<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 1997
REGISTRATION NO. 333-27679
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------
ZYDECO ENERGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 1311 76-0404904
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
----------------
1710 TWO ALLEN CENTER, 1200 SMITH STREET
HOUSTON, TEXAS 77002
(713) 659-2222
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
W. KYLE WILLIS
ZYDECO ENERGY, INC.
CHIEF FINANCIAL OFFICER
1710 TWO ALLEN CENTER, 1200 SMITH STREET
HOUSTON, TEXAS 77002
(713) 659-2222
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
MICHAEL C. BLANEY, ESQ. JAMES R. TANENBAUM, ESQ.
ANDREWS & KURTH L.L.P. STROOCK & STROOCK & LAVAN LLP
4200 TEXAS COMMERCE TOWER 180 MAIDEN LANE
HOUSTON, TEXAS 77002 NEW YORK, NEW YORK 10038
TELEPHONE: (713) 220-4200 TELEPHONE: (212) 806-5400
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after effectiveness of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
ZYDECO ENERGY, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION IN
FORM S-1 LOCATION OR CAPTION IN PROSPECTUS
-------------------------- ---------------------------------
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Front Forepart of Registration Statement and
Cover Page of Prospectus...... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back
Cover Pages of Inside Front Cover Page of Prospectus;
Prospectus.................... Table of Contents; Additional Information
3. Summary Information, Risk Fac-
tors and Ratio of Earnings to Prospectus Summary; Risk Factors
Fixed Charges.................
4. Use of Proceeds................ Use of Proceeds
5. Determination of Offering Underwriting
Price.........................
6. Dilution....................... Dilution
7. Selling Security Holders....... *
8. Plan of Distribution........... Underwriting
9. Description of Securities to be Description of Company's Securities
Registered....................
10. Interests of Named Experts and *
Counsel.......................
11. Information with Respect to the Outside Front Cover Page of Prospectus;
Registrant.................... Prospectus Summary; Risk Factors; Price
Range of Common Stock and Dividend Policy;
Dilution; Capitalization; Selected
Consolidated Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business and Properties; Management;
Principal Stockholders; Legal Matters;
Change of Accountants; Experts;
Consolidated Financial Statements
12. Disclosure of Commission Posi-
tion on Indemnification for *
Securities Act Liabilities....
</TABLE>
- --------
* Omitted from the Prospectus because item is inapplicable.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 1997
PROSPECTUS
2,000,000 SHARES
ZYDECO ENERGY, INC.
COMMON STOCK
-----------
All of the 2,000,000 shares (the "Shares") of common stock, par value $0.001
per share (the "Common Stock"), offered hereby are being sold by Zydeco Energy,
Inc. ("Zydeco" or the "Company").
Since December 21, 1995, the Common Stock has been included on The Nasdaq
Stock Market's SmallCap Market (the "Nasdaq SmallCap Market") under the trading
symbol "ZNRG." From December 21, 1993 until December 21, 1995, the Common Stock
was quoted on the OTC Bulletin Board under the symbol "TNER." As of July 1,
1997, the last reported sale price for the Common Stock was $5.41 per share.
See "Price Range of Common Stock."
-----------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share....................... $ $ $
- -------------------------------------------------------------------------------
Total(3)........................ $ $ $
- -------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses of the offering payable by the Company estimated
to be $ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of 300,000 additional shares of Common Stock on the same terms
and conditions as the Shares offered hereby solely to cover over-
allotments, if any. If the Underwriters exercise this option in full, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to Company will be $ , $ and $ , respectively. See
"Underwriting."
The Shares offered hereby are offered by the Underwriters, subject to prior
sale when, as and if delivered to and accepted by the Underwriters and subject
to certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the certificates representing the Shares will be made
at the offices of Brean Murray & Co., Inc. in New York, New York on or about
, 1997.
-----------
BREAN MURRAY & CO., INC.
-----------
The date of this Prospectus is , 1997.
<PAGE>
[Graphic--Map of Louisiana Transition Zone
indicating location of the
Company's West Cameron Seismic Project.]
[Graphic--Seismic Image]
High resolution 3D image from seismic data over Cameron Parish, Louisiana at
depths ranging from 8,000 feet to 25,000 feet. The image was processed with
Zydeco Energy's Wavefield Imaging Technology with a 220 x 220 foot input
spacing that yielded an image with a 55 x 55 foot output spacing; included are
the interpreted geologic structures, faults and stratigraphic features
correlated with known well control information.
----------------
IN CONNECTION WITH THIS OFFERING THE UNDERWRITERS MAY OVER-ALLOT OR ENGAGE
IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE
OF THE COMMON STOCK OF THE COMPANY, INCLUDING STABILIZING, SYNDICATE SHORT
COVERING AND PENALTY BID TRANSACTIONS. SUCH TRANSACTIONS MAY BE EFFECTED
THROUGH THE NASDAQ SMALLCAP MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME. SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON SHARES ON THE NASDAQ SMALLCAP MARKET
IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................................... 4
Risk Factors......................................................... 8
Use of Proceeds...................................................... 14
Price Range of Common Stock and Dividend Policy...................... 15
Capitalization....................................................... 16
Dilution............................................................. 17
Selected Consolidated Financial Data................................. 18
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 19
Business and Properties.............................................. 25
Management........................................................... 39
Description of Company's Securities.................................. 48
Principal Stockholders............................................... 50
Underwriting......................................................... 51
Legal Matters........................................................ 52
Change of Accountants................................................ 52
Experts.............................................................. 52
Available Information................................................ 53
Glossary of Certain Industry Terms................................... 54
Index to Consolidated Financial Statements........................... F-1
</TABLE>
----------------
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offer other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any security
other than in connection with the offer made by this Prospectus, nor does it
constitute an offer to sell or a solicitation of any offer made by this
Prospectus, nor does it constitute an offer to sell or a solicitation of any
offer to buy the Common Shares offered hereby in any jurisdiction in which
such an offer or solicitation is not authorized, or in which the person making
such offer or solicitation is not qualified to do so, or to any person to whom
it is unlawful to make such offer or solicitation. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that the information contained herein is correct as of
any time subsequent to its date.
3
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain significant matters discussed elsewhere
in this document. This Summary is qualified in its entirety by reference to the
more detailed information appearing elsewhere in this Prospectus including
information under "Risk Factors." Prospective investors are urged to read the
entire Prospectus. Certain terms used in this Summary and elsewhere in this
Prospectus are used as defined in the Summary or elsewhere in this Prospectus.
See the "Glossary of Certain Industry Terms" appearing at the end of this
Prospectus for the definitions of certain terms used herein. Unless otherwise
indicated, all information contained in this Prospectus assumes that the
Underwriters' over-allotment option as described in "Underwriting" is not
exercised. The "Company" means Zydeco Energy Inc. and its wholly-owned
subsidiaries, Zydeco Exploration Inc. and Wavefield Image, Inc., and, unless
the context otherwise requires, such subsidiaries are also included in the
description of the Company. The Shares offered hereby involve a high degree of
risk and investors should carefully consider information set forth in "Risk
Factors."
THE COMPANY
Zydeco Energy, Inc. ("Zydeco" or the "Company") is an independent energy
company engaged in the exploration for oil and gas in areas utilizing advanced
3D seismic and computer aided exploration ("CAEX") techniques. The Company
believes it is one of the few independent exploration companies with
comprehensive in-house technology and expertise enabling it to use the most
recent advances in such 3D seismic and CAEX technology. Zydeco's geophysicists
design the seismic data acquisition survey, manage the acquisition of seismic
data and process and interpret the resulting data. The Company believes that
its technology and expertise enable it to acquire and analyze seismic data
efficiently over large geographical areas. The Company attempts to concentrate
its efforts in areas previously unexplored with advanced 3D seismic technology.
Based upon analysis of processed data, Zydeco personnel identify and rank
potential oil and gas prospects for leasehold acquisition. The Company intends
to enter into agreements with experienced industry partners for the development
of such prospects and retain significant non-operating production interests in
those prospects.
Zydeco's present exploration efforts are focused in the Louisiana Transition
Zone, the region of land and shallow water extending several miles both onshore
and offshore from the coastline of Louisiana. The Louisiana Transition Zone is
part of a geologically complex trend in which large oil and natural gas
reserves have been discovered and produced. However, the Company believes that
the Louisiana Transition Zone has historically been underexplored with 3D
seismic techniques relative to nearby and geologically related deeper waters
and lands inland from the coastline, primarily due to characteristics that make
seismic data acquisition difficult and expensive. The Company believes that the
comparatively low levels of 3D seismic exploration in the Louisiana Transition
Zone provide significant opportunities for prospect identification in a region
with prolific historical oil and gas production.
The Company's three senior executives have an average of 29 years experience
in the oil and gas exploration business. In addition, the Company has assembled
an experienced exploration team of geophysicists and geologists with
substantial industry experience in exploration and advanced seismic technology
and analysis. This team has successfully assembled an integrated hardware and
software seismic processing system which allows the Company to capitalize on
the most recent developments in 3D seismic and CAEX technology. These recent
developments include a processing technique initially licensed and recently
acquired by the Company ("Wavefield Imaging Technology") which substantially
reduces the cost of seismic data acquisition for certain surveys while
improving the resolution of the subsurface image. The Company recently acquired
Wavefield Image, Inc. ("Wavefield"), the owner and licensor of the Wavefield
Imaging Technology. On July 3, 1997, the Company received notice that a patent
application in respect of Wavefield Imaging Technology has been allowed for
patent issuance by the United States Patent and Trademark Office. The Company
expects that the patent will be issued in a few months.
The Company's primary objective is to discover and develop oil and gas
reserves and increase cash flow through exploration, prospect identification
and participation in projects to develop such prospects. Key elements of the
Company's strategy include: (i) focusing its efforts in geologic areas that it
believes are seismically underexplored and have the potential for substantial
oil and gas reserves; (ii) continuing to develop and apply its advanced in-
house
4
<PAGE>
3D seismic technology and expertise; and (iii) pursuing joint ventures with
industry partners to drill and develop producing properties from such
prospects. To date, the Company has not generated net income primarily because
of the significance and timing of its exploration expenditures and the
substantial investments in advanced supercomputing processors and software
required to keep pace with the most recent advances in CAEX technologies.
In August 1996, the Company commenced an extensive 3D seismic exploration
program in a part of the Louisiana Transition Zone in western Cameron Parish,
Louisiana (the "West Cameron Seismic Project") utilizing the Wavefield Imaging
Technology. As of July 1, 1997, the Company had acquired seismic permits and
exclusive seismic options on approximately 151,000 contiguous acres onshore and
in state and federal waters, including 51,000 acres with respect to which the
Company has an exclusive seismic permit and 36,000 acres with respect to which
the Company has lease options. As of July 1, 1997, seismic data acquisition has
been completed over approximately 90% of the West Cameron Seismic Project
acreage. The Company presently expects to complete data acquisition in the
summer of 1997 and commence lease acquisition for identified prospects in late
1997. While the Company believes the preliminary analysis of the data acquired
from the West Cameron Seismic Project is promising for prospect identification,
no assurances can be made as to the results of further processing and analysis
of such data or as to the existence of recoverable hydrocarbons on the West
Cameron Seismic Project acreage. No assurances can be made as to the existence
of recoverable hydrocarbons on the West Cameron Seismic Project acreage or in
any other areas in which the Company explores.
The Company is financing the West Cameron Seismic Project in part through an
exploration agreement (the "Cheniere Exploration Agreement") with Cheniere
Energy Operating Co., Inc. ("Cheniere"). Pursuant to the Cheniere Exploration
Agreement, Cheniere agreed to pay for all of the costs of permits, options and
seismic data acquisition and processing for the West Cameron Seismic Project up
to a maximum of $13.5 million, plus 50% of such costs in excess of $13.5
million, in exchange for an interest of up to 50% in the West Cameron Seismic
Project. As of July 1, 1997, Cheniere had paid $12.0 million. Under the terms
of the Cheniere Exploration Agreement, Cheniere may elect to cease payment of
costs at any time, in which case its interest in the West Cameron Seismic
Project would be proportionately reduced.
In addition to its interests in the West Cameron Seismic Project, the Company
has identified a number of other potential prospects in the Louisiana
Transition Zone, most of which were identified prior to conducting any 3D
seismic surveys. As of March 31, 1997, the Company held oil and gas leases
covering approximately 21,480 gross acres (11,326 net acres) in Louisiana State
and Federal waters. Approximately two-thirds of these potential prospects are
owned equally by Fortune Petroleum Corp. ("Fortune") pursuant to an agreement
(the "Fortune Exploration Agreement") between the Company and Fortune. In June
1997, Fortune exercised its right under the Fortune Exploration Agreement to
have returned to it $2.2 million in unexpended funds which it had previously
advanced to the Company to cover anticipated lease acquisition and exploration
expenses relating to the co-owned prospects. Although the Company plans to
pursue further evaluation of certain of these potential prospects, including
the possible sale of some of these prospects, there can be no assurance that
any of the potential prospects will be drilled or will contain any commercially
recoverable amounts of oil and gas.
The Company's principal offices are located at Two Allen Center, 1200 Smith
Street, Suite 1710, Houston Texas 77002. Its telephone number is (713) 659-
2222.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the
Company......................... 2,000,000 shares
Common Stock Outstanding after
the Offering(1)................. 8,707,098 shares
Use of Proceeds.................. To finance leasehold acquisition costs,
seismic data acquisition costs, and
processing and analysis costs principally in
respect of the Company's West Cameron Seismic
Project, drilling participation costs, and,
to a lesser extent, for general corporate
purposes, including working capital.
Nasdaq SmallCap Market Symbol.... "ZNRG"
</TABLE>
- --------
(1) Excludes 5,885,799 shares issuable upon exercise of outstanding options,
unit options and warrants. See "Capitalization."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (1)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SALES PRICE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 17,
THREE MONTHS YEAR ENDED 1994)
ENDED MARCH 31, DECEMBER 31, THROUGH
-------------------- -------------------- DECEMBER 31,
1997 1996 1996 1995 1994
--------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Operating revenues...... $ 374 $ 252 $ 1,470 $ 587 $ --
Operating expenses...... 991 713 3,577 1,737 110
--------- --------- --------- --------- ---------
Operating loss.......... (617) (461) (2,107) (1,150) (110)
Other income (expense).. 51 72 249 (24) (23)
--------- --------- --------- --------- ---------
Net loss................ $ (566) $ (389) $ (1,858) $ (1,174) $ (133)
========= ========= ========= ========= =========
Net loss per share of
Common Stock and Common
Stock equivalent ...... $ (0.09) $ (0.07) $ (0.30) $ (0.30) $ (0.03)
========= ========= ========= ========= =========
Weighted average shares
of Common Stock and
Common Stock
equivalents
outstanding............ 6,593,648 5,799,117 6,168,798 3,906,706 4,468,777
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1997
--------------------
ACTUAL AS ADJUSTED(2)
------ -------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities.......... $7,645 $17,280
Working capital........................................... 4,149 13,784
Total assets.............................................. 9,539 19,174
Stockholders' equity...................................... 5,774 15,409
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
THREE MONTHS (MARCH 17,
ENDED MARCH YEAR ENDED 1994)
31, DECEMBER 31, THROUGH
-------------- -------------- DECEMBER 31,
1997 1996 1996 1995 1994
------- ------ ------- ------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Production:
Oil (Bbls)......................... 3,280 3,481 20,186 1,118 --
Natural gas (Mcf).................. 103,241 74,278 372,678 84,546 --
Average sales prices:
Oil ( per Bbl)..................... $ 23.37 $19.64 $ 22.39 $18.37 $--
Natural gas ( per Mcf)............. $ 2.88 $ 2.47 $ 2.60 $ 1.76 $--
</TABLE>
- --------
(1) On December 20, 1995, TN Acquisition Corp. ("TN Acquisition"), a wholly-
owned subsidiary of the Company, merged with and into Zydeco Exploration,
Inc. ("Zydeco Exploration") in a reverse triangular merger (the "Merger").
As a result, Zydeco Exploration became a wholly-owned subsidiary of the
Company and the Company, formerly known as "TN Energy Services Acquisition
Corp." changed its name to "Zydeco Energy, Inc." Under accounting rules
applicable to the Merger, the historical financial statements of Zydeco
Exploration became the historical financial statements of the Company. For
the years ended December 31, 1996 and 1995 and the period from Inception
(March 17, 1994) through December 31, 1994, the historical financial data
has been derived from financial statements audited by independent public
accountants as indicated in their report included in this Prospectus. The
financial data set forth above should be read in conjunction with the
consolidated financial statements of the Company together with the related
notes thereto included elsewhere herein and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(2) Adjusted to reflect the sale of 2,000,000 Shares offered hereby at an
assumed offering price of $5.41 per share after deducting underwriting
discounts and commissions and estimated offering expenses and the
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."
6
<PAGE>
SUMMARY OIL AND GAS RESERVE INFORMATION
The following table sets forth summary information with respect to the
Company's estimated proved oil and gas reserves as of December 31, 1996. The
reserve and present value data as of December 31, 1996 have been prepared by
Ryder Scott Company Petroleum Engineers, independent petroleum engineering
consultants. For additional information relating to the Company's proved
reserves, see "Business and Properties--Oil and Gas Reserves."
<TABLE>
<CAPTION>
RESERVES
------------------
PROVED TOTAL
DEVELOPED PROVED
--------- --------
<S> <C> <C>
Oil (Bbls)............................................. 10,052 10,052
Natural gas (Mcf)...................................... 243,000 243,000
Net equivalent Mcf's................................... 303,312 303,312
Present value of estimated future net cash flows,
discounted at 10%...................................... $999,818 $999,818
</TABLE>
7
<PAGE>
RISK FACTORS
Statements contained in this Prospectus concerning expected 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. When used in this
Prospectus the words "expect," "estimate," "project" and similar expressions
are also intended to identify forward-looking statements. All such 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. The Company's assumptions and the Company's actual
future performance, however, 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. The securities offered hereby involve a high degree of risk. Each
prospective investor should carefully consider, among other factors, the
following risks inherent in, and affecting the business of the Company and the
securities offered hereby before making an investment decision. Some of these
risks are described in summary form below. Investors should read the section
or sections of this Prospectus cross-referenced below for a more complete
discussion of certain of these risks.
LIMITED OPERATING HISTORY AND SIGNIFICANT HISTORICAL OPERATING LOSSES
The Company has a limited operating history. Potential investors, therefore,
have limited historical financial and operating information upon which to base
an evaluation of the Company's performance and an investment in the Shares.
The Company's potential must be considered in light of the risks, expenses and
difficulties frequently experienced by companies in the early stages of their
development. As a result of operating expenses, the Company has incurred
significant operating and net losses to date. Net losses for the period from
inception on March 17, 1994 through December 31, 1994, and for the years ended
December 31, 1995 and 1996 were approximately $0.1 million, $1.2 million and
$1.9 million respectively. Net loss for the three month period ended March 31,
1997 was approximately $0.6 million. At March 31, 1997, the Company had
accumulated a deficit of $3.7 million. The Company's future financial results
will depend primarily on its ability to locate hydrocarbons economically in
commercial quantities, to identify drillable prospects that result in
profitable productive wells and on the market prices for oil and gas. There
can be no assurance that the Company will achieve or sustain profitability or
positive cash flows from operating activities in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
NEED FOR ADDITIONAL FINANCING
Most of the Company's operations are in the early stages of oil and gas
exploration. The Company's operations have not generated and, in the near
future, are not expected to generate, cash flows sufficient to fund operations
and exploration expenditures. Accordingly, the Company expects that it will
need substantial additional capital in order to sustain operations, to fund
anticipated expenditures for the acquisition of additional oil and gas leases
and to drill wells on the Company's prospects, if any. The Company incurred
capital expenditures of $11.2 million (including exploration costs of
approximately $1.8 million) in the six months ended June 30, 1997 and plans to
incur capital expenditures of approximately $4.5 million (including
exploration costs of approximately $2.7 million) in the remaining two quarters
of 1997. Management believes that the Company will have sufficient cash,
including the net proceeds of the offering made by this Prospectus (the
"Offering"), to fund planned expenditures to January 1, 1999. Additional
capital may be secured from a combination of funding sources that may include
borrowings from financial institutions, joint venture partnerships, vendor
financings, production payment financings, debt offerings, or additional
offerings of the Company's stock. The timing and extent of the need for
additional financing will depend, in part, on whether Cheniere elects to
continue to provide funds pursuant to the Cheniere Exploration Agreement. The
Company's ability to access additional capital will depend on its success in
acquiring and developing oil and gas exploration prospects with commercial oil
and gas reserve potential and on the productivity of the oil and gas leases
which the Company owns, or controls or acquires in the future. The Company's
ability to meet its needs for additional financing will also depend on the
8
<PAGE>
status of various capital markets and industry conditions at the time such
additional capital is sought. There is no assurance that capital will be
available to the Company from any source or that, if available, it will be on
terms acceptable to the Company. There can be no assurance that the Company
will be able to generate or raise sufficient capital to enable it to realize
fully all of its strategic objectives. Should sufficient financing not be
available because costs are higher than estimated, a partner on a project
fails to meet its financing obligations or otherwise, the development and
exploration of any prospect developed by the Company would be delayed or
possibly lost and, accordingly, the implementation of the Company's business
strategy could be adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business and
Properties--Strategy."
OIL AND GAS INDUSTRY CONDITIONS AND PRICE VOLATILITY
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 small 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. 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
will reduce the amount of the Company's oil and gas reserves that can be
economically produced or make some potential prospects uneconomical to
develop. 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 materially adversely affect the Company's ability to
market its oil and gas production. See "Business and Properties--Competition
and Markets" and "--Governmental Regulation."
RELIANCE ON TECHNOLOGY
The Company uses its recently developed Wavefield Imaging Technology to
gather and analyze the seismic data it acquires. The Company has recently
acquired Wavefield, the owner of the Wavefield Imaging Technology. The
Wavefield Imaging Technology has not yet been used to identify a prospect
which was then drilled and shown to have proved reserves. On July 3, 1997, the
Company received notice that a patent application in respect of the Wavefield
Imaging Technology has been allowed for patent issuance by the United States
Patent and Trademark Office. The Company expects that the patent will be
issued in a few months. Prior to the acquisition, Wavefield granted licenses
for the Wavefield Imaging Technology to one major oil company and one foreign
company and offered a license to another foreign company.
A number of other companies are engaged in the research and development of
seismic acquisition and analysis technology. In the future, such companies may
develop more advanced seismic imaging and analysis technology which could be
made available to the Company's competitors, but may not be made available to
the Company. If the Company is unable to utilize the most advanced
commercially available technology, the Company's business, financial condition
and results of operations could be materially and adversely affected. See
"Business and Properties--Technology."
DEPENDENCE UPON SUCCESSFUL IDENTIFICATION OF PROSPECTS
The Company will, for the near future, dedicate substantial capital
resources to identifying and developing potential prospects on existing or
future acquired leases utilizing its enhanced 3D seismic technology. A
significant investment will be required to obtain, process and interpret the
additional geophysical and geological data necessary to complete this
analysis, particularly with respect to the West Cameron Seismic Project. There
9
<PAGE>
can be no assurance that after such expenditures the Company will identify any
prospects suitable for drilling on its current leases or on future acquired
leases. Because of the inherent uncertainties in developing specific
exploratory prospects pursuant to this analysis, there is also no assurance as
to the timing or amount of drilling operations that the Company may undertake.
The inability to identify sufficient prospects suitable for drilling will have
a material adverse effect on the Company's business, financial position and
results of operations. See "Business and Properties."
DEPENDENCE UPON SUCCESSFUL LEASE ACQUISITION ACTIVITIES
If the Company identifies areas with significant potential for oil and gas
reserves, the success of the Company's business plan will be dependent upon
the successful acquisition of leasehold or other drilling rights in the
identified properties. Governmental entities generally award oil and gas
leases on a competitive bidding basis. For example, while the Company has
retained the exclusive right to nominate for bid any acreage covered by its
state waters seismic permit relating to the West Cameron Seismic Project until
February 1998, the bidding for such acreage will be competitive. The
acquisition of onshore oil and gas leaseholds and related seismic rights is
often extremely competitive. The Company expects that other major and
independent oil and gas companies having financial resources significantly
greater than those of the Company will compete with the Company for the
acquisition of oil and gas leases in areas targeted by the Company.
Accordingly, there can be no assurance that the Company will be successful in
acquiring any leases on which it bids even after incurring significant
expenditures. See "Business and Properties."
EXPLORATION AND OPERATING RISKS OF OIL AND GAS OPERATIONS
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 Louisiana Transition Zone and any other
areas in which the Company may conduct such activities. Risks in exploratory
drilling include the risk that no commercially productive oil and gas
reservoirs will be encountered. Risks in exploration also include liability to
landowners for damage caused by seismic charges and delays due to weather and
sea conditions. The cost of drilling, completing and operating wells is often
uncertain and drilling operations may be curtailed, delayed or canceled as a
result of a variety of factors including unexpected formation and drilling
conditions, pressure or other irregularities in formations, equipment failures
or accidents and delays in the delivery of equipment. Risks in drilling
operations also 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, loss of life, 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 or
all of which could adversely affect the Company.
The Company's operations could also result in liability for oil spills,
discharge of hazardous materials, other environmental damages and other
property damage. 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. There can be no assurance, however, that
any insurance coverage 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. See "Business and
Properties--Operational Risks and Insurance." 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. See "Business and Properties--Governmental
Regulation."
Most of the oil and gas leases the Company has acquired or currently 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 susceptible to the risks
described above.
COMPETITION
The exploration for and production of oil and gas are highly competitive.
Many companies and individuals are engaged in the business of exploring for,
acquiring interests in and developing onshore and near onshore oil and gas
properties in the United States. The Company competes with major and
independent oil and gas
10
<PAGE>
companies for the acquisition of oil and gas leases and producing properties
as well as for the capital, equipment and experienced labor required to
locate, develop and operate such properties. Many of these competitors have
financial, technical, human and other resources substantially greater than
those of the Company. Such competitive disadvantages could affect the
Company's ability to successfully identify, obtain rights to, and develop
prospects. See "Business and Properties--Competition and Markets"
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company may experience significant fluctuations in its quarterly
operating results. The Company's future operating results are dependent upon a
number of factors, including, but not limited to, the success of the
exploration and drilling activities of the Company and its industry partners,
the timing of the expenses incurred for such activities, the demand for oil
and gas and economic conditions, both generally and in the oil and gas
industry. In particular, a dry hole or failure to obtain a lease for a
prospect on which the Company has incurred substantial exploration costs could
have an almost immediate impact on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
CONFLICTS OF INTEREST
Certain of the Company's officers, directors, employees and stockholders own
working and overriding royalty interests in leases owned by the Company or
that adjoin, or are in the vicinity of, some of the potential prospects
described herein. Such officers, directors, employees and stockholders will
continue to conduct operations on such leases, including, without limitation,
acquiring or shooting, processing and/or reprocessing seismic data,
remediating or recompleting existing wells and/or the drilling of new wells.
Hence, a conflict of interest may exist if the Company proposes to drill or
farmout for the drilling of a well or wells upon leases it currently owns and
leases immediately offsetting the leases owned by its officers, directors,
employees or stockholders.
Certain members of the Company's management team are also investors,
executive officers and/or directors of other small privately owned independent
oil companies with limited operations. Though these members of the Company's
management team intend to spend the substantial majority of their business
time managing the affairs of the Company, there may be a conflict of interest
in the apportionment of management time between the business matters of the
Company and any other positions they hold. Company transactions with related
parties have been and will be subject to the approval of the independent
directors. See "Management--Conflicts of Interest."
DEPENDENCE ON MANAGEMENT AND KEY PERSONNEL
The Company believes that its success will be highly dependent upon its
continued ability to attract and retain skilled senior management and key
personnel, including Sam B. Myers, Jr., Chairman and Chief Executive Officer,
Edward R. Prince, Jr., Vice Chairman, John O. Smith, President and Chief
Operating Officer and Norman S. Neidell, Vice President--Innovation, and
skilled exploration personnel. Furthermore, due to the recent increase in
exploration activity in the Gulf Coast, it is becoming increasingly more
difficult to attract and retain experienced and skilled exploration personnel.
Although the Company's employees intend to devote substantially all of their
time to the Company, they may devote a minor portion of their business time to
other business ventures. 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. The Company has not entered into employment
agreements with any of the foregoing individuals (other than Dr. Neidell), or
obtained key-man insurance on any officers or employees of the Company. The
Company does have employment agreements with three of its other employees. See
"Management."
COMPLIANCE WITH GOVERNMENTAL REGULATIONS
The Company's business is 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
11
<PAGE>
political conditions. Matters subject to regulation include permits for
drilling operations, drilling and abandonment bonds, reports concerning
operations, the spacing of wells, unitization and forced 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 the protection of human health and the environment.
These laws and regulations have 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 increasing
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. Any
new legislation or taxes, if enacted, could have a significant adverse impact
on the Company's operating costs. See "Business and Properties--Governmental
Regulation."
UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES
There are numerous uncertainties inherent in estimating oil and gas reserves
and in projecting future rates of production. Petroleum engineering is a
subjective process of estimating underground accumulations of oil and gas that
cannot be measured in an exact manner. Estimates of economically recoverable
oil and gas reserves and of future net cash flows depend upon a number of
variable factors and assumptions, such as historical production from the area
compared with production from other producing areas, the assumed effects of
regulations by governmental agencies, and assumptions concerning future oil
and gas prices, future operating costs, severance and excise taxes,
development costs, and workover and remedial costs, all which may vary
considerably from actual results. For these reasons, estimates of the
economically recoverable quantities of oil and gas attributable to any
particular group of properties, classifications of such reserves based on risk
of recovery and estimates of the future net cash flows, expected therefrom
prepared by different engineers or by the same engineers at different times
may vary substantially. Actual production, revenues and expenditures with
respect to the Company's reserves will likely vary from estimates, and such
variances may be material. See "Business and Properties--Oil and Gas
Reserves."
SHARES ELIGIBLE FOR FUTURE SALES; POTENTIAL ADVERSE EFFECT ON MARKET PRICE AND
DILUTION FROM EXERCISE OF WARRANTS AND OPTIONS
The Company's Certificate of Incorporation authorizes the issuance of
50,000,000 shares of Common Stock, of which 8,707,098 shares would be
outstanding as of the date of this Prospectus after giving effect to
completion of the Offering. In addition, as of the date of this Prospectus,
the Company had outstanding (i) unit options and warrants to acquire 4,005,668
shares of Common Stock exercisable at an average price of $5.50 per share;
(ii) options to acquire 993,131 shares of Common Stock at an average price of
$1.60 per share, granted by Zydeco Exploration to its employees and assumed by
the Company; and (iii) 995,000 shares eligible for issuance pursuant to the
Company's 1996 Incentive Equity Plan and the Company's 1996 Non-employee
Directors Stock Option Plan, of which options for the purchase of 887,000
shares have been granted and currently remain outstanding as of the date of
this Prospectus and are exercisable at an average price of $5.92 per share.
