<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________to ___________
COMMISSION FILE NUMBER: 0-22076
ZYDECO ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
76-0404904
(I.R.S. Employer Identification No.)
1710 TWO ALLEN CENTER
1200 SMITH STREET
HOUSTON, TEXAS
(Address of principal executive offices)
77002-4312
(Zip Code)
(713) 659-2222
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ------
As of June 30, 1996, there were 5,812,396 shares of Zydeco Energy, Inc. Common
Stock, $.001 par value, issued and outstanding.
<PAGE>
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets..................................................... 3
Consolidated Statements of Operations........................................... 4
Consolidated Statements of Stockholders' Equity................................. 5
Consolidated Statements of Cash Flows........................................... 6
Notes to Consolidated Financial Statements...................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 13
PART II. OTHER INFORMATION AND SIGNATURES
Item 6. Exhibits and Reports on Form 8-K..................................... 16
Signatures...................................................................... 17
</TABLE>
Page 2 of 17
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 9,026,012 $ 517,781
Marketable securities 1,713,925 10,938,674
Oil and gas revenue receivable 185,722 67,024
Other receivables 70,847 46,546
Prepaid expenses 52,667 --
----------- -----------
TOTAL CURRENT ASSETS 11,049,173 11,570,025
----------- -----------
Oil & gas properties, using successful efforts method of
accounting
Proved properties 308,036 309,110
Unproved properties 303,540 --
Equipment and software, at cost 1,508,324 789,710
----------- -----------
2,119,900 1,098,820
Less: Accumulated depreciation, depletion and amortization (661,269) (399,541)
----------- -----------
1,458,631 699,279
Operating bond and other assets 361,627 313,101
----------- -----------
TOTAL ASSETS $12,869,431 $12,582,405
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 267,712 $ 284,219
Accrued liabilities 241,347 355,833
Exploration obligations 4,513,895 3,210,477
Short-term bridge financing notes payable -- 225,028
Capital lease obligation-current portion 175,624 160,693
----------- -----------
TOTAL CURRENT LIABILITIES 5,198,578 4,236,250
----------- -----------
CAPITAL LEASE OBLIGATION 65,827 157,537
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Convertible preferred stock, par value $.001 per share; 1,000,000
shares authorized; 781,255 shares issued and outstanding 781 781
Common stock, par value $.001 per share; 50,000,000 shares
authorized; 6,593,651 and 6,562,530 shares issued; 5,812,396
and 5,781,275 shares outstanding, respectively 6,594 6,563
Additional paid-in capital 9,503,943 9,495,053
Accumulated deficit (1,899,040) (1,306,527)
Less-Treasury stock, at cost; 781,255 shares (7,252) (7,252)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 7,605,026 8,188,618
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,869,431 $12,582,405
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 3 of 17
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1996 1995 1996 1995
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
REVENUES
Oil and gas production $ 305,211 $ 35,375 $ 556,746 $ 56,469
Gain on sales of unproved leases 16,319 67,517 16,319 117,517
Seismic services 31,500 100,000 31,500 300,000
Interest income 82,610 10,188 169,109 28,011
---------- ---------- ---------- ----------
TOTAL REVENUES 435,640 213,080 773,674 501,997
EXPENSES
Lease operating expenses 4,684 2,242 11,233 5,368
Exploration and dry hole costs 38,472 -- 38,472 259,368
Seismic service costs -- -- -- 200,000
General and administrative expenses 433,084 226,036 1,029,082 411,378
Depreciation, depletion and amortization 151,364 98,212 261,729 181,432
Interest expense 11,983 6,808 25,671 37,212
---------- ---------- ---------- ----------
TOTAL EXPENSES 639,587 333,298 1,366,187 1,094,758
NET LOSS $ (203,947) $ (120,218) $ (592,513) $ (592,761)
========== ========== ========== ==========
PER COMMON SHARE AND SHARE EQUIVALENT--
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON
SHARE EQUIVALENTS OUTSTANDING 5,810,453 3,986,660 5,804,929 3,986,660
========== ========== ========== ==========
LOSS PER COMMON EQUIVALENT SHARE $ (0.04) $ (0.03) $ (0.10) $ (0.15)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 4 of 17
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------ ------------------ PAID-IN ACCUMULATED TREASURY STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK EQUITY
-------- -------- -------- -------- ---------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 781,255 $781 4,468,777 $4,469 $2,195,278 $ (132,881) $ -- $2,067,647
(UNAUDITED):
Acquisition of treasury stock -- -- (781,255) -- -- -- (7,252) $ (7,252)
Net Loss -- -- -- -- -- (592,761) -- $ (592,761)
Private issuance of Common Stock -- -- 140,001 140 (96) -- -- $ 44
------- ---- --------- ------ ---------- ----------- ------- ----------
BALANCE AT JUNE 30, 1995 781,255 $781 3,827,523 $4,609 $2,195,182 $ (725,642) $(7,252) $1,467,678
======= ==== ========= ====== ========== =========== ======= ==========
BALANCE AT DECEMBER 31, 1995 781,255 $781 5,781,275 $6,563 $9,495,053 $(1,306,527) $(7,252) $8,188,168
(UNAUDITED):
Net Loss -- -- -- -- -- (592,513) -- (592,513)
Warrants exercised for Common
Stock -- -- 31,154 31 8,890 -- -- 8,921
Adjustment for fractional shares
paid in cash (33) --
------- ---- --------- ------ ---------- ----------- ------- ----------
BALANCE AT JUNE 30, 1996 781,255 $781 5,812,396 $6,594 $9,503,943 $(1,899,040) $(7,252) $7,604,026
======= ==== ========= ====== ========== =========== ======= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 5 of 17
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (592,512) $ (592,761)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization 261,729 181,432
Gain on sales of unproved leases (16,319) (117,517)
Exploration and dry hole costs 38,472 259,368
Changes in operating assets and liabilities
(Increase) in oil & gas revenue receivable (118,698) (24,000)
(Increase) Decrease in other current assets (76,968) (21,154)
Increase (Decrease) in accounts payable (16,507) (74,004)
Increase in accrued liabilities (114,486) 105,236
Other (38,442) --
----------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (673,731) (283,400)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of oil and gas properties $ (302,466) $ (302,198)
Proceeds from the sale of unproved leases 16,319 150,000
Cost recovery on exploration agreement -- 698,675
Net advance on exploration obligation 3,000,000 1,603,062
Expenditures against exploration obligation (1,696,582) --
Purchase of equipment and software (718,614) (209,289)
Other capital expenditures (48,527) --
Proceeds from sale of marketable securities 9,224,749 --
Investment in marketable securities -- --
----------- ----------
NET CASH (USED IN) INVESTING ACTIVITIES 9,474,879 1,940,250
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments of short-term Bridge Financing $ (225,028) $ --
Principal payments of capital lease obligations (76,779) --
Common stock proceeds 8,890 44
---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (292,917) 44
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $8,508,231 $1,656,894
Cash and cash equivalents at beginning of period 517,781 875,927
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $9,026,012 $2,532,821
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 6 of 17
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. PREPARATION OF INTERIM FINANCIAL STATEMENTS.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with instructions to Form 10-Q and, therefore, do
not include all disclosures required by generally accepted accounting
principles. However, in the opinion of management, these statements
include all adjustments, which are of a normal recurring nature, necessary
to present fairly the financial position at June 30, 1996 and June 30, 1995
and the results of operations and changes in cash flows for the six months
ended June 30, 1996 and 1995, respectively. These financial statements
should be read in conjunction with the consolidated financial statements
and notes to consolidated financial statements included in the Company's
annual report on Form 10-K for the year ended December 31, 1995.
2. ORGANIZATION AND BUSINESS OPERATIONS.
Zydeco Energy, Inc. was incorporated in Delaware in June 1993 as a "special
purpose acquisition corporation" under the name TN Energy Services
Acquisition Corp. ("TN Energy"), for the purpose of raising funds and
acquiring an operating business engaged in the energy services industry.
Other than its efforts to acquire an energy services business, TN Energy
did not engage in any business activities prior to December 1995. On
December 20, 1995, the Company acquired all the outstanding common stock
and preferred stock of Zydeco Exploration, Inc. ("Zydeco") pursuant to a
merger and changed its name to Zydeco Energy, Inc. As used herein, unless
the context indicates otherwise, the term "Company" refers to Zydeco
Energy, Inc. and Zydeco, its wholly-owned subsidiary.
For accounting purposes the acquisition has been treated as a
recapitalization of Zydeco with Zydeco as the acquiror (reverse
acquisition). Accordingly, the historical financial statements prior to
December 20, 1995 are those of Zydeco. No pro forma information giving
earlier effect to the transaction has been presented since the transaction
is accounted for as a recapitalization. The consolidated financial
statements at December 31, 1995 and for all periods and dates subsequent to
such date include the accounts of the Company and Zydeco Exploration, Inc.,
the wholly-owned subsidiary of the Company. All significant intercompany
transactions have been eliminated in consolidation.
