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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
(ZIP CODE)
(713) 659-2222
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.001 par value
Warrants to Purchase One Share of Common Stock
Units Consisting of One Share of Common Stock and Two Warrants
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K ((S) 229.405 under the Securities Exchange Act of
1934) is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _______
As of March 5, 1997, there were 6,593,650 shares of Zydeco Energy, Inc.
Common Stock, $.001 par value, issued and outstanding, 2,753,433 of which,
having an aggregate market value of approximately $18,586,000, were held by non-
affiliates of the registrant (affiliates being, for these purposes only,
directors, executive officers, and holders of more than 5% of the registrant's
Common Stock).
DOCUMENTS INCORPORATED BY REFERENCE
Part III, Items 10 through 13 are incorporated from the registrant's
definitive Proxy Statement to be filed in connection with its Annual Meeting to
be held on May 15, 1997.
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TABLE OF CONTENTS
PAGE
Part I
Item 1. Business
The Company..................................................... 1
History......................................................... 1
Business Strategy............................................... 1
Louisiana Transition Zone and Other Areas of Interest........... 2
Fortune Exploration Agreement................................... 3
West Cameron Seismic Project.................................... 4
Cheniere Exploration Agreement.................................. 4
Proprietary Rights and Licenses................................. 5
Competition and Markets......................................... 5
Governmental Regulation......................................... 5
Operational Risks and Insurance................................. 8
Risk Factors.................................................... 8
Employees....................................................... 10
Item 2. Properties........................................................ 10
Prospects and Leases............................................ 10
Drilling Activities............................................. 12
Oil and Gas Reserves............................................ 12
Statistical Information - Oil and Gas Properties................ 13
Item 3. Legal Proceedings................................................. 14
Item 4. Submission of Matters to a Vote of Security Holders............... 15
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................. 15
Item 6. Selected Financial Data........................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 16
General......................................................... 16
Results of Operations - 1996 Compared to 1995................... 18
Results of Operations - March 17, 1994, to December 31, 1995.... 19
Liquidity and Capital Resources................................. 20
Forward Looking Statements...................................... 21
Item 8. Financial Statements and Supplementary Data....................... 21
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................. 21
Part III
Item 10. Directors and Executive Officers of the Registrant................ 21
Item 11. Executive Compensation............................................ 22
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 22
Item 13. Certain Relationships and Related Transactions.................... 22
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 10-K.. 22
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PART I
When used in this document, the words "anticipate," "believe," "expect,"
"estimate," "project," and similar expressions are intended to identify forward-
looking statements. Such statements are subject to certain risks, uncertainties
and assumptions. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, believed, expected, estimated, or
projected. For additional discussion of such risks, uncertainties, and
assumptions, see "Item 1. Business--Risk Factors" included elsewhere in this
report.
ITEM 1. BUSINESS
THE COMPANY
Zydeco Energy, Inc. ("Zydeco Energy") is an independent oil and gas
exploration company engaged in identifying oil and gas prospects, acquiring
leases, drilling, and producing reserves utilizing focused geologic concepts and
advanced 3D seismic and computer-aided exploration ("CAEX") technology. The
Company's efforts are focused primarily in the Louisiana Transition Zone and, to
a lesser extent, the Timbalier Trench. The "Louisiana Transition Zone"
encompasses the region of land and shallow water within a few miles of the
coastline of Louisiana. The Timbalier Trench is an ancestral channel of the
Mississippi River in the Gulf of Mexico. The Louisiana Transition Zone and the
Timbalier Trench are geologically complex trends in which large oil and natural
gas reserves have been discovered. The Company believes that use of innovative
and advanced 3D seismic technology, including structural and stratigraphic
imaging and attribute analysis, reduces the exploration risk in these areas.
Accordingly, the use of innovating 3D seismic technology is an integral
component of the Company's business strategy.
As used herein, unless the context indicates otherwise, the term "Company"
refers to Zydeco Energy and its operating subsidiary, Zydeco Exploration, Inc.
("Zydeco"). The Company's principal executive office is located at 1710 Two
Allen Center, 1200 Smith Street, Houston, Texas 77002, and its telephone number
is (713) 659-2222.
HISTORY
The Company was incorporated in June 1993 as a "special purpose acquisition
corporation" under the name "TN Energy Services Acquisition Corp." ("TN
Energy"). TN Energy was formed for the purpose of raising funds and acquiring
an operating business engaged in the energy services industry. In December
1995, TN Energy acquired Zydeco and changed its name to "Zydeco Energy, Inc."
Other than its efforts to acquire an energy services business, TN Energy did not
engage in any business activities prior to December 1995. The Company is now
active as an independent oil and gas exploration and production company. Zydeco
was formed and commenced operations in March 1994. Prior to its acquisition by
TN Energy, Zydeco acquired equipment, software, and personnel necessary for
enhanced 3D seismic analysis and had commenced acquiring and analyzing seismic
data and acquiring oil and gas leases and interests in wells.
The acquisition by merger of Zydeco (the "Merger") was treated as a reverse
acquisition for accounting purposes with Zydeco as the acquiror and TN Energy as
the acquiree based upon Zydeco's officers and directors assuming management
control of the resulting entity and the then current Zydeco stockholders
receiving value and ownership interests exceeding that received by TN Energy
stockholders. The effect of the Merger for accounting purposes was treated as
if Zydeco issued additional capital stock to TN Energy shareholders for cash.
BUSINESS STRATEGY
GENERAL. The Company's primary business strategy is to achieve reserve
growth by utilizing enhanced 3D seismic technology to explore for, acquire, and
develop high reserve potential prospects located in the Louisiana Transition
Zone and the Timbalier Trench. In addition, the Company may acquire and develop
other selected
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properties in the Gulf Coast region and elsewhere that are characterized by
relatively low initial investment, high reserve potential, close proximity to
existing or proposed pipeline infrastructure, and the availability of existing
well and other technical data. To a lesser extent, the Company may evaluate,
acquire, and operate producing properties that have the potential for increased
production through workovers, recompletions, and developmental drilling that
similarly can be evaluated by the Company through utilization of advanced 3D
seismic technology.
IDENTIFICATION OF PROSPECTS. To capitalize on the economic opportunities
that it believes exist in the Louisiana Transition Zone and in the Timbalier
Trench, the Company has acquired undeveloped oil and gas leases and commenced
identifying potential prospects in those areas for further evaluation. These
potential prospects have been identified by licensing certain 2D and 3D seismic
data, processing or reprocessing such seismic data, correlating the seismic data
with subsurface well control and historical production data from similar
properties, and analyzing all such available data through enhanced 3D structural
and stratigraphic imaging and attribute analysis techniques. The undeveloped
leases and other leasing and drilling activity are described in Item 2 of this
Report; to the extent required or appropriate, the response to Item 2 is
incorporated in this Item 1.
The Company is executing its business strategy by (i) shooting, acquiring,
and/or processing seismic data, (ii) acquiring leases or options for leases of
land, (iii) subsequently utilizing enhanced 3D seismic technology to determine
which of the leases or options include prospects suitable for drilling, and (iv)
exploring and developing prospects suitable for development by the Company or
through farmout or other arrangements with industry partners. The Company may
also acquire and operate producing properties.
The Company is continuing to develop and expand its 3D seismic expertise
and capabilities through acquisition of generally available hardware and
software, development of in-house capabilities and, when appropriate,
collaboration with individuals and other companies in the development of 3D
seismic technologies. The Company may market its enhanced 3D seismic capability
to other domestic and international oil and gas companies for consideration,
which may be in the form of a property interest.
In its exploration and development efforts, the Company intends to pursue
commercial joint ventures with strategic industry partners in order to (i)
outsource all non-essential and less-profitable operations related to the
drilling, completion, operation, and abandonment of the Company's properties and
(ii) utilize the bonding and insurance capabilities of "bond exempt" partners in
order to be able to purchase leases and drill wells in the offshore federal
domain without having to collateralize these activities with the substantial
bonding and insurance amounts required pursuant to recent federal legislation.
EXPLORATION AND DEVELOPMENT AGREEMENTS. After evaluation of prospects
primarily through the use of enhanced 3D seismic technology and subject to the
availability of additional working capital, the Company expects to participate
for a 12.5% to 50% working interest in the drilling of test wells upon the
prospects that it deems worthy of further drilling evaluation. The Company
intends to drill most wells under turnkey contracts with recognized and well
capitalized industry contractors so as to maintain proper and effective
management of its drilling operations by limiting the costs thereof to a fixed
turnkey price irrespective of the actual costs incurred by the contractor. This
practice should protect the Company from significant cost overruns attributable
to down hole drilling problems and the legal liabilities resulting therefrom.
However, since the recent increase in drilling activity, especially in the Gulf
of Mexico, turnkey contracts are more difficult to obtain.
LOUISIANA TRANSITION ZONE AND OTHER AREAS OF INTEREST
GENERAL. The Company has identified and is evaluating numerous potential
prospects offshore in the Louisiana Transition Zone and the Timbalier Trench,
the Company's principal areas of concentration. As detailed in Item 2 of this
Report, leases have been obtained on many of these potential prospects. The
Company has participated, through either farmouts or direct drilling
participation, in drilling three of the prospects as discussed in Item 2 and has
purchased a minority production interest in a well in the Louisiana Transition
Zone. The Company's other drilling activities are subject to the completion of
its analysis of various seismic and other data with respect to these potential
prospects. While the Company believes that these prospects could have the
potential to produce oil and gas reserves and, ultimately, revenues, no
assurance can be given that the drilling of exploratory wells on any of the
potential prospects will occur or will result in the discovery of commercial
quantities of oil and natural gas.
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LOUISIANA TRANSITION ZONE. The Louisiana Transition Zone is a narrow trend
paralleling the coastline of Louisiana. It is approximately six miles wide
(three miles on either side of the beach) and extends approximately 300 miles
from the Sabine River eastward to the Bird's Foot Delta of the Mississippi
River. Water depths range from 0 to 40 feet in the areas of the Company' s
prospects. The Louisiana Transition Zone contains the Miocene Trend which has
produced many of the largest oil and gas fields developed in the continental
United States and its territorial waters. Objectives within the Miocene Trend
have excellent reservoir characteristics and have historically exhibited
multiple pay zones, which allow a single strategically placed well bore to drain
multiple reservoirs. The western portion of the Louisiana Transition Zone
contains the gas prolific Planulina sands.
The Louisiana Transition Zone is populated with salt domes with numerous
radial and tangential faults surrounding the salt domes. The use of advanced 3D
seismic technology is essential to the exploration of such salt features and
fault blocks. There are relatively few 3D surveys within the Louisiana
Transition Zone because of the relatively high cost of such surveys compared to
land or deepwater surveys. The high cost is a result of the combinations of
land and marine recordings necessary across the marshlands, bays, highland, and
open water areas. Different types of sources and receivers have been required
for a true transition survey over the beach area which complicates the
processing and quality control of a seismic survey. Seismic activity has also
been limited due to surf related noise and wildlife sanctuaries. Leases in this
area are controlled by sophisticated land owners onshore and the State of
Louisiana within three miles of the beach offshore. Permits for 3D acquisition
require the consent of all landholders and all leaseholders. (These consents
are not required in Federal waters.) Thus, seismic contractors have not been
able to easily conduct speculative 3D surveys due to the difficulty of
permitting acreage here. Due to these limitations, this zone is considered a
"seismically blind" area and is thus reflected on virtually every onshore and
offshore 2D seismic coverage map for the State of Louisiana as an area of "no
seismic coverage." Given this low level of historical exploration and the high
recovery factors characterizing the Louisiana Transition Zone, the Company
believes that this zone has the potential for containing substantial undeveloped
oil and gas reserves. Many of these prospective areas in the Louisiana
Transition Zone are located in shallow waters near existing pipeline
infrastructure. As a result, reserves underlying these areas are generally less
costly to develop and connect to pipeline infrastructure than reserves in deeper
water areas.
TIMBALIER TRENCH. The Timbalier Trench is a narrow, circuitous channel
approximately seven miles wide and situated 600 feet beneath the floor of the
Gulf of Mexico. This trench is an ancestral channel of the Mississippi River.
Water depths range from 40 to 130 feet in the defined prospect areas. The
Timbalier Trench contains an irregular shale section deposited over a normal
sedimentary section. The differences in the reflective qualities of these
sections cause a distortion in the penetration and recording of energy from a
seismic source which results in a lack of data continuity and resolution. This
lack of continuity and resolution with respect to seismic shot in the Timbalier
Trench creates a "seismically blind" area in that abnormally low seismic
velocities in the shale "Trench" create processing problems which have
historically resulted in the area being considered a "poor data" area. Due to
the lack of high quality seismic data, this area also remains relatively
unexplored.
FORTUNE EXPLORATION AGREEMENT
On February 13, 1995, Zydeco entered into an Exploration Agreement (the
"Fortune Agreement") with a predecessor of Fortune Petroleum Corporation
("Fortune"). Pursuant to the Fortune Agreement, in a series of payments,
Fortune paid Zydeco $4.8 million and agreed to pay fifty percent of any
additional funds necessary for the acquisition and processing of seismic data
and acquiring leases on certain of the prospects identified in the table in Item
2 of this Report, in exchange for Fortune's right to maintain up to a 50%
interest in such prospects. Fortune's interest in such prospects may drop below
50% if it elects not to contribute to development costs for such prospects. In
addition to the initial prospects, Zydeco and Fortune have established areas of
mutual interest ("AMIs") adjoining each prospect and granted each other a right
of first refusal on any other projects developed along the Gulf Coast of
Louisiana until December 31, 1996. No assurance can be given that any new
projects within the AMIs will be identified.
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Fortune has the right to "farmout" a portion or all of its interest in each
prospect to Zydeco under a put arrangement in the Fortune Agreement. In the
event of such a farmout, Fortune would retain a two percent of eight eighths
overriding royalty interest in the project, convertible into a 20% of eight
eighths working interest after Zydeco recouped its drilling, completion, and
hook-up costs of the well from production. Should Fortune farmout a smaller
working interest to Zydeco, the overriding royalty and after-payout working
interests would be proportionately reduced. Zydeco has similar farmout rights
under the Fortune Agreement.
WEST CAMERON SEISMIC PROJECT
In 1996, the Company commenced an extensive 3D seismic exploration program
in the Louisiana Transition Zone in western Cameron Parish, Louisiana (the "West
Cameron Seismic Project"). At the core of this Project is a 51,000 acre
exclusive seismic option on state waters obtained by the Company from the State
of Louisiana. See "Item 2. Properties - Prospects and Leases - Seismic
Options". In April 1996, the Company entered into an exploration agreement with
an industry participant with respect to the West Cameron Seismic Project. See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - General". Additional onshore options and permits have
been secured and in September 1996 seismic data acquisition commenced under a
turnkey seismic contract. Data acquisition operations were suspended for the
winter in December 1996. In December, the Company's seismic contractor on the
West Cameron Seismic Project filed for protection under Chapter 11 of the U. S.
Bankruptcy statutes. The Company executed a new contract with its contractor on
March 14, 1997. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources".
In January 1997, the Company completed the assembly of an exploration team
of geophysicists, geologists, and seismic analysts and the integration of its 3-
D seismic interpretive hardware and software. As of March 1997, the Company has
received seismic data for analysis and interpretation on approximately 12% of
the original West Cameron contract acreage. The Company is presently analyzing
such data and applying various seismic processing techniques to improve data
resolution and to develop routines for more complicated processes, including
pre-stack migration and velocity analyses. These techniques will also be used
in analyzing future data obtained in respect of the Project. While the Company
believes the preliminary data results are promising, the exploration potential
of the data is still not known and identification of prospects would be
premature. The analysis of the exploration potential of the data will be
dependent on further seismic processing and analysis and the availability of
additional data covering the Project area.
