect that the Company believes may confirm an extension of the Raccoon Point Field. Cumulative production from this field, located in Collier County, Florida, has exceeded 9.5 MMBOE. The Company and its partner currently are exploring other 3-D project opportunities within the Sunniland trend by acquiring, reprocessing and analyzing 2-D seismic data along with other evaluation methods. The Company and its partner control approximately 81,000 gross acres in the trend. The Company owns an 8% working interest therein excluding the currently established production. The Raccoon Point Field is within the Cretaceous Sunniland Trend, which extends from south of Ft. Myers, Florida to northwest of Miami, Florida. Prospective geology in the trend is characterized by carbonate reefs and shoals. The trend's primary historical oil and gas producing formation is the Sunniland formation. SOUTH LOUISIANA PROJECTS FOUR ISLE DOME. To date, the Company has identified multiple drilling targets in the upper Miocene zone of Four Isle Dome, located in Terrebone Parish, Louisiana. The first of these wells was spud by the Company and its partner, Plains, in October 1996 and will target the upper Miocene at depths ranging from 12,000 feet to 15,000 feet. The Company is participating with Plains in an additional well scheduled to be drilled in December 1996. Prior to the Company's involvement in the project, Plains and its partners acquired a 51-square mile 3-D seismic survey in late 1995. In February 1996, the Company signed a joint venture agreement with Plains covering Four Isle Dome. Since then, the Company has assisted with completion of the seismic processing, has analyzed the seismic data and has identified drilling targets. The Company and its partner control approximately 19,000 gross acres on this project. The Company owns a 20% working interest in the well currently being drilled and will own a 5% working interest in the well to be spud in December 1996. HAYES. The Company and its partner, Alta Mesa Resources, Inc. expect to spud the first well in the Hayes project in late 1996. The Company has analyzed a 25-square mile 3-D seismic survey utilizing the 3DXPRESS process. The survey area included the Hayes Field and selected adjacent acreage in Calcasieu and Jefferson Davis Parishes, Louisiana. Cumulative production from the Hayes 33 Field has exceeded 157 Bcf and 1.64 MMBbls. The Company does not own an interest in the field, but the Company believes that it has identified several drilling targets on the adjacent acreage. The Company and its partner control over 7,800 gross acres in this project in which the Company owns a 10% working interest. RACELAND. The Company and its partner, Texoil, Inc., plan to drill the first exploratory well, targeted at Miocene formations, in the Raceland project during the first quarter of 1997. The Raceland project is located near the Raceland Field in Lafourche Parish, Louisiana. Acquisition of a 64-square mile 3-D seismic survey on the underlying salt dome was completed in August 1996 and the Company currently is analyzing the seismic data. The nearby Raceland Field has produced over 24 MMBbls and 134 Bcf from Miocene sands at depths of 7,000 feet to 16,000 feet. The Company and its partner control over 17,000 gross acres in the Raceland project in which the Company owns a 5% working interest. EAST CAMERON 42. The Company and its partners, Gulf Star Energy, Inc. and Santa Fe Energy Resources, Inc., drilled a gas discovery in Miocene sands on East Cameron 42, the Company's Hollywood project, in July 1996. The well is scheduled to be connected to existing production facilities in November 1996. East Cameron 42 is located in federal waters approximately 175 miles southwest of New Orleans in 45 feet of water. The project acreage is held by production, and the Company owns a 5% working interest in this well. OTHER PROJECTS LANELL FARMS. The Company and its partner, Browning Oil Company, have completed drilling operations on a well at Lanell Farms, located in Gaines County, West Texas, targeting the Devonian and Wolfcamp formations. Both target formations appear to be productive and the Company and its partner have commenced completion operations on the well. A second well, targeting the Wolfcamp formation, is scheduled to be spud in the first quarter 1997. The 2,000-acre project area is covered by a 3-D seismic survey in which the Company participated. The Company owns a 6% working interest in the first well and a 10% working interest in the second well to be drilled. SIGNIFICANT BUSINESS RELATIONSHIPS As of November 15, 1996 the Company's current portfolio included 11 active operator partners. Such partners are identified below:
Alta Mesa Resources, Inc. Esenjay Petroleum Corporation Ameritex Ventures, Ltd. Harrison Interests, Ltd. Bellwether Exploration Company Plains Resources, Inc. Browning Oil Company PrimeEnergy Management Corporation Cox & Perkins Exploration, Inc. Texoil Inc. EnerVest Management Co.
In February 1996, the Company formed a joint venture and strategic alliance with Plains, the Company's partner in the Sunniland trend, pursuant to which the companies agreed to jointly pursue exploitation and exploration opportunities. Pursuant to the joint venture, the Company acquired a working interest of up to 8% in the Sunniland trend exploration project and an initial working interest of approximately 7% in the Four Isle Dome project. In addition to their joint venture, the Company and Plains have entered into a strategic alliance which has an initial term of five years. Under the terms of the alliance, the Company has the right to participate in exploitation or exploration projects where 3-D seismic is applicable (i) for up to 15% of Plains' interest in the Illinois Basin, located in southern Illinois, and in the Los Angeles Basin, located in Los Angeles County, California, and (ii) for up to 20% of Plains' interest in any additional properties Plains might acquire. 34 The Company also has a strategic alliance with PrimeEnergy Management Corporation, a subsidiary of PrimeEnergy Corporation, covering an area of mutual interest in the Texas Gulf Coast trend and a contractual relationship on projects with Esenjay Petroleum Corporation, a privately held corporation, in the Texas Gulf Coast trend and the Mississippi/Alabama trend which, if successful, could lead to a broader geographic alliance. See "--Significant Projects and Properties." The Company believes that these types of joint ventures and alliances involving long-term partner relationships enhance the flow of opportunities presented to the Company and reduce the risk involved in determining the quality of the partner and the relationship. As part of its strategy, the Company attempts to convert successful relationships on individual projects with quality partners into long-term strategic alliances. In addition to its relationship with certain operator partners, the Company maintains an agreement with Landmark Graphics pursuant to which the Company has acquired a license to use certain software manufactured by Landmark Graphics. In addition, the Company maintains informal agreements with Landmark Graphics which entitle the Company's employees to participate in Landmark Graphics' medical insurance plan, life insurance plans and 401(k) plan. The Company currently anticipates that its informal agreements with Landmark Graphics will remain in place until at least December 31, 1997. See "Certain Transactions--Agreements with Landmark Graphics." 3-D IMAGING TECHNOLOGY The Company's oil and gas finding capabilities are dependent upon the effective application of 3-D imaging technologies. Although the initial application of 3-D imaging technology began in the late 1960's, its cost through the 1970s justified use only in deep offshore applications and other environments with substantial drilling costs and risk. By the mid-to-late 1980's 3-D imaging was a principal tool used in exploration activities in both the North Sea and the Gulf of Mexico. Advances in technology during the 1980's made the use of 3-D imaging more cost advantageous and more readily available for use onshore. In general, 3-D imaging technology provides an "image" of the subsurface geology by collecting seismic data along multiple parallel lines and creating a cube of information which is spatially sampled throughout. The data acquired by use of 3-D imaging technology is of a significantly better quality and provides significantly greater advantages than the data acquired by 2-D seismic technology. The higher fidelity and resolution of 3-D data result in more accurate images than are possible using 2-D seismic and other conventional methods. The productive application of 3-D imaging technology requires the skills of highly trained experts. GEOLOGIC, GEOPHYSICAL AND ENGINEERING EXPERTISE The Company has assembled a group of talented and experienced geologists, geophysicists and engineers that work in multidisciplinary teams to enable the Company to exploit fully the advantages afforded by 3-D imaging technologies. The Company currently has ten full-time experts who design and manage the process of seismic data acquisition, processing, imaging and analysis and drill site selection using computer systems and software owned or licensed by the Company. Each of those geoscientists and engineers has between five to 20 years of experience involving the utilization of seismic data imaging and analysis, and they have collectively participated in over 300 3-D seismic projects in diverse geologic trends throughout the world. By assembling in-house technical expertise, the Company is able to manage fully and effectively the imaging and analytical phase of the projects in which it participates. The Company provides its technical expertise exclusively to those projects in which it participates as a working interest partner. See "Management--Geoscientists and Engineers." By assembling for each project a multidisciplinary team of Company and project partner experts, led by one of the Company's geoscientists or engineers, the Company is able to capitalize on the expertise and experience of its partners' technical staff while retaining management and overall responsibility for the imaging and analytical phase of the project. If a project requires technical expertise not available from the 35 Company's or project partners' personnel, the Company's project manager will identify and recruit an industry expert to join the project team. In addition to being responsible for finding oil and gas quickly and economically, the Company's project managers are in charge of scheduling, budgeting and timely reporting. To insure that all responsibilities assigned to various team members are completed in a systematic manner and that all variables arising in connection with the imaging and analysis of a specific project are thoroughly reviewed and integrated into the imaging and analysis procedures, all of the Company's project managers are required to adhere to the Company's technical template for each project for which they are responsible. Generally, the Company's project manager maintains responsibility for the project throughout the project life, which typically extends through drilling of the last exploratory well. RESEARCH AND DEVELOPMENT The Company believes that it possesses a competitive advantage over other oil and gas companies by utilizing the experience of its in-house scientific experts to continually develop innovative techniques and tools to optimize the Company's utilization of 3-D imaging technologies. The Company's ongoing research and development and its continuous accumulation of knowledge have resulted in technical improvements and innovations that the Company believes provide it with significant competitive advantages. Application of the 3DXPRESS process, AVO, inversion and geostatistics to the process of reservoir characterization and innovative utilization of technologies including digital orthomaps and GPS locators are examples of such improvements which the Company believes enable it to acquire higher quality seismic data than that which may be acquired without effective utilization of such technologies and techniques. The Company believes such higher quality data enable it to locate hydrocarbon reserves more accurately thereby creating for it and its project partners a significant competitive advantage. The Company enhances its ongoing research program by forging strategic alliances with select suppliers of hardware and software which have demonstrated foresight in the science of earth imaging. The Company believes that its strategy of applied research and development will allow it to remain at the forefront of oil and gas exploration technology. The Company has been able to adapt and refine concurrent imaging methods to create the Company's 3DXPRESS process through the effective application of its applied research and development strategy. In its first commercial application of the 3DXPRESS process, the Company commenced and completed a project's imaging and analysis phase in a four week period. Thereafter, the project operator successfully drilled and completed four of the five resulting wells in a complex geologic setting relying upon the Company's drill site and target depth recommendations. Other innovations and improvements to the imaging process resulting from the Company's ongoing research include the use of digital orthomaps for survey planning and control, the use of GPS locators on seismic vibrators for positioning control, application of AVO, inversion and geostatistics to the process of reservoir characterization and the application of interactive migration velocity analysis and depth migration to achieve superior image reconstruction. Many of these innovations and improvements are the result of strategic alignments with pioneering technology suppliers such as GPS Technologies, Inc., Hampton-Russell Software, Inc., Landmark Graphics and Paradigm Geophysical, Inc. OIL AND NATURAL GAS RESERVES All of the Company's proved reserves described below were located onshore in West Texas and onshore and near-shore in the Louisiana and Texas Gulf Coast region. All of the Company's proved reserves reflected in the table were proved developed reserves. The Company's estimated total proved 36 reserves of oil and natural gas as of December 31, 1993, 1994 and 1995, and September 30, 1996, based upon estimates prepared by the Company, were as set forth in the following table:
AT DECEMBER 31, --------------------------------- AT SEPTEMBER 1993 1994 1995 30, 1996 ----- --------- --------- ------------- Estimated Net Proved Reserves Data: Gas (MMcf).............................................................. 20 1,237 443 2,169(1) Oil and condensate (MBbl)............................................... 4 40 41 31(1) Total equivalent (MMcfe)................................................ 44 1,477 689 2,355 Pre-tax present value of proved reserves discounted at 10%(2)............. $ 60 $ 1,606 $ 771 $ 2,775 Standardized Measure of Discounted Future Net Cash Flows (in thousands)(2)(3)........................................................ $ 60 $ 1,606 $ 771 $ 2,775(1)
- ------------------------ (1) Estimates of the Company's net proved gas and oil and condensate reserves and related revenue estimates as of September 30, 1996 were prepared by the Company and have been the subject of the Ryder Scott Reserve Report prepared by Ryder Scott. A summary report prepared by Ryder Scott is included as Appendix A hereto. (2) Because the Company has substantial net operating loss carryforwards, the amounts reflected are the same before taxes and after projected income taxes. (3) In accordance with requirements of the Securities and Exchange Commission, represents the present value of estimated future net revenues after income taxes discounted at 10%. In addition to the discussion below, reference is made to the Financial Statements including the Supplemental Oil and Gas Information (unaudited) included in the notes thereto included elsewhere herein. Such discussion also contains information with respect to the Company's reserves at December 31, 1993, 1994, 1995 and at September 30, 1996. The Company has not included 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 (the "Commission"). At December 31, 1993, 1994 and 1995 and September 30, 1996, the Company held interests in the following productive wells:
AT DECEMBER 31, ---------------------------------------------------------------------------- AT SEPTEMBER 1993 1994 1995 30, 1996 ------------------------ ------------------------ ------------------------ ----------- GROSS(1) NET(2) GROSS(1) NET(2) GROSS(1) NET(2) GROSS(1) ----------- ----------- ----------- ----------- ----------- ----------- ----------- Oil Wells....................... 3 0.03 6 0.06 7 0.16 8 Gas Wells....................... -- -- 4 0.56 5 0.74 10 NET(2) ----------- Oil Wells....................... 0.25 Gas Wells....................... 1.50
- ------------------------ (1) The number of gross wells equals the total number of wells in which the Company owns a working interest. (2) The number of net wells equals the sum of the Company's fractional working interests owned in gross wells. In general, estimates of economically recoverable oil and gas reserves and of the future net revenues therefrom are based upon a number of variable factors and assumptions, such as historical production from the subject properties, the assumed effects of regulation by governmental agencies and assumptions concerning future oil and natural gas prices and future operating costs, all of which may vary considerably 37 from actual results. All such estimates are to some degree speculative and classifications of reserves are only attempts to define the degree of speculation involved. For these reasons, estimates of the economically recoverable oil and gas reserves attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of the future net revenues expected therefrom, prepared by different engineers or by the same engineers at different times, may vary substantially. Therefore, the actual production, revenues, severance and excise taxes, development and operating expenditures with respect to the Company's reserves will likely vary from such estimates, and such variances could be material. The Company's producing wells have been producing for only a short period of time. Accordingly, estimates of future production based on this limited history are subject to various uncertainties with regard to the rate at which current production will decline. Estimates with respect to proved reserves that may be developed and produced in the future are often based upon volumetric calculations and upon analogy to similar types of reserves rather than actual production history. Estimates based on these methods are generally less reliable than those based on actual production history, and subsequent evaluation of the same reserves, based upon production history, will result in variations, which may be substantial, in the estimated reserves. See "Risk Factors--Limited Operating History and Significant Historical Operating Losses." In accordance with applicable requirements of the 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. Actual future prices and costs may be materially higher or lower. Actual future net revenues also will be affected by factors such as actual production, supply and demand for oil and gas, curtailments or increases in consumption by natural gas purchasers, changes in governmental regulations or taxation and the impact of inflation on costs. See "Risk Factors--Volatility of Oil and Gas Prices." OIL AND NATURAL 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 1993, 1994, 1995 and during the first nine months of 1996.
GROSS WELLS NET WELLS ------------------------------------- ------------------------ PRODUCTIVE DRY TOTAL PRODUCTIVE DRY ------------- --- ----- ------------- --------- EXPLORATORY WELLS(1) Year ended December 31, 1993................................. 3 0 3 0.03 -- Year ended December 31, 1994................................. 7 5 12 0.59 0.70 Year ended December 31, 1995................................. 2 0 2 0.28 -- Nine months ended September 30, 1996......................... 6 6 12 0.69 0.67 DEVELOPMENT WELLS Year ended December 31, 1993................................. -- -- -- -- -- Year ended December 31, 1994................................. -- -- -- -- -- Year ended December 31, 1995................................. -- -- -- -- -- Nine months ended September 30, 1996......................... 2 -- 2 0.40 -- TOTAL --------- EXPLORATORY WELLS(1) Year ended December 31, 1993................................. 0.03 Year ended December 31, 1994................................. 1.29 Year ended December 31, 1995................................. 0.28 Nine months ended September 30, 1996......................... 1.36 DEVELOPMENT WELLS Year ended December 31, 1993................................. -- Year ended December 31, 1994................................. -- Year ended December 31, 1995................................. -- Nine months ended September 30, 1996......................... 0.40
- ------------------------ (1) As of the date of this Prospectus, the Company was participating in two gross and 1.26 net exploratory wells. 38 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 the three years ended December 31, 1995 and for the nine months ended September 30, 1996.
GAS OIL -------------------------------- ---------------------------------- NET PRODUCTION AVERAGE SALES NET PRODUCTION AVERAGE SALES (MMCF) PRICE/MCF (MMCF) PRICE/BBL --------------- --------------- ------------------- ------------- Year ended December 31, 1993........................ -- $ -- -- $ -- Year ended December 31, 1994........................ 105.1 1.93 6.1 16.58 Year ended December 31, 1995........................ 97.1 1.59 6.7 17.89 Nine months ended September 30, 1996................ 117.8 2.41 6.5 19.17
Average oil and gas operating expenses per Mcfe were $0.10, $0.44 and $0.18 for the years ended December 31, 1994 and 1995 and the nine month period ended September 30, 1996, respectively. With the addition of severance and ad valorem taxes, the total average oil and gas operating expenses per Mcfe were $0.24, $0.57 and $0.33 for the years ended December 31, 1994 and 1995 and nine months ended September 30, 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 September 30, 1996. Undeveloped acreage is considered to be 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 --------- --------- --------- --------- Alabama...................................................................... -- -- -- -- Florida...................................................................... -- -- 5,000 400 Texas........................................................................ 2,976 462 46,219 6,381 Louisiana.................................................................... 2,880 144 8,900 499 Mississippi.................................................................. -- -- 3,280 492 --------- --------- --------- --------- Total........................................................................ 5,856 606 63,399 7,772 --------- --------- --------- --------- --------- --------- --------- ---------
In addition to the above acreage, the Company currently has options or farm-ins to acquire leases on 217,420 gross (27,523 net) acres of undeveloped land located in Alabama, Florida, Louisiana, Mississippi and Texas. 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 provision of seismic imaging, analytical and other related services 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 basis of competition in the industry, as oil and gas exploration companies demand higher quality seismic data delivered and analyzed in increasingly shorter time frames 39 and greater assurances that the interests of such company are respected and advanced. 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 offered by the Company. See "Risk Factors--Competition." REGULATION The Company's operations are subject to numerous 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 that 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 regulations 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. 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, the Minerals Management Service ("MMS") has the authority to promulgate regulations requiring financial assurance from owners and operators of "offshore facilities" to cover potential environmental cleanup and restoration costs. Although there has been uncertainty about the scope and applicability of these requirements, Congress recently adopted legislation that has been signed by the President that excludes certain inland facilities with a worst-case oil spill risk of 1,000 barrels or less from the financial assurance requirements. Under this new legislation, the amount of financial responsibility that must be demonstrated for an offshore facility was reduced to $35.0 million if the facility is located seaward of the seaward boundary of a State, or $10.0 million if located landward of the boundary. These limitations can be adjusted upward should MMS believe there are additional risks. 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. 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 40 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 with respect to the regulation of hazardous wastes. The Texas Railroad Commission has issued rules for management of certain types of hazardous waste generated in the oilfield. The Texas Railroad Commission and the Texas Natural Resource Conservation Water Commission regulate pollution of groundwater and surface water resulting from various oilfield operations. 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. See "Risk Factors--Compliance with Governmental Regulations." 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. Through operator partners, the Company indirectly maintains insurance against some, but not all, operating risks. The insurance maintained by project operator partners generally does not cover claims relating to trespass during 3-D survey acquisition or surface damage attributible to seismic operations, business interruption or protect against loss of revenues. There can be no assurance that any insurance obtained by project operator partners will be adequate to cover any losses or liabilities which may be incurred within projects in which the Company participates. The Company is an additional named insured on the insurance policies procured and maintained by operator partners. The Company cannot predict the continued availability of such insurance or the availability of insurance at premium levels that justify its purchase. If any project operator partner 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. See "Risk Factors--Operating Hazards." 41 EMPLOYEES AND INDEPENDENT CONSULTANTS At November 15, 1996, the Company had 14 full-time employees including ten geoscientists and engineers and one person, the President and Chief Executive Officer, engaged principally in the management of the Company. The Company believes that its relationship with its employees is good. None of the Company's employees is covered by a collective bargaining agreement. At November 15, 1996, the Company had arrangements with eight individuals to provide, from time to time, various consulting and professional services. The agreements with these consultants provide for the payment of fees and expenses for services rendered. The Company has commenced and expects to continue a program to hire recent college graduates and advanced degree holders. See "Management." LEGAL PROCEEDINGS To date, the Company has not been involved in any legal proceedings. 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. 42 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information with respect to the directors and executive officers of the Company.