The Company is engaged in acquiring leases, drilling, and producing
reserves from those properties utilizing focused geologic concepts and
advanced 3D seismic technology. In addition to utilizing advanced 3D
seismic technology to evaluate and analyze prospects for the Company, the
Company performs advanced geophysical seismic analysis services for third
parties. The Company's current focus is to explore for oil and gas in the
Louisiana Transition Zone, the region of land and shallow waters within a
few miles of the shoreline.
The Company's future operations are dependent upon a variety of factors,
including, but not limited to, successful application of 3D seismic
evaluation and interpretation expertise in developing oil and gas
prospects, profitable exploitation of future prospects, and the Company's
ability to access capital sources necessary for continued growth.
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 at the date
of the financial statements
Page 7 of 17
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(UNAUDITED)
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Significant
estimates with regard to these financial statements include the estimate of
proved oil and gas reserve volumes and the related discounted future net
cash flows therefrom.
3. PROPERTY ADDITIONS.
In February 1996, the Company purchased an exclusive seismic option permit
from the state of Louisiana covering approximately 51,000 acres of state
waters in western Cameron Parish, Louisiana. The Company paid $783,754 for
the seismic permit. Under the Agreement with the state of Louisiana, the
Company is obligated to deliver within 18 months a 3D seismic survey over
the state acreage included in the permit or pay a penalty equivalent to the
initial payment for the permit and/or unspecified damages. In August, the
Company commenced operations for a 3D survey project, including the area
covered by the permit.
In February 1996, the Company entered into a technology agreement with an
individual to develop, test and evaluate certain proprietary technology
related to 3D seismic processing and imaging. The Company committed to
providing the test environment including personnel, computing hardware,
software and certain data in exchange for an option to receive a license to
use the resulting technology in certain exclusive areas of the Gulf of
Mexico. The Company completed its testing in April 1996 and exercised its
option in May 1996 and paid the first year's royalty fee of $40,000. The
Company intends to utilize the processing technology in the project
described above. The license provides for annual royalty payments, at the
option of the Company.
In June 1996, the Company purchased all the working interest in certain
unproved properties consisting of five non-producing offshore oil and gas
leases from the Myers Affiliates (see "Note 7 ---Related Party
Transactions") for $302,464. In May 1996, the Company purchased certain
proprietary geologic and geophysical data and computer equipment from a
Myers Affiliate for $145,490.
4. EXPLORATION AGREEMENTS.
Fortune Exploration Agreement- In February 1995, Zydeco entered into an
Exploration Agreement (the "Fortune Agreement") with a predecessor of
Fortune Petroleum Corporation ("Fortune"). Under the Fortune Agreement,
Fortune advanced $4.8 million in a series of payments to purchase a 50%
interest in certain potential prospects ("Prospects") owned by the Company
and fund the initial development of the potential Prospects. Pursuant to
the Fortune Agreement, $628,547 represented a reimbursement of certain of
the costs previously incurred by the Company on the potential Prospects.
The remaining $4,171,453 is designated to fund all third-party costs of
preparing potential Prospects for evaluation, including lease acquisition,
lease maintenance, and the acquisition, processing and interpretation of
seismic data. Thereafter, the Fortune Agreement provides that the parties
shall bear any additional costs equally. At March 31, 1996 and December
31, 1995, the portion not yet expended is recorded as an exploration
obligation and classified as a current liability. Future expenditures
incurred on Prospect leads will be charged against the obligation. No
expenditures incurred pursuant to the Fortune Agreement will be capitalized
by the Company until the parties begin sharing equally in such costs, if
any. At June 30, 1996, inception to date expenditures under the Fortune
Agreement aggregated approximately $2,010,000, net of income from prospect
sales and interest earned of $185,029.
Cheniere Exploration Agreement- In April 1996, the Company executed an
Exploration Agreement (the "Cheniere Agreement") with Cheniere Energy
Operating Co., Inc. ("Cheniere") covering an area of land and waters in
western Cameron Parish, Louisiana, including the area covered by the
seismic option permit described above ("West Cameron Seismic Project").
The Cheniere Agreement, as amended, provides that Cheniere may receive up
to a 50% interest in the West Cameron Seismic Project, based on Cheniere
completing its funding of the entire $13.5 million. The Cheniere Agreement
provides that Cheniere may discontinue funding and
Page 8 of 17
<PAGE>
ZYDECO ENERYG, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(UNAUDITED)
its interest be reduced pro rata based on Projects total cost. At June 30,
1996, the Company had incurred costs of approximately $1,696,582 in
connection with the Project. The agreement provides for aggregate payments
to Zydeco of $13.5 million to fund the estimated costs of seismic
acquisition, including the purchase of seismic rights or lease options on
the related onshore acreage of the Project, and to complete data
acquisition and processing of a 3D seismic survey of the onshore and
offshore areas. At June 30, 1996, Cheniere had advanced $3 million under
the Cheniere Agreement, as amended, with payments aggregating $3 million,
$4 million and $2.5 million due during the three months ended September 30,
1996, December 31, 1996 and March 31, 1997, respectively. The Company began
onshore leasing and seismic permitting in February and commenced seismic
operations in August 1996.
5. INDEBTEDNESS.
Long-term Obligations. Balances of the Company's long-term obligations at
June 30, 1996 and December 31, 1995 consist of the following:
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
---------------------- ------------------------
CURRENT LONG-TERM CURRENT LONG-TERM
---------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Capital Lease-
Computer Hardware & Software $ 167,992 $ 112,700 $ 160,693 $ 157,537
</TABLE>
Bridge Financing. In connection with the Merger, TN Energy entered into a
financing arrangement ("Bridge Financing") and ultimately borrowed $225,028
from three investors ("Bridge Lenders") to finance TN Energy's share of
legal, accounting and printing costs of the Merger. The notes, including
accrued interest at 10%, were repaid in January 1996. In December 1995, in
connection with arranging the Bridge Financing, the Company issued to the
Bridge Lenders, five-year warrants to purchase, at a purchase price of
$5.33 per share, 225,028 shares of Common Stock.
Also, in connection with the Bridge Financing, options to purchase 225,000
outstanding shares of the Company were granted in December 1995 by certain
stockholders of the Company from shares owned by them. The options were
granted by the stockholders for 150,000 shares to the Bridge Lenders as an
inducement to make the Bridge Financing and for 75,000 shares to other
Principals in connection with discussions with TN Energy that resulted in
the introduction of Zydeco. The aggregate exercise price for all the
options granted was approximately $30. The cost of such options was
reflected as a financing expense and capital contribution by the Company
prior to the Merger.
6. CONVERTIBLE PREFERRED STOCK AND COMMON STOCK.
During the six month period ended June 30, 1995, the Company issued 141,001
common shares for nominal consideration. In connection with the Merger,
1,875,000 shares of Common Stock were effectively issued to the
shareholders of TN Energy with entries to common stock and additional paid-
in capital for $7,971,525, the net assets of TN Energy on the date of the
Merger (comprised primarily of cash and marketable securities). The
outstanding shares of convertible preferred stock were issued in a
$2,500,000 private placement offering completed by Zydeco in December 1994.
Conversion of Preferred Stock. Shares of Convertible Preferred Stock, par
value $.001, were subject to conversion at rate of one share of Common
Stock for each share of Convertible Preferred Stock upon, either, (i) the
occurrence of a successful public offering or (ii) in the event the closing
price for the Common Stock equaled or exceeded $6.50 for a period of 30
consecutive trading days. The price of the Common
Page 9 of 17
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
Stock exceeded the minimum price for the required period in June 1996, and,
accordingly, the Company exercised its option to convert all shares of
Preferred Stock to Common Stock effective July 15, 1996.
Warrants. In connection with the private placement offering and subject to
certain terms and conditions, Zydeco issued or is obligated to issue up to
72,268 Common Stock purchase warrants to the underwriters, each of which
entitles the holder to purchase one share of Common Stock at an exercise
price of $1.60 per share at any time during the five-year period commencing
from the Closing Date, December 2, 1994. The initial value of such
warrants issued in connection with the private placement was immaterial.
During the six months ended June 30, 1996, warrants were exercised for
29,818 shares of Common Stock, net of 9,575 warrant shares tendered upon
exercise.