CHENIERE EXPLORATION AGREEMENT
In April 1996, the Company executed an Exploration Agreement (the "Cheniere
Agreement") with Cheniere Energy Operating Co., Inc. ("Cheniere") covering the
West Cameron Seismic Project. The Cheniere Agreement provides for aggregate
payments to Zydeco of $13.5 million to fund the costs of seismic acquisition,
including the purchase of seismic rights or lease options on the related onshore
acreage of the West Cameron Seismic Project, and to complete data acquisition
and processing of a 3D seismic survey of the onshore and offshore areas. The
Cheniere Agreement, as amended, provides that Cheniere may receive up to a 50%
interest in the West Cameron Seismic Project and any leases acquired as a result
thereof through May 2001, based on Cheniere completing its funding of the entire
$13.5 million. The Cheniere Agreement provides that Cheniere may discontinue
funding at any time and its interest would then be reduced pro rata based on the
West Cameron Seismic Project's total cost.
Cheniere has the right to "farmout" a portion or all of its interest in
each prospect identified in the project to Zydeco under a put arrangement in the
Cheniere Agreement. In the event of such a farmout, Cheniere would retain a
percent eight eighths royalty interest in the project, convertible into a 20% of
eight eighths working interest after Zydeco recouped its drilling, completion,
and hook-up costs of the well from production. Should Cheniere farmout a smaller
working interest to Zydeco, the overriding royalty and after-payout working
interests would be proportionately reduced. Zydeco has similar farmout rights
under the Cheniere Agreement.
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PROPRIETARY RIGHTS AND LICENSES
The Company believes that its success depends primarily on the innovative
skills, technical competence, and sales and marketing abilities of its personnel
rather than upon the ownership of patents or other intellectual property. The
Company has obtained licenses to use all software necessary to its business.
The Company presently has no patents.
In May 1996, the Company entered into a license to certain technology
developed by Mr. Norman Neidell. Mr. Neidell, an independent researcher, has
developed a method of analyzing seismic data using fewer data points than
methods currently employed. Such a technique, if successful, could
significantly reduce the costs of acquiring seismic data on a prospect. The
Company's license is for use worldwide and exclusively in the Louisiana
Transition Zone and the transition zone bordering the Gulf of Mexico in the
Republic of Mexico.
COMPETITION AND MARKETS
Competition in the Louisiana Transition Zone and the Timbalier Trench is
intense, particularly with respect to the acquisition of producing properties
and proved undeveloped acreage. The Company competes with the major oil
companies and other independent producers of varying sizes, all of which are
engaged in the exploration, development, and acquisition of producing and non-
producing properties. Many of the Company's competitors have financial
resources and exploration and development budgets that are substantially greater
than those of the Company, which may adversely affect the Company's ability to
compete, particularly in regions outside of the Gulf Coast Basin.
The availability of a ready market for and the price of any hydrocarbons
produced will depend on many factors beyond the control of the Company,
including the extent of domestic production and imports of foreign oil, the
marketing of competitive fuels, the proximity and capacity of natural gas
pipelines, the availability of transportation and other market facilities, the
demand for hydrocarbons, the political conditions in the Middle East, the effect
of federal and state regulation of allowable rates of production, taxation and
the conduct of drilling operations, and federal regulation of natural gas. In
the past, as a result of excess deliverability of natural gas, many pipeline
companies have curtailed the amount of natural gas taken from producing wells,
shut-in some producing wells, significantly reduced gas taken under existing
contracts, refused to make payments under applicable "take-or-pay" provisions,
and have not contracted for gas available from some newly completed wells. The
Company can give no assurance that such problems will not arise again. In
addition, the ongoing restructuring of the natural gas pipeline industry will
eliminate the gas purchasing activity of traditional interstate gas transmission
pipeline buyers. See "Item 1 - Business - Governmental Regulation".
Producers of natural gas, therefore, will be required to develop new
markets among gas marketing companies, end users of natural gas, and local
distribution companies. All of these factors, together with economic factors in
the marketing area, generally may affect the supply and/or demand for oil and
gas and thus the prices available for sales of oil and gas.
GOVERNMENTAL REGULATION
The Company's oil and gas exploration, production, and related operations
are subject to extensive rules and regulations promulgated by Federal and state
agencies. Failure to comply with such rules and regulations can result in
substantial penalties. The regulatory burden on the oil and gas industry
increases the Company's cost of doing business and affects its profitability.
Because such rules and regulations are frequently amended or reinterpreted, the
Company is unable to predict the future cost or impact of complying with such
laws.
PRODUCTION. In most, if not all, areas where the Company may conduct
activities, there may be statutory provisions regulating the production of oil
and natural gas under which administrative agencies may promulgate rules in
connection with the operation and production of both oil and gas wells,
determine the reasonable market demand for oil and gas, and establish allowable
rates of production. Such regulation may restrict the rate at which
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the Company's wells produce oil or gas below the rate at which such wells would
be produced in the absence of such regulation, with the result that the amount
or timing of the Company's revenues could be adversely affected.
OFFSHORE LEASING. The Company has acquired and plans to acquire additional
oil and gas leases in the Gulf of Mexico, which will be granted by the Federal
government and administered by the U.S. Department of Interior Minerals
Management Service (the "MMS"). Such leases are issued through competitive
bidding, contain relatively standardized terms, and require compliance with
detailed MMS regulations and orders pursuant to the Outer Continental Shelf
Lands Act ("OCSLA") (which are subject to change by the MMS). For offshore
operations, lessees must obtain MMS approval for exploration plans and
development and production plans prior to the commencement of such operations.
In addition to permits required from other agencies (such as the Coast Guard,
the Army Corps of Engineers, and the Environmental Protection Agency (the
"EPA"), lessees must obtain a permit from the MMS prior to the commencement of
drilling. The MMS has promulgated regulations requiring offshore production
facilities located on the Outer Continental Shelf to meet stringent engineering
and construction specifications. Similarly, the MMS has promulgated other
regulations governing the plugging and abandoning of wells located offshore and
the removal of all production facilities. With respect to any Company
operations conducted on offshore federal leases, liability may generally be
imposed under the OCSLA for the costs of clean-up and damages caused by
pollution resulting from such operations, other than damages caused by acts of
war or the negligence of third parties. Under certain circumstances, including
but not limited to, conditions deemed a threat or harm to the environment, the
MMS may also require any Company operations on federal leases to be suspended or
terminated in the affected area.
Under the OCSLA, all oil and natural gas pipelines operating on the Outer
Continental Shelf must provide "open and non-discriminatory" access to both
owner and non-owner shippers. Consequently, the Company's gathering and
transportation facilities located on the Outer Continental Shelf must be made
available to third parties.
BONDING AND FINANCIAL RESPONSIBILITY REQUIREMENTS. The Company is required
to obtain bonding, or otherwise demonstrate financial responsibility, at varying
levels by governmental agencies in connection with obtaining state or federal
leases or acting as operator on such leases. These bonds may cover such
obligations as plugging and abandonment of unproductive wells, removal of
related production facilities, and pollution liabilities on federal and state
leases. A substantially larger bond than the current $300,000 bond currently
issued on behalf of the Company is required in order to act as operator on
federal offshore leases. The Company will have to satisfy these increased
bonding requirements in the event that it elects to operate any wells on federal
leases. The Company expects to be able to enter into participation arrangements
on its prospects with industry partners who are qualified to act as operators on
Federal leases. In addition, the State of Louisiana recently adopted financial
responsibility requirements with respect to plugging and abandonment liabilities
on Louisiana leases.
NATURAL GAS MARKETING AND TRANSPORTATION. The Federal Energy Regulatory
Commission ("FERC") regulates the transportation and sale for resale of natural
gas in interstate commerce pursuant to the Natural Gas Act of 1938 ("NGA") and
the Natural Gas Policy Act of 1978 ("NGPA"). In the past, the Federal
government has regulated the prices at which oil and gas could be sold.
Deregulation of wellhead sales in the natural gas industry began with the
enactment of the NGPA in 1978. In 1989, Congress enacted the Natural Gas
Wellhead Decontrol Act (the "Decontrol Act"). The Decontrol Act removed all NGA
and NGPA price and nonprice controls affecting wellhead sales of natural gas
effective January 1, 1993. While sales by producers of natural gas can
currently be made at uncontrolled market prices, Congress could reenact price
controls in the future.
On April 8, 1992, the FERC issued Order No. 636, as amended by Order No.
636-A (issued in August 1992) and Order No. 636-B (issued in November 1992) as a
continuation of its efforts to improve the competitive structure of the
interstate natural gas pipeline industry and maximize the consumer benefits of a
competitive wellhead gas market. The FERC proposed to generally require
interstate pipelines to "unbundle," or separate their traditional merchant sales
services from their transportation and storage services and to provide
comparable transportation and storage services with respect to all gas supplies
whether purchased from the pipeline or from other merchants such as marketers or
producers. The pipelines must now separately state the applicable rates for
each unbundled service (e.g., for natural gas transportation and for storage).
This unbundling process has been implemented through negotiated settlement in
individual pipeline services restructuring proceedings. Ultimately,
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Order Nos. 636, et al., may enhance the competitiveness of the natural gas
market. It is impossible to predict at this time the ultimate form and effect of
Order No. 636. While Order No. 636 will not directly regulate the production and
sale of gas that may be produced from the Company's properties, the order could
affect the market conditions in which the gas is sold and the availability of
transportation services to deliver the gas to market.
Certain segments of the industry have opposed aspects of Order Nos. 636 et
al. and several parties have sought court review of those orders. Furthermore,
after the FERC issued orders approving the individual pipeline restructuring
plans authorized pursuant to Order No. 636, various parties sought court review
of certain of these pipeline restructuring orders. Upon review, any or all of
Order Nos. 636 et al, or the individual pipeline restructuring orders may be
reversed in whole or in part and remanded to the FERC for further action
consistent with the court's decision. It is impossible for the Company to
predict the ultimate outcome regarding this court review. In addition, the
composition of the FERC has changed considerably since the issuance of Order
Nos. 636 et al. The Company cannot, therefore, predict the ultimate outcome or
duration of the unbundled regulatory regime contemplated under Order No. 636.
OIL SALES AND TRANSPORTATION RATES. The FERC regulates the transportation
of oil in interstate commerce pursuant to the Interstate Commerce Act. Sales of
crude oil, condensate, and gas liquids by the Company are not regulated and are
made at market prices. However, the price a company receives from the sale of
these products is affected by the cost of transporting the products to market.
Effective as of January 1, 1995, the FERC implemented regulations establishing
an indexing system for transportation rates for oil pipelines, which would
generally index such rates to inflation, subject to certain conditions and
limitations. These regulations could increase the cost of transporting crude
oil, liquids, and condensate by pipeline. These regulations are subject to
pending petitions for judicial review. The Company is not able to predict with
certainty what effect, if any, these regulations will have on it, but other
factors being equal, the regulations may tend to increase transportation costs
or reduce wellhead prices for such commodities.
ENVIRONMENTAL. 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. These laws and regulations may
require the acquisition of a permit before drilling commences, restrict the
types, quantities, and concentration of various substances that can be released
into the environment in connection with drilling and production activities,
limit or prohibit drilling activities on certain lands lying within wilderness,
wetlands, and other protected areas, and impose substantial liabilities for
pollution resulting from the Company's operations. Moreover, the recent trend
toward stricter standards in environmental legislation and regulation is likely
to continue. For instance, legislation has been proposed in Congress from time
to time that would reclassify certain oil and gas exploration and production
wastes as "hazardous wastes" which would make the reclassified wastes subject to
much more stringent handling, disposal, and clean-up requirements. If such
legislation were to be enacted, it could have a significant impact on the
operating costs of the Company, as well as the oil and gas industry in general.
State initiatives to further regulate the disposal of oil and gas wastes are
also pending in certain states, and these various initiatives could have a
similar impact on the Company. See "Item 1 - Business - Risk Factors -
Governmental Regulations".
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. It is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury and property damage.
7
<PAGE>
OPERATIONAL RISKS AND INSURANCE
The Company anticipates that all of its wells will be drilled by proven
industry contractors under turnkey contracts, subject to availability, that
limit the Company's financial and legal exposure. However, circumstances may
arise where the Company is unable to secure a turnkey contract on satisfactory
terms. In this case, the Company may decide to drill, or cause to be drilled,
the applicable test well(s) on either a footage or day rate basis and the
drilling thereof will be subject to the usual drilling hazards such as
cratering, explosions, uncontrollable flows of oil, gas or well fluids, fires,
pollution, and other environmental risks. The Company's activities are also
subject to perils specific to 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,
pollution or environmental damage, and suspension of operations. In accordance
with customary industry practices, the Company intends to maintain insurance
against some, but not all, of such risks and some, but not all, of such losses.
The occurrence of a significant event not fully insured or indemnified against
could materially and adversely affect the Company's financial condition and
operations. Moreover, no assurance can be given that the Company will be able to
maintain adequate insurance in the future at rates it considers reasonable.
RISK FACTORS
HIGH DEPENDENCE ON 3D SEISMIC AND EXPLORATORY DRILLING ACTIVITIES. All but
two of the offshore oil and gas leases the Company has acquired are undeveloped
and carry a high degree of exploration risk. Accordingly, the future success of
the Company will be dependent upon the success of its exploratory drilling
activities. Drilling involves numerous risks, including the risk that no
commercially productive oil or gas reservoirs will be encountered. The cost of
drilling, completing, and operating wells is often uncertain and drilling
operations may be curtailed, delayed, or abandoned as a result of a variety of
factors, including unexpected drilling conditions, pressure or irregularities in
formations, equipment failures or accidents, weather conditions, and shortages
or delays in the delivery of equipment.
LACK OF DIVERSIFICATION; OIL AND GAS INDUSTRY CONDITIONS; AND VOLATILITY OF
PRICES FOR OIL AND GAS. As an independent energy company, the Company's
revenues and profits will be substantially dependent on the oil and gas industry
in general and the prevailing prices for oil and gas in particular.
Historically, the markets for oil and gas have been volatile and are likely to
continue to be volatile in the future. Prices for oil and gas are subject to
wide fluctuations in response to relatively minor changes in supply of and
demand for oil and gas, market uncertainty, and a variety of additional factors
that are beyond the control of the Company. These factors include political
conditions in the Middle East, the domestic and foreign supply of oil and gas,
the price of foreign imports, the level of consumer demand, weather conditions,
domestic and foreign government regulations, the price and availability of
alternative fuels, and overall economic conditions. Accordingly, it is
impossible to predict future oil and gas price movements with any certainty.
Declines in oil and gas prices would adversely affect the Company's cash flow,
liquidity, and profitability, and reduce the amount of the Company's oil and gas
reserves that can be economically produced. In addition, various factors,
including the availability and capacity of gas gathering systems and pipelines,
the effect of federal regulations on production and transportation, general
economic conditions, and changes in supply and demand, may adversely affect the
Company's ability to market its oil and gas production.
HIGH DEPENDENCE UPON LEASE ACQUISITION ACTIVITIES. Both the United States
Department of Interior and the State of Louisiana award oil and gas leases on a
competitive bidding basis. It is expected that other major and independent oil
and gas companies having financial resources significantly greater than those of
the Company will bid against the Company for the purchase of oil and gas leases.
Recent sales of federal and state leases have indicated that the competition for
lease acreage may be substantially greater and, accordingly, the Company may
face substantial increases in lease costs. Accordingly, there can be no
assurance that the Company will be successful in acquiring any leases on which
it bids.
LIMITED OPERATING REVENUES; NEED FOR ADDITIONAL FINANCING. The Company
presently has limited operating revenues and does not expect to generate
substantial operating revenues in the immediate future. It is expected the
Company will need substantial additional capital in order to sustain operations
and to acquire additional oil and gas leases, producing properties, or to drill
wells on the potential prospects. Additional capital may be secured from a
combination of funding sources that may include borrowings from financial
institutions,
8
<PAGE>
joint venture partnerships, vendor financings, production payment financings,
debt offerings, or additional offerings of the Company's stock. The Company's
ability to access additional capital will depend on its success in acquiring and
developing high reserve potential oil and gas leases and expanding its services
business and the status of various capital markets at the time such additional
capital is sought. Accordingly, there can be no assurances that capital will be
available to the Company from any source or that, if available, it will be on
terms acceptable to the Company. Should sufficient financing not be available
because costs are higher than estimated or otherwise, the development and
exploration of any Prospect acquired by the Company would be delayed and,
accordingly, the implementation of the Company's business strategy could be
adversely affected.