NAME AGE POSITION - ------------------------------------ ----------- ------------------------------------------------------------ Jon W. Bayless (1).................. 56 Director, Chairman of the Board C. Eugene Ennis..................... 52 President and Chief Executive Officer; Director Peter M. Duncan..................... 44 Vice President of Technology; Treasurer Douglas C. Nester................... 39 Vice President of Exploration; Secretary Robert J. Bacon, Jr................. 42 Vice President of Joint Ventures Joseph Schuchardt III............... 44 Vice President of Business Development Robert H. Chaney (1)................ 37 Director Charles E. Edwards (2).............. 71 Consultant; Director Douglas C. Williamson (2)........... 45 Director
- ------------------------ (1) Member of the Company's Compensation Committee. (2) Member of the Company's Audit Committee. Upon completion of the Offering, the term of office of the members of the Board of Directors will be staggered into three classes. The initial term of each of Class I, Class II and Class III will expire at the first, second and third annual meetings, respectively, of the Board of Directors which is held after the completion of this Offering. Each class will thereafter have a term of three years. JON W. BAYLESS. Mr. Bayless has been Chairman of the Board of the Company since October 1996 and a Director since November 1993. Since 1983, Mr. Bayless has been a general partner of Sevin Rosen Funds, a venture capital investment firm. Mr. Bayless is also the controlling stockholder and sole director of Jon W. Bayless, Inc., the general partner of Atlantic Partners L.P., which is the general partner of Citi Growth Fund L.P., a venture capital investment firm, and serves as a director of a number of privately held companies. Mr. Bayless is also Chairman of the Board of Directors of Shared Resource Exchange, Inc. Shared Resource Exchange, Inc. filed for reorganization under Chapter 11 of the Federal Bankruptcy Code in August 1996. A plan under Chapter 11 has been approved. C. EUGENE ENNIS. Mr. Ennis, who co-founded the Company with Peter M. Duncan and Douglas C. Nester, has served as the Company's President and Chief Executive Officer and as a Director since the Company's inception in December 1992. From September 1984 to December 1992, Mr. Ennis was President and Chief Executive Officer of Landmark Graphics, a provider of interdisciplinary interpretation tools for the petroleum industry. Mr. Ennis holds a Bachelor of Science in electrical engineering from the University of Houston and began his career in 1969 as a design engineer in the Geophysical Products Division of Texas Instruments where he was employed until 1983. PETER M. DUNCAN. Dr. Duncan, a co-founder of the Company, has served as the Company's Vice President of Technology and Treasurer since the Company's inception. Prior to joining the Company, Dr. Duncan was employed by Landmark Concurrent Solutions Inc., an affiliate of Landmark Graphics, that merged with ExploiTech, as Vice President from July 1991 until December 1992. Dr. Duncan was a founder in 1987 of ExploiTech, a company specializing in integrated multi-disciplinary reservoir description studies for exploration and exploitation that merged with Landmark Graphics in 1989. From 1986 to 1987, Dr. Duncan served as Vice President of Marine Operations and Chief Geophysicist of North America for Digicon Inc., a major geophysical contractor. From 1984 to 1986, Dr. Duncan was employed as Chief Geophysicist of Pulsonic Geophysical of Calgary Inc., a former subsidiary of Digicon Inc. From 1978 to 1984, Dr. Duncan held various positions with Shell Canada Resources Inc. ("Shell"), including Party Chief 43 for Shell's offshore seismic programs. Dr. Duncan holds a Ph.D in geophysics from the University of Toronto. DOUGLAS C. NESTER. Mr. Nester, a co-founder of the Company, has served as the Company's Vice President of Exploration and Secretary since the Company's inception. Prior to joining the Company, Mr. Nester was employed by Landmark Concurrent Solutions Inc., an affiliate of Landmark Graphics that merged with ExploiTech, as Director of Technology from June 1988 to December 1992. From 1981 to 1988, Mr. Nester was employed in various geophysical positions by Pennzoil Corp., and held the position of Geophysical Specialist at the time of his departure. Mr. Nester began his career as an engineering geologist for Bechtel Corporation. Mr. Nester holds a Bachelor of Science in Geology from Indiana University of Pennsylvania and a Masters in Business Administration in Finance from the University of St. Thomas. ROBERT J. BACON, JR. Mr. Bacon has been Vice President of Joint Ventures since September 1995. Prior to joining the Company, Mr. Bacon was Manager of Business Development for Scientific Software-Intercomp, Inc., a software company, from May 1994 to June 1995 and served as Vice President of Sales and Marketing for JetFax Inc, a manufacturer of facsimile machines and facsimilie peripherals, from September 1990 to May 1994. From 1988 to 1990, Mr. Bacon was employed by ExploiTech as the Director of Marketing for consulting services. From 1985 to 1987, Mr. Bacon held positions in key account management at Landmark Graphics. Mr. Bacon is a founder and currently serves on the Board of Directors of Innovative Transducers Inc., a privately held designer and manufacturer of solid towed hydrophonic arrays for the military and geophysical marine markets. Mr. Bacon holds a Bachelor of Science in Advertising from the University of Texas. JOSEPH SCHUCHARDT III. Mr. Schuchardt has served as the Company's Vice President of Business Development since November 1993. Prior to his employment with the Company, Mr. Schuchardt served as Vice President of Land for Great Western Resources Inc. from April 1992 to November 1993. Mr. Schuchardt also served as Vice President of Land for Paramount Petroleum Company from 1991 to 1992. Mr. Schuchardt was employed as Land Manager of Horizon Exploration Company from 1980 to 1991 and has held positions with Texas Oil & Gas Corporation, Coastal States Oil and Gas Corporation and Texaco Inc. Mr. Schuchardt holds a B.B.A. in Management from the University of Texas. ROBERT H. CHANEY. Mr. Chaney has served as a Director of the Company since November 1993. Mr. Chaney is Chairman and Chief Executive Officer of R. Chaney & Co., Inc., an investment firm specializing in equity investments in emerging energy technology companies. Mr. Chaney was a co-founder of Paramount Petroleum Company, an independent oil and gas company, and served as its President and Chief Executive Officer from 1986 to July 1993. CHARLES E. EDWARDS. Mr. Edwards has served as a Director of the Company since August 1995. Since August 1985 to present, Mr. Edwards has acted as a consultant in petroleum technologies. Prior to August 1985, Mr. Edwards was employed by Chevron Corp. for a period in excess of 37 years and most recently served as Chief Geophysicist with responsibility for global exploration activities. Mr. Edwards has also served as a director for Digicon Inc. and Landmark Graphics. DOUGLAS C. WILLIAMSON. Mr. Williamson has served as a Director to the Company since July 1995. Mr. Williamson is a Managing Director in the Venture Capital Group in the Dallas, Texas office of NationsBanc Capital Corporation. 44 GEOSCIENTISTS AND ENGINEERS In addition to Dr. Duncan and Mr. Nester, the Company has assembled a group of talented and experienced geologists, geophysicists and engineers to enable it to exploit fully the advantages afforded by 3-D imaging technology. Information with respect to those experts is set forth below. HERBERT R. ROHLOFF. Mr. Rohloff has served as a Senior Reservoir Engineer since joining the Company in January 1995. He is a registered professional engineer in the State of Texas. Prior to joining the Company, Mr. Rohloff was employed by Amoco Production Company from 1979 to 1993 in various engineering, economic and supervisory positions beginning in 1979 and served most recently as Project Manager--Production New Ventures. Mr. Rohloff holds a Bachelor of Science in Chemical Engineering from Texas A&M University. DOUGLAS W. BECKMAN. Mr. Beckman has served as a Project Manager since joining the Company in September 1994. Mr. Beckman has over 12 years of experience in the oil and gas industry. Prior to joining the Company, Mr. Beckman was employed by Exxon Corp. from May 1982 to August 1994, and served most recently as a seismic applications specialist. Mr. Beckman holds a Bachelor of Arts in Geology from Wittenberg University. ERIC B. GARDNER. Mr. Gardner has served as Project Manager since joining the Company in September 1994. Mr. Gardner has over ten years of industry experience and has worked in many geoscience areas, including production, exploration, seismic technology, and research. Mr. Gardner began his career with Amoco Production Company in 1985 as a technical geophysicist and served most recently as a staff geophysicist. Mr. Gardner holds a Bachelor of Science in Engineering Physics from Colorado School of Mines. JEFFREY K. OWENS. Mr. Owens has served as a Project Manager since joining the Company in August 1994. Prior to joining the Company, Mr. Owens was employed by Amoco Production Company where he began his career in 1984 as a production and reservoir engineer and served most recently as a staff geophysicist. Mr. Owens holds a Bachelor of Science in Petroleum Engineering from Mississippi State University. RICHMOND MILLER. Mr. Miller has served as a Senior Geophysicist since joining the Company in September 1996. Prior to joining the Company, Mr. Miller held various positions with Digicon Geophysical Corp. beginning in 1987 and served most recently as Marine Acquisition Manager. Mr. Miller holds a Bachelor of Science in Geology from Stephen F. Austin State University. MICHAEL A. SAUNDERS. Mr. Saunders has served as a Senior Geophysicist since joining the Company in December 1994. Mr. Saunders began his career with Pulsonic Geophysical of Calgary Inc. as a Processing Geophysicist. From 1987 to 1994, Mr. Saunders was employed by Digicon Geophysical Corp., and served most recently as Manager of Marine Technology. Mr. Saunders has a Bachelor of Science in Geophysics from the University of Alberta, Edmonton, Alberta. CAROL ANNE ESTES. Ms. Estes has served as an Explorationist since joining the Company in June 1996. Prior to joining the Company, Ms. Estes was employed as a Senior Geophysicist for Exxon Exploration Company from April 1994 to June 1996. Ms. Estes holds a Bachelor of Science in Geophysics from Texas A&M University and a Master of Science in Geophysics from Stanford University. BRENDA HAGAN. Ms. Hagan has served as a Senior Exploration Technologist since joining the Company in December 1993. Ms. Hagan began her career with Houston Oil & Minerals Corp. in 1977. From 1989 to November 1993 she was employed as a geological technician at British Gas Exploration and Production. 45 OTHER EMPLOYEES GAYLE ANDERSON. Ms. Anderson has served as Office Manager of the Company since April 1996. Prior to joining the Company, Ms. Anderson held positions in various areas, including accounts payable and commercial loans. Ms. Anderson also served as office manager of R.J. Power & Associates from September 1995 to April 1996. From June 1989 to September 1995, Ms. Anderson managed Andco, Inc., a business which she co-founded, serving as Comptroller, Human Relations and Payroll Officer. CONSULTANTS HARDIE W. MORGAN. Mr. Morgan is a Certified Public Accountant and has served as a consultant to the Company since January 1993. Mr. Morgan has been self-employed since January 1992 as a consultant providing business and financial services to a number of public and private companies. From April 1985 until December 1991, Mr. Morgan served as Chief Financial Officer of Landmark Graphics. JOHN M. JAMES. Mr. James is a Certified Public Accountant and has served as a consultant to the Company since January 1993. Mr. James founded his own accounting firm in 1990. Prior to that time, Mr. James was a partner at Ernst & Young LLP. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors has established two committees, a Compensation Committee and an Audit Committee. The Compensation Committee currently consists of Messrs. Bayless and Chaney and the Audit Committee currently consists of Messrs. Edwards and Williamson. The Compensation Committee reviews general policy matters relating to compensation and benefits of officers and employees of the Company and administers the Stock Option Plan. The Audit Committee, established in October 1996, is responsible for recommending to the Board of Directors the annual engagement of a firm of independent accountants and for reviewing with the independent accountants the scope and results of audits, the internal accounting controls of the Company and audit practices and professional services rendered to the Company by the independent accountants. COMPENSATION OF DIRECTORS Following the completion of the Offering, independent Directors will receive a fee in the amount of $750 for every board meeting attended in person or by telephone and a fee of $500 for each committee meeting held separately attended in person or by telephone. All Directors who are not employees of the Company, will be reimbursed for out-of-pocket expenses. Under the Stock Option Plan, the Company may, from time to time, and in the discretion of the Board of Directors, grant stock options to Directors. EXECUTIVE COMPENSATION The following table sets forth information concerning compensation for services in all capacities awarded to, earned by or paid to, the Company's Chief Executive Officer and the Company's other most highly compensated executive officers, whose aggregate cash and cash equivalent compensation exceeded $100,000 (the "Named Executives"), with respect to the year ended December 31, 1995. The table also identifies the principal capacity in which each of the Named Executives served the Company at the end of 1995. No other executive officer of the Company received cash and cash equivalent compensation which exceeded $100,000 in the aggregate. 46 SUMMARY COMPENSATION TABLE
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) - ------------------------------------------------------------------------- --------- ---------- --------- C. Eugene Ennis President and Chief Executive Officer.................................. 1995 $ 150,000 $ -- Peter M. Duncan Vice President of Technology; Treasurer................................ 1995 103,920 12,000
STOCK OPTION GRANTS Since January 1, 1996, the Company has granted options to purchase an aggregate of 112,706 (which is net of options to purchase 155,100 shares of Common Stock that were both granted and cancelled during 1996) shares of Common Stock exercisable at prices ranging from $0.58 to $11.20 per share. The exercise price was based upon the estimated fair market value of the Company as of the date of grant as determined by the Board of Directors. OPTION EXERCISES AND YEAR-END VALUE TABLE The following table sets forth information regarding the exercise of stock options during fiscal 1995 and the number and year-end value of unexercised options held at December 31, 1995, by each of the Named Executives. No stock options or stock appreciation rights were exercised by the Named Executives during fiscal 1995. AGGREGATE OPTION EXERCISES IN FISCAL 1995 AND FISCAL 1995 YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISABLE "IN-THE-MONEY" OPTIONS AT FISCAL OPTIONS AT FISCAL YEAR-END (#) YEAR-END($) NAME EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE(2) - ---------------------------------------------------------- -------------------------- -------------------------- C. Eugene Ennis........................................... 10,911/9,233 4,221/3,572 Peter M. Duncan........................................... 10,912/9,233 4,221/3,572
- ------------------------ (1) The number of unexercised options held by each of the Named Executive Officers represents approximately 3% of the total options outstanding under the Stock Option Plan. (2) Options are "in-the-money" if the fair market value of the underlying securities exceeds the exercise price of the options. Prior to the Offering, there was no public market for the Common Stock. Therefore, the amounts set forth represent the difference between $.58 per share, the fair market value of the Common Stock issuable upon exercise of options at December 31, 1995 (as determined by the Board of Directors) and the exercise price of the option, multiplied by the applicable number of options. Based on an assumed initial public offering price of $14.00 per share of Common Stock, the value of unexercised "in the money" options at December 31, 1995 would have been as follows: Mr. Ennis--$150,644/$127,476 (exercised/unexercisable) and Dr. Duncan--$150,657/$127,476 (exercisable/unexercisable). CASH BONUS PLAN In 1996 the Company adopted the 1996 Incentive Compensation Plan (the "Bonus Plan") which provides for the payment of annual cash bonuses, in an amount up to 40% of the participant's base salary, if certain pre-established Company-based performance criteria are satisfied. All full-time employees of the Company are eligible to participate in the Bonus Plan, with the exception of the Chief Executive Officer. Bonuses are awarded if the Company achieves at least 80% of its targeted performance criteria. The 47 bonuses are then prorated accordingly. Dr. Duncan is among the employees entitled to participate in the Bonus Plan. The bonus of the Chief Executive Officer is separately determined in the discretion of the Board of Directors. STOCK OPTION PLAN In January 1994, the Company adopted the Stock Option Plan under which "non-qualified" stock options ("NQSOs") to acquire shares of Common Stock may be granted to directors of and consultants to the Company and "incentive" stock options ("ISOs") to acquire shares of Common Stock may be granted to employees and directors who are also employees of the Company. The Stock Option Plan provides for the issuance of up to a maximum of 1,504,937 shares of Common Stock and is administered by the Compensation Committee. Under the Stock Option Plan, the option price of any ISO may not be less than the fair market value of a share of Common Stock on the date on which the option is granted. The option price of an NQSO may be less than the fair market value on the date the NQSO is granted if the Compensation Committee so determines, but may not in any event be less than 85% of such fair market value. An ISO may not be granted to a "ten percent stockholder" (as such term is defined in Section 422A of the Code) unless the exercise price is at least 110% of the fair market value of the Common Stock at the time of grant and the option must be exercised within five years. Each option granted pursuant to the Stock Option Plan will be evidenced by a written agreement executed by the Company and the grantee, which will contain the terms, provisions and conditions of the grant. Stock options may not be assigned or transferred during the lifetime of the holder except as may be required by law or pursuant to a qualified domestic relations order. The maximum term of each stock option is ten years from the date of grant. In order for the options to qualify as ISOs, the aggregate fair market value, determined on the date of grant, of the shares with respect to which the ISOs are exercisable for the first time by the grantee during any calendar year may not exceed $100,000. Payment by option holders upon exercise of an option may be made (i) in cash, (ii) by tender to the Company of shares of the Company's stock owned by the optionee having a fair market value, as determined by the Compensation Committee (but without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company), not less than the exercise price, (iii) by delivery of a promissory note made by the optionee in a form approved by the Company, (iv) by the assignment of the proceeds of a sale of some or all of the shares being acquired upon the exercise of the option, (v) by the withholding of shares being acquired upon exercise of the option bearing a fair market value, as determined by the Compensation Committee (but without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company), not less than the exercise price, or (vi) by any combination thereof. The Compensation Committee may at any time or from time to time grant options which do not permit all of the foregoing forms of consideration to be used in payment of the exercise price and/or which otherwise restrict the use of one or more forms of consideration. In addition, the Compensation Committee, in its sole discretion, may authorize the surrender by an optionee of all or part of an unexercised stock option and authorize a payment in consideration thereof of an amount equal to the difference between the aggregate fair market value of the Common Stock subject to such stock option and the aggregate option price of such Common Stock. In the Compensation Committee's discretion, such payment may be made in cash, shares of Common Stock with a fair market value on the date of surrender equal to the payment amount or some combination thereof. The Stock Option Plan provides that outstanding options vest in their entirety and become exercisable in the event of certain mergers, consolidations or sales of all or substantially all of the assets of the Company, unless the successor corporation assumes such options. As of the date hereof, options to 48 purchase 794,479 shares of Common Stock are outstanding under the Stock Option Plan at exercise prices ranging from $0.19 to $11.20 per share. After the completion of the Offering, the Company expects to file with the Commission a Registration Statement on Form S-8 covering the shares of Common Stock issued pursuant to the Stock Option Plan and the shares of Common Stock underlying options granted under the Stock Option Plan. CERTAIN TRANSACTIONS AGREEMENTS WITH LANDMARK GRAPHICS In connection with its initial capitalization, the Company entered into a Technical Services Agreement with Landmark Graphics pursuant to which Landmark Graphics agreed to grant to the Company ongoing licenses to use Landmark Graphics software as it is first made available to Landmark Graphics customers. In addition, the agreement provides for a strategic alliance between Landmark Graphics and the Company, which enables the Company to request, and requires Landmark Graphics to deliver, enhancements and modifications to existing Landmark Graphics software and, in certain instances, to develop new software for use in the Company's oil and gas exploration efforts. In exchange for such rights, the Company has agreed to serve as an alpha test site for software developed by Landmark Graphics. Neither this agreement nor any of the licenses granted by Landmark Graphics to the Company contain any provisions with respect to expiration or termination. In addition, the Company and Landmark Graphics are also partners to an informal agreement pursuant to which the Company's employees participate in Landmark Graphics' medical insurance plan, life insurance plans and 401(k) plan. See "Business-- Significant Business Relationships." In connection with the informal agreements pursuant to which the Company purchases medical and life insurance for its employees and their dependents as a part of the Landmark Graphics benefit plan and those agreements which enable the Company's employees to participate in the Landmark Graphics' 401(k) Plan, the Company reimburses Landmark Graphics for all direct costs associated with such benefits and programs and pays Landmark Graphics a quarterly administrative and billing fee in an aggregate amount less than $1,500 annually. The Company believes these informal arrangements result in an administrative convenience for the Company, and may allow the Company's employees and their dependents to obtain better insurance coverage than would be available from other plans that the Company could obtain independently. Such arrangements do not result in any material financial benefit to the Company since the Company reimburses Landmark Graphics for all of costs which Landmark Graphics incurs in connection with such arrangements. PURCHASES OF COMMON STOCK BY CERTAIN OFFICERS In January 1993, the Company issued 256,039 shares of restricted Common Stock to each of Messrs. Ennis and Nester and Dr. Duncan at a price per share of $0.06. As of October 30, 1996, 245,371 of the 256,039 shares issued to each of Messrs. Ennis and Nester and Dr. Duncan were vested, and the remaining shares vest at the rate of 5,334 shares per month. All such shares will fully vest on December 31, 1996. In November 1993, the Company issued 86,391 shares of restricted Common Stock to each of Messrs. Ennis and Nester and Dr. Duncan at a price per share of $.19. As of October 30, 1996, 82,792 of the 86,391 shares issued to each of Messrs. Ennis and Nester and Dr. Duncan were vested and the remaining shares vest at the rate of 1,800 shares per month. All such shares will fully vest on December 31, 1996. 49 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock, as of November 15, 1996, before and after giving effect to the Offering, by (i) each person known to the Company to own beneficially 5% or more of the Company's outstanding shares of Common Stock, (ii) each director of the Company, (iii) each of the Named Executives, (iv) the Selling Stockholder and (v) all executive officers and directors of the Company as a group. All information with respect to beneficial ownership has been furnished to the Company by the respective stockholders of the Company.