See "Description of the Company's Securities." Most of the shares issuable
upon the exercise of outstanding options and warrants will become immediately
available for resale in the public market. In addition, the Company expects to
issue 150,000 additional shares to the shareholders of Wavefield pursurant to
the issuance of a patent of the Wavefield Imaging Technology. See "Business
and Properties--Technology." The Company and its officers, directors and
certain stockholders have agreed to not offer, sell, grant any option (except
pursuant to stock option plans) to purchase or otherwise dispose of a total of
4,436,470 shares held by such parties during the 180 days following the sale
of the shares being offered hereby without the prior consent of Brean Murray &
Co., Inc. See "Underwriting" and "Principal Stockholders." Sales of
substantial numbers of such shares in the public market could adversely affect
the market price of the Common Stock.
12
<PAGE>
STOCK PRICE VOLATILITY; LIMITED MARKET FOR THE COMPANY'S COMMON STOCK
Factors such as announcements of technological innovations by the Company or
its competitors, as well as market conditions generally or in the oil and gas
industry, or changes in earnings estimates by securities analysts may cause
the market price of the Common Stock to fluctuate significantly. In addition,
the stock market in recent years has experienced significant price and volume
fluctuations which have particularly affected the market prices of equity
securities of many high technology and oil and gas exploration companies and
which often have been unrelated to the operating performance of such
companies. These market fluctuations may adversely affect the price of the
Common Stock. See "Price Range of Common Stock and Dividend Policy." In
addition, although the Common Stock is listed on the Nasdaq SmallCap Market,
the public market for the Common Stock has been relatively small. Stocks with
small markets and limited liquidity may experience fluctuations in their
prices due to imbalances between orders to buy and orders to sell the stock.
There can be no assurance as to when an active public market for the Common
Stock will develop, if at all. If, during the time in which the Common Stock
is quoted on the Nasdaq SmallCap Market, the Common Stock in any transaction
is priced below $5.00 per share, trading of the Common Stock may become
subject to federal regulations governing "penny stocks" (the "Penny Stock
Rules"). Application of the Penny Stock Rules may make it more difficult for
brokers to sell the Common Stock, and purchasers of the Common Stock offered
hereby may have difficulty in selling their shares in the future in the
secondary trading market.
POTENTIAL ADVERSE IMPACT OF ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and Bylaws and the provisions of
Delaware General Corporation Law contain provisions which may be deemed to
have the effect of discouraging a third party from pursuing a non-negotiated
takeover of the Company because they have the effect of delaying, deterring or
preventing a change in control of the Company. The Company's Certificate of
Incorporation authorizes the issuance of "blank check" preferred stock with
such rights and preferences as may be determined from time to time by the
Board of Directors without stockholder approval. In the event of issuance, the
preferred stock could be used, under certain circumstances, to discourage,
delay or prevent a change in control of the Company even though such an
attempt might be economically beneficial to the stockholders of the Company.
Such provisions may have an adverse impact on the price of the securities of
the Company that are traded in the public market. See "Description of
Company's Securities."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 Shares
offered hereby are estimated to be approximately $9,634,600, ($11,143,990 if
the Underwriters' over-allotment option is exercised in full) based on an
assumed public offering price of $5.41 per share, after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company.
The Company currently intends to use such net proceeds to finance leasehold
acquisition costs, seismic data acquisition costs, processing and analysis
costs primarily in connection with the West Cameron Seismic Project, and, to a
lesser extent, for general corporate purposes, including working capital. The
Company may use a portion of the net proceeds from the Offering to participate
in the drilling of oil and gas wells if an opportunity to do so arises.
Pending such uses, the Company intends to invest the net proceeds in short-
term, interest bearing, investment grade securities.
The Company expects to require funds, in addition to the proceeds from this
Offering, to complete all of the leasehold acquisitions for the West Cameron
Seismic Project. There can be no assurance that the Company will be able to
generate or raise sufficient capital to enable it to realize fully all of its
strategic objectives. The timing of the need for additional funds will depend,
in part, on whether or not Cheniere continues to provide funds for the West
Cameron Seismic Project. See "Risk Factors--Need for Additional Financing" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
14
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Shares of the Company's Common Stock and warrants (the "Warrants"), each
entitling the holder thereof to purchase one share of Common Stock for $5.50
per share ,were quoted on the OTC Bulletin Board under the symbols "TNER," and
"TNERW," respectively, from December 21, 1993 until December 21, 1995 and on
the Nasdaq SmallCap Market under the symbols "ZNRG" and "ZNRGW" respectively
since that time.
The following table sets forth the range of high and low bid quotations of
the Common Stock for each of the fiscal quarters or portion thereof for the
period from January 1, 1995 through December 21, 1995, as reported by the OTC
Bulletin Board and since December 22, 1995 as reported by the Nasdaq SmallCap
Stock Market. The quotes represent "inter-dealer" prices without retail
markups, markdowns or commissions and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
Year Ended December 31, 1995
First Quarter.............................................. $4.66 $4.25
Second Quarter............................................. 4.84 4.62
Third Quarter.............................................. 5.00 4.76
Fourth Quarter............................................. 6.00 4.94
Year Ended December 31, 1996
First Quarter.............................................. $7.00 $5.12
Second Quarter............................................. 8.00 5.75
Third Quarter.............................................. 7.25 4.50
Fourth Quarter............................................. 6.87 4.37
Year Ending December 31, 1997
First Quarter.............................................. $7.87 $6.12
Second Quarter ............................................ 6.75 4.50
</TABLE>
As of July 1, 1997, the last reported sales price for the Company's Common
Stock on the Nasdaq SmallCap Market was $5.41 per share. At July 1, 1997, the
Company had approximately 56 stockholders of record. The Company believes that
certain holders of record hold a substantial number of shares of Common Stock
as nominees for a significant number of beneficial owners.
The Company has not paid any dividends on its shares of Common Stock to date
and the payment of future dividends is in the discretion of the Board of
Directors. It is the present intention of the Board of Directors to retain all
earnings, if any, for use in the Company's business operations and,
accordingly, the Board does not anticipate declaring any dividends in the
foreseeable future.
15
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of March 31, 1997 and as adjusted to reflect the issuance and sale of the
2,000,000 Shares offered hereby at an assumed offering price of $5.41 per
share and after deducting underwriting discounts and commissions and estimated
offering expenses as if the Offering had occurred March 31, 1997. This table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and Notes to Consolidated Financial Statements included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
AT MARCH 31, 1997(1)
--------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt........................................... $ -- $ --
Stockholders' equity:
Convertible preferred stock; $.001 par value; 1,000,000
shares authorized;
no shares outstanding................................. -- --
Common Stock, $.001 par value; 50,000,000 shares
authorized; 7,374,903 (9,374,903 as adjusted) shares
issued; and 6,593,648 (8,593,648 as adjusted) shares
outstanding........................................... 7 9
Additional paid-in capital............................. 9,504 19,137
Accumulated deficit.................................... (3,730) (3,730)
Less treasury stock (at cost, 781,255 shares).......... (7) (7)
------- -------
Total stockholders' equity............................. 5,774 15,409
------- -------
Total capitalization................................. $ 5,774 $15,409
======= =======
</TABLE>
- --------
(1) As of March 31, 1997, the Company had outstanding (i) options to acquire
150,000 units, exercisable at $6.60 per unit, composed of one share of
Common Stock and two warrants to purchase one share of Common Stock each
for $5.50; (ii) warrants to acquire 3,558,129 shares of Common Stock
exercisable at an average price of $5.45 per share; (iii) options to
acquire 1,004,693 shares of Common Stock at an average price of $1.60 per
share, granted by Zydeco Exploration to its employees and assumed by the
Company; and (iv) 995,000 shares of Common Stock eligible for issuance
pursuant to the Company's 1996 Incentive Equity Plan and the Company's
1996 Non-employee Director Stock Option Plan, of which options for the
purchase of 615,000 shares of Common Stock were outstanding with a
weighted average exercise price of $6.06 per share. Since March 31, 1997,
the Company has (i) issued 13,450 shares of Common Stock as a result of
the exercise of 11,562 employee options and 1,888 Zydeco Exploration
Warrants (net of 573 Zydeco Exploration Warrants tendered as payment of
the exercise price); (ii) granted options to purchase 272,000 shares of
Common Stock pursuant to the 1996 Incentive Equity Plan, and (iii) the
Company acquired all the outstanding stock of Wavefield Image, Inc., in
exchange for 100,000 shares of Common Stock and an additional 150,000
shares contingent upon the issuance of the U.S. patent in respect of the
Wavefield Imaging Technology, which patent application has been allowed
for patent issuance by the United States Patent and Trademark Office.
16
<PAGE>
DILUTION
The net tangible book value of the Company as of March 31, 1997 was
$5,766,290 or $0.87 per share of Common Stock. Net tangible book value per
share of Common Stock represents the net tangible assets, less the total
liabilities, divided by the number of shares of Common Stock outstanding.
After giving effect to the sale by the Company of the 2,000,000 Shares offered
hereby at an assumed public offering price of $5.41 per share, and after
deducting underwriting discounts and commissions and estimated offering
expenses, the net tangible book value of the Company as of March 31, 1997
would have been $15,401,290 or $1.79 per share of Common Stock. This
represents an immediate increase in such net tangible book value of $0.92 per
share to existing stockholders and an immediate dilution of $3.62 per share to
new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share...................... $5.41
Net tangible book value per share at March 31, 1997........ $0.87
Increase in net tangible book value per share attributable
to new investors.......................................... 0.92
-----
Net tangible book value per share after giving effect to
this offering............................................. 1.79
-----
Dilution per share to new investors........................ $3.62
=====
</TABLE>
The foregoing assumes no exercise of the Underwriters over-allotment option
or options, unit options and warrants after March 31, 1997. As of March 31,
1997, there were outstanding options, unit options or warrants to purchase an
aggregate of 5,627,822 shares of Common Stock, and the Company had also
reserved up to an additional 380,000 shares of Common Stock for issuance upon
the exercise of options which had not yet been granted under the Company's
1996 Incentive Equity Plan and 1996 Non-employee Director Stock Option Plan.
To the extent options, unit options or warrants are exercised, there will be
further dilution to new investors. See "Capitalization."
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth the selected consolidated financial data with
respect to the Company, for the periods and at the dates indicated, which have
been derived from the audited financial statements, except for the interim
financial statements, of the Company included in this Prospectus. On December
20, 1995, TN Acquisition, Corp. a wholly-owned subsidiary of the Company,
merged with and into Zydeco Exploration in a reverse triangular merger. As a
result, Zydeco Exploration became a wholly-owned subsidiary of the Company.
Under accounting rules applicable to the Merger, the historical financial
statements of Zydeco Exploration became the historical financial statements of
the Company. The data set forth below should be read in conjunction with the
consolidated financial statements of the Company together with the related
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," each included elsewhere herein.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 17,
THREE MONTHS YEAR ENDED DECEMBER 1994)
ENDED MARCH 31, 31, THROUGH
-------------------- -------------------- DECEMBER 31,
1997 1996 1996 1995 1994
--------- --------- --------- --------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Operating revenues
Oil and gas sales...... $ 374 $ 252 $ 1,422 $ 169 $ --
Gain on sales of
properties............ -- -- 16 118 --
Seismic services....... -- -- 32 300 --
--------- --------- --------- --------- ---------
374 252 1,470 587 --
Operating costs and
expenses
Exploration expenses
Geological and
geophysical expenses.. 445 209 968 399 --
Dry hole costs......... 16 -- 700 262 30
Production costs....... 5 7 22 28 --
Seismic services costs. -- -- -- 200 --
Depreciation,
depletion, and
amortization.......... 169 110 631 392 7
General and
administrative
expenses.............. 356 387 1,256 456 73
--------- --------- --------- --------- ---------
991 713 3,577 1,737 110
Operating loss.......... (617) (461) (2,107) (1,150) (110)
Other income (expense)
Interest income........ 58 86 293 46 49
Interest expense....... (7) (14) (44) (70) (72)
--------- --------- --------- --------- ---------
51 72 249 (24) (23)
--------- --------- --------- --------- ---------
Net loss................ $ (566) $ (389) $ (1,858) $ (1,174) $ (133)
========= ========= ========= ========= =========
Net loss per share of
Common Stock and Common
Stock equivalent....... $ (0.09) $ (0.07) $ (0.30) $ (0.30) $ (0.03)
========= ========= ========= ========= =========
Weighted average
shares of Common
Stock and Common
Stock equivalents
outstanding............ 6,593,648 5,799,117 6,168,798 3,906,706 4,468,777
========= ========= ========= ========= =========
<CAPTION>
AT DECEMBER 31,
AT MARCH 31, ----------------------------------
1997 1996 1995 1994
------------ --------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash, cash equivalents
and marketable
securities............ $ 7,645 $ 7,753 $ 11,456 $ 876
Working capital........ 4,149 4,660 7,334 564
Total assets........... 9,539 9,912 12,582 2,696
Long-term capital lease
obligation............ -- -- 158 304
Total stockholders'
equity................ 5,774 6,339 8,189 2,068
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company (formerly "TN Energy Services Acquisition Corp.") was
incorporated in June 1993. Other than raising capital and reviewing
acquisition candidates, the Company did not engage in any significant business
activities prior to December 1995. Zydeco Exploration, the Company's wholly
owned subsidiary, was incorporated as an independently owned corporation in
March 1994. Zydeco Exploration immediately commenced exploration activities in
the Louisiana Transition Zone. On December 20, 1995, the Company acquired all
the outstanding common stock and preferred stock of Zydeco Exploration
pursuant to a merger (the "Merger") and changed its name to Zydeco Energy,
Inc. For accounting purposes, the Merger has been treated as a
recapitalization of Zydeco Exploration with Zydeco Exploration as the acquiror
(a reverse acquisition). Accordingly, the historical financial statements
prior to December 20, 1995, are those of Zydeco Exploration. No pro forma
information giving earlier effect to the transaction has been presented since
the transaction was accounted for as a recapitalization.
In May 1996, the Company entered into a license agreement with Dr. Norman
Neidell ("Neidell") for the use of the Wavefield Imaging Technology, the
benefits of which may substantially reduce the Company's total costs of
seismic data acquisition for certain surveys. On July 1, 1997, the Company
acquired Wavefield, the owner and licensor of the rights to the Wavefield
Imaging Technology. On July 3, 1997, the Company received notice that a patent
application in respect of the Wavefield Imaging Technology was allowed for
issuance by the United States Patent and Trademark Office. The Company expects
that the patent will be issued in a few months. See "Business and Properties--
Technology."
In February 1996, the Company obtained an exclusive seismic permit from the
State of Louisiana covering approximately 51,000 acres of state waters in
western Cameron Parish, Louisiana, which will expire on August 18, 1997. The
Company paid a fee of $783,754 for the permit. The Company may extend the
permit period to February 18, 1998 by payment of an additional fee of
$391,877. During such period the Company has the exclusive right to nominate
parcels of such area for competitive bidding for drilling rights. Under the
permit, the State of Louisiana is required to keep the information obtained
from the survey confidential for a period of ten years. See "Business and
Properties--West Cameron Seismic Project."
In April 1996, the Company executed the Cheniere Exploration Agreement with
Cheniere, for the West Cameron Seismic Project, covering an area of land and
waters in western Cameron Parish, Louisiana, including the area covered by the
seismic permit described above. Cheniere holds an interest of 50% in the West
Cameron Seismic Project. In exchange for such interest, Cheniere has agreed to
fund the costs of seismic acquisition up to $13.5 million and 50% of such
costs in excess of $13.5 million. Such costs include the purchase of seismic
rights, the cost of 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. Cheniere may elect to discontinue
funding of the West Cameron Seismic Project at any time, in which case its
interest would be reduced pro rata in relation to total project costs. As of
July 1, 1997, Cheniere had made payments of $12.0 million against costs
incurred on the West Cameron Seismic Project of approximately $15.5 million.
See "Risk Factors--Need for Additional Financing."
In connection with the West Cameron Seismic Project, the Company began
onshore leasing and permitting in February 1996. Seismic data acquisition
commenced in August 1996 and was discontinued in early December due to weather
conditions and recommenced in April 1997. As of July 1, 1997, approximately
132,000 acres, out of a total of 146,000 acres to be surveyed, had been
surveyed and seismic data acquired.
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
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the U. S. Bankruptcy Code and is currently restructuring its operations. In
March 1997, the Company and Grant executed a new Master Geophysical Data
Acquisition Agreement (the "Grant Agreement"), providing for reimbursement of
Grant under a "cost plus" services arrangement, which could have the effect of
increasing seismic data acquisition costs. See "--Liquidity and Capital
Resources."
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1996
Oil and Gas Sales. Oil and gas sales increased by $122,459, or 49%, to
$373,994 for the quarter ended March 31, 1997 from $251,535 for the quarter
ended March 31, 1996. The increase was attributable to an increase in
production volumes of $67,482 and an increase in the average prices for oil
and natural gas of $54,977. The increased prices and volumes from oil and gas
in first quarter 1997, compared to the same quarter in 1996, demonstrate the
sensitivity of the Company's operations to price fluctuations and its current
dependence on a small number of producing wells. The following table sets
forth information concerning crude oil, and natural gas sales volumes, average
sales prices, and per barrel oil equivalent ("NBOE") operating costs
(excluding depreciation, depletion, and amortization hereinafter referred to
as "DD&A") for the Company's exploration and production activities for the
indicated periods:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH
31,
--------------
1997 1996
------- ------
<S> <C> <C>
Sales volumes:
Natural gas (mcf)............................................. 103,241 74,278
Crude oil (bbl)............................................... 3,280 3,481
NBOE (bbl).................................................... 20,487 15,861
Average sales prices:
Natural gas ($/mcf)........................................... $ 2.88 $ 2.47
Crude oil ($/bbl)............................................. $ 23.37 $19.64
Lease operating expense ($/NBOE)................................ $ 0.28 $ 0.41
DD&A ($/NBOE) (1)............................................... $ 1.66 $ 2.00
</TABLE>
- --------
(1) Excludes depreciation on seismic computer hardware and software of
$136,640 and $78,686 for the three months ended March 31, 1997 and 1996
respectively.
Operating Expenses. Exploration expenses increased $252,088, or 121%, to
$460,688 for the quarter ended March 31, 1997 from $208,600 for the quarter
ended March 31, 1996. The increase was primarily a result of increased
personnel associated with the Company's two exploration projects. Production
costs from the one working interest well decreased 13% to $5,690. DD&A expense
in the first quarter of 1997 increased $58,278, or 53%, to $168,643 from
$110,365 for the first quarter of 1996. The increase was principally a result
of additional depreciation and amortization on additions of computer equipment
and geophysical software.
20
<PAGE>
Other Income (Expense). Net other income decreased $21,280, or 29%, to
$51,531 for the three months ended March 31, 1997 compared to net other income
of $72,811, for the three months ended March 31, 1996, principally as a result
of decreased interest income due to the decrease in available cash.
Net Loss. For the quarter ended March 31, 1997, operations resulted in a net
loss of $565,617 ($.09 per share) compared to a net loss of $388,566 ($.07 per
share) for the comparable period in 1996. The increase in net loss of
$177,051, or 46%, was due to increased revenue of $122,459, increased
operating expenses of $278,230, and a decrease in net other income of $21,280.
The $.02 increase in per share loss was also affected by the increased number
of shares of common stock outstanding in the first quarter of 1997,
principally due to the conversion of the preferred stock in July 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
During 1996 and 1995, the Company's primary operations consisted of the
acquisition of federal and state oil and gas leases, the acquisition of 3D
seismic analysis hardware and software, the purchase of an interest in a gas
well which commenced production in January 1995, and the farmout of two leases
(one of which resulted in commercial production commencing in December 1995).
Exploration activities in 1995 also included a one-eighth participation in the
drilling of an exploratory well which resulted in a dry hole in March 1995.
Exploration activities in 1996 included a joint venture participation in the
drilling of one well that was abandoned in September 1996 without reaching the
well's primary objectives. The Company also initiated two seismic exploration
joint ventures, one in 1995 and one in 1996, with industry partners who are
required under the agreements to fund substantially all the Company's share of
the seismic project costs, up to certain limits. See "Note 2--Exploration
Agreements" in Notes to Consolidated Financial Statements.
The following table sets forth information concerning crude oil and natural
gas sales volumes, average sales prices, and per NBOE operating costs
(excluding DD&A) for the Company's exploration and production activities for
the indicated periods:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM INCEPTION
DECEMBER 31, (MARCH 17, 1994)
-------------- THROUGH
1996 1995 DECEMBER 31, 1994
------- ------ ---------------------
<S> <C> <C> <C>
Sales volumes:
Natural gas (mcf)................... 372,678 84,546 --
Crude oil (bbl)..................... 20,186 1,118 --
NBOE (bbl).......................... 82,299 15,209 --
Average sales prices:
Natural gas ($/mcf)................. $ 2.60 $ 1.76 $--
Crude oil ($/bbl)................... $ 22.39 $18.37 $--
Lease operating expense ($/NBOE)...... $ 0.27 $ 1.81 $--
DD&A ($/NBOE) (1)..................... $ 1.73 $ 7.50 $--
</TABLE>
- --------
(1) Excludes depreciation on seismic computer hardware and software of
$488,521 and $278,297 for the years ended December 31, 1996 and 1995
respectively.
Oil and Gas Sales. Oil and gas sales increased by $1,252,992, or 740%, to
$1,422,227 for the year ended December 31, 1996 from $169,235 for the year
ended December 31, 1995. Of this increase, $856,961 was attributable to an
increase in production volumes and $396,031 was due to increases in the
average prices for oil and gas. Of the increase in oil and gas sales,
production from one well aggregated $1,007,613. This well commenced initial
production in December 1995 from a completion by Bois D'Arc Resources in which
21
<PAGE>
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.
Operating Expenses. Exploration expenses increased $1,006,964, or 152%, to
$1,667,523 for the year ended December 31, 1996 from $660,559 for the year
ended December 31, 1995. The increase was primarily a result of one well
abandoned in September 1996 ($647,355) and increased exploration expense
($569,354) related to increased personnel associated with the Company's two
exploration projects. Production costs from the one working interest well
decreased 18% to $22,508. DD&A expense increased $238,478, or 61%, to $630,865
in 1996 from $392,387 in 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 $210,224, or 76%, to $488,521 in 1996 from
$278,297 in 1995 principally as a result of additions aggregating $818,497 in
computer equipment and geophysical software. General and administrative
expense increased $800,343, or 175%, to $1,256,489 in 1996 from $456,146 in
1995 principally due to increases in personnel of $262,587 and estimated
additional costs of being a public company of approximately $172,549.
Other Income (Expense). Net other income increased $273,021 for the year
ended December 31, 1996 compared to a net expense of $23,814, for the year
ended December 31, 1995, principally as a result of increased interest income
due to the increase in available cash resulting from the Merger in December
1995.
Net Loss. 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 the year ended December 31, 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.
PERIOD FROM INCEPTION, MARCH 17, 1994, TO DECEMBER 31, 1995
From March 17, 1994, (the inception of Zydeco Exploration) through December
31, 1995, Zydeco Exploration'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 Exploration had
completed only one full fiscal year, analysis of comparable interim periods is
not meaningful.
Oil and Gas Sales. The Company had no revenue or oil and gas reserves during
1994. 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.
Operating Costs and Expenses. 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 of $300,000, oil and gas
sales, primarily from one gas well which began production in January 1995 of
$169,235, and gains on sales of unproved leases of $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
22
<PAGE>
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 Exploration 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. Production from the one
working interest well commenced in January 1995 and represented the increase
in production costs of $27,492 compared to 1994. The principal components of
the $456,146 of general and administrative expenses for 1995 included $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 was comprised of DD&A of $114,090 on oil and gas properties and
depreciation of $278,297 primarily related to geophysical software (which is
depreciated over two years because of rapid changes in 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 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 Exploration Agreement and
increased expense from the addition of employees.
Other Income (Expense). Net other expense increased $1,175, or 5%, to
$23,814 for the year ended December 31, 1995 compared to net other expense of
$22,639 for the period from inception (March 17, 1994) through December 31,
1994.
Net Loss. For the year ended December 31, 1995, operations resulted in a net
loss of $1,173,646 ($.30 per share) compared to a net loss of $132,881 ($.03
per share) for the prior period. The increase in net loss of $1,040,765 was
due to increased revenue of $586,752, increased operating expenses of
$1,626,342 and increased net other expenses of $1,175.
LIQUIDITY AND CAPITAL RESOURCES
The Company has generated funds from public and private equity offerings,
cash flow from the Company's operations, and cash payments made to it under
the Fortune Exploration Agreement and the Cheniere Exploration 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
approximately $10.1 million from the sale of securities in 1993, 1994 and
1995, advances in 1995 under the Fortune Exploration Agreement and $12.0
million, as of July 1, 1997, provided under the Cheniere Exploration
Agreement.
The Company expects that capital needs for 1997 will be satisfied through
cash on hand (including the proceeds from this Offering and internal cash
reserves) and cash available under the Cheniere Exploration Agreement.
Although Cheniere may elect to discontinue its funding of the remaining
payment of $1.5 million due on July 22, 1997, and thus substantially reduce
its interest in the West Cameron Seismic Project, Cheniere
23
<PAGE>
is responsible for funding 50% of the costs in excess of $13.5 million. The
Company believes that the Company has adequate existing cash to meet its
obligations incurred in connection with the West Cameron Seismic Project. The
Company has estimated approximately $13.2 million of costs in 1997 related to
the West Cameron Seismic Project, of which, Cheniere had advanced $6.7 million
as of July 1, 1997 and is expected to advance an additional $4.0 million. The
Company's share of 1997 costs budgeted for the West Cameron Seismic Project is
$2.5 million, which is included in its capital expenditure budget discussed
below. The Company's share of the budgeted costs could increase if Cheniere
elects to discontinue funding of the West Cameron Seismic Project. Such
additional costs and other capital needs may be funded from available cash of
the Company, the issuance of additional 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 Company's projects. Depending upon the results of the West Cameron Seismic
Project, the Company may need additional funds in the future, principally in
order to undertake leasehold acquisitions, exploratory drilling or other
related costs. 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. See "Risk
Factors--Need for Additional Financing."
The Company's current budget for its capital expenditures for 1997 is
approximately $3.0 million, including $2.5 million 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. Other
significant additional capital expenditures may include the acquisition of
additional oil and gas leases, the drilling of prospects identified by the
Company, the acquisition of interests in producing wells, and other oil and
gas exploration and production related 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's prospects and the cost of drilling
and completing wells in the Louisiana Transition Zone and the Timbalier
Trench.
Although the Company has incurred net losses since its inception in 1994,
cash flow from operating activities was $342,668 for the year ended December
31, 1996. The Company does not expect to generate operating cash flow or net
income in 1997. The Company expects to generate a net loss in 1997, including
its 50% share of geological and geophysical costs of approximately $2.5
million which it expects to incur on the West Cameron Seismic Project
primarily during the third quarter. The successful efforts method of
accounting generally requires that geological and geophysical expenses be
expensed when incurred.
The Company currently maintains a $300,000 bond required 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.
24
<PAGE>
BUSINESS AND PROPERTIES
THE COMPANY
Zydeco Energy, Inc. is an independent energy company engaged in the
exploration for oil and gas utilizing advanced 3D seismic and computer aided
exploration ("CAEX") techniques. The Company believes it is one of the few
independent exploration companies with comprehensive in-house technology and
expertise enabling it to use the most recent advances in such 3D seismic and
CAEX technology. Such technology includes the Wavefield Imaging Technology, a
data processing technique designed to substantially reduce the cost of 3D
seismic data acquisition for certain surveys while improving the resolution of
the subsurface image. Zydeco's geophysicists design the seismic data
acquisition survey, manage the acquisition of seismic data and process and
interpret the resulting data. The Company believes that its technology and
expertise enable it to acquire and analyze seismic data efficiently over large
geographical areas. The Company attempts to concentrate its efforts in areas
previously unexplored with advanced 3D seismic applications. Based upon
analysis of processed data, Zydeco personnel identify and rank potential oil
and gas drilling prospects for leasehold acquisition. The Company intends to
enter into agreements with experienced industry partners for the development
of its prospects and retain significant non-operating production interests in
those prospects. Zydeco's current exploration efforts are focused on the
Louisiana Transition Zone.
STRATEGY
The Company's primary objective is to discover and develop oil and gas
reserves and increase cash flow through exploration, prospect identification
and participation in projects to develop such prospects. In pursuing this
strategy the Company intends to:
Continue Focused Exploration Activities. The Company focuses its efforts in
geologic areas worldwide that it believes are underexplored with 3D seismic
techniques and have the potential for substantial oil and gas reserves. Such
areas include geologically complex trends with characteristics that have
discouraged exploration in the past due to difficult seismic data acquisition
and analysis using conventional methods. The Company believes that use of its
Wavefield Imaging Technology and the most advanced available 3D seismic
processing techniques provides it with the capability to economically collect
and evaluate seismic data for such areas.
Continue Development of Industry Leading Seismic Technology and Expertise.
The Company believes the seismic data collection, processing and analysis
techniques it employs are significantly more advanced than those commonly used
in the industry. The Company intends to continue to expand its exploration
expertise through acquisition of high speed computers and parallel processing
software as they become available, integration of in-house capabilities and,
when appropriate, collaboration with individuals and other companies in the
development of new seismic technologies. The Company believes its Wavefield
Imaging Technology gives it a current advantage over exploration companies
that do not have access to it by substantially reducing the costs of seismic
data acquisition for certain surveys and improving spacial resolution in the
seismic imaging process. The Company may exploit its Wavefield Imaging
Technology by application to both its own seismic surveys and, through joint
ventures or similar arrangements, to seismic surveys by other companies.
Pursue Joint Ventures. The Company intends to pursue exploration and
development joint ventures with strategic industry partners in order to (i)
obtain funds necessary to explore for and identify potential prospects; (ii)
control and reduce the Company's exposure to the risks related to the
drilling, completion, production operation, and abandonment of properties;
and, where applicable, (iii) utilize the bonding and insurance capabilities of
experienced operating 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 governmental legislation.