On December 21, 1993, the Company sold 1,500,000 units ("Units") in its
initial public offering ("Public Offering"). Each Unit consists of one
share of the Company's Common Stock, $.001 par value, and two Redeemable
Common Stock Purchase Warrants ("Public Warrants"). Each Public Warrant
entitles the holder to purchase, during the period commencing on the later
of the consummation by the Company of a Business Combination or one year
from the effective date of the Public Offering and ending seven years from
the effective date of the Public Offering, from the Company one share of
Common Stock at an exercise price of $5.50. The Public Warrants will be
redeemable at a price of $.01 per warrant upon 30 days' notice at any time,
only in the event that the last sale price of the Common Stock is at least
$10.00 per share for 20 consecutive trading days ending on the third day
prior to date on which notice of redemption is given.
The Company also issued, in connection with the Public Offering, an
aggregate of $150,000 of promissory notes to certain accredited investors.
These notes bore interest at the rate of 10% per annum and were repaid on
the consummation of the Public Offering with accrued interest thereon. In
addition, the investors were issued 300,000 warrants (valued at a nominal
amount) which are identical to the Public Warrants discussed above.
On December 21, 1993, the Company sold to the underwriters in the Public
Offering and their designees, for nominal consideration, the right to
purchase up to 150,000 units ("Unit Purchase Option"). The underwriters'
units issuable upon the exercise of the Unit Purchase Option are identical
to the Units discussed above except that the Public Warrants contained
therein expire five years from the effective date of the Public Offering
and cannot be redeemed. At June 30, 1996, no Public Warrants or Unit
Purchase Options had been exercised.
Treasury Stock. Treasury stock is recorded at cost and represents the
value of 781,255 common shares purchased in January 1995 from an officer of
the Company in consideration for an overriding royalty interest in certain
properties in which the Company had an interest at the time of the treasury
stock purchase.
The Company had no proved reserves at the time of the transaction. The
cost of treasury stock of $7,252 was determined on the basis of a pro-rata
allocation of the Company's accumulated cost in unproved properties at the
time of the transaction in comparison to the net revenue interest
transferred.
7. RELATED-PARTY TRANSACTIONS.
In June 1996, the Company purchased all the working interest in certain
unproved properties consisting of five non-producing offshore oil and gas
leases from entities beneficially owned or controlled by affiliates (the
"Myers Affiliates") of the Company's President and Chief Executive Officer,
Mr. Sam B. Myers, Jr. The Company paid $302,464 (represented by Myers as
the accumulated cost of the Myers Affiliates in the property interests) for
the leases which are located in Bay Marchand Blocks #4 and #5 in state
waters offshore Louisiana. The leases are subject to 7.5% backin after
payout by the Myers Affiliates. The Myers
Page 10 of 17
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
Affiliates also own an aggregate of between 4% and 8% overriding royalty
interest in these leases, which interests were owned by the Myers
Affiliates prior to this transaction with the Company. In addition, two
Vice Presidents and an employee of the Company own an aggregate of
approximately 2.2% net revenue interest under the leases. In May 1996, the
Company purchased certain proprietary geologic and geophysical data and
computer equipment which was being utilized by the Company from a Myers
Affiliate for $145,490. Each of the above transactions was approved by the
Company's Board of Directors, with Mr. Myers abstaining.
In September 1995, the Company engaged the services of a law firm,
including the services of a partner in the firm who is a relative of an
officer and director of the Company. The Company incurred expenses of
approximately $99,600 to this firm during six months ended June 30, 1996.
Zydeco entered into an exchange agreement, dated January 1, 1995, with
an entity where certain officers and/or directors are officers and/or
directors of the Company, and agreed to provide 3D seismic analysis
services in exchange for a license to such data. The value of this exchange
was determined by the parties to be $200,000. As this exchange agreement
represents an exchange of dissimilar goods, income and expense reflects the
gross value of seismic service revenues and related data costs associated
with this transaction for the six months ended June 30, 1995.
Effective January 1, 1995, Zydeco assumed an obligation for office
facilities under an operating lease agreement, expiring in March 1997, from
an entity where certain officers and/or directors are officers and/or
directors of the Company. The lease agreement required base monthly
payments of $3,122. In connection with the relocation of the Company's
offices in June 1996, the Company bought out the remaining nine month term
under this lease for $24,000. Rental expense related to this lease was
$9,861 and $9,735 which is included in general and administrative expenses
for the six months ended June 30, 1996 and 1995, respectively.
8. STOCK OPTION PLANS.
Common Stock was issued in the amount of 1,562 shares during the six months
ended June 30, 1996 in connection with stock options exercised under the
Company's 1995 Employee Stock Option Plan. Shares exercisable under this
Plan aggregated 250,001 shares and no shares at June 30, 1996 and 1995,
respectively, with an exercise price of $1.60 per share.
On January 4, 1996 the Board of Directors approved and adopted the Zydeco
Energy, Inc. 1996 Equity Incentive Plan. The Plan authorizes the grant of
various stock and stock-related awards to key management and other
personnel on the basis of individual and corporate performance. The Plan
provides for the granting of stock options to purchase an aggregate of
350,000 shares of Common Stock, which are reserved for such purpose.
During the six months ended June 30, 1996, options to purchase 175,000
shares were granted to employees at exercise prices ranging between $6 and
$7 per share. At June 30, 1996, no options had been exercised or were
exercisable under this Plan. Such options are non-compensatory, vest over
a four-year period and terminate no later than ten years after the date of
grant unless otherwise determined by the Compensation Committee.
Also on January 4, 1996, the Board of Directors adopted the 1996 Non-
employee Director Stock Option Plan and granted an aggregate of 45,000
shares of Common Stock to three non-employee directors. The options
granted become exercisable, one third on April 1, 1997 and one third each
of the next two succeeding years. The options were granted at $7, the
average of the high and low sales price of the Company's Common Stock on
the date of grant. At June 30, 1996, no options had been exercised or were
exercised under the Plan. The options terminate no later than ten years
after the date of grant. Both of the above plans were approved by the
Company's shareholders at the Annual Meeting on July 9, 1996.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 123, a new standard for
accounting for stock-based compensation. This standard
Page 11 of 17
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
established a fair-value based method of accounting for stock options
awarded after December 31, 1995 and encourages companies to adopt SFAS No.
123 in place of the existing accounting method, which requires expense
recognition only in situations where stock compensation plans award
intrinsic value to recipients at the date of grant. Companies that do not
follow SFAS No. 123 for accounting purposes must make annual pro forma
disclosures of its effects. Adoption of the standard is required in 1996,
although earlier implementation is permitted. The Company does not intend
to adopt SFAS No. 123 for accounting purposes; however, it will make annual
pro forma disclosures of its effects commencing in 1996.
9. SUBSEQUENT EVENT.
In August 1996, the Company, with the approval of the Board of Directors,
purchased non-producing leasehold interests and agreed to participate in
the drilling of an exploratory well owned by a Myers Affiliate located in
Timbalier Bay in state waters offshore Louisiana. The Company paid $187,500
for a 37.5% working interest in the drilling prospect and advanced
estimated dry-hole drilling and completion costs of $924,242. The Myers
Affiliates own an aggregate of between 33.1% and 37.25% net revenue
interest in the prospect leases and Mr. Myers owns an approximate 1.6% net
revenue interest under portions of the leases. The Myers Affiliates are
participating in the drilling and completion of the well with a working
interest of 41.2% and paid their proportionate share of the estimated cost
of drilling and completion of the well. The Myers Affiliates can also back
in for 25% of the well after payout. Two of the Company's Vice Presidents
also own approximately 2.2% net revenue interest in the prospect leases.
Drilling of the well commenced in August 1996.
In June 1996, the Company exercised its option to convert all outstanding
shares of Convertible Preferred Stock to Common Stock effective July 15,
1996 (See "Note 6--Convertible Preferred Stock and Common Stock").
Page 12 of 17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company was incorporated in June 1993 as a "special purpose acquisition
corporation" for the purpose of raising funds and acquiring an operating
business engaged in the energy services industry. In December 1995 the Company
acquired Zydeco Exploration, Inc. ("Zydeco") by merger (the "Merger"). Other
than its efforts to acquire an energy services business, the Company did not
engage in any business activities prior to December 1995. The Company, through
its operating subsidiary, Zydeco, is now active as an independent oil and gas
exploration company. The Company's operations are subject to a variety of
factors, including successful application of 3D seismic evaluation and
interpretation expertise to develop potential drilling prospects, profitable
exploration and exploitation of such prospects, the ability to joint venture
with third parties utilizing the Company's 3D seismic analysis experience
and the Company's ability to access capital sources necessary for continued
growth. The Company's revenues, profitability and future rate of growth will be
substantially dependent upon prevailing prices for natural gas, oil and
condensate, which are dependent upon numerous factors beyond the Company's
control.
The Company has been acquiring, and will continue to acquire, oil and gas
leases in the Louisiana Transition Zone and the Timbalier Trench. From such
lease positions, the Company is developing and intends to develop 3D seismic
survey programs or obtain existing non-exclusive 3D seismic data for analysis.