SHARES SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED BEING OWNED AFTER THE BEFORE THE OFFERING(1) SOLD OFFERING(1)(2) -------------------------- --------- --------------------- NAME NUMBER PERCENT NUMBER NUMBER PERCENT - --------------------------------------------------- --------------- --------- --------- ---------- --------- C. Eugene Ennis.................................... 483,081(3) 10.69% -- 483,081 6.88% Peter M. Duncan.................................... 370,478(4) 8.19% -- 370,478 5.28% Douglas C. Nester.................................. 370,477(5) 8.19% -- 370,477 5.28% Jon W. Bayless..................................... 676,581(6) 15.01% -- 676,581 9.65% Robert H. Chaney................................... 342,644(7) 7.60% -- 342,644 4.89% Charles E. Edwards................................. 19,587(8) 0.43% -- 19,587 0.28% Douglas C. Williamson.............................. 760,851(9) 16.88% -- 760,851 10.86% NationsBanc Capital Corporation.................... 758,226(10) 16.83% -- 758,226 10.82% Citi Growth Fund L.P............................... 639,991(11) 14.21% -- 639,991 9.14% R. Chaney & Partners - 1993 L.P.................... 340,059(12) 7.55% -- 340,059 4.85% Landmark Graphics Corporation...................... 449,862(13) 9.99% 449,862 -- -- Metropolitan Life Insurance Company................ 284,350(14) 6.31% -- 284,350 4.06% Centennial Associates L.P./Centennial Energy Partners L.P...................................... 245,861(15) 5.46% -- 245,861 3.51% All directors and executive officers as a group (9 persons).......................................... 3,225,957(16) 68.24% -- 3,225,957 44.63%
- ------------------------ (1) Beneficial ownership is determined in accordance with the rules of the Commission. In computing the number of shares of Common Stock beneficially owned by a person and the percentage ownership of that person, shares of Common Stock subject to options and warrants held by that person that are currently exercisable or exercisable within 60 days of November 15, 1996 are deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Except as indicated in the footnotes to this table, each stockholder named in the table has sole voting and investment power with respect to the shares set forth opposite such stockholder's name. The information contained in this table is adjusted to give effect to the Transactions. (2) Assumes the Underwriters' over-allotment option is not exercised. (3) Includes vested and exercisable options to purchase 15,947 shares of Common Stock which were granted pursuant to the Stock Option Plan, excludes options to purchase 4,197 shares of Common Stock which are not vested. (4) Includes vested and exercisable options to purchase 15,948 shares of Common Stock which were granted pursuant to the Stock Option Plan, excludes options to purchase 4,197 shares of Common Stock which are not vested. (5) Includes vested and exercisable options to purchase 15,947 shares of Common Stock which were granted pursuant to the Stock Option Plan, excludes options to purchase 4,197 shares of Common Stock which are not vested. 50 (6) Excludes options to purchase 2,585 shares of Common Stock which were granted pursuant to the Stock Option Plan which are not vested. Includes 639,991 shares beneficially owned by Citi Growth Fund L.P. Mr. Bayless is the controlling stockholder and sole director of Jon W. Bayless Inc., the general partner of Atlantic Partners L.P., the general partner of Citi Growth Fund L.P. beneficially owned by Citi Growth Fund L.P. (7) Excludes options to purchase 2,585 shares of Common Stock which were granted pursuant to the Stock Option Plan which are not vested. Includes 340,059 shares held by R. Chaney and Partners-1993 L.P. Mr. Chaney is the general partner of R. Chaney & Partners-1993 L.P. (8) Excludes options to purchase 2,585 shares of Common Stock which were granted pursuant to the Stock Option Plan which are not vested. (9) Excludes options to purchase 2,585 shares of Common Stock which were granted pursuant to the Stock Option Plan which are not vested. Includes 758,266 shares of Common Stock held by NationsBanc Capital Corporation. Mr. Williamson is a Managing Director in the Venture Capital Group of NationsBanc Capital Corporation. (10) The business address of NationsBanc Capital Corporation is 901 Main Street, Dallas, Texas 75202. (11) The business address of Citi Growth Fund L.P. is c/o CitiGrowth Funds, Sycamore Partners, 989 Lenox Drive, Lawrenceville, New Jersey 08648. (12) The business address of R. Chaney & Partners--1993 L.P. is 909 Fannin, Houston, Texas 77010. (13) The business address of Landmark Graphics is 15150 Memorial Drive, Houston, Texas 77079. Landmark Graphics is a wholly-owned subsidiary of Halliburton Company. (14) The business address of Metropolitan Life Insurance Company is c/o State Street Research, One Financial Center, Boston, Massachusetts 02111. (15) The business address of each of Centennial Associates L.P. and Centennial Energy Partners L.P. is 900 Third Avenue, New York, New York 10022. (16) Includes vested and exercisable options to purchase 220,624 shares of Common Stock which were granted pursuant to the Stock Option Plan, excludes options to purchase 171,629 shares of Common Stock which are not vested. DESCRIPTION OF CAPITAL STOCK GENERAL Effective upon completion of the Offering, the Company's authorized capital stock will consist of (i) 20,000,000 shares of Common Stock, and (ii) 1,000,000 shares of Preferred Stock, of which 7,005,049 shares of Common Stock and no shares of Preferred Stock will be issued and outstanding. The statements set forth below are brief summaries of all material provisions of the Certificate of Incorporation and Bylaws which are filed as exhibits to the Registration Statement of which this Prospectus is a part, relating to the Company's capital stock. Such summaries do not purport to be complete, and are subject to, and are qualified in their entirety by reference to, such documents. COMMON STOCK Holders of shares of Common Stock are entitled to one vote per share on all matters on which the holders of Common Stock are entitled to vote and do not have any cumulative voting rights. This means that the holders of more than 50% of the shares voting for the election of directors can elect all of the directors if they choose to do so; in such event, the holders of the remaining shares of Common Stock will not be able to elect any person to the Board of Directors. Subject to the rights of the holders of shares of any series of Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may from time to time be declared by the Board of Directors of the Company out of funds legally available 51 therefor. See "Dividend Policy." Holders of shares of Common Stock have no preemptive, conversion, redemption, subscription or similar rights. In the event of a liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, holders of shares of Common Stock are entitled to share ratably in the assets of the Company that are legally available for distribution, if any, remaining after the payment or provision for the payment of all debts and other liabilities of the Company and the payment and setting aside for payment of any preferential amount due to the holders of shares of any series of Preferred Stock. All outstanding shares of Common Stock are, and all shares of Common Stock offered hereby when issued will be, upon payment therefor, validly issued, fully-paid and nonassessable. At present there is no established trading market for the Common Stock. The shares of Common Stock have been approved for quotation on the Nasdaq National Market under the proposed symbol "TDXT," subject to official notice of issuance. PREFERRED STOCK Prior to the completion of the Offering, the Certificate of Incorporation will be amended to authorize the Board of Directors of the Company to issue from time to time up to one million shares of Preferred Stock in one or more series and to fix the rights, designations, preferences, qualifications, limitations and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series, without any further action by the stockholders of the Company. The issuance of Preferred Stock with voting rights could have an adverse effect on the voting power of holders of Common Stock by increasing the number of outstanding shares having voting rights. In addition, if the Board of Directors authorizes Preferred Stock with conversion rights, the number of shares of Common Stock outstanding could potentially be increased up to the authorized amount. The issuance of Preferred Stock could decrease the amount of earnings and assets available for distribution to holders of Common Stock. Any such issuance could also have the effect of delaying, deterring or preventing a change in control of the Company and may adversely affect the rights of holders of Common Stock. The Board of Directors does not presently intend to issue any shares of Preferred Stock. CERTAIN EFFECTS OF AUTHORIZED AND UNISSUED STOCK The unissued and unreserved shares of capital stock may be issued for a variety of proper corporate purposes, including future public or private offerings to raise additional capital or facilitate acquisitions. The Company's Board of Directors does not currently have any plans to issue additional shares of Common Stock or Preferred Stock (other than in connection with this Offering or the Stock Option Plan). One of the effects of the existence of such unissued and unreserved shares may be to enable the Company's Board of Directors to discourage an attempt to change control of the Company (by means of a tender offer, proxy contest or otherwise) and thereby to protect the continuity of the Company's management. The issuance of shares of Preferred Stock, whether or not related to any attempt to effect a change in control, may adversely affect the rights of the holders of shares of Common Stock. CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS The Certificate of Incorporation provides that no director of the Company shall be liable to the Company or its stockholders for monetary damages for breach of his fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) in respect of certain unlawful dividend payments or stock redemptions or repurchases or (iv) for any transaction from which the director derived an improper personal benefit. The effect of these provisions is to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of fiduciary duty as a director (including breaches resulting from grossly negligent behavior), except in the situations described 52 above. These provisions will not limit the liability of directors under the federal securities laws of the United States. The Bylaws require the Company to indemnify any legal representative, director or officer of the Company or any person who is or was serving at the request of the Company as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, to the fullest extent authorized by the DGCL. Prior to the completion of the Offering, the Company intends to acquire officer's and directors' liability insurance in the amount of $10 million for members of its Board of Directors and executive officers. In addition to the indemnification provided in the Certificate of Incorporation and Bylaws, prior to the completion of the Offering, the Company will enter into agreements to indemnify its directors and officers. Prior to the completion of the Offering, the Certificate of Incorporation and Bylaws will be amended to provide that the Company's Board of Directors will be divided as equally as possible into three classes serving staggered, three year terms. The Bylaws will be amended to establish advance notice procedures with regard to the nomination, other than by or at the direction of the Board of Directors, of candidates for election as directors and with regard to certain matters to be brought before an annual meeting of stockholders of the Company. In general, notice must be received by the Company not less than 80 days prior to the meeting and must contain certain specified information concerning the person to be nominated or the matter to be brought before the meeting and concerning the stockholder submitting the proposal. OTHER PROVISIONS. The Bylaws will be further amended to provide that directors can be removed only for cause and only by the affirmative vote of holders of at least 67% of the voting power of all then outstanding shares of capital stock of the Company entitled to vote generally for the election of directors (the "Voting Stock") and that a vacancy on the Company's Board of Directors, including a vacancy created by an increase in the authorized number of directors, may be filled only by a majority of the directors then in office (and not by the stockholders unless no directors are then in office). Under the DGCL, if at the time of filling any such vacancy the directors then in office constitute less than a majority of the entire Board, the Delaware Court of Chancery may order, upon the application of the holders of at least 10% of the outstanding shares of capital stock of the Company entitled to vote for the election of the directors filling such vacancies, that a meeting of stockholders be held for the purpose of electing directors to fill such vacancies or to replace directors filling such vacancies elected by the Company's Board of Directors. In addition, the Certificate of Incorporation and Bylaws will be amended to provide that stockholders are not permitted to call a special meeting of stockholders or to require the Company's Board of Directors or officers to call such a special meeting, that only a majority of the entire Board, certain committees of the Company's Board of Directors, certain directors or the president or chief executive officer will be able to call such a special meeting and that stockholder action may be taken only at an annual or a special meeting of stockholders and may not be taken by written consent. Prior to the completion of the Offering, the Certificate of Incorporation will be amended to provide that the affirmative vote of the holders of 67% of the Voting Stock will be required to amend, modify or repeal any provision of the Bylaws or the provisions of the Certificate of Incorporation discussed above. The Certificate of Incorporation will be amended to provide that the Company's Board of Directors, pursuant to (but only pursuant to) a resolution adopted by the affirmative vote of a majority of the entire Board, will be able to amend, modify or repeal the Bylaws. Such provisions are intended to enhance the likelihood of continuity and stability in the composition of the Company's Board of Directors and may have the effect of delaying, deterring or preventing a future takeover or change in control of the Company unless such takeover or change in control is approved by the Company's Board of Directors. Such provisions may also render the removal of the directors and management more difficult. 53 DELAWARE ANTI-TAKEOVER LAW The Company is subject to Section 203 of the DGCL because it is a Delaware corporation. Section 203 of the DGCL prohibits certain transactions between a Delaware corporation and an "interested stockholder," which is defined as a person who, together with any affiliates or associates of such person, beneficially owns, directly or indirectly, 15% or more of the outstanding voting shares of a Delaware corporation. This provision prohibits certain business combinations (defined broadly to include mergers, consolidations, sales or other dispositions of assets having an aggregate value in excess of 10% of the consolidated assets of the corporation, and certain transactions that would increase the interested stockholder's proportionate share ownership in the corporation) between an interested stockholder and a corporation for a period of three years after the date the interested stockholder becomes an interested stockholder, unless (i) prior to the date the interested stockholder becomes an interested stockholder, the business combination or the transaction by which the stockholder becomes an interested stockholder is approved by the corporation's board of directors, (ii) the interested stockholder acquired at least 85% of the voting stock of the corporation (other than stock held by directors who are also officers or by certain employee stock plans) in the transaction in which it became an interested stockholder or (iii) the business combination is approved by a majority of the board of directors and by the affirmative vote of 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. REGISTRATION RIGHTS Holders of approximately 4,501,925 shares of Common Stock have certain rights with respect to the registration of such shares under the Securities Act. Pursuant to the terms of the Series C Preferred Stock Purchase Agreement, at any time after the six month anniversary of the effective date of the Registration Statement of which this Prospectus forms a part, holders of shares of Common Stock acquired in connection with the Series C Preferred Stock offering may require the Company, subject to certain conditions and limitations, to effect a registration of all or part of the shares of Common Stock held by such persons on an unlimited number of occasions. Also, the holders of shares of Common Stock acquired in connection with the Series B Preferred Stock offering have certain rights to require the Company, at any time after the six month anniversary of the effective date of the Registration Statement of which this Prospectus forms a part, to effect a registration of all or part of the shares of Common Stock held by such persons on two occasions. The holders of 1,514,017 shares of Common Stock issuable upon conversion of the Series C Preferred Stock which are issuable upon exercise of certain outstanding Warrants also have certain rights to require the Company to register such shares. At such time as the Company is qualified to use a Registration Statement on Form S-3 to register additional securities, the number of occasions on which the holders of shares of Common Stock acquired in connection with the Series B Preferred Stock may request registration of such shares shall be, subject to certain conditions, unlimited in number. Additionally, if at any time the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other security holders, holders of shares of Common Stock issued in connection with each of the Series B Preferred Stock offering and the Series C Preferred Stock offering, Messrs. Ennis and Nester, Dr. Duncan and certain other key employees, are entitled to written notice of such registration and to include therein shares of Common Stock held by such holder. The registration rights of all parties are subject to certain conditions and limitations, including the right of the underwriters of any offering to limit the number of shares included in the registration. The Company generally is required to bear all the fees, costs and expenses of such registrations other than underwriting discounts and commissions. In connection with this Offering, no registration rights have been exercised by any holder of Common Stock except for Landmark Graphics. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is Continental Stock Transfer & Trust Company, whose address is 2 Broadway, New York, New York 10004. 54 SHARES ELIGIBLE FOR FUTURE SALE Prior to the Offering, there has been no public market for the Common Stock. Sales of a substantial amount of Common Stock in the public market, or the perception that such sales may occur, could adversely affect the market price of the Common Stock prevailing from time to time in the public market and could impair the Company's ability to raise additional capital through the sale of its equity securities in the future. Upon completion of the Offering, the Company will have 7,005,049 shares of Common Stock outstanding (7,447,529 if the Underwriters' over-allotment option is exercised in full), including 2,949,862 shares of Common Stock offered hereby (3,392,342 if the Underwriters' over-allotment option is exercised in full) and 4,505,049 "restricted" shares of Common Stock. Of the restricted shares held by persons other than "affiliates" of the Company within the meaning of Rule 144 promulgated under the Securities Act, 908,545 shares of Common Stock are currently eligible for sale under Rule 144 as currently in effect, and the remaining 593,171 shares of Common Stock held by persons other than affiliates will become eligible for sale under Rule 144 at varying times commencing July 27, 1997. The shares of Common Stock offered in the Offering will be freely tradeable without restriction or further registration under the Securities Act by persons other than "affiliates" of the Company within the meaning of Rule 144 promulgated under the Securities Act. The holders of restricted shares generally will be entitled to sell these shares in the public securities market without registration under the Securities Act to the extent permitted by Rule 144 or any exemption under the Securities Act. In general, under Rule 144 as currently in effect, if two years have elapsed since the later of the date of acquisition of restricted shares from the Company or any "affiliate" of the Company, the holder is entitled to sell within any three-month period such number of shares of Common Stock that does not exceed the greater of 1% of the then outstanding shares of Common Stock or the average weekly trading volume of shares of Common Stock during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 are also subject to certain restrictions on the manner of sale, notice requirements and the availability of current public information about the Company. If three years have elapsed since the holder acquired the restricted shares from the Company or from any "affiliate" of the Company, and the holder is deemed not to have been an affiliate of the Company at any time during the 90 days preceding a sale, such person will be entitled to sell such Common Stock in the public market under Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements. The Commission has proposed an amendment to Rule 144 that would reduce the holding period for shares subject to Rule 144 to become eligible for sale in the public market. This proposal, if adopted, would increase the number of shares of Common Stock eligible for immediate sale following the expiration of the "lock-up period" described below. After the completion of the Offering, the Company intends to file a registration statement under the Securities Act to register shares of Common Stock reserved for issuance under or issued pursuant to the Stock Option Plan, thereby permitting the resale of such shares by non-affiliates in the public market without restriction under the Securities Act. See "Management--Stock Option Plan." The Company and certain of its stockholders have entered into "lock-up" agreements with the Underwriters, providing that, subject to certain exceptions, they will not, for a period of 180 days following the date of this Prospectus, without the prior written consent of Howard, Weil, Labouisse, Friedrichs Incorporated, offer, sell or contract to sell, or otherwise dispose of, directly or indirectly, or announce an offering of, any shares of Common Stock or any securities convertible into, or exchangeable for, shares of Common Stock, provided that, the Company may issue and sell shares of Common Stock pursuant to the Stock Option Plan. See "Underwriting." 55 UNDERWRITING The Underwriters named below (the "Underwriters"), for whom Howard, Weil, Labouisse, Friedrichs Incorporated and Petrie Parkman & Co., Inc. are acting as representatives (the "Representatives"), have severally agreed, subject to the terms and conditions contained in the Underwriting Agreement, to purchase from the Company and the Selling Stockholder the number of shares of Common Stock set forth below opposite their respective names:
NUMBER UNDERWRITERS OF SHARES - -------------------------------------------------- -------------- Howard, Weil, Labouisse, Friedrichs Incorporated.................................... Petrie Parkman & Co., Inc......................... -------------- Total......................................... 2,949,862 -------------- --------------
The Company and the Selling Stockholder are obligated to sell, and the Underwriters are obligated to purchase, all of the shares of Common Stock offered hereby if any are purchased. The Underwriters, through their Representatives, have advised the Company and the Selling Stockholder that they propose to offer the Common Stock initially at the public offering price set forth on the cover page of this Prospectus; that the Underwriters may allow selected dealers a concession of $ per share; and that such dealers may reallow a concession of $ per share to certain other dealers. After the public offering, the offering price and the concessions may be changed by the Representatives. The Company has granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to 442,480 additional shares of Common Stock at the initial public offering price, less underwriting discounts and commissions, as set forth on the cover page of this Prospectus. The Underwriters may exercise such option solely for the purpose of covering over-allotments incurred in the sale of the shares of Common Stock offered hereby. To the extent such option to purchase is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number of shares set forth next to such Underwriter's name in the table above bears to the total number of shares set forth in the table above. The Underwriters may exercise such option only to cover over-allotments in connection with the sale of the 2,949,862 shares of Common Stock offered hereby. The Company and the Selling Stockholder have agreed to indemnify the several Underwriters or contribute to losses arising out of certain liabilities, including liabilities under the Securities Act of 1933, as amended. The Company and certain of its stockholders, holding an aggregate of 3,616,660 shares of Common Stock and options to purchase up to 794,479 additional shares of Common Stock, have agreed that they will not, directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of an option to purchase or other disposition) of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock or other capital stock of the Company, without the prior written consent of Howard, Weil, Labouisse, Friedrichs Incorporated on behalf of the Underwriters for a period of 180 days after the date of this Prospectus, except for (i) shares issued in connection with any employee benefit plan of the Company existing as of the date of this Prospectus, (ii) shares issued in connection with the conversion of the Series C Preferred Stock into Common Stock and the 0.517-to-1 reverse stock split to be effected prior to the Offering and (iii) shares issued in connection with the Offering. 56 Prior to the Offering, there has been no public market for the Common Stock. The initial public offering price of the Common Stock will be determined by negotiation among the Company and the Representatives. Among the factors to be considered in determining the initial public offering price include the information set forth in this Prospectus and otherwise available to the Representatives, the history of and future prospects for the industry in which the Company competes, the skills and experience of the Company's management, the general conditions of the securities market at the time of the Offering, and the market prices of securities and certain financial and operating information of companies engaged in activities similar to those of the Company. There can be no assurance that the price at which shares of Common Stock will sell in the public market after the Offering will not be lower than the price at which they are sold in the Offering by the Underwriters. Peter Gough, a Director of Petrie Parkman & Co., Inc., is the beneficial owner of 51,007 shares of the Company's Common Stock. LEGAL MATTERS The validity of the shares will be passed upon for the Company by Kelley Drye & Warren LLP, New York, New York. Frederic A. Rubinstein, a partner of Kelley Drye & Warren LLP is the beneficial owner of 18,154 shares of Common Stock. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Andrews & Kurth LLP, Houston, Texas. EXPERTS The audited balance sheets of the Company as of December 31, 1994 and 1995, and the related statements of operations, changes in common stockholders' equity (deficit) and cash flows for the period from inception of operations (January 6, 1993) to December 31, 1993 and for the years ended December 31, 1994 and 1995, included in this registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. The Reserve Report of Ryder Scott, set forth in this Prospectus as Appendix A, has been included herein in reliance upon the authority of that firm as an expert in petroleum engineering. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 under the Securities Act with respect to the shares being sold in the Offering. This Prospectus, which constitutes a part of the Registration Statement, does not contain all the information set forth in the Registration Statement and the exhibits and schedule thereto, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock, reference is made to the Registration Statement and the exhibits and schedule filed as a part thereof. Statements contained in the Prospectuses as to the contents of any contract, agreement or other document referred to are brief summaries of the material provisions thereof but are not necessarily complete, and in each instance reference is made to the copy of such contract, agreement or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Registration Statement, including exhibits and schedules thereto, may be inspected without charge at the Commission's principal office at 450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549 and at the following regional offices of the Commission: Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and at Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of all or any portion of the Registration Statement may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, upon payment of fees prescribed by the Commission. As a result of the Offering, the Company will be subject to the informational requirements of the Exchange Act and, in accordance therewith, will file periodic reports and other information with the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the reports and information so 57 filed can be obtained from the Public Reference Section of the Commission, upon payment of fees prescribed by the Commission. So long as the Company is subject to the periodic reporting requirements of the Exchange Act, it will furnish the reports and other information required thereby to the Commission. The Company intends to furnish holders of its Common Stock with annual reports containing among other information audited financial statements certified by an independent accounting firm. The Company also intends to furnish such other reports as it may determine or as may be required by law. The Commission maintains a Web site that contains reports, proxy statements and other information regarding registrants that file electronically with the Commission. The address of the Commission's Web site is http:\\www.sec.gov. 58 GLOSSARY OF CERTAIN INDUSTRY TERMS The definitions set forth below shall apply to the indicated terms as used in this Prospectus. All volumes of natural gas referred to herein are stated at the legal pressure base of the state or area where the reserves exist and at 60 degrees Fahrenheit and in most instances are rounded to the nearest major multiple. 2-D SEISMIC. The method by which a cross-section of the earth's subsurface is created through the interpretation of reflecting seismic data collected along a single source profile. 3-D IMAGING. The method by which a three dimensional image of the earth's subsurface is created through the interpretation of reflection seismic data collected over surface grid. 3-D seismic surveys allow for a more detailed understanding of the subsurface than do conventional surveys and contribute significantly to field appraisal, development and production. AVO ANALYSIS. A geophysical technique depending upon the principle of reflection coefficient change with angle of incidence that when applied under certain conditions allows interpreters to distinguish gas bearing sands from other bright spot causes such as hard streaks, wet sands and lignite. BCF. Billion cubic feet of natural gas. BCFE. Billion cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids. BBL. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in reference to crude oil or other liquid hydrocarbons. COMPLETION. The installation of permanent equipment for the production of oil or gas, or in the case of a dry hole, the reporting of abandonment to the appropriate agency. DISCOUNTED PRESENT VALUE. A method of determining the present value of proved reserves in accordance with Commission requirements. Under the Commission method, the future net revenues before income taxes from proved reserves are estimated assuming that oil and natural gas prices and production costs remain constant. The resulting stream of revenues is then discounted at the rate of 10% per year to obtain the present value. DRY HOLE OR WELL. A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes. EXPLORATORY WELL. A well drilled to find and produce oil or gas reserves not classified as proved, to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir or to extend a known reservoir. FARM-IN OR FARM-OUT. An agreement whereunder the owner of a working interest in an oil and gas lease assigns the working interest or a portion thereof to another party who desires to drill on the leased acreage. Generally, the assignee is required to drill one or more wells in order to earn its interest in the acreage. The assignor usually retains a royalty or reversionary interest in the lease. The interest received by an assignee is a "farm-in" while the interest transferred by the assignor is a "farm-out." FIELD. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition. GPS. Global positioning system. GROSS ACRES OR GROSS WELLS. The total acres or wells, as the case may be, in which a working interest is owned. MBBLS. One thousand barrels of crude oil or other liquid hydrocarbons. 59 MCF. One thousand cubic feet of natural gas. MCF/D. One thousand cubic feet of natural gas per day. MCFE. One thousand cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids. MMBBLS. One million barrels of crude oil or other liquid hydrocarbons. MMBOE. One million barrels of oil equivalent. MMCF. One million cubic feet of natural gas. MMCFE/D. One million cubic feet of natural gas equivalent per day. NET ACRES OR NET WELLS. The sum of the fractional working interests owned in gross acres or gross wells. PAY. An industry term used to describe reservoirs in the subsurface which contain hydrocarbons. PRESENT VALUE. When used with respect to oil and gas reserves, the estimated future gross revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices and costs in effect as of the date indicated, without giving effect to non-property related expenses such as general and administrative expenses, debt service and future income tax expense or to depreciation, depletion and amortization, discounted using an annual discount rate of 10%. PRODUCTIVE WELL. A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes. PROVED DEVELOPED PRODUCING RESERVES. Proved developed reserves that are expected to be recovered from completion intervals currently open in existing wells and able to produce to market. PROVED DEVELOPED RESERVES. Proved reserves that can be expected to be recovered from existing wells with existing equipment and operating methods. PROVED DEVELOPED NONPRODUCING RESERVES. Proved developed reserves expected to be recovered from zones behind casing in existing wells. PROVED RESERVES. The estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. PROVED UNDEVELOPED RESERVES. Proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion. RECOMPLETION. The completion for production of an existing well bore in another formation from that in which the well has been previously completed. RESERVOIR. A porous and permeable underground formation containing a natural accumulation of producible oil and/or gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs. TCF. Trillion cubic feet of natural gas. UNDEVELOPED ACREAGE. Lease acreage 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 such acreage contains proved reserves. WORKING INTEREST. The operating interest which gives the owner the right to drill, produce and conduct operating activities on the property and a share of production. 60 INDEX TO FINANCIAL STATEMENTS