IMPLEMENTATION
Identify Areas Believed to Have Underexplored Potential. The Company intends
to continue to identify areas that it believes have underexplored potential
for substantial oil and gas reserves. Such areas include coastal transition
zones and similar areas that have characteristics that make seismic data
acquisition and analysis
25
<PAGE>
difficult and expensive using conventional methods. For example, seismic data
in the coastal transition zones is difficult and expensive to acquire due to
the combinations of land and marine recordings that must be obtained across
the marshlands, bays, highland, and open water areas. Different types of
sources and receivers may be required for a true transition survey over a
beach area which complicates the processing and quality control of a seismic
survey. Surf related noise creates additional complications for a coastal
transition zone seismic survey. The Company's West Cameron Seismic Project in
the Louisiana Transition Zone is an example of such a survey.
Acquire Seismic Rights or Proprietary Data. Once the Company has identified
an area of interest, it then seeks to obtain the rights to acquire seismic
data and engages a contractor to shoot 3D seismic data in a survey designed by
the Company for processing with the Wavefield Imaging Technology. The Company
may also purchase existing seismic data if it is available and can be usefully
processed with the Company's technical resources. The ability to assemble the
rights to shoot seismic data over large areas may be important to the success
of a 3D survey. A seismic survey for 3D analysis must gather data over an area
broader than the subsurface area intended for analysis, especially for deeper
objectives. Data from a broader area is necessary because the data from the
edges of a seismic survey cannot produce 3D imaging of the immediate
subsurface. To effect a proper 3D image requires a significant distance
between the sources and receivers which is not available at the edges of the
survey. In its West Cameron Seismic Project, the Company has assembled survey
rights over approximately 151,000 acres from highly fragmented ownership.
Identify Prospects. The seismic data is then processed or reprocessed and
then interpreted to identify potential prospects. Such processing includes
correlating the seismic data with subsurface well control and historical
production data from similar properties, and integrating all such available
data with enhanced 3D structural and stratigraphic imaging and attribute
analysis techniques by the Company's expert geophysicists and geologists. The
decision to drill any exploratory prospect is based on an analysis of the
economic risk associated with the potential return. Such analysis involves a
number of factors, including: (i) the availability of leases on reasonable
terms and permits for the prospect; (ii) the results of the review and
analysis of the seismic data, including the results of 3D seismic surveys;
(iii) the availability of sufficient capital resources to the Company and the
other participants for the drilling of the prospect; (iv) the approval of
other participants in 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.
Acquire Leases and Drilling Rights. The Company acquires leases and
concessions for the potential prospects it identifies. Depending on whether
governmental or private individuals own the property in the area of interest
to the Company, the Company may be able, or required, to acquire such rights
prior to acquisition of the seismic data or it may wait until after
identifying potential prospects before acquiring any leases or drilling
rights. In the case of state properties, an interested party must nominate a
property for bid. The right to survey and/or lease the property is then
publicly auctioned by the state government. Leases for federal properties
available for drilling are publicly auctioned at least once each year. In the
case of privately held land or foreign concessions the right to explore the
property is normally privately negotiated.
Establish Exploration Joint Ventures and Partnerships. Once the Company has
identified potential prospects and obtained leases and drilling rights for the
potential prospects, the Company may enter into agreements with experienced
industry partners for drilling and development. The Company may enter into a
joint venture for the drilling and development of the prospect or it may
farmout or sell the prospect for a combination of cash and/or a retained
interest. The Company will seek partners with proven records at managing
drilling and production activities in the area of the prospect. Generally, the
Company intends to retain only a nonoperating production interest with respect
to its prospects.
TECHNOLOGY
Traditionally, seismic analysis involved the acquisition, processing and
interpretation of seismic data collected along a single line of seismic
detectors and sources. Processing of the resulting data created a two
dimensional cross section of the earth's subsurface beneath this line. This
technique constitutes 2D seismic
26
<PAGE>
surveying ("2D seismic"). The advent of high speed, large storage capacity
computers and advanced geophysical software development has permitted the
acquisition, processing and interpretation of seismic data collected in an
areal array, usually from multiple relatively closely spaced lines of seismic
detectors and sources. Processing of the resulting data creates a three
dimensional image of the earth's subsurface. This technique constitutes 3D
seismic surveying ("3D seismic"). 3D seismic provides a substantially improved
image for interpretation and analysis than the cross section created by 2D
seismic. As a result, the industry's success rate with respect to the drilling
of prospects has risen with the adoption of 3D seismic technology.
Basic 3D seismic imaging and analysis are now routinely used in oil and gas
exploration. The goal of 3D seismic processing is to image the subsurface for
detailed structural and stratigraphic interpretation. When sound waves from
seismic sources move through various strata of rock, the speed and the angle
of transmission of these waves change from one strata to another. If the
strata is tilting or "dipping", the path of the sound waves is further
complicated. These factors will cause the seismic events indicating structural
changes to be misplaced from their true locations unless the data is corrected
by processing. The basic processes used in 3D seismic processing are Dip-
Moveout ("DMO"), Common Depth Point stacking ("CDP") and poststack migration.
Each of these processes is intended to adjust the collected seismic data to
more accurately image the subsurface.
Migration is an imaging process that "relocates" seismic events to account
for changes in the dip of the underlying strata and moves those events into
their proper location. This process requires knowledge of the velocity of the
sound waves as they are transmitted and reflected through the strata.
For approximately the past thirty-five years, the most commonly used
technique to improve the signal quality of seismic data has been CDP stacking.
This technique simply adds or "stacks" the seismic traces which have a common
mid-point between each source and receiver after time correcting the data for
the offset or distance between the sources and the receivers.
Dip-Moveout (DMO) is a more recently developed process to correct the CDP
data so that dipping events will stack or focus better using a common
velocity. This technique is sometimes referred to as a partial migration.
Nevertheless, migration is a necessary process applied poststack, i.e. after
summation of the common midpoint traces.
Continuing improvements in computing speed and capacity resulted in the
development of more advanced 3D processing techniques. These advanced 3D
processing techniques include prestack migration which migrates the individual
data traces prior to any summation of the data with respect to either time or
depth. Prestack migration requires a more accurate analysis of sound velocity
through the various subsurface strata present in the area surveyed than the
more commonly used sequence of CDP and poststack migration. Determining an
accurate velocity model is an iterative process requiring close coordination
between the processing and interpretation experts. Not all oil and gas
exploration companies are capable of performing prestack migration processing.
Most recently, the Wavefield Imaging Technology, developed by Dr. Norman S.
Neidell, an independent researcher, represents a further advancement of 3D
seismic processing and analysis. Wavefield Imaging is a method of producing a
more finely resolved image of the subsurface than is possible with previously
existing 3D processing techniques. Consequently, Wavefield Imaging Technology
permits the Company to use more broadly spaced seismic receivers in its
surveys thereby reducing the cost of data acquisition for certain surveys and
improving the resolution of the subsurface image. Under the present survey
configuration used by the Company in its West Cameron Seismic Survey, the
Wavefield Imaging Technology is limited to analysis of seismic objectives
below 8,000 feet. The Company believes the technology may also be applied in
the analysis of shallower objectives by increasing receiver and sound source
densities, although with diminishing cost advantages. In May 1996, the Company
entered into a license with Dr. Neidell for the Wavefield Imaging Technology.
On July 1, 1997, the Company acquired all of the outstanding capital stock
of Wavefield, the owner of the Wavefield Imaging Technology. Pursuant to the
acquisition, the Company issued 100,000 shares of Common Stock to shareholders
of Wavefield Image, Inc., including its principal shareholder, Dr. Norman S.
27
<PAGE>
Neidell, inventor of the Wavefield Imaging Technology. In addition, the
Company expects to issue an additional 150,000 shares of Common Stock to the
shareholders of Wavefield for a patent of the Wavefield Imaging Technology
which the Company received notice that the patent application has been allowed
for issuance by the United States Patent and Trademark Office. The Company
also entered into a four year agreement with Dr. Neidell regarding his
employment with the Company. In addition, the Company granted Dr. Neidell
options, vesting over four years, to purchase 150,000 shares of the Company's
Common Stock. As a result of the acquisition, the Company owns the Wavefield
Imaging Technology subject to licenses granted previously by Wavefield. Prior
to the acquisition, Wavefield granted licenses for the Wavefield Imaging
Technology to one major oil company and one foreign company and offered a
license to another foreign company. In addition, Dr. Neidell's employment
agreement with the Company grants Dr. Neidell an option to obtain a limited,
nontransferable license to the Wavefield Imaging Technology under certain
conditions. Currently, the Company is not aware of any company, including the
licensees, employing Wavefield Imaging Technology in the design of its seismic
surveys and processing of its seismic data. The Company and Dr. Neidell have
also agreed to negotiate in good faith to form a joint venture between them to
own and exploit any non-seismic applications of the Wavefield Imaging
Technology.
The Company believes it is one of the few independent exploration companies
to perform both 3D seismic data processing and seismic interpretation in-
house. As described above, prestack migration involves an iterative process.
Most independent exploration companies use outside contractors to process
their 3D data in this iterative process. However, this iterative process
requires continual free exchange of information between the data processing
experts and the interpretation experts. Use of outside contractors can result
in slower turn-around time for processing. In addition, exploration companies
are often reluctant, for confidentiality reasons, to disclose more than the
necessary data to the outside processing experts and this may further limit
the effectiveness of the process. Finally, outside processing contractors
generally do not specialize in processing data from any particular area. The
Company believes processes such as prestack migration analysis can be most
effectively and efficiently accomplished by performing seismic survey design,
data processing and interpretation in-house. The Company believes performance
of such work in-house allows the Company to integrate all of those processes
and thereby produce a more accurate image of the subsurface to identify
prospects for leasing and drilling.
The Company has selected and assembled the computers and software necessary
to perform this advanced 3D seismic imaging and analysis. This equipment is
specifically designed to handle the scale and complexity of large scale
seismic projects such as the Company's West Cameron Seismic Project. The
Company has also assembled a team of geophysicists and geologists with
expertise in these advanced 3D processes. The Company believes its personnel,
software and Wavefield Imaging Technology combined with its hardware
processing capacity represents unique in-house capabilities with respect to
advanced 3D seismic analysis leading to more accurate 3D images at a reduced
cost. See "Risk Factors--Technology."
GEOLOGIC AND GEOPHYSICAL EXPERTISE
The Company has employed a group of talented and experienced geologists and
geophysicists. The Company currently employs three geologists and eight
geophysicists. These experts have an average of 20 years of experience in
seismic imaging and analysis. As discussed above, the Company believes this
in-house expertise is a critical factor in enabling the Company to effectively
and efficiently use the most recent developments in 3D seismic imaging.
LOUISIANA TRANSITION ZONE AND OTHER AREAS OF INTEREST
The Company has identified and is evaluating numerous potential prospects
offshore in the Louisiana Transition Zone and the Timbalier Trench, the
Company's current principal areas of concentration.
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 Mississippi River. Water depths in the
Louisiana Transition Zone range up to approximately 40 feet. 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. Productive zones 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.
28
<PAGE>
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. Historically, there have been relatively few 3D surveys conducted
in 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
problems associated with seismic surveys in coastal transition zones discussed
in "Implementation" above. Seismic activity has also been limited due to
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. Such consents are not required in Federal waters. Thus,
seismic contractors have been reluctant to conduct speculative 3D surveys due
to the difficulty of permitting acreage in the Louisiana Transition Zone. 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 Company's 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 has historically been considered a "poor quality data" area because
abnormally low seismic velocities in the shale "Trench" create data processing
problems.
WEST CAMERON SEISMIC PROJECT
In August 1996, the Company commenced the West Cameron Seismic Project, an
extensive 3D seismic exploration program in a part of the Louisiana Transition
Zone in western Cameron Parish, Louisiana. The Company anticipates the West
Cameron Seismic Project will encompass approximately 146,000 gross acres. At
the core of the West Cameron Seismic Project is a 51,000 acre exclusive seismic
permit on state waters obtained by the Company from the State of Louisiana.
Options and Permits. In connection with the West Cameron Seismic Project, the
Company has negotiated seismic options covering approximately 35,775 gross
acres (32,398 net acres) and has secured seismic permits covering approximately
98,454 gross acres (97,762 net acres). Options and permits aggregating 57,913
gross acres (54,325 net acres) are located onshore in Cameron Parish,
Louisiana, including the exclusive seismic permit with the State of Louisiana.
In connection with the exclusive seismic permit, for eighteen months,
commencing February 1996, the Company has the exclusive right to acquire
seismic data on the State's acreage and nominate any of the acreage for
competitive lease bids. In Louisiana, a public auction of leases is held
approximately 90 days after the property is nominated for bid and the auction
is generally announced only 30 days prior to the auction date. A bidder at the
auction may bid on all or only a portion of the property nominated for bid. The
Company is obligated to deliver to the State of Louisiana a copy of a 3D
seismic survey over the state acreage included in the permit or pay a
substantial penalty. Under the Company's seismic permit, 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 ending February 14,
1998 for an additional payment of $391,877.
Exploration Agreement. In April, 1996, the Company executed the Cheniere
Exploration Agreement covering the West Cameron Seismic Project. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General". The Cheniere Exploration Agreement provides for aggregate
payments to Zydeco of at least $13.5 million to fund the costs of seismic
acquisition, including the purchase of
29
<PAGE>
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 Exploration
Agreement, as amended, provides that Cheniere may receive 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 initial
$13.5 million and 50% of any costs incurred thereafter. As of July 1, 1997,
Cheniere had funded a total of $12.0 million pursuant to the Cheniere
Exploration Agreement. The Cheniere Exploration 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 farm out a portion or all of its interest in each
prospect identified in the project to Zydeco under a put arrangement in the
Cheniere Exploration Agreement. In the event of such a farmout, Cheniere would
retain a 1% overriding royalty interest, as to its interest in the project,
convertible into a 10% working interest as to its interest in the project,
after Zydeco, or its partners, has recouped the cost of drilling, completion,
and hook-up of completed wells. Should Cheniere farm out 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 Exploration Agreement.
Seismic Data Acquisition. In September 1996, seismic data acquisition
commenced under a turnkey seismic contract with Grant. Data acquisition
operations were suspended for the winter in December 1996. In December 1996,
Grant filed for protection under Chapter 11 of the U. S. Bankruptcy statutes.
The Company executed a new contract with Grant in March 1997, and seismic data
acquisition operations recommenced in April 1997. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
Data Analysis. In January 1997, the Company completed the assembly of an
exploration team of geophysicists, geologists, and seismic analysts and the
integration of its 3D seismic interpretive hardware and software. As of July
1, 1997, the Company had collected seismic data for analysis and
interpretation on approximately 90% of the original West Cameron contract
acreage. The Company is presently analyzing such data and applying various
advanced 3D 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 for the West Cameron Seismic 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 West Cameron Seismic Project area.
FORTUNE PROJECT
In February 1995, Zydeco Exploration entered into the Fortune Exploration
Agreement with a predecessor of Fortune. Pursuant to the Fortune Exploration
Agreement Fortune advanced to Zydeco $4.8 million and agreed to advance 50% of
any additional funds necessary for the acquisition and processing of seismic
data and acquiring leases on certain of the potential prospects described in
"Potential Prospects and Leases" below in exchange for Fortune's right to
maintain up to a 50% interest in such prospects. Fortune's interest in such
potential prospects may drop below 50% if it elects not to contribute to
development costs for such potential prospects. Since the inception of the
Fortune Exploration Agreement, Zydeco has spent approximately $2.6 million to
acquire and maintain leases and to purchase and process seismic data. In June
1997, Fortune exercised its right under the Fortune Exploration Agreement to
have returned to it $2.2 million in unexpended funds which it had previously
advanced to the Company to cover anticipated lease acquisition and exploration
expenses relating to the co-owned prospects. In addition to the initial
potential prospects, Zydeco and Fortune have established areas of mutual
interest ("AMIs") adjoining each potential prospect. No assurance can be given
that any new projects within the AMIs will be identified.
Fortune has the right to farm out a portion or all of its interest in each
prospect to Zydeco under a put arrangement in the Fortune Exploration
Agreement. In the event of such a farmout, Fortune would retain a 1%
overriding royalty interest, as to its interest in the prospect, convertible
into a 10% working interest in its interest in the prospect after Zydeco or
its partners, have recouped the cost of drilling, completion, and hook-up
30
<PAGE>
of the well. Should Fortune farm out 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 Exploration
Agreement.
POTENTIAL PROSPECTS AND LEASES
Undeveloped Properties. The Company has identified and is evaluating a
number of potential prospects outside of the West Cameron Seismic Project
under oil and gas leases in which the Company has an interest. These leases
are located primarily 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. As of July 1, 1997, the Company held
oil and gas leases covering approximately 21,480 gross acres (11,326 net
acres) in the Louisiana Transition Zone and the Timbalier Trench. The Company
owns 100% of the interest in five of the potential prospects in the Bay
Marchand and Timbalier Bay areas. The Company owns a 50% interest in 17 of the
potential prospects in which Fortune owns the remaining 50% interest, and the
Company owns limited interests in the four other potential prospects which are
all located in the Louisiana Transition Zone. The Company is currently
offering to sell interests or farmout five of the potential prospects in which
it has an interest in the Bay Marchand area. The Company is currently in the
process of acquiring 3D seismic data and analyzing such data for certain of
the other potential prospects. As of December 31, 1996, the Company had
licensed 3D seismic data covering approximately 88,320 acres offshore
Louisiana encompassing approximately 10,366 gross acres in which the Company
has leases covering all or portions of the potential prospects. In addition,
during 1997, the Company licensed 3D seismic data covering approximately
55,000 acres over federal and state waters adjacent to the Company's West
Cameron Seismic Project. The Company does not have any leases in the area
covered by the recently acquired data.
The Company is in the process of collecting and analyzing the seismic data
for the West Cameron Seismic Project. As a result, the Company has not
commenced any lease acquisitions in that area. The Company acquired Fortune's
interest in a 116 acre potential prospect in the area of the West Cameron
Seismic Project to eliminate any conflict between the AMIs for the West
Cameron Seismic Project and the Fortune project.
Lease Terms. All the leases currently held by the Company are Federal or
State of Louisiana offshore leases. The Company's leases have expiration dates
ranging from 1997 to 2001. 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 U.S.
Department of Interior Minerals Management Service (the "MMS"). Annual rentals
on Federal leases are $5.00 per acre. 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 are administered by the State Mineral Board
of the State of Louisiana and generally provide for: (i) a minimum royalty of
20%; (ii) a five year primary term; and (iii) annual rentals in an amount
equal to 50% of the original lease acquisition cost. Generally, 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.
DRILLING 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 August 1995, the
Company acquired a 50% interest in an adjacent state lease in the Bon Ton
Prospect. In March 1996, Zydeco and Fortune farmed out the Polaris Prospect to
FW Oil Interests, Inc. ("FW"). FW commenced drilling a well in July 1996,
which was unsuccessful and abandoned in October 1996.
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
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<PAGE>
drilling of an exploratory well located in Timbalier Bay in state waters
offshore Louisiana. See "Management--Certain Relationships and Related
Transactions." 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 had undertaken to sell or farm out all or a portion of 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 as of December 31,
1996, for all of the Company's proved properties. Ryder Scott is an
independent oil and gas reserve engineering firm. Prior to 1995, the Company
had no proved oil and gas reserves. Ryder Scott was also engaged 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, 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 natural 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 Prospectus 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.
INFORMATION RELATING TO 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 periods indicated:
<TABLE>
<CAPTION>
THREE
MONTHS YEAR ENDED
ENDED DECEMBER 31,
MARCH 31, --------------
1997 1996 1995
--------- ------- ------
<S> <C> <C> <C>
Crude oil and natural gas liquids (Bbls)............... 3,280 20,186 1,118
Natural gas (Mcf)...................................... 103,241 372,678 84,546
</TABLE>
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.
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<PAGE>
Average Prices and Production Costs. 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:
<TABLE>
<CAPTION>
AVERAGE AVERAGE OPERATING
SALES PRICE COSTS PER NBOE(1)
------------ -----------------
PER PER
BBL MCF PRODUCTION
OIL GAS (LIFTING) DD&A(2)
------ ----- ---------- ------
<S> <C> <C> <C> <C>
Three Months Ended March 31, 1997............... $23.37 $2.88 $0.28 $1.66
Year Ended December 31, 1996.................... $22.39 $2.60 $0.27 $1.73
Year Ended December 31, 1995.................... $18.37 $1.76 $1.81 $7.50
</TABLE>
- --------
(1) Net barrel of oil equivalent (NBOE) assuming natural gas converted at six
mcf per equivalent barrel.
(2) Excludes depreciation of seismic computer hardware and software of
$136,640 for the three months ended March 31, 1997 and $488,521 and
$278,297 for the years ended December 31, 1996 and 1995, respectively.
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 interests
in productive wells and in developed and undeveloped acres at December 31,
1996, are summarized as follows:
<TABLE>
<CAPTION>
GROSS NET
------- -------
OIL GAS OIL GAS
--- --- --- ---
<S> <C> <C> <C> <C>
Productive wells(1)............................................. -- 1 -- .10
Developed acres(2).............................................. 349 35
Undeveloped acres(3)............................................ 21,479 11,326
</TABLE>
- --------
(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.
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<PAGE>
Drilling 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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1996 1995
---------- ----------
GROSS NET GROSS NET
----- ---- ----- ----
<S> <C> <C> <C> <C>
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
=== ==== === ====
</TABLE>
- --------
(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.
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. On July 3, 1997, the Company received notice that an application
in respect of the Wavefield Imaging Technology has been allowed for issuance
of a patent by the United States Patent and Trademark Office. The Company
expects that the patent will be issued in a few months. As discussed above,
the Company has acquired a non-exclusive license to use the Wavefield Imaging
Technology throughout the world and an exclusive license to use it in the
Louisiana Transition Zone. See "--Strategy" and "--Technology."
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 leases and
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 other than the Gulf Coast.
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
34
<PAGE>
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 "--Governmental Regulation" and "Risk
Factors--Competition."
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, development, 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 rules and regulations.
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 regulations may restrict the rate at which
the Company's wells produce oil or gas below the rate at which such wells
would be produced in the absence of such regulations, with the result that the
amount or timing of the Company's revenues could be adversely affected.
Louisiana State Regulation. The State of Louisiana requires permits for
seismic or drilling operations, drilling bonds, and reports concerning
operations and imposes other requirements relating to the exploration and
production of oil and gas. The State of Louisiana also has statutes or
regulations addressing conservation matters, including provisions for the
unitization or pooling of oil and gas properties, the establishment of maximum
rates of production from wells, and the regulation of spacing, plugging, and
abandonment of such wells.
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 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.
35
<PAGE>
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.
On July 16, 1996, the Court of Appeals for the District of Columbia Circuit
("D.C. Circuit") issued its opinion on review of Order No. 636. The opinion
upheld most elements of Order No. 636 including the unbundling of sales and
transportation services, curtailment of pipeline capacity, implementation of
the capacity release program and the mandatory imposition of straight-fixed-
variable ("SFV") rate design for interstate pipeline companies. The D.C.
Circuit did remand certain aspects of Order No. 636 to the FERC for further
explanation including, inter alia, the FERC's decision to exempt pipelines
from sharing in gas supply realignment ("GSR") costs caused by restructuring;
FERC's selection of a twenty-year term matching cap for the right -of-first-
refusal mechanism; the FERC's restriction on the entitlement of no-notice
transportation service to only those customers receiving bundled sales service
at the time of restructuring; and FERC's determination that pipelines should
focus on individual customers, rather than customer classes, in mitigating the
effects of SFV rate design. On February 27, 1997, the FERC issued its order on
remand. The order reaffirmed the holding of Order No. 636 that pipelines
should be entitled to recover 100 percent of their prudently incurred GSR
costs. Moreover, since Order No. 636, few, if any, pipeline customers have
been willing, or required, to commit to twenty-year contracts for existing
capacity. Thus, FERC reduced the contract-matching cap for the right-of-first-
refusal mechanism to five years. In light of the varied post-restructuring
experience with no-notice service, the FERC also decided to no longer limit a
pipeline's no-notice service to its bundled sales customers at the time of
restructuring. Finally, the FERC reaffirmed that pipelines should focus on
individual customers, rather than customer classes, in mitigating the effects
of SFV rate design. Four petitions were filed with the Supreme Court on
January 27, 1997 for writ of certiorari to review those portions of the D.C.
Circuit's opinion which affirmed the capacity release and right-of-first-
refusal provisions adopted in Order No. 636. Those petitions are still pending
before the Court.
36
<PAGE>
Although the Company is unable to predict the consequences of Order No. 636,
the Company believes that Order No. 636 could have a significant effect on all
segments of the natural gas industry. While Order No. 636 will not directly
regulate the production and sale of gas that may be produced from the
Company's properties, the FERC has stated that the order was intended
primarily to foster increased competition in the natural gas industry and to
allow for the transmission of more accurate price signals. Thus, 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.
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. Under the new regulations petroleum pipelines are
able to change their rates within prescribed ceiling levels that are tied to
the Producer Price Index for Finished Goods, minus one percent. Rate increases
made pursuant to the index will be subject to protest, but such protests must
show that the portion of the rate increase resulting from application of the
index is substantially in excess of the pipeline's increase in costs. The new
indexing methodology can be applied to any existing rate, even if the rate is
under investigation. If such rate is subsequently adjusted, the ceiling level
established under the index must be likewise adjusted.
In the order adopting the new regulations the FERC said that as a general
rule pipelines must utilize the indexing methodology to change their rates.
FERC indicated, however, that it was retaining cost-of-service ratemaking,
market-based rates, and settlements as alternatives to the indexing approach.
A cost-of-service proceeding will be instituted to determine just and
reasonable initial rates for new services. A pipeline can also follow a cost-
of-service approach when seeking to increase its rates above index levels for
uncontrollable circumstances. A pipeline can seek to charge market-based rates
if it can establish that it lacks market power. Finally, a pipeline can
establish rates pursuant to settlement if agreed upon by all current shippers.
On May 10, 1996, the D.C. Circuit affirmed the new regulations. The Court
held that by establishing a general indexing methodology along with limited
exceptions to indexed rates, FERC had reasonably balanced its dual
responsibilities of ensuring just and reasonable rates and streamlining
ratemaking through generally applicable procedures. Because of the novelty and
uncertainty surrounding the indexing methodology, as well as the possibility
of the use of cost-of-service ratemaking and market-based rates, the Company
is not able to predict with certainty what effect, if any, these regulations
will have on it. However, 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 "--
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
37
<PAGE>
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 of 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.
OPERATIONAL RISKS AND INSURANCE
The drilling of wells is 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 maintains 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. See "Risk Factors--Exploration and Operating Risks of
National Gas and Oil Operations."
FACILITIES
The Company leases approximately 12,600 square feet of office space in
Houston, Texas under a lease expiring in 1999.
EMPLOYEES
As of July 1, 1997, the Company had 25 full-time employees, including three
geologists, eight geophysicists and three landmen. The Company considers its
relations with its employees to be good.
38
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company are as follows:.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Sam B. Myers, Jr................. 59 Chairman of the Board, Chief Executive
Officer and Director
Edward R. Prince, Jr............. 67 Vice Chairman and Director
John O. Smith.................... 48 President, Chief Operating Officer and
Director
Norman S. Neidell................ 58 Vice President
W. Kyle Willis................... 49 Vice President, Treasurer, Chief Financial
Officer and Secretary
John W. McTigue, Jr.............. 41 Vice President
Charles E. Bradley, Sr........... 67 Director
Harry C. Johnson................. 64 Director
Philip A. Tuttle................. 55 Director
</TABLE>
Sam B. Myers, Jr. has served, since December 1995, as Chairman of the Board
of the Company and Chief Executive Officer and, until October 1996, President
of the Company and in the same capacity for Zydeco Exploration since its
formation in March, 1994. Mr. Myers has been an independent oil and gas
operator and private investor since 1961. In addition, Mr. Myers has served as
Chairman of the Board of Directors of Search Capital Group, Inc. ("Search"), a
publicly held specialty financial services company, from August 1985 until May
1995 when he voluntarily resigned and as President and Chief Executive Officer
from August 1985 until August 1993 and from November 1994 to January 1995. Mr.
Myers served as interim President and Chief Executive Officer of Search, and
certain of its finance subsidiaries, for 30 days commencing December 1994,
after the resignation of Search's former President and Chief Executive
Officer. After Mr. Myers' departure, eight finance subsidiaries, whose assets
consist primarily of automobile loan portfolios, voluntarily filed for
protection under Chapter 11 of the federal bankruptcy code in August 1995. Mr.
Myers graduated from Texas A & M University with a BBA in Finance.
Edward R. Prince, Jr. has served as Vice Chairman of the Board of the
Company since December 1995 and served in the same capacity for Zydeco
Exploration since August 1994. Mr. Prince has been involved in the geophysical
service and exploration industry for 37 years. Mr. Prince was a founder of
Digicon Inc., a publicly held geophysical contractor, which is now part of
Veritas DGC, Inc. In 1994, he retired as Chief Executive Officer of Digicon, a
position he held for more than 24 years. Mr. Prince has served the geophysical
industry in various capacities including Chairman of the International
Association of Geophysical Contractors and as a director of the National Ocean
Industries Association. Mr. Prince also serves as a director of GeoScience
Corporation, a publicly held designer and manufacturer of seismic data
acquisition systems, geoscientific software and related products, and as a
director of JetFax, Inc. Mr. Prince graduated with a BS from the U.S. Military
Academy at West Point and received his MS in Applied Mathematics from North
Carolina State College.
John O. Smith joined the Company as President and Chief Operating Officer in
October 1996. In January 1997, Mr. Smith was named a Director of the Company.
Mr. Smith has 26 years experience in the exploration and production sector of
the oil and gas business. Since 1984, Mr. Smith has been President and owner
of JOS Energy Corp., an independent operator in the domestic Gulf Coast and
Mid-Continent areas. Additionally, since 1984, Mr. Smith has provided oil and
gas project management and consulting services to selected domestic and
foreign clients. Prior to 1984 he held positions of increasing responsibility
with independent oil and gas companies (Inexco Oil Company 1974-75; Tomlinson
Interests, Inc. 1975-78; Longhorn Oil & Gas Company 1978-83). From 1971-1974
he was employed as a landman for Mobil Oil Corporation. Mr. Smith is a 1970
graduate of the University of Texas with a BBA in Petroleum Land Management.