COMPETITIVE INDUSTRY. The Company operates in a highly competitive
industry. The Company competes with major and independent oil and gas companies
for the acquisition of oil and gas leases and producing properties as well as
for the equipment and labor required to develop and operate such properties.
Many of these competitors have financial, technical, human, and other resources
substantially greater than those of the Company.
OPERATING RISKS. The Company's oil and gas operations are subject to all
of the risks and hazards typically associated with the exploration for, and the
development and production of, oil and gas in the Gulf of Mexico and any other
areas in which the Company may, in the future, conduct such activities. Risks
in drilling operations include blowouts, oil spills, fires, and offshore risks
such as capsizing, collision, hurricanes, and other adverse weather and sea
conditions. Such risks can result in personal injury and loss of life and
substantial damage to or destruction of oil and gas wells, platforms, production
facilities, or other property, suspension of operations, and liabilities to
third parties, any and all of which could adversely affect the Company.
The Company's operations could also result in liability for oil spills,
discharge of hazardous materials, and other environmental damages. In
accordance with customary industry practices, the Company maintains insurance
against some, but not all, of such risks and some, but not all, of such losses.
There can be no assurance, however, that any insurance the Company intends to
carry will be available to the Company when applied for or, if available and
carried, will be adequate to cover the Company's liability in all circumstances.
The occurrence of an event not fully covered by insurance could have a material
and adverse effect on the financial position and results of operations of the
Company. In addition, the Company may be liable for environmental damages
caused by previous owners of any property which may be purchased by the Company,
which liabilities would not be covered by insurance.
Most of the oil and gas leases the Company has acquired or expects to
acquire are or will be located offshore in water depths of less than 130 feet.
Drilling operations offshore in such water depths are by their nature more
remote, exposed, and, consequently, more difficult than typical drilling
operations conducted on land, and, as a result, could result in significantly
higher drilling, completion and connection costs.
RISKS OF TURNKEY CONTRACTS. The Company intends to have other industry
partners operate its wells and will attempt to obtain, wherever possible and
desirable, turnkey contracts, subject to availability, for the drilling of wells
on any of the potential prospects the Company may acquire. In the event a
turnkey contract is not economically beneficial to the Company or is otherwise
unobtainable from proven industry partners, the Company may contract for
drilling operations on either a footage or day rate basis. The recent increase
in exploration activity in the Gulf coast region may result in the inability to
negotiate turnkey contracts. In this instance, the Company may be liable for
significant cost overruns attributable to downhole drilling problems that
otherwise would have been covered by a turnkey contract had one been negotiated.
DEPENDENCE ON KEY PERSONNEL. The Company believes that its success will be
highly dependent upon its continued ability to attract and retain skilled
managers and employees. In the event that the Company loses the services of any
of its key personnel, there could be a material adverse effect on the Company's
business and prospects.
GOVERNMENTAL REGULATIONS. The Company's business will be regulated by
certain federal, state, and local laws and regulations relating to the
development, production, marketing, and transportation of oil, gas, and related
products as well as certain environmental and safety matters. These laws may be
changed from time to time in response to economic or political conditions.
Matters subject to regulation include permits for drilling operations,
9
<PAGE>
drilling and abandonment bonds, reports concerning operations, the spacing of
wells, utilization and pooling of properties, and taxation. From time to time,
regulatory agencies have imposed price controls and limitations on production by
restricting the rate of flow of oil and gas wells below actual production
capacity in order to conserve supplies of oil and gas. In addition, the
production, handling, storage, transportation, and disposal of oil and gas, by-
products therefrom, and other substances and materials produced or used in
connection with oil and gas operations are subject to regulation under federal,
state, and local laws and regulations primarily relating to protection of human
health and the environment. These laws and regulations have continually imposed
increasingly strict requirements for water and air pollution control and solid
waste management. The Company believes the trend of more expansive and stricter
environmental legislation and regulations will continue and such legislation may
result in costs to the Company in the future. Amendments to laws regulating the
disposal of oil and gas exploration and production wastes have been considered
by Congress and may be adopted. Moreover, new and additional taxes have been
proposed on energy consumption in the form of a BTU tax or a gasoline tax. Such
legislation or taxes, if enacted, could have a significant adverse impact on the
Company's operating costs.
EMPLOYEES
As of December 31, 1996, the Company had 17 full-time employees and 2 full-
time consultants, including 3 geologists and 5 geophysicists. The Company
considers its relations with its employees to be good.
ITEM 2. PROPERTIES
PROSPECTS AND LEASES
UNDEVELOPED PROPERTIES. The Company has identified and is evaluating
several potential prospects under oil and gas leases in which the Company has an
interest. These leases are located in the Miocene Trend of southern Louisiana.
The potential prospects have generally been identified by shooting or purchasing
certain 2D and 3D seismic data; processing or reprocessing thereof, and
correlating the seismic data with subsurface well control and historical
production data from similar properties. The Company is currently in the
process of acquiring 3D seismic data and analyzing such data for certain of the
potential prospects. As of December 31, 1996, the Company had analyzed or
acquired interests in 3D seismic data covering approximately 138 square miles
offshore Louisiana encompassing approximately 10,366 gross acres in which the
Company has leases covering all or portions of 17 potential prospects. To the
extent required or appropriate, the response to Item 1 is incorporated in this
Item 2.
The following table sets forth a summary of certain potential prospects
that the Company is planning to analyze and, if such analysis confirms oil or
gas potential, drill or farm out during the life of the leases. Although the
Company plans to pursue further evaluation of each of these potential prospects
subject to availability of funds, there can be no assurance that each of the
potential prospects will in fact be drilled. The final decision with respect to
the drilling of any exploratory drilling prospect will be dependent on a number
of factors, including: (i) the availability of leases on reasonable terms and
permits for the prospect, (ii) the results of a further review and analysis of
the seismic data, including the results of 3D seismic surveys, (iii) the
availability of sufficient capital resources by the Company and the other
participants for the drilling of the prospects, (iv) the approval of other
10
<PAGE>
participants to the drilling of the prospect after additional data has been
compiled, (v) rig availability and (vi) economic conditions at the time of
drilling, including prevailing and anticipated prices for crude oil and natural
gas.
<TABLE>
<CAPTION>
INTEREST EARLIEST
POTENTIAL OWNED AT GROSS LEASE
PROSPECT DEC.31, ACREAGE NET EXPIRATION
NAME AREA TREND CO-OWNER/(1)/ 1996 OWNED ACREAGE DATE
---- ---- ----- ---------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Aurora Bay Marchand Transition Zone and Fortune 50% 513 256 5/1999
Timbalier Trench
Bell Pass Bay Marchand Transition Zone --- 100% 495 495 11/1997
DABM Bay Marchand Transition Zone Neomar Resources, 37.5%/(4)/ 409 154 8/1998
Inc., et.al.
Carpe Diem Bay Marchand Transition Zone --- 100% 296 296 5/1999
Cirrus Bay Marchand Transition Zone Fortune 50% 245 122 5/1999
Bon Ton Bay Marchand Transition Zone and
Timbalier Trench --- 53.75%/(4)/ 198 106 8/1998
Falcon Bay Marchand Transition Zone and
Timbalier Trench --- 100% 47 47 10/2000
Cherokee Bay Marchand Transition Zone --- 100% 99 99 7/2000
Royal Bay Marchand Transition Zone 100% 31 31 7/2001
Tuxedo Eugene Island Transition Zone Fortune 50% 419 210 6/2001
Obelisk Grand Isle Transition Zone Fortune 50%/(2)/ 160 80 10/2000
Orchid Grand Isle Transition Zone Fortune 50% 155 79 10/2000
Schooner Grand Isle Transition Zone Fortune 50% 92 46 10/2000
Thunder East Ship Shoal Transition Zone Fortune 50% 1,151 575 5/1999
Thunder West Ship Shoal Transition Zone Bois D'Arc ---/(3)/ 293 293 5/1999
Jade Ship Shoal Transition Zone Fortune 50%/(2)/ 150 75 10/2000
Ovation South Pass Transition Zone Fortune 50%/(2)/ 664 332 5/1999
Matador South Pass Transition Zone Fortune 50%/(2)/ 2,137 1,068 5/1997
Mentor South Timbalier Timbalier Trench Fortune 50% 5,000 2,500 5/1999
Polaris South Timbalier Timbalier Trench Fortune 50% 2,500 1,250 5/1999
Opal South Timbalier Timbalier Trench Fortune 50% 2,452 1,226 5/1999
Ulysses South Timbalier Timbalier Trench Fortune 50% 2,148 1,074 5/1999
Sword South Timbalier Transition Zone Fortune 50% 30 15 5/1999
Valhalla West Cameron Transition Zone Fortune 50% 116 58 6/1999
Everest West Cameron Transition Zone Fortune 50% 289 144 6/1999
Jubilee West Delta Transition Zone Fortune 50%/(2)/ 1,390 695 5/1999
------ ------
Total Potential Prospects 21,479 11,326
====== ======
Productive Acreage:
- -------------------
Falcon Bay Marchand Transition Zone Clayton Williams 10%/(4)/ 349 35 ---/(5)/
Thunder West Ship Shoal Transition Zone Bois D'Arc ---/(5)/ --- --- ---/(5)/
</TABLE>
- ----------------------------
/(1)/ For information on the Fortune Agreement, see "Fortune Exploration
Agreement" in Item 1 of this Annual Report.
/(2)/ Prior to entering into the Fortune Agreement, Zydeco granted to Clayton
Williams Energy the right to purchase, prior to the commencement of
drilling, a one-eighth working interest in certain projects in the
Louisiana Transition Zone in exchange for one-eighth of all costs incurred
in the project to that time, plus one-eighth of all future costs which
include drilling, completion, and operating costs for any wells drilled on
the project.
/(3)/ Prospect as to deep rights; see "Other Activities" under "Drilling
Activities" below.
/(4)/ See "Other Activities" under "Drilling Activities" below.
/(5)/ Held by production.
LEASES. As of December 31, 1996, the Company held oil and gas leases covering
approximately 21,480 gross acres in 26 different potential prospects in the
Louisiana Transition Zone and the Timbalier Trench. The
11
<PAGE>
Company's leases have expiration dates ranging from 1997 to 2001. As of December
31, 1996, two properties had proved reserves.
Federal offshore leases generally provide for a minimum royalty of 16.67%,
have a primary lease term of five years, comprise an approximately 5,000 acre
lease block, and are administered by the MMS. In general, the Company's federal
leases consist of portions of 5,000 acre lease blocks. If production is not
established or an extension is not obtained during the primary term, the lease
terminates. Louisiana state leases generally provide for a minimum royalty of
20%, have a five year primary term, are administered by the State Mineral Board
of the State of Louisiana, and have annual rentals in an amount equal to 50% of
the original lease acquisition cost. Generally speaking, title to state and
federal leases is merchantable in all respects and operations thereon are not
normally subject to litigation resulting from the legal doctrine of adverse
possession or any other similar challenge to title.
SEISMIC OPTIONS. The Company has entered into an exclusive option with the
State of Louisiana to acquire seismic data on approximately 51,000 acres located
in the Louisiana Transition Zone in western Cameron Parish. For eighteen
months, commencing February 1996, the Company has the exclusive right to acquire
seismic data on the acreage and nominate any of the acreage for competitive
lease bids. The Company is obligated to deliver to the state a copy of a 3D
seismic survey over the state acreage included in the option or pay a
substantial penalty. Under the option, the State of Louisiana is required to
keep the information obtained from the survey confidential for a period of ten
years. The Company can, and currently intends to, extend the time period for
delivery of the survey for a six month period for an additional payment of
$391,877. See "Note 10 -Commitments and Contingencies" in Notes to Consolidated
Financial Statements. In connection with the West Cameron Seismic Project, the
Company has negotiated seismic options covering approximately 35,775 onshore
gross acres (32,398 net acres) and has secured seismic permits covering
approximately 98,454 onshore gross acres (97,762 net acres).
DRILLING ACTIVITIES
FORTUNE ACTIVITIES. In March 1996, Zydeco and Fortune farmed out the
Polaris Prospect to FW Oil Interests, Inc. ("FW"). FW commenced a well in July
1996, which was unsuccessful and abandoned in October 1996.
OTHER ACTIVITIES. In May 1994, Zydeco purchased a 10% working interest in
a tested but unproven well in the Falcon Prospect. In January 1995, the well
began production of natural gas. In April 1995, Bois D'Arc Exploration
successfully tested a well in the Thunder West prospect as a farmout from
Zydeco. Zydeco has a 7.33% overriding royalty interest in the well. In October
1994, Zydeco purchased a one-eighth working interest and participated in an
exploratory well in the Bon Ton prospect. In March 1995, the well was
determined to be a dry hole and was plugged and abandoned. Subsequently in
1995, the Company acquired a 50% interest in an adjacent state lease in the Bon
Ton prospect.
In August 1996, the Company purchased certain non-producing leasehold
interests from Neomar Resources, Inc., an affiliate of Mr. Sam B. Myers, Jr.,
Chief Executive Officer of the Company, and participated in the drilling of an
exploratory well located in Timbalier Bay in state waters offshore Louisiana.
See "Note 7 - Related-Party Transactions" in Notes to Consolidated Financial
Statements. The Company paid $187,500 for a 37.5% working interest in the
prospect leases, subject to a 25% back-in interest by Neomar after payout.
Drilling of the exploratory well commenced in August 1996 and was abandoned in
September 1996 for mechanical reasons without testing the well's primary
objectives. Neomar Resources, Inc. participated for a 41.2% working interest in
the well. The Company incurred $647,355 in exploration expense in 1996 in
connection with the drilling and abandonment of the well. At December 31, 1996,
the Company has undertaken to sell a portion or farmout its interest in this
prospect.
OIL AND GAS RESERVES
The Company engaged Ryder Scott & Company, Petroleum Engineers ("Ryder
Scott") to estimate the proved oil and gas reserves of the Company for the year
ended December 31, 1996, for all of the Company's properties. Prior to 1995,
the Company had no proved oil and gas reserves. Ryder Scott is an independent
oil and gas reserve engineering firm. This firm was also asked to estimate the
future net revenues to be derived from such properties. In preparing their
report, Ryder Scott reviewed and examined such geological, economic,
engineering,
12
<PAGE>
and other data provided by the Company as considered necessary under the
circumstances, and examined the reasonableness of certain economic assumptions
regarding estimated operating and development costs and recovery rates in light
of economic circumstances as of December 31, 1996. As of December 31, 1996, the
proved oil reserves were estimated to be 10,052 Bbls. and the proved gas
reserves were estimated to be 243,000 Mcf.
There are numerous uncertainties inherent in estimating quantities of
reserves and in projecting future rates of production and timing of development
expenditures, including many factors beyond the control of the producer. The
reserve data set forth in this Annual Report on Form 10-K represent only
estimates. Reserve engineering is a subjective process of estimating
underground accumulations of oil and gas that cannot be measured in an exact
way, and the accuracy of any reserve estimate is a function of the quality and
quantity of available data and of engineering and geological interpretation and
judgment. As a result, estimates of different engineers often vary. In
addition, results of drilling, testing, and production subsequent to the date of
an estimate may justify revision of such estimate. Accordingly, reserve
estimates at a specific point in time are often different from the quantities of
oil and gas that are ultimately recovered, which differences may be significant.
Additionally, the estimates of future net revenues from proved reserves of the
Company and the present value of future net revenues are based upon certain
assumptions about future production levels, prices, and costs that may not prove
correct over time. The meaningfulness of such estimates is highly dependent
upon the accuracy of the assumptions upon which they were based.
STATISTICAL INFORMATION - OIL AND GAS PROPERTIES
PRODUCTION. The Company had no oil and gas reserves or production prior to
1995. The following table summarizes the sales volumes of the Company's net oil
and gas production in the United States in barrels of oil and thousands of cubic
feet of natural gas for each of the two years ended December 31, 1996, and 1995,
respectively:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
---- ----
Crude Oil and Natural Gas Liquids (Bbls) 20,186 1,118
Natural Gas (Mcf) 372,678 84,546
The sales volumes in the table represent sales of "net production", i.e.,
production which is net to the Company and produced to its interest after
deducting royalty and other similar interests.