PAGE --------- Report of Independent Public Accountants................................................................... F-2 Balance Sheets as of December 31, 1994 and 1995 and unaudited as of September 30, 1996..................... F-3 Statements of Operations for the period from inception of operations (January 6, 1993) through December 31, 1993, the years ended December 31, 1994 and 1995 and unaudited for the nine month periods ended September 30, 1995 and 1996......................................................................................... F-4 Statements of Changes in Common Stockholders' Equity (Deficit) for the period from inception of operations (January 6, 1993) through December 31, 1993, the years ended December 31, 1994 and 1995 and unaudited for the nine month period ended September 30, 1996............................................................ F-5 Statements of Cash Flows for the period from inception (January 6, 1993) through December 31, 1993, the years ended December 31, 1994 and 1995 and unaudited for the nine month periods ended September 30, 1995 and 1996.................................................................................................. F-6 Notes to Financial Statements.............................................................................. F-7
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and 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, 1994 and 1995, and the related statements of operations, changes in common stockholders' equity (deficit) and cash flows for the period from inception of operations (January 6, 1993) through December 31, 1993 and for the years ended December 31, 1994 and 1995. 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, 1994 and 1995, and the results of its operations and its cash flows for the period from inception of operations (January 6, 1993) through December 31, 1993 and for the years ended December 31, 1994 and 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas May 7, 1996 F-2 3DX TECHNOLOGIES INC. BALANCE SHEETS ASSETS
PRO FORMA DECEMBER 31, SEPTEMBER 30, ------------- ---------------------- ------------- SEPTEMBER 30, 1994 1995 1996 1996 ---------- ---------- ------------- ------------- (UNAUDITED) (UNAUDITED) (SEE NOTE 17) Current assets: Cash and cash equivalents..................................... $2,444,014 $5,704,014 $ 3,762,208 $ 4,560,880 Securities held to maturity................................... -- 1,595,167 -- -- Accounts receivable........................................... 68,219 113,704 287,548 287,548 Prepaid expenses.............................................. 9,598 85,786 81,334 81,334 ---------- ---------- ------------- ------------- Total current assets...................................... 2,521,831 7,498,671 4,131,090 4,929,762 ---------- ---------- ------------- ------------- Property and equipment: Oil and gas properties (full-cost method--including $828,321, $1,375,145 and $1,993,753, respectively, not subject to depletion, depreciation and amortization)................... 2,403,467 4,023,869 7,435,604 7,435,604 Technical interpretation equipment............................ 464,105 1,083,925 1,496,925 1,496,925 Office furniture and equipment................................ 73,444 139,570 162,717 162,717 Office leasehold improvements................................. -- 31,307 39,101 39,101 ---------- ---------- ------------- ------------- 2,941,016 5,278,671 9,134,347 9,134,347 Less accumulated depletion, depreciation and amortization..... (271,839) (2,343,578) (4,281,588) (4,281,588) ---------- ---------- ------------- ------------- 2,669,177 2,935,093 4,852,759 4,852,759 Other assets: Deposits...................................................... -- 12,886 7,886 7,886 Organization costs, net of accumulated amortization........... 5,787 3,854 2,405 2,405 ---------- ---------- ------------- ------------- $5,196,795 $10,450,504 $ 8,994,140 $ 9,792,812 ---------- ---------- ------------- ------------- ---------- ---------- ------------- ------------- LIABILITIES, REDEEMABLE PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable.............................................. $ 365,539 $ 194,742 $ 620,557 $ 620,557 Accrued liabilities........................................... 53,706 39,166 74,883 74,883 ---------- ---------- ------------- ------------- Total current liabilities................................. 419,245 233,908 695,440 695,440 ---------- ---------- ------------- ------------- Dividends payable on Series C preferred stock................... -- -- 798,672 798,672 ---------- ---------- ------------- ------------- Commitments (Note 10) Mandatorily redeemable Series B preferred stock, $.01 par value, $100 per share redemption price, 200,000 shares authorized, 59,034, 66,871 and 66,871 shares issued and outstanding, respectively.................................................. 5,518,487 6,344,791 6,377,389 6,687,100 ---------- ---------- ------------- ------------- Mandatorily redeemable Series C senior preferred stock, $.01 par value, $3 per share redemption price, 3,300,000 shares authorized, 0, 2,662,241 and 2,662,241 shares issued and outstanding, respectively..................................... -- 7,903,833 7,912,368 -- ---------- ---------- ------------- ------------- Common stockholders' equity (deficit): Common stock, $.01 par value, 12,000,000 shares authorized, 2,987,908, 2,987,908 and 2,991,032 shares issued and outstanding, respectively................................... 29,879 29,879 29,910 45,050 Paid-in capital............................................... 793,166 793,166 793,739 9,473,191 Notes receivable from stock sales............................. (26,157) (47,756) (16,448) -- Accumulated deficit........................................... (1,537,825) (4,807,317) (7,596,930) (7,906,641) ---------- ---------- ------------- ------------- Total common stockholders' deficit........................ (740,937) (4,032,028) (6,789,729) 1,611,600 ---------- ---------- ------------- ------------- $5,196,795 $10,450,504 $ 8,994,140 $ 9,792,812 ---------- ---------- ------------- ------------- ---------- ---------- ------------- -------------
The accompanying notes are an integral part of these financial statements. F-3 3DX TECHNOLOGIES INC. STATEMENTS OF OPERATIONS
PERIOD FROM INCEPTION OF OPERATIONS (JANUARY 6, 1993) NINE MONTH PERIODS THROUGH YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30, DECEMBER 31, -------------------------- ---------------------------- 1993 1994 1995 1995 1996 --------------- ----------- ------------- ------------- ------------- (UNAUDITED) Revenues: Oil and gas......................... $ -- $ 303,836 $ 274,511 $ 202,185 $ 408,459 Rental income....................... 127,034 100,962 58,195 45,563 120,098 Interest and other.................. 7,528 52,817 236,186 125,549 217,678 --------------- ----------- ------------- ------------- ------------- Total revenues.................. 134,562 457,615 568,892 373,297 746,235 --------------- ----------- ------------- ------------- ------------- Costs and expenses: Lease operating..................... -- 14,225 60,877 31,443 28,463 Production and ad valorem taxes..... -- 19,812 17,656 12,380 22,764 Impairment of oil and gas properties........................ -- -- 1,627,321 1,477,567 1,476,690 Depletion, depreciation, and amortization...................... 65,368 210,347 446,350 287,933 463,573 General and administrative.......... 596,267 598,244 854,072 652,671 704,264 Interest and amortization of loan guarantee fees.................... 88,006 -- -- -- 289 --------------- ----------- ------------- ------------- ------------- Total costs and expenses........ 749,641 842,628 3,006,276 2,461,994 2,696,043 --------------- ----------- ------------- ------------- ------------- Net loss.............................. (615,079) (385,013) (2,437,384) (2,088,697) (1,949,808) Dividends on preferred stock.......... -- (503,400) (783,700) -- (798,672) Accretion on preferred stock.......... (3,966) (30,367) (48,408) (34,681) (41,133) --------------- ----------- ------------- ------------- ------------- Net loss applicable to common stockholders........................ $ (619,045) $ (918,780) $ (3,269,492) $ (2,123,378) $ (2,789,613) --------------- ----------- ------------- ------------- ------------- --------------- ----------- ------------- ------------- ------------- Pro forma net loss applicable to common stockholders (unaudited)..... $ (2,437,384) $ (1,949,808) ------------- ------------- ------------- ------------- Pro forma primary and fully diluted net loss per common share (Note 2) (unaudited)......................... $(.47) $(.38) ------------- ------------- ------------- ------------- Pro forma weighted average number of common shares outstanding (unaudited)......................... 5,185,472 5,187,043 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these financial statements. F-4 3DX TECHNOLOGIES INC. STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY (DEFICIT) FOR THE PERIOD FROM INCEPTION OF OPERATIONS (JANUARY 6, 1993) THROUGH DECEMBER 31, 1993, AND THE YEARS ENDED DECEMBER 31, 1994 AND 1995 AND UNAUDITED FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996
COMMON STOCKHOLDERS' EQUITY (DEFICIT) ----------------------------------------------------------------------------- COMMON STOCK STOCK --------------------- PAID-IN ACCUMULATED SUBSCRIPTIONS SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE TOTAL ---------- --------- ---------- ------------- ------------ ------------- Shares issued for cash at inception........ 768,117 $ 7,681 $ 36,891 $ -- $ -- $ 44,572 Shares issued to founders in November 1993..................................... 259,172 2,592 47,538 -- (16,543) 33,587 Conversion of shares to common stock....... 329,003 3,290 409,460 -- -- 412,750 Shares issued in November 1993............. 876,237 8,762 160,723 -- (24,984) 144,501 Accretion on preferred stock............... -- -- -- (3,966) -- (3,966) Net loss................................... -- -- -- (615,079) -- (615,079) ---------- --------- ---------- ------------- ------------ ------------- Balance at December 31, 1993............... 2,232,529 22,325 654,612 (619,045) (41,527) 16,365 Principal collections...................... -- -- -- -- 27,862 27,862 Shares issued in October 1994.............. 755,378 7,554 138,554 -- (12,492) 133,616 Accrual of dividends....................... -- -- -- (503,400) -- (503,400) Accretion on preferred stock............... -- -- -- (30,367) -- (30,367) Net loss................................... -- -- -- (385,013) -- (385,013) ---------- --------- ---------- ------------- ------------ ------------- Balance at December 31, 1994............... 2,987,907 29,879 793,166 (1,537,825) (26,157) (740,937) Principal collections...................... -- -- -- -- 36,156 36,156 Shares issued in 1995...................... -- -- -- -- (57,755) (57,755) Accrual of dividends....................... -- -- -- (783,700) -- (783,700) Accretion on preferred stock............... -- -- -- (48,408) -- (48,408) Net loss................................... -- -- -- (2,437,384) -- (2,437,384) ---------- --------- ---------- ------------- ------------ ------------- Balance at December 31, 1995............... 2,987,907 29,879 793,166 (4,807,317) (47,756) (4,032,028) UNAUDITED: Principal collections...................... -- -- -- -- 31,308 31,308 Shares issued in June 1996................. 3,124 31 573 -- -- 604 Accrual of dividends....................... -- -- -- (798,672) -- (798,672) Accretion on preferred stock............... -- -- -- (41,133) -- (41,133) Net loss................................... -- -- -- (1,949,808) -- (1,949,808) ---------- --------- ---------- ------------- ------------ ------------- Balance at September 30, 1996.............. 2,991,031 $ 29,910 $ 793,739 $ (7,596,930) $ (16,448) $ (6,789,729) ---------- --------- ---------- ------------- ------------ ------------- ---------- --------- ---------- ------------- ------------ -------------
The accompanying notes are an integral part of these financial statements. F-5 3DX TECHNOLOGIES INC. STATEMENTS OF CASH FLOWS
PERIOD FROM INCEPTION OF OPERATIONS (JANUARY 6, NINE MONTH PERIODS 1993) YEARS ENDED ENDED THROUGH DECEMBER 31, SEPTEMBER 30, DECEMBER 31, ---------------------- ---------------------- 1993 1994 1995 1995 1996 ------------ ---------- ---------- ---------- ---------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss....................................... $ (615,079) $ (385,013) $(2,437,384) $(2,088,697) $(1,949,808) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depletion, depreciation and amortization..... 65,368 210,347 446,350 287,933 463,573 Amortization of loan guarantee fees.......... 80,000 -- -- -- -- Non-cash general and administrative expenses................................... 26,751 -- -- -- -- Impairment of oil and gas properties......... -- -- 1,627,321 1,477,567 1,476,690 (Increase) decrease in accounts receivable... (216,147) 147,928 (45,485) 27,672 (173,844) (Increase) decrease in prepaid expenses...... (1,361) (8,237) (76,188) (118,709) 4,452 Increase (decrease) in accounts payable...... 15,025 24,441 (3,005) (341,112) (72,303) Increase (decrease) in accrued liabilities... 26,929 26,777 (14,540) 47,641 35,717 ------------ ---------- ---------- ---------- ---------- Net cash provided by (used in) operating activities................................... (618,514) 16,243 (502,931) (707,705) (215,523) ------------ ---------- ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition, exploration and development of oil and gas properties........................... (794,377) (1,822,174) (2,185,804) (1,257,552) (2,913,619) Sales proceeds--undeveloped oil and gas interests.................................... 396,370 -- 480,931 480,931 -- Purchase of technical and office equipment and leasehold improvements....................... -- (108,817) (395,093) (104,250) (224,479) Purchase of technical equipment from Landmark Graphics..................................... -- (87,373) (405,480) (405,480) (219,461) (Purchase of) proceeds from securities held to maturity..................................... -- -- (1,595,167) -- 1,595,167 Other.......................................... (2,736) 500 (12,886) (7,886) 4,197 ------------ ---------- ---------- ---------- ---------- Net cash used in investing activities.......... (400,743) (2,017,864) (4,113,499) (1,294,237) (1,758,195) ------------ ---------- ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Common stock proceeds, net of issuance costs... 247,644 162,651 -- -- 604 Series A preferred stock cash proceeds......... 100,000 -- -- -- -- Series B preferred stock proceeds, net of issuance costs............................... 2,601,875 2,352,722 25,297 25,297 -- Series C preferred stock proceeds, net of issuance costs............................... -- -- 7,851,133 7,802,874 31,308 Proceeds from issuance of long-term debt....... 400,000 -- -- -- -- Repayments of long-term debt................... (400,000) -- -- -- -- ------------ ---------- ---------- ---------- ---------- Net cash provided by financing activities...... 2,949,519 2,515,373 7,876,430 7,828,171 31,912 ------------ ---------- ---------- ---------- ---------- Net change in cash and cash equivalents.......... 1,930,262 513,752 3,260,000 5,826,229 (1,941,806) Cash and cash equivalents at beginning of year... -- 1,930,262 2,444,014 2,444,014 5,704,014 ------------ ---------- ---------- ---------- ---------- Cash and cash equivalents at end of the year..... $1,930,262 $2,444,014 $5,704,014 $8,270,243 $3,762,208 ------------ ---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements. F-6 3DX TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 1. ORGANIZATION AND BASIS OF PRESENTATION 3DX Technologies Inc. ("3DX" or the "Company"), began operations in January 1993 to offer its 3-D seismic data and computer-aided exploration capabilities as a partner to experienced oil and gas operators in its geographical areas of interest. By combining the operator's local knowledge and infrastructure with 3DX's imaging capabilities, 3DX believes it is able to evaluate and exploit drilling opportunities at lower-than-normal cost. The Company primarily invests in prospects where 3-D seismic evaluation and interpretation is expected to reduce drilling risk. Working interests in major prospects have ranged from 5% up to 40% in property investments to date. The Company's future operations are dependent on a variety of factors, including its successful application of its technical expertise, profitable exploitation of its oil and gas properties, successful access to capital sources and variable oil and gas prices and costs, among others. See "Risk Factors" included elsewhere in this document. The Company was initially funded by its three founding stockholders and by Landmark Graphics Corporation (Landmark), a publicly-traded Houston company which is a leading supplier of interactive computer-aided exploration systems used by geoscientists to analyze subsurface data in the process of exploring for and producing petroleum reserves. Landmark's initial investment included cash of $100,000, technical equipment and office furniture valued at approximately $150,000 and $50,000, respectively (which approximated predecessor cost), organization costs valued at approximately $6,000, a $400,000 bank loan guarantee valued at approximately $80,000, the payment of certain 3DX general and administrative expenses of approximately $27,000, and preferred stock issuance costs of approximately $87,000. The three founding stockholders of 3DX were formerly employed by Landmark. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OIL AND GAS PROPERTIES 3DX accounts for its oil and gas properties using the full-cost method. All direct and certain indirect 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 the period ended December 31, 1993, the years ended December 31, 1994 and 1995 and the nine month periods ended September 30, 1995 and 1996 are general and administrative costs of $156,652, $375,922, $618,614, $449,678, and $649,885, respectively, that are directly attributable to the Company's acquisition, exploration and development activities. Dispositions of oil and gas properties are reported as adjustments to capitalized costs, with gains and losses not recognized unless such adjustments would significantly alter the relationship between capitalized costs and estimated proved oil and gas reserves. The evaluated costs of oil and gas properties plus estimated future development and dismantlement costs (including plugging, abandonment and site-restoration costs) are charged to operations as depreciation, depletion, and amortization using the unit-of-production method based on the ratio of current production to proved recoverable oil and gas reserves as estimated by the Company and corroborated by independent petroleum engineering firms. The Company excludes unevaluated property costs from the depreciation, depletion and amortization computations until the discovery of proved reserves or a determination of impairment occurs. Unevaluated properties are evaluated for impairment on a property- F-7 3DX TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) by-property basis annually through 1995 and quarterly beginning in 1996. When the determination has been made that an unproved property has either encountered proved reserves or has been impaired, the related costs are transferred to the evaluated cost pool which is compared in total to the estimated values of proved reserves in the full-cost ceiling test of asset recoverability discussed further below. To the extent that capitalized costs of oil and gas properties, net of related accumulated depreciation, depletion and amortization and related deferred income taxes, exceed the discounted future net revenues of estimated proved oil and gas reserves plus the lower of cost or fair value of unevaluated properties, net of income tax effects, such excess costs are charged to operations as an impairment of oil and gas properties. No such writedowns were required during 1993 or 1994. A writedown of $1,627,321 was required for the year ended December 31, 1995. Write-downs of $1,477,567 and $1,476,690 were required for the nine month periods ended September 30, 1995 and 1996, respectively. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 121 ("SFAS No. 121") regarding accounting for the impairment of long-lived assets. The Company adopted SFAS No. 121 effective January 1, 1996. However, such adoption did not affect the primary test of asset recoverability because the Company's oil and gas properties are accounted for under the full-cost method of accounting as discussed above. The adoption of SFAS No. 121 had no effect on the Company's results of operations for the nine month period ended September 30, 1996. Technical interpretation equipment, including software, and office furniture and equipment are recorded at cost. Depreciation is determined on a straight-line basis over the estimated useful lives of the assets. The estimated useful life of the technical interpretation equipment, including software, is 3 years, and for office furniture and equipment, it is 5 years. Depletion, depreciation and amortization expense includes depreciation related to technical interpretation equipment, including software, and office furniture and equipment of $65,368, $119,675, $288,014, and $336,427 for the period ended December 31, 1993, the years ended December 31, 1994 and 1995, and the nine month period ended September 30, 1996. SECURITIES HELD TO MATURITY Securities held to maturity at December 31, 1995 include various types of government debt securities which matured on March 31, 1996, and are carried at amortized cost at December 31, 1995. ACCOUNTING FOR INCOME TAXES The Company provides deferred income taxes at the balance sheet date for the estimated tax effects of differences in the existing 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. F-8 3DX TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RENTAL INCOME In January 1993, the Company entered into an informal revenue-sharing arrangement with a seismic processing company whereby the Company would receive a percentage of the seismic processing company's gross billings in exchange for providing office space and use of the Company's technical equipment. Revenues under this ongoing arrangement amounted to $89,718, $100,962 and $58,195 in 1993, 1994 and 1995, respectively. Revenues under this arrangement amounted to $45,563 and $120,098 in the nine month periods ended September 30, 1995 and 1996, respectively. 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. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, securities held to maturity and accounts receivable, approximate their fair values due to their short-term nature. 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 the ceiling test, are inherently imprecise and are expected to change as future information becomes available. COMPUTATION OF PRO FORMA NET LOSS APPLICABLE TO COMMON STOCKHOLDERS (UNAUDITED) Because of the significance of the planned redemption of Series B Preferred Stock at its $100 liquidation value per share, the exercise of outstanding warrants or 266,224 shares of Series C Preferred Stock and conversion of a total of 2,662,241 shares of Series C Preferred Stock into 1,514,017 shares of common stock that will automatically upon effectiveness of the Offering (see Note 13), historical net loss per common share is not presented herein. The effects of these transactions are included in pro forma net loss applicable to common stockholders per share for 1995 and the nine month period ended September 30, 1996 assuming such redemption and conversion transactions occurred as of January 1, 1995. Pro Forma net loss applicable to common stockholders is computed using the weighted average number of common shares outstanding during the periods after giving effect to the issuance and sale of a sufficient number of shares of common stock in the filing of the Registration Statement on Form S-1 (Note 13) to F-9 3DX TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) redeem all the issued and outstanding shares of Series B Preferred Stock and the conversion of all Series C Preferred Stock into shares of Common Stock. All common stock and options issued since October 18, 1995 have been, for purposes of calculating net loss per common share, treated as outstanding for all periods presented, which is the treatment contemplated in Staff Accounting Bulletin No. 83. INTERIM FINANCIAL DATA (UNAUDITED) The unaudited financial statements as of September 30, 1996, and for the nine month periods ended September 30, 1995 and 1996 and all related footnote information for these periods have been prepared on the same basis as the audited financial statements and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and results of operations and cash flows in accordance with generally accepted accounting principles. PRIOR YEAR RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with the current presentation. 3. INCOME TAXES Significant components of the Company's deferred tax liabilities and assets are as follows:
DECEMBER 31, -------------------------- 1994 1995 ----------- ------------- Deferred tax liability: Exploration and development expenditures deducted for tax and capitalized for books......................................... $ 345,831 $ (103,867) Other items, net................................................ -- (37,523) ----------- ------------- Total deferred tax liability................................ (345,831) (141,390) ----------- ------------- Deferred tax assets: Net operating loss carryforwards................................ 653,394 1,238,317 Other items, net................................................ 28,419 66,375 ----------- ------------- Total deferred tax assets................................... 681,813 1,304,692 Less: Valuation allowance....................................... (335,982) (1,163,302) ----------- ------------- Net deferred tax assets........................................... 345,831 141,390 ----------- ------------- 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. F-10 3DX TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 3. INCOME TAXES (CONTINUED) 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. Such valuation allowance amounted to $208,183, $335,982 and $1,163,302 as of December 31, 1993, 1994 and 1995 respectively. As of December 31, 1995, the Company has tax net operating loss carryforwards of $3,642,108 which begin to expire in 2008. As a result of the pending initial public offering (See Note 13), there may be a limitation placed on the Company's utilization of its NOL's by Section 382 of the Internal Revenue Code. The Company will review the valuation allowance at the end of each quarter and will make adjustments if it is determined that it is more likely than not that the deferred tax assets will be realized. 4. RELATED-PARTY TRANSACTIONS The Company purchased technical equipment, supplies, and software and hardware maintenance amounting to $174,374 in 1993, $118,630 in 1994 and $521,128 in 1995 from Landmark. During the unaudited nine month periods ended September 30, 1995 and 1996, the Company purchased $405,480 and $219,461, respectively, from Landmark. 5. MANDATORILY REDEEMABLE PREFERRED STOCK On January 27, 1993, the Company sold 100,000 shares of Series A preferred stock to Landmark for a total consideration of $500,000, composed of cash, technical and office equipment, furniture, organizational costs, a bank loan guarantee, payment of certain general and administrative expenses, and preferred stock issuance costs. The Series A preferred stock contained no voting rights, was convertible into Class A common stock, and contained a mandatory-redemption feature which allowed the holder of the Series A preferred stock to require 3DX to redeem the stock at the higher of the original issue value or the then- current fair market value of the stock at the time of redemption. The Series A preferred stock was exchanged for 329,003 shares of common stock in connection with the issuance of Series B preferred stock in connection with the sale of equity units in November 1993. The Company's Series B and Series C redeemable preferred stocks are presented on the balance sheet outside of common equity because they both have mandatory-redemption provisions outside the control of the Company, and both are being accreted to their projected redemption values through a charge to common equity during the periods such securities were outstanding. In November 1993, the Company sold 29,000 equity units consisting of an aggregate of 29,000 shares of the Company's redeemable Series B preferred stock, par value of $.01 per share, and 876,237 shares of common stock, par value of $.01 per share. The stock was sold for net proceeds of $94.1558 per share of Series B preferred stock and $.19 per share of common stock. The difference between the sales price and the redemption price of $100 per share is subject to an annual pro-rata accretion charge to retained earnings, so that at the time of the mandatory redemption, the value of each share of preferred stock will equal the redemption price of $100. The Series B preferred stockholders are entitled to 100 votes for each share held, and shall vote together with holders of common stock and not as a separate class. The Series B preferred stockholders are entitled to receive (out of any funds legally available therefor) dividends (in cash or in shares of Series B preferred stock, as determined by the Board of Directors) at an annual rate per share of $12.50 if in cash or .13276 shares of Series B preferred stock if in stock, payable annually on F-11 3DX TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 5. MANDATORILY REDEEMABLE PREFERRED STOCK (CONTINUED) December 31, commencing in December 1994. The Series B preferred stock has a redemption price of $100 per share. The Series B preferred stock also contains a mandatory-redemption feature under which the stock will be redeemed at the redemption price in two installments (50% on November 9, 2002 and 50% on November 9, 2003). 3DX has the option to redeem the outstanding Series B Preferred stock at any time with funds legally available therefor. As consideration for the Series B preferred and common stock sale, the Company received $2,875,019 in cash and promissory notes from two of its founders amounting to $24,984. The Company incurred legal and other offering costs of $103,659 in connection with this Series B preferred stock unit sale. On October 24, 1994, the Company sold 25,000 equity units consisting of an aggregate of 25,000 shares of the Company's redeemable Series B preferred stock, par value of $.01 per share, and 755,378 shares of common stock, par value of $.01 per share. The stock was sold for net proceeds of $94.1558 per share of Series B preferred stock and $.19 per share of common stock. As consideration for the Series B preferred and common stock sale, the Company received $2,487,511 in cash and a promissory note from one of its founders amounting to $12,492. Dividends on the Series B preferred stock have been paid in stock rather than in cash as determined by the Board of Directors. During the period from July 26, 1995 until September 25, 1995, the Company sold a total of 2,662,241 shares of the Company's senior redeemable convertible Series C preferred stock, par value of $.01 per share. The stock was sold for $3 per share. The Series C preferred stockholders are entitled to 1 vote for each number of common shares their Series C preferred stock is convertible into, and shall vote together with holders of common stock and not as a separate class. The Series C preferred stockholders are entitled to receive when, as and if declared by the Board of Directors (out of any funds legally available therefor) dividends (in cash or in shares of Series C preferred stock, as determined by the Board of Directors) at an annual rate per share of $.24 if in cash or .08 shares of Series C preferred stock if in stock, payable quarterly, commencing on September 30, 1995. In the event the Board of Directors fails to declare the dividend in stock or cash by the end of each calendar quarter, the dividend is automatically deemed declared in cash. The Series C preferred stock also contains a right to convert to common stock on a one share for one share basis at any time (See Note 13 for discussion of the impact of the October 1996 reverse stock split), and the shares shall be automatically converted upon the occurrence of certain automatic conversion events (including the successful completion of an initial public offering of the Company's common stock if certain pricing and other criteria are met). The Series C preferred stock also contains a mandatory-redemption feature under which the stock will be redeemed (if requested in writing with at least 30 days notice by at least 67% of the holders) at the liquidation price in two installments (50% on November 9, 2002 and 50% on November 9, 2003). In the event of a merger, sale or dissolution of the Company, or initiation of mandatory redemption of the senior preferred Series C stock where the proceeds to the holders are less than two times the holders' original basis plus accrued dividends, then in such event the holders will receive the face value of their investment plus accrued dividends and will also be entitled to participate on an "as if converted" basis in all remaining net proceeds of the Company. As consideration for the Series C preferred stock sale, the Company received $7,928,968 in cash, and promissory notes from F-12 3DX TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 5. MANDATORILY REDEEMABLE PREFERRED STOCK (CONTINUED) two of its founders and one board member amounting to $57,755. The Company incurred legal and other offering costs of $87,844 in connection with this Series C preferred stock sale. At its October 6, 1995 meeting, the Board of Directors of the Company granted each purchaser of shares of senior redeemable convertible Series C preferred stock a warrant to purchase additional shares equal to 10% of the shares owned by such purchaser, at an exercise price of $3 per share, such shares to be 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, since the warrant exercise price equaled the price recently paid for the stock. During the nine months ended September 30, 1996, the Company accrued a dividend on the Series C preferred stock of $798,672. The following table summarizes the inception to date activity of mandatorily redeemable preferred stock:
REDEEMABLE PREFERRED STOCK -------------------------------------------------------------------------- SERIES A SERIES B SERIES C ----------------------- ----------------------- ------------------------ SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------- ----------- --------- ------------ ---------- ------------ Shares issued for cash and other assets in January 1993.............................. 100,000 $ 500,000 -- $ -- -- $ -- Issuance costs.............................. -- (87,250) -- -- -- -- Conversion of shares to common stock........ (100,000) (412,750) -- -- -- -- Shares issued in November 1993.............. -- -- 29,000 2,730,518 -- -- Issuance costs.............................. -- -- -- (103,659) -- -- Accretion to redemption value............... -- -- -- 3,966 -- -- ---------- ----------- --------- ------------ ---------- ------------ Balance at December 31, 1993................ -- -- 29,000 2,630,825 -- -- Shares issued in October 1994............... -- -- 25,000 2,353,895 -- -- Accrual of dividends........................ -- -- 5,034 503,400 -- -- Accretion to redemption value............... -- -- -- 30,367 -- -- ---------- ----------- --------- ------------ ---------- ------------ Balance at December 31, 1994................ -- -- 59,034 5,518,487 -- -- Shares issued in 1995....................... -- -- -- -- 2,662,241 7,986,723 Offering Costs.............................. -- -- -- (860) -- (87,834) Accrual of dividends........................ -- -- 7,837 783,700 -- -- Accretion to redemption value............... -- -- -- 43,464 -- 4,944 ---------- ----------- --------- ------------ ---------- ------------ Balance at December 31, 1995................ -- -- 66,871 6,344,791 2,662,241 7,903,833 UNAUDITED: Accretion to redemption value............... -- -- -- 32,598 -- 8,535 ---------- ----------- --------- ------------ ---------- ------------ Balance of September 30, 1996............... -- $ -- 66,871 $ 6,377,389 2,662,241 $ 7,912,368 ---------- ----------- --------- ------------ ---------- ------------ ---------- ----------- --------- ------------ ---------- ------------
F-13 3DX TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 6. COMMON STOCKHOLDERS' EQUITY (DEFICIT) On January 27, 1993, the Company sold 768,117 shares of common stock to its founding stockholders for $44,572 ($.06 per share). These shares are subject to a stock purchase and restriction agreement under which the Company has retained a right to repurchase any "unvested" shares at the original sales price of $.06 per share. For purposes of determining vesting, the shares vest over a period of 4 years based on the continued employment of the applicable stockholder, annually the first two years and monthly the next 24 months. On November 9, 1993, the Company sold 259,172 shares of common stock to its founding stockholders at $.19 per share. As consideration for the common stock sale, the Company received net proceeds of $33,587 in cash and a promissory note from one of its founders amounting to $16,543. On May 24, 1995, the stockholders approved a 10-for-1 stock split of the Company's common stock. See also Note 12 for information on the reverse stock split which occurred in October 1996. All references in this report to the number of common shares outstanding reflect these splits. 7. STOCK OPTIONS In June 1994, the Board of Directors approved the 1994 Stock Option Plan (the Plan) for employees, officers, directors and certain consultants of the Company. The ten year options vest for employees over four years (annually for the first two years and monthly the last two years) and for directors and consultants over three years (annually with 50% in year one) and certain of these options are eligible for accelerated vesting upon a change of control of the Company. At December 31, 1995 the Company had reserved 987,937 shares of common stock for issuance under this Plan. All options to purchase common stock were granted at or above the fair value of the Company's common stock as determined by the Board of Directors. The following table summarizes option balances and activity for the Plan:
YEAR ENDED DECEMBER 31, ------------------------ 1994 1995 ----------- ----------- PERIOD ENDED SEPTEMBER 30, 1996 ------------- (UNAUDITED) Option shares outstanding: Beginning of period.................................................. -- 438,783 686,943 Granted.............................................................. 438,783 248,160 235,235 Exercised............................................................ -- -- (3,124) Canceled............................................................. -- -- (157,146) ----------- ----------- ------------- End of period........................................................ 438,783 686,943 761,908 Shares available for grant at end of period............................ 549,154 300,994 222,905 Weighted average price of options exercised during period.............. -- -- $ 0.19 Range of exercise price of options outstanding at end of period........ $ 0.19-0.26 $ 0.19-0.58 $ 0.19-0.58 Weighted average exercise price of options outstanding at end of period............................................................... $ 0.22 $ 0.42 $ 0.47 Weighted average fair value of options granted during period........... -- $ 0.42 $ 0.47
F-14 3DX TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 7. STOCK OPTIONS (CONTINUED) The Company did not record any compensation expense related to the above options because the related exercise prices were at or above the estimated fair values of the Company's common stock at the time such options were granted. In October 1995, the Financial Accounting Standards Board issued Statement No. 123 ("SFAS No. 123"). SFAS No. 123 is a new standard of accounting for stock-based compensation and establishes a fair value method of accounting for awards granted after December 31, 1995 under stock compensation plans. SFAS No. 123 encourages, but does not require, companies to adopt the fair value method of accounting in place of the existing method of accounting for stock-based compensation whereupon compensation costs are recognized only in situations where stock compensation plans award intrinsic value to recipients at the date of grant. Companies that do not adopt the fair value method of accounting prescribed in SFAS No. 123 must, nonetheless, make annual pro forma disclosures of the estimated effects on net income and earnings per share in their year-end 1996 financial statements as if the fair value method had been used for grants after December 31, 1994. 8. NOTES RECEIVABLE FROM STOCK SALES During 1993, 1994 and 1995, two officers and one member of the Board of Directors purchased common or preferred stock for notes, which are reflected as an offset to equity in the accompanying financial statements. The notes are full recourse promissory notes bearing interest at a fixed rate of 6% per annum. The notes from the two employees are collateralized by certain vested stock options the individuals hold from their former employer. The principal and all accrued interest on the notes held at December 31, 1995 and at September 30, 1996 are due in or before January 1997. 9. SAVINGS PLAN The Company has joined with Landmark in offering its employees an employee 401-K savings plan (the Plan) which became effective upon inception of the Company. The Plan covers substantially all employees and entitles them to contribute up to 15% of their annual compensation, subject to maximum limitations imposed by the Internal Revenue Code. While the Plan allows for employer matching of a portion of the employee contributions, the Company has elected not to match contributions. 10. COMMITMENTS Effective March 1, 1995, the Company entered into a 5-year office facilities operating lease agreement which required an 18-month rent prepayment at inception, and contains typical renewal options and escalation clauses. Rental expense under office facilities operating leases was approximately $61,000 in 1994 and $90,370 in 1995. Rental expense under office facilities operating leases was $66,599 and $72,136 for the nine months ended September 30, 1995 and 1996, respectively. F-15 3DX TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 10. COMMITMENTS (CONTINUED) Future minimum payments under non-cancelable operating leases having initial terms of one year or more are as follows at December 31, 1995: 1996.................................................... $ 31,544 1997.................................................... 94,633 1998.................................................... 94,633 1999.................................................... 94,633 Thereafter.............................................. 15,772 --------- Total minimum lease payments.............................. $ 331,215 --------- ---------
11. SALE OF ASSETS In April 1995, the Company sold 66.67% of its working interest in the Double Diamond/Jones Ranch prospect to a group of individual investors who are stockholders in the Company (through a limited partnership). Proceeds from the sale, which represented both the estimated fair market value of the interest sold as well as 3DX's proportionate cost to date on the prospect, amounted to $480,931. No gain or loss was recorded on this transaction. F-16 3DX TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 12. SUPPLEMENTAL CASH FLOW INFORMATION The following table summarizes cash paid for interest and taxes as well as non-cash transactions for the indicated periods:
SEPT. 30, SEPT. 30, 1993 1994 1995 1995 1996 ---------- ---------- ---------- --------- ---------- Cash paid during period for interest.................. $ 8,006 $ -- $ -- $ -- $ 289 Cash paid during period for taxes..................... -- -- -- -- -- NON-CASH TRANSACTIONS: Dividends declared but not paid....................... $ -- $ -- $ -- $ -- $ 798,672 Accretion on preferred stock.......................... 3,966 30,367 48,408 34,681 41,133 Sale of Series A preferred stock to Landmark in exchange for technical & office equipment, furniture, organizational costs, bank loan guarantee, payment of certain general & administrative expenses and preferred stock issuance costs............................................... 400,000 -- -- -- -- Exchange of Series A preferred stock for 329,003 shares of common stock.............................. 412,750 -- -- -- -- Sale of common stock in exchange for promissory note from one of the founders............................ 16,543 -- -- -- -- Sale of common stock in exchange for promissory note from one of the founders (November 1993)............ 24,984 -- -- -- -- Sale of Series B preferred and common stock in exchange for promissory note from one of the founders (October 24, 1994)......................... -- 12,492 -- -- -- Stock dividend on Series B preferred stock............ -- 503,400 783,700 -- -- Sale of Series C preferred stock in exchange for promissory notes from two of the founders........... -- -- 57,755 -- -- 10 for 1 common stock split (Note 13)................. -- -- -- -- --
13. EVENTS SUBSEQUENT TO AUDITORS' REPORT DATE In October 1996, the Board of Directors authorized a reverse stock split whereby stockholders of common stock will receive .517 shares of common stock for every 1 share previously owned. The previous conversion ratio of 1 share of Series C Preferred Stock for 1 share of Common Stock will also be adjusted for this reverse split so that 1 share of Series C Preferred Stock will be convertible into .517 shares of common stock. In addition, authorized, issued, and outstanding options under the Company's 1994 stock option plan will be revised to reflect the impact of the reverse stock split on share and option prices. All references in this report to number of common shares outstanding reflect this reverse stock split retroactively to inception of the Company. The Company anticipates filing a registration statement on Form S-1 for the sale of 2,500,000 shares of common stock in the fourth quarter of 1996. The offering is expected to raise approximately $31.8 F-17 3DX TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 13. EVENTS SUBSEQUENT TO AUDITORS' REPORT DATE (CONTINUED) million in net proceeds, which are expected to be used, among other purposes, to redeem all the outstanding Series B preferred stock and for future capital and exploration expenditures. In connection with such offering, the Series C preferred stock is expected to be converted to common stock and the Series C dividends payable will be paid in cash. 14. RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) The following table sets forth the Company's results of operations for oil and gas producing activities for the years ended December 31, 1994 and 1995 and for the nine months ended September 30, 1996. There were no oil and gas producing activities for the period from inception (January 6, 1993) through December 31, 1993.
SEPTEMBER 30, 1994 1995 1996 ---------- ------------- ------------- Oil and gas revenues.......................................... $ 303,836 $ 274,511 $ 408,459 Lease operating costs......................................... 14,225 60,877 28,463 Production taxes.............................................. 19,812 17,656 22,764 Impairment of oil and gas properties.......................... -- 1,627,321 1,476,690 Depletion, depreciation and amortization...................... 90,672 158,336 126,342 ---------- ------------- ------------- Income (loss) before income taxes............................. 179,127 (1,589,679) (1,245,800) Income tax expense (credit)................................... -- -- -- ---------- ------------- ------------- Net income (loss)............................................. $ 179,127 $ (1,589,679) $(1,245,800) ---------- ------------- ------------- ---------- ------------- ------------- Amortization per physical unit of production (equivalent Mcf of gas)..................................................... $ .64 $ 1.15 $ .81 ---------- ------------- -------------
The results of operations from oil and gas producing activities were determined in accordance with Statement of Financial Accounting Standards No. 69, "Disclosures About Oil and Gas Producing Activities" ("SFAS No. 69") and, therefore, do not include corporate overhead, interest and other general income and expense items. 15. 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, 1994 and 1995 and at September 30, 1996 were as follows:
1994 1995 1996 ------------ ------------- ------------- Unproved properties......................................... $ 828,321 $ 1,375,145 $ 1,993,753 Proved properties........................................... 1,575,146 2,648,724 5,441,851 ------------ ------------- ------------- Total capitalized costs..................................... 2,403,467 4,023,869 7,435,604 Less--accumulated depletion, depreciation and amortization.............................................. (90,672) (1,876,329) (3,479,361) ------------ ------------- ------------- $ 2,312,795 $ 2,147,540 $ 3,956,243 ------------ ------------- ------------- ------------ ------------- -------------
F-18 3DX TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 15. COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED) Unevaluated properties and associated costs not currently being amortized and included in oil and gas properties were $828,321, $1,375,145, and $1,993,753 at December 31, 1994, and 1995 and September 30, 1996, respectively. The projects represented by these costs were at such dates undergoing exploration or development activities or projects in which the Company intends to commence such 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 the unevaluated properties at December 31, 1995 will be fully evaluated in 24 to 36 months. The following table represents an analysis of remaining unevaluated oil and gas property costs at December 31, 1995, and the periods in which they were incurred:
1994 1995 ---------- ------------ Acquisition costs............................................................. $ 238,219 $ 418,027 Exploration costs............................................................. 104,596 614,303 Development costs............................................................. 0 0 ---------- ------------ Total..................................................................... $ 342,815 $ 1,032,330 ---------- ------------ ---------- ------------
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:
NINE MONTHS ENDED SEPTEMBER 30, 1993 1994 1995 1996 ---------- ------------ ------------ ------------- Property acquisition costs-- Proved........................................ $ 0 $ 0 $ 0 $ 0 Unproved...................................... 96,558 372,134 490,141 424,922 Exploration costs............................... 712,996 1,618,149 1,611,192 2,883,603 Development costs............................... 0 0 0 103,210 ---------- ------------ ------------ ------------- $ 809,554 $ 1,990,283 $ 2,101,333 $ 3,411,735 ---------- ------------ ------------ ------------- ---------- ------------ ------------ -------------
16. 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. F-19 3DX TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 16. OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED) The Company began its exploration program in 1993, by participating in an exploration program as a royalty owner. The Company did not produce any discovered oil and gas reserves in 1993. The Company added proved oil and gas reserves in 1994 as a result of exploration efforts on one prospect. In 1995, the Company added proved reserves from one additional well in the 1994 prospect, and drilled one additional successful well in a new prospect. In the nine months ended September 30, 1996, the Company added proved reserves from eight successful wells from drilling on various prospects. The Company's oil and gas reserves, shown below, all of which are located in the continental United States, consist of proved reserves which are estimated to be recoverable in the future under economic and operating conditions. The following table sets forth the changes in the Company's total proved reserves (all of which are developed) for the years ended December 31, 1993, 1994 and 1995. The reserve estimates for the Company were prepared by the Company and corroborated by independent petroleum engineering firms.
YEAR ENDED NINE MONTHS DECEMBER 31, ENDED --------------------------------- SEPTEMBER 30, 1993 1994 1995 1996 --------- ---------- ---------- ------------- OIL (BBLS) ------------------------------------------------ Proved reserves at the beginning of the period....... -- 4,000 39,886 41,193 Extensions, discoveries, and other additions......... 4,000 42,000 26,000 5,066 Revisions of previous estimates...................... -- -- (18,000) (8,972) Production........................................... -- (6,114) (6,693) (6,499) --------- ---------- ---------- ------------- Proved reserves at the end of the period............. 4,000 39,886 41,193 30,788 --------- ---------- ---------- ------------- --------- ---------- ---------- ------------- GAS (MCF) ------------------------------------------------ Proved reserves at the beginning of the period....... -- 20,000 1,236,915 442,795 Extensions, discoveries, and other additions......... 20,000 1,322,000 104,000 1,980,032 Revisions of previous estimates...................... -- -- (801,000) (136,318) Production........................................... -- (105,085) (97,120) (117,772) --------- ---------- ---------- ------------- Proved reserves at the end of the period............. 20,000 1,236,915 442,795 2,168,737 --------- ---------- ---------- ------------- --------- ---------- ---------- -------------
F-20 3DX TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 16. OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED) 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 (amounts in thousands):
DECEMBER 31, --------------------------------------- SEPTEMBER 30, 1993 1994 1995 1996 ---------- ------------ ------------- ------------- Future cash inflow........................................ $ 84,000 $ 2,997,000 $ 1,405,000 $ 4,336,000 Future production, development and abandonment costs...... ( --) (755,000) (329,000) (743,000) ---------- ------------ ------------- ------------- Future cash flows before income taxes..................... 84,000 2,242,000 1,076,000 3,593,000 Future income taxes....................................... -- -- -- -- ---------- ------------ ------------- ------------- Future net cash flows..................................... 84,000 2,242,000 1,076,000 3,593,000 10% Discount factor....................................... (24,000) (636,000) (305,000) (818,000) ---------- ------------ ------------- ------------- Standardized measure of discounted future net cash flow... $ 60,000 $ 1,606,000 $ 771,000 $ 2,775,000 ---------- ------------ ------------- ------------- ---------- ------------ ------------- ------------- Changes in standardized measure of discounted future net cash flows: Sales of oil, gas and natural gas liquids, net of production costs...................................... $ (270,000) $ (196,000) $ (357,000) Extensions, discoveries and other additions............. 1,878,000 349,000 2,373,000 Revisions of estimates of reserves proved in prior years: Quantities estimated.................................. -- (1,280,000) (338,000) Net changes in price and production cost.............. -- (71,000) 153,000 Accretion of discount................................... 6,000 161,000 58,000 Changes in future development costs..................... (112,000) 103,000 31,000 Changes in production rates (timing) and other.......... 44,000 99,000 84,000 ------------ ------------- ------------- Net change.............................................. $ 1,546,000 $ (835,000) $ 2,004,000 ------------ ------------- ------------- ------------ ------------- -------------
Estimated future cash inflows are computed by applying year-end prices of oil and gas to year-end quantities of proved reserves. Future price changes are considered only to the extent provided by contractual arrangements. Estimated future development and production costs are determined by estimating the expenditures to be incurred in developing and producing the proved oil and gas reserves at the end of the year, based on year-end costs and assuming continuation of existing economic conditions. Estimated future income tax expense is calculated by applying year-end statutory tax rates to estimated future pretax net cash flows related to proved oil and gas reserves, less the tax basis (including net operating loss carryforwards projected to be usable) of the properties involved. These estimates were determined in accordance with SFAS No. 69. Because of unpredictable variances in expenses and capital forecasts, crude oil and gas prices and oil and gas reserve volume estimates, as well as the arbitrary pricing and discounting assumptions used in these cash flow estimates, F-21 3DX TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 16. OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED) 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. The Company does not have oil and gas reserves which are committed under oil and gas contracts. 17. PRO FORMA BALANCE SHEET AS OF SEPTEMBER 30, 1996 (UNAUDITED) The pro forma balance sheet as of September 30, 1996 gives effect to the following transactions as if they occurred on such date, in connection with the filing of a registration statement on Form S-1 for the sale of 2,500,000 shares of common stock in the fourth quarter of 1996 (Note 13): (i) the redemption immediately after the closing of the registration of all issued and outstanding shares of the Series B Preferred Stock at a price of $100 per share (including the effects of the $309,711 redemption premium), and (ii) the conversion, prior to giving effect to the reverse stock split (Note 13) of each of 266,224 shares of Series C Preferred Stock issuable upon exercise of certain outstanding warrants and the 2,662,241 shares of Series C Preferred Stock issued and outstanding as of the date of the Registration Statement on Form S-1 filing into 1,514,017 of Common Stock, after giving effect to the reverse stock split. F-22 APPENDIX A October 22, 1996 3DX Technologies Inc. 12012 Wickchester, Suite 250 Houston, TX 77079-1218 Gentlemen: The estimated reserve volumes and future income amounts presented in this report are related to hydrocarbon prices. September 1996 hydrocarbon prices were used in the preparation of this report as required by the Securities and Exchange Commission (SEC) and Financial Accounting Standards Bulletin No. 69 (FASB 69) guidelines; however, actual future prices may vary significantly from September 1996 prices. Therefore, volumes of reserves actually recovered and amounts of income actually received may differ significantly from the estimated quantities presented in this report. The Company's reserves are located in onshore and offshore Texas and in Federal waters offshore Louisiana. Our estimates of the net proved reserves attributable to the interests of the Company (referred to herein as the Company), as of September 30, 1996 are presented below:
PROVED NET RESERVES AS OF SEPTEMBER 30, 1996 ------------------------------ GAS, MMCF LIQUID, BARRELS ------------- --------------- Developed and Undeveloped....................................... 2,146 27,305 Developed....................................................... 2,146 27,305