39
<PAGE>
Norman S. Neidell joined the Company as Vice President of Research and
Development in July 1997. Dr. Neidell founded Wavefield Image, Inc. in 1995
and served as Chairman and President. In 1989, he co-founded Gandalf Explorers
International, Ltd. (now MMS Petroleum PLC), a public company traded on the
London AIM Stock Exchange in Ireland and the United Kingdom, where he serves
as a director and technical advisor. In 1989, he co-founded GeoQuest
International, Inc. (now Petroleum Information), where he served as a
director, and in 1977, Zenith Exploration Co., Inc., where he has served as
President, Chairman, and Chief Executive Officer. Dr. Neidell was a lecturer
and an Adjunct Professor in the Geology Department of the University of
Houston from 1971 to 1987. He is a Past President and Honorary Member of the
Geophysical Society of Houston, a Distinguished Lecturer of the SEG, a Past
Associate Editor of Geophysics, and a member of several AAPG and SEG
committees. He graduated with a BS in mathematics from New York University, a
Post Graduate Diploma in Applied Geophysics from Imperial College, and a Ph.D
in Geodesy and Geophysics from Cambridge University.
W. Kyle Willis joined the Company in January 1996 as Vice President,
Treasurer, and Chief Financial Officer. From July 1992 to January 1996 Mr.
Willis was a director, Executive Vice President, and Chief Financial Officer
of Reunion Resources Company (formerly Buttes Gas & Oil Co.). From 1977 to
1996, Mr. Willis' executive experience included more than 14 years with public
companies engaged in the energy industry where he served nine of those years
as the principal financial officer. For the period from 1983 to 1990, Mr.
Willis was engaged by four national venture capital firms where he conducted
financial restructurings and operational workouts of technology investments
and assisted emerging technology business startups. During this period, he
served as President of TCS Software, Inc., a software developer, Vice
President of Image Data Corporation, a video imaging communications
manufacturer, and Southwest Network Services, a wide-area data network
services company. Mr. Willis is a certified public accountant and practiced
with Deloitte, Haskins & Sells for four years. Mr. Willis received his BBA in
Accounting from Texas A & M University.
John W. McTigue, Jr. has served as Vice President of the Company since
December 1995. He has served in the same position for Zydeco Exploration since
August 1994. Mr. McTigue has been involved in developing 3D seismic
workstation technology and interpretation techniques for over ten years while
working in various capacities with Paradigm Geophysical Corp. (1993 to 1994),
INEXS, Inc. (1992 to 1993), GeoQuest Systems, Inc. (1990 to 1992) and Shell
Development Company (1984 to 1990). Mr. McTigue holds BS and MS in
Geology/Geophysics from Yale University and the University of Arizona,
respectively.
Charles E. Bradley, Sr. has served as a Director of the Company since
December 1995. He is one of the founders of Stanwich Partners, Inc., a private
investment firm which engages in leveraged buyouts, and has been President, a
director and a shareholder of that company since its formation in 1982. Mr.
Bradley serves in executive capacities for numerous companies, including
Chairman of the Board of Consumer Portfolio Services, Inc., Reunion Industries
Corp. (also Chief Executive Officer), DeVlieg-Bullard, Inc., Chatwins Group,
Inc., Texon Energy Corporation (also President), Sanitas, Inc. (also
President) and as a director of General Housewares Corp. and Audit & Survey's,
Inc., all of which are publicly-held corporations. Mr. Bradley's previous
experience also includes a position as a general partner at Price Waterhouse.
Mr. Bradley received a BS in Economics from Yale University and an MBA from
the New York University Graduate School of Business.
Harry C. Johnson has served as a Director of the Company since December
1995. He has over 40 years experience in the oil and gas industry. He was
founder and served as Chief Executive Officer of Red Eagle Resources
Corporation until February 1995. Mr. Johnson has also been actively involved
as a principal in various businesses, including banking, agriculture and
aviation. Mr. Johnson was formerly a registered principal with the National
Association of Securities Dealers, Inc. and was an allied member of The New
York Stock Exchange. Mr. Johnson is a registered professional engineer with a
degree in petroleum engineering from the University of Oklahoma.
Philip A. Tuttle served as President, Chief Executive Officer, Chairman of
the Board and a Director of the Company from its formation in June 1993 to
December 1995. Mr. Tuttle has continued to serve as a Director. Since June
1989, he has been a general partner of Davis Tuttle Venture Partners, L.P., a
private investment partnership. From November 1990 to October 1995, Mr. Tuttle
was a director of Quality Tubing, Inc., a
40
<PAGE>
manufacturer of steel coil tubing for the energy services industry, becoming
Chairman of the Board in May 1992. Mr. Tuttle is a founder and was formerly
President of the Houston Venture Capital Association. He was also President
and a director of the Houston Chapter of the Association for Corporate Growth,
Chairman of the Accounting Council at Rice University-Jones Graduate School of
Administration and a member of the Board of Governors of the National
Association of Small Business Investment Companies. In addition, Mr. Tuttle
serves on the Board of Drypers Corp., a publicly traded company that
manufactures and distributes disposable diapers. He is a Certified Public
Accountant and Fellow of the Institute of Directors, London, England. Mr.
Tuttle received a BA in Economics from Rice University and a MBA from
Northwestern University.
The directors named above were elected at the Company's 1997 Annual Meeting
to serve in such capacities until the Company's 1998 Annual Meeting or until
their respective successors have been duly elected and have been qualified, or
until their earlier death, resignation, disqualification or removal from
office. There is no family relationship between any of the directors and
executive officers of Zydeco.
GEOSCIENTISTS
In addition to Mr. Prince and Mr. McTigue the Company has employed a group
of talented and experienced geologists and geophysicists. Information with
respect to those experts is set forth below.
Stephen W. Knecht. Mr. Knecht is a geologist and was a co-founder of Zydeco
Exploration. Mr. Knecht has over 22 years experience in oil and gas
exploration. Prior to the formation of Zydeco Exploration, Mr. Knecht worked
as an exploration geologist for privately held exploration companies and
Standard Oil Company of Ohio, Williams Exploration Company and NRG Resources,
Inc. Mr. Knecht holds a BS in Geology from Texas A&M University.
William L. Weibel. Mr. Weibel joined the Company as a geophysicist in 1996.
Mr. Weibel has over 15 years experience in oil and gas exploration. Prior to
joining the Company, Mr. Weibel worked as a geophysicist for Amoco Production
Company and Landmark Graphics, Inc. Mr. Weibel holds a BS in Geology from
Northern Illinois University and an MS in Geosciences from the University of
Arizona.
Stephen H. Allen. Mr. Allen is a geologist and joined the Company in 1996.
He has 27 years experience in oil and gas exploration. Mr. Allen has worked
as a geologist at Atlantic Richfield Company, Hanson Minerals, Cockrell Oil
Corporation and other small and medium sized oil and gas exploration
companies. Mr. Allen holds a BS in Geology from Southern Methodist University
and an MS in Geology from Louisiana State University.
Charles Gartmann. Mr. Gartmann joined the Company as a geophysicist in 1996.
Prior to joining the Company Mr. Gartmann worked as a geophysicist at Energy
Development Corporation, Apache Corporation, Placid Oil Company and Amoco
Production Company. Mr. Gartmann holds a BA in Geology and an MS in
Geology/Geophysics from the University of Wisconsin--Milwaukee.
James Sobczak. Mr. Sobczak joined the Company as a geophysicist in 1997.
Mr. Sobczak has over 16 years experience in oil and gas exploration and
related businesses at Digicon Inc., CogniSeis Development, Inc. and Texaco,
Inc. Mr. Sobczak holds a BS in Mechanical Engineering from Purdue University
and a BS in Geophysical Engineering from Colorado School of Mines.
Jim Taylor. Mr. Taylor joined the Company as a geologist in 1997. Mr.
Taylor has over 22 years experience in oil and gas exploration. He has worked
as a geologist at Union Oil of California, Quintana Corporation, Apache
Corporation and JAPEX (US) Corp. Mr. Taylor holds a BS and an MS in Geology
from the University of Memphis.
Margaret Smith. Ms. Smith joined the Company as a geophysicist in 1997. Ms.
Smith has over 20 years experience in seismic data processing in the oil and
gas industry. Before joining the Company, she was employed by Seismograph
Service Ltd., Digicon Geophysical Corp., and N. S. Neidell and Associates. Ms.
Smith holds a BS in Geology from the University of Glasgow, Scotland.
Rosemary P. Mullin. Ms. Mullin joined the Company as a geologist in 1997.
Ms. Mullin has over 21 years experience in the oil and gas industry. She has
worked as a geologist for Shell Oil Company and N. S. Neidell and Associates.
Ms. Mullin holds a BS in Mathematics and Earth Sciences and a MS in Geology
from the University of Michigan.
41
<PAGE>
COMPENSATION
The following table reflects all forms of compensation for services to the
Company and its subsidiaries for the years ended December 31, 1996, and 1995,
of those individuals who were at December 31, 1996, (i) the Chief Executive
Officer and (ii) each of the five other most highly compensated executive
officers of the Company (the "Named Executives"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION
COMPENSATION(1) AWARDS
---------------------------------
SECURITIES
NAME AND PRINCIPAL OPTIONS ALL OTHER
POSITION YEAR SALARY BONUS UNDERLYING COMPENSATION
- ------------------ ---- ---------- ------------------- ------------
<S> <C> <C> <C> <C> <C>
Sam B. Myers, Jr........ 1996 $ 150,000 $ -- -- $9,651(2)
Chief Executive Officer 1995 69,500 -- -- 724(2)
Edward R. Prince, Jr.... 1996 150,000 -- -- --
Vice Chairman 1995 -- -- -- --
John O. Smith........... 1996 37,500(3) -- 200,000 28,670(2)(4)
President and Chief
Operating Officer 1995 -- -- -- --
W. Kyle Willis.......... 1996 100,000 -- 150,000 8,841(2)
Vice President, 1995 -- -- -- --
Treasurer and Chief
Financial Officer
Stephen W. Knecht(5).... 1996 150,000 -- -- 8,159(2)
Vice President 1995 39,250 -- -- 701(2)
John W. McTigue, Jr..... 1996 100,000 -- -- 6,656(2)
Vice President 1995 18,665 -- -- 518(2)
</TABLE>
- --------
(1) From January 1, 1995, to December 20, 1995, no officer received any
compensation other than reimbursement for any reasonable business expense
incurred in connection with activities on behalf of the Company. After
December 20, 1995, the date of the acquisition by merger of Zydeco
Exploration (the "Merger"), the Company paid all officers' salaries for
the remainder of 1995 in amounts which did not exceed $6,250 for any one
person. In addition, after December 20, 1995, Zydeco Exploration paid
accrued compensation which had been deferred from earlier in 1995 to
Messrs. Myers, Knecht, and McTigue in the amounts of $66,000, $33,000, and
$12,498 respectively. (Prior to December 20, 1995, Zydeco Exploration was
an independent, privately held company.)
(2) Includes the Company's portion of expenses incurred under the Company's
health and long-term disability plans under the same terms and conditions
as available to all employees.
(3) Mr. Smith's salary for 1997 is anticipated to be $150,000.
(4) Includes $27,156 in consulting fees paid to Mr. Smith in 1996 for services
rendered prior to his employment by the Company.
(5) Mr. Knecht ceased to be an executive officer of the Company as of May 15,
1997.
The Company's Named Executives receive health and disability insurance
benefits which do not exceed 10% of their respective salaries. These benefits
are also provided to all other employees of the Company. The Company's 1996
Incentive Equity Plan is described below.
AGREEMENTS WITH DIRECTORS AND EXECUTIVE OFFICERS
In 1995, Zydeco Exploration entered into employment agreements with Messrs.
Knecht and McTigue. Each of the agreements provides: (i) for a five year term
ending December 31, 1999 (the "Primary Term"); (ii) that
42
<PAGE>
Zydeco Exploration may terminate employment with or without cause during the
Primary Term; (iii) for a base salary of $150,000 and $100,000 for Messrs.
Knecht and McTigue, respectively, subject to the Zydeco Exploration Board's
discretion to elect to defer up to 50% of the base salary for not more than
one year; (iv) for the payment of base salary for the entirety of the Primary
Term if the employee is terminated other than for death, disability or for
cause; (v) if terminated for "cause" during the Primary Term, the agreement is
terminated immediately and Zydeco Exploration shall have no further payment
obligations; and (vi) that the employee will retain confidentiality of certain
information and will not compete in the Timbalier Trench or Louisiana
Transition Zone with Zydeco Exploration for a period ending one year after the
expiration of the Primary Term or the termination of the agreement, whichever
occurs first.
Mr. McTigue's agreement also provided for the issuance of certain employee
stock options under the employee stock option plan then in effect for Zydeco
Exploration.
Mr. Knecht's agreement entitles him to receive a 1% overriding royalty
interest in Zydeco Exploration's interest in all oil and gas prospects
generated for Zydeco Exploration by Mr. Knecht. Mr. Knecht relinquished
500,000 shares of Zydeco Exploration Common Stock to Zydeco Exploration in
exchange for the right to receive the overriding royalties under this
agreement.
On July 1, 1997, Zydeco Energy entered into an employment agreement with Dr.
Neidell. Dr. Neidell's agreement provided (i) for a four year term (the
"Neidell Term") ending July 1, 2001; (ii) that Zydeco may terminate employment
with or without cause; (iii) for a base salary of $150,000; (iv) for the
payment of base salary for the entirety of the Neidell Term if he is
terminated other than for death, disability or for cause; (v) that if
terminated for "cause" during the Primary Term, the agreement is terminated
immediately and Zydeco Energy shall have no further payment obligations; and
(vi) that the employee will retain confidentiality of certain information and
will not compete with the Company for one year after termination.
The Company has not entered into any other employment agreements. The
Company has entered into confidentiality agreements with all of its employees.
COMPENSATION OF DIRECTORS
The Company does not compensate its directors, who are executive officers,
for their services other than their compensation as officers and employees of
the Company. The Company pays an annual fee of $12,000, in equal monthly
amounts, to directors who are not executive officers or employees. In 1996 the
Company adopted the 1996 Non-employee Directors Stock Option Plan (the
"Directors Plan"). The Board has granted 15,000 options to each of Messrs.
Tuttle, Bradley and Johnson, pursuant to the Directors Plan. The options
granted vest in one-third increments annually with the first one-third vesting
April 1, 1997. The exercise price of the options granted is $6.69, the average
of the high bid price and low asked price for the Common Stock on the date of
grant.
1996 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
The Directors Plan was adopted by the Company in 1996. Pursuant to the
Directors Plan, each Non-employee Director is granted an option (a "Director
Option") to purchase 15,000 shares of Common Stock at the average of the
closing bid price and asked price on the date appointed or elected. As of July
1, 1997, three persons were eligible for, and had been granted, Director
Options covering 45,000 shares under the Directors Plan. Each Director Option
that is vested may be exercised in full at one time or in part from time to
time. The exercise price may be paid in cash or shares of Common Stock. Unless
sooner terminated, the Directors Plan will expire on December 31, 2005, and
any Director Option outstanding on such date will remain outstanding until it
has either expired or has been fully exercised.
43
<PAGE>
The Directors Plan provides for adjustments to the maximum number of shares
for which Director Options may be granted, the number of shares subject to
outstanding Director Options and the exercise price of such outstanding
Director Options in the event of a declaration of a stock dividend or any
recapitalization resulting in a stock split-up, combination or exchange of
shares of Common Stock in order to prevent dilution or enlargement of the
rights of optionee. In the event of a "Change in Control," as defined in the
Directors Plan, options granted more than six months prior to the "Change in
Control" will be canceled in exchange for a cash payment equal to the value of
such options.
The Company has filed a registration statement registering the sale of the
shares of Common Stock acquired upon exercise of the Directors Options.
EMPLOYEE STOCK OPTIONS
1995 Zydeco Exploration Employee Options. Zydeco Exploration adopted as of
February 22, 1995, the Zydeco 1995 Employee Stock Option Plan (the "1995
Plan"). Pursuant to the 1995 Plan, the Company granted the options summarized
in the table under "1995 Employee Options" on March 3, 1995. These Zydeco
Exploration options (the "1995 Employee Options") were assumed by the Company
pursuant to the Merger.
The following table summarizes the 1995 Employee Options granted by Zydeco
Exploration and which have been assumed by the Company pursuant to the Merger.
The Company did not assume or adopt the Zydeco 1995 Employee Stock Option
Plan.
ZYDECO EXPLORATION EMPLOYEE STOCK OPTIONS GRANTED PURSUANT TO THE 1995 PLAN
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------------
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
NUMBER OF PERCENT OF EXERCISE RATES OF STOCK
SECURITIES TOTAL OR BASE PRICE APPRECIATION
UNDERLYING OPTIONS PRICE FOR OPTION TERM(1)
OPTIONS GRANTED PER EXPIRATION -------------------
NAME GRANTED TO EMPLOYEES SHARE DATE 5% 10%
---- ---------- ------------ -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
John W. McTigue, Jr..... 625,004 62.1% $1.60 3/03/05 $628,899 $1,593,753
Edward R. Prince, Jr.... 312,502 31.1 1.60 3/03/05 314,449 796,876
</TABLE>
- --------
(1) These amounts represent assumed rates of appreciation in the price of the
Company's Common Stock during the terms of the options. Actual gains, if
any, on stock option exercises will depend on the future price of the
Common Stock and overall stock market conditions. There is no
representation that the rates of appreciation reflected in this table will
be achieved.
The exercise price of a 1995 Employee Option may be paid in cash or delivery
of already owned shares of Common Stock having a fair market value equal to
the exercise price. Thirty days prior to certain major corporate events such
as, among other things, certain changes in control, mergers or sales of
substantially all of the assets of Zydeco, each 1995 Employee Option shall
immediately become exercisable in full. All the 1995 Employee Options expire
on March 3, 2005. The number of shares subject to the 1995 Employee Options
and the exercise price of the 1995 Employee Options are subject to adjustment
in the event of a declaration of a stock dividend or any recapitalization
resulting in a stock split-up, combination or exchange of shares of Common
Stock. The shares issuable pursuant to the exercise of the 1995 Employee
Options are registered under the Securities Act of 1933, as amended (the
"Securities Act").
1996 Incentive Equity Plan. In 1996, the Company adopted the 1996 Incentive
Equity Plan (the "1996 Incentive Plan"). The 1996 Incentive Plan provides for
the granting of stock options, stock appreciation rights, phantom shares,
restricted stock, performance units and bonus shares. The aggregate amount of
Common Stock with respect to which awards may be made may not exceed 950,000
shares of Common Stock. The 1996 Incentive Plan is administered by the
Compensation Committee of the Board of Directors (the "Committee"). Subject to
the terms of the 1996 Incentive Plan, the Committee determines to whom
discretionary awards will be made and the terms and conditions of such awards.
44
<PAGE>
No awards other than stock options have been granted under the 1996
Incentive Plan. The following table sets forth information with respect to the
options to purchase shares of Common Stock granted under all stock option
plans to each executive officer named in the Summary Compensation Table in the
fiscal year ended December 31, 1996:
OPTIONS GRANTED PURSUANT TO THE 1996 INCENTIVE PLAN
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------------
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK
SECURITIES TOTAL EXERCISE PRICE APPRECIATION
UNDERLYING OPTIONS OR BASE FOR OPTION TERM(3)
OPTIONS GRANTED PRICE PER EXPIRATION -------------------
NAME GRANTED(1) TO EMPLOYEES SHARE(2) DATE 5% 10%
---- ---------- ------------ --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
John O. Smith........... 200,000 40.4% $5.22 10/7/06 $656,440 $1,663,548
W. Kyle Willis.......... 150,000 30.3 6.69 1/4/06 630,860 1,598,723
</TABLE>
- --------
(1) One fourth of these options vest on the first anniversary of the date of
grant and on each of the succeeding three anniversary dates. Options are
exercisable within the ten-year period from the date of grant subject to
the vesting schedule.
(2) The exercise price of all options granted during 1996 was equal to the
market value of the underlying Common Stock on the date of grant.
(3) These amounts represent assumed rates of appreciation in the price of the
Company's Common Stock during the terms of the options. Actual gains, if
any, on stock option exercises will depend on the future price of the
Common Stock and overall stock market conditions. There is no
representation that the rates of appreciation reflected in this table will
be achieved.
In the event of a "change in control" (as defined in the 1996 Incentive
Plan), all awards that have been granted under the 1996 Incentive Plan more
than six months prior to the date of such event may be canceled by action of
the Board, effective on the date of such event. Upon cancellation a
participant would be paid in cash an amount equal to the net value of the
cancelled award.
The Board may make or provide for such adjustments in the numbers of shares
of Common Stock covered by outstanding option rights, appreciation rights and
phantom shares granted hereunder, in the option price or grant price
applicable to any such option rights and appreciation rights, and/or in the
kind of shares covered thereby (including shares of another issuer), as the
Board may determine is equitably required to prevent dilution or enlargement
of the rights of participants that otherwise would result from any stock
dividend, stock split, combination of shares, recapitalization or other change
in the capital structure of the Company, merger, consolidation,
reorganization, partial or complete liquidation, issuance of rights or
warrants to purchase securities or any other corporation transaction or event
having an effect similar to any of the foregoing.
The Company has filed a registration statement under the Securities Act
registering the sale of the shares of Common Stock granted or acquired upon
exercise of awards granted pursuant to the 1996 Incentive Plan.
45
<PAGE>
YEAR-END OPTIONS VALUE TABLE
The following table summarizes the options granted by the Company to the
Named Executives pursuant to the 1995 Plan and the 1996 Incentive Plan. All of
the options granted pursuant to the 1996 Incentive Plan have an exercise price
equal to the fair market value of a share of Common Stock on the date granted.
The value of the in-the-money options in the following table was determined
using the closing bid price of the Company's Common Stock, which was $6.25 per
share, as of December 31, 1996 less the exercise price of such option.
OPTION VALUES AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996 DECEMBER 31, 1996
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Sam B. Myers, Jr............ -- -- $ -- $ --
Edward R. Prince, Jr........ 156,251 156,251 726,567 726,567
John O. Smith............... -- 200,000 -- 206,000
Stephen W. Knecht........... -- -- -- --
John W. McTigue, Jr......... 312,502 312,502 1,453,134 1,453,134
W. Kyle Willis.............. -- 150,000 -- --
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED 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 (the "Myers Family Interests") owned by the adult
children of the Company's Chief Executive Officer, Mr. Sam B. Myers, Jr., who
subsequently became an officer of certain of the entities. At the time of the
purchase, Mr. Knecht and Mr. Reed were President and Vice President,
respectively, of one of the sellers. The Company paid $302,464 (represented by
the Myers Family Interests as their accumulated cost in the property
interests) for the leases which are located in state waters offshore
Louisiana. The leases are subject to a 7.5% working interest back-in after
payout by the Myers Family Interests. The Myers Family Interests also own an
aggregate of between 4.5% and 7.5% overriding royalty interest in these
leases, which interests were owned by the Myers Family Interests prior to this
transaction with the Company. In addition, Messrs. Knecht and Reed and an
employee of the Company own overriding royalty interests under the leases and
Mr. Knecht received an additional 1.0% overriding royalty interest in three of
the leases pursuant to his employment contract. In addition, at the time of
purchase of the property interests, Messrs. Knecht and Reed also received an
aggregate one-half percent overriding royalty interest in two of the leases
directly from the Myers Family Interests. 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 Family Interest for $145,490
(represented by the seller to the Company as the depreciated book value of the
purchased property).
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 certain Myers Family Interests and agreed to participate
with a Myers Family Interest in the drilling of an exploratory well located in
Timbalier Bay in state waters offshore Louisiana. Mr. Myers was at the time of
the sale, and remains, President of both of the selling entities. The Company
paid $187,500 for a 37.5% working interest in the drilling prospect. The Myers
Family Interests own an aggregate of between 33.1% and 37.3% net revenue
interest in the prospect leases and Mr. Myers owns an approximate 1.6%
overriding royalty interest under portions of the leases. The Myers Family
Interests participated in the well with a working interest of 41.2% and paid
their proportionate share of the estimated cost of drilling and well
completion. The Myers Family Interests can also back-in for a 25.0% working
interest of a well after payout. In addition, an affiliate of a director of
the Company also purchased a 5.0% working interest in the properties on the
same basis as the terms of the Company's participation. Messrs. Knecht and
46
<PAGE>
Reed 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 exploratory 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 a subsidiary of GeoScience
Corporation. Subsequently, in October 1996, Mr. Prince became a director of
GeoScience Corporation.
In connection with the acquisition of Wavefield, the Company agreed to lease
certain office furniture and equipment owned by Dr. Neidell which was and is
used by Wavefield.
Dr. Neidell is a director of MMS Petroleum PLC, a licensee of the Wavefield
Imaging Technology. The license was negotiated and executed prior to the
Company's acquisition of Wavefield.
The Company believes all of the transactions with related parties have been
on terms no less favorable to the Company than those terms which may have been
obtained from unrelated third parties.
None of the officers or directors of the Company is related to any other
executive officer or director of the Company.
CONFLICTS OF INTEREST
Certain of the Company's officers, directors, employees and stockholders own
working and overriding royalty interests in leases owned by the Company or that
adjoin, or are in the vicinity of, some of the potential prospects described
herein. Such officers, directors, employees and stockholders will continue to
conduct operations on such leases, including, without limitation, acquiring or
shooting, processing and/or reprocessing seismic data, remediating or
recompleting existing wells and/or the drilling of new wells. Hence, a conflict
of interest may exist if the Company proposes to drill or farmout for the
drilling of a well or wells upon leases it currently owns and leases
immediately offsetting the leases owned by its officers, directors, employees
or stockholders.
Certain members of the Company's management team are also investors,
executive officers and/or directors of small privately owned companies with
limited oil and gas operations. Though the Company's management team intends to
devote their full time to managing the affairs of the Company, they may
occasionally devote a minimal amount of time to other positions they hold.
Company transactions with related parties have been and will be subject to the
approval of the independent directors. See "Risk Factors--Conflicts of
Interest."
47
<PAGE>
DESCRIPTION OF THE COMPANY'S SECURITIES
GENERAL
The Company is authorized to issue 50,000,000 shares of Common Stock, par
value $.001 per share, and 1,000,000 shares of Preferred Stock, par value
$.001 per share. As of the date of this Prospectus, 6,707,098 shares of Common
Stock are outstanding, and such shares are owned by approximately 56 persons
of record and are owned beneficially by approximately 750 persons. As of the
date of this Prospectus, there are no shares of Preferred Stock outstanding.
COMMON STOCK
The holders of shares of Common Stock are entitled to one vote for each
share held of record on all matters to be voted on by stockholders. There is
no cumulative voting with respect to the election of directors, with the
result that the holders of more than 50% of the shares voting for the election
of directors can elect all of the directors then being elected. The holders of
shares of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors out of funds legally available therefor. In
the event of liquidation, dissolution or winding up of the Company, the
holders of shares of Common Stock are entitled to share ratably in all assets
remaining available for distribution to them after payment of liabilities and
after provision has been made for each class of stock, if any, having
preference over the shares of Common Stock. Holders of shares of Common Stock,
as such, have no conversion, redemption, preemptive or other subscription
rights. All of the outstanding shares of Common Stock and the shares of Common
Stock included in the Units, described below, are fully paid and
nonassessable.
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of
1,000,000 shares of Preferred Stock with such designations, rights and
preferences as may be determined from time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without stockholder
approval, to issue shares of Preferred Stock with dividend, liquidation,
conversion, voting or other rights which could adversely affect the voting
power or other rights of the holders of shares of Common Stock. In addition,
the shares of Preferred Stock could be utilized, under certain circumstances,
as a method of discouraging, delaying or preventing a change in control of the
Company. In July 1996, all 781,255 shares of Preferred Stock then outstanding
were converted into 781,255 shares of Common Stock. There are no shares of
Preferred Stock currently outstanding.
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Each Redeemable Common Stock Purchase Warrant (a "Redeemable Warrant")
entitles the registered holder to purchase one share of Common Stock for
$5.50, subject to adjustment in certain circumstances. The Redeemable Warrants
expire on December 13, 2000. The Company may call the Redeemable Warrants for
redemption, in whole and not in part, at a price of $.01 per Redeemable
Warrant at any time if the last sale price of the shares of Common Stock has
been at least $10.00 per share for the 20 consecutive trading days ending on
the third day prior to the date on which the notice of redemption is given.
The notice of redemption must be given at least 30 days in advance of the
redemption date. The holders of Redeemable Warrants have exercise rights until
the close of business on the redemption date.
The exercise price, number of shares of Common Stock issuable on exercise of
the Redeemable Warrants and redemption price are subject to adjustment in
certain circumstances including in the event of a stock dividend,
recapitalization, reorganization, merger or consolidation of the Company.
However, the Redeemable Warrants are not subject to adjustment for issuances
of shares of Common Stock at a price below their exercise price.
The Company has the right, in its sole discretion, to decrease the exercise
price of the Redeemable Warrants for a period of not less than 30 days on not
less than 30 days prior written notice to the warrant holders. In addition,
48
<PAGE>
the Company has the right, in its sole discretion, to extend the expiration
date of the Redeemable Warrants on five business days prior written notice to
the holders of the Redeemable Warrants.
The Redeemable Warrants are quoted on the Nasdaq SmallCap Market. As of the
date of this Prospectus there are 3,300,000 Redeemable Warrants outstanding.
UNIT OPTIONS
The Company's Unit Options are currently exercisable at $6.60 per Unit. Each
Unit consists of one share of Common Stock and two Common Stock Purchase
Warrants ("Unit Option Warrants"). Each Unit Option Warrant will entitle the
holder to purchase one share of Common Stock under terms similar to the terms
of the Redeemable Warrants except that the Unit Option Warrants are not
redeemable. The exercise price of the Unit Options and the number of Units
issuable upon exercise of a Unit Option are subject to adjustment in the event
Common Stock (or warrants, options or convertible securities exercisable or
convertible into Common Stock) (including the Shares offered hereby) are
issued at less than either the Unit Option exercise price or trading price of
the Common Stock. The holders of Unit Options may elect to convert Unit
Options into a number of Units equal to the difference between the trading
price of Common Stock and the then current Unit Option exercise price, divided
by the exercise price. The result of the foregoing provisions is that the
number of Unit Options will adjust upward and the related exercise price will
adjust downward in the event the Shares are sold in the Offering at a Price to
the Public of less than $6.60 per share. The foregoing provisions could, under
certain circumstances, afford the holders of the Unit Options the opportunity
to purchase a substantial amount of the Company's securities at a price
significantly below market. The holders of Unit Options are entitled to demand
and piggyback registration rights with respect to the Unit Options and all
underlying securities. The demand registration rights expire December 13, 1998
and the piggyback registration rights expire on December 13, 2000. As of the
date of this Prospectus there were 150,000 Unit Options outstanding.