The Company intends to analyze such data with the goal of developing a number of
drilling prospects. Prior to drilling such prospects, the Company will likely
seek participation in such prospects from industry partners or by including as
drilling participants oil and gas companies owning working interests in
adjoining or nearby acreage. There is no assurance, however, that the Company
will be able to generate any particular number of drilling prospects, or that
the Company will achieve a particular success rate in finding paying quantities
of oil and gas. The Company also intends to offer its technical expertise in 3D
seismic analysis and interpretation to other oil and gas companies in
negotiating joint venture or property interests.
On December 20, 1995, TN Energy Acquisition, the Company's wholly-owned
subsidiary, merged with and into Zydeco. For accounting purposes, the Merger
was treated as a recapitalization of Zydeco with Zydeco as the acquiror, or a
reverse acquisition, based upon Zydeco's officers and directors assuming
management control of the resulting entity and Zydeco Exploration's stockholders
receiving value and ownership interest exceeding that received by the TN Energy
stockholders. Under this accounting treatment, the historical financial
statements of Zydeco prior to the Merger have become those of the Company.
On February 7, 1996, the Company entered into a technology agreement with an
individual to develop, test and evaluate certain proprietary technology related
to 3D seismic processing and imaging ("Technology License Agreement"). The
Company committed to providing the test environment including personnel,
computing hardware, software and certain data in exchange for an option to
receive a license to use the resulting technology worldwide and exclusively in
certain coastal areas of the Gulf of Mexico. The Company completed its testing
in April 1996 and exercised its option in May 1996 and paid a royalty fee of
$40,000. The license provides for annual royalty payments in fixed amounts,
except that the Company may elect to terminate the license at any time.
On February 14, 1996, the Company purchased an exclusive seismic option permit
from the state of Louisiana covering approximately 51,000 acres of state waters
in western Cameron Parish, Louisiana. The Company paid $783,753 for the seismic
permit and is required to provide a 3D survey over the area within 18 months.
On April 4, 1996, the Company executed an Exploration Agreement with Cheniere
Energy Operating Co., Inc. ("Cheniere") covering an area of land and waters in
western Cameron Parish, Louisiana, including the area covered by the seismic
option permit described above ("West Cameron Seismic Project"). Cheniere's
interest of up to 50% in the Project is conditioned upon receipt of aggregate
payments of $13.5 million to fund the estimated costs of seismic acquisition,
including the purchase of seismic rights or lease options on the related onshore
acreage of the Project, and to complete data acquisition and processing of a 3D
seismic survey of the onshore and offshore areas. Cheniere may elect to
discontinue funding of the Project, in which case its interest would be reduced
pro rata in relation to
Page 13 of 17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(Continued)
total Project costs. The Company began onshore leasing and permitting in
February and commenced seismic operations in August 1996.
RESULTS OF OPERATIONS-SECOND QUARTER 1996 COMPARED TO SECOND QUARTER 1995.
During 1996 and 1995, the Company's primary operations consisted of the
acquisition of federal and state oil and gas leases, the acquisition of 3D
seismic analysis hardware and software, and the purchase of an interest in a gas
well which commenced production in January 1995, the farmout of two leases (one
of which resulted in commercial production commencing in December 1995) and a
one-eighth participation in the drilling of an exploratory well, which resulted
in a dry hole. Due to its limited operations and because Zydeco had completed
only one full fiscal year prior to 1996, analysis of comparable interim periods
prior to 1995 is not meaningful.
For the three months ended June 30, 1996, operations resulted in a net loss
of $203,947 ($.04 per share) compared to a net loss of $120,218 ($.03 per share)
for the comparable period in 1995. The increase in net loss of $83,729 is
comprised of increased revenue of $222,560 and increased expenses of $306,289.
Oil and gas sales in second quarter 1996 increased $269,836 compared to second
quarter 1995 primarily due to the commencement of new production in December
1995 from a well completed by Bois d' Arc Resources in which the Company has an
overriding royalty interest of 4.33% before payout (7.33% after payout). In
second quarter 1996, the Company's oil and gas revenue represented production
from two wells of 4,523 barrels of oil and 73,742 mcf of natural gas which was
sold for prices averaging approximately $22.93 per barrel and $2.73 per mcf,
respectively. This compared to second quarter 1995 production from one well of
166 barrels and 18,693 mcf at prices averaging $18.64 per barrel and $1.66 per
mcf, respectively. Offsetting the increased oil and gas production were
decreases in revenue from seismic services ($68,500) and sales of unproved
property interests ($51,198) as compared to the second quarter of 1995. Interest
income increased $72,422 as a result of the increase in available cash resulting
from the Merger in December 1995. Exploration costs increased in 1996 primarily
as a result of increases in delay rentals pertaining to unproved properties.
General and administrative expense increased $207,048 primarily as a result of
increases related to the increase in employees and personnel related ($112,000)
and increases in public company expenses ($84,000). Depletion, depreciation and
amortization increased $53,152 primarily due to increased oil and gas production
and additions of hardware and software used in connection with the Company's
seismic processing activities.
RESULTS OF OPERATIONS-FIRST HALF 1996 COMPARED TO FIRST HALF 1995
For the first half of 1996, operations resulted in a net loss of $592,513
($.07 per share) compared to a net loss of $592,761 ($.15 per share) for the
comparable period in 1995. This represented increased revenue of $271,677 and
increased expenses of $271,429. The loss per share decreased as a result of the
additional dilution from shares outstanding which increased due to the shares
issued in the Merger. Oil and gas sales in 1996 increased $500,277 primarily
due to new production from the well discussed above. In the first half 1996, the
Company's oil and gas revenue represented production from two wells of 8,004
barrels of oil and 148,020 mcf of natural gas which was sold for prices
averaging approximately $21.50 per barrel and $2.60 per mcf, respectively. This
compared to first half 1995 production from one well of approximately 287
barrels and 31,528 mcf at prices averaging $18.20 per barrel and $1.59 per mcf,
respectively. Offsetting the increased oil and gas production were decreases in
revenue from seismic services ($268,500) and sales of unproved property
interests ($51,198) as compared to the second quarter of 1995. Interest income
increased $72,422 as a result of the increase in available cash resulting from
the Merger in December 1995. Exploration costs increased in second half 1996
primarily as a result of increases in delay rentals pertaining to unproved
properties. General and administrative expense increased $617,704 primarily as a
result of increases related to the increase in employees and personnel related
costs ($278,484) and increases in public company expenses ($268,400). Depletion,
depreciation and amortization increased $80,297 primarily due to increased oil
and gas production and additions of hardware and software used in connection
with the Company's seismic processing activities.
Page 14 of 17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(Continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company has generated funds from a public offering, private equity
offering, company operations and cash payments under the Fortune and Cheniere
Agreements. Sources of funds include the December 1993 public offering of the
Company's Common Stock and Warrants which raised net proceeds, after offering
costs, of approximately $7.9 million; the December 1994 offering of the
convertible preferred stock by Zydeco with proceeds to the Company, after
offering costs, of approximately $2.2 million, and cash payments of $4.8 million
advanced in 1995 under the Fortune Agreement. Under the Fortune Agreement,
approximately $629,000 represented a direct reimbursement of lease acquisition
and seismic expenses previously incurred by the Company. The remainder received
from Fortune is required to be used by the Company for leasehold acquisitions
and related seismic development on leases in which Fortune has obtained an
interest. The Cheniere Exploration Agreement executed in April 1996, provides
for funding of $13.5 million of project expenditures. Other sources of capital
for the Company include lease financing from computer hardware equipment and
software vendors. The Company expects that a significant portion of any
additional computer equipment and software acquired by the Company could be
financed under vendor lease financing arrangements.
The Company does not maintain any credit facilities. The Company may in
the future explore the possibility of obtaining such a facility in the event the
Company increases oil and gas production through the successful completion of
oil and gas wells drilled by the Company or as it increases its seismic
activities.
The Company expects that capital needs for 1996 will be satisfied through (i)
cash on hand (including cash available from liquidation of marketable
securities), (ii) cash made available under the Fortune Agreement, and (iii)
cash to be made available under the Cheniere Exploration Agreement. Although
Cheniere may elect to discontinue its funding at any time, the Company believes
that it has adequate internal cash reserves to meet its obligations in
connection with the Project. Additional capital needs may be met through
additional issuance of equity securities, including the exercise of outstanding
warrants and options of the Company, securing additional project partners or the
sale of prospects, if any, identified by the project. There can be no assurance
that the Company will be successful in securing such partners or funds.
The Company may use its cash for any general corporate purposes, except for
the funds advanced by Fortune and Cheniere which are committed to the project
operations for which they were intended.