All hydrocarbon liquid reserves are expressed in standard 42 gallon barrels. All gas volumes are sales gas expressed in MMCF at the pressure and temperature bases of the area where the gas reserves are located. Proved reserves of crude oil, concentrate, natural gas, and natural gas liquids are estimated quantities that geological and engineering data demonstrate with reasonable certainty to be recoverable in the future from known reservoirs under existing conditions. Reservoirs are considered proved if economic producibility is supported by actual production or formation tests. In certain instances, proved reserves are assigned on the basis of a combination of core analysis and electrical and other type logs which indicate the reservoirs are analogous to reservoirs in the same field which are producing or have demonstrated the ability to produce on a formation test. The area of a reservoir considered proved includes (1) that portion delineated by drilling and defined by fluid contacts, if any, and (2) the adjoining portions not yet drilled that can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of data on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. Proved reserves are estimates of hydrocarbons to be recovered from a given date forward. They may be revised as hydrocarbons are produced and additional data become available. Proved natural gas reserves are comprised of non-associated, associated, and dissolved gas. An appropriate reduction in gas reserves has been made for the expected removal of natural gas liquids, for lease and plant fuel, and the exclusion of non-hydrocarbon gases if they occur in significant quantities and are removed prior to sale. Reserves that can be produced economically through the application of improved recovery techniques are included in the proved classification when these qualifications are met: (1) successful testing by a pilot project or the operation of an installed program in the reservoir provides support for the engineering analysis on which the project or program was based, and A-1 (2) it is reasonably certain the project will proceed. Improved recovery includes all methods for supplementing natural reservoir forces and energy, or otherwise increasing ultimate recovery from a reservoir, including (1) pressure maintenance, (2) cycling, and (3) secondary recovery in its original sense. Improved recovery also includes the enhanced recovery methods of thermal, chemical flooding, and the use of miscible and immiscible displacement fluids. Estimates of proved reserves do not include crude oil, natural gas, or natural gas liquids being held in underground storage. Depending on the status of development, these proved reserves are further subdivided into: (i) "developed reserves" which are those proved reserves reasonably expected to be recovered through existing wells with existing equipment and operating methods, including (a) "developed producing reserves" which are those proved developed reserves reasonably expected to be produced from existing completion intervals now open for production in existing wells, and (b) "developed non-producing reserves" which are those proved developed reserves which exist behind the casing of existing wells which are reasonably expected to be produced through these wells in the predictable future where the cost of making such hydrocarbons available for production should be relatively small compared to the cost of a new well; and (ii) "undeveloped reserves" which are those proved reserves reasonably expected to be recovered from new wells on undrilled acreage, from existing wells where a relatively large expenditure is required, and from acreage for which an application of fluid injection or other improved recovery technique is contemplated where the technique has been proved effective by actual tests in the area in the same reservoir. Reserves from undrilled acreage are limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units are included only where it can be demonstrated with reasonable certaintity that there us continuity of production from the existing productive formation. The Company has interests in certain tracts which have substantial additional hydrocarbon quantities which cannot be classified as proved and consequently are not included herein. The Company has active exploratory and development drilling programs which may result in the reclassification of significant additional volumes to the proved category. In accordance with the requirements of FASB 69, our estimates of future cash inflows, future costs and future net cash inflows before income tax as of September 30, 1996 from this report are presented as follows:
AS OF SEPTEMBER 30, 1996 ----------------------- Future Cash Inflows.................................................. $ 4,239,599 Future Costs Production......................................................... $ 549,092 Development........................................................ 183,571 ----------- Future Net Cash Inflows Before Income Tax............................ $ 3,506,936 Present Value at 10% Before Income Tax............................... $ 2,723,338
The future cash inflows are gross revenues before any deductions. The production costs were based on current data and include production taxes, ad valorem taxes and certain other items such as transportation costs in addition to the operating costs directly applicable to the individual leases or wells. The development costs were based on current data and include dismantlement and abandonment costs net of salvage for properties where such costs are relatively significant. The Company furnished us with gas prices in effect at September 30, 1996 and with its forecasts of future gas prices which take into account SEC guidelines, current market prices, and contract prices. In accordance with SEC guidelines, the future gas prices used in this report make no alllowances for future gas price increases which may occur as a result of inflation nor do they account for seasonal variations in A-2 gas prices which may occur future yearly average gas prices to be somewhat lower than September 30, 1996 gas prices. The Company furnished us with liquid prices in effect at September 30, 1996 and these prices were held constant to depletion of the properties. In accordance with SEC guidelines, changes in liquid prices subsequent to September 30, 1996 were not considered in this report. Operating costs for the leases and wells in this report were based on the operating expense reports of the Company and include only these costs directly applicable to the leases or wells. When applicable, the operating costs include a portion of general and administrative costs allocated directly to the leases and wells under terms of operating agreements. Development costs were furnished to us by the Company and are based on authorizations for expenditure for the proposed work or actual costs for similar projects. The current operating and development costs were held constant throughout the life of the properties. The estimated net cost of abandonment after salvage was included for properties where abandonment costs net of salvage are significant. The estimates of the net abandonment costs furnished by the Company were accepted without independent verification. No deduction was made for indirect costs such as general administration and overhead expenses, loan repayments, interest expenses and exploration and development prepayments. No attempt was made to quantify or otherwise account for any accumulated gas production imbalances that may exist. The estimates of reserves presented herein are based upon a detailed study of the properties in which the Company owns an interest; however, we have not made any field examination of the properties. No consideration was given in this report to potential environmental liabilities which may exist nor were any costs included for potential liability to restore and clean up damages, if any, caused by past operating practices. The Company has informed us that they have furnished us all of the accounts, records, geological and engineering data and reports, and other data required for this investigation. The ownership interests, prices, and other factual data furnished by the Company were accepted without independent verification. The estimates presented in this report are based on data available through September 1996. The reserves included in this report are estimates only and should not be construed as being exact quantities. They may or may not be actually recovered, and if recovered, the revenues therefrom and the actual costs related thereto could be more or less than the estimated amounts. Moreover, estimates of reserves may increase or decrease as a result of future operations. The future production rates from wells now on production may be more or less than estimated because of changes in market demand or allowables set by regulatory bodies. While it may reasonably be anticipated that the future prices received for the sale of production and the operating costs and other costs relating to such production may also increase or decrease from existing levels, such changes were, in accordance with the rules adopted by the SEC, omitted from consideration in making this evaluation. Neither we nor any of our employees have any interest in the subject properties and neither the employment to make this study nor the compensation is contingent on our estimates of reserves and future cash inflows for the subject properties. Very truly yours, RYDER SCOTT COMPANY PETROLEUM ENGINEERS /s/ DON P. GRIFFIN ------------------------------------------ Don P. Griffin, P.E. VICE PRESIDENT A-3 - ------------------------------------------------ ------------------------------------------------ - ------------------------------------------------ ------------------------------------------------ NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 7 The Company............................................................... 14 Use of Proceeds........................................................... 15 Dividend Policy........................................................... 15 Dilution.................................................................. 16 Capitalization............................................................ 17 Selected Financial Data................................................... 18 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 20 Business.................................................................. 28 Management................................................................ 43 Certain Transactions...................................................... 49 Principal and Selling Stockholders........................................ 50 Description of Capital Stock.............................................. 51 Shares Eligible for Future Sale........................................... 55 Underwriting.............................................................. 56 Legal Matters............................................................. 57 Experts................................................................... 57 Additional Information.................................................... 57 Glossary of Certain Industry Terms........................................ 59 Index to Financial Statements............................................. F-1 Summary Report of Ryder Scott Company..................................... A-1
------------------------ UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 2,949,862 SHARES 3DX TECHNOLOGIES INC. [LOGO] COMMON STOCK --------------------- PROSPECTUS --------------------- HOWARD, WEIL, LABOUISSE, FRIEDRICHS INCORPORATED PETRIE PARKMAN & CO. DATED , 1996 - ------------------------------------------------ ------------------------------------------------ - ------------------------------------------------ ------------------------------------------------ PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses in connection with the sale and distribution of the securities being registered, other than underwriting discounts and commissions. All the amounts shown are estimated except the Securities and Exchange Commission (the "Commission") registration fee, the National Association of Securities Dealers, Inc. (the "NASD") filing fee and the Nasdaq National Market listing fee. Securities and Exchange Commission registration fee............... $ 15,420 NASD filing fee................................................... 4,813 Nasdaq National Market listing application fee.................... 35,013 Printing and engraving expenses................................... 100,000 Legal fees and expenses........................................... 300,000 Accounting fees and expenses...................................... 205,000 Blue Sky fees and expenses (including legal fees)................. 12,000 Transfer agent and registrar fees and expenses.................... 3,000 Miscellaneous..................................................... 99,754 --------- Total......................................................... $ 775,000 --------- ---------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law (the "DGCL") provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding") (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. A Delaware corporation may indemnify any person under such Section in connection with a proceeding by or in the right of the corporation to procure judgment in its favor, as provided in the preceding sentence, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action, except that no indemnification shall be made in respect thereof unless, and then only to the extent that, a court of competent jurisdiction shall determine upon application that such person is fairly and reasonably entitled to indemnity for such expenses as the court shall deem proper. A Delaware corporation must indemnify any person who was successful on the merits or otherwise in defense of any action, suit or proceeding or in defense of any claim, issue or matter in any proceeding, by reason of the fact that he is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. A Delaware corporation may pay for the expenses (including attorneys' fees) incurred by an officer or director in defending a proceeding in advance of the final disposition upon receipt of an undertaking by or on behalf of such officer or director to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation. II-1 Section 102(b)(7) of the DGCL permits a corporation to provide in its certificate of incorporation that a director shall not be personally liable to the corporation or its stockholders for monetary damages for a breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for any acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) in respect of certain unlawful dividend payments or stock redemptions or repurchases, or (iv) for any transaction from which the director derived an improper personal benefit. Article Ninth of the Company's Certificate of Incorporation eliminates the liability of directors to the fullest extent permitted by Section 102(b)(7) of the DGCL. The DGCL permits the purchase of insurance on behalf of directors and officers against any liability asserted against directors and officers and incurred by such persons in such capacity, or arising out of their status as such, whether or not the corporation would have the power to indemnify directors and officers against such liability. Prior to consummation of the Offering, the Company intends to acquire officers' and directors' liability insurance of $10 million for members of its Board of Directors and executive officers. In addition, the Company has entered into agreements to indemnify its directors and officers. At present, there is no pending litigation or other proceeding involving a director or officer of the Company as to which indemnification is being sought, nor is the Company aware of any threatened litigation that may result in claims for indemnification by any officer or director. Reference is made to the form of Underwriting Agreement, filed as Exhibit 1.1 to this Registration Statement which provides for indemnification of the directors and officers signing this Registration Statement and certain controlling persons of the Registrant against certain liabilities, including those arising under the Securities Act, in certain instances by the Underwriters. Article Seventh of the Company's Restated Certificate of Incorporation and Section 5 of the Company's Bylaws provide for indemnification of directors and officers to the fullest extent permitted by Section 145 of the DGCL. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The following sets forth information as to all securities issued by the Registrant during the past three years which were not registered under the Securities Act. In January 1993 the Company sold 256,039 shares of restricted Common Stock to each of Messrs. Ennis and Nester and Dr. Duncan at a price per share of $0.06. As of September 30, 1996, 240,037 of the 256,039 shares issued to each of Messrs. Ennis and Nester and Dr. Duncan have vested and the remaining shares vest at the rate of 5,334 shares per month. All such shares will fully vest on December 31, 1996. Also, in January 1993, the Company sold 100,000 shares of Series A Preferred Stock to Landmark Graphics Corp., an accredited investor. In November 1993, the Company issued 329,003 shares of Common Stock in exchange for all of the issued and outstanding shares of Series A Preferred Stock. In November 1993, the Company issued 86,391 shares of restricted Common Stock to each of Messrs. Ennis and Nester and Dr. Duncan at a price per share of $0.19. As of September 30, 1996, 80,992 of the 86,391 shares issued to each of Messrs. Ennis and Nester and Dr. Duncan have vested and the remaining shares vest at the rate of 1,800 shares per month. All such shares will fully vest on December 31, 1996. In November 1993 and October 1994, the Company sold an aggregate of 54,000 Units, each Unit consisting of one share of Series B Preferred Stock and 30.22 shares of Common Stock, to various accredited investors. The purchase price for each Unit was $100, of which $94.1558 was allocated to each share of Series B Preferred Stock and $0.19 was allocated to each share of Common Stock. The aggregate purchase price for the Units was $5.4 million. II-2 Between July 1995 and September 1995, the Company sold an aggregate of 2,662,241 shares of Series C Preferred Stock to various accredited investors. The purchase price for each share of Series C Preferred Stock was $3.00, with aggregate proceeds to the Company of $7,986,723. On October 6, 1995, the Company issued to the holders of Series C Preferred Stock, warrants to purchase an aggregate of 266,224 shares of Series C Preferred Stock. The exercise price of each warrant is $3.00 per share, subject to adjustment and cashless exercise based on a predetermined formula. The Warrants expire on the earlier to occur of (i) five years from the date of issuance or (ii) the effective date of the initial public offering of the Company's securities. No brokers or underwriters were involved in any of the above issuances and/or sales. All certificates for the shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Common Stock so issued bear restrictive legends. In connection with each of the offerings and sales described above, the Company relied on Section 4(2) for an exemption from the registration requirements of the Securities Act and each of the respective purchasers represented that they were purchasing such securities for investment only and without a view towards resale. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
EXHIBIT NO. DESCRIPTION - -------- -------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement between the Company and the Underwriters.* 3.1(i)(a) Third Restated Certificate of Incorporation of the Company.** 3.1(i)(b) Fourth Restated Certificate of Incorporation of the Company. 3.1(i)(c) Fifth Restated Certificate of Incorporation of the Company.* 3.1(i)(d) Sixth Restated Certificate of Incorporation of the Company.* 3.1(ii)(a) Amended and Restated Bylaws of the Company.** 3.1(ii)(b) Second Amended and Restated Bylaws of the Company.* 4.1 Form of Specimen Stock Certificate. 5.1 Opinion of Kelley Drye & Warren LLP (including the consent of such firm) as to the validity of the securities being offered. 10.1 Technical Services Agreement between Landmark Graphics Corporation and Novera Energy Inc. dated January 1993.** 10.2 Stock Purchase Agreement among the Company, C. Eugene Ennis, Douglas C. Nester, Peter M. Duncan and the Investors named therein dated November 9, 1993.** 10.3 Series C Preferred Stock Purchase Agreement among the Company, C. Eugene Ennis, Douglas C. Nester, Peter M. Duncan and the Investors named therein dated July 26, 1995.** 10.4 Second Amended and Restated Co-Sale Agreement among the Company, C. Eugene Ennis, Douglas C. Nester, Peter M. Duncan and the Investors named therein dated July 26, 1995.** 10.5 Stock Purchase and Restriction Agreement between the Company and C. Eugene Ennis dated November 9, 1993.** 10.6 Stock Purchase and Restriction Agreement between the Company and Peter M. Duncan dated November 9, 1993.** 10.7 Stock Purchase and Restriction Agreement between the Company and Douglas C. Nester dated November 9, 1993.**
II-3
EXHIBIT NO. DESCRIPTION - -------- -------------------------------------------------------------------------- 10.8 Lease Contract dated January 22, 1995 between the Company and The Penn Mutual Life Insurance Company and Letter dated March 1, 1995 from Trammell Crow Houston, Inc.** 10.9 1994 Stock Option Plan.+** 10.10 1996 Incentive Compensation Program.+ 11.1 Computation of Earnings per Share. 23.1 Consent of Kelley Drye & Warren LLP (included in Exhibit 5.1). 23.2 Consent of Arthur Andersen LLP. 23.3 Consent of Ryder Scott Company. 24.1 Power of Attorney (included on page II-5 hereof).** 27.1 Financial Data Schedule (December 31, 1995).** 27.2 Financial Data Schedule (September 30, 1996).**
- ------------------------ * To be filed by amendment. ** Previously filed. + Management contract or compensatory plan or arrangement. (b) Financial Statement Schedules All schedules are omitted because they are inapplicable or the requested information is shown in the financial statements or related notes. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to provisions described in Item 14 above, or otherwise, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Company hereby undertakes: (1) that for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective; (2) that for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and (3) The Company hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. II-4 SIGNATURES In accordance with the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, State of Texas, on the th day of November, 1996. 3DX TECHNOLOGIES INC. By: /s/ C. Eugene Ennis ------------------------------------ C. Eugene Ennis President and Chief Executive Officer POWER OF ATTORNEY In accordance with the requirements of the Securities Act of 1933, as amended, this Registration Statement was signed on the th day of November, 1996, by the following persons in the capacities indicated:
SIGNATURE TITLE(S) - ------------------------------------------------------ ------------------------------------------------------------------ /s/ C. Eugene Ennis - ------------------------------------------------ President, Chief Executive Officer; Director (Principal Executive C. Eugene Ennis Officer and Principal Accounting Officer) * - ------------------------------------------------ Vice President, Technology Peter M. Duncan * - ------------------------------------------------ Vice President, Exploration Douglas C. Nester * - ------------------------------------------------ Vice President, Joint Ventures Robert J. Bacon, Jr. /s/ Joseph Schuchardt, III - ------------------------------------------------ Vice President, Business Development Joseph Schuchardt, III * - ------------------------------------------------ Director Jon W. Bayless * - ------------------------------------------------ Director Robert H. Chaney * - ------------------------------------------------ Director Charles E. Edwards * - ------------------------------------------------ Director Douglas C. Williamson *By /s/ C. Eugene Ennis ------------------------------------------- C. Eugene Ennis ATTORNEY-IN-FACT
II-5 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION - ------------ ------------------------------------------------------------------------------------------ 1.1 Form of Underwriting Agreement between the Company and the Underwriters.* 3.1(i)(a) Third Restated Certificate of Incorporation of the Company.** 3.1(i)(b) Fourth Restated Certificate of Incorporation of the Company. 3.1(i)(c) Fifth Restated Certificate of Incorporation of the Company.* 3.1(i)(d) Sixth Restated Certificate of Incorporation of the Company.* 3.1(ii)(a) Amended and Restated Bylaws of the Company.** 3.1(ii)(b) Second Amended and Restated Bylaws of the Company.* 4.1 Form of Specimen Stock Certificate. 5.1 Opinion of Kelley Drye & Warren LLP (including the consent of such firm) as to the validity of the securities being offered. 10.1 Technical Services Agreement between Landmark Graphics Corporation and Novera Energy Inc. dated January 1993.** 10.2 Stock Purchase Agreement among the Company, C. Eugene Ennis, Douglas C. Nester, Peter M. Duncan and the Investors named therein dated November 9, 1993.** 10.3 Series C Preferred Stock Purchase Agreement among the Company, C. Eugene Ennis, Douglas C. Nester, Peter M. Duncan and the Investors named therein dated July 26, 1995.** 10.4 Second Amended and Restated Co-Sale Agreement among the Company, C. Eugene Ennis, Douglas C. Nester, Peter M. Duncan and the Investors named therein dated July 26, 1995.** 10.5 Stock Purchase and Restriction Agreement between the Company and C. Eugene Ennis dated November 9, 1993.** 10.6 Stock Purchase and Restriction Agreement between the Company and Peter M. Duncan dated November 9, 1993.** 10.7 Stock Purchase and Restriction Agreement between the Company and Douglas C. Nester dated November 9, 1993.** 10.8 Lease Contract dated January 22, 1995 between the Company and The Penn Mutual Life Insurance Company and Letter dated March 1, 1995 from Trammell Crow Houston, Inc.** 10.9 1994 Stock Option Plan.+** 10.10 1996 Incentive Compensation Program.+ 11.1 Computation of Earnings per Share. 23.1 Consent of Kelley Drye & Warren LLP (included in Exhibit 5.1). 23.2 Consent of Arthur Andersen LLP. 23.3 Consent of Ryder Scott Company. 24.1 Power of Attorney (included on page II-5 hereof).** 27.1 Financial Data Schedule (December 31, 1995).** 27.2 Financial Data Schedule (September 30, 1996).**
- ------------------------ * To be filed by amendment. ** Previously filed. + Management contract or compensatory plan or arrangement. EX-3.1(I)(A) 2 EXHIBIT 3.1(I)(A) FOURTH RESTATED CERTIFICATE OF INCORPORATION OF 3DX TECHNOLOGIES INC. It is hereby certified that: 1. The name of the corporation is 3DX TECHNOLOGIES INC. (the "Corporation"), and the name under which the Corporation was originally incorporated is Novera Energy Inc. The date of filing of the original Certificate of Incorporation of the Corporation with the Secretary of State of the State of Delaware is December 8, 1992. 2. The Certificate of Incorporation of the Corporation, as previously amended and restated, is hereby further amended by (i) increasing the number of authorized shares of Common Stock and Preferred Stock of the Corporation; and (iii) creating a new series of Preferred Stock, to be designated as "Senior Redeemable Convertible Preferred Stock, Series C", and in connection therewith, deleting Article Fourth thereof in its entirety and inserting in lieu thereof a new Article Fourth, which is set forth in the Restated Certificate of Incorporation hereinafter provided for. 3. The provisions of the Certificate of Incorporation of the Corporation, as previously and as herein amended, are hereby restated and integrated into the single instrument that is hereinafter set forth, and that is entitled "Fourth Restated Certificate of Incorporation of 3DX Technologies Inc." without any further amendments other than the amendments herein certified and without any discrepancy between the provisions of the Certificate of Incorporation as heretofore amended and supplemented and the provisions of the said single instrument hereinafter set forth. 4. The amendments and the restatement of the Fourth Restated Certificate of Incorporation herein certified have been duly adopted by the stockholders of the Corporation in accordance with the provisions of Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware. "FOURTH RESTATED CERTIFICATE OF INCORPORATION OF 3DX TECHNOLOGIES INC. FIRST: The name of the corporation is 3DX Technologies Inc. (the "Corporation"), and the name under which it was incorporated was Novera Energy Inc. SECOND: The address of the Corporation's registered office in the State of Delaware is 32 Loockerman Square, Suite L-100, in the city of Dover, County of Kent. The name of its registered agent at such address is The Prentice-Hall Corporation System, Inc. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: The Corporation shall have the authority to issue two (2) classes of shares, to be designated respectively "Preferred Stock" and "Common Stock". The total number of shares of stock that the Corporation shall have the authority to issue is Fifteen Million Five Hundred Thousand (15,500,000). The total number of shares of Preferred Stock that the Corporation shall have authority to issue is Three Million Five Hundred Thousand (3,500,000), par value $.01 per share, of which Two Hundred Thousand (200,000) shall be designated as "Redeemable Preferred Stock, Series B" (the "Series B Preferred Stock"), and Three Million Three Hundred Thousand (3,300,000) shall be designated "Senior Redeemable Convertible Preferred Stock, Series C" (the "Series C Preferred Stock" and, together with the Series B Preferred Stock, the "Designated Preferred Stock"). The total number of shares of Common Stock that the Corporation shall have the authority to issue is Twelve Million (12,000,000), par value $.01 per share (the "Common Stock"). The relative preferences, powers, rights, qualifications, limitations and restrictions in respect of the Designated Preferred Stock and the Common Stock are as follows: A. DESIGNATED PREFERRED STOCK 1. VOTING RIGHTS. Each holder of shares of Series B Preferred Stock shall be entitled to one hundred (100) votes for each share held. Each holder of Series C Preferred Stock shall be entitled to the number of votes equal to the largest whole number of shares of Common Stock into which such shares of Series C Preferred Stock could be converted, pursuant to the provisions of Section A.4 hereof, on the record date for the determination of the stockholders entitled to vote on such matters or, if no such record date is established, in accordance with Delaware law. Except as otherwise expressly provided herein or as required by law, the holders of Designated Preferred Stock and the holders of Common Stock shall vote together and not as separate classes. 