1995 BRIDGE WARRANTS
In connection with certain private financing, the Company issued a total of
225,028 warrants (the "1995 Bridge Warrants") to certain persons. The terms
and conditions of the 1995 Bridge Warrants are substantially the same as the
terms and conditions of the $5.50 Warrants except as described in this
paragraph. The exercise price for the 1995 Bridge Warrants is $5.33 per share,
and they include a "cashless" exercise right pursuant to which 1995 Bridge
Warrants may be surrendered in order to pay the exercise price on other 1995
Bridge Warrants. In addition, the 1995 Bridge Warrants may not be redeemed by
the Company. The 1995 Bridge Warrants were not registered with the Securities
and Exchange Commission (the "Commission"). One of the Underwriters owns
75,000 of the 1995 Bridge Warrants.
ZYDECO EXPLORATION WARRANTS
Certain Company warrants (the "Zydeco Exploration Warrants") were issued by
Zydeco Exploration, Inc. prior to the Merger with TN Energy and assumed by the
Company in connection with the Merger. Each Zydeco Exploration Warrant
entitles the registered holder to purchase one share of Common Stock for
$1.60, subject to adjustment in certain circumstances, at any time ending on
December 1, 1999, at which time the Warrants will expire. The Zydeco
Exploration Warrants are not redeemable.
The exercise price and the number of shares of Common Stock issuable on
exercise of the Zydeco Exploration Warrants are subject to adjustment in
certain circumstances including in the event of a stock dividend,
recapitalization, reorganization, merger or consolidation of the Company. The
exercise price may be paid in cash or with shares of Common Stock. The holders
of Zydeco Exploration Warrants do not have the rights or privileges of holders
of shares of Common Stock prior to the exercise of the Zydeco Exploration
Warrants.
The Company has registered the resale of the shares of Common Stock issuable
upon exercise of the Zydeco Exploration Warrants with the Commission. As of
the date of this Prospectus there were 30,640 Zydeco Exploration Warrants
outstanding.
49
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of July 1, 1997,
regarding beneficial ownership of Common Stock and as adjusted to reflect the
sale of the Shares offered hereby of (i) each stockholder who is known by the
Company to beneficially own more than 5% of Common Stock; (ii) each Director;
(iii) each Named Executive; and (iv) all directors and executive officers as a
group.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY OWNED
NUMBER OF SHARES -----------------------
OF COMMON STOCK BEFORE THE AFTER THE
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING(1) OFFERING(2)
- ------------------------ ------------------ ----------- -----------
<S> <C> <C> <C>
Richard L. Morgan................... 1,562,510(3) 23.3% 17.9%
David M. Fender..................... 1,544,018(4) 23.0% 17.7%
Elizabeth I. Magness................ 390,627(5) 5.8% 4.5%
John W. McTigue, Jr................. 312,502(6) 4.5% 3.5%
Sam B. Myers, Jr.................... 269,925 4.0% 3.1%
Edward R. Prince, Jr................ 171,876(6) 2.5% 1.9%
Norman S. Neidell................... 75,000 1.1% 0.9%
Philip A. Tuttle.................... 57,512(6) 0.9% 0.7%
W. Kyle Willis...................... 37,500(6) 0.6% 0.4%
Charles E. Bradley, Sr.............. 10,000(6) 0.1% 0.1%
Harry C. Johnson.................... 5,000(6) 0.1% 0.1%
John O. Smith....................... -- -- --
Directors and Officers as a group (9
persons)........................... 939,315(6) 13.0% 10.2%
</TABLE>
- --------
(1) Based on 6,707,098 shares of Common Stock outstanding as of July 1, 1997.
(2) Based on 8,707,098 shares of Common Stock, assuming all 2,000,000 Shares
offered hereby are sold to third parties.
(3) Includes 781,255 shares owned by The SBM III Trust and 781,255 shares
owned by The MFM Trust; Mr. Morgan is trustee of both trusts. The SBM III
Trust was established for the benefit of the children of Sam B. Myers,
III. The MFM Trust was established for the benefit of the children of
Melanie F. Myers. Mr. Morgan has sole voting and dispositive power with
respect to such shares. Mr. Sam B. Myers, Jr. disclaims any beneficial
ownership of the shares owned by the trusts. Mr. Morgan's address is 700
N. Pearl Street, Suite 2170, Dallas, Texas 75201.
(4) Includes 15,625 shares owned personally by Mr. Fender and 1,528,393 shares
owned by The Bon Temps Trust for which Mr. Fender is trustee. The Bon
Temps Trust is a trust established for the benefit of the children of Sam
B. Myers, Jr. Mr. Fender has sole voting and dispositive power with
respect to such shares. Mr. Myers disclaims any beneficial ownership of
the shares owned by the trust. Mr. Fender's address is 116 East Front
Street, Tyler, Texas 75702.
(5) Includes 390,627 shares held by The Knecht 1994 Descendants Trust, a trust
established for the benefit of the children of Stephen W. Knecht. Mrs.
Magness has sole voting and dispositive power with respect to such shares.
Mr. Knecht disclaims any beneficial ownership of the shares owned by the
trust. Mrs. Magness' address is 3202 Wild Candle, Spring, Texas 77388.
(6) These amounts include shares of Common Stock covered by options
exercisable within 60 days.
50
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
underwriters named below (the "Underwriters"), for which Brean Murray & Co.,
Inc. is acting as representative (the "Representative"), and each of the
Underwriters severally has agreed to purchase from the Company the aggregate
number of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Brean Murray & Co., Inc..................................
---------
Total.................................................. 2,000,000
=========
</TABLE>
Upon the terms and subject to the conditions of the Underwriting Agreement,
the Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the Common Shares set forth in the above table if any of the
Common Shares are purchased.
The Underwriters propose to offer the Shares to the public initially at the
public offering price set forth on the cover page of this Prospectus, and to
selected dealers at such public offering price less a concession not to exceed
$ per share. The Underwriters or such dealers may reallow a commission
to certain other dealers not to exceed $ per share. After the Offering to
the public, the offering price, the concession to selected dealers and the
reallowance to other dealers may be changed by the Representative.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 300,000 additional
Shares to cover over-allotment, if any, at the public offering price, less
underwriting discounts and commissions, as set forth on the cover page of this
Prospectus. If the Underwriters exercise this option, then each of the
Underwriters will have a firm commitment, subject to certain conditions, to
purchase a number of option shares proportionate to such Underwriters' initial
commitment as indicated in the table above. The Underwriters may exercise such
option only to cover over-allotments made in connection with the sale of the
Shares offered hereby.
The Company, its officers and directors and certain stockholders (who
beneficially hold in the aggregate 4,361,470 shares of Common Stock) have
agreed not to sell, offer to sell, issue, distribute or otherwise dispose of
any shares of Common Stock of the Company for a period of 180 days from the
date of this Prospectus (subject to certain limited exceptions) without the
prior written consent of the Representative.
The Company has agreed to reimburse the Underwriters for up to $150,000 of
the Underwriters' out-of-pocket expenses (including fees of their counsel) in
connection with the sale of the Shares offered hereby. The Company has also
agreed to indemnify the Underwriters or contribute to losses arising out of
certain liabilities that may be incurred in connection with this Offering,
including liabilities under the Securities Act.
In connection with this Offering, certain Underwriters may engage in passive
market making transactions in the Common Stock on the Nasdaq SmallCap Market
immediately prior to the commencement of sales in this Offering, in accordance
with Rule 103 of Regulation M. Passive market making consists of displaying
bids on the Nasdaq SmallCap Market limited by the bid prices of independent
market makers and purchases limited by such prices and effected in response to
order flow. Net purchases by a passive market maker on each day are limited to
a specified percentage of the passive market maker's average daily trading
volume in the Common Stock during a specified period and must be discontinued
when such limit is reached. Passive market making
51
<PAGE>
may stabilize the market price of the Common Stock at a level above that which
might otherwise prevail and, if commenced, may be discontinued at any time.
In connection with this offering, the Underwriters may engage in
stabilizing, syndicate short covering transactions, penalty bids or other
transactions during the offering that may stabilize, maintain or otherwise
affect the market price of the Common Stock at a level above that which might
otherwise prevail in the open market. Stabilizing transactions are bids for
and purchases of the Common Stock for the purpose of preventing or retarding a
decline in the market price of the Common Stock to facilitate the Offering.
Syndicate short covering transactions are bids to purchase and actual
purchases of Common Stock on behalf of the Underwriters to provide them with
enough Common Stock to deliver to those purchasing Common Stock in the
Offering. A penalty bid is an arrangement that permits the Representative to
reclaim a selling concession when the Common Stock originally sold by the
syndicate member are purchased in a syndicate covering transaction. Such
stabilizing, syndicate short covering transactions, penalty bids and other
transactions, if commenced, may be discontinued at any time.
LEGAL MATTERS
Andrews & Kurth L.L.P., Houston, Texas, has passed upon certain matters with
respect to the validity of shares of Common Stock offered hereby, as counsel
for the Company. A partner of that firm who has rendered services to the
Company in connection with this Registration Statement is the son of Mr.
Edward R. Prince, Jr., Vice Chairman of the Company. Certain legal matters
will be passed upon for the Underwriters by Stroock & Stroock & Lavan LLP, New
York, New York.
CHANGE OF ACCOUNTANTS
On January 17, 1996, the Company advised BDO Seidman, LLP that its services
would no longer be required as independent accountants for auditing the annual
financial statements of the Company. As a result of the Merger of the Company
with Zydeco Exploration, the historical financial statements of Zydeco
Exploration became the financial statements of the Company. Arthur Andersen
LLP were the independent accountants for Zydeco Exploration prior to the
Merger and became the independent accountants of the Company commencing with
the audit of the Company's consolidated financial statements for the year
ended December 31, 1995. During the two most recent fiscal years prior to
January 17, 1996, there were no disagreements with BDO Seidman, LLP on any
matter of accounting principles or practices, financial statement disclosure,
auditing scope or procedure, or any reportable events. The report of BDO
Seidman, LLP for fiscal years 1993 and 1994 contained no adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty,
audit scope or accounting principles.
BDO Seidman, LLP, at the request of the Company, furnished a letter
addressed to the Commission stating their agreement with the above statements.
A copy of the BDO Seidman letter to the Commission, dated January 19, 1996,
was filed as Exhibit 16.1 to the Company's Form 8-K, dated January 22, 1996.
EXPERTS
The audited financial statements included in this Prospectus, and elsewhere
in the registration statement, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in accounting and auditing in giving said report.
The information regarding proved reserves in the "Summary" and in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is based on a Reserve Report by Ryder Scott and has been included
herein in reliance upon the authority of that firm as an expert in petroleum
engineering.
52
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, accordingly, files
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information filed with the Commission are
available for inspection and copying at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, DC 20549, and at the Commission's Regional Offices located
at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661; 1801 California Street, Suite 4800, Denver, Colorado 80202; 5670
Wilshire Blvd., 11th Floor, Los Angeles, California 90036; 1401 Brickell Ave.,
Suite 200, Miami, Florida 33131; and at Seven World Trade Center, Suite 1300,
New York, New York 10048 or may be obtained on the Internet at
http:www.sec.gov. Copies of such documents may also be obtained from the
Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, DC 20549, at prescribed rates. In addition, such
materials and other information concerning the Company can be inspected at the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, DC 20006.
The Company has filed with the Commission a registration statement (the
"Registration Statement") under the Securities Act on Form S-1 (Reg. No. 333-
27679) with respect to the securities offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto, certain parts of which are omitted in accordance with the
rules and regulations of the Commission. Statements made in this Prospectus as
to the contents of any contract, agreement or other document referred to are
not necessarily complete. With respect to each such contract, agreement or
other document filed as an exhibit to the Registration Statement, reference is
made to the exhibit for a more complete description of the matter involved.
The Registration Statement and any amendments thereto, including exhibits
filed or incorporated by reference as a part thereof, are available for
inspection and copying at the Commission's offices as described above.
----------------
53
<PAGE>
GLOSSARY OF CERTAIN INDUSTRY TERMS
The definitions set forth below shall apply to the indicated terms as used
in this Prospectus. All volumes of natural gas referred to herein are stated
at the legal pressure base of the state or area where the reserves exist and
at 60 degrees Fahrenheit and in most instances are rounded to the nearest
major multiple.
Area of Mutual Interest. An area designated by exploration contract or other
oil and gas agreement in which the contract parties have mutual and exclusive
rights to conduct exploration and development for oil and gas.
2-D Seismic. The method by which a cross-section of the earth's subsurface
is created through the processing of reflected seismic data collected along a
single source profile.
3-D Seismic. The method by which a three dimensional image of the earth's
subsurface is created through the processing of reflected seismic data
collected over surface grid. 3-D seismic surveys allow for a more detailed
understanding of the subsurface than do 2-D seismic surveys and contribute
significantly to field appraisal, development and production.
Back-in Interest. A portion of an economic interest in an oil and gas lease
that may be returned to its former owner after a predetermined amount of
production or income has been produced.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in
reference to crude oil or other liquid hydrocarbons.
CAEX. Computer aided exploration for oil and gas.
Completion. The installation of permanent equipment for the production of
oil or gas, or in the case of a dry hole, the reporting of abandonment to the
appropriate agency.
Common Depth Point stacking or CDP. A method of improving the signal quality
of seismic data by adding or "stacking" the seismic traces which have a common
midpoint between each source and receiver after time-correcting the data for
the offset or distance between the sources and receivers.
Dip-Moveout or DMO. A process to correct CDP data so that dipping events
will stack or focus better using a common velocity.
Discounted Present Value. A method of determining the present value of
proved reserves in accordance with Commission requirements. Under the
Commission method, the future net revenues before income taxes from proved
reserves are estimated assuming that oil and natural gas prices and production
costs remain constant. The resulting stream of revenues is then discounted at
the rate of 10% per year to obtain the present value.
Dry hole or well. A well found to be incapable of producing hydrocarbons in
sufficient quantities such that proceeds from the sale of such production
exceed production expenses and taxes.
Exploratory well. A well drilled to find and produce oil or gas reserves not
classified as proved, to find a new reservoir in a field previously found to
be productive of oil or gas in another reservoir, or to extend a known
reservoir.
Farmout. An agreement whereunder the owner of a working interest in an oil
and gas lease assigns the working interest or a portion thereof to another
party who desires to drill on the leased acreage. Generally, the assignee is
required to drill one or more wells in order to earn its interest in the
acreage. The assignor usually retains a royalty or reversionary interest in
the lease. The interest transferred by the assignor is a "farmout."
Field. An area consisting of a single reservoir or multiple reservoirs all
grouped on or related to the same individual geological structural feature
and/or stratigraphic condition.
54
<PAGE>
Gross acres or gross wells. The total acres or wells, as the case may be, in
which a working interest is owned.
Lease Option. An option which gives the holder a right to obtain a lease
allowing the holder to drill and develop oil and gas wells on the subject
property.
Nonoperating Interest. An interest in a well which does not include the
responsibility for the development and operation of the well.
Operating Interest. An interest in a well which includes responsibility for
the development and operation of the well.
MBbls. One thousand barrels of crude oil or other liquid hydrocarbons.
Mcf. One thousand cubic feet of natural gas.
Mcf/d. One thousand cubic feet of natural gas per day.
Mcfe. One thousand cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Migration. An imaging process that "relocates" seismic events to account for
changes in the dip of the underlying strata.
Net acres or net wells. The sum of the fractional working interests owned in
gross acres or gross wells.
Pay or Pay Zone. An industry term used to describe reservoirs in the
subsurface which contain hydrocarbons.
Poststack Migration. Migration applied to seismic traces after the traces
have been "stacked."
Present Value. When used with respect to oil and gas reserves, the estimated
future gross revenue to be generated from the production of proved reserves,
net of estimated production and future development costs, using prices and
costs in effect as of the date indicated, without giving effect to non-
property related expenses such as general and administrative expenses, debt
service and future income tax expense or to depreciation, depletion and
amortization, discounted using an annual discount rate of 10%.
Prestack Migration. Migration applied to individual seismic traces prior to
"stacking."
Productive Well. A well that is found to be capable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.
Proved developed producing reserves. Proved developed reserves that are
expected to be recovered from completion intervals currently open in existing
wells and able to produce to market.
Proved developed reserves. Proved reserves that can be expected to be
recovered from existing wells with existing equipment and operating methods.
Proved developed nonproducing reserves. Proved developed reserves expected
to be recovered from zones behind casing in existing wells.
Proved reserves. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
Proved undeveloped reserves. Proved reserves that are expected to be
recovered from new wells on undrilled acreage or from existing wells where a
relatively major expenditure is required for recompletion.
55
<PAGE>
Recompletion. The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.
Reservoir. A porous and permeable underground formation containing a natural
accumulation of producible oil and/or gas that is confined by impermeable rock
or water barriers and is individual and separate from other reservoirs.
Seismic Permit. A permit which grants the holder the right to acquire
seismic data over the subject property.
Stacking. A seismic processing technique involving the addition of seismic
traces.
Transition Zone. The area of land and water extending several miles both
onshore and offshore of a coastline.
Undeveloped acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and gas regardless of whether such acreage contains proved reserves.
Working interest. The operating interest which gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production.
56
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
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 isMarch 14, 1997)
F-2
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------- ------------------------
ASSETS 1997 1996 1995
------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets
Cash and Cash Equivalents............. $ 6,382,058 $ 6,906,650 $ 517,781
Marketable Securities................. 1,262,753 845,852 10,938,674
Oil and Gas Revenue Receivables....... 177,662 327,975 67,024
Other Receivables..................... 12,524 21,244 46,546
Prepaid Expenses...................... 78,969 130,495 --
----------- ----------- -----------
Total Current Assets................ 7,913,966 8,232,216 11,570,025
Oil & Gas Properties, Using Successful
Efforts Method of Accounting
Proved Properties..................... 302,472 300,784 309,110
Unproved Properties................... 488,290 488,290 --
Equipment and Software, at Cost......... 1,719,645 1,608,207 789,710
----------- ----------- -----------
2,510,407 2,397,281 1,098,820
Less: Accumulated Depreciation,
Depletion, and Amortization............ (1,193,600) (1,026,046) (399,541)
----------- ----------- -----------
1,316,807 1,371,235 699,279
Operating Bond and Other Assets......... 308,062 308,151 313,101
----------- ----------- -----------
Total Assets........................ $ 9,538,835 $ 9,911,602 $12,582,405
=========== =========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current Liabilities
Accounts Payable...................... $ 351,244 $ 692,188 $ 284,219
Accrued Liabilities................... 235,559 232,738 355,833
Exploration Obligations............... 3,065,542 2,489,732 3,210,477
Short-Term Bridge Financing Notes
Payable.............................. -- -- 225,028
Capital Lease Obligation--Current
Portion.............................. 112,700 157,537 160,693
----------- ----------- -----------
Total Current Liabilities........... 3,765,045 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; Authorized 50,000,000 Shares;
Issued 7,374,903 and 7,374,905 and
6,562,530 Shares; Outstanding
6,593,648 and 6,593,650 and 5,781,275
Shares, Respectively................. 7,375 7,375 6,563
Additional Paid-In Capital............ 9,503,943 9,503,943 9,495,053
Accumulated Deficit................... (3,730,276) (3,164,659) (1,306,527)
Less: Treasury Stock, at Cost; 781,255
Shares............................... (7,252) (7,252) (7,252)
----------- ----------- -----------
Total Stockholders' Equity.......... 5,773,790 6,339,407 8,188,618
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY................................. $ 9,538,835 $ 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>
THREE MONTHS ENDED YEARS ENDED DECEMBER PERIOD FROM INCEPTION
MARCH 31, 31, (MARCH 17, 1994)
-------------------- ------------------------ THROUGH
1997 1996 1996 1995 DECEMBER 31, 1994
--------- --------- ----------- ----------- ---------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating Revenues
Oil and Gas Sales ..... $ 373,994 $ 251,535 $ 1,422,227 $ 169,235 $ --
Gain on Sales of
Properties............ -- -- 16,319 117,517 --
Seismic Services....... -- -- 31,500 300,000 --
--------- --------- ----------- ----------- ---------
373,994 251,535 1,470,046 586,752 --
Operating Costs and
Expenses
Exploration Expenses
Geological and
Geophysical Expenses. 444,839 208,600 967,957 398,603 --
Dry Hole Costs........ 15,849 -- 699,566 261,956 30,108
Production Costs....... 5,690 6,549 22,508 27,492 --
Seismic Service Costs.. -- -- -- 200,000 --
Depreciation,
Depletion, and
Amortization.......... 168,643 110,365 630,865 392,387 7,153
General and
Administrative
Expenses.............. 356,121 387,398 1,256,489 456,146 72,981
--------- --------- ----------- ----------- ---------
991,142 712,912 3,577,385 1,736,584 110,242
Operating Loss.......... (617,148) (461,377) (2,107,339) (1,149,832) (110,242)
Other Income (Expense)
Interest Income........ 57,919 86,499 293,414 46,555 48,629
Interest Expense....... (6,388) (13,688) (44,207) (70,369) (71,268)
--------- --------- ----------- ----------- ---------
51,531 72,811 249,207 (23,814) (22,639)
Net Loss................ $(565,617) $(388,566) $(1,858,132) $(1,173,646) $(132,881)
========= ========= =========== =========== =========
Per Share of Common
Stock and Common Stock
Equivalent -- Weighted
Average Number of
Shares of Common Stock
and Common Stock
Equivalents
Outstanding............ 6,593,648 5,799,117 6,168,798 3,906,706 4,468,777
========= ========= =========== =========== =========
Loss Per Share of Common
Stock Equivalent ...... $ (0.09) $ (0.07) $ (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 SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
----------------- ------------------
ADDITIONAL TOTAL
PAID-IN ACCUMULATED TREASURY STOCKHOLDERS'
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 and 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
Unaudited:
Net Loss................ -- -- -- -- -- (565,617) -- (565,617)
Adjustment for
Fractional Shares Paid
in Cash................ -- -- (2) -- -- -- -- --
--------- ---- ---------- ------ ---------- ----------- ------- ----------
Balance at March 31,
1997................... -- $ -- 6,593,648 $7,375 $9,503,943 $(3,730,276) $(7,252) $5,773,790
========= ==== ========== ====== ========== =========== ======= ==========
</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>
THREE MONTHS ENDED PERIOD FROM INCEPTION
MARCH 31, YEARS ENDED DECEMBER 31, (MARCH 17, 1994)
---------------------- -------------------------- THROUGH
1997 1996 1996 1995 DECEMBER 31, 1994
----------- --------- ------------ ------------ --------------------- ---
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Loss................ $ (565,617) $(388,566) $ (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.......... 168,643 110,365 630,865 392,387 7,153
Abandonment of Unproved
Leases................ -- -- 28,005 -- --
Gain on Sales of
Properties............ -- -- (16,319) (117,517) --
Exploration and Dry
Hole Costs............ 460,688 208,600 1,639,519 660,559 30,108
Changes in Operating
Assets and Liabilities
(Increase) Decrease in
Oil & Gas Revenue
Receivables.......... 150,313 (83,077) (260,951) (67,024) --
(Increase) Decrease in
Other Current Assets. 60,246 (6,390) (105,193) (34,638) --
Increase (Decrease) in
Accounts Payable..... (340,944) 82,245 407,969 183,070 101,149
Increase (Decrease) in
Accrued Liabilities.. 2,821 (103,232) (123,095) (145,487) --
Other................. (1,000) (4,088) -- 3,040 --
----------- --------- ------------ ------------ -----------
Net Cash Provided by
(Used in) Operating
Activities............ (64,850) (184,143) 342,668 (299,256) 5,529
Cash Flows from
Investing Activities:
Additions to Oil and
Gas Properties........ $ (1,688) $ (10,072) $ (507,377) $ (77,573) $ (870,000)
Exploration and Dry
Hole Costs............ (460,688) (208,600) (1,639,519) (660,559) (30,108)
Proceeds from the Sale
of Properties......... -- -- 16,319 100,000 --
Cost Recovery on
Exploration Agreement. -- (936,683) -- 628,547 --
Advances on Exploration
Obligations........... 2,000,000 -- 6,000,000 4,171,453 --
Net Expenditures
against Exploration
Obligations........... (1,406,220) (90,266) (6,503,043) (960,976) --
Distributions to
Exploration Partner... (17,970) -- (217,704) -- --
Purchases of Equipment
and Software.......... (111,438) (205,916) (818,497) (140,352) (131,849)
Proceeds from the Sale
of (Investment in)
Marketable Securities,
Net................... (416,901) 1,855,751 10,092,822 (10,938,674) (298,173)
----------- --------- ------------ ------------ -----------
Net Cash Provided by
(Used in) Investing
Activities............ (414,905) 404,214 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........... (44,837) (37,537) (160,693) (208,973) --
Borrowings of Short-
Term Debt............. -- -- -- -- 1,330,000
Repayments of Short-
Term Debt............. -- (225,028) (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............ (44,837) (262,565) (376,800) 7,819,244 2,200,528
----------- --------- ------------ ------------ -----------
Net Increase (Decrease)
in Cash and Cash
Equivalents............ $ (524,592) $ (42,494) $ 6,388,869 $ (358,146) $ 875,927
Cash and Cash
Equivalents at
Beginning of Period.... 6,906,650 517,781 517,781 875,927 --
----------- --------- ------------ ------------ -----------
Cash and Cash
Equivalents at End of
Period................. $ 6,382,058 $ 475,287 $ 6,906,650 $ 517,781 $ 875,927
=========== ========= ============ ============ ===========
Cash Paid during the
Period for:
Interest............... $ 6,388 $ 13,688 $ 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.
In connection with the Company's two exploration agreements (See "Note 2--
Exploration Agreements"), advances to the Company are treated as exploration
obligations and expenditures made by the Company pursuant to the exploration
agreements are charged against the related exploration obligation. No costs or
expenses incurred pursuant to the exploration agreements are recognized by the
Company until the Company, pursuant to the terms of the exploration
agreements, begins sharing in such costs.
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. Such investments are
classified as trading securities since they are generally invested for periods
of thirty days or less with no intent of holding to maturity. As a result of
their short-term nature, any unrealized gains or losses are not significant.
F-7
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 share of common stock and common stock
equivalent (primary earnings per share) is based on the weighted average
number of shares of common stock and common stock equivalents 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.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128--"Earnings per
Share" effective for interim and annual periods after December 15, 1997. This
statement replaces primary earnings per share ("EPS") with a newly defined
basic EPS and modifies the computation of diluted EPS. The Company's basic and
diluted EPS computed using the requirements of SFAS 128, are the same as the
currently disclosed primary EPS.
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
F-8
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Unaudited Interim Financial Information. The consolidated financial
statements for the three months ended March 31, 1997 and 1996 included herein
have been prepared by the Company without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, these
statements reflect all adjustments (consisting only of normal recurring
entries) which are, in the opinion of management, necessary for a fair
statement of the financial results for the interim periods. Certain
information and notes normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations, although management
believes that the disclosures are adequate to make the information presented
not misleading. Interim period results are not necessarily indicative of the
results to be achieved for an entire year.
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. Inception-to-
date expenditures through March 31, 1997, aggregated $2,393,498 (unaudited)
net of interest earned of $185,279 (unaudited).
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
F-9
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. Inception-to-date expenditures through
March 31, 1997, aggregated $7,171,605 (unaudited) net of interest earned of
$41,471 (unaudited). 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 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 shares of common
stock 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.
F-10
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
----------- ---------
<S> <C> <C>
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.......................... $ -- $ --
=========== =========
</TABLE>
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.
5. INDEBTEDNESS.
Long-term Obligations. Balances of the Company's long-term obligations at
December 31, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>
1996 1995
------------------ -----------------
LONG-
CURRENT LONG-TERM CURRENT TERM
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Computer Hardware Lease.................... $157,537 $ -- $160,693 $157,537
======== ========= ======== ========
</TABLE>
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
F-11
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------
<S> <C>
1997 $126,481
1998 123,947
1999 11,851
</TABLE>
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 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 1, 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
F-12
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 Board of Directors, then composed of a majority of three
outside directors, reviewed the related-party transactions discussed above,
including the geological and geophysical studies prepared by the Company's
geologist and exploration vice president. Two of the three independent
directors are experienced chief executive officers of publicly traded
companies with oil and gas operations and negotiated the transactions,
including certain terms regarding price and the amount of retained interests.
The information reviewed and discussed by the Board included analysis of
possible reserves, typical reservoir economics, representative costs of
drilling and completion of wells and costs of production platform
construction. 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
F-13
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. In September 1996 while drilling for
hydrocarbon objectives at a depth over 10,000 feet, the drillstring
encountered caving of the wellbore due to the high angle of drillstring bend
designed to reach multiple objectives and the inability of the drilling mud
system to control the wellbore's condition. The well was abandoned as a result
of the increasing risk of losing the drilling contractor's drillstring in the
wellbore for which the interest owners were financially responsible. 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 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.
F-14
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C> <C>
Net Loss As Reported $(1,858,132) $(1,173,646)
Pro Forma $(2,296,904) $(1,291,163)
Loss Per Equivalent Share of Common
Stock As Reported $ (0.30) $ (0.30)
Pro Forma $ (0.37) $ (0.33)
</TABLE>
For purposes of the above pro forma 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) shares of common stock. 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 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 Incentive Equity Plan (the "1996 Incentive Plan"). The 1996
Incentive 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 1996 Incentive 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 $5.22 and $6.69 per
share. Options for
F-15
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Incentive 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 Incentive Plan. The weighted average exercise price
of stock options outstanding under the 1996 Incentive Plan at December 31,
1996, was $5.83 per share. 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 Directors Stock Option Plan (the "1996 Directors 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, 1997, 1998, and 1999, and have an
exercise price of $6.69 per share. The options terminate no later than ten
years after the date of grant. Both the 1996 Incentive Plan and the 1996
Directors Plan were approved by the Company's shareholders at the Annual
Meeting on July 9, 1996.
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
=========== =========== ==========
</TABLE>
F-16
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------
1996 1995 1994
---------- ----------- ----------
<S> <C> <C> <C>
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
========== =========== ==========
</TABLE>
- --------
(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".
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.
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
("Wavefield Imaging"). The Company is authorized to use Wavefield Imaging
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:
<TABLE>
<S> <C>
1997 $40,000
1998 $60,000
1999 $80,000
2000 $80,000
Thereafter $100,000
</TABLE>
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
F-17
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 commitment
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.