The Company currently estimates its capital expenditures for 1996,
excluding the costs of the Fortune and Cheniere Projects, at approximately $2.4
million, including $1.6 million for exploration and development, $80,000 for
capital costs associated with the Technology License Agreement, $573,000 related
to the purchase of computer equipment and software, and $130,000 for office
relocation and improvements. At June 30, 1996, the Company had incurred capital
expenditures totaling $1,069606. In connection with the West Cameron Seismic
Project, the Company's preliminary estimates of costs to complete the two-year
project are between $12 million and $15 million. In addition to the Cheniere
Exploration Agreement, the Company is currently negotiating with other potential
partners which may be required to complete the West Cameron Seismic Project.
Other significant additional capital expenditures may include the acquisition of
additional oil and gas leases, the drilling of prospects identified on the
Company's current portfolio of oil and gas leases, the acquisition of interests
in producing wells and other corporate investment opportunities determined by
the board to be in the interest of the Company. The amount and timing of these
expenditures will be dependent upon numerous factors, including the availability
of seismic data, the number and type of drilling prospects identified as a
result of the Company's 3D seismic analysis, the terms under which industry
partners may participate in the Company prospects and the cost of drilling and
completion of wells in the Louisiana Transition Zone and the Timbalier Trench.
The Company currently maintains a required $300,000 bond in order to hold
its present federal oil and gas leases. This bond is collateralized by a United
States Treasury Note. In the event the Company determines to act as operator on
federal offshore lease or is otherwise required to increase its bonding by
federal or state authorities, such additional bonding may require significant
amounts of capital as collateral.
Page 15 of 17
<PAGE>
PART II- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
The Company held its 1996 Annual Meeting of Stockholders on July ,
1996. At such meeting:
(i) the board of directors was re-elected in its entirety;
(ii) an amendment to the Company's Certificate of Incorporation to
eliminate classes of directors was approved by the stockholders by a
vote of 4,025,356 for and 7,812 against;
(iii) the Company's 1996 Equity Incentive Plan was approved by the
stockholders by a vote of 4,033,168 for and no votes against; and
(iv) the Company's 1996 Non-employee Director Stock Option Plan was
approved by the stockholders by a vote of 4,033,168 for and no votes
against.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit
Number Description
----------- -------------------------------------------------------
10.10 Exploration Agreement between Zydeco Exploration, Inc.
and Cheniere Energy Operating Co., Inc. (formerly FX
Energy, Inc.) dated April 4, 1996.
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
1. June 27, 1996- Item 5- Other Events
The registrant reported that it had elected to exercise its option to
convert each outstanding share of convertible preferred stock, par
value $.001, (the "Preferred Stock") of Zydeco Energy, Inc. ("Zydeco")
into one share of Zydeco Common Stock, par value $.001, (the "Common
Stock") pursuant to its optional conversion rights in Section 9.B of
the Certificate of Designations for the Preferred Stock.
The conversion is effective July 15, 1996 with holders of shares of
Preferred Stock required to exchange their certificates for Common
Stock certificates.
Page 16 of 17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZYDECO ENERGY, INC.
/s/ Sam B. Myers, Jr
-------------------- --------------------------
Sam B. Myers, Jr., Chief Executive Officer and
President (Principal Executive Officer)
/s/ W. Kyle Willis
-----------------------------------------------
W. Kyle Willis, Vice President and Treasurer
(Principal Financial Officer)
Dated: August 14, 1996
Page 17 of 17
<PAGE>
EXPLORATION AGREEMENT
BETWEEN
ZYDECO EXPLORATION, INC.
AND
FX ENERGY, INC.
DATED
APRIL 4, 1996
EXPLORATION AGREEMENT
i
<PAGE>
INDEX
1. USE OF THE SEISMIC FUNDS.............................................. 2
2. SEISMIC FUNDS......................................................... 3
3. EXCESS SEISMIC COSTS DUE TO TURNKEY CONTRACTS......................... 4
4. DAMAGES TO THE STATE OF LOUISIANA UNDER THE EXCLUSIVE SEISMIC PERMIT.. 4
5. DISCONTINUANCE OF SEISMIC FUND PAYMENTS............................... 4
6. PROSPECTS............................................................. 6
7. PROSPECT DEVELOPMENT.................................................. 6
9. PROSPECT TEST WELL.................................................... 8
10. NON-PROPOSING PARTY'S ELECTION TO PARTICIPATE......................... 8
11. ZEI'S OBLIGATIONS..................................................... 9
12. ACCOUNTING OF SEISMIC FUNDS........................................... 9
13. RECORD TITLE..........................................................10
14. AREA OF MUTUAL INTEREST...............................................10
15. SEISMIC DATA..........................................................11
16. GENERAL PROVISIONS....................................................12
ii
<PAGE>
EXPLORATION AGREEMENT
This Exploration Agreement is made and entered into this 4th day of April,
1996, by and between Zydeco Exploration, Inc. ("ZEI") and FX Energy, Inc.
("FX").
W I T N E S S E T H :
WHEREAS, ZEI has considerable expertise in exploration and production
activities in the formerly seismically-blind trends of southern Louisiana; and
WHEREAS, ZEI utilizes advanced seismic imaging and comprehensive well log
analysis and integration to identify new drilling opportunities in an attempt to
minimize the risk in each of the prospects so identified; and
WHEREAS, FX desires to acquire and explore for oil and gas reserves in the
on- and off-shore area of coastal Louisiana; and
WHEREAS, FX and ZEI desire to work together to generate, develop, and
exploit oil and gas exploration prospects in the coastal Louisiana area; and
WHEREAS, the parties desire to establish an area of mutual interest within
which to develop exploration and drilling prospects to be shared by them; and
WHEREAS, the parties desire to delegate to ZEI the responsibility of
managing the acquisition of seismic options and/or permits, managing the
acquisition, processing, and reprocessing of seismic data, identifying
potential prospects, acquiring leases and farmouts, interpreting geological and
geophysical data, making drilling recommendations, and managing the exploration
process, including selecting and monitoring a production operator, or
alternately, acting itself as production operator; and
WHEREAS, ZEI will contribute to the exploration program for costs a State
of Louisiana exclusive seismic survey permit obtained at the State of Louisiana
tender on February 14, 1996 (the "Exclusive Seismic Permit"), a copy of which is
attached hereto as Exhibit "A," and all overhead costs associated with the
development and interpretation of drillable prospects except for the costs of
processing and re-processing seismic data and well logs; and
WHEREAS, FX will pay 100% of Seismic Costs, as hereafter defined, up to
$13,500,000 and 50% of Seismic Costs thereafter; and
WHEREAS, the parties memorialize their undertakings pursuant to the terms
hereinafter set forth;
<PAGE>
NOW, THEREFORE, in consideration of the foregoing, and of the mutual and
dependent covenants hereinafter set forth, and other good and valuable
consideration, the receipt and adequacy of which is hereby acknowledged, the
parties hereto agree as follows:
1. USE OF THE SEISMIC FUNDS
------------------------
ZEI shall obtain seismic data (the "Program Data") covering the lands
depicted on Exhibit "B" and modified by Exhibit "B-1" (the "Initial Prospect
Lands") using funds ("Seismic Funds") contributed by FX, subject to the
understanding that should Seismic Costs, as defined herein, exceed $13,500,000
(the "Target Costs"), ZEI and FX shall jointly bear all Seismic Costs in excess
of Target Costs. The Seismic Funds shall be advanced by FX according to the
schedule described in Section 2.
The Seismic Funds shall be applied by ZEI as follows:
a. To ZEI as reimbursement for the expenses, including bonus, incurred to
date in acquisition of the Exclusive Seismic Permit; then
b. toward costs incurred by ZEI in acquiring and processing Program Data,
including:
i. acquisition of proprietary seismic data, including, without
limitation, the seismic data required under the Exclusive Seismic
Permit, including quality control expenses and feasibility tests
prior to commencement of acquisition of seismic data;
ii. obtaining permits to acquire seismic data;
iii. payments for options to obtain seismic data, and out of pocket
costs incident thereto, including the state permit for 51,350
acres, (to the extent such permit is not reimbursed under the
other provisions hereof);
iv. seismic processing and reprocessing costs;
v. licensing of seismic data owned by third parties;
vi. third party legal and professional expenses relating to the
Exclusive Seismic Permit, or the acquisition or processing of
Program Data;
vii. weather insurance, as applicable for non-turnkey agreements;
viii. turnkey contracts;
ix. damages paid by ZEI to landowners for damages to lands or
2
<PAGE>
possessions;
x. the cost of legal defense, judgments, and settlements relating to
any claim or cause of action brought by a land or mineral owner
relating to or arising out of the acquisition of seismic data
hereunder;
xi. the cost of transmission or transportation of data from field to
office and insurance costs associated therewith;
xii. any other third party expense reasonably incurred by ZEI in
connection with the items enumerated under this Section.
c. toward costs incurred by ZEI in acquiring permits, options to lease
lands within the AMI, and leases of lands within the AMI when
necessary including:
i. bonus and other payments made to parties for such options;
ii. out-of-pocket costs incurred by ZEI in obtaining such options,
e.g., landman costs, broker expenses, abstract charges, etc.;
iii. third party legal, accounting, and professional expenses
incurred in obtaining such options, both in examination of title
and in negotiating options;
iv. any other third party expense reasonably incurred by ZEI in
connection with the items enumerated under this Section.