AVERAGE PRICES AND PRODUCTION COSTS. For each of the last two years,
average unit prices and unit production costs are set forth below with respect
to the Company's net share of production of oil and gas in the United States:
AVERAGE SALES PRICE/(1)/ AVERAGE OPERATING COSTS PER
NBOE/(2)/
----------------------- ---------------------------
PER BBL. PER MCF. PRODUCTION
OIL GAS (LIFTING) DD&A
------------ --------- -------------- --------
1996 $22.39 $2.60 $0.27 $1.73
1995 $18.37 $1.76 $1.81 $7.50
------ ----- ----- -----
/(1)/ Crude oil revenues are recorded at time of sale rather than as
produced.
/(2)/ Net barrel oil equivalent (NBOE) assuming natural gas converted at
six mcf per equivalent barrel.
ACREAGE AND WELL SUMMARY. The information presented below relates to
properties in the United States in which the Company has "working interests"
which bear the cost of operations. The Company's total gross and net
13
<PAGE>
interests in productive wells and in developed and undeveloped acres at December
31, 1996, are summarized as follows:
GROSS NET
------------------- -------------------
OIL GAS OIL GAS
-------- ------- ------- --------
Productive Wells/(1)/ - 1 - .10
Developed Acres/(2)/ 349 35
Undeveloped Acres/(3)/ 21,479 11,326
- -----------------------
/(1)/ "Productive Wells" are producing wells and wells capable of
production, and include gas wells awaiting pipeline connections or
necessary governmental certifications to commence deliveries and oil
wells to be connected to production facilities.
/(2)/ "Developed Acres" include all acreage (on a leasehold basis in the
United States) as to which proved reserves are attributed, whether or
not currently producing, but exclude all producing acreage as to which
the Company's interest is limited to royalty, overriding royalty, and
other similar interests.
/(3)/ "Undeveloped Acres" are 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 or gas regardless of
whether such acreage contains proved reserves.
DRILLING AND PRESENT ACTIVITIES. The following table summarizes the oil
and gas drilling activities of the Company in the United States for each of the
two years ended December 31, 1996, and 1995, respectively:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
---------- -----------
GROSS NET GROSS NET
----- --- ----- ---
Development Wells Drilled/(1)(2)/:
Productive - - - -
Dry - - - -
Exploratory Wells Drilled/(1)(2)/:
Productive - - - -
Dry 1.0 .375 1.0 .125
---- ---- ---- ----
Total 1.0 .375 1.0 .125
==== ==== ==== ====
- ------------------
/(1)/ "Wells Drilled" refers to the number of wells completed at any time
during the fiscal year, regardless of when drilling was initiated.
The term "completed" refers to the installation of permanent equipment
for the production of oil or gas, or, in the case of a dry hole, to
the reporting of abandonment to the appropriate agency.
/(2)/ A dry well is an exploratory or a development well found to be
incapable of producing either oil or gas in sufficient quantities to
justify completion as an oil or gas well. A productive well is an
exploratory or a development well that is not a dry well.
At December 31, 1996, the Company was not participating in any drilling
wells.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings currently pending against the Company.
14
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders of the Company
during the fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock and the Warrants have traded on The Nasdaq SmallCap Market
under the symbols "ZNRG" and "ZNRGW" since December 23, 1995; prior to that date
they were quoted on the OTC Bulletin Board under the symbols "TNER" and "TNERW",
respectively. Prior to its conversion in July 1996, the Preferred Stock was
quoted on the OTC Bulletin Board starting in January 1996. Prior to December
23, 1995, the Units were quoted on the OTC Bulletin Board under the symbol
"TNERU"; the Units are no longer quoted on the OTC Bulletin Board. There is
very limited trading of the Units and pricing information is not readily
available. The high and low sales prices of the Common Stock, the Warrants, and
the Units during each quarter are presented in the table below. The quotes
represent "inter-dealer" prices without retail markups, markdown, or commissions
and may not necessarily represent actual transactions.
COMMON STOCK WARRANTS UNITS/(1)/
------------------ ----------------- ------------------
HIGH($) LOW($) HIGH($) LOW($) HIGH($) LOW ($)
--------- ------- -------- -------- -------- ---------
Three Months Ended
March 31, 1995 4-21/32 4-1/4 7/8 3/4 N/A N/A
June 30, 1995 4-27/32 4-5/8 3/4 1/2 6 6
September 30, 1995 5 4-49/64 1/2 1/4 6 5-1/2
December 31, 1995 6 4-15/16 1-11/16 3/8 6 5-1/2
Three Months Ended
March 31, 1996 7 5-1/8 2-3/8 1-5/16 N/A N/A
June 30, 1996 8 5-3/4 3-1/8 1-7/16 N/A N/A
September 30, 1996 7-1/4 4-1/2 3-1/8 1-3/8 N/A N/A
December 31, 1996 6-7/8 4-3/8 2-1/8 1-3/16 N/A N/A
- ------------------
/(1)/ The Units have not been quoted after December 23, 1995.
As of March 5, 1997, there were 6,593,650 shares of the Company's
Common Stock outstanding held by approximately 46 holders of record. The
Company believes there are approximately 359 beneficial owners of the Common
Stock.
The Company has never paid a cash dividend on its Preferred Stock
(prior to its conversion) or its Common Stock. The Company currently intends to
retain earnings to finance the growth and development of its business and does
not anticipate paying any cash dividends on the Common Stock in the foreseeable
future. Any future change in the Company's dividend policy will be made at the
discretion of the Company's Board of Directors in light of the financial
condition, capital requirements, earnings, and prospects of the Company and any
restrictions under any credit agreements, as well as other factors the Board of
Directors may deem relevant.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below are derived from the
Consolidated Financial Statements of the Company that have been examined by
Arthur Andersen LLP, independent public accountants, for the periods
15
<PAGE>
indicated. The financial data should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and vthe Company's Consolidated Financial Statements and Notes
thereto included elsewhere in this report.
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
YEAR ENDED DECEMBER 31, (MARCH 17, 1994)
------------------------- THROUGH
1996 1995 DECEMBER 31, 1994
--------- ---------- ----------------------
<S> <C> <C> <C>
SUMMARY OPERATIONS DATA:
Total Revenues $ 1,470,046 $ 586,752 $ -
Operating Costs and Expenses (3,577,385) (1,736,584) (110,242)
Other Income (Expense), Net 249,207 (23,814) (22,639)
----------- ----------- -----------
Net Loss $(1,858,132) $(1,173,646) $ (132,881)
=========== =========== ===========
Weighted Average Number of Common Shares
and Common Share Equivalents Outstanding 6,168,798 3,906,706 4,468,777
Loss Per Common Equivalent Share $ (0.30) $ (0.30) $ (0.03)
=========== =========== ===========
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
SUMMARY BALANCE SHEET DATA:
Cash and Cash Equivalents $ 6,906,650 $ 517,781
Marketable Securities 845,852 10,938,674
Properties, Equipment, and Software-Net 1,371,235 699,279
Total Assets 9,911,602 12,582,405
Total Stockholders' Equity 6,339,407 8,188,618
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company (formerly "TN Energy Services Acquisition Corp.") 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. Other than its efforts to acquire an energy services
business, the Company 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 (the "TN Acquisition") and changed its name to Zydeco Energy, Inc.
For accounting purposes, the TN 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. As used herein, unless the context indicates otherwise, the
term "Company" refers to Zydeco Energy, Inc. and Zydeco, its wholly-owned
subsidiary. See "Note 1 - Organization and Summary of Significant Accounting
Policies" and "Note 3 - Reverse Acquisition by Zydeco" in Notes to Consolidated
Financial Statements.
The Company is engaged in identifying drilling prospects, acquiring leases,
drilling, and producing reserves from those properties and utilizing focused
geologic concepts and advanced 3D seismic technology. In
16
<PAGE>
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, principally for its exploration partners.
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 operations are dependent upon a variety of factors, including
successful application of 3D seismic evaluation and interpretation expertise to
develop potential drilling prospects, profitable exploitation of such prospects,
and the Company's ability to access capital sources necessary for continued
growth. 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 may also offer its technical expertise in 3D seismic analysis and
interpretation to other oil and gas companies for consideration, which may be in
the form of a property interest or cash. 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. To date, the Company has not received any
significant revenue from its 3D exploration programs.
The Company accounts for its oil and gas exploration and production
activities using the successful efforts method of accounting. Under this
method, acquisition costs for proved and unproved properties are capitalized
when incurred. Exploration costs, including geological and geophysical costs
and the costs of carrying and retaining unproved properties, are expensed.
Exploratory drilling costs are initially capitalized, but charged to expense if
and when the well is determined not to have found proved reserves. Costs of
productive wells, developmental dry holes, and productive leases are capitalized
and amortized on a property-by-property basis using the unit-of-production
method. The estimated costs of future plugging, abandonment, restoration, and
dismantlement are considered as a component of the calculation of depletion,
depreciation, and amortization. Unproved properties with significant
acquisition costs are assessed periodically on a property-by-property basis and
any impairment in value is charged to expense.
In May 1996, the Company entered into a technology license with an
individual for use of a seismic processing technology, the benefits of which
could, among other things, substantially reduce the total costs of seismic data
acquisition and processing. The Company is licensed worldwide to use the
processing technology and is exclusively licensed for its use in the transition
zones along the Gulf Coast of Louisiana and the Republic of Mexico.
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 $783,754 for the
permit and is required to provide to the state a copy of a 3D survey over the
area within 18 months. Under the option, the State of Louisiana is required to
keep the information obtained from the survey confidential for a period of ten
years.
On April 4, 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"). Cheniere's interest of up to 50% in the West Cameron
Seismic Project is conditioned upon payment of an aggregate of $13.5 million to
fund the costs of seismic acquisition. Such costs include the purchase of
seismic rights or lease options on the related onshore acreage of the West
Cameron Seismic Project, and data acquisition and processing of a 3D seismic
survey of the onshore and offshore areas. The Agreement provides that costs in
excess of $13.5 million will be shared equally by both parties. Cheniere may
elect to discontinue funding of the Project at any time, in which case its
interest would be reduced pro rata in relation to total project costs. As of
December 31, 1996, Cheniere has made payments of $6,000,000 against costs
incurred on the West Cameron Seismic Project of $5,806,113. As amended, the
Cheniere Agreement provides for the remaining scheduled advances (see "Liquidity
and Capital Resources" below) to be paid by Cheniere consistent with the
Company's current expectations of the timing of the costs to be incurred on the
Project. The Company began onshore leasing and permitting in February and
commenced seismic operations in August 1996. Seismic data acquisition commenced
in September 1996. Prior to discontinuing data acquisition operations in early
December due to weather conditions, 27 square miles of
17
<PAGE>
seismic data had been surveyed and acquired. The Company anticipates that work
on the project will resume in April 1997.
RESULTS OF OPERATIONS - 1996 COMPARED TO 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, the purchase of an interest in a gas
well which commenced production in January 1995, and the farmout of two leases
(one of which resulted in commercial production commencing in December 1995).
Exploration activities in 1995 also included a one-eighth participation in the
drilling of an exploratory well, which resulted in a dry hole in March 1995.
Exploration activities in 1996 included a joint venture participation in the
drilling of one well which was abandoned in September 1996 without reaching the
well's primary objectives. The Company also initiated two seismic exploration
joint ventures, one in 1995, and one in 1996, with industry partners who are
required under the agreements to fund substantially all the Company's share of
the seismic project costs, up to certain limits. See "Note 2 - Exploration
Agreements" in Notes to Consolidated Financial Statements.
For the year ended December 31, 1996, operations resulted in a net loss of
$1,858,132 ($.30 per share) compared to a net loss of $1,173,646 ($.30 per
share) for 1995. The increase in net loss of $684,486 is comprised of increased
revenue of $883,294, increased expenses of $1,840,801, and increased other
income of $273,021. The following table sets forth information concerning crude
oil and natural gas sales volumes, average sales prices, and per barrel oil
equivalent ("NBOE") operating costs (excluding depletion, depreciation, and
amortization - "DD&A") for the Company's exploration and production activities
for indicated periods:
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
YEAR ENDED DECEMBER 31, (MARCH 17, 1994)
-------------------------- THROUGH
1996 1995 DECEMBER 31, 1994
----------- ----------- ----------------------
<S> <C> <C> <C>
SALES VOLUMES:
Natural Gas (Mcf) 372,678 84,546 -
Crude Oil (Bbl) 20,186 1,118 -
NBOE (Bbl) 82,299 15,209 -
AVERAGE SALES PRICES:
Natural Gas ($/Mcf) $ 2.60 $ 1.76 $ -
Crude Oil ($/Bbl) $ 22.39 $ 18.37 $ -
Lease operating Expense ($/NBOE) $ 0.27 $ 1.81 $ -
Depletion, Depreciation, & Amortization ($/NBOE) $ 1.73 $ 7.50 $ -
</TABLE>
The increase in oil and gas sales of $1,252,992 in 1996, was composed of
revenue increases attributable to increased volumes of $856,961 and prices of
$396,031. Oil and gas sales increased by $1,007,613 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 7.33% after payout
(4.33% before payout). Payout on this well occurred in June 1996. The
Company's share of production from this well was 229,501 mcf and 18,866 barrels
of oil in 1996. The increased prices and volumes from oil and gas in 1996,
compared to 1995, demonstrate the sensitivity of the Company's operations to
price fluctuations and its current dependence on a small number of producing
wells. Should there be a significant decline either in the volumes or in the
prices the Company receives for its oil and gas production, the Company's
results of operations, financial position, and cash flows could be adversely
affected.
Exploration (including geological and geophysical costs) and production
expenses increased $1,001,980 in 1996 compared to 1995 primarily as a result of
one well abandoned in September 1996 ($647,355) and increased exploration
expense of ($569,354) related to increased personnel associated with the
Company's two exploration
18
<PAGE>
projects. DD&A expense in 1996 increased $238,478 over 1995. DD&A expense on oil
and gas properties was $142,344 in 1996 compared to $114,090 in 1995 and
represented a significant per equivalent barrel decrease as a result of
increased reserves due to revisions in engineering estimates (34,952 net
equivalent barrels) principally associated with the Bois D'Arc well.
Depreciation and amortization expense of equipment and software increased from
$278,297 in 1995 to $488,521 in 1996 principally as a result of additions
aggregating $818,497 in computer equipment and geophysical software.
Net other income increased $273,021, principally as a result of increased
interest income due to the increase in available cash resulting from the Merger
in December 1995. General and administrative expense increased $800,343
principally due to increases in personnel of $262,587 and estimated additional
costs of being a public company of approximately $172,549.
RESULTS OF OPERATIONS - MARCH 17, 1994, TO DECEMBER 31, 1995
From March 17, 1994, (the inception of Zydeco) through December 31, 1995,
Zydeco's primary operations consisted of the acquisition of federal and state
oil and gas leases, the acquisition of 3D seismic analysis hardware and
software, the purchase of an interest in a gas well which commenced production
in early 1995, the farmout of two leases (one of which resulted in commercial
production in late 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 has completed only one full fiscal year, analysis of
comparable interim periods is not meaningful.
The Company's primary operations, prior to January 1, 1995, related to (i)
an initial capitalization, primarily through a private placement of 781,255
shares of convertible preferred stock at $3.20 per share, which closed on
December 2, 1994, (ii) the acquisition of computer hardware equipment and
software, and (iii) the acquisition of certain oil and gas leases. Revenues for
the period from inception through December 31, 1994, consisted solely of $48,629
of interest income earned on proceeds received from the offering of the
convertible preferred stock. Expenses incurred from inception through December
31, 1994, consisted primarily of $72,981 of general and administrative expenses
and $71,268 of interest expense on advances to the Company totaling
approximately $1.3 million from related parties. These advances were repaid
with proceeds from the issuance of convertible preferred stock.