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>
OPERATING 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
OPERATING COSTS AND EXPENSES
Exploration Expenses
Geological and Geophysical
Expenses..................... 208,600 192,969 224,895 341,493
Dry Hole Costs................ -- 17,074 669,351 13,141
Production Costs............... 6,549 4,684 6,073 5,202
Depreciation, Depletion and
Amortization.................. 110,365 151,364 181,763 187,373
General and Administrative
Expenses...................... 387,398 261,513 322,290 285,288
--------- --------- --------- ---------
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>
12. SUBSEQUENT EVENT (UNAUDITED)
On June 20, 1997, at the request of Fortune, the Company returned $2,153,645
to Fortune representing the unexpended funds previously advanced to the
Company under the Fortune Agreement. The funds returned to Fortune were
reported as an exploration liability on the Company's balance sheet and their
return will be accounted for as a reduction of such balance, with no effect on
working capital. The Company will retain its current undivided 50% working
interest in each of the existing properties.
F-18
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On July 1, 1997, the Company acquired Wavefield Image, Inc. ("Wavefield"), a
privately held company that develops and licenses a seismic data processing
technique known as Wavefield Imaging Technology. The Company is utilizing
Wavefield Imaging Technology in its West Cameron Seismic Project pursuant to a
license negotiated in May 1996. The Company issued 100,000 shares of Common
Stock to stockholders of Wavefield, including its founder, Dr. Norman S.
Neidell, in exchange for all of the outstanding stock of Wavefield. An
additional 150,000 shares of Common Stock are expected to be issued to
Wavefield's stockholders with respect to a patent for the Wavefield Imaging
Technology, for which the Company received notice on July 3, 1997, that the
application has been allowed for issuance of a patent by the United States
Patent and Trademark Office. The historical operations of Wavefield are not
significant to the Company's financial position or results of operations.
F-19
<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
-------- ------- -------
OIL (BBLS)
<S> <C> <C> <C>
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 --
======== ======= =======
<CAPTION>
GAS (MCF)
<S> <C> <C> <C>
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 17, 1994.
F-20
<PAGE>
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>
YEAR ENDED DECEMBER PERIOD FROM INCEPTION
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 Geophysical
Expenses......................... (967,957) (398,603) --
Depreciation, Depletion, and
Amortization..................... (592,996) (153,710) --
Income Tax Provision (Benefit).... -- -- --
---------- --------- --------
Results of Operations from Oil and
Gas Producing 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>
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>
YEAR ENDED DECEMBER PERIOD FROM INCEPTION
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>
F-21
<PAGE>
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>
YEAR ENDED DECEMBER PERIOD FROM INCEPTION
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.
PRINCIPAL SOURCES OF CHANGE IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER PERIOD FROM INCEPTION
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 the
Period......................... $ 999,818 $1,307,337 $ --
=========== ========== ======
</TABLE>
F-22
<PAGE>
INSIDE BACK COVER
[GRAPHIC- PICTURE OF SEISMIC WORKSTATION]
<PAGE>
ZYDECO ENERGY, INC.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below are the expenses expected to be incurred in connection with
the issuance and distribution of the securities registered hereby. With the
exception of the Securities and Exchange Commission registration fee and the
NASD filing fee, the amounts set forth below are estimates:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $ 3,572
NASD filing fee................................................. 1,679
Nasdaq listing fee and expenses................................. 30,000
Printing and engraving expenses................................. 65,000
Blue Sky fees and expenses...................................... 23,000
Underwriting expenses........................................... 25,000
Legal fees and expenses......................................... 180,000
Accounting fees and expenses ................................... 60,000
Miscellaneous fees and expenses................................. 40,000
--------
Total......................................................... $428,251
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("Section 145") permits
indemnification of directors, officers, agents and controlling persons of a
corporation under certain conditions and subject to certain limitations.
Article Eighth of the Company's Certificate of Incorporation and Section 8.1
of the Company's Bylaws) provide for the indemnification of directors,
officers and other authorized representatives of the Company to the maximum
extent permitted by the Delaware General Corporation Law. Section 145 empowers
a corporation to indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise.
Depending on the character of the proceeding, a corporation may indemnify
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred in connection with such
action, suit or proceeding if the person seeking indemnification acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. In
the case of an action by or in the right of the corporation, no
indemnification may be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine that despite the adjudication
of liability such person is fairly and reasonably entitled to indemnity for
such expenses which the court shall deem proper. Section 145 further provides
that to the extent a director or officer of a corporation has been successful
in defense of any action, suit or proceeding referred to above or in defense
of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him
in connection therewith.
Section 8.6 of the Company's Bylaws permits it to purchase and maintain
insurance on behalf of any such person who is or was a director, officer,
employee or agent of the Company or is or was serving at the request of the
Company, as a director, officer, employee or agent of another corporation or
enterprise against any liability asserted against him and incurred by him in
such capacity, or arising out of his status as such, whether or not the
Company would have the power to indemnify him against such liability under the
foregoing provisions of the Bylaws.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning all sales of securities by
the Company during the last three years that were not registered under the
Securities Act. In the opinion of the Company, each of these transactions were
exempt from registration pursuant to Section 4(2) of the Securities Act as
transactions not involving a public offering.
(a) In September 1995, the Company issued and sold promissory notes and
warrants aggregating $225,028 and 225,028 warrants to the following investors:
<TABLE>
<CAPTION>
AMOUNT PURCHASE
NAME OF INVESTOR OF NOTE WARRANTS PRICE
---------------- ------- -------- --------
<S> <C> <C> <C>
BSR Investments................................. $75,014 75,014 $75,014
W. Forster & Co., Inc........................... $75,014 75,014 $75,014
Brean Murray, Foster Securities Inc............. $75,000 75,000 $75,000
</TABLE>
(b) The Company has issued to its employees options to purchase a total of
842,000 shares of the Company's Common Stock pursuant to the 1996 Incentive
Equity Plan adopted by the Company in 1996. 350,000 of such options were
granted to two executive officers of the Company.
(c) The Company has issued options to purchase a total of 45,000 shares of
the Company's Common Stock pursuant to the 1996 Nonemployee Directors Stock
Option Plan adopted by the Company in 1996. All such options were granted to
the three nonemployee directors of the Company.
(d) On July 1, 1997, the Company issued 100,000 shares of Common Stock in
exchange for all of the outstanding stock of Wavefield Image, Inc., a
privately held company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1+ --Underwriting Agreement and exhibits thereto (filed as Exhibit
1.1 to this Registration Statement)
3.1+ --Certificate of Incorporation of the Company 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)
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 the
year ended December 31, 1995)
4.7+ --Form of Stock Purchase Warrant granted by Zydeco Exploration,
Inc. 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)
5.1* --Opinion of Andrews & Kurth L.L.P.
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))
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.2+ --Warrant Agreement for Redeemable Warrants (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 Exploration, Inc. 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 Exploration, Inc. 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 Exploration, Inc. 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 Exploration, Inc. 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 Exploration, Inc., 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)
10.9+ --Option Agreement dated February 7, 1996, between the Company and
Norman S. Neidell concerning certain wavefield imaging technology
including, as an exhibit, the form of License Agreement between
the Company and Mr. Neidell (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 (filed as
Exhibit 11.1 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996)
10.15+ --Master Geophysical Data Acquisition Agreement dated March 14,
1997 between Zydeco Exploration, Inc. and Grant Geophysical, Inc.
(filed as Exhibit 10.15 to the Company's Quarterly Report on Form
10-Q for the three months ended March 31, 1997)
10.16+ --1996 Incentive Equity Plan (filed on May 20, 1997 as Exhibit
99.1 to the Company's Registration Statement on Form S-8)
10.17+ --1996 Non-employee Directors Stock Option Plan (filed on May 20,
1997 as Exhibit 99.1 to the Company's Registration Statement on
Form S-8)
10.18 --Agreement and Plan of Merger dated July 1, 1996 by and between
the Company, Wavefield Image, Inc. and certain stockholders of
Wavefield Image, Inc.
10.19 --Employment Agreement between Zydeco Energy, Inc. and Norman S.
Neidell
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)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
23.1 --Consent of Arthur Andersen LLP
23.2 --Consent of Ryder Scott Company Petroleum Engineers
23.3* --Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1)
</TABLE>
- --------
+ Incorporated herein by reference to the indicated filing.
* To be filed by amendment.
(b) Financial Statement Schedules:
Schedules for which provision is made in the applicable accounting
regulations of the Commission are not required under the related
instructions or are not applicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS
(1) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred by paid by a director officer or controlling
person in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
its against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
(2) The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1933, the
Registrant has duly caused this Amendment No. 1 to the registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Houston, State of Texas on the 3rd day of July, 1997.
Zydeco Energy, Inc.
/s/ Sam B. Myers, Jr.
By:__________________________________
Sam B. Myers, Jr.
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Sam B. Myers, Jr. Director, Chairman of the July 3, 1997
____________________________________ Board and Chief Executive
Sam B. Myers, Jr. Officer (Principal Executive
Officer)
/s/ W. Kyle Willis* Vice President, Treasurer, July 3, 1997
____________________________________ and Chief Financial Officer
W. Kyle Willis (Chief Accounting Officer)
/s/ Edward R. Prince, Jr.* Director, Vice Chairman of July 3, 1997
____________________________________ the Board
Edward R. Prince, Jr.
/s/ John O. Smith* Director, President and July 3, 1997
____________________________________ Chief Operating Officer
John O. Smith
/s/ Philip A. Tuttle* Director July 3, 1997
____________________________________
Philip A. Tuttle
/s/ Harry C. Johnson* Director July 3, 1997
____________________________________
Harry C. Johnson
/s/ Charles E. Bradley, Sr.* Director July 3, 1997
____________________________________
Charles E. Bradley, Sr.
</TABLE>
*By /s/ Sam B. Myers, Jr.
_________________________
Attorney-in-Fact
(under power of attorney
filed as part of the
initial registration
statement)
II-5
<PAGE>
EXHIBIT 10.18
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER is made as of June 30, 1997 by and among
Zydeco Energy, Inc., a Delaware corporation ("Zydeco"), WFI Acquisition Corp., a
Texas corporation (the "Merger Subsidiary," and together with Zydeco, the
"Zydeco Parties"), Wavefield Image, Inc., a Texas corporation ("Wavefield") and
the persons executing this Agreement as stockholders of Wavefield (collectively,
"Stockholders"). Certain terms are used herein as defined below in Article I or
elsewhere in this Agreement.
BACKGROUND
----------
Zydeco owns all of the outstanding capital stock of the Merger Subsidiary. The
Zydeco Parties and Wavefield desire to merge Merger Subsidiary with and into
Wavefield (the "Merger") in accordance with the Texas Business Corporation Act
(the "TBCA") and on the terms and conditions set forth herein. In consideration
of the respective covenants contained herein and intending to be legally bound
hereby, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
For convenience, certain terms used in more than one part of this Agreement are
listed in alphabetical order and defined or referred to below (such terms, as
well as any other terms defined elsewhere in this Agreement, shall apply equally
to both the singular and plural of the terms defined).
"AFFILIATES" means, with respect to a particular party, persons or entities
controlling, controlled by or under common control with that party, as well as
any officers, directors and majority-owned entities of that party and of its
other Affiliates.
"AGREEMENT" means this Agreement of Merger and the exhibits and schedules
hereto.
"ARTICLES OF MERGER" is defined in Section 2.1.
"ASSETS" means all of the assets, properties, goodwill and rights of every kind
and description, real and personal, tangible and intangible, wherever situated
and whether or not reflected in the most recent financial statements, that are
owned or possessed by the representing party.
<PAGE>
"BENEFIT PLANS" means all employee benefit plans of a representing party within
the meaning of Section 3(3) of ERISA and any related or separate contracts,
plans, trusts, programs, policies, arrangements, practices, customs, and
understandings, in each case whether formal or informal, that provide benefits
of economic value to any present or former employee of a representing party, or
present or former beneficiary, dependent or assignee of any such employee or
former employee.
"BUSINESS" means the entire business, operations, facilities and prospects of
the representing party unless otherwise specified.
"CHARTER DOCUMENTS" means an entity's certificate or articles of incorporation,
certificate defining the rights and preferences of securities, articles of
organization, general or limited partnership agreement, certificate of limited
partnership, joint venture agreement or similar document governing the entity.
"CLOSING" means the Closing of the Merger and the other Transactions.
"CLOSING DATE" is defined in Section 2.6.
"CODE" means the Internal Revenue Code of 1986, as amended, and the Regulations
promulgated thereunder.
"COMMISSION" means the United States Securities and Exchange Commission.
"CONTINGENT RIGHTS"is defined in Section 3.1(a).
"CONTINGENT SHARES"is defined in Section 3.1(a).
"COURT ORDER" means any judgment, decree, injunction, order or ruling of any
federal, state, local or foreign court or governmental or regulatory body or
authority that is binding on any Person or its property under applicable law.
"DGCL" means the Delaware General Corporation Law.
"DEFAULT" means (i) a breach, default or violation; or (ii) the occurrence of an
event that with the passage of time or the giving of notice, or both, would
constitute a breach, default or violation.
"EFFECTIVE TIME" is defined in Section 2.2.
"ENCUMBRANCES" means any lien, mortgage, security interest, pledge, restriction
or transferability, defect or title or other claim, charge or encumbrance of any
nature whatsoever on any property or property interest.
"ENVIRONMENTAL CONDITION" is defined in Section 4.14.
-2-
<PAGE>
"ENVIRONMENTAL LAW" is defined in Section 4.14.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
"EXCHANGE ACT" is defined in Section 5.3.
"EXCHANGE AGENT" is defined in Section 3.2.
"GAAP" means United States generally accepted accounting principles.
"GOVERNMENT PERMITS" is defined in Section 4.10.
"HAZARDOUS SUBSTANCE" means any substance, waste, material or product defined as
hazardous, radioactive, extremely hazardous or toxic under any Environmental
Law.
"INTELLECTUAL PROPERTY" is defined in Section 4.15.
"IRS" is the Internal Revenue Service.
"KNOWLEDGE" or any similar phrase when used in the context of matters within the
knowledge of Wavefield or either or both Zydeco Parties means the actual
knowledge of Wavefield or either or both Zydeco Parties, as the case may be, or
of any director or executive officer of Wavefield or a Zydeco Party,
respectively.
"LIABILITY" means any direct or indirect liability, indebtedness, obligation,
expense, claim, loss, damage, deficiency, guaranty or endorsement of or by any
Person, absolute or contingent, accrued or unaccrued, due or to become due,
liquidated or unliquidated.
"LITIGATION" means any lawsuit, action, arbitration, administrative or other
proceeding, criminal prosecution or governmental investigation or inquiry.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on the financial
condition, results of operations, liquidity and products of any representing
party, taken as a whole with all of its subsidiaries.
"MERGER" is defined in the "Background" section on page 1.
"MERGER CONSIDERATION" is defined in Section 3.1(a).
"MERGER SUBSIDIARY" is defined in the preamble on page 1.
"ORDINARY COURSE" or "ORDINARY COURSE OF BUSINESS" means the ordinary course of
business that is consistent with past practices.
-3-
<PAGE>
"PATENT ISSUANCE EVENT" shall mean the issuance of Letters Patent by the United
States Patent and Trademark Office in respect of the Wavefield Patent
Application which includes claims of substantially comparable commercial impact
to those claims made in the initial Wavefield Patent Application filed with the
United States Patent and Trademark Office on June 10, 1996.
"PERSON" means any natural person, corporation, partnership, proprietorship,
association, trust or other legal entity.
"PLANS" is defined in Section 5.4.
"PLAN OPTIONS" is defined in Section 5.4.
"REGISTRATION STATEMENT" means that certain Registration Statement of Zydeco on
Form S-1 (No.333-27685) filed by Zydeco with the Commission in connection with a
proposed public offering of Zydeco Common Stock, as amended.
"REGULATION" means any statute, law, ordinance, regulation, order or rule of any
federal, state, local, foreign or other governmental agency or body or of any
other type of regulatory body, including those covering environmental, energy,
safety, health, transportation, bribery, recordkeeping, zoning,
antidiscrimination, antitrust, wage and hour, and price and wage control
matters.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SUBSIDIARY" means any corporate entity the voting capital stock of which is
majority owned by such other Person, and any non-corporate entity the equity
capital of which is majority owned by such other Person.
"SURVIVING CORPORATION" is defined in Section 2.1.
"TERMINATION DATES" is defined in Section 10.1(b).
"TRANSACTION DOCUMENTS" means this Agreement, the Articles of Merger and the
other agreements and documents contemplated hereby and thereby.
"TRANSACTIONS" means the Merger and the other transactions contemplated by the
Transaction Documents.
"WAVEFIELD FINANCIALS" is defined in Section 4.5.
"WAVEFIELD BALANCE SHEET" is defined in Section 4.5.
"WAVEFIELD BALANCE SHEET DATE" is defined in Section 4.5.
-4-
<PAGE>
"WAVEFIELD COMMON STOCK" means the Common Stock, $.01 par value per share, of
Wavefield.
"WAVEFIELD DESIGNEES" is defined in Section 7.7.
"WAVEFIELD YEAR-END FINANCIAL STATEMENTS" is defined in Section 4.5.
"WAVEFIELD HOLDERS" means all of the record holders of Wavefield Shares as of
the Effective Time.
"WAVEFIELD IMAGING TECHNOLOGY" means (a) all technical information, data, know-
how and inventions (patented or unpatented), including without limitation
software programs, existing associated screen and menu designs, routines and
related documentation, which (i) utilize or incorporate an algorithm called the
Kirchoff-Neidell Computational Algorithm, including any utility or service
programs or routines which Wavefield owns or licenses or has the right to
license, and all user documentation associated with such utility or service
programs or (ii) which relates to the specifications, drawings and claims set
forth in the initial Wavefield Patent Application claims made in the initial
Wavefield Patent Application filed with the United States Patent and Trademark
Office on June 10, 1996 and (b) all rights, titles and interests in and to the
Wavefield Patent Application and any Letters Patent that may be issued in
connection therewith.
"WAVEFIELD INTERIM FINANCIALS" is defined in Section 4.5.
"WAVEFIELD OPTION PLAN" is defined in Section 4.4.
"WAVEFIELD PATENT APPLICATION" shall mean that certain Application for Letters
Patent (Serial No. 08/661,189) filed with the United States Patent and Trademark
Office by Norman S. Neidell, inventor, titled "Sampling and Reconstruction of
Propagating Wavefields", which has been assigned to Wavefield.
"WAVEFIELD SHARES" means shares of Wavefield Common Stock.
"ZYDECO BALANCE SHEET" is defined in Section 5.5.
"ZYDECO BALANCE SHEET DATE" is defined in Section 5.5.
"ZYDECO COMMON STOCK" means the Common Stock, $0.001 par value per share, of
Zydeco.
"ZYDECO DESIGNEES" is defined in Section 7.7.
"ZYDECO MINOR CONTRACTS" is defined in Section 5.11(a).
"ZYDECO PARTIES" is defined in the preamble on page 1.
-5-
<PAGE>
"ZYDECO PROSPECTUS" means the final Zydeco Prospectus dated December 13, 1993
relating to the initial public offering of securities of Zydeco.
"ZYDECO SHARES" means the shares of Zydeco Common Stock to be issued in
connection with the Merger.
"ZYDECO WARRANTS" means common stock purchase warrants for Zydeco Common Stock.
ARTICLE II
THE MERGER
2.1 THE MERGER. Upon the terms and subject to the conditions hereof, and in
accordance with the relevant provisions of the TBCA, Wavefield and the Merger
Subsidiary shall consummate the plan of Merger, which provides for the merger of
Merger Subsidiary with and into Wavefield at the Effective Time (defined below).
Following the Merger, Wavefield shall continue as the surviving corporation (the
"Surviving Corporation") and shall continue its existence under the laws of the
State of Texas and the separate corporate existence of Merger Subsidiary shall
cease.
2.2 EFFECTIVE TIME. As soon as practicable after the satisfaction or waiver
of all conditions to the Merger, but in any event on or prior to the first
to occur thereafter of (i) the passage of two business days or (ii) July 3,
1997, Wavefield and the Merger Subsidiary shall file with the Secretary of
State of the State of Texas Articles of Merger to effect the plan of Merger in
accordance with the TBCA (the "Articles of Merger"). The Merger shall become
effective at such time as the Articles of Merger are so filed (the "Effective
Time").
2.3 EFFECTS OF THE MERGER. The Merger shall have the effects set forth in
Article 5.06 of the TBCA.
2.4 ARTICLES OF INCORPORATION AND BYLAWS OF SURVIVING CORPORATION. The
Articles of Incorporation of Wavefield and the bylaws of Wavefield shall be the
Articles of Incorporation and bylaws, respectively, of the Surviving Corporation
at the Effective Time.
2.5 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. After the Effective
Time, the directors and officers of Wavefield shall be as set forth on Exhibit A
hereto. Such persons shall hold such positions as directors and officers until
their successors are elected or appointed in accordance with the Articles of
Incorporation and the bylaws of the Surviving Corporation.
2.6 CLOSING. Unless this Agreement shall have been terminated and the
Transactions abandoned pursuant to Article X, subject to satisfaction or waiver
of the conditions to the Merger set forth in Article IX, immediately prior to
the Effective Time the Closing shall take place, at the offices of Andrews &
Kurth L.L.P., 4200 Texas Commerce Tower, Houston, Texas, unless the parties
hereto agree in writing to another date or place. The date on which the Closing
occurs is referred to herein as the "Closing Date."
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<PAGE>
ARTICLE III
CONVERSION OF SHARES AND OTHER MATTERS
3.1 CONVERSION OF THE WAVEFIELD SHARES.
(a) Except as otherwise provided in Section 3.1(c) or 3.1(d), at the Effective
Time, each Wavefield Share outstanding immediately prior to the Effective
Time, shall be converted into (i) a number of Zydeco Shares determined by
dividing 100,000 by the aggregate number of Wavefield Shares outstanding
(exclusive of treasury shares) immediately prior to the Effective Time and
(ii) a contingent right (collectively, the "Contingent Rights") to receive
an additional number of Zydeco Shares determined by dividing 150,000 by
the aggregate number of Wavefield Shares (exclusive of treasury shares)
outstanding immediately prior to the Effective Time in the event the Patent
Issuance Event occurs on or prior to June 30, 1999 (such Zydeco Shares that
may be issued pursuant to the Contingent Rights are herein referred to as
the "Contingent Shares"). The consideration to be received by the Wavefield
shareholders in respect of each Wavefield Share pursuant to this Section
3.1 is hereinafter referred to as the "Merger Consideration."
(b) Each share of capital stock of the Merger Subsidiary outstanding
immediately prior to the Effective Time shall be converted into one share
of Wavefield Common Stock at the Effective Time.
(c) At the Effective Time, each Wavefield Share owned by Wavefield as treasury
stock and any shares of Wavefield Common Stock owned by Zydeco, Merger
Subsidiary or any other wholly owned Subsidiary of Zydeco or Wavefield
shall be canceled and retired and shall cease to exist and no capital stock
of Zydeco or other consideration shall be delivered in exchange therefor.
(d) No fractional Zydeco Shares shall be issued in the Merger. All fractional
Zydeco Shares (other than Contingent Shares) that a holder would otherwise
be entitled to receive as a result of the Merger shall be aggregated and,
if a fractional Zydeco Share results from such aggregation, cash in lieu
thereof shall be paid in respect of such fractional Zydeco Share. If and
when issued pursuant to the terms of the Contingent Rights, all fractional
Contingent Shares that a holder may otherwise be entitled to receive as a
result of the Merger and the Contingent Rights shall be aggregated and, if
a fractional Contingent Share results from such aggregation, cash in lieu
thereof shall be paid in respect of such fractional Contingent Share. In
the case of a fractional Zydeco Share or a Contingent Share, such holder
shall be entitled to receive, in lieu thereof, an amount in cash determined
by multiplying the average of the closing trade price of a share of Zydeco
Common Stock, as reported on the NASDAQ SmallCap Market for the last five
trading days prior to the Effective Time, by the fraction of a Zydeco Share
or Contingent Share, as the case may be, to which such holder would
otherwise have been entitled pursuant to this Agreement.
-7-
<PAGE>
3.2 SURRENDER; PAYMENT AND ISSUANCE OF CERTIFICATES.
(a) Each holder of Wavefield Shares that shall have been converted into a right
to receive the Merger Consideration, upon surrender to Zydeco of a
certificate or certificates formerly representing such Wavefield Shares,
together with (if requested by Zydeco or its transfer agent ) a properly
completed letter of transmittal covering such certificates, will receive
the Merger Consideration payable in respect of such Wavefield Shares.
Until so surrendered, each such certificate shall, after the Effective
Time, represent for all purposes, only the right to receive such Merger
Consideration. In no event will a holder of Wavefield Shares be entitled
to interest on the Merger Consideration payable in respect of such
Wavefield Shares.
(b) If any portion of the Merger Consideration is to be paid to a Person other
than the registered holder of the Wavefield Shares formerly represented by
the certificate or certificates surrendered in exchange for the Merger
Consideration, it shall be a condition to such payment that the certificate
or certificates so surrendered shall be properly endorsed or otherwise be
in proper form for transfer and that the Person requesting such payment
shall pay to Zydeco any transfer or other taxes required as a result of
such payment to a Person other than the registered holder of such Wavefield
Shares or establish to the satisfaction of Zydeco that such tax has been
paid or is not payable.
(c) Upon proper surrender of certificates evidencing the Wavefield Shares in
accordance with the other provisions of this Section 3.2, the Company shall
cause its transfer agent to promptly issue stock certificates evidencing
the Zydeco Shares (other than Contingent Shares) to be received as Merger
Consideration. In the event the surrendering holder becomes entitled to
receive the Contingent Shares, the Company shall cause its transfer agent
to promptly issue stock certificates evidencing the Contingent Shares
(other than Contingent Shares) to be received as Merger Consideration. All
such stock certificates evidencing the Zydeco Shares or the Contingent
Shares shall bear such restrictive legends as Zydeco believes are
appropriate to indicate that the shares evidenced by such certificate have
not been registered under the Securities Act or qualified under applicable
state securities laws and may not be sold or otherwise transferred except
pursuant to an effective registration statement under the Securities Act
and qualification under applicable state securities laws or in reliance
upon an exemption from such registration and qualification. Such legend
may require an opinion of counsel reasonably acceptable to Zydeco in the
event of any transfer in reliance upon such exemptions. Stockholders agree
to be bound by the terms of such restrictive legend. The Contingent Rights
shall not be evidenced by any certificate.
(d) After the Effective Time, there shall be no further registration of
transfers of Wavefield Shares. If, after the Effective Time, certificates
formerly representing Wavefield Shares are presented to the Surviving
Corporation, they shall be canceled and exchanged for the consideration
provided for, and in accordance with the procedures set forth, in this
Article III.
(e) Any portion of the Merger Consideration made available by Zydeco pursuant
to this Section 3.2 that remains unclaimed by the holders of Wavefield
Shares shall be retained to Zydeco until such Person exchanges his or her
certificate or certificates for the Merger Consideration in accordance
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<PAGE>
with this Article III. Notwithstanding the foregoing, Zydeco shall not be
liable to any Person for any amount paid to a public official pursuant to
applicable abandoned property laws. Any amounts remaining unclaimed under
this Article III two years after the Effective Time (or such earlier date
immediately prior to such time as such amounts would otherwise escheat to
or become property of any governmental entity) shall, to the extent
permitted by applicable law, become the property of Zydeco free and clear
of any claims or interest of any Person previously entitled thereto.
(f) No dividends or other distributions otherwise payable by Zydeco with
respect to securities constituting part of the Merger Consideration shall
be paid to any Wavefield Holder who has not surrendered his certificates
formerly representing Wavefield Shares until such certificates are
surrendered as provided in this Article III. Upon such surrender, there
shall be paid, without interest, to the Person in whose name the
certificates representing the securities of Zydeco into which such
Wavefield Shares were converted are registered, all dividends and other
distributions payable in respect of such securities on a date subsequent
to, and in respect of a record date after, the Effective Time.
3.3. ADJUSTMENTS. If at any time during the period between the date of
this Agreement and the Effective Time, the outstanding shares of capital stock
of Zydeco shall have been changed into a different number of shares or a
different class by reason of any stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares, the Merger
Consideration shall be correspondingly adjusted to reflect such stock dividend,
subdivision, reclassification, recapitalization, split, combination or exchange
of shares.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF WAVEFIELD
Wavefield hereby represents and warrants to the Zydeco Parties as follows:
4.1 CORPORATE STATUS. Wavefield is a corporation duly organized, validly
existing and in good standing under the laws of the State of Texas. Wavefield
is qualified to do business as a foreign corporation in all jurisdictions where
it is required to be so qualified, except where the failure to so qualify would
not have a Material Adverse Effect. The Charter Documents and bylaws of
Wavefield that have been delivered to Zydeco have been duly adopted and are
current, correct and complete.
4.2 AUTHORIZATION. Wavefield has the requisite power and authority to
execute and deliver the Transaction Documents to which it is or will be a party
and to perform the Transactions to be performed by it. Such execution, delivery
and performance by Wavefield has been duly authorized by all necessary corporate
action, except for approval by the Wavefield stockholders in accordance with its
Articles of Incorporation and the TBCA. The Transaction Documents executed on
or before the date hereof constitute, and the Transaction Documents to be
executed after the date hereof will constitute, valid and binding obligations of
Wavefield, enforceable against it in accordance with their
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terms, except as such enforcement may be limited by applicable bankruptcy,
insolvency or similar laws affecting the enforcement of creditors' rights
generally or the availability of equitable remedies.
4.3 CONSENTS AND APPROVALS. Neither the execution and delivery by Wavefield
of the Transaction Documents to which it is or will be a party, nor the
performance of the Transactions to be performed by Wavefield, will require any
filing, consent or approval or constitute a Default under (a) any Regulation or
Court Order to which Wavefield is subject, (b) the Charter Documents or bylaws
of Wavefield or (c) any contract, Government Permit or other document to which
Wavefield is a party or by which the properties or other assets of Wavefield may
be subject, except for the filing of the Articles of Merger in accordance with
the TBCA.