2. DIVIDEND RIGHTS. (a) Each issued and outstanding share of Series B Preferred Stock shall entitle the holder of record thereof to receive, out of any funds legally available therefor, dividends in cash or in shares of Series B Preferred Stock (with the determination of whether such payment shall be in cash or in shares of Series B Preferred Stock to be made in good faith by the Board of Directors of the Corporation), at the annual rate per share of twelve dollars and fifty cents ($12.50), if in cash, or 0.13276 shares of Series B Preferred Stock, if in stock, in each case as adjusted for stock splits, stock dividends, recapitalizations, reclassifications and similar events (together herein referred to as "Recapitalization Events"), payable annually on December 31 of each year commencing December 31, 1994; PROVIDED that if the Board of Directors fails to make such determination at least ten (10) business days prior to December 31 of each year, such dividends shall be paid in shares of Series B Preferred Stock; and PROVIDED FURTHER that if, in respect of any fiscal year of the Corporation, dividends on the Series C Preferred Stock are paid in shares of Series C Preferred Stock, dividends on the Series B Preferred Stock will be paid only in shares of Series B Preferred Stock, and not in cash; and PROVIDED FURTHER that no dividends shall be paid to the holders of Series B Preferred Stock in respect of any period so long as a default under Section 6 hereof or under Section 7 or 9 of the Series C Preferred Stock Purchase Agreement, dated on or about July 26, 1995, among the Corporation and the other parties set forth therein (the "Series C Preferred Stock Purchase Agreement") occurs and is continuing. Dividends and distributions (other than those payable solely in Common Stock) may be paid, or declared and set aside for payment, upon shares of Common Stock in any calendar year only if dividends shall have been paid, or declared and set apart for payment, on account of all shares of Series B Preferred Stock then issued and outstanding, at the aforesaid rate for such calendar year. (b)(i) Each issued and outstanding share of Series C Preferred Stock shall entitle the holder of record thereof to receive, when, as and if declared by the Board of Directors, out of any funds legally available therefor, dividends in cash or in shares of Series C Preferred Stock (with the determination of whether such payment shall be in cash or in shares of Series C Preferred Stock to be made in good faith by the Board of Directors of the Corporation), at the annual rate per share of Twenty-Four Cents ($.24) (or such greater amount per share as such Series C Preferred Stock would be entitled if such Series C Preferred Stock were converted into Common Stock), if in cash, or 0.08 shares of Series C Preferred Stock, if in stock, in each case as adjusted for Recapitalization Events, payable or accruing quarterly on the last day of March, June, September and December of each year, commencing September 30, 1995; PROVIDED that if the Board of Directors fails to make such determination at least ten (10) business days prior to the last day of any such quarter, such dividends shall be paid in cash or shall accrue; and PROVIDED FURTHER that no dividends shall be paid to the holders of Series C Preferred Stock in respect of any period so long as a default under Section 6 hereof or under Section 7 or 9 of the Series C Preferred Stock Purchase Agreement occurs and is continuing. If such dividends are to be paid in shares of Series C Preferred Stock, the 2 Corporation shall issue and deliver certificates in respect of such shares within 90 days after the quarter in which the election to issue shares is made. Dividends and distributions (other than those payable solely in Common Stock) may be paid, or declared and set aside for payment, upon shares of (x) Common Stock in any calendar year only if dividends shall have been paid, or declared and set apart for payment, on account of all shares of Designated Preferred Stock then issued and outstanding, at the aforesaid rate for such calendar year and (y) Series B Preferred Stock only in accordance with the provisos set forth in Section 2(a) above. (ii) The right to dividends upon the issued and outstanding shares of Series C Preferred Stock shall be cumulative so that such rights shall be deemed to accrue whether there be funds legally available therefor, or whether said dividends shall have been declared; and if such dividends in respect of any period beginning with the Issuance Date (as defined in Section A.4(c)), shall not have been declared and either paid or a sum sufficient for the payment thereof set aside in full, the accumulated unpaid dividends shall first be fully paid on the Series C Preferred Stock, before any dividend or other distribution (other than those payable solely in Common Stock) may be paid, or declared and set apart for payment, to the holders of shares of Common Stock, and shall in any event be paid upon conversion of the Series C Preferred Stock. Any accumulation of dividends on the shares of Series C Preferred Stock shall bear interest at the rate of 8% per annum, compounded annually, until paid. (c) The restrictions on dividends and distributions with respect to shares of Series B Preferred Stock and Common Stock set forth in Section 2 hereof are in addition to, and not in derogation of, the other restrictions on such dividends and distributions set forth herein. 3. LIQUIDATION RIGHTS. (a) In the event of a voluntary or involuntary liquidation, dissolution, or winding up of the Corporation (a "Liquidation"), the holders of record of shares of Series C Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any assets of the Corporation to the holders of Series B Preferred Stock or Common Stock by reason of their ownership thereof, on a Liquidation, out of the assets of the Corporation legally available therefor, an amount per share equal to the sum of (1) Three Dollars ($3.00) per share of Series C Preferred Stock (the "Original Series C Issue Price"), adjusted for Recapitalization Events, plus (2) a further amount per share equal to dividends, if any, (x) then declared and unpaid on account of Series C Preferred Stock and (y) whether or not declared, then accrued in accordance with the provisions of Section A.2(b) hereof, before any payment shall be made or any assets distributed to the holders of shares of Series B Preferred Stock or Common Stock. If, upon any Liquidation, the assets available for distribution among the holders of the Series C Preferred Stock shall be insufficient to permit payment to such holders of the full preferential amounts aforesaid, then such assets shall be distributed ratably among the holders of Series C Preferred Stock as among the holders of Series C Preferred Stock based on the number of shares of such series so held. 3 (b) After payment to the holders of record of the shares of Series C Preferred Stock of the full amounts set forth in Section A.3(a), the holders of record of shares of Series B Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any assets of the Corporation to the holders of Common Stock by reason of their ownership thereof, out of the assets of the Corporation legally available thereof, an amount equal to One Hundred Dollars ($100.00) per share of Series B Preferred Stock (the "Series B Price"), as adjusted for Recapitalization Events, before any payment shall be made or any assets distributed to the holders of shares of Common Stock. If upon any Liquidation, after payment shall have been made to all holders of record of Series C Preferred Stock of the full amounts to which such holders shall be entitled pursuant to Section A.3(a) hereof, the assets available for distribution among the holders of the Series B Preferred Stock shall be insufficient to permit payment to such holders of the full preferential amounts aforesaid, then such assets shall be distributed ratably among the holders of Series B Preferred Stock as among the holders of Series B Preferred Stock based on the number of shares so held. (c) After payment to the holders of record of the shares of the Designated Preferred Stock of the amounts set forth in Sections A.3(a) and A.3(b), the remaining assets of the Corporation shall be distributed in equal amounts per share to the holders of record of the Corporation's Common Stock and Series C Preferred Stock (each share of Series C Preferred Stock being treated as the number of shares of Common Stock (giving effect to fractional shares) into which it could then be converted for such purpose), PROVIDED, HOWEVER, that if the assets and the funds distributed hereunder and under Section 3(a) hereof would be sufficient in the aggregate to permit the payment to the holders of Series C Preferred Stock of an amount in excess of (A) Six Dollars ($6.00) per share of Series C Preferred Stock (as adjusted for Recapitalization Events), plus (B) dividends, if any, (x) then declared and unpaid on account of Series C Preferred Stock and (y) whether or not declared, then accrued in accordance with the provisions of Section A.2(b) hereof, then the holders of Series C Preferred Stock shall be entitled to the full amounts otherwise payable to them pursuant to the preceding provisions, but shall not be entitled to share in the remaining assets and funds of the Corporation in excess of (A) Six Dollars ($6.00) per share of Series C Preferred Stock (as adjusted for Recapitalization Events), plus (B) dividends, if any, (x) then declared and unpaid on account of Series C Preferred Stock and (y) whether or not declared, then accrued in accordance with the provisions of Section A.2(b) hereof, after which payment the remaining assets of the Corporation shall be distributed in equal amounts per share to the holders of record of the Corporation's Common Stock. (d) A consolidation or merger of the Corporation with or into any other corporation or corporations, or a sale of all or substantially all of the assets of the Corporation, shall each be deemed to be a Liquidation within the meaning of this Section A.3, unless holders of record of at least sixty-seven percent (67%) of the outstanding shares of the Series B Preferred Stock and the Series C Preferred Stock, each voting as a separate class, vote otherwise; PROVIDED that the holders of Designated Preferred Stock receive at least 20 days' prior written notice of such consolidation, merger or sale. 4 4. CONVERSION RIGHTS. The holders of the Series C Preferred Stock shall have conversion rights (the "Conversion Rights") as follows: (a) RIGHT TO CONVERT. Each holder of record of shares of Series C Preferred Stock may, at any time, upon surrender to the Corporation of the certificates therefor at the principal office of the Corporation or at such other place as the Corporation shall designate, convert all or any part of such holder's shares of Series C Preferred Stock into such number of fully paid and non-assessable shares of Common Stock of the Corporation (as such Common Stock shall then be constituted) equal to the product of (A) the number of shares of Series C Preferred Stock which such holder shall then surrender to the Corporation, multiplied by (B) the number determined by dividing Three Dollars ($3.00) by the Conversion Price (as hereinafter defined) per share for the Series C Preferred Stock in effect at the time of conversion. If any holder of Series C Preferred Stock elects to convert any of its shares of Series C Preferred Stock in connection with a Liquidation under Section A.3(d), such holder may make such conversion conditional upon the consummation of any transaction deemed to be a Liquidation under Section A.3(d). (b) AUTOMATIC CONVERSION. All outstanding shares of Series C Preferred Stock shall be deemed automatically converted into such number of shares of Common Stock as are determined in accordance with Section 4(a) hereof upon the consummation of a firm commitment underwritten public offering of the securities of the Corporation pursuant to a registration statement filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended, where (i) the aggregate proceeds to the Corporation from the sale of such securities (before deduction of underwriting discounts and expenses of sale) is not less than $10,000,000 and the per share sales price of such securities before such deductions is not less than Twelve Dollars ($12.00) (whether or not pursuant to a Recapitalization Event) and (ii) the sales price per share of such securities is equal to at least the product of (x) the Original Series C Issue Price, as adjusted for Recapitalization Events, MULTIPLIED by (y) two (2) (an "Automatic Conversion Event"). On or after the date of occurrence of an Automatic Conversion Event, and in any event within 10 days after receipt of notice, by certified or registered mail, postage prepaid, from the Corporation of the occurrence of such Automatic Conversion Event, each holder of record of shares of Series C Preferred Stock shall surrender such holder's certificates evidencing such holder's shares of Series C Preferred Stock at the principal office of the Corporation or at such other place as the Corporation shall designate, and shall thereupon be entitled to receive certificates evidencing the number of shares of Common Stock into which such shares of Series C Preferred Stock are converted (plus additional certificates representing shares of Series C Preferred Stock not so converted, if any). On the date of the occurrence of an Automatic Conversion Event, each holder of record of shares of Series C Preferred Stock shall (i) receive from the proceeds of such offering an amount per share equal to dividends, if any, (x) then declared and unpaid on account of such Series C Preferred Stock and (y) whether or not declared, then accrued in accordance with the provisions of Section A.2(b) hereof, and (ii) be deemed to be the holder of record of the Common Stock issuable upon such conversion, 5 notwithstanding that the certificates representing such shares of Series C Preferred Stock shall not have been surrendered at the office of the Corporation, that notice from the Corporation shall not have been received by any holder of record of shares of Series C Preferred Stock, or that the certificates evidencing such shares of Common Stock shall not then be actually delivered to such holder. (c) For purposes of this Certificate of Incorporation: "ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares of Common Stock issued (or, pursuant to this Section 4, deemed to be issued) by the Corporation, other than shares of Common Stock issued or issuable: (i) upon conversion of shares of Series C Preferred Stock; (ii) to officers, directors, or employees of, or consultants to, the Corporation pursuant to a stock grant or sale or option plan or other employee stock incentive program approved by the Board of Directors, provided that such shares shall not exceed 1,850,010 in the aggregate without the approval of holders of at least 66-2/3% of the Designated Preferred Stock, voting together as a class; (iii) as a dividend or distribution on Designated Preferred Stock; (iv) in any deferred closing under the Series C Preferred Stock Purchase Agreement; (v) in connection with (x) an acquisition or joint venture by the Corporation, or (y) a bridge financing from institutional investors, in each case as unanimously approved by the Board of Directors; and (vi) to consultants, vendors or customers as unanimously approved by the Board of Directors. "CONVERSION PRICE" shall mean the price at which shares of the Common Stock shall be deliverable upon conversion of the Series C Preferred Stock as adjusted from time to time as herein provided. The initial Conversion Price per share for shares of Series C Preferred Stock shall be the Original Series C Issue Price. The Conversion Price shall be subject to adjustment as herein provided. "CONVERSION SHARES OUTSTANDING" includes all Common Stock issued or issuable upon conversion of (i) all outstanding shares of Series C Preferred Stock issued on the Issuance Date and (ii) all Additional Shares of Common Stock issued after the Issuance Date. 6 "CONVERTIBLE SECURITIES" shall mean any evidences of indebtedness, shares or securities, in each case convertible into or exchangeable for Additional Shares of Common Stock. "EFFECTIVE PRICE" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, or deemed to have been issued or sold by the Corporation under Section A.4(d)(i), into the aggregate consideration received or deemed to have been received by the Corporation for such issue under Section A.4(d)(i). "ISSUANCE DATE" shall mean the actual initial date of issuance of the Series C Preferred Stock. "OPTION" shall mean rights, options or warrants to subscribe for purchase or otherwise acquire Common Stock or Convertible Securities. (d) ADJUSTMENTS TO CONVERSION PRICE FOR DILUTING ISSUES. (i) SALE OF SHARES BELOW CONVERSION PRICE. (A) If at any time or from time to time after the Issuance Date, the Corporation issues or sells, or is deemed by the express provisions of this Section A.4(d)(i) to have issued or sold, Additional Shares of Common Stock, for an Effective Price per share of less than the Original Series C Issuance Price (as adjusted for Recapitalization Events), then and in each such case the then existing Conversion Price for Series C Preferred Stock shall be reduced, as of the opening of business on the date of such issue or sale, to a price determined by multiplying the Conversion Price for the Series C Preferred Stock by a fraction (a) the numerator of which shall be (A) the number of Conversion Shares Outstanding immediately prior to such issue or sale plus (B) the number of shares of Common Stock which the aggregate consideration received (or by express provision hereof deemed to have been received) by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price and (b) the denominator of which shall be the number of Conversion Shares Outstanding at the close of business on the date of such issue after giving effect to such issue of Additional Shares of Common Stock. (B) For the purpose of making any adjustment required under this Section A.4(d)(i), the consideration received by the Corporation for any issue or sale of securities shall (1) to the extent it consists of cash be computed at the gross amount of cash received by the Corporation before deduction of any expenses payable by the Corporation and any underwriting or similar commissions, compensation or concessions paid or allowed by the Corporation in connection with such issue or sale, (2) to the extent it consists of property other than cash, be computed at the fair market value of that property as determined in good faith by the Board of Directors and (3) if Additional Shares of Common Stock, Convertible Securities, or rights or options to purchase either Additional Shares of Common Stock or Convertible 7 Securities are issued or sold together with other stock or securities or other assets of the Corporation for a consideration which covers both, be computed (as provided in clauses (1) and (2) above) as the portion of the consideration so received that may be reasonably determined in good faith by the Board of Directors to be allocable to such Additional Shares of Common Stock, Convertible Securities or rights or options. (C) For the purpose of the adjustment required under this Section A.4(d)(i), if at any time or from time to time after the Issuance Date for the Series C Preferred Stock, the Corporation issues or sells any Options or Convertible Securities (other than options or rights exercisable for or convertible into shares of Common Stock referred to in clause (ii) of the definition of Additional Shares of Common Stock), then in each case the Corporation shall be deemed to have issued at the time of the issuance of such Options or Convertible Securities the maximum number of Additional Shares of Common Stock (as set forth in the instruments relating thereto, giving effect to any provision contained therein for a subsequent upward adjustment of such number) issuable upon exercise or conversion thereof and to have received as consideration for the issuance of such shares an amount equal to the total amount of the consideration, if any, received by the Corporation for the issuance of such Options or Convertible Securities plus, in the case of such Options, the minimum amounts of consideration, if any (as set forth in the instruments relating thereto, giving effect to any provision contained therein for a subsequent downward adjustment of such consideration), payable to the Corporation upon the exercise of such Options and, in the case of Convertible Securities, the minimum amounts of consideration, if any, payable to the Corporation (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities which were deemed to have been received by the Corporation on issuance of such Convertible Securities). No further adjustment of the Conversion Price for Series C Preferred Stock, adjusted upon the issuance of such Options or Convertible Securities, shall be made as a result of the actual issuance of Additional Shares of Common Stock on the exercise of any such Options or the conversion of any such Convertible Securities; PROVIDED, HOWEVER, that if any such Options or the conversion privilege represented by any such Convertible Securities shall expire without having been exercised, or are exercised for a lesser number of Additional Shares of Common Stock or with a greater consideration paid to the Corporation than was previously deemed to be issued or received by the Corporation, the Conversion Price for Series C Preferred Stock adjusted upon the issuance of such Options or Convertible Securities shall be readjusted to the Conversion Price for Series C Preferred Stock which would have been in effect had an adjustment been made on the basis that the only Additional Shares of Common Stock so issued were the Additional Shares of Common Stock, if any, actually issued or sold on the exercise of such Options or rights of conversion of such Convertible Securities, and such Additional Shares of Common Stock, if any, were issued or sold for the consideration actually received by the Corporation upon such exercise, plus the consideration, if any, actually received by the Corporation for the granting of all such Options, whether or not exercised, plus the consideration received for issuing or selling the Convertible Securities actually converted plus the consideration, if any, actually received by the Corporation (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities 8 which were deemed to have been received by the Corporation on issuance of such Convertible Securities) on the conversion of such Convertible Securities. (D) In each case of an adjustment or readjustment of the Conversion Price for the Series C Preferred Stock or the number of shares of Common Stock or other securities issuable upon conversion of the Series C Preferred Stock, the Corporation, at its expense, shall cause the chief financial officer of the Corporation to compute such adjustment or readjustment in accordance with the provisions hereof and prepare a certificate showing such adjustment or readjustment, and shall mail such certificate, by first class mail, postage prepaid, to each registered holder of the Series C Preferred Stock at the holder's address as shown in the Corporation's books. The certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based including a statement of (a) the consideration received or deemed to be received by the Corporation for any Additional Shares of Common Stock issued or sold or deemed to have been issued or sold, (b) the Conversion Price for Series C Preferred Stock at the time in effect (after giving effect to such adjustment or readjustment), (c) the number of Additional Shares of Common Stock and (d) the type and amount, if any, of other property which at the time would be received upon conversion of Series C Preferred Stock. (E) Except as expressly provided herein, no adjustment in the Conversion Price of any share of Series C Preferred Stock shall be made in respect of the issue of Additional Shares of Common Stock unless the consideration per share for such Additional Shares of Common Stock issued or deemed to be issued by the Corporation is less than the Conversion Price in effect on the date of, and immediately prior to, such issue, for such share of Series C Preferred Stock. (F) No readjustment to the Conversion Price pursuant to Section A.4(d)(i) shall (a) affect the Conversion Price in respect of, or any shares of Common Stock previously issued upon conversion of, the Series C Preferred Stock or (b) have the effect of increasing the Conversion Price for the Series C Preferred Stock to an amount which exceeds the lower of (x) the Conversion Price for the Series C Preferred Stock on such original adjustment date or (y) the Conversion Price for the Series C Preferred Stock that would have resulted from any issuance of Additional Shares of Common Stock between such original adjustment date and each subsequent readjustment date. (ii) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If the Corporation at any time or from time to time after the Issuance Date effects a subdivision of the outstanding Common Stock, the Conversion Price for Series C Preferred Stock then in effect immediately before that subdivision shall be proportionately decreased, and conversely, if the Corporation at any time or from time to time after the Issuance Date combines the outstanding shares of Common Stock, the Conversion Price for Series C Preferred Stock then in effect immediately before the combination shall be proportionately increased. Any adjustment under this subsection (ii) shall become effective at the close of business on the date the subdivision or combination becomes effective. 9 (iii) ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS. In the event the Corporation at any time, or from time to time after the Issuance Date makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in Additional Shares of Common Stock, as the case may be, then and in each such event the Conversion Price for Series C Preferred Stock then in effect shall be decreased as of the time of such issuance or, in the event such a record date is fixed, as of the close of business on such record date, by multiplying the Conversion Price for Series C Preferred Stock then in effect by a fraction (x) the numerator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (y) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the total number of shares of Common Stock issuable in payment of such dividend or distribution; PROVIDED, HOWEVER, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price for Series C Preferred Stock shall be recomputed accordingly as of the close of business on such record date and thereafter the Conversion Price for Series C Preferred Stock shall be adjusted pursuant to this Section A.4(d)(iii) as of the time of actual payment of such dividends or distributions. (iv) ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In the event the Corporation at any time or from time to time after the Issuance Date makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then in each such event provision shall be made so that the holders of Series C Preferred Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Corporation which they would have received had their Series C Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the date of conversion, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this paragraph (d) with respect to the rights of the holders of the Series C Preferred Stock. (v) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. If the Common Stock issuable upon the conversion of Series C Preferred Stock is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination of shares, a stock dividend or a reorganization, provided for elsewhere in this Section A.4), then and in any such event each holder of Series C Preferred Stock shall have the right thereafter to convert such stock into the kind and amount of stock and other securities and property receivable upon such reorganization, reclassification or other change, by holders of the number of shares of Common Stock into which such shares of Series C Preferred Stock might have been converted immediately prior to such reorganization, reclassification or change, all subject to further adjustment as provided herein. 10 (vi) REORGANIZATIONS. If at any time or from time to time there is a capital reorganization of the Common Stock (other than a recapitalization, subdivision, combination, reclassification or exchange of shares provided for elsewhere in this Section A.4), then, as a part of such reorganization, provision shall be made so that the holders of Series C Preferred Stock shall thereafter be entitled to receive, upon conversion of Series C Preferred Stock, the number of shares of stock or other securities or property of the Corporation to which a holder of Common Stock deliverable upon conversion would have been entitled on such capital reorganization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section A.4 with respect to the rights of holders of the Series C Preferred Stock after the reorganization to the end that the provisions of this Section A.4 (including adjustment of the Conversion Price for Series C Preferred Stock then in effect and number of shares purchasable upon conversion of Series C Preferred Stock) shall be applicable after that event and be as nearly equivalent to the provisions hereof as may be practicable. (e) NO IMPAIRMENT. The Corporation will not, by amendment of this Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section A.4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series C Preferred Stock against dilution or other impairment. The Corporation shall at all times reserve and keep available out of its authorized but unissued Common Stock the full number of shares of Common Stock deliverable upon the conversion of all the then outstanding shares of Series C Preferred Stock and shall take all such action and obtain all such permits or orders as may be necessary to enable the Corporation lawfully to issue such Common Stock upon the conversion of Series C Preferred Stock. (f) NOTICES OF RECORD DATE. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend which is the same as cash dividends paid in previous quarters) or other distribution, the Corporation shall mail to each holder of Series C Preferred Stock at least twenty (20) days prior to the date specified herein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution. 5. REDEMPTION. (a) MANDATORY REDEMPTION. The Designated Preferred Stock shall be redeemed by the Corporation in two equal installments with respect to the Series B Preferred Stock and two equal installments with respect to the Series C Preferred Stock, in each case in accordance with the following provisions: 11 (i) OBLIGATION OF CORPORATION TO REDEEM DESIGNATED PREFERRED STOCK. (A) The Corporation shall redeem the Series B Preferred Stock at the times, and pursuant to the terms, set forth below, without any action on the part of the holders of Series B Preferred Stock (other than surrendering to the Corporation in the manner specified in Section A.5(a)(v) hereof the certificate or certificates representing the shares of Series B Preferred Stock to be redeemed), PROVIDED that the Corporation shall not redeem any shares of Series B Preferred Stock (x) so long as the Corporation, pursuant to the terms of this Section A.5, is obligated but has failed to redeem any shares of Series C Preferred Stock pursuant to the terms of this Section A.5, without giving effect to any inability of the Corporation to redeem any such shares of Series C Preferred Stock due to insufficient funds being legally available therefor or (y) if the Corporation has not at the time of such applicable Redemption Date, whether under Section A.5(a) or A.5(b), demonstrated to the reasonable satisfaction of the holders of a majority in interest of the Series C Preferred Stock adequate resources to redeem the Series C Preferred Stock (either in cash, borrowing capacity, fixed net cash flow net to the Corporation, or other form of reserved assets) in accordance with this Section A.5. (B) The Corporation shall redeem the Series C Preferred Stock at the times, and pursuant to the terms, set forth below, if the Corporation receives written certification (the "Redemption Certificate") that holders of no less than sixty-seven percent (67%) of the then outstanding Series C Preferred Stock (the "Electing Holders") have elected in favor of redemption (the "Redemption Election"). The Redemption Certificate shall be signed by the Electing Holders and shall be delivered to the Corporation at its principal office on or after October 1, 2002. (ii) REDEMPTION PRICE. The Designated Preferred Stock shall be redeemed by the Corporation (x) in the case of the Series B Preferred Stock, paying in cash, out of funds legally available therefor, an amount equal to the Series B Price per share (adjusted for any Recapitalization Events with respect to such shares) (the "Series B Redemption Price"), and (y) in the case of the Series C Preferred Stock, (1) paying in cash, out of funds legally available therefor, an amount equal to the sum of (A) the Original Series C Issue Price (as adjusted for any Recapitalization Events with respect to such shares), PLUS (B) an amount per share equal to dividends, if any, (I) then declared and unpaid on account of such Series C Preferred Stock and (II) whether or not declared, then accrued in accordance with the provisions of Section A.2(b) hereof to and including the date fixed for redemption, and (2) issuing that number of shares of Common Stock into which such Series C Preferred Stock would be convertible immediately prior to the applicable Series C Redemption Date (collectively, the "Series C Redemption Price"). 12 (iii) TWO INSTALLMENTS. (A) Except as otherwise set forth in Sections A.5.(a)(iii)(B) and A.5(b) below, the Series B Preferred Stock shall be redeemed in two installments, with the Corporation redeeming 50% of each holder's shares of Series B Preferred Stock in the first installment and the remaining shares of Series B Preferred Stock in the second installment. Subject to the foregoing and to the Corporation having funds legally available, the closing of the first installment of the Series B Preferred Stock shall occur on November 9, 2002 (the "First Series B Redemption Date") and the closing of the second installment of the Series B Preferred Stock shall take place on November 9, 2003 (the "Second Series B Redemption Date") or, if either such Date is not a business day, on the first business day after each such Date (each such Date is referred to as a "Series B Redemption Date"). (B) The Redemption Election constitutes an election in favor of a mandatory redemption of all shares of Series C Preferred Stock. Except as otherwise set forth in the following provisions of this Section A.5.