For the year ended December 31, 1995, the Company had revenues of $586,752
consisting of seismic services revenue ($300,000), oil and gas sales, primarily
from one gas well which began production in January 1995 ($169,235), and gains
on sales of unproved leases ($117,517). Seismic services revenue of $200,000
and the related cost of service were recognized under an exchange agreement
between the Company and a related party. Under this agreement, the Company
agreed to provide 3D seismic analysis services in exchange for a license to use
the underlying seismic data owned by the related party. As this exchange
agreement represented an exchange of dissimilar goods, income and expense for
1995 reflects the gross value of seismic service revenues and related data costs
associated with this transaction. The remaining $100,000 of seismic services
revenue was realized in connection with performing certain seismic analysis
services under the Fortune Agreement. The Company had no revenues for the
comparable period from inception (March 17, 1994,) to December 31, 1994, since
it had not yet commenced revenue producing activities following organization.
During the year ended December 31, 1995, the Company had exploration costs
of $261,956 primarily related to dry hole costs and related costs of plugging
and abandoning a well in which the Company participated in drilling in March
1995. Geological and geophysical expense of $398,603 was composed principally
of salaries and related personnel cost of $275,399 and geological and
geophysical software maintenance expense of $91,593. The principal components
of the $456,146 of general and administrative expenses for 1995 include $294,527
of employee salaries and related costs, $41,225 of legal and accounting costs,
and $43,149 of office and facilities rent. DD&A expense totaling $392,387 for
1995 is comprised of DD&A of $114,090 on oil and gas properties and depreciation
of $278,297 primarily related to technical software (which is depreciated over
two years because of rapid changes in leading seismic-analysis technology) and
related equipment (which is depreciated over three to seven years). General and
administrative expenses for the comparable period from inception (March 17,
1994,) to December 31, 1994, were $72,981 consisting primarily of legal and
office expense related to initial office
19
<PAGE>
operations. The Company paid no salaries in 1994. Increased revenues and
expenses for the year ended December 31, 1995, reflect increased operations
resulting from lease prospecting activities under the Fortune Agreement and
increased expense from the addition of employees.
LIQUIDITY AND CAPITAL RESOURCES
The Company has generated funds from a public offering, private equity
offering, company operations, and cash payments under the Fortune Agreement and
the Cheniere Agreement. 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. Sources of
funds include the December 1993 public offering of the Company's Common Stock
and Warrants which raised net proceeds of approximately $7.9 million after
offering costs; the December 1994 offering of convertible preferred stock by
Zydeco with proceeds of approximately $2.2 million to the Company after offering
costs; and cash payments of $4.8 million advanced in 1995 under the Fortune
Agreement. The Cheniere Agreement, executed in April 1996, provides for
Cheniere to provide funding of $13.5 million for project expenditures of which
$6 million had been advanced through December 31, 1996. The parties have
amended the Cheniere Agreement effective November 29, 1996, to delay the timing
of the remaining payments required to be paid by Cheniere consistent with the
Company's current expectations of the timing of the costs to be incurred on the
Project. The Company currently anticipates that its survey contractor will
resume operations in April 1997. The Company has consistently paid for all
project costs as incurred under the Cheniere Agreement, including the prepayment
of long-term leases of computer hardware and software to be utilized in the
processing of the seismic data. At December 31, 1996, the Company had prepaid a
hardware lease aggregating $746,872 to secure more attractive pricing,
discounts, and terms from the hardware vendor.
The Company had originally negotiated a turnkey seismic services agreement
with a survey contractor, Grant Geophysical, Inc. ("Grant"), in an effort to
control some of the costs and risks associated with the West Cameron Seismic
Project survey. In December 1996, after Grant informed the Company it was
ceasing survey operations due to winter weather conditions, Grant filed for
protection and reorganization under Chapter 11 of the U. S. Bankruptcy statutes
and currently is attempting to restructure its operations. On March 14, 1997,
the Company and Grant executed a new Master Geophysical Data Acquisition
Agreement ("the Agreement") providing for reimbursement of Grant under a "cost
plus" services arrangement, which could have the effect of increasing seismic
data acquisition costs. The nature of such an agreement increases both the risks
and the management efforts associated with the seismic acquisition phase of the
West Cameron Seismic Project. The Company has never attempted such a contract
and there is no assurance that the Company's estimates of costs or the amount of
actual costs will be less than or equal to that which might be estimated or
incurred under the original turnkey contract. The Company currently estimates
that the costs to complete the survey (assuming no reduction in the survey area)
may run approximately 30% higher than the actual costs incurred (approximately
$44,000 per square mile) under the original turnkey contract with Grant. Under
the Agreement, the Company has the ability to reduce the size of the survey
area. The effect of any such reduction would be to limit overall costs but
increase the costs on a square mile basis due to the fixed nature of
mobilization and demobilization costs. The Company paid a commitment fee of
$150,000 and advanced $350,000 upon execution of the Agreement. The Company
expects survey operations to commence in mid-April, subject to the delivery of a
certain recording system from its manufacturer.
The Company expects that capital needs for 1997 will be satisfied through
cash on hand (including cash available from liquidation of cash equivalents and
marketable securities) and cash available under the Fortune Agreement and the
Cheniere Agreement. Although Cheniere may elect to discontinue its funding at
any time (and thus reduce its interest in the Project), the Company believes
that it has adequate existing cash to meet its obligations in connection with
the West Cameron Seismic Project. The Company has budgeted approximately $12.6
million of costs related to the West Cameron Seismic Project, with Cheniere
providing $10.1 million and the remaining $2.5 million to be provided by the
Company. As a result of the current contract re-negotiations with Grant, the
Company expects to increase its capital budget for seismic data acquisition for
the West Cameron Seismic Project. Such additional costs in West Cameron (and
Cheniere's share of costs in the event it elects to discontinue funding) would
either be funded from available cash of the Company or from new industry
participants in the Project. Alternatively, the Company could elect to reduce
the contract area of the Project in order to reduce
20
<PAGE>
costs. Other 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 projects. 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. There can be
no assurance that the Company will be successful in securing additional partners
or additional project financing or credit financing.
The Company's current budget for its capital expenditures for 1997 is
approximately $3,009,000, including $2,556,000 of West Cameron Seismic Project
costs (prior to any revisions for seismic acquisition costs) and $393,000
related to the purchase of computer equipment and software. There can be no
assurance the Company will be successful in locating partners or financing 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 management and the Board of Directors 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 capital to
the Company, availability of seismic data, the number and type of drilling
prospects, if any, 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 completing 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
a 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.
FORWARD LOOKING STATEMENTS
Statements contained in this Item 7 concerning results or estimates of
future capital expenditures, production volumes, reserve volumes, reserve
values, number of development and exploration projects, total assets, cash flow,
and earnings are forward-looking statements. These statements are based on
assumptions concerning, among other things, the timing and completion of
projects, commodity prices, recompletion and drilling results, lease operating
expenses, administrative expenses, interest, and other financing costs that
management believes are reasonable based on currently available information.
However, management's assumptions and the Company's future performance are both
subject to a wide range of business risks and there is no assurance that these
goals and projections can or will be met.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item are incorporated under Item
14 in Part IV of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by this item has been previously reported in
accordance with the rules and regulations under the Securities Exchange Act of
1934.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT*
21
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION*
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT*
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS*
__________________
* Items 10, 11, 12, and 13 are incorporated by reference to the registrant's
Definitive Proxy Statement to be filed with the Commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934 within 120 days
after the close of the registrant's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(A)(1) FINANCIAL STATEMENTS
The following financial statements and the Report of Independent Public
Accountants are filed as a part of this report on the pages indicated:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1996, and 1995 F-3
Consolidated Statements of Operations for the Years Ended December 31, 1996,
and 1995, and for the Period from Inception through December 31, 1994 F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1996, and 1995, and for the Period from Inception through December 31, 1994 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, and
1995, and for the Period from Inception through December 31, 1994 F-6
Notes to Consolidated Financial Statements F-7
Supplemental Information on Oil and Gas Producing Activities F-19
</TABLE>
(A)(2) FINANCIAL STATEMENTS SCHEDULES
Not applicable.
(A)(3) EXHIBITS
The exhibits to this report have been included only with the copies of this
report filed with the Securities and Exchange Commission. Copies of individual
exhibits will be furnished to stockholders upon written request to Treasurer,
Zydeco Energy, Inc., 1710 Two Allen Center, 1200 Smith Street, Houston, Texas
77002 with payment of a reasonable fee.
EXHIBIT NO. DESCRIPTION
3.1+ Certificate of Incorporation and Certificates of Amendment thereto
(filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995)
22
<PAGE>
3.2+ Form of Amended and Restated Bylaws (filed as Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (Reg. No. 33-65286))
4.1+ Form of Certificate representing shares of Common Stock (filed as
Exhibit 4.1 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995)
4.2+ Form of Certificate evidencing Common Stock Purchase Warrants
(filed as Exhibit 4.2 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995)
4.3+ Unit Purchase Option Granted to Underwriters by the Company (filed
as Exhibit 4.3 to the Company's Registration Statement on Form S-1
(Reg. No. 33-65286))
4.4+ Warrant Agreement between Continental Stock Transfer & Trust
Company and the Company (filed as Exhibit 4.4 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-65286))
4.5+ Certificate of Designation evidencing shares of Preferred Stock
(filed as Exhibit 4.5 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995)
4.6+ Form of Certificate evidencing shares of Preferred Stock (filed as
Exhibit 4.6 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995)
4.7+ Form of Stock Purchase Warrant granted by Zydeco and Letter to
holders from the Company (filed as Exhibit 4.7 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995)
10.1+ Share Escrow Agreement between the Company and Continental Stock
Transfer & Trust Company (filed as Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-65286))
10.2+ Warrant Agreement (filed as Exhibit 4.4 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-65286))
10.3+ Zydeco 1995 Employee Stock Option Plan and form of letter to
Optionees from the Company (filed as Exhibit 10.3 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995)
10.4+ Employment Agreement between Zydeco and Stephen W. Knecht (filed as
Exhibit 10.4 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995)
10.5+ Employment Agreement between Zydeco and John W. McTigue, Jr. (filed
as Exhibit 10.5 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995)
10.6+ Exploration Agreement between Zydeco and Lagniappe Exploration,
Inc. (predecessor to Fortune Petroleum, Inc.) (filed as Exhibit
10.6 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995)
10.7+ Farmout Agreement between Zydeco and Bois D'Arc Exploration (filed
as Exhibit 10.7 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995)
10.8+ Farmout Agreement between Zydeco, Fortune and Southern Gas Company
of Delaware (filed as Exhibit 10.8 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995)
23
<PAGE>
10.9+ Option Agreement dated February 7, 1996, between the Company and
Norman Neidell concerning certain wave field imaging Technology
(filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the three months ended March 31, 1996)
10.10+ Exploration Agreement between Zydeco Exploration, Inc. and Cheniere
Energy Operating Co., Inc. (formerly FX Energy, Inc.) dated April
4, 1996 (filed as Exhibit 10.10 to the Company's Quarterly Report
on Form 10-Q for the three months ended June 30, 1996)
10.11+ Master Geophysical Data Acquisition Agreement dated June 12, 1996,
(executed August 5, 1996) between Zydeco Exploration, Inc. and
Grant Geophysical, Inc. (filed as Exhibit 10.11 to the Company's
Quarterly Report on Form 10-Q for the three months ended September
30, 1996)
10.12+ Second Amendment to the Exploration Agreement between Zydeco
Exploration, Inc. and Cheniere Energy Operating Co., Inc. (formerly
FX Energy, Inc.) dated August 5, 1996 (filed as Exhibit 10.12 to
the Company's Quarterly Report on Form 10-Q for the three months
ended September 30, 1996)
10.13+ Third Amendment to the Exploration Agreement between Zydeco
Exploration, Inc. and Cheniere Energy Operating Co., Inc. (formerly
FX Energy, Inc.) dated October 31, 1996 (filed as Exhibit 10.13 to
the Company's Quarterly Report on Form 10-Q for the three months
ended September 30, 1996)
10.14 Fourth Amendment to the Exploration Agreement between Zydeco
Exploration, Inc. and Cheniere Energy Operating Co., Inc. (formerly
FX Energy, Inc.) dated November 29, 1996
11.1 Statement regarding computation of per share earnings
21.1+ List of Subsidiaries (filed as Exhibit 21.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995)
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Ryder Scott Company
27 Financial Data Schedule
- -------------------
+ Incorporated herein by reference to the indicated filing.
(B) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the fourth quarter of 1996.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Houston, State of Texas.
ZYDECO ENERGY, INC.
(Registrant)
By: /s/ SAM B. MYERS, JR.
-----------------------------
Sam B. Myers, Jr.
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ SAM B. MYERS, JR. Chairman of the Board, and Chief March 20, 1997
--------------------------- Executive Officer (Principal Executive Officer)
Sam B. Myers, Jr.
/s/ EDWARD R. PRINCE, JR. Director, Vice Chairman of the Board March 20, 1997
---------------------------
Edward R. Prince, Jr.
/s/JOHN O. SMITH Director, President and Chief Operating Officer March 20, 1997
---------------------------
John O. Smith
/s/ W. KYLE WILLIS Vice President, Treasurer, and Chief March 20, 1997
--------------------------- Financial Officer (Principal Accounting Officer)
W. Kyle Willis
/s/ PHILIP A. TUTTLE Director March 20, 1997
---------------------------
Philip A. Tuttle
/s/ HARRY C. JOHNSON Director March 20, 1997
---------------------------
Harry C. Johnson
/s/ CHARLES E. BRADLEY, SR. Director March 20, 1997
---------------------------
Charles E. Bradley, Sr.