4.4 CAPITALIZATION AND STOCK OWNERSHIP. As of the date hereof, the
authorized capital stock of Wavefield consists of 1,000 shares of common stock,
par value $ .01 per share. As of the date of this Agreement, 800 shares of
Wavefield Common Stock were outstanding and owned beneficially and of record by
each of the Stockholders as set forth in Exhibit B hereto free and clear of all
liens claims and encumbrances. All the outstanding shares of capital stock of
Wavefield are validly issued, fully paid and nonassessable and not issued
subject to any preemptive rights. As of the date of this Agreement, except for
this Agreement, there are no options, warrants, calls, rights, or agreements to
which Wavefield is a party or by which it is bound obligating Wavefield to
issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of capital stock of Wavefield or obligating Wavefield to grant, extend or
enter into any such option, warrant, call, right or agreement. After the
Effective Time, there will be no option, warrant, call, right or agreement
obligating Wavefield to issue, deliver or sell, or cause to be issued, delivered
or sold, any shares of capital stock of Wavefield, or obligating Wavefield to
grant, extend or enter into any such option, warrant, call, right or agreement.
Wavefield is not a party to any voting trust or shareholder agreement with
respect to its shares of capital stock, nor, as of the date of this Agreement,
are there any voting agreements or voting trusts known to Wavefield to which any
of the Wavefield Shares are subject. Wavefield does not own, beneficially or of
record, any shares of capital stock of a corporation or any other equity
interest in a partnership, trust or other business entity.
4.5 FINANCIAL STATEMENTS. The unaudited financial statements of Wavefield as
of and for the respective periods ended December 31, 1996 (the "Wavefield Year-
End Financials") and Wavefield's unaudited financial statements consisting of a
balance sheet of Wavefield as of the end of the five-month period ended May 31,
1997 and the related statement of income for the period then ended (the
"Wavefield Interim Financials") have been delivered to Zydeco. All such
Wavefield Year-End Financials and Wavefield Interim Financials are referred to
herein collectively as the "Wavefield Financial Statements." Although not in
accordance with GAAP, the Wavefield Financial Statements fairly present, in all
material respects, the financial position and Assets and Liabilities of
Wavefield as of the dates thereof and Wavefield's results of operations for the
periods then ended. The balance sheet as of May 31, 1997 included as a part of
the Wavefield Interim Financials is referred to herein as the "Wavefield Balance
Sheet," and the date thereof is referred to herein as the "Wavefield Balance
Sheet Date." Wavefield is not a successor to any entity which engaged in any
operations prior to the date of incorporation of Wavefield.
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4.6 LIABILITIES. Wavefield has no Liabilities, and none of the Assets of
Wavefield is subject to any Liabilities, except (a) those Liabilities listed on
Schedule 4.6; or (b) Liabilities incurred since the Wavefield Balance Sheet Date
that are approved in writing by Zydeco.
4.7 TAXES. Wavefield has duly filed all foreign, federal, state, local and
other tax returns that are required to be filed and that were due as of the date
hereof, and has paid or established adequate reserves for all material taxes
(including penalties and interest) that have become due pursuant to such returns
or pursuant to any assessment received. All taxes and other assessments and
levies that Wavefield has been required by law to withhold or to collect have
been duly withheld and collected and have been paid over to the proper
governmental authorities or are properly held by Wavefield for such payment.
There are no proceedings or other actions pending, and to the knowledge of
Wavefield no proceedings or other actions are threatened, for the assessment and
collection of additional taxes of any kind for any period for which returns have
or should have been filed.
4.8 LEGAL PROCEEDINGS. As of the date of this Agreement, there is no (i)
Litigation that is pending or, to Wavefield's knowledge, threatened, against or
related to Wavefield or (ii) Court Order issued and effective and known to
Wavefield that is specifically applicable to Wavefield or any of its properties,
including without limitation the Wavefield Imaging Technology. As of the
Effective Time, there will be no (x) Litigation that is pending or, to
Wavefield's knowledge at such time, threatened, against or related to Wavefield
or (y) Court Order issued and effective and known to Wavefield that is
specifically applicable to Wavefield or any of its properties, including without
limitation the Wavefield Imaging Technology.
4.9 CONTRACTS. Schedule 4.9 lists all contracts, licenses, leases and other
agreements to which Wavefield is a party or to which its Assets are subject,
including without limitation the Wavefield Imaging Technology. Wavefield has
furnished true and accurate copies of each of the documents listed in Schedule
4.9. All of such agreements are in effect and enforceable in accordance with
their terms, and no party to any such agreement is in Default thereunder.
Except as provided in Schedule 4.9 or as provided or contemplated under this
Agreement, Wavefield is not a party to any written or oral (i) contract with, or
obligation to, any officer, director or key employee of Wavefield or any
Affiliate of the foregoing (a) for any term of employment or guaranteed
compensation of such person by Wavefield, (b) for the provision of any services
or the reimbursement of any material expense or cost by Wavefield or (c) the
benefits of which are contingent, or the terms of which are materially altered,
upon the occurrence of a transaction involving Wavefield of the nature
contemplated in this Agreement, or (ii) agreement or plan, the benefits of which
will be increased, or the vesting of benefits of which will be accelerated, by
the occurrence of the transactions contemplated in this Agreement or the value
of which benefits will be calculated on the basis of the transactions
contemplated by this Agreement.
4.10 GOVERNMENTAL PERMITS. Wavefield has obtained all governmental permits,
licenses, registrations, certificates of occupancy, approvals and other
authorizations that are required for the complete operation of the Business of
Wavefield as currently operated except such items as to which
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the failure to obtain or to comply, in the aggregate, would not have a Material
Adverse Effect (the "Government Permits").
4.11 ERISA. No benefit Plans are sponsored or maintained by Wavefield or
under which Wavefield may be obligated. Wavefield has no Benefit Plan that is
intended to be qualified under Section 401(a) of the Code and exempt from tax
under Section 501(a) of the Code. Wavefield does not have a defined benefit
plan subject to Title IV of ERISA and does not have a current or contingent
obligation to contribute to any multiemployer plan (as defined in Section 3(37)
of ERISA). Wavefield has no liability with respect to any employee benefit plan
(as defined in Section 3(3) of ERISA). There are no pending or, to Wavefield's
knowledge, threatened claims by or on behalf of any Benefit Plans, or by or on
behalf of any individual participants or beneficiaries of any Benefit Plans,
alleging any breach of fiduciary duty on the part of Wavefield or any of its
officers, directors or employees under ERISA or any other applicable
regulations, or claiming benefit payments other than those made in the ordinary
operation of such plans, nor is there, to Wavefield's knowledge, any basis for
such claim.
All Benefit Plans conform (and at all times have conformed) in all
material respects to, and are being administered and operated (and have at all
time been administered and operated) in material compliance with, the
requirements of ERISA, the Code and all other applicable Regulations. All
returns, reports and disclosure statements required to be made under ERISA and
the Code with respect to all Benefit Plans have been timely filed or delivered.
There have not been any "prohibited transactions," as such term is defined in
Section 4975 of the Code or Section 406 of ERISA involving any of the Benefit
Plans, that could subject Wavefield to any material penalty or tax imposed under
the Code or ERISA.
4.12 INSURANCE. Schedule 4.12 contains a list of all material insurance
policies currently in effect related to Wavefield.
4.13 TITLE TO ASSETS. All of Wavefield's Assets are listed on Schedule
4.13. Wavefield owns all of its Assets free and clear of all mortgages, liens,
loans and encumbrances, except for the encumbrances and liens listed on Schedule
4.6. With respect to the Assets it leases, as indicated on Schedule 4.13,
Wavefield is in compliance with such leases and, to the best of its knowledge,
holds a valid leasehold interest free of any liens, claims or encumbrances.
4.14 NO ENVIRONMENTAL CONDITIONS. There has not occurred any Environmental
Condition (defined below), at any property owned, leased or operated at any time
by Wavefield, any Person controlled by Wavefield or any predecessor thereof
during the time of Wavefield's or any such person's possession or occupation
thereof; provided that the foregoing representation shall in no event apply to
non-operated oil and gas interests owned or leased by Wavefield. To Wavefield's
knowledge, there has not occurred any Environmental Condition (i) on any oil and
gas leasehold in which Wavefield owns an interest or at any premises at which
the Business of Wavefield has been conducted or (ii) at any property at which
wastes have been deposited or disposed by or at the behest or direction of
Wavefield, any Person controlled by Wavefield or any predecessor thereof.
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Wavefield has not received written notice of any Environmental Conditions that,
in the aggregate, would have a Material Adverse Effect. "Environmental
Condition" means any condition or circumstance, including the presence of
Hazardous Substances, whether created by any third party or otherwise, at or
relating to any such property or premises that would (i) require abatement or
correction under an Environmental Law (defined below); (ii) give rise to any
civil or criminal liability, penalty or fine under an Environmental Law; or
(iii) create a public or private nuisance. "Environmental Law" means all
Regulations and Court Orders relating to pollution or protection of the
environment as well as any principles of common law under which a party may be
held liable for the release or discharge of any materials into the environment.
4.15 PATENTS AND TRADEMARKS. All patents, trademarks, service marks,
trade names, copyrights, applications or registrations for any of the foregoing,
trade secrets, information, proprietary rights and processes, including without
limitation the Wavefield Imaging Technology, (collectively, "Intellectual
Property") owned by Wavefield are listed on Schedule 4.13. Wavefield does not
use or require any intellectual property rights, other than the Intellectual
Property, to use and/or license the Wavefield Imaging Technology throughout the
world or to otherwise operate its business. The use of the Intellectual
Property does not infringe on, or constitute a misappropriation of, the rights
of others. The Wavefield Patent Application is the only patent application
Wavefield or Norman S. Neidell ("Neidell") has filed with respect to the
Intellectual Property. Wavefield has not filed any trademark registrations or
copyright registrations. Except as disclosed in Schedule 4.9, there are no
outstanding licenses, options or agreements of any kind relating to the
Intellectual Property, including without limitation the Wavefield Imaging
Technology, nor is the Company bound by or a party to any options, licenses or
agreements of any kind with respect to any intellectual property of any other
Person. Wavefield has not received any notice of any claim of infringement or
any other claim or proceeding, with respect to any such Intellectual Property
owned or claimed by another Person. To Wavefield's knowledge, no employee or
consultant of Wavefield or other third Person has used, in the course of his
work for Wavefield, any information that is confidential or owned by any other
Person
4.16 ABSENCE OF CERTAIN CHANGES. Since the Wavefield Balance Sheet Date,
Wavefield has conducted its Business in the ordinary course and there has not
been:
(a) any material adverse change in its Business or Liabilities;
(b) any distribution or payment declared or made in respect of its capital
stock by way of dividends, purchase or redemption of shares or otherwise,
other than distributions of available cash;
(c) any increase in the compensation payable or to become payable to any
director, officer, employee or agent, except for merit and seniority
increases for employees made in the ordinary course of business, nor any
other change that is material to any employment or consulting agreement;
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(d) any sale, assignment or transfer of Assets, or any additions to or
transactions involving any Assets, other than those made in the ordinary
course of business and other than distributions of available cash;
(e) other than in the ordinary course of business, any waiver or release of any
claim or right or cancellation of any debt held; or
(f) any contract, license, lease or other agreement made by Wavefield in
respect of the Wavefield Imaging Technology; or
(g) any payments to any Affiliate of Wavefield, other than distributions of
available cash.
4.17 FINDER'S FEES. No Person has been retained by Wavefield who is or
will be entitled to any commission or finder's or similar fee in connection with
the Transactions.
4.18 ACCURACY OF INFORMATION. Wavefield has delivered to Zydeco the
Schedules referred to in this Article IV and has delivered true and accurate
copies of the Charter Documents and all other documents of Wavefield identified
in such Schedules. No representation or warranty by Wavefield herein or in any
Transaction Document, and no information contained therein, contains any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements contained herein or therein not misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE ZYDECO PARTIES
Zydeco and the Merger Subsidiary jointly and severally hereby represent and
warrant to Wavefield as follows:
5.1 CORPORATE STATUS. Each Zydeco Party is a corporation duly organized,
validly existing and in good standing under the laws of the state which it was
incorporated. Each of the Zydeco Parties is qualified to do business as a
foreign corporation in each jurisdiction where it is required to be qualified,
except where the failure to so qualify would not have a Material Adverse Effect.
5.2 AUTHORIZATION. Each Zydeco Party has the requisite power and
authority to execute and deliver the Transaction Documents to which it is or
will be a party and to perform the Transactions to be performed by it. Such
execution, delivery and performance by each Zydeco Party has been duly
authorized by all necessary corporate action. The Transaction Documents executed
on or before the date hereof constitute, and the Transaction Documents to be
executed after the date hereof will constitute, valid and binding obligations of
each Zydeco Party that is or will be a party thereof, enforceable against each
such party in accordance with their terms, except as such enforcement may be
limited by applicable bankruptcy, insolvency or similar laws affecting the
enforcement of creditors' rights generally or the availability of equitable
remedies. It is not necessary under DGCL
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to obtain stockholder approval in connection with the Merger and the
transactions contemplated under this Agreement.
5.3 CONSENTS AND APPROVALS. Neither the execution and delivery by either
Zydeco Party of the Transaction Documents to which it is or will be a party, nor
the performance of the Transactions to be performed by either Zydeco Party, will
require any filing, consent or approval or constitute a Default under (a) any
Regulation or Court Order to which either Zydeco Party is subject, (b) the
Charter Documents or bylaws of either Zydeco Party or (c) any contract,
Government Permit or other document to which either Zydeco Party is a party or
by which the properties or other assets of either Zydeco Party may be subject,
except for (i) the filing of the Articles of Merger in accordance with the TBCA,
(ii) compliance with any applicable requirements of the Securities Act, (iii)
compliance with any applicable requirements of the Securities Exchange Act of
1934, as amended, and the Regulations promulgated thereunder (the "Exchange
Act"), (iv) approval by Zydeco, as the sole stockholder of the Merger
Subsidiary, in accordance with the DGCL and (v) those cases where the aggregate
effect of any such Defaults would not have a Material Adverse Effect.
5.4 CAPITALIZATION. (a) The authorized capital stock of Zydeco consists of
50,000,000 shares of Zydeco Common Stock and 1,000,000 shares of preferred
stock, par value $.001 per share. As of the date of this Agreement, (i)
6,607,098 shares of Zydeco Common Stock were outstanding, (ii) no shares of
preferred stock of Zydeco were outstanding, (iii) 3,577,668 shares of Zydeco
Common Stock were reserved for issuance upon the exercise of outstanding Zydeco
Warrants, (iv) 450,000 shares of Zydeco Common Stock were reserved for issuance
in the event of the exercise of 150,000 Unit Purchase Options, each Unit
consisting of one share of Zydeco Common Stock and two Warrants each for one
share of Zydeco Common Stock, (iv) 1,658,131 shares of Zydeco Common Stock were
reserved for issuance upon the exercise of stock options ("Plan Options")
granted and outstanding under Zydeco's 1996 Incentive Equity Plan, as amended,
its 1996 Non-employee Directors Stock Option Plan or pursuant to certain options
assumed by Zydeco under the Zydeco Exploration Inc. 1995 Employee Stock Option
Plan (collectively, the "Plans") and (v) 781,255 shares of Zydeco Preferred
Stock were held by Zydeco in its treasury or by a wholly owned Subsidiary.
Merger Subsidiary is the sole Subsidiary of Zydeco. The authorized capital
stock of Merger Subsidiary consists of 100 shares of common stock, par value
$.01 per share, of which 100 shares are issued and outstanding, validly issued,
fully paid and nonassessable and not issued subject to any preemptive rights,
and owned beneficially and of record by Zydeco, free and clear of all
Encumbrances. Except for this Agreement, the Unit Purchase Options, the Zydeco
Warrants, awards or grants made pursuant to the Plans, including without
limitation the Plan Options, and except pursuant to the transactions
contemplated in the Registration Statement, there are no options, warrants,
calls, rights, or agreements to which Zydeco or any Subsidiary of Zydeco is a
party or by which it is bound obligating Zydeco or any Subsidiary of Zydeco to
issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of capital stock of Zydeco or of any Subsidiary of Zydeco or obligating
Zydeco or any Subsidiary of Zydeco to grant, extend or enter into any such
option, warrant, call, right or agreement, except pursuant to the transactions
contemplated
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in the Registration Statement. Except for this Agreement and awards or grants
made pursuant to the Plans, including without limitation the Plan Options and
except pursuant to the transactions contemplated in the Registration Statement,
after the Effective Time, there will be no option, warrant, call, right or
agreement obligating Zydeco or any Subsidiary of Zydeco to issue, deliver or
sell, or cause to be issued, delivered or sold, any shares of capital stock of
Zydeco or any Subsidiary of Zydeco, or obligating Zydeco or any Subsidiary of
Zydeco to grant, extend or enter into any such option, warrant, call, right or
agreement.
(b) All of the Zydeco Shares to be issued as Merger Consideration will, upon
issuance in accordance with the terms thereof and the terms of this
Agreement, constitute validly authorized and issued, fully paid and non-
assessable shares of Zydeco Common Stock.
5.5 FINANCIAL STATEMENTS. The audited financial statements of Zydeco and the
unaudited interim financial statements of Zydeco included in the Registration
Statement fairly present in conformity with GAAP applied on a consistent basis
the financial position and Assets and Liabilities of Zydeco as of the dates
thereof and Zydeco's statements of operations and cash flows for the periods
then ended (subject, in the case of unaudited interim financial statements, to
normal, recurring year-end adjustments). The balance sheet of Zydeco as of
March 31, 1997 that is included in such financial statements is referred to
herein as the "Zydeco Balance Sheet," and the date thereof is referred to herein
as the "Zydeco Balance Sheet Date."
5.6 SECURITIES FILINGS. (a) Each of (i) Zydeco's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996 (the "Annual Report"), (ii) Zydeco's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, (iii) the
Registration Statement and (iv) all other reports filed by Zydeco under the
Exchange Act (all of the foregoing materials, together with any amendments
thereto and documents incorporated by reference therein are referred to herein
as the "SEC Filings") have been filed with the Commission and true and correct
copies of which have been delivered to Wavefield.
(b) As of its filing date, or if applicable, its effective date, each SEC
Filing complied in all material respects with the requirements of the
Regulations applicable to such SEC Filing, including the Securities Act and
the Exchange Act.
(c) As of its filing date or, if applicable, its effective date, each SEC
Filing filed pursuant to the Securities Act or the Exchange Act did not
contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in
the light of the circumstances under which they were made, not misleading.
Zydeco has filed all reports under the Exchange Act that were required to
be filed as of the date hereof and will have filed all such reports
required to have been filed through the Effective Time.
(d) Zydeco has filed, or caused to be filed, all filings with governmental
authorities required under the Securities Act or applicable state
securities or "blue sky" laws in order to perfect registration or
qualification, or an exemption from such registration or qualification, for
the offer and sale of all securities of Zydeco, except where the omission
of such filing will not (i) affect the availability of an applicable
exemption from registration or qualification, (ii) materially and
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adversely impact the marketability of the outstanding Zydeco Common Stock
or (iii) otherwise have a Material Adverse Effect.
5.7 TITLE TO ASSETS AND RELATED MATTERS. Each Zydeco Party has good and
marketable title to all of its assets, free from any Encumbrances, except for
such Encumbrances as disclosed in the financial statements included in the SEC
Filings or that, in the aggregate, are not material to the Zydeco Parties taken
as a whole. The use of each Zydeco Party's assets is not subject to any
Encumbrances (other than those specified in the preceding sentence).
5.8 LIABILITIES. Except as specified in Schedule 5.8, none of the Zydeco
Parties has any Liabilities, and none of the assets of either Zydeco Party is
subject to any Liabilities, except (a) to the extent specifically disclosed or
provided for in the Zydeco Balance Sheet; (b) Liabilities incurred since the
Zydeco Balance Sheet Date; (c) Liabilities under any contracts, copies of which
were delivered to Wavefield, that were not required under GAAP to have been
specifically disclosed or reserved for on the Zydeco Balance Sheet; (d)
Liabilities under or contemplated by this Agreement; and (e) Liabilities
incurred since the Zydeco Balance Sheet Date that are approved in writing by
Wavefield.
5.9 TAXES. Except as set forth in Schedule 5.1, each Zydeco Party has duly
filed all foreign, federal, state, local and other tax returns that are required
to be filed and that were due as of the date hereof, and has paid all material
taxes and assessments that have become due pursuant to such returns or pursuant
to any assessment received. All taxes and other assessments and levies that
either Zydeco Party has been required by law to withhold or to collect have been
duly withheld and collected and have been paid over to the proper governmental
authorities or are property held by such Zydeco Party for such payment. There
are no proceedings or other actions pending, and to the knowledge of either
Zydeco Party no proceedings or other actions are threatened, for the assessment
and collection of additional taxes of any kind or any period for which returns
have or should have been filed.
5.10 LEGAL PROCEEDINGS AND BUSINESS ACTIVITIES. (a) Except as set forth on
Schedule 5.10, there is no Litigation that is pending or, to either Zydeco
Party's knowledge, threatened against or related to either Zydeco Party. There
has been no Default with respect to any Court Order applicable to either Zydeco
Party.
(b) At all times since its incorporation, Zydeco has engaged in business
activities in accordance with the description set forth in the Zydeco
Prospectus and to its knowledge, there has not occurred any event which
could give rise to a claim by a Zydeco stockholder for fraud or material
misrepresentation as to its business activities or the description of such
business activities in its Prospectus. Since its incorporation, the Merger
Subsidiary has not engaged in any substantial business activities.
5.11 ABSENCE OF CERTAIN CHANGES. Since the Zydeco Balance Sheet Date and
the date of organization of Merger Subsidiary, there has not been with respect
to Zydeco or Merger Subsidiary, respectively:
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(a) except as described on Schedule 5.8 , any material adverse change in its
Liabilities;
(b) any distribution or payment declared or made in respect of its capital
stock by way of dividends, purchase or redemption of shares or otherwise,
other than distributions of available cash either to Stockholders or to
employees as bonuses on or prior to the Effective Time;
(c) any increase in the compensation payable or to become payable to any
director, officer, employee or agent, except for merit and seniority
increases for employees made in the ordinary course of business, nor any
other change in any employment or consulting arrangement that is material;
(d) any sale, assignment or transfer of its assets, or any additions to or
transactions involving any of its assets, other than (i) the transfer to
Fortune Petroleum Corporation of approximately $2,151,000 of exploration
funds pursuant to an Exploration Agreement with Fortune Petroleum
Corporation, (ii) those made in the ordinary course of business and (iii)
distributions of available cash either to Stockholders or to employees as
bonuses on or prior to the Effective Time;
(e) other than in the ordinary course of business, any waiver or release of any
claim or right or cancellation of any debt held; or
(f) any payments to any Affiliate of either Zydeco Party except as specified in
Schedule 5.11 other than distributions of available cash either to
Stockholders or to employees as bonuses on or prior to the Effective Time.
5.12 FINDER'S FEES. No Person has been retained by either Zydeco Party who
is or will be entitled to any commission or finder's or similar fee from either
Zydeco Party in connection with the Transactions.
5.13 ACCURACY OF INFORMATION. On or prior to the date of this Agreement,
Zydeco has delivered to Wavefield and each of the Stockholders a private
placement memorandum of Zydeco (the "Private Placement Memorandum") together
with (i) the Schedules referred to in this Article V, (ii) true and correct
copies of the Charter Documents and other organizational documents of Zydeco and
(iii) the SEC Filings. No representation or warranty by either Zydeco Party
herein or in any Transaction Document, and no information contained in the
Private Placement Memorandum contains any untrue statement of a material fact or
omits to state any material fact necessary in order to make the statements
contained herein or therein not misleading.
ARTICLE VI
COVENANTS OF WAVEFIELD AND STOCKHOLDERS
6.1 OPERATION OF THE BUSINESS. From the date hereof to the earlier of the
Effective Time or the termination of this Agreement, Wavefield shall conduct its
Business solely in the ordinary course,
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and shall refrain from the following actions in furtherance of and in addition
to such restriction (except as contemplated by this Agreement or as approved by
Zydeco in writing): amending its Charter Documents or bylaws; merging or
consolidating with, or acquiring all or substantially all of, or otherwise
acquiring any business operations of, any Person; selling or otherwise disposing
of any Assets other than in the ordinary course; or issuing any securities other
than in connection with the exercise of any options, warrants or other rights
that are outstanding on the date hereof; entering into any contract, license,
lease or other agreements in respect of the Wavefield Imaging Technology (or
entering into negotiations for any of the foregoing); provided, however, that
the foregoing shall not restrict Wavefield's ability to perform any contract or
incur any liability that is described in any Schedule delivered pursuant to
Article IV hereof.
6.2 STOCKHOLDER CONSENTS. Each of the Stockholders agrees to deliver a
written consent in favor of the Merger on or prior to the Effective Time for the
purpose of voting on the adoption of this Agreement and the Merger as required
by the TBCA. The directors of Wavefield shall recommend such adoption of this
Agreement and the Merger by Wavefield's stockholders. In connection with such
meeting, Wavefield will (a) use all reasonable efforts to obtain the necessary
approvals by its shareholders of this Agreement and the Transactions; and (b)
otherwise comply with all legal requirements applicable to such meeting.
6.3 ACCESS. Wavefield shall give Zydeco and its accountants, counsel and
other representatives full access, without unreasonably interfering with
business operations, to all properties, books, contracts and records of
Wavefield and shall furnish to Zydeco all such documents, records and
information as Zydeco shall from time to time reasonably request.
6.4 MAINTENANCE OF THE ASSETS. Wavefield shall continue to maintain and
service the Assets consistent with past practice. Wavefield shall not, directly
or indirectly, sell or encumber all or any material part of the Assets, other
than sales in the ordinary course of business, or initiate or participate in any
discussions or negotiations or enter into any agreement to do any of the
foregoing.
6.5 EMPLOYEES AND BUSINESS RELATIONS. Wavefield shall use commercially
reasonable efforts to keep available the services of its current employees and
agents and to maintain its relations and goodwill with its customers and
licensees and any others having business relations with it.
6.6 CONFIDENTIALITY. Prior to the Effective Time and for three years from
any termination of this Agreement, Wavefield will hold, and will use
commercially reasonable efforts to cause its officers, directors, employees,
accountants, counsel, consultants, advisors and agents to hold, in confidence,
unless compelled to disclose by judicial or administrative process or by other
requirements of law, all confidential documents and information concerning
either Zydeco Party furnished to Wavefield in connection with the Transactions,
except to the extent that such information can be shown to have been (a)
previously known by Wavefield and not acquired, directly or indirectly, from
either Zydeco Party; (b) at the time of disclosure, in the public domain or
after disclosure, part of the public domain through no fault of Wavefield; (c)
later acquired by Wavefield from sources other than Zydeco so long as, to the
knowledge of Wavefield, such sources are not subject to a contractual or
fiduciary
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duty of confidentiality with respect to such information; or (d) developed by or
for Wavefield independent of the confidential information in question; provided,
that Wavefield may disclose such information to its officers, directors,
employees, accountants, counsel, consultants, advisors and agents in connection
with the Transactions so long as such Persons are informed by Wavefield of the
confidential nature of such information and are directed by Wavefield to treat
such information confidentially. The obligation of Wavefield to hold any such
information in confidence shall be satisfied if it exercises the same care with
respect to such information as it would take to preserve the confidentiality of
its own similar information. If this Agreement is terminated, Wavefield will,
and will use commercially reasonable efforts to cause its officers, directors,
employees, accountants, counsel, consultants, advisors and agents to, destroy or
deliver to Zydeco all documents and other materials, and all copies thereof,
obtained by Wavefield or on its behalf from either Zydeco Party in connection
with this Agreement that are subject to such confidence.
6.7 EXPENSES. Wavefield and Stockholders agree to pay all of the legal,
accounting and other expenses incurred by Wavefield in connection with the
Transactions. In the event the Merger is consummated, Stockholders agree to
pay, and indemnify Wavefield against, and Wavefield shall have no liability for
(a) the fees and expenses of Baker & Hostetler and any other law firm engaged by
Wavefield in connection with the Transaction, (b) all incentive bonuses and
other amounts payable to employees of Wavefield as a result of the consummation
of the Transaction, if any and (c) the fees and expenses of any financial
advisor or consultant engaged by Wavefield in connection with the Transactions;
provided that Wavefield may pay such liabilities out of its available cash prior
to the Effective Time.
6.8 FULFILLMENT OF CONDITIONS. From the date hereof to the Closing,
Wavefield shall use commercially reasonable efforts to fulfill the conditions
specified in Article IX to the extent that the fulfillment of such conditions is
within its control. The foregoing obligation includes the (a) execution and
delivery of the Transaction Documents; (b) completion of all corporate
authorizations to enable Wavefield to effect the Merger; and (c) taking or
refraining from such actions as may be necessary to fulfill such conditions
(including conducting the Business in such manner that on the Closing Date the
representation and warranties of Wavefield contained herein shall be accurate as
though then made, except as contemplated by the terms hereof).
6.9 DISCLOSURE OF CERTAIN MATTERS. During the period from the date hereof
through the Effective Time, Wavefield shall give Zydeco prompt written notice of
any event or development that occurs that (a) had it existed or been known on
the date hereof would have been required to be disclosed under this Agreement;
(b) would cause any of the representations and warranties of Wavefield contained
herein to be inaccurate or otherwise misleading; (c) give Wavefield any reason
to believe that any of the conditions set forth in Article IX will not be
satisfied prior to the Termination Date; or (d) is of a nature that is or may be
materially adverse to the operations, prospects or condition (financial or
otherwise) of Wavefield.
6.10 NO OTHER NEGOTIATIONS. Until the earlier of the Closing or the
termination of this Agreement, neither Wavefield nor any of the Stockholders
shall (a) solicit or encourage, directly or
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indirectly, any inquiries, discussions or proposals for, (b) continue, propose
or enter into any negotiations or discussions looking toward, or (c) enter into
any agreement or understanding providing for, any acquisition of any capital
stock of Wavefield or of the Wavefield Imaging Technology other than as
contemplated or authorized hereby, nor shall Wavefield provide any information
to any Person for the purposes of evaluating or determining whether to make or
pursue any such inquiries or proposals with respect to any such acquisition.
Wavefield shall immediately notify Zydeco of any such inquiries or proposals or
requests for information for such purpose. Wavefield shall use commercially
reasonably efforts to cause the directors, officers, employees, agents and other
representatives of Wavefield to comply, with the provisions of this Section
6.10.