The term "Seismic Costs" shall include all items referred to in this
Section 1.
2. SEISMIC FUNDS
-------------
FX shall pay the Seismic Funds to ZEI for deposit in the segregated
account described in Section 12.a on the following schedule.
<TABLE>
<CAPTION>
DATE AMOUNT
---- ------
<S> <C>
1996-05-15 $3,000,000.00
1996-06-30 1,000,000.00
1996-07-30 1,000,000.00
1996-08-30 1,000,000.00
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
1996-09-30 2,000,000.00
1996-10-30 1,000,000.00
1996-11-30 1,000,000.00
1996-12-30 1,000,000.00
1997-01-30 1,000,000.00
1997-02-28 1,500,000.00
</TABLE>
Should FX fail to make the initial advance by May 15, 1996, this agreement
shall terminate and be of no further force or effect.
3. EXCESS SEISMIC COSTS DUE TO TURNKEY CONTRACTS
---------------------------------------------
The parties anticipate that ZEI may enter into one or more turnkey
contracts. The parties estimate that the premium required for turnkey contracts
may bring total Seismic Costs to $15,000,000. Should turnkey costs cause
Seismic Costs to exceed the Target Costs, the parties agree:
(i) In lieu of FX bearing 100% of Seismic Costs up to $13,500,000, FX
shall bear 100% of Seismic Costs up to $13,000,000.
(ii) FX and ZEI shall bear Seismic Costs between $13,000,000 and
$15,000,000 equally; and
(iii)Any Seismic Costs in excess of $15,000,000 shall be borne equally.
4. DAMAGES TO THE STATE OF LOUISIANA UNDER THE EXCLUSIVE SEISMIC PERMIT
--------------------------------------------------------------------
The Exclusive Seismic Permit requires the payment of liquidated and
other damages in certain situations. Should such be required, the parties agree
that such damages shall be borne equally by FX and ZEI.
5. DISCONTINUANCE OF SEISMIC FUND PAYMENTS
---------------------------------------
a. Should FX fail to make a Seismic Fund payment within thirty days
of the date due (a "Discontinuance"),
the parties shall proceed as follows:
i. The obligation of FX to make additional Seismic Fund payments
4
<PAGE>
shall terminate, as well as the right of FX to make such
payments.
ii. ZEI shall, individually, or with the cooperation or assistance of
one or more companies, complete acquiring or processing Program
Data; provided however, it shall incur no liability to FX for
failing to do so.
iii. At such time as ZEI acquires an interest in a lease covering a
portion of the Initial Prospect Lands (which may be acquired by
direct lease, assignment from an existing lease, or acquiring a
farmout), ZEI shall determine the aggregate amount of Seismic
Costs incurred to that date.
iv. FX shall be entitled to a prospect ownership interest (the "FX
Prospect Interest") which, expressed as a percentage, is equal to
the Seismic Funds FX paid divided by twice the total Seismic
Funds expended. Thus a contribution of $3.0 of Seismic Funds by
FX when total Seismic Costs were $12.0 million entitle FX to a FX
Prospect Interest equal to 12.5%.
b. Where ZEI itself, following a Discontinuance, contributes funds that
otherwise would be provided by FX under the terms hereof, ZEI shall be
entitled to receive back such funds, together with interest thereon at
the prime interest rate, from revenues attributable to the FX Prospect
Interest (including, without limitation, any working interest or
overriding royalty interest revenues from production or front end
proceeds attributable to such interest when owned by FX under the
applicable operating agreement or proceeds from the sale or license of
seismic data).
c. Subject to the provision immediately below, if a Discontinuance
occurs, and ZEI does not itself fund the deficient Seismic Costs, ZEI
may sell, trade, farm-out, lease, sublease or otherwise trade
(collectively, a "Trade") the aggregate (i.e., both that of ZEI and
FX) prospect interests to any party on arms' length terms. For this
purpose the aggregate prospect interests includes all seismic data
acquired hereunder, and revenues from a Trade include seismic data
sale or license proceeds. Any revenues accruing from a Trade shall be
applied toward the cost of completing the project contemplated
hereunder.
.
d. Should ZEI do a Trade and FX have funded $8,000,000 or more prior to
the Discontinuance, then the parties shall treat FX as having earned a
vested prospect ownership interest of 25%, which shall be treated
under the applicable operating agreement and not subject to any Trade,
and any revenues from a Trade, which would in this instance cover a
75% prospect ownership interest, shall be shared 33 1/3% by FX and 66
2/3% by ZEI.
5
<PAGE>
6. PROSPECTS
---------
As used herein, "prospect" shall mean a block of acreage suitable for
exploration, including leasehold, operating, nonoperating, mineral and royalty
interests, licenses, permits, and contract rights relating thereto.
Upon acquisition of the Program Data, ZEI shall evaluate such data for
prospects. Prospects found during the initial review of such seismic data are
hereinafter referred to as the "Prospects."
7. PROSPECT DEVELOPMENT
--------------------
a. Prospect Preparation
ZEI will prepare the Prospects for evaluation, which shall include,
among other things, the following:
i. examination of land and lease titles to determine lands and
leases available for lease or farmout;
ii. leasing of lands within the Prospect perimeters, and, where such
lands are under lease, acquiring farmouts;
iii. geological and geophysical interpretation;
iv. mapping; and
v. permitting.
b. Operating Agreement for Prospects
Each Prospect will be drilled and operated under an operating
agreement in the form of that attached hereto as Exhibit "C" (the "Default
Operating Agreement"). Each such operating agreement shall cover the
Prospect Lands for the applicable Prospect. The parties acknowledge that
for one or more of the Prospects, third parties may participate in the
drilling of wells. Such parties may request changes in the applicable
operating agreement. ZEI and FX agree to negotiate changes as may be
requested in good faith. On one or more Prospects, ZEI may itself not wish
to act as operator. In such event ZEI may designate a qualified third
party to act as operator of the Prospect.
In the event of any inconsistency or conflict between the terms and
provisions of this Agreement and of the operating agreement covering any
Prospect or other prospect developed hereunder, the terms and provisions of
this Agreement shall prevail.
6
<PAGE>
c. Notice to FX of Completion of Prospect Assembly and Development
ZEI will notify FX when a Prospect's assembly and development is
complete. Subject to any applicable restrictions imposed in
confidentiality agreements or license agreements, ZEI will make available
to FX in ZEI's office all seismic materials, maps, geological reports
leases, farmout agreements or other materials in its possession reasonably
relevant to a decision to participate in the drilling of the Prospect test
well and prospect. ZEI shall give FX access to ZEI's 3D work stations
during normal business hours as necessary or appropriate to allow FX to
evaluate 3D seismic data relevant to the prospect.
8. PROSPECT EXPENSES
-----------------
a. Program expenses ("Prospect Expenses") are to be borne equally
by ZEI and FX and include the following costs of preparing the
Prospects for evaluation, development, and drilling:
i. lease bonuses and brokerage for additional leases wholly or
partly within the Prospect Lands;
ii. delay or shut in rental payments on leases or interests acquired
hereunder;
iii. third party legal and professional expenses relating to the
acquisition or maintenance of leases or farmouts;
iv. any other third party expense reasonably incurred by ZEI in
connection with the items enumerated under this Section or in
Section 7;
v. engineering costs
provided, however, if FX fails to pay the full amount of the Target
Costs, FX shall bear a percentage of the Prospect Expenses equal to
its FX Prospect Interest. FX shall have the opportunity to
participate for a working interest in Prospect leases and farmouts
equal to its FX Prospect Interest.
b. Should FX fail to pay Prospect Expenses within thirty days of receipt
of a billing therefor, and ZEI demand payment of such Prospect
Expenses by written demand delivered by certified mail, return receipt
requested, and FX not pay the delinquent Prospect Expenses within
fifteen (15) days of receipt of the certified mail demand; then
i. FX shall have no liability for such Prospect Expenses;
7
<PAGE>
ii. FX shall be deemed to have declined to participate in the
Prospect in question; and
iii. FX shall promptly, upon request, quitclaim to ZEI any interest
it has or might have in the Prospect in question.