</TABLE>
25
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS..................... F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets............................. F-3
Consolidated Statements of Operations................... F-4
Consolidated Statements of Stockholders' Equity......... F-5
Consolidated Statements of Cash Flows................... F-6
Notes to Consolidated Financial Statements.............. F-7
Supplemental Information on Oil and Gas
Producing Activities.................................. F-19
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND THE BOARD OF DIRECTORS OF ZYDECO ENERGY, INC.:
We have audited the accompanying consolidated balance sheets of Zydeco Energy,
Inc. (a Delaware corporation) and subsidiary as of December 31, 1996, and 1995,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years then ended and the period from inception (March 17,
1994) through December 31, 1994. 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 Zydeco Energy, Inc. and
subsidiary as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for the years ended December 31, 1996, and 1995, and the
period from inception (March 17, 1994) through December 31, 1994, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 28, 1997 (except with
respect to the matter discussed
in Note 10, as to which
the date is March 14, 1997)
F-2
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
------ ------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 6,906,650 $ 517,781
Marketable Securities 845,852 10,938,674
Oil and Gas Revenue Receivables 327,975 67,024
Other Receivables 21,244 46,546
Prepaid Expenses 130,495 --
----------- -----------
TOTAL CURRENT ASSETS 8,232,216 11,570,025
Oil & Gas Properties, Using Successful Efforts
Method of Accounting
Proved Properties 300,784 309,110
Unproved Properties 488,290 --
Equipment and Software, at Cost 1,608,207 789,710
----------- -----------
2,397,281 1,098,820
Less: Accumulated Depreciation, Depletion
and Amortization (1,026,046) (399,541)
----------- -----------
1,371,235 699,279
Operating Bond and Other Assets 308,151 313,101
----------- -----------
TOTAL ASSETS $ 9,911,602 $12,582,405
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 692,188 $ 284,219
Accrued Liabilities 232,738 355,833
Exploration Obligations 2,489,732 3,210,477
Short-Term Bridge Financing Notes Payable -- 225,028
Capital Lease Obligation-Current Portion 157,537 160,693
----------- -----------
TOTAL CURRENT LIABILITIES 3,572,195 4,236,250
CAPITAL LEASE OBLIGATION -- 157,537
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY
Convertible Preferred Stock, Par Value $.001
Per Share; 1,000,000 Shares Authorized;
781,255 Shares Issued and Outstanding at
December 31, 1995 -- 781
Common Stock, Par Value $.001 Per Share;
50,000,000 Shares Authorized; 7,374,905 and
6,562,530 Shares Issued; 6,593,650 and
5,781,275 Shares Outstanding, Respectively 7,375 6,563
Additional Paid-In Capital 9,503,943 9,495,053
Accumulated Deficit (3,164,659) (1,306,527)
Less Treasury Stock, at Cost; 781,255 Shares (7,252) (7,252)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 6,339,407 8,188,618
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,911,602 $12,582,405
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
YEARS ENDED DECEMBER 31, (MARCH 17, 1994)
---------------------------- THROUGH
1996 1995 DECEMBER 31, 1994
----------- ------------ -------------------
<S> <C> <C> <C>
REVENUES
Oil and Gas Sales $ 1,422,227 $ 169,235 $ --
Gain on Sales of Properties 16,319 117,517 --
Seismic Services 31,500 300,000 --
----------- ----------- ----------
1,470,046 586,752 --
EXPENSES
Dry Hole and Production Costs 722,074 289,448 30,108
Geological and Geophysical Expenses 967,957 398,603 --
Seismic Service Costs -- 200,000 --
General and Administrative Expenses 1,256,489 456,146 72,981
Depreciation, Depletion, and
Amortization 630,865 392,387 7,153
----------- ----------- ----------
3,577,385 1,736,584 110,242
OPERATING LOSS (2,107,339) (1,149,832) (110,242)
OTHER INCOME (EXPENSE)
Interest Income 293,414 46,555 48,629
Interest Expense (44,207) (70,369) (71,268)
----------- ----------- ----------
249,207 (23,814) (22,639)
NET LOSS $(1,858,132) $(1,173,646) $ (132,881)
=========== =========== ==========
PER COMMON SHARE AND SHARE EQUIVALENT--
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND COMMON SHARE EQUIVALENTS
OUTSTANDING 6,168,798 3,906,706 4,468,777
=========== =========== ==========
LOSS PER COMMON EQUIVALENT SHARE $ (0.30) $ (0.30) $ (0.03)
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDAIRY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
---------------- ------------------ PAID-IN ACCUMULATED TREASURY STOCKHOLDER'S
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK EQUITY
------- ------ --------- ------ ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT INCEPTION
(MARCH 17, 1994) - $ - - $ - $ - $ - $ - $ -
Net Loss - - - - - (132,881) - (132,881)
Issuance of Common Stock - - 4,468,777 4,469 (3,514) - - 955
Issuance of Convertible
Preferred Stock 781,255 781 - - 2,499,219 - - 2,500,000
Convertible Preferred
Stock Issuance Costs - - - - (300,427) - - (300,427)
------- ---- --------- ------ --------- ----------- ------- ----------
BALANCE AT DECEMBER 31, 1994 781,255 781 4,468,777 4,469 2,195,278 (132,881) - 2,067,647
Net Loss - - - - - (1,173,646) - (1,173,646)
Issuance of Common Stock
Prior to Merger - - 218,753 219 (175) - - 44
Acquisition of
Treasury Stock - - (781,255) - - - (7,252) (7,252)
Issuance of Common Stock
to Acquire TN Energy - - 1,875,000 1,875 7,969,650 - - 7,971,525
Costs of the Merger - - - - (669,700) - - (669,700)
------- ---- --------- ------ --------- ----------- ------- ----------
BALANCE AT DECEMBER 31, 1995 781,255 781 5,781,275 6,563 9,495,053 (1,306,527) (7,252) 8,188,618
Net Loss - - - - - (1,858,132) - (1,858,132)
Options & Warrants
Exercised for Common Stock - - 31,154 31 8,890 - - 8,921
Adjustment for Fractional
Shares Paid in Cash - - (34) - - - - -
Conversion of Preferred
Stock to Common Stock (781,255) (781) 781,255 781 - - - -
------- ---- --------- ------ --------- ----------- ------- ----------
BALANCE AT DECEMBER 31, 1996 - $ - 6,593,650 $7,375 $9,503,943 $(3,164,659) $(7,252) $6,339,407
======= ==== ========= ====== ========== =========== ======= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
YEARS ENDED DECEMBER 31 (MARCH 17, 1994)
------------------------------ THROUGH
1996 1995 DECEMBER 31, 1994
---------- ---------- -----------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,858,132) $ (1,173,646) $ (132,881)
Adjustments to Reconcile Net Loss to Net Cash Provided
by (Used in) Operating Activities:
Depreciation, Depletion, and Amortization 630,865 392,387 7,153
Abandonment of Unproved Leases 28,005 - -
Gain on Sales of Properties (16,319) (117,517) -
Exploration and Dry Hole Costs 1,639,519 660,559 30,108
Changes in Operating Assets and Liabilities
(Increase) in Oil & Gas Revenue Receivables (260,951) (67,024) -
(Increase) in Other Current Assets (105,193) (34,638) -
Increase in Accounts Payable 407,969 183,070 101,149
(Decrease) in Accrued Liabilities (123,095) (145,487) -
Other - 3,040 -
----------- ------------ -----------
Net Cash Provided by (Used in) Operating Activities 342,668 (299,256) 5,529
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to Oil and Gas Properties $ (507,377) $ (77,573) $ (870,000)
Exploration and Dry Hole Costs (1,639,519) (660,559) (30,108)
Proceeds from the Sale of Properties 16,319 100,000 -
Cost Recovery on Exploration Agreement - 628,547 -
Advances on Exploration Obligations 6,000,000 4,171,453 -
Net Expenditures against Exploration Obligations (6,503,043) (960,976) -
Distributions to Exploration Partner (217,704) - -
Purchases of Equipment and Software (818,497) (140,352) (131,849)
Proceeds from the Sale of (Investment in) Marketable
Securities, Net 10,092,822 (10,938,674) (298,173)
----------- ------------ -----------
Net Cash Provided by (Used in) Investing Activities 6,423,001 (7,878,134) (1,330,130)
CASH FLOWS FROM FINANCING ACTIVITIES:
Common Stock Issued in Reverse Acquisition of TN Energy $ - $ 8,196,553 $ -
Costs of Acquisition of TN Energy - (168,380) -
Principal Payments of Capital Lease Obligations (160,693) (208,973) -
Borrowings of Short-Term Debt - - 1,330,000
Repayments of Short-Term Debt (225,028) - (1,330,000)
Convertible Preferred Stock Proceeds - - 2,500,000
Convertible Preferred Stock Offering Costs - - (300,427)
Proceeds from Options and Warrants Exercised 8,921 - -
Proceeds from Common Stock Issuances - 44 955
----------- ------------ -----------
Net Cash Provided by (Used in) Financing Activities (376,800) 7,819,244 2,200,528
----------- ------------ -----------
Net Increase (Decrease) in Cash and Cash Equivalents $ 6,388,869 $ (358,146) $ 875,927
Cash and Cash Equivalents at Beginning of Period 517,781 875,927 -
----------- ------------ -----------
Cash and Cash Equivalents at End of Period $ 6,906,650 $ 517,781 $ 875,927
=========== ============ ===========
Cash Paid during the Period for:
Interest $ 46,296 $ 70,369 $ 71,268
Income Taxes $ - $ - $ -
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Organization. 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 (the "TN Acquisition") 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. See
"Note 3 - Reverse Acquisition by Zydeco".
The Company is engaged in identifying drilling prospects, acquiring leases,
drilling, and producing reserves from those properties and 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, principally for its
exploration partners. 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, future generation of 3D
seismic analysis fees, profitable exploitation of future prospects, and the
Company's ability to access capital sources necessary for continued growth.
SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. For accounting purposes the TN 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. The consolidated financial
statements at December 31, 1996, and 1995, 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.
Cash and Cash Equivalents. The Company considers all highly liquid
investments purchased with original maturities of three months or less to
be cash equivalents.
Marketable Securities. The Company's investments in marketable securities
primarily consisted of short-term U. S. Treasury bills at December 31,
1996, and short-term investments in federal agency obligations under
guaranteed bank repurchase agreements at December 31, 1995. As the
Company's investments in marketable securities are all short-term in
nature, their carrying values at December 31, 1996 and 1995 approximate
fair value.
Oil and Gas Properties. The Company accounts for its oil and gas
exploration and production activities using the successful efforts method
of accounting. Under this method, acquisition costs for proved and unproved
properties are capitalized when incurred. Exploration costs, including
geological and geophysical costs and the costs of carrying and retaining
unproved properties, are expensed. Exploratory drilling costs are initially
capitalized, but charged to expense if and when the well is determined not
to have found proved reserves. Costs of productive wells, developmental dry
holes and productive leases are capitalized and amortized on a property-by-
property basis using the unit-of-production method. The estimated costs of
future plugging, abandonment, restoration and dismantlement are considered
as a component of the calculation of depreciation, depletion, and
amortization. Unproved properties with significant acquisition costs are
assessed periodically on a property-by-property basis and any impairment in
value is charged to expense.
F-7
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Equipment. Hardware and software associated with the 3D seismic technology
equipment, office furniture, and leasehold improvements are recorded at
cost, and the related depreciation is calculated on a straight-line basis
over the estimated useful lives of the assets, which range from 2 to 7
years.
Impairment of Long-Lived Assets. The Company elected to adopt Statement of
Financial Accounting Standards (SFAS) No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" effective in 1994. Management reviews its long-lived assets (i.e., oil
and gas properties and equipment) whenever events or changes in
circumstances indicate that the carrying amounts of such assets may not be
recoverable. If the carrying amounts of any of the Company's oil and gas
properties or equipment are greater than their projected undiscounted
future cash flows, an impairment loss to adjust the properties or equipment
to fair value is recognized. Through December 31, 1996, no such provision
for impairment was necessary. This determination of future cash flows from
proved properties is based on current proved oil and gas reserve estimates
and current oil and gas prices and costs. Management's estimates of fair
value also reflect a discount factor on future cash flows consistent with
the rate used by the Company in other fair-value determinations.
Income Taxes. The Company accounts for income taxes under SFAS No. 109
which requires the asset and liability approach to accounting for income
taxes. Under this approach, deferred income taxes are determined based upon
differences between the financial statement and tax bases of the Company's
assets and liabilities and operating loss carryforwards using enacted tax
rates in effect for the years in which the differences are expected to
reverse. Deferred tax assets are recognized if it is more likely than not
that the future tax benefit will be realized.
Oil and Gas Revenues. Oil and gas revenues are recorded using the
entitlements method of accounting, whereby the Company recognizes oil and
gas revenues as their entitlement share is produced. Individually and in
the aggregate, the Company has no material gas imbalances as of
December 31, 1996.
Seismic Service Revenues. Seismic service revenues are recognized as
services are performed.
Earnings Per Share. Earnings per common share and common share equivalent
(primary earnings per share) is based on the weighted average number of
shares of common stock and common equivalent shares outstanding during the
period. The common stock options, common stock warrants, and convertible
preferred stock are common stock equivalents but were anti-dilutive in all
periods presented.
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.
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 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. See "Supplemental
Information on Oil and Gas Producing Activities".
Reclassifications. Certain reclassifications of prior period amounts have
been made to conform with current year presentation.
F-8
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. 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 to 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 funds are designated for all third-party costs of preparing
the 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 December 31, 1996, and 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 recognized by the Company until
the parties begin sharing equally in such costs, if any. At December 31,
1996, inception-to-date expenditures under the Fortune Agreement aggregated
approximately $2,352,770, net of interest earned of $161,758 and revenue
from farmout of interests of $66,319.
The Fortune Agreement provides that the Company may, at its option, perform
seismic data or well log processing on the Prospects utilizing its own
facilities rather than engaging third parties. Revenues related to in-house
processing of the Prospects were $31,500 and $100,000 for the years ended
December 31, 1996, and 1995, respectively.
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 ("West Cameron Seismic Project"). The
Cheniere Agreement provides for aggregate payments to Zydeco of $13.5
million to fund the costs of seismic acquisition, including the purchase of
seismic rights or lease options on the related onshore acreage of the West
Cameron Seismic Project, and to complete data acquisition and processing of
a 3D seismic survey of the onshore and offshore areas. The Cheniere
Agreement, as amended, provides that Cheniere may receive up to a 50%
interest in the West Cameron Seismic Project and in any leases acquired as
a result thereof through May 2001, based on Cheniere completing its funding
of the entire $13.5 million. The Cheniere Agreement provides that Cheniere
may discontinue funding at any time and its interest would then be reduced
pro rata based on the West Cameron Seismic Project's total cost. Seismic
operations commenced in August 1996. At December 31, 1996, the Company had
incurred costs of approximately $5,806,113 in connection with the West
Cameron Seismic Project net of interest earned of $31,067 on the unused
project funds. As amended, the Cheniere Agreement provides for the
remaining payments to be paid by Cheniere consistent with the Company's
current expectations of the timing of costs to be incurred on the Project.
At December 31, 1996, Cheniere had advanced $6 million under the Cheniere
Agreement.
Each of the above exploration agreements contains provisions whereby either
party to the agreement has the right to "farmout" a portion or all of its
interest in a prospect under a put arrangement. In the event of such a
farmout, the farmor would retain a two percent of eight eighths overriding
royalty interest in the project, convertible into a 20% of eight eighths
working interest after the other party recouped its drilling, completion,
and hook-up costs of the well from production. Should either party farmout
a smaller working interest, the overriding royalty and after-payout working
interests would be proportionately reduced.
3. REVERSE ACQUISITION BY ZYDECO.
On December 20, 1995, the shareholders of TN Energy approved a merger with
Zydeco ("the Merger"). Pursuant to the Merger Agreement, each outstanding
share of common stock of Zydeco, par value $.000333 per share, was
converted into the right to receive 1.56251 shares of Common Stock of TN
Energy, par value $.001 per share; each share of convertible preferred
stock of Zydeco, par value $5.00 per
F-9
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
share, was converted into the right to receive 1.56251 shares of
Convertible Preferred Stock of TN Energy, par value $.001 per share, and
any fractional shares settled in cash.
In addition, TN Energy assumed Zydeco's existing stock options issued in
connection with Zydeco's 1995 Employee Stock Option Plan (the "Plan"),
substituting shares of Common Stock of TN Energy as the shares subject to
purchase under the Plan. Further, TN Energy assumed each existing common
stock warrant issued by Zydeco, substituting Common Stock of TN Energy as
the shares subject to purchase under the warrants. The number of shares
subject to purchase under option and warrant agreements was adjusted by
multiplying the number of Zydeco option or warrant shares by the exchange
ratio of 1.56251 shares. The exercise prices for Zydeco options and
warrants were adjusted by dividing the stated exercise price by the
exchange ratio. After completion of the Merger, TN Energy changed its name
to Zydeco Energy, Inc. At the conclusion of the Merger on December 21,
1995, Zydeco Energy, Inc. had 5,781,275 shares of Common Stock outstanding
and 781,255 shares of Convertible Preferred Stock outstanding.
The Merger was treated as a reverse acquisition for accounting purposes
with Zydeco as the acquiror and TN Energy as the acquiree based upon
Zydeco's then current officers and directors assuming management control of
the resulting entity and the value and ownership interest being received by
current Zydeco stockholders exceeding that received by TN Energy
stockholders. The Merger, for accounting purposes, was treated as if Zydeco
issued additional capital stock to TN Energy shareholders for cash. The net
assets of TN Energy on the date of the Merger were $7,971,525 and,
accordingly, the common shares of TN Energy on such date were recorded as
an increase in common stock and additional paid-in capital. The costs
incurred in connection with the Merger of approximately $669,700 were
charged to additional paid-in capital at December 31, 1995.
4. INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets
are as follows:
DECEMBER 31,
------------------------------
1996 1995
------------------------------
Deferred Tax Liability $ - $ -
============ ==========
Deferred Tax Assets
Net Operating Loss Carryforwards $ 845,499 $ 272,513
Book/Tax Differences in Bases
of Oil and Gas Assets $ 211,457 $ 138,263
Less Valuation Allowance $ (1,056,956) $ (410,776)
------------ ----------
Total Deferred Tax Assets $ - $ -
============ ==========
Net Deferred Tax Liability $ - $ -
============ ==========
As of December 31, 1996, the Company had a net operating loss carryforward
for federal income tax purposes approximately equal to the accumulated
deficit recognized for book purposes, which will be available to reduce
future taxable income. The full realization of the tax benefit associated
with the carryforward depends predominantly upon the Company's ability to
generate taxable income during the carryforward period. Because of the
current uncertainty of realizing such tax asset in the future, a valuation
allowance has been recorded equal to the amount of the net deferred tax
asset, which caused the Company's effective tax rate to differ from the
statutory income tax rate. The net operating loss carryforward, if not
utilized, will begin to expire in the year 2009.