(a)(iii)(B), the Series C Preferred Stock shall be redeemed in two installments, with the Corporation redeeming 50% of each holder's shares of Series C Preferred Stock in the first installment and the remaining shares of Series C Preferred Stock in the second installment. Subject to the Corporation having funds legally available, the closing of the first installment of the Series C Preferred Stock (the "First Series C Redemption Date") shall occur on the date specified in the Redemption Certificate (which shall be at least 30 days after the date of the Redemption Certificate) and the closing of the second installment of the Series C Preferred Stock (the "Second Series C Redemption Date") shall occur on the one-year anniversary of the First Series C Redemption Date, or, if either such Date is not a business day, on the first business day after such Date (each such Date is referred to as a "Series C Redemption Date"; either Series B Redemption Date or Series C Redemption Date is sometimes hereinafter referred to as a "Redemption Date"). If at either Series C Redemption Date the funds legally available for payment of the Series C Redemption Price are insufficient to pay the Series C Redemption Price then due for the Series C Preferred Stock, the Corporation shall (A) apply all of its available funds to redeem the Series C Preferred Stock on a ratable basis as among the holders of Series C Preferred Stock based on the number of shares so held and (B) not redeem any shares of Series B Preferred Stock until such Series C Preferred Stock is redeemed. If the Corporation shall not have sufficient funds legally available for the redemption of the Series C Preferred Stock on the First Series C Redemption Date or the Second Series C Redemption Date, respectively, the Corporation shall redeem a pro rata portion of each holder's shares of Series C Preferred Stock out of funds legally available therefor and shall redeem the remaining shares, as well as all shares of Series B Preferred Stock which the 13 Corporation shall have become obligated to redeem on any Series B Redemption Date occurring on or prior to such Series C Redemption Date, as soon as practicable after the Corporation has funds legally available therefor. (iv) REDEMPTION NOTICE. The Corporation shall give by certified or registered mail, postage prepaid, not less than 30 days nor more than 60 days prior to any Redemption Date, written notice thereof (the "Redemption Notice"), to each holder of record of Series B Preferred Stock or Series C Preferred Stock, as the case may be, at its post office address last shown on the records of the Corporation. The Redemption Notice shall state: (A) the number of shares of Series B Preferred Stock or Series C Preferred Stock, as the case may be, held by the holder that the Corporation shall redeem on the applicable Redemption Date specified in the Redemption Notice; (B) the applicable Redemption Date and Redemption Price; and (C) that the holder is to surrender to the Corporation, in the manner and at the place designated, its certificate or certificates representing the shares of Series B Preferred Stock or Series C Preferred Stock to be redeemed. (v) SURRENDER OF CERTIFICATES; PAYMENT. On or before each Redemption Date, each holder of shares of Series B Preferred Stock or Series C Preferred Stock to be redeemed on such Redemption Date shall surrender the certificate or certificates representing such shares to the Corporation, in the manner and at the place designated in the Redemption Notice, and thereupon on the applicable Redemption Date the Series B Redemption Price or Series C Redemption Price, as the case may be, for such shares shall be paid to the order of the person whose name appears on such certificate or certificates as the owner thereof, and each surrendered certificate shall be canceled and retired. In the event that fewer than all of the shares represented by such certificate are redeemed, a new certificate representing the unredeemed shares shall be issued forthwith. (vi) RIGHTS SUBSEQUENT TO REDEMPTION. If the Redemption Notice shall have been duly given, and if on each Redemption Date the Series B Redemption Price or the Series C Redemption Price, as the case may be, for the shares of Series B Preferred Stock or Series C Preferred Stock to be redeemed on such Date is either paid or made available for payment through the deposit arrangement specified in subparagraph (vii) below, then notwithstanding that the certificates evidencing any of the shares of Series B Preferred Stock or Series C Preferred Stock so called for redemption shall not have been surrendered, the dividends with respect to such shares shall cease to accrue after the Redemption Date and all rights with respect to such shares shall forthwith terminate after the Redemption Date, except only the right of the holders to receive the Series B Redemption Price or Series C Redemption Price, as the case may be, with respect to such shares without interest upon surrender of their certificate or certificates therefor. 14 (vii) DEPOSIT OF FUNDS. On or prior to each Redemption Date, the Corporation shall deposit as a trust fund with any bank or trust company, having a capital and surplus of at least $100,000,000, a sum equal to the aggregate Series B Redemption Price and Series C Redemption Price of all shares of Series B Preferred Stock or Series C Preferred Stock called for redemption on such Redemption Date and not yet redeemed pursuant to subparagraph (v) above, with irrevocable instructions and authority to the bank or trust company to pay, on and after each such Redemption Date, the Series B Redemption Price or the Series C Redemption Price, as the case may be, to the respective holders upon the surrender of their share certificates. From and after the date of such deposit (but not prior to each Redemption Date), the shares so called for redemption on such Redemption Date shall be deemed to have been redeemed. The deposit shall constitute full payment of the shares to their holders, and from and after each Redemption Date the shares redeemed on such Redemption Date shall be deemed to be no longer outstanding, and the holders thereof shall cease to be stockholders with respect to such shares and shall have no rights with respect thereto except the rights to receive, from the bank or trust company, payment of the Series B Redemption Price or the Series C Redemption Price, as the case may be, of the shares, without interest, upon surrender of their certificates therefor. Any funds so deposited and unclaimed at the end of one year from the Second Series B Redemption Date and the Second Series C Redemption Date shall be released or repaid to the Corporation, after which the holders of shares called for redemption shall be entitled to receive payment of the Series B Redemption Price or the Series C Redemption Price, as the case may be, only from the Corporation. All interest on the amounts deposited with such bank or trust company shall be paid to the Corporation at the end of one year from the Second Series B Redemption Date and the Second Series C Redemption Date. (b) OPTIONAL REDEMPTION. The Corporation may, at any time and from time to time prior to the Second Series B Redemption Date, redeem any or all shares of the Series B Preferred Stock at the Series B Redemption Price with funds legally available therefore. In the event the Corporation elects to effectuate any such redemption, it shall send a Redemption Notice in accordance with Section A.5(a)(iv) above. Thereafter, the shares to be redeemed pursuant to the Redemption Notice shall be redeemed in accordance with the provisions of Sections A.5(a)(v) through (vii) above. 6. PROTECTIVE PROVISIONS. (a) So long as any shares of Series B Preferred Stock or Series C Preferred Stock are outstanding, the Corporation shall not, without the prior written consent or affirmative vote of the holders of record of at least 66-2/3% of the outstanding shares of the Series B Preferred Stock and the Series C Preferred Stock, each voting as a separate class: (i) amend, repeal or modify any provision of, or add any provision to, the Corporation's Certificate of Incorporation or By-laws if such action would alter or change the rights, preferences, privileges or powers of, or the restrictions provided for the benefit of, the Designated Preferred Stock; 15 (ii) authorize, create or issue shares of any class or series of stock having any preference or priority as to dividends, liquidation, redemption or assets superior to or on a parity with any such preference or priority of the Series B Preferred Stock or the Series C Preferred Stock, or authorize, create or issue shares of any class or series or any bonds, debentures, notes or other obligations convertible into or exchangeable for, or having optional rights to purchase, any shares of capital stock of the Corporation having any such preference or priority; or (iii) reclassify the shares of Common Stock or any other shares of stock hereafter created junior to the Series B Preferred Stock or Series C Preferred Stock as to dividends, liquidation, redemption or assets into shares of Series B Preferred Stock or Series C Preferred Stock or into shares having any preference or priority as to dividends or assets superior to or on a parity with that of the Series B Preferred Stock or Series C Preferred Stock. (b) So long as not less than 4,000 shares of Series B Preferred Stock or 100,000 shares of Series C Preferred Stock are outstanding, the Corporation shall not, without the prior written consent or affirmative vote of the holders of record of at least 66-2/3% of the outstanding shares of Series B Preferred Stock and the Series C Preferred Stock, each voting as a separate class: (i) declare or pay any dividends or make any other distributions on shares of Common Stock, other than dividends payable solely in shares of Common Stock; (ii) repurchase any shares of Series B Preferred Stock or Common Stock (other than shares of Common Stock issued or sold by the Corporation to an employee pursuant to an employee stock purchase option or benefit plan, agreement or other offering or arrangement, including without limitation all shares sold to employees of the Corporation subject to agreements of restriction by the Company or redemptions effected upon the terms contained in the Fourth Restated Certificate of Incorporation of the Corporation); (iii) sell, convey or otherwise dispose of all or substantially all of the property or business of the Corporation; (iv) merge or consolidate the Corporation into or with any other corporation, partnership or other entity unless upon consummation of such merger or consolidation, the holders of voting securities of the Corporation own directly or indirectly 51% or more of the voting power to elect directors of the surviving, acquiring or consolidated corporation, partnership or other entity; (v) permit the assignment in whole or in part of amounts otherwise due to the Corporation from the discovery and production of hydrocarbons to any stockholder of the Corporation, or officer of the Corporation, or any founding stockholder of the 16 Corporation, unless such assignment has been approved by the unanimous consent of the non-management members of the Board of Directors of the Corporation; or (vi) pay any agency, transaction or other fees to any stockholder of the Corporation unless such payment has been approved by the unanimous consent of the non-management members of the Board of Directors of the Corporation. (c) So long as not less than 4,000 shares of Series B Preferred Stock or 100,000 shares of Series C Preferred Stock are outstanding, the Company shall not, without the prior written consent or affirmative vote of 66-2/3% of the entire Board of Directors: (i) acquire, or permit any Controlled Entity to acquire, any stock or other securities of any Controlled Entity or other corporation, partnership or entity or acquire additional assets in any case for consideration in excess of $500,000 unless the acquired entity is wholly owned by the Corporation, and except certificates of deposit, high quality commercial paper, United States government securities and other short-term, high quality liquid investment grade securities; (ii) acquire assets from or merge with one or more companies or merge or consolidate one or more companies into a subsidiary of the Corporation for consideration in excess of an aggregate of $500,000; (iii) sell, lease, convey or otherwise dispose of any "material assets" (which, for the purposes of this Section A.6(c)(iii), are defined as assets having an aggregate fair market value of at least $250,000) of the Corporation or its subsidiaries or business operations of material subsidiaries of the Corporation that in the aggregate constitute a material asset of the Corporation; (iv) replace the chief executive officer of the Corporation upon his death, retirement or disability; (v) make, or permit any corporation, firm or entity under its control (a "Controlled Entity") to make, any loans or advances or create any liens or contingent liabilities in excess of $250,000; or (vi) mortgage or pledge, or create a security interest in, or permit any Controlled Entity to mortgage, pledge or create a security interest in, a majority in value of the property of the Corporation or such Controlled Entity, in any case to secure a debt in excess of $250,000. 17 B. COMMON STOCK The Common Stock shall consist of Twelve Million (12,000,000) shares. The powers, preferences and rights, and the qualifications, limitations and restrictions of the Common Stock are as follows: 1. VOTING, ETC. Each holder of shares of Common Stock shall be entitled to one (1) vote for each share held. Each share of Common Stock is vested with all of the same rights and powers in all respects, including, without limitation, dividend and liquidation rights. 2. DIVIDENDS. When and as dividends are declared thereon, whether payable in cash, property or securities of the Corporation, holders of Common Stock will be entitled to share in such dividends ratably according to the number of shares of Common Stock held by them. No dividend may be declared on the Common Stock unless dividends have been paid, or declared and set apart for payment, on account of the Designated Preferred Stock, in accordance with the provisions of Section A.2 above. 3. LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of Common Stock shall be entitled to share, ratably according to the number of shares of Common Stock held by them, in the remaining assets of the Corporation available for distribution to its stockholders, after payment is made to the holders of the Designated Preferred Stock as indicated in Section A.3 above. FIFTH: The following provisions are inserted for purposes of the management of the business and conduct of the affairs of the Corporation and for creating, defining, limiting and regulating the powers of the Corporation and its directors and stockholders: (a) The number of directors of the Corporation shall be fixed and may be altered from time to time in the manner provided in the By-Laws of the Corporation (the "By-Laws"), and vacancies in the Board of Directors and newly created directorships resulting from any increase in the authorized number of directors may be filled, and directors may be removed, as provided in the By-Laws. (b) The election of directors may be conducted in any manner approved by the stockholders at the time that such election is held and need not be by ballot. (c) All corporate power and authority of the Corporation (except as at the time otherwise provided by law, by this Certificate of Incorporation or by the By-Laws) shall be vested in and exercised by the Board of Directors. 18 (d) The Board of Directors shall have the power without the assent or vote of the stockholders to adopt, amend, alter or repeal the By-Laws unless the By-Laws or this Certificate of Incorporation otherwise provide. SIXTH: No director of the Corporation shall have personal liability to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that nothing in this article shall eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law (the "DGCL"), or (iv) for any transaction from which the director derived an improper personal benefit. In the event the DGCL is amended after the date hereof so as to authorize corporate action further eliminating or limiting the liability of directors of the Corporation, the liability of the directors shall thereupon be eliminated or limited to the maximum extent permitted by the DGCL, as so amended from time to time. SEVENTH: The Corporation shall indemnify any person: (a) who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal action or proceeding, had reasonable cause to believe such person's action was unlawful, or (b) who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner he or she reasonably believed to be in or not 19 opposed to the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue or matters as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsection (a) and (b), or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. Any indemnification under subsections (a) and (b) (unless ordered by a court) shall be made by the Corporation only as authorized in the specified case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because such person has met the applicable standard of conduct set forth in subsections (a) and (b). Such determination shall be made (1) by the board of directors of a majority vote of the quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. Expenses (including legal fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article Seventh. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate. The indemnification and advancement of expenses provided by or granted pursuant to this Article Seventh shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. The Corporation may purchase and maintain, insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in such capacity or arising out of his status as such, whether 20 or not the Corporation would have the power to indemnify such person against such liability under the provisions of this Article Seventh. For purposes of this Article Seventh, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have the power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this Article Seventh with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. For purpose of this Article Seventh, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation that imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article Seventh. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article Seventh shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person." 21 IN WITNESS WHEREOF, the undersigned do execute this Certificate and affirm and acknowledge, under penalties of perjury, that this Certificate are their act and deed and that the facts stated herein are true, this __ day of July, 1995. ------------------------------------- President Attest: - -------------------------------- Secretary 22 EX-4.1 3 EXHIBIT 4.1 Exhibit 4.1 FORM OF COMMON STOCK CERTIFICATE NUMBER SHARES TDX [3DX TECHNOLOGIES INC. LOGO] 3DX TECHNOLOGIES INC. INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE COMMON STOCK CUSIP 88554G109 PAR VALUE $.01 PER SHARE See reverse for certain definitions THIS CERTIFIES THAT is the record holder of FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE, OF 3DX TECHNOLOGIES INC. (the "Corporation"), a Delaware corporation. The shares represented by this certificate are transferable only on the stock transfer books of the Corporation by the holder of record hereof, or by the holder's duly authorized attorney or legal representative, upon the surrender of this certificate properly endorsed. The Corporation has more than one class of stock authorized for issuance. This certificate and the shares represented hereby are issued and held subject to each of the laws of the State of Delaware, the Restated Certificate of Incorporation of the Corporation and the Second Amended and Restated By-laws of the Corporation as each may from time to time be amended, modified or supplemented. This Certificate is not valid until countersigned and registered by the Corporation's Transfer Agent and Registrar. IN WITNESS WHEREOF, the Corporation has caused this certificate to be executed by the facsimile signatures of its duly authorized officers and has caused a facsimile of its corporate seal to be hereunto affixed. Dated [SEAL] - ---------------------------------- ---------------------------------- Secretary President and Chief Executive Officer Countersigned and Registered: CONTINENTAL STOCK TRANSFER & TRUST COMPANY Transfer Agent and Registrar By - ---------------------------------- Authorized Signature 2 3DX TECHNOLOGIES INC. THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL, OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF OF THE CORPORATION AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. SUCH REQUEST SHALL BE MADE TO THE CORPORATION AT ITS PRINCIPAL OFFICE. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT - Custodian (Cust) (Minor) under Uniform Gifts to Minors Act (State) Additional abbreviations may also be used though not in the above list. For value received, hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE OF ASSIGNEE) Shares of the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint Attorney to transfer the said shares on the books of the within-named Corporation with full power of substitution in the premises. Dated NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed: By THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. KEEP THIS CERTIFICATE IN A SAFE PLACE. IF LOST, STOLEN, MUTILATED OR DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE. EX-5.1 4 EXHIBIT 5.1 November [27], 1996 3DX Technologies Inc. 12012 Wickchester Suite 250 Houston, TX 77079 Re: Registration Statement on Form S-1 (File No. 333-14473) for 2,949,862 shares of Common Stock --------------------------------------------------------- Ladies and Gentlemen: We have acted as counsel to 3DX Technologies Inc., a Delaware corporation (the "Company"), in connection with the proposed public offering of 2,949,862 shares (the "Firm Shares") of the Company's common stock, par value $0.01 per share (the "Common Stock"), and up to an additional 442,480 shares (the "Option Shares") of Common Stock subject to an over-allotment option granted to the several underwriters of such public offering. The Firm Shares and the Option Shares are hereinafter referred to collectively as the "Shares." The Company has filed a Registration Statement on Form S-1 (File No. 333-14473) (the "Registration Statement") with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Act of 1933, as amended (the "Act"), with respect to the public offering of the Shares. As such counsel, you have requested our opinion as to the matters described herein relating to the issuance of the Shares. In connection with this opinion, we have examined and relied upon copies certified or otherwise identified to our satisfaction of: (i) the Company's Restated Certificate of Incorporation and By-laws, each as amended to date; (ii) the minute books and other records of corporate proceedings of the Company through the date hereof as made available to us by officers of the Company; (iii) an executed copy of the Registration Statement, and each amendment thereto through the date hereof, together with the exhibits and schedules thereto, in the form filed with the Commission; and we have reviewed such matters of law and fact deemed necessary by us in order to deliver the within opinion. 3DX Technologies Inc. November [27], 1996 Page 2 For purposes of this opinion we have assumed the authenticity of all documents submitted to us as originals, the conformity to originals of copies, and the authenticity of the originals of such copies. We have also assumed the legal capacity of all natural persons, the genuineness of all signatures on all documents examined by us, the authority of such persons signing on behalf of the parties thereto other than the Company and the due authorization, execution and delivery of all documents by the parties thereto other than the Company. As to certain factual matters, we have relied upon statements and representations of officers and other representatives of the Company. Based upon and subject to the foregoing assumptions and the further limitations set forth below, it is our opinion that the Shares have been duly authorized and, when issued and delivered in the manner and for the consideration stated in the Registration Statement, will be validly issued, fully paid and non-assessable. This opinion is limited to the specific issues addressed herein, and no opinion may be inferred or implied beyond that expressly stated herein. We assume no obligation to revise or supplement this opinion should the laws of the State of Delaware or the federal law of the United States be changed by legislative action, judicial decision or otherwise. We hereby consent to the filing of this letter as an exhibit to the Registration Statement and to the reference to our firm under the heading "Legal Matters" in the Registration Statement. In giving such consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission promulgated thereunder. This opinion is furnished to you in connection with the filing of the Registration Statement and is not to be used, circulated, quoted or otherwise relied upon for any other purpose. Very truly yours, KELLEY DRYE & WARREN LLP EX-10.10 5 EXHIBIT 10.10 3DX TECHNOLOGIES INC. 1996 INCENTIVE COMPENSATION PROGRAM INCENTIVE BUDGET: 3DX will set aside 20% of the total salary base of the Company, excluding the CEO, for the incentive compensation program. The budget for 1996 is $183,320. A maximum of twice the budget could be paid. ELIGIBILITY: All full-time 3DX employees will be eligible during the year for the actual number of months of service prorated against 12 months. Eligible employees must be employees as of December 31, 1996. PLAN CRITERIA: Performance criteria required for the incentive plan will be - production (48,150 BOE) - reserves added (740 MBOE) - number of new projects (12) The amount of reserves added will be determined by an independent Petroleum Engineer such as Ryder Scott. All employees will have two criteria each of which, determine 50% of the bonus amount. Technical and administrative personnel will have the criteria of production (50%) and ending reserves (50%). The VP of Joint Ventures will have criteria of number of new projects (50%) and production (50%). The VP of Business Development will have criteria of number of new projects (50%) and reserves added (50%). COMPUTATION OF PAYMENTS: An eligible employee will be paid 100% of his or her budgeted amount if 100% of the two relevant budgeted criteria is achieved. Nothing will be paid if 80% or less of the two relevant budgeted criteria is achieved. Bonus amounts due for criteria achieved between 80% and 100% of budget will be prorated. For example, if 95% of one relevant criterion and 85% of the second relevant criterion were attained, the amount paid would be computed as follows: AMOUNT PAID = 75% OF 50% OF BONUS BUDGET + 25% OF 50% OF BONUS BUDGET For relevant criteria attained between 100% and 200% budget, the bonus amount will be calculated using the achieved percentage as a multiplier up to a maximum of 200%. For example, if 250% of one relevant criterion and 150% of the second relevant criterion were achieved, the amount paid would be computed as follows: AMOUNT PAID = 200% OF 50% OF BONUS BUDGET + 150% OF 50% OF BONUS BUDGET PAYMENT TIMING: In general, the incentive bonus payments are made at the end of the year. However, criteria are reviewed quarterly to note extraordinary performance. This quarterly review could result in some bonus payments being made before the end of the year upon achievement of the performance criteria. CEO BONUS: This will be decided at the discretion of the Board of Directors. EX-11.1 6 EXHIBIT 11.1 EXHIBIT 11.1 COMPUTATION OF EARNINGS PER SHARE CALCULATION OF PROFORMA NET LOSS PER SHARE
NINE MONTHS FISCAL YEAR ENDING ENDING SEPTEMBER CALCULATION OF PROFORMA NET LOSS ATTRIBUTABLE DECEMBER 31, 1995 30,1996 TO COMMON SHARES Actual Net Loss Attributable To Common Shares $ (3,269,492) $ (2,789,613) Plus: Preferred B Dividend 783,700 0 Plus: Preferred C Dividend 0 798,672 Plus: Preferred B Acretion 43,464 32,598 Plus: Preferred C Acretion 4,944 8,535 ------------------ ------------------ Total Dividends & Acretion 832,108 839,805 ------------------ ------------------ Proforma Net Loss Attributable to Common Shares $ (2,437,384) $ (1,949,808) ------------------ ------------------ ------------------ ------------------ CALCULATION OF SHARES REQUIRED TO RETIRE PREFERRED AND PAY DIVIDENDS Offering Expenses $ 775,000 $ 775,000 Less: Warrant Proceeds $ (798,672) $ (798,672) Redemption of Series B Preferred $ 6,687,100 $ 6,687,100 Payment of Series C Dividend $ - ------------------ ------------------ Total Proforma Use of Proceeds $ 6,663,428 $ 6,663,428 Per Share Proceeds to Company $ 13.02 $ 13.02 ------------------ ------------------ Shares Required 511,785 511,785 ------------------ ------------------ ------------------ ------------------ CALCULATION OF PROFORMA WEIGHTED AVERAGE SHARES Actual Weighted Average Shares Outstanding 3,159,670 3,161,241 Post Split Series C Preferred Stock Conversion 1,376,379 1,376,379 Post Split Series C Preferred Stock Warrant Exercise and Conversion 137,638 137,638 Shares Required From Above 511,785 511, 785 ------------------ ------------------ Shares Used in Proforma Net Loss per Share 5,185,472 5,187,043 ------------------ ------------------ ------------------ ------------------ CALCULATION OF PROFORMA PRIMARY AND FULLY DILUTED NET LOSS PER COMMON SHARE Proforma Net Loss Attributable to Common Shares $ (2,437,384) $ (1,949,808) Proforma Weighted Average Shares 5,185,472 5,187,043 ------------------ ------------------ Proforma Net Loss Per Common Share $ (0.47) $ (0.38) ------------------ ------------------ ------------------ ------------------
3DX EPS CALCULATION CALCULATION OF ACTUAL WEIGHTED AVERAGE SHARE OUTSTANDING ISSUE ACTUAL WEIGHTED DATED SHARES AVERAGE Inception 1/27/93 768,117 768,117 Options Issued w/in 12 months of IPO 1/27/93 171,762 171,762 Common Stock Sales 11/9/93 1,464,413 225,294 ------------- ------------- 1993 Subtotal 12/31/93 2,404,292 1,165,173 Common Stock Sales 10/24/94 755,378 140,728 ------------- ------------- 1994 Subtotal 12/31/94 3,159,670 2,545,020 Common Stock Sales - - ------------- ------------- 1995 Subtotal 12/31/95 3,159,670 3,159,670 Option Exercise 5/15/96 3,120 1,571 ------------- ------------- September 30, 1996 Subtotal 9/30/96 3,162,790 3,161,241 CALCULATION OF TREASURY STOCK METHOD FOR OPTIONS ISSUED WITHIN ONE YEAR OF INITIAL PUBLIC OFFERING Number of Options Issued Within One Year of Initial Public Offering Aggregate Option Price of Options Issued Within One Year of Initial Public Offering Estimated Price Per Common Share in Initial Public Offering 198,011 Shares Assumed to be Repurchased Under Treasury Stock Method 367,490 Shares Deemed Outstanding Since Inception Due to Issue Within One Year of Initial Public Offering $14.00 (26,249) -------------- 171,762 -------------- --------------
EX-23.2 7 EXHIBIT 23.2 Exhibit 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report and to all references to our Firm included in or made a part of this registration statement. /s/ ARTHUR ANDERSEN LLP November 27, 1996 Houston, Texas EX-23.3 8 EXHIBIT 23.3 EXHIBIT 23.3 [LETTERHEAD OF RYDER SCOTT COMPANY] CONSENT OF RYDER SCOTT COMPANY To the Board of Directors of 3DX Technologies Inc.: We hereby consent to the inclusion of our report dated October 22, 1996 relating to the estimate of reserves, future production and income attributable to certain leasehold interests of 3DX Technologies Inc. (the "Company"), as of September 30, 1996, in the Company's Registration Statement on Form S-1 and the prospectus incorporated therein, and all references to our firm therein. RYDER SCOTT COMPANY PETROLEUM ENGINEERS Houston, Texas November 26, 1996 -----END PRIVACY-ENHANCED MESSAGE-----