9. PROSPECT TEST WELL
------------------
For a period of ninety days following ZEI's delivery of the notice
provided in Section 7.c advising that a Prospect's assembly and development is
complete, ZEI shall have the exclusive right to propose a well. Thereafter,
either party may propose a well. The proposing party shall include the
following information with its notice:
a. the spud date scheduled for the initial test well on the Prospect,
which shall not be less than 90 days from the date of notice (subject
to rig availability) unless a farmout requirement or lease termination
necessitates a shorter period;
b. the target formation;
c. an AFE for the test well, with dry hole and completion costs shown;
d. whether the well is recommended to be drilled on a turnkey, daywork,
or footage basis;
e. an estimated economic evaluation of the Prospect; and
f. the Default Operating Agreement for signature, revised to include the
legal description of the Prospect in question.
10. NON-PROPOSING PARTY'S ELECTION TO PARTICIPATE
---------------------------------------------
Within 30 days of its receipt of the notice described in Section 9
above, the non-proposing party shall advise the proposing party of the working
interest, if any, with which the non-proposing party will either take itself or
sell to a third party. If the aggregate working interest for which the non-
proposing party will either itself participate or sell to a third party is less
than the working interest owned by the non-proposing party, the non-proposing
party shall assign the balance of its working interest to proposing party or its
designee. Such assignment shall be in the form of that attached hereto as
Exhibit "D" (the "Assignment"). As provided in the Assignment, the non-
proposing party will reserve a 2% of 8/8ths overriding royalty until payout, as
therein defined, together with an option to convert said overriding royalty
interest to a 20% of 8/8ths working interest at payout, both the overriding
royalty and working interest to be proportionately reduced to reflect the
working interest assigned.
8
<PAGE>
Any consideration received by a party for the sale or farming out of a
portion of its working interest shall be solely for such party's account.
Should a non-proposing party fail to assign its excess interest under the
Assignment prior to ten days before the scheduled spud date, the excess interest
will be drilled subject to the non-consent provisions of the Default Operating
Agreement, which provides for a forfeiture of interest on Exploratory
Operations, as defined therein.
11. ZEI'S OBLIGATIONS
-----------------
Without further consideration, ZEI shall undertake the following:
a. to provide all management and administration necessary to prepare the
Prospects for drilling, as more fully described under Section 7.a;
b. all bonding requirements necessary to maintain leases acquired
pursuant hereto;
c. geophysical and geological evaluations of the Prospects; and
d. estimated economic evaluations of the Prospects.
Notwithstanding the foregoing, FX shall reimburse ZEI for one-half the cost
of bonding a Lease at the time ZEI delivers an assignment of an interest in the
Lease to FX.
ZEI shall have the sole authority to determine the specifications of
acquiring, processing, and reprocessing seismic data and well logs. Further,
ZEI has the option of performing all or partial sequencing of the seismic data
or well log processing utilizing its own facilities.
12. ACCOUNTING OF SEISMIC FUNDS
---------------------------
a. Segregated Account
For ease of accounting, ZEI shall segregate the Seismic Funds into a
separate account (the "Seismic Fund Account"). Such account shall be
styled to put third parties on notice that the funds are held for the joint
account of FX and ZEI. Except where impractical, all Seismic Costs shall
be withdrawn directly from the Seismic Fund Account.
b. Accounting
Not less than 45 days after the end of each calendar quarter, ZEI
shall
9
<PAGE>
give FX a detailed accounting of all funds withdrawn from the Seismic
Fund Account. ZEI shall furnish documentation supporting Seismic Fund
expenditures to FX upon request.
c. Right to Audit
FX shall have such rights of audit as are available to a non-operator
under the Default Operating Agreement.
d. Internally Generated Statements
Prior to the end of each month ZEI shall forward to FX internally
prepared statements for the prior month showing revenues and expenses
charged to the Seismic Fund Account.
e. Joint Signature Account
Should the timing of Seismic Costs and payment of the Seismic Funds be
such that the Seismic Fund Account would have in excess of $2,000,000 at
one time, ZEI and FX shall jointly deposit the excess funds (i.e., those
over $2,000,000) into a joint signature account.
13. RECORD TITLE
------------
a. ZEI shall obtain title to leases acquired pursuant hereto (the
"Leases"). ZEI shall assign to FX its leasehold interest in a
Lease utilizing the form of assignment provided herein. Such
assignment shall be delivered after FX has paid all Prospect
Expenses billed to it hereunder and:
i. a well is ready for drilling; or
ii. front end costs have been paid to ZEI by a third party working
interest owner, or
iii. a farmout of the prospect has been signed.
b. Each of ZEI and FX agree not to pledge, mortgage, or hypothecate any
Lease without the consent of the other prior to the time a well is
spudded on such Lease or a unit containing such Lease. Each of ZEI
and FX further agree not to pledge, mortgage or hypothecate any
seismic data obtained hereunder.
14. AREA OF MUTUAL INTEREST
-----------------------
10
<PAGE>
The parties hereby designate an Area of Mutual Interest ("AMI"). The
AMI shall encompass the Initial Prospect Lands. Should ZEI acquire as a Seismic
Cost data covering lands outside the Initial Prospect Lands, the AMI shall be
deemed enlarged to cover all lands covered by such seismic data. Any interest
taken by either party after May 16, 1996 and prior to May 15, 2001 in an oil and
gas lease, exploration option, operating agreement, farm-in, deed coupled with
mineral interest, or any similar agreement which creates or effects an interest
in hydrocarbons in lands within the AMI (an "Interest"), or acquisition of a
contractual right to acquire an Interest, shall be deemed taken for development
under this agreement. The party acquiring an Interest shall, within thirty (30)
days of the time of such acquisition, notify, in writing, the non-acquiring
party. The notice shall describe the interest and set forth the terms of such
acquisition, the consideration paid, any other acquisition costs, and other
obligations assumed. The non-acquiring party will then have the right, within
thirty (30) days of the receipt of such notice, to elect in writing to receive
an assignment of one half (or, if smaller, its working interest ownership
determined by the FX Prospect Interest, as applicable) of each such acquired
Interest and the obligations connected therewith. If the non-acquiring party
elects to take such an assignment, the non-acquiring party shall tender to the
acquiring party, at the time it gives notice of its election, its share of the
consideration and acquisition costs actually paid by the acquiring party, and in
consideration thereof, shall receive an assignment of its share of the Interest
with covenants of special warranty. The failure to make such election and to
tender its share of the consideration and costs within such thirty (30) day
period shall constitute a waiver of the non-acquiring party's right to receive
such an interest. During such thirty (30) day notice period, the non-acquiring
party shall have the right to inspect all leases, documents, title information,
and contracts reflecting the interest to be acquired.
15. SEISMIC DATA
------------
a. Licensed Data
When licensing data for use in evaluation of the Prospects, ZEI shall
endeavor to secure a joint license which would allow FX and ZEI to use the
licensed data independently. However, if a joint license can be obtained
only by the payment of an additional premium, ZEI shall license such data
with only itself as the licensee.
b. Marketing of Proprietary Data
ZEI will acquire proprietary seismic data in its prospect development
program. Absent the agreement of both parties, such data shall not be
marketed to third parties. FX shall own an interest in such seismic data
equal to the FX Prospect Interest and ZEI the own the remaining interest in
such data.
Notwithstanding the ownership in the seismic data described above, if
FX funds the entire seismic acquisition program contemplated hereunder,
then until
11
<PAGE>
such time, if any, as proceeds from the sale or license of proprietary
seismic data equal Seismic Funds advanced by FX, FX shall receive all
proceeds from any license or sale of proprietary seismic data. After such
proceeds equal the Seismic Funds advanced by FX, any further proceeds shall
be shared equally by ZEI and FX.
16. GENERAL PROVISIONS
------------------
a. Additional Documents
The parties agree to execute such further documents as may be
necessary or appropriate to more fully reflect the agreements and
understandings reflected herein.
b. Amendment.
This Agreement may be amended only by an instrument signed by the
party against whom such amendment is sought to be enforced.
c. Arbitration.
Subject to any restriction imposed by law on agreements for compulsory
arbitration, the parties agree that any controversy or dispute arising out
of, in connection with, or related to this Agreement, any provision or
breach thereof, or any transaction contemplated hereby shall be submitted
to and settled by binding and conclusive arbitration before a panel of
three (3) arbitrators in Houston, Texas in accordance with the applicable
rules of the American Arbitration Association (or any other form of
arbitration agreed to by the parties) then in effect; provided, however,
that only actual damages and attorney fees of the prevailing party
reasonably incurred in connection with the arbitration proceeding shall be
awarded in connection therewith. Judgment on any award rendered pursuant
to any such arbitration proceeding may be entered in any court, Federal or
state, having jurisdiction thereof, and the parties shall be deemed to have
waived their right to any form of appeal of such award to the extent
permitted by law.
d. Assignment
This agreement may be assigned in whole or part by FX with the
approval of ZEI, which approval shall not be unreasonably denied.
e. Successors and Assigns.