F-10
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. INDEBTEDNESS.
Long-term Obligations. Balances of the Company's long-term obligations at
December 31, 1996 and 1995 consist of the following:
1996 1995
-------------------- -------------------
CURRENT LONG-TERM CURRENT LONG-TERM
--------- --------- --------- ----------
Computer Hardware Lease $ 157,537 $ - $ 160,693 $ 157,537
========= ========= ========= ==========
Capital Lease - Computer Hardware. Amortization is calculated on a three-
year, straight-line basis and aggregated $316,747 as of December 31, 1996.
This lease has a stated interest rate of 19.45%. The lease is
collateralized by the computer equipment utilized under the lease.
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 warrants to purchase 225,028 shares of Common Stock ("Non-
Redeemable Bridge Warrants") at a purchase price of $5.33 per share. See
"Note 6 - Convertible Preferred Stock, Common Stock, and Warrants".
In addition, options to purchase 225,000 outstanding shares of the Company
were granted in December 1995, by certain stockholders of the Company. 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, respectively, by
the Company prior to the Merger.
Maturities. The Company's existing indebtedness completely matures in 1997.
The aggregate amount of the remaining lease payments for the Company's
capital lease obligation discussed above is $170,750 in 1997, including
interest of $13,213.
Operating Leases. The Company incurred rental expense of $125,734 and
$37,465 in 1996, and 1995, respectively, in connection with its office
leases. See "Note 7 - Related-Party Transactions". At December 31, 1996,
future minimum lease payments for leases having initial or remaining
noncancelable lease terms in excess of one year are presented below:
YEAR AMOUNT
----------------
1997 $126,481
1998 123,947
1999 11,851
6. CONVERTIBLE PREFERRED STOCK, COMMON STOCK, AND WARRANTS.
In connection with a $2.5 million private placement in December 1994 (the
"1994 Private Placement"), Zydeco issued 781,255 shares of convertible
preferred shares. During the six month period ended June 30, 1995, Zydeco
issued 218,753 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
F-11
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
to common stock and additional paid-in capital totaling $7,971,525, the net
assets of TN Energy on the date of the Merger (comprised primarily of cash
and marketable securities).
Conversion of Preferred Stock. Shares of Convertible Preferred Stock, par
value $.001, were subject to conversion at a 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 Stock exceeded the
minimum price for the required period in June 1996, and, accordingly, the
Company exercised its option to convert all shares of Convertible Preferred
Stock to Common Stock effective July 15, 1996.
Placement Warrants. In connection with the 1994 Private Placement, Zydeco
issued 72,268 Common Stock purchase warrants ("Placement Warrants") to the
participating placement agents, 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 prior to their expiration on December 2, 1999. These warrants
are subject to a cashless exercise provision (i.e., the exercise price may
be satisfied by canceling a number of unexercised warrants valued by the
difference between the exercise price and the market value of the shares).
The initial value of such warrants issued in connection with the private
placement was immaterial. No Placement Warrants had been exercised prior to
1996. In 1996, Placement Warrants were exercised for 29,592 shares of
Common Stock, net of 9,575 warrant shares tendered in satisfaction of the
exercise price. At December 31, 1996, there were 33,101 unexercised
Placement Warrants outstanding.
Redeemable Warrants. On December 21, 1993, the Company sold 1,500,000 units
("Units") in its initial public offering ("IPO"). Each Unit consists of one
share of the Company's Common Stock, $.001 par value, and two redeemable
Common Stock Purchase Warrants ("Redeemable Warrants"). Each Redeemable
Warrant entitles the holder to purchase from the Company one share of
Common Stock at an exercise price of $5.50, 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 IPO, effectively December 20, 1995,
and ending seven years from the effective date of the IPO, effectively
December 13, 2000. The Merger constituted a business combination under the
terms of the Redeemable Warrants. The Redeemable 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 the date on which notice of redemption is given.
The Company also issued, in connection with the IPO, 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 Redeemable Warrants valued at a
nominal amount. At December 31, 1996, no Redeemable Warrants had been
exercised.
Unit Purchase Options. Also on December 21, 1993, the Company sold to the
underwriters in the IPO and their designees, for nominal consideration, the
right to purchase up to 150,000 units ("Unit Purchase Options"). The Unit
Purchase Options are exercisable initially at $6.60 per Unit ("Option
Exercise Price") until December 13, 1998, when they expire. The Unit
Purchase Options contain anti-dilution provisions providing for adjustment
of the Option Exercise Price upon the occurrence of certain events,
including the issuance of shares of Common Stock or other securities
convertible into or exercisable for shares of Common Stock at a price per
share less than the Option Exercise Price or the market price of the Common
Stock, or in the event of any recapitalization, reclassification, stock
dividend, stock split, stock combination, or similar transaction. The Unit
Purchase Options grant to the holders thereof certain "piggyback" and
demand registration rights for periods of seven and five years,
respectively, from the date of the IPO. The underwriters' units issuable
upon the exercise of the Unit Purchase Options are identical to the Units
discussed above, except that the warrants contained therein expire five
years from the effective date of the IPO, or December 13, 1998, and cannot
be redeemed. At December 31, 1996, no Unit Purchase Options had been
exercised.
F-12
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Non-Redeemable Bridge Warrants. In December 1995, in connection with
arranging the Bridge Financing, the Company issued to the Bridge Lenders
warrants to purchase 225,028 shares of Common Stock ("Non-Redeemable Bridge
Warrants"), at an exercise price of $5.33 per share. The terms of the Non-
Redeemable Bridge Warrants are identical to the terms of the Redeemable
Warrants, except that they are not redeemable and are subject to a cashless
exercise provision. At December 31, 1996, no Non-Redeemable Bridge Warrants
had been exercised.
7. RELATED-PARTY TRANSACTIONS.
In June 1996, the Company, with the approval of the Board of Directors (Mr.
Sam B. Myers, Jr. abstaining), 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 Chief Executive Officer, Mr. Sam
B. Myers, Jr. The Company paid $302,464 (represented by the Myers
Affiliates as its accumulated cost in the property interests) for the
leases which are located in state waters offshore Louisiana. The leases are
subject to 7.5% back-in after payout by the Myers Affiliates. The Myers
Affiliates also own an aggregate of between 4.5% and 7.5% 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 (formerly officers of
certain Myers Affiliates) own overriding royalty interests under the leases
and one such employee received an additional 1% overriding royalty interest
pursuant to an employment contract. In addition, at the time of purchase of
the property interests, the two Vice Presidents also received an aggregate
one-half percent overriding royalty interest in the properties directly
from the Myers Affiliate. 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.
In August 1996, the Company, with the approval of the Board of Directors
(Mr. Sam B. Myers, Jr. abstaining), purchased non-producing leasehold
interests owned by a Myers Affiliate and agreed to participate in the
drilling of an exploratory well located in Timbalier Bay in state waters
offshore Louisiana. The Company paid $187,500 for a 37.5% working interest
in the drilling prospect. The Myers Affiliate owns 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 participated in 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. In addition, an affiliate of a director of the
Company also purchased a 5% working interest in the properties on the same
basis as the terms of the Company's participation. Two of the Company's
Vice Presidents also own net revenue interests in the prospect leases, one
of which also purchased an additional 1% working interest participation in
the property at the same time and on the same basis as the terms of the
Company's participation. Drilling of the well commenced in August 1996 and
was abandoned in September 1996 for mechanical reasons without testing the
well's primary objectives. The Company has undertaken to sell a portion or
farmout its interest in this prospect and at December 31, 1996, reflected
$187,500 in unproved and unevaluated properties related to the prospect.
The Company charged $647,355 to exploration expense in 1996 in connection
with the drilling and abandonment of the well.
In 1996, the Company licensed software and purchased related software
maintenance services aggregating $325,768 from an unaffiliated vendor.
Subsequently, in October 1996, an officer and director of the Company
became a director of the vendor.
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 $109,902 and
$118,970 to this firm during the years ended December 31, 1996, and 1995,
respectively.
Zydeco entered into an exchange agreement, dated January 1, 1995, with an
entity beneficially owned by certain Myers Affiliates where certain
officers and/or directors are officers and/or directors of the
F-13
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 1995.
Effective January 1, 1995, Zydeco assumed an obligation for office
facilities under an operating lease agreement expiring in March 1997, from
a Myers Affiliate where certain officers of the Company were, at the time,
also officers and/or directors of the Myers Affiliate. 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 $24,615. Rental expense related to
this lease was $44,887 and $37,340 which is included in general and
administrative expenses for the years ended 1996, and 1995, respectively.
Effective December 15, 1994, Zydeco assumed an obligation related to
certain computer equipment and related software under a capital financing
lease expiring October 1997, from a Myers Affiliate where certain officers
of the Company were, at the time, also officers and/or directors of the
Myers Affiliate. The leased equipment was assigned to the Company by such
entity, and the original lender has released the entity from all liability
in the event of the Company's non-performance.
8. STOCK OPTION PLANS.
At December 31, 1996, the Company had three stock-based compensation plans,
which are described below. Each Plan provides for the granting of options
generally at not less than the per share market price on the date of grant.
The Company applies APB Opinion 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plans. Had compensation cost for the
Company's three stock-based compensation plans been determined based on the
fair value at the grant dates for awards under those plans consistent with
the method of SFAS No. 123 "Accounting for Stock-Based Compensation", the
Company's net loss and loss per share would have been reduced to the pro
forma amounts indicated below:
1996 1995
------------ ------------
Net Loss As Reported $ (1,858,132) $ (1,173,646)
Pro Forma $ (2,296,904) $ (1,291,163)
Loss Per Common
Equivalent Share As Reported $ (0.30) $ (0.30)
Pro Forma $ (0.37) $ (0.33)
For purposes of the above proforma disclosure, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used
for grants in 1996 and 1995, respectively: no dividend yield for both
years, expected volatility of .52 and .10, risk-free interest rates of 5.2%
for both years, and expected lives of 10 years for all options. In
connection with the above assumptions, the estimated weighted average fair
value of options granted in 1996 and 1995 is $4.07 and $.56 per share,
respectively.
In February 1995, Zydeco's board of directors approved the 1995 Employee
Stock Option Plan (the "Zydeco Plan") for certain employees of the Company
and any subsequently incorporated subsidiaries of the Company. The Zydeco
Plan provides for the granting of stock options to purchase up to an
aggregate of one million (pre-Merger) common shares. Options to purchase
1,006,256 (post-Merger) shares of stock at a price of $1.60 per share, as
adjusted pursuant to the Merger, were granted in March 1995. Such options
are non-compensatory, vest over a four-year period and terminate no later
than March 2005. Pursuant to the terms of the Merger, options granted
pursuant to the Zydeco Plan were assumed by the Company and an equivalent
number of shares of Common Stock are reserved for issuance upon exercise of
F-14
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
the assumed Zydeco Plan options. See "Note 3 - Reverse Acquisition by
Zydeco". Common Stock was issued in the amount of 1,562 shares in
connection with stock options exercised in 1996, under the Zydeco Plan.
Shares exercisable under vested options issued under the Zydeco Plan
aggregated 501,565 shares and 251,564 shares at December 31, 1996, and
1995, respectively.
On January 4, 1996 the Board of Directors approved and adopted the Zydeco
Energy, Inc. 1996 Equity Incentive Plan (the "1996 Plan"). The 1996 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. In 1996, options to purchase 495,000 shares were granted
to employees at exercise prices ranging between $5 and $67/8 per share.
Options for 100,000 shares of Common Stock granted in January 1996, expired
in February 1996, upon termination of an employee. The net 45,000 option
shares granted in excess of the authorized limit of the 1996 Plan were
granted subject to the approval of shareholders at the Company's next
Annual Meeting scheduled in May 1997. At December 31, 1996, no options had
been exercised or were exercisable under the 1996 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 (the "1996 Director Plan") and granted
an aggregate of 45,000 shares of Common Stock to three non-employee
directors. The options vest, one third on April 1, 1996, 1997, and 1998,
and have an exercise price of $6.88. At December 31, 1996, there were
11,250 shares exercisable under the 1996 Director Plan and no options had
been exercised. The options terminate no later than ten years after the
date of grant. Both the 1996 Plan and the 1996 Director Plan were approved
by the Company's shareholders at the Annual Meeting on July 9, 1996.
F-15
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. SEGMENT INFORMATION.
The Company operates principally in one industry segment - oil and gas
exploration and production ("E & P"). In 1995, the Company also had
operations in one other reportable segment: 3D seismic analysis services.
The assets reported in the 3D seismic analysis services segment in 1995
were used in both segments and are included in the oil and gas E & P
segment in 1996. During 1994, the Company had limited operations and no
revenue, other than interest income. The following table sets forth key
operating information for each business segment:
<TABLE>
<CAPTION> PERIOD FROM INCEPTION
YEAR ENDED DECEMBER 31, (MARCH 17, 1994
------------------------------ THROUGH
1996 1995 DECEMBER 31, 1994
------------- ------------- -----------------
<S> <C> <C> <C>
Operating Revenues
Oil and Gas E&P $ 1,470,046 $ 286,752 $ -
3D Seismic Analysis Services - 300,000 -
------------ ------------ ------------
Consolidated Total $ 1,470,046 $ 586,752 $ -
============ ============ ============
Operating (Loss)
Oil and Gas E&P $ (812,981) $ (555,009) $ (30,108)
3D Seismic Analysis Services - (108,716) -
Corporate General & Administrative (1,294,358) (486,107) (80,134)
------------ ------------ ------------
Consolidated Total $ (2,107,339) $ (1,149,832) $ (110,242)
============ ============ ============
Capital Expenditures
Oil and Gas E&P $ 1,077,350 $ 226,770 $ 870,000
3D Seismic Analysis Services - - 468,162
Corporate General & Administrative 248,524 - 178,982
------------- ------------- ------------
Consolidated Total $ 1,325,874 $ 226,770 $ 1,517,144
============ ============ ============
Depreciation, Depletion and Amortization
Oil and Gas E&P $ 592,996 $ 153,710 $ -
3D Seismic Analysis Services - 208,716 -
Corporate General & Administrative 37,869 29,961 7,153
------------ ------------ ------------
Consolidated Total $ 630,865 $ 392,387 $ 7,153
============ ============ ============
AT DECEMBER 31,
----------------------------------------------
1996 1995 1994
------------- ------------- ------------
Identifiable Assets
Oil and Gas E&P $ 5,048,109/1/ $ 3,501,290/1/ $ 1,168,173
3D Seismic Analysis Services - 364,770 468,162
Corporate General & Administrative 4,863,493 8,716,345 1,059,664
------------ ------------ ------------
Consolidated Total $ 9,911,602 $ 12,582,405 $ 2,695,999
============ ============ ============
(1) Identifiable assets of the Oil and Gas E & P segment include $3,172,378 and $3,210,477 at December 31, 1996, and 1995,
respectively, related to the Exploration Agreements. See "Note 2 - Exploration Agreements".
</TABLE>
Major Customers. Oil and gas sales to two customers of $1,030,424 and
$391,803, respectively, in 1996, and $133,589 to one customer in 1995, each
constituted more than 10% of consolidated revenue for such years. In
addition, 3D seismic services revenue of $100,000 in 1995, from one
customer represented more than 10% of consolidated revenue for 1995.
F-16
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
10. COMMITMENTS AND CONTINGENCIES.
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 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. Under the option, the
State of Louisiana is required to keep the information obtained from the
survey confidential for a period of ten years. The Company can extend the
time period for delivery of the survey for a six month period for an
additional payment of $391,877. In August, 1996, the Company commenced
operations for a 3D survey project (the "West Cameron Seismic Project")
which includes the area covered by the permit and additional contiguous
land acreage.
In May 1996, the Company entered into a license agreement with an
individual to use a proprietary 3D seismic processing and wavefield imaging
technology (the "Technology"). The Company is authorized to use the
Technology worldwide and exclusively in certain transition zone areas of
the Gulf of Mexico, including the area covered by the West Cameron Seismic
Project. The Company paid the first year's royalty fee of $40,000 in May
1996, and can, at its option, renew the license annually by payment of
annual royalties as follows:
1997 $ 40,000
1998 $ 60,000
1999 $ 80,000
2000 $ 80,000
Thereafter $100,000
In August 1996, the Company negotiated and executed a turnkey seismic
services agreement with its survey contractor Grant Geophysical, Inc.