Except as otherwise expressly provided herein, the provisions hereof
shall inure to the benefit of, and be binding upon, the successors,
assigns, heirs, executors and administrators of the parties hereto.
12
<PAGE>
f. Consequential Damages.
Neither party hereto shall be liable to the other for special,
indirect, consequential or incidental damages resulting from or arising out
of this Agreement or the obligations contemplated hereunder, including, but
not limited to, loss of production, loss of anticipated profits or business
interruptions, however same may be caused.
g. Contractual Liabilities
Should ZEI incur a contractual liability to a third party in
performing its undertakings hereunder, such contractual liability shall be
treated as a Prospect Expense. Should ZEI incur a tort liability to a
third party in performing its undertakings hereunder, and such liability be
a result of gross negligence or willful malfeasance, such liability, and
all attorneys fees and expenses relating thereto, shall be solely for ZEI's
account. Should ZEI incur a tort liability to a third party in performing
its undertakings hereunder, and such liability not be a result of gross
negligence or willful malfeasance, such liability, and all attorneys fees
and expenses relating thereto, shall be borne equally by FX (or its
assigns) and ZEI.
h. Counterparts.
This Agreement may be executed in any number of counterparts, each of
which shall be an original, but all of which together shall constitute one
instrument.
i. WAIVER OF CONSUMER RIGHTS
-------------------------
(Texas Deceptive Trade Practices Act)
It is the belief of the parties that this agreement is exempt from the
provisions of the Texas Deceptive Trade Practices-Consumer Protection Act
(the "Act"). Should, however, the Act be construed to not exempt this
transaction, the following waiver shall apply. For the purpose of the
following waiver, ZEI is deemed the Seller and FX the Purchaser:
PURCHASER REPRESENTS AND STIPULATES TO SELLER THAT:
(I) THE PURCHASER IS NOT IN A SIGNIFICANTLY DISPARATE BARGAINING POSITION;
(II) THE PURCHASER IS REPRESENTED BY LEGAL COUNSEL IN SEEKING OR ACQUIRING
THE GOODS OR SERVICES WHICH IT ACQUIRES UNDER THIS AGREEMENT; AND
(III) CONSUMER'S LEGAL COUNSEL WAS NOT DIRECTLY OR INDIRECTLY IDENTIFIED,
SUGGESTED, OR SELECTED BY SELLER OF AN AGENT OF THE SELLER.
13
<PAGE>
(IV) I (THE PURCHASER) WAIVE MY RIGHTS UNDER THE DECEPTIVE TRADE
PRACTICES-CONSUMER PROTECTION ACT, SECTION 17.41 ET SEQ., BUSINESS &
COMMERCE CODE, A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND PROTECTIONS.
AFTER CONSULTATION WITH AN ATTORNEY OF MY OWN SELECTION, I VOLUNTARILY
CONSENT TO THIS WAIVER."
j. Due Authorization.
Each party hereto represents that the execution, delivery and performance
of this Agreement by such party has been duly authorized by all necessary
corporate action.
k. Entire Agreement.
This Agreement, including the schedules and exhibits hereto constitutes
the entire Agreement, and supersedes all other prior agreements,
understandings, representations and warranties both written and oral, among
the parties, with respect to the subject matter hereto.
l. Force Majeure
In the event that any party is rendered unable, in whole or in part, by
force majeure to carry out its obligations under this Agreement (other than
the obligation to make payments of money due), upon such party giving notice
and reasonably full particulars of such force majeure in writing to the
other party within a reasonable time after the occurrence of the cause
relied upon, the obligations of the party giving such notice, so far as they
are affected by such force majeure, shall be suspended during the
continuance of any inability so caused, but for no longer period; and the
cause of the force majeure as far as possible shall be remedied with all
reasonable dispatch. The term "force majeure" as employed herein shall mean
an act of God, strike, lockout or other industrial disturbance, war,
blockade, riot, lightning, fire, storm, flood, explosion, governmental
restraint and any other cause whether of the kind herein enumerated, or
otherwise, not reasonably within the control of the party claiming
suspension. The settlement of strikes, lockouts and other labor
difficulties shall be entirely within the discretion of the party having the
difficulty. The above requirement that any force majeure shall be remedied
with all reasonable dispatch shall not require the settlement of labor
difficulties by acceding to the demands of opponents therein when such
course is inadvisable in the discretion of the party having the difficulty.
m. Governing Law
Except as otherwise required by mandatory provisions of applicable law,
this Agreement shall be governed by and construed in accordance with the
laws of
14
<PAGE>
the State of Texas, without reference to principles of conflicts of
law.
n. Headings.
Section headings in this Agreement are included herein for convenience of
reference only and shall not constitute a part of this Agreement for any
other purpose.
o. Relationship of the parties
The parties to this Agreement are independent contractors. There is no
relationship of agency, partnership, joint venture, employment, or franchise
between the parties in any way. Neither party nor its employees has the
authority to bind or commit the other party in any way or to incur any
obligation on its behalf.
p. Notices
Any notice or report herein required or permitted to be given shall be
addressed to the parties as follows:
If to FX:
FX Energy, Inc.
237 Park Avenue, Suite 2100
New York, NY 10017
Tel: 212 551 3550
Fax: 212 490 0131
If to ZEI:
Zydeco Exploration, Inc.
Suite 1160
333 North Sam Houston Parkway East
Houston, Texas 77060-2403
Tel: 713 820 2481
Fax: 713 820 6054
Any notice required to be given hereunder shall be sufficient if in
writing, and sent by nationally recognized overnight courier service, hand
delivery, telecopy or registered mail (return receipt requested and first-
class postage prepaid), addressed to the address first set forth above for
each party (or to such other address as any party shall specify by written
notice so given), and shall be deemed to have been delivered as of the date
sent.
15
<PAGE>
q. Performance Standards
In performing their duties or exercising their rights hereunder, one party
shall be liable to the other only for gross negligence or willful
malfeasance. It is not the intent that either party have a fiduciary
obligation to the other, any such obligation being expressly waived and
disclaimed.
r. Severability
If any part of this Agreement is found invalid or unenforceable, that part
will be amended to achieve as nearly as possible the same economic effect as
the original provision and the remainder of this Agreement will remain in
full force.
s. Statute of limitations.
No action arising under this Agreement may be brought at any time more
than thirty six (36) months after discovery or acquisition of knowledge of
the facts upon which the cause of action is based occurred.
t. Tax Matters
As to all operations hereunder, the parties hereto shall be subject to and
shall comply and abide with the tax election provisions set out in Exhibit
"E" attached hereto and made a part hereof for all purposes.
u. Third Party Beneficiary.
This Agreement is not intended to benefit or to create any obligations to,
or rights in respect of, any persons other than the parties hereto, and
their respective legal representatives, heirs or estates.
v. Time
Time is of the essence in all matters pertaining to this Agreement.
w. Titles
The parties acknowledge that the determination of adequate or marketable
title to Louisiana lands and leases is, to a great extent, subjective. As
to any option, permit, or land or lease acquired hereunder, ZEI shall make
all title materials in its possession available to FX upon request. ZEI
makes no warranty or representation that the title of any party granting any
option, permit, land or lease hereunder is adequate, good, or marketable.
Further, ZEI shall have no liability to FX of any nature upon the total or
partial failure of title to any option, permit, land or lease acquired
hereunder.
16
<PAGE>
IN WITNESS WHEREOF, this Exploration Agreement is executed as of the date
first above written.
ZYDECO EXPLORATION, INC.
By: /s/ Sam B. Myers, Jr.
-----------------------------------
Sam Myers, President
FX ENERGY, INC.
/s/ William D. Forster
By: William D. Forster
Its: President_________________________
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 9,026,012
<SECURITIES> 1,713,925
<RECEIVABLES> 256,569
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,049,173
<PP&E> 2,119,900
<DEPRECIATION> (661,269)
<TOTAL-ASSETS> 12,869,431
<CURRENT-LIABILITIES> 5,198,578
<BONDS> 0
0
781
<COMMON> 6,594
<OTHER-SE> 7,597,651
<TOTAL-LIABILITY-AND-EQUITY> 12,869,431
<SALES> 556,746
<TOTAL-REVENUES> 773,674
<CGS> 11,233
<TOTAL-COSTS> 11,233
<OTHER-EXPENSES> 1,067,554
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,671
<INCOME-PRETAX> (592,513)
<INCOME-TAX> 0
<INCOME-CONTINUING> (592,513)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (592,513)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