("Grant") in an effort to control some of the risks associated with a
survey as large as the West Cameron Seismic Project. In December 1996,
after Grant informed the Company it was ceasing survey operations due to
winter weather conditions, Grant filed for protection and reorganization
under Chapter 11 of the U. S. Bankruptcy statutes and currently is
attempting to restructure its operations. On March 14, 1997, the Company
and Grant executed a new Master Geophysical Data Acquisition Agreement
("the Agreement") to commence survey operations in mid-April 1997 under a
"cost plus" services arrangement. The nature of such an agreement
increases both the risks and the management efforts associated with the
seismic acquisition phase of the West Cameron Seismic Project. The current
estimates of the cost to complete the survey (assuming no reduction in the
survey area) are substantially higher than the estimates or the actual
costs incurred (approximately $44,000 per square mile) under the former
turnkey contract with Grant. The Company paid a committment fee of $150,000
and advanced $350,000 upon execution of the Agreement. Management currently
believes that it will be able to meet its obligations under the Permit.
F-17
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED).
Results of operations by quarter for the year ended December 31, 1996, are
set forth in the following table. The Company had no operations prior to
the Merger in December 1995.
<TABLE>
<CAPTION>
1996 QUARTER ENDED
--------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Oil and Gas Sales $ 251,535 $ 305,211 $ 461,038 $ 404,443
Gain on Sales of Properties - 16,319 - -
Seismic Services - 31,500 - -
------------- ------------- ------------ ------------
251,535 353,030 461,038 404,443
EXPENSES
Dry Hole and Production Costs 6,549 21,758 675,424 18,343
Geological and Geophysical Expenses 208,600 192,969 224,895 341,493
General and Administrative Expenses 387,398 261,513 322,290 285,288
Depreciation, Depletion, and Amortization 110,365 151,364 181,763 187,373
------------- ------------- ------------ ------------
712,912 627,604 1,404,372 832,497
OPERATING LOSS (461,377) (274,574) (943,334) (428,054)
OTHER INCOME (EXPENSE)
Interest Income 86,499 82,610 58,869 65,436
Interest Expense (13,688) (11,983) (10,200) (8,336)
------------- ------------- ------------ ------------
72,811 70,627 48,669 57,100
NET LOSS $ (388,566) $ (203,947) $ (894,665) $ (370,954)
============= ============= ============ ============
LOSS PER COMMON EQUIVALENT SHARE $ (0.07) $ (0.04) $ (0.14) $ (0.05)
============= ============= ============ ============
</TABLE>
F-18
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
The following unaudited information has been provided pursuant to Statement of
Financial Accounting Standards No. 69 "Disclosures about Oil and Gas Producing
Activities". There are numerous uncertainties inherent in estimating quantities
of proved reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond the control of the
Company. Reserve engineering is a subjective process of estimating underground
accumulations of oil and gas that cannot be measured in an exact way.
Accordingly, reserve estimates are often different from quantities of oil and
gas that are ultimately recovered. The Company's proved oil and gas reserves
were estimated by Ryder Scott Company, Petroleum Engineers.
PROVED DEVELOPED RESERVE QUANTITIES
The Company's oil and gas producing activities have been conducted solely in the
United States. The Company had no proved undeveloped reserves at December 31,
1996, 1995, or 1994. The following table sets forth the changes in the Company's
total proved reserves (all of which are developed) for the periods ended
December 31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
OIL (Bbls)
Total Proved Reserves:
Proved Oil Reserves at the Beginning of the Period 15,899 - -/1/
Extensions, Discoveries, and Other Additions - 17,017 -
Revisions of Previous Estimates 14,339 - -
Production (20,186) (1,118) -
------------ ------------ ------------
Proved Oil Reserves at the End of the Period 10,052 15,899 -
============ ============ ============
GAS (Mcf)
Proved Gas Reserves at the Beginning of the Period 492,000 - -/1/
Extensions, Discoveries, and Other Additions - 576,546 -
Revisions of Previous Estimates 123,678 - -
Production (372,678) (84,546) -
------------ ------------ ------------
Proved Gas Reserves at the End of the Period 243,000 492,000 -
============ ============ ============
Proved Developed Reserves:
End of Period - Oil (Bbls) 10,052 15,899 -
============ ============ ============
Gas (Mcf) 243,000 492,000 -
============ ============ ============
</TABLE>
(1) At Inception, March 13, 1994.
F-19
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES
The results of operations for oil and gas producing activities for the periods
indicated are presented below:
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
YEAR ENDED DECEMBER 31, (MARCH 17, 1994)
------------------------------ THROUGH
1996 1995 DECEMBER 31, 1994
------------- ------------ ---------------------
<S> <C> <C> <C>
Oil and Gas Sales $ 1,422,227 $ 169,235 $ -
Production (Lifting) Costs (22,508) (27,492) -
Dry Hole Costs (699,566) (261,956) (30,108)
Geological and Geophysicial Expenses (967,957) (398,603) -
Depreciation, Depletion, and Amortization (592,996) (153,710) -
Income Tax Provision (Benefit) - - -
------------- ------------ -------------
Results of Operations from Oil and Gas
Producting Activities $ (860,800) $ (672,526) $ (30,108)
============= ============ =============
</TABLE>
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES
The following table presents total capitalized costs of proved and unproved oil
and gas properties and associated accumulated depreciation, depletion and
amortization:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1996 1995
------------ --------------
<S> <C> <C>
Proved Oil and Gas Properties, at Cost $ 300,784 $ 309,110
Unproved Oil and Gas Properties, at Cost 488,290 -
Equipment and Software 1,343,655 -
Less - Accumulated Depreciation, Depletion, and Amortization (955,422) (114,090)
------------ ---------------
Net Capitalized Costs $ 1,177,307 $ 195,020
============ ===============
</TABLE>
F-20
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT
ACTIVITIES
Presented below are costs incurred in oil and gas property acquisition,
exploration and development activities:
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
YEAR ENDED DECEMBER 31, (MARCH 17, 1994)
------------------------------ THROUGH
1996 1995 DECEMBER 31, 1994
------------ ------------ ---------------------
<S> <C> <C> <C>
Proved Property Acquisition Costs $ 7 $ 77,573 $ -
Unproved Property Acquisition Costs 507,370 - 726,030
Exploration Costs 1,639,519 660,559 174,078
Equipment and Software Additions 569,973 - -
------------ ------------ -------------
Total for Period $ 2,716,869 $ 738,132 $ 900,108
============ ============ =============
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVE QUANTITIES
Future cash inflows from the sale of production of proved reserves, net of
estimated production and development costs, as calculated by the Company's
independent reserve engineers, are discounted at 10%. The calculations are based
on year-end prices and costs and statutory tax rates that relate to existing
proved oil and gas reserves in which the Company has mineral interests. Actual
oil and gas sales prices continue to be subject to wide fluctuations due to
market changes. The standardized measure is not intended to represent the market
value of reserves and, in view of the uncertainties involved in the reserve
estimation process, including the instability of energy markets, may be subject
to material future revisions. See "Note 1 - Organization and Summary of
Significant Accounting Policies".
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
YEAR ENDED DECEMBER 31, (MARCH 17, 1994)
------------------------------ THROUGH
1996 1995 DECEMBER 31, 1994
------------ ------------ ---------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Future Cash Inflows $ 1,116,568 $ 1,496,181 $ -
Future Production and Development Costs/1/ (72,225) (76,500) -
Future Income Tax Expense - - -
------------ ------------ -------------
Undiscounted Future Net Cash Flows $ 1,044,343 $ 1,419,681 $ -
Discount (44,525) (112,344) -
------------ ------------ -------------
Standardized Measure of Discounted Future Net
Cash Flows $ 999,818 $ 1,307,337 $ -
============ ============ =============
============ ============ =============
</TABLE>
(1) Estimated future costs associated with property development and plugging,
abandonment, site restoration and dismantlement requirements at December 31,
1996 and 1995 were approximately $32,500.
F-21
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
PRINCIPAL SOURCES OF CHANGE IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET
CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
YEAR ENDED DECEMBER 31, (MARCH 17, 1994)
----------------------- THROUGH
1996 1995 DECEMBER 31, 1994
------------------------------ ---------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Balance at the Beginning of the Period $ 1,307,337 $ -- $ --
Sales, Net of Operating Costs (1,399,719) (141,743) --
Net Changes in Prices and Production Costs 343,316 -- --
Extensions, Discoveries and
Improved Recovery -- 1,449,080 --
Revisions of Quantity Estimates 685,619 -- --
Accretion of Discount 130,734 -- --
Other (67,469) -- --
----------- ------------ ------------
Balance at the End of Period $ 999,818 $ 1,307,337 $ --
=========== ============ ============
</TABLE>
F-22
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
<S> <C> <C>
10.14 Fourth Amendment to the Exploration Agreement between Zydeco
Exploration, Inc. and Cheniere Energy Operating Co., Inc. (formerly FX Energy,
Inc.) dated November 29, 1996
11.1 Statement regarding computation of per share earnings
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Ryder Scott Company
27 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 10.14
November 29, 1996
Cheniere Energy Operating Co., Inc.
237 Park Avenue, Suite 2100
New York, NY 10017
Re: Fourth Amendment
Gentlemen:
I am writing with respect to that certain Exploration Agreement dated
April 4, 1996, by and between FX Energy, Inc. and Zydeco Exploration, Inc., as
amended by that certain First Amendment dated May 15, 1996, and that certain
Second Amendment dated August 5, 1996, and that certain Third Amendment dated
October 31, 1996 (as amended, the "Agreement"). For convenience, terms
defined therein shall have the same meaning when used herein. FX Energy, Inc.
("FX") has changed its name to Cheniere Energy Operating Co., Inc.
("Cheniere").
Section 2 of the Agreement originally provided:
FX shall pay the Seismic Funds to ZEI for deposit in the segregated
account described in Section 12.a on the following schedule.
DATE AMOUNT
---- ------
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
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
<PAGE>
Through yesterday, November 28, 1996, Cheniere had paid $6,000,00.00. Under
the Third Amendment to the Agreement, we substituted an alternate schedule for
the remaining payments, which provided for payments as follows:
DATE AMOUNT
---- ------
1996-11-30 2,000,000.00
1997-01-31 2,000,000.00
1997-02-28 2,000,000.00
1997-03-31 1,500,000.00
Funds in the Seismic Funds Account, an account set up at Bank One Texas,
N.A. styled "Zydeco Exploration Inc. Seismic Joint Venture Account," are
approximately $895,000 at present.
The parties anticipate that field data acquisition will be temporarily
suspended due to weather. Assuming a suspension, a minimum balance of
$1,000,000 in the Seismic Fund Account is adequate.
According, ZEI and Cheniere agree as follows:
1. Payments by Cheniere of additional Seismic Funds shall be
suspended; provided, however, Cheniere shall from time to time
furnish additional Seismic Funds sufficient to maintain the balance
of the Seismic Fund Account at approximately $1,000,000. Such funds
shall be forwarded within 10 days of request by ZEI. Should such
funds not be forwarded within 20 days of a reminder notice, the
default shall be treated as a Discontinuance under Section 5.
2. At any time before December 1, 1997, ZEI may direct Cheniere to
resume payment of the Seismic Funds. Such notice shall stipulate
the date the first resumed installment payment (that due on
November 30, 1996 under the Third Amendment) is due. The date so
specified shall be at least 30 days after delivery of notice to
Cheniere.
3. The first resumed payment shall be reduced from its $2,000,000
amount by payments Cheniere has made to replenish the Seismic Fund
Account.
4. Unless longer periods between payments are specified by ZEI:
a) the second resumed payment (that of $2,000,000 due January 31,
1996 under the Third Amendment) shall be due 60 days after the
first resumed payment;
b) the third resumed payment (that of $2,000,000 due February 28,
1997 under the Third Amendment) shall be due 90 days after the
first resumed payment; and
c) the fourth resumed payment (that of $1,500,000 due March 31,
1997 under the Third Amendment) shall be due 120 days after the
first resumed payment.
5. The normal grace period shall apply to each resumed payment.
6. Should Zydeco not direct that installment payment of Seismic Funds
be resumed by December 1, 1997, absent an agreement of the parties
to the contrary, no further Seismic Funds shall be required under
the Agreement.
<PAGE>
7. The parties agree that the agreements by Zydeco to defer payments
under Section 2 do not obligate Zydeco to grant further waivers nor
waive the rights of Zydeco to have payments made at the times
provided in the Agreement, as modified hereby.
If I have correctly set forth our agreements, kindly so indicate by
executing one counterpart of this letter and returning it to the undersigned.
Yours very truly,
ZYDECO EXPLORATION, INC.
By: /s/ W. Kyle Willis
-------------------------------
Its: Vice President & Treasurer
-------------------------------
ACCEPTED AND AGREED TO THIS
29TH DAY OF NOVEMBER, 1996.
CHENIERE ENERGY OPERATING CO., INC.
By: /s/ William D. Forster
-----------------------------
Its: President
-----------------------------
A918-2.ZEI
<PAGE>
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
DATE COMMON STOCK AND EQUIVALENTS
- ------ ---------------------------------
NO. OF SHARES DECEMBER 31, 1996
OUTSTANDING WEIGHTED AVERAGE
SHARES
<S> <C> <C>
COMMON STOCK:
12/31/95 Shares Outstanding 5,781,275 5,781,275
Various Options and Warrants Exercised in 1996 31,120 29,448
7/15/96 Conversion of Preferred Stock 781,255 358,075
----------- -------------
SHARES OUTSTANDING DECEMBER 31, 1996 6,593,650 6,168,798
COMMON STOCK EQUIVALENTS AT DECEMBER 31, 1996:
Options to Purchase Common Stock 1,444,693 Anti-dilutive
Placement Warrants 33,101 Anti-dilutive
Redeemable Warrants 3,300,000 Anti-dilutive
Unit Purchase Options 450,000 Anti-dilutive
Non-Redeemable Bridge Warrants 225,028 Anti-dilutive
----------- -------------
12,046,472 6,168,798
=========== =============
</TABLE>
Since the Company had a net loss for the period ended December 31, 1996, the
effect of any dilution from common stock equivalents would be anti-dilutive and
consequently not considered. Therefore, primary and fully diluted earnings per
share are the same as weighted average shares outstanding.
<TABLE>
<CAPTION>
<S> <C>
LOSS PER SHARE COMPUTATION:
Net Loss for the Year Ended December 31, 1996 $ (1,858,132)
Divided By Weighted Average Common Shares and Common
Share Equivalents 6,168,798
-------------
LOSS PER SHARE $ (0.30)
=============
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into Zydeco Energy, Inc.'s previously
filed Registration Statement on Form S-8 (No. 333-00902).
ARTHUR ANDERSEN LLP
Houston, Texas
March 20, 1997
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the reference to our firm in this Current Report of Form
10-K for the year ended December 31, 1996, for Zydeco Energy, Inc. under the
headings "Oil and Gas Reserves" and "Supplemental Information on Oil and Gas
Producing Activities". We also consent to the incorporation by reference of
such references in Zydeco Energy, Inc.'s Form S-8 (Registration No. 333-
00902).
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
March 20, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,906,650
<SECURITIES> 845,852
<RECEIVABLES> 349,219
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,232,216
<PP&E> 2,397,281
<DEPRECIATION> (1,026,046)
<TOTAL-ASSETS> 9,911,602
<CURRENT-LIABILITIES> 3,572,195
<BONDS> 0
0
0
<COMMON> 7,375
<OTHER-SE> 6,332,032
<TOTAL-LIABILITY-AND-EQUITY> 9,911,602
<SALES> 1,422,227
<TOTAL-REVENUES> 1,470,046
<CGS> 22,508
<TOTAL-COSTS> 22,508
<OTHER-EXPENSES> 1,667,523
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,207
<INCOME-PRETAX> (1,858,132)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,858,132)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,858,132)
<EPS-PRIMARY> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