ARTICLE VII
COVENANTS OF THE ZYDECO PARTIES
7.1 OPERATION OF THE BUSINESS. From the date hereof to the Effective Time,
Zydeco shall conduct its business solely in the ordinary course, and shall
refrain and cause the Merger Subsidiary to refrain from the following actions in
furtherance of and in addition to such restriction (except as contemplated by
this Agreement or as approved by Wavefield in writing): amending its Charter
Documents or bylaws; merging or consolidating with, or acquiring all or
substantially all of, or otherwise acquiring any business operations of, any
Person; or issuing any securities other than in connection with the exercise of
any options, warrants or other rights that are outstanding on the date hereof
and other than grants of stock options in accordance with the Plans; provided,
however, that the foregoing shall not limit the incurrence by Zydeco of any
liability incurred in furtherance of any of the transactions contemplated by
this Agreement or restrict Zydeco's ability to perform any contract or incur any
Liability.
7.2 ACCESS. From the date hereof to the Effective Date, Zydeco shall give
Wavefield and its counsel and other representatives full access, without
unreasonably interfering with business operations, to all properties, books,
Contracts and records of the Zydeco Group and shall furnish to Wavefield all
such documents, records and information as Wavefield shall from time to time
reasonably request.
7.3 MAINTENANCE OF THE ASSETS. From the date hereof to the Effective Date,
Zydeco shall, and shall cause the Merger Subsidiary to, continue to maintain and
service its assets consistent with past practice. Zydeco shall not, and shall
cause the Merger Subsidiary not to, directly or indirectly, sell or encumber all
or any material part of its assets or initiate or participate in any discussion
or negotiations or enter into any agreement to do any of the foregoing.
7.4 CONFIDENTIALITY. Prior to the Effective Time and for three years from
any termination of this Agreement, Zydeco will hold, and will use commercially
reasonable efforts to cause the Merger Subsidiary and the officers, directors,
employees, accountants, counsel, consultants, advisors and agents of each Zydeco
Party to hold, in confidence, unless compelled to disclose by judicial or
administrative process or by other requirements of law, all confidential
documents and information
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concerning Wavefield furnished to either Zydeco Party in connection with the
Transactions except for information (a) previously known by either Zydeco Party
and not acquired, directly or indirectly from Wavefield; (b) at the time of
disclosure in the public domain or after disclosure, part of the public domain
through no fault of either Zydeco Party; (c) later acquired by either Zydeco
Party from sources other than Wavefield so long as, to the knowledge of either
Zydeco Party, such sources are not subject to a contractual or fiduciary duty of
confidentiality with respect to such information; or (d) developed by or for
either Zydeco Party independent of the confidential information in question;
provided, that either Zydeco Party may disclose such information to its
officers, directors, employees, accountants, counsel, consultants, advisors and
agents in connection with the Transactions so long as such Persons are informed
by a Zydeco Party of the confidential nature of such information and are
directed by a Zydeco Party to treat such information confidentially. The
obligation of either Zydeco Party to hold any such information in confidence
shall be satisfied if it exercises the same care with respect to such
information as it would take to preserve the confidentiality of its own similar
information. If this Agreement is terminated, Zydeco will, and will use
commercially reasonable efforts to cause each other Zydeco Party and the
officers, directors, employees, accountants, counsel, consultants, advisors and
agents of each Zydeco Party to, destroy or deliver to Wavefield all documents
and other materials, and all copies thereof, obtained by either Zydeco Party or
on its behalf from Wavefield in connection with this Agreement that are subject
to such confidence.
7.5 RESERVATION OF ZYDECO STOCK. Zydeco shall reserve for issuance out of
its authorized but unissued capital stock, a sufficient number of shares of
Zydeco Common Stock to be issued (i) upon consummation of the Merger and (ii)
thereafter upon the issuance of any Contingent Shares..
7.6 FULFILLMENT OF CONDITIONS. From the date hereof to the Closing, each
Zydeco Party shall use commercially reasonable efforts to fulfill the conditions
specified in Article IX to the extent that the fulfillment of such conditions is
within its control. The foregoing obligation includes the (a) execution and
delivery of the Transaction Documents; (b) completion of all corporate
authorizations to enable Wavefield to effect the Merger; and (c) taking or
refraining from such actions as may be necessary to fulfill such conditions
(including conducting the Business of each Zydeco Party in such manner that on
the Closing Date the representations and warranties of the Zydeco Parties herein
shall be accurate as though then made, except as contemplated by the terms
hereof).
7.8 DISCLOSURE OF CERTAIN MATTERS. During the period from the date hereof
through the Effective Time, Zydeco shall give Wavefield prompt written notice of
any event or development that occurs that (a) had it existed or been known on
the date hereof would have been required to be disclosed under this Agreement;
(b) would cause any of the representations and warranties of either Zydeco Party
contained herein to be inaccurate or otherwise misleading; (c) gives Zydeco any
reason to believe that any of the conditions set forth in Article IX will not be
satisfied prior to the Termination Date; (d) is of a nature that is or may be
materially adverse to the operations, prospects or condition (financial or
otherwise) of the Zydeco Parties; or (e) would require any amendment or
supplement to the Proxy Statement.
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ARTICLE VIII
ADDITIONAL AGREEMENTS OF THE ZYDECO PARTIES AND WAVEFIELD
8.1 COMMERCIALLY REASONABLE EFFORTS. Subject to the terms and conditions of
this Agreement, each party shall use commercially reasonably efforts to take, or
cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable under applicable Regulations to consummate the
Transactions, including the execution and delivery of any additional instruments
necessary to consummate the Transactions.
8.2 DEVELOPMENT OF NONSEISMIC APPLICATIONS OF WAVEFIELD IMAGING TECHNOLOGY.
Zydeco shall offer, or shall cause Wavefield to offer, to enter into a joint
venture with Neidell for the development and commercialization of nonseismic
applications of the Wavefield Imaging Technology. Upon such offer Zydeco, or
Wavefield, and Neidell shall negotiate diligently and in good faith to agree
upon the formation and operation of the joint venture. The joint venture shall
be owned by Neidell and Zydeco in proportion to their contributions to the joint
venture, which the parties intend should be structured as nearly as possible to
provide for equal ownership between Wavefield and Zydeco on the one hand, and
Neidell on the other. If Zydeco and Wavefield fail to make such an offer,
Neidell may require, by written notice, that they enter into negotiations to
form the joint venture. If Zydeco and Wavefield do not desire to engage in such
a joint venture, they shall give notice of such desire to Neidell and offer to
grant Neidell a nonexclusive, worldwide, royalty free license for nonseismic
applications of the Wavefield Imaging Technology. If, however, Neidell, upon
receiving an offer to negotiate a joint venture, does not desire to enter into a
joint venture, and rejects such offer, his rights to such application under this
Section 8.2 shall terminate. This Section 8.2 shall survive the Closing.
8.3 COMMERCIALLY REASONABLE EFFORTS. Subject to the terms and conditions of
this Agreement, each party shall use commercially reasonable efforts to take, or
cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable to cause the Patent Issuance Event to occur.
ARTICLE IX
CONDITIONS PRECEDENT TO THE MERGER
9.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of
each party to consummate the Merger and the other Transactions shall be subject
to the fulfillment at or prior to the Effective Time of the following
conditions:
(a) the negotiation of a mutually satisfactory employment or consulting
arrangement or agreement shall have been completed by Zydeco and Dr. Norman
S. Neidell.
9.2 CONDITIONS TO OBLIGATIONS OF THE ZYDECO PARTIES. The obligations of the
Zydeco Parties to consummate the Merger and the Transactions shall be subject to
the satisfaction or waiver, on or
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before the Effective Time (or such earlier date as is specified below), of each
of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES TRUE. Except for changes contemplated by
this Agreement, (i) the representations and warranties of Wavefield
contained herein shall be true and correct in all material respects at and
as of the date hereof; and (ii) such representations and warranties shall
be true and correct in all material respects at and as of the Effective
Time as though such representations and warranties were made again at and
as of the Effective Time, except to the extent that such representations
and warranties are made herein as of a specific date prior to the Effective
Time.
(b) PERFORMANCE. Wavefield and the Stockholders shall have performed and
complied in all material respects with the agreements and covenants
contained in this Agreement required to be performed or complied with by it
on or prior to the Effective Time.
(c) CONSENTS AND APPROVALS. Wavefield shall have obtained all third party
consents and approvals necessary, proper or advisable to consummate the
Merger.
(d) NO GOVERNMENTAL ORDER OR REGULATION. There shall not be in effect any
order, decree or injunction (whether preliminary, final or appealable) of a
United States federal or state court of competent jurisdiction, and no
Regulation shall have been enacted or promulgated by any governmental
authority or agency, that prohibits the consummation of the Merger.
(e) ABSENCE OF CERTAIN LITIGATION. No action shall have been filed and remain
undismissed in any court of competent jurisdiction against Wavefield.
(f) RIGHTS TO WAVEFIELD IMAGING TECHNOLOGY. Zydeco shall have confirmed to its
reasonable satisfaction that all rights, titles and interests in and to the
Wavefield Imaging Technology shall have vested in Wavefield, subject only
to existing licensing agreements disclosed in Schedule 4.9.
(g) LEGAL OPINION. Zydeco shall have received an opinion of Baker & Hostetler,
counsel to Wavefield, dated as of the Effective Time, in form and substance
reasonably satisfactory to Zydeco.
(h) CONFIDENTIALITY AGREEMENTS. Each Wavefield employee who will remain an
employee after the Effective Time shall execute and deliver to Zydeco a
standard confidentiality and non-disclosure agreement.
(i) OTHER DOCUMENTS. Zydeco shall have received executed copies of all
Transaction Documents to which Wavefield or any Wavefield Holder is a party
to the extent that they shall not have been received prior to the Closing.
Zydeco shall have received all other documents required under the terms of
any of the Transaction Documents and any other documents reasonably
requested on or prior to the Closing Date.
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(j) CERTIFICATES. Wavefield shall have furnished to Zydeco a certificate of
the President of Wavefield, dated the Effective Time, certifying compliance
as of the Effective Time with the conditions set forth in paragraphs (a)
and (b) of this Section 9.2 in all material respects.
9.3 CONDITIONS TO OBLIGATIONS OF WAVEFIELD. The obligations of Wavefield to
consummate the Merger and the Transactions shall be subject to the satisfaction
or waiver, on or before the Effective Time, of each of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES TRUE. Except for changes contemplated by
this Agreement, (i) the representations and warranties of the Zydeco
Parties contained herein shall be true and correct in all material respects
at and as of the date hereof; and (ii) such representations and warranties
shall be true and correct in all material respects at and as of the
Effective Time as though such representations and warranties were made
again at and as of the Effective Time, except to the extent that such
representation and warranties are made herein as of a specific date prior
to the Effective Time.
(b) PERFORMANCE. The Zydeco Parties shall have performed and complied in all
material respects with the agreements and covenants contained in this
Agreement required to be performed or complied with by them on or prior to
the Effective Time.
(c) NO GOVERNMENTAL ORDER OR REGULATION. There shall not be in effect any
order, decree or injunction (whether preliminary, final or appealable) of a
United States federal or state court of competent jurisdiction, and no
Regulation shall have been enacted or promulgated by any governmental
authority or agency, that prohibits consummation of the Merger.
(d) ABSENCE OF CERTAIN LITIGATION. No action shall have been filed and remain
undismissed in any court of competent jurisdiction by any stockholder of
Zydeco or purported stockholder of Zydeco, or any holder of a Zydeco
Warrant or purported holder of Zydeco Warrant, or governmental authority,
based upon allegations of (i) fraud, securities fraud, breach of fiduciary
duty, non-compliance with DGCL, the TBCA or the provisions of the Charter
Documents of Zydeco by Zydeco, its officers or its directors or (ii)
illegality of the Merger and the Transactions.
(e) LEGAL OPINION. Wavefield shall have received an opinion of Andrews & Kurth
L.L.P., counsel to Zydeco, dated as of the Effective Time, to the effect
that (a) the Merger has been effected under the TBCA and (b) upon surrender
of the stock certificates evidencing the Wavefield Shares by Stockholders
in accordance with this Agreement, the Zydeco Shares issued to Stockholders
as Merger Consideration are validly issued, fully paid and non-assessable.
(f) OTHER DOCUMENTS. Wavefield shall have received executed copies of all
Transaction Documents to which either Zydeco Party is a party to the extent
that they shall not have been received prior to the Closing. Wavefield
shall have received all other documents required under the terms of any of
the Transaction Documents and any other documents reasonably requested on
or prior to the Closing Date.
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(g) CERTIFICATES. Zydeco shall have furnished to Wavefield a certificate of
the Chief Executive Officer of Zydeco, dated the Effective Time, certifying
compliance as of the Effective Time with the conditions set forth in
paragraphs (a) and (b) of this Section 9.3 in all material respects.
ARTICLE X
TERMINATION
10.1 GROUNDS FOR TERMINATION. This Agreement may be terminated at any time
prior to the Closing Date:
(a) by mutual written consent of Zydeco and Wavefield;
(b) by Wavefield if any Zydeco Party shall have breached any of its covenants
hereunder in any material respects or if the representations and warranties
of any Zydeco Party contained in this Agreement shall not be true and
correct, except for such changes as are contemplated by this Agreement, in
all material respects, and in either event, if such breach is subject to
cure, the Zydeco Parties have not cured such breach within 3 business days
of Wavefield's notice of an intent to terminate;
(c) by Zydeco, if Wavefield shall have breached any of its covenants hereunder
in any material respect or if the representations and warranties of
Wavefield contained in this Agreement shall not be true and correct, except
for such changes as are contemplated by this Agreement, in all material
respects, and in either event, if such breach is subject to cure, Wavefield
has not cured such breach within 3 business days if Zydeco's notice of an
intent to terminate; or
(d) by either Zydeco or Wavefield, if any condition precedent contained in
Section 9.2 (in the case of Zydeco) or 9.3 (in the case of Wavefield) shall
not have been satisfied or waived on or before the Effective Date (or, if
earlier, the date specified in such Section).
10.2 EFFECT OF TERMINATION. If this Agreement is terminated pursuant to
Section 10.1, the agreements contained in Sections 6.6, 6.7, 7.4, 7.6 and 8.2
shall survive the termination hereof. In addition, any party may pursue any
legal or equitable remedies that may be available if such termination is based
on a breach of another party.
ARTICLE XI
MISCELLANEOUS
11.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations,
warranties and covenants contained in this Agreement shall survive the closing
of the Merger for a period of two years from the Effective Time (the "Survival
Period"). In the event Zydeco determines during the Survival Period that a
representation or warranty of Wavefield and the Stockholders contained is
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determined to be untrue in any material respect at the Effective Time or a
covenant contained in this Agreement is breached in any material respect by
Wavefield or by any Stockholder prior to the Effective Time, then Zydeco shall
be entitled to recover damages for such breach from Stockholders; provided that
(a) written notice of such breach shall have been sent by Zydeco to each of the
Stockholders on or prior to the expiration of the Survival Period and (b) any
such damages may be satisfied by Stockholders by surrender to Zydeco of Zydeco
Shares owned by such Stockholders (in the event of a breach by Wavefield, by
each Stockholder in proportion to the number of Zydeco Shares received as a
result of the Merger), which surrendered shares shall be valued for this purpose
at the last reported closing trade price of a share of Zydeco Common Stock, as
reported on the NASDAQ SmallCap Market on the Effective Date. In the event any
Stockholder determines during the Survival Period that a representation or
warranty of Zydeco contained is determined to be untrue in any material respect
at the Effective Time or a covenant contained in this Agreement is breached in
any material respect by Zydeco or by any Stockholder prior to the Effective
Time, then Stockholder shall be entitled to recover damages for such breach from
Zydeco, provided that written notice of such breach shall have been sent by such
Stockholder to Zydeco on or prior to the expiration of the Survival Period.
11.2 PRIVATE PLACEMENT; RESTRICTED STOCK. Each Stockholder acknowledges and
agrees that (a) he or she has received all information about Zydeco, and have
been afforded the opportunity to ask questions of management of Zydeco, to the
extent necessary to make an informed business judgment regarding investment in
Zydeco Common Stock as a result of the Merger, (b) he or she is acquiring the
shares of Zydeco Common Stock pursuant to this Agreement for investment purposes
and without the present intention of engaging in a distribution of such shares,
(c) when issued in accordance with this Agreement, the Zydeco Shares and the
Contingent Shares have not been registered under the Securities Act or qualified
under applicable state securities laws and may not be sold or otherwise
transferred except pursuant to an effective registration statement under the
Securities Act and qualification under applicable state securities laws or in
reliance upon an exemption from such registration and qualification, and (c)
stock certificates issued to Stockholders evidencing the Zydeco Shares and the
Contingent Shares will bear a legend giving notice of the absence of such
registration or qualification and requiring an opinion of counsel reasonably
acceptable to Zydeco in the event of any transfer in reliance upon such
exemptions, provided that at any time after two years from the Effective Time,
in the case of the Zydeco Shares, and two years after the date of issuance of
such shares, in the case of the Contingent Shares, Stockholders who are not
Affiliates of Zydeco, and who have not been Affiliates of Zydeco for a period of
90 days prior to such request, may request removal of such legends and Zydeco
shall arrange for such removal provided that is permitted to do so under then
applicable securities laws.
11.3 PUBLIC ANNOUNCEMENTS. Zydeco and Wavefield will consult with each other
before issuing any press release or making any public statement with respect to
this Agreement and the Transactions and, except as may be required by applicable
law or stock exchange regulations, will not issue any such press release or make
any such public statement prior to such consultation.
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11.4 CONTENTS OF AGREEMENT, AMENDMENT, PARTIES IN INTEREST, ASSIGNMENT,
ETC. This Agreement sets forth the entire understanding of the parties hereto
with respect to the subject matter hereof. This Agreement may be amended,
modified or supplemented only by a written instrument duly executed by each of
the parties hereto. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the respective heirs, legal representatives,
successors and permitted assigns of the parties hereto. No party hereto may
assign this Agreement or any right, benefit or obligation hereunder. Any term
or provision of this Agreement may be waived at any time by the party entitled
to the benefit thereof by a written instrument duly executed by such party. The
parties hereto shall execute and deliver any and all documents and take any and
all other actions that may be deemed reasonably necessary by their respective
counsel to complete the Transactions.
11.5 INTERPRETATION. Unless the context of this Agreement clearly requires
otherwise, (a) references to the plural include the singular, the singular the
plural, the part the whole; (b) "or" has the inclusive meaning frequently
identified with the phrase "and/or"; and (c) "including" has the inclusive
meaning frequently identified with the phrase "but not limited to." The section
and other headings contained in this Agreement are for reference purposes only
and shall not control or affect the construction of this Agreement or the
interpretation thereof in any respect. Section, subsection, schedule and
exhibit references are to this Agreement unless otherwise specified. Each
accounting term used herein that is not specifically defined herein shall have
the meaning given to it under GAAP.
11.6 NOTICES. All notices that are required or permitted hereunder shall be in
writing and shall be sufficient if personally delivered or sent by mail,
facsimile message or Federal Express or other delivery service. Any notices
shall be deemed given upon the earlier of the date when received at, or the
second business day after the date when sent by registered or certified mail or
the day after the date when sent by Federal Express to, the address or fax
number set forth below, unless such address or fax number is changed by notice
to the other party hereto:
If to Zydeco or the Merger Subsidiary:
Zydeco Energy, Inc.
1710 Two Allen Center
1200 Smith Street
Houston, Texas 77002
Attention: Chief Financial Officer
with a required copy to:
Andrews & Kurth L.L.P.
4200 Texas Commerce Tower
Houston, Texas 77002
Attention: James M. Prince
Tel. No. (713) 220-4486
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If to Wavefield, to Dr. Norman S. Neidell at the address set forth on Exhibit A
hereto, with a required copy to Richard Yount, Baker & Hostetler, 1000
Louisiana, Suite 2000, Houston, Texas 77002. If to Stockholders, at the
address set forth on Exhibit A hereto, with a required copy to Richard Yount,
Baker & Hostetler, 1000 Louisiana, Suite 2000, Houston, Texas 77002.
11.7 GOVERNING LAW. This Agreement shall be construed and interpreted in
accordance with the laws of the State of Texas, without regard to its provisions
concerning conflict of laws.
11.8 COUNTERPARTS. This Agreement may be executed in two or more counterparts,
each of which shall be binding as of the date first written above, and all of
which shall constitute one and the same instrument. Each such copy shall be
deemed an original, and it shall no be necessary in making proof of this
Agreement to produce or account for more than one such counterpart.
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This Agreement has been executed by the parties hereto as of the day and year
first written above.
ZYDECO ENERGY, INC.
By: /s/ EDWARD R. PRINCE, JR.
-------------------------
Edward R. Prince, Jr.
Vice Chairman
WFI ACQUISITION CORP.
By: /s/ EDWARD R. PRINCE, JR.
-------------------------
Edward R. Prince, Jr.
Vice Chairman
WAVEFIELD IMAGE, INC.
By: /s/ NORMAN S. NEIDELL
-------------------------
Norman S. Neidell
President
STOCKHOLDERS OF
WAVEFIELD IMAGE, INC.:
/s/ NORMAN S. NEIDELL
-------------------------
Norman S. Neidell
/s/ K. BRUCE MEADOURS
-------------------------
K. Bruce Meadours
/s/ MARGARET SMITH
-------------------------
Margaret Smith
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EXHIBIT A
DIRECTORS AND OFFICERS OF THE
SURVIVING CORPORATION
Directors:
Sam B. Myers, Jr. Chairman
Norman S. Neidell
John O. Smith
John McTigue
Officers:
Norman S. Neidell President
W. Kyle Willis Vice President, Treasurer, and Secretary
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EXHIBIT 10.19
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made effective as of
the 1st day of July, 1997 (the "Effective Date") by and between ZYDECO ENERGY,
INC., a Delaware corporation (the "Company"), and NORMAN S. NEIDELL, an
individual with an address of 10200 Richmond Avenue, Suite 200A, Houston, Texas
77042 (the "Employee").
WHEREAS, the Company has proposed to engage the Employee as its Vice
President of Innovation ("VP of Innovation");
WHEREAS, the Company wishes to employ the Employee and the Employee
desires to continue to work for the Company upon the terms and conditions set
forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
promises hereinafter set forth, the Company and the Employee agree as follows:
1. Employment. The Company hereby agrees to employ the Employee and
the Employee hereby agrees to work for the Company upon the terms and conditions
set forth herein.
2. Term of Employment. Subject to Section 6 hereof, this Agreement
shall have a term of four (4) years (the "Initial Term") commencing on the
Effective Date. Thereafter this Agreement shall continue in effect on a year to
year basis unless terminated in accordance with Section 6 or by either party on
written notice to the other party given no less than sixty (60) days.
3. Scope of Duties; Representations and Warranties.
(a) The Employee shall be employed by the Company as its VP of
Innovation. At all times, the Employee shall serve under the direction of the
Vice Chairman of the Company, or if there is no Vice Chairman, the Chairman of
the Board, and shall perform such services as the Vice Chairman (or the Chairman
of the Board, as the case may be), in his sole discretion, shall deem
appropriate.
(b) So long as he is employed by the Company, the Employee shall
devote his skill, energy and best efforts to the faithful discharge of his
duties as an employee of the Company. The Employee agrees that in the provision
of all services to the Company, he will comply with and follow all generally
applicable or reasonable directives, policies, standards and regulations from
time to time established by the Board of Directors of the Company.
<PAGE>
(c) The Employee represents and warrants that he is under no
contractual or other restrictions or obligations which will in any way limit his
activities on behalf of the Company.
4. Compensation.
(a) The Company shall pay the Employee a salary at a rate equal to
$150,000 per year (payable at such regular intervals as other employees of the
Company are compensated in accordance with the Company's employment practices).
(b) All payments of salary and other compensation to the Employee
shall be made after deduction of any taxes which are required to be withheld
with respect thereto under applicable federal and state laws.
5. Fringe Benefits; Expenses.
(a) The Company shall, without duplication, provide Employee with any
non-cash benefits provided by the Company to its other officers and key
employees as they may exist from time to time. Such benefits shall include
leave or vacation time (not less than two (2) weeks per year), medical and
dental insurance, life insurance and other health care benefits, retirement and
disability benefits as may hereafter be provided by the Company in accordance
with its policies.
(b) The Company will reimburse the Employee for all reasonable
business expenses incurred by the Employee in the scope of his employment.
6. Termination. The Employee's employment hereunder may be
terminated without any breach of this Agreement only under the following
circumstances:
(a) Death. The Employee's employment hereunder shall terminate upon
his death.
(b) Disability. If, as a result of the Employee's incapacity due to
physical or mental illness, the Employee shall have been absent from his
duties hereunder on a substantial basis for a period of five consecutive
months and within thirty (30) days after written notice of termination is
given shall not have returned to the performance of his duties hereunder on
a full-time basis, the Company may terminate the Employee's employment
hereunder for "Disability."
(c) Cause. The Company may terminate the Employee's employment
hereunder for Cause. For purposes of this Agreement, the Company shall
have "Cause" to terminate the Employee's employment hereunder upon the
Employee's:
(i) conviction of the commission of a felony; or
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(ii) willful and continuing failure to substantially perform his
duties hereunder (other than such failure resulting from the
Employee's incapacity due to physical or mental illness or subsequent
to the issuance of a notice of termination by the Employee for Good
Reason) after demand for substantial performance is delivered by the
Company in writing that specifically identifies the manner in which
the Company believes the Employee has not substantially performed his
duties and the Employee does not remedy such failure within thirty
(30) days following receipt of such written notice;
(iii) commission of fraud by the Employee against the Company,
its affiliates or customers, including any misrepresentation on Employee's
resume or regarding the terms of separation from any prior employer; or
(iv) willful breach of any material provision of the
Confidentiality Agreement dated the date hereof between the Company
and Employee that is materially injurious to the Company or its
subsidiaries, whether monetarily or otherwise.
Cause shall not exist unless and until the Company has delivered to the
Employee a copy of a resolution duly adopted by a majority of the Board at
a meeting of the Board called and held for such purpose (after reasonable
notice to the Employee and an opportunity for the Employee, together with
his counsel, to be heard before the Board), finding that in the good faith
opinion of the Board, the conduct set forth in this Section 6(c) occurred,
and specifying the particulars thereof in detail.
(d) Good Reason. The Employee may terminate his employment hereunder
for "Good Reason" within ten (10) days after the expiration of the thirty
(30) day period following written notice of such an occurrence, without the
written consent of the Company, of one of the following events that has not
been cured within thirty (30) days after written notice thereof has been
given by the Employee to the Company:
(i) the failure of a successor to the Company (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the Company's business and/or assets of the
Company to expressly assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required
to perform it if no such succession had taken place. Failure of the
Company to obtain such assumption and agreement prior to the
effectiveness of any such succession, without regard to the 30 day
notice provision above, shall be a breach of this Agreement; or
(ii) a failure of the Company to comply with any other material
provision of this Agreement.
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<PAGE>
(e) Termination Without Cause. The Company may terminate the
Employee without Cause at any time, subject to the terms of Sections 7(b)
and 7(d) and any other applicable provisions of this Agreement.
7. Compensation Upon Termination or During Disability.
(a) Disability Period. During any period that the Employee fails to
perform his duties hereunder as a result of incapacity due to physical or mental
illness ("Disability Period"), the Employee shall continue to receive his full
base salary and annual bonus, if any, until his employment is terminated
pursuant to Section 7(b), provided that payments so made to the Employee during
the first 180 days of the Disability Period shall be reduced by the sum of the
amounts, if any, payable to the Employee at or prior to the time of any such
payment under the disability insurance policy provided for herein, under any
disability benefit plans of the Company or under the Social Security disability
insurance program, and which amounts were not previously applied to reduce any
such payment.
(b) Death, Disability Termination by Company (without Cause) or By
Employee Pursuant to Section 6(d). If the Employee's employment is terminated
by his death or his Disability then the Company shall continue to pay to the
Employee (or his legal representatives or estate or as may be directed by the
legal representatives of his estate, as the case may be) his then current
salary, on the usual schedule for payment of the salary, for ninety (90) days
after such termination. If the Employee's employment is terminated by the
Company (without Cause) or by the Employee pursuant to Section 6(d), then the
Company shall continue to pay to the Employee (or his legal representatives or
estate or as may be directed by the legal representatives of his estate, as the
case may be) his then current salary, on the usual schedule for payment of the
salary, for the remainder of the Initial Term.
The Company shall also continue to provide Employee, for the
applicable period as indicated in the foregoing paragraph, the benefits then
available to Employee and described in Section 5(a) above (to the extent the
Company is legally able to provide such benefits). In the event that the
Employee's participation in any such benefit plan is barred and the Employee is
not otherwise entitled to be covered by a comparable benefit plan, the Company
shall arrange to provide the Employee and his dependents with benefits
substantially similar to those which the Employee and his dependents would
otherwise have been entitled to receive under such plans and programs from which
their continued participation is barred. The foregoing salary payments and
benefits shall terminate prior to the time provided if Employee accepts
employment, whether as an employee, a consultant or otherwise, during such
period.
The Company shall also pay Employee for any accrued and unpaid salary
payments, expense reimbursements, and bonuses resulting from the occurrence of
any performance milestones which have been achieved as of the date of
termination and are owing as of the date of such termination; all of such above
amounts shall be paid within thirty (30) days of such termination if not sooner.
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With respect to a termination in accordance with Section 6 above (other
than Section 6(c)), Company and Employee agree that the receipt of all of the
salary payments and benefits under Sections 7(b) and 7(d) shall constitute and
act as liquidated damages and not as a penalty and as the exclusive remedy for
any such termination. Employee hereby waives all rights (i) under Federal,
state, local or common law relating to discrimination based upon age, sex, race
or disability, and (ii) to sue the Company for any additional amounts other than
those identified above resulting from the termination of this Agreement.
(c) Cause or By Employee Other than Pursuant to Section 6(d). If the
Employee's employment shall be terminated by the Company for Cause or by the
Employee (other than pursuant to Section 6(d)) then:
(i) the Company shall pay the Employee within thirty (30) days if not
sooner his base salary (at the rate in effect at the time notice of
termination is given) through the date of termination;
(ii) except as specifically provided herein (including Section 7(d)
below), Employee shall receive no further base salary or annual bonus and
the Company shall have no additional obligation to the Employee under this
Agreement.
(d) Compensation Plans. Following any termination of Employee's
employment, the Company shall pay the Employee all unpaid amounts, if any, to
which the Employee is entitled as of the date of termination under any
compensation plan or program of the Company, at the time such payments are due.
8. No Mitigation. Nothing in Sections 6 and 7 of this Agreement
shall require Employee to, or impose a duty on Employee to, seek alternative
employment following a termination of his employment with the Company as a
condition to the Company's obligation to pay the salary continuation payments
and benefits provided in Sections 6 and 7 above.
9. Noncompetition. The Employee agrees that he will not for one
year after the termination of his employment with the Company, directly or
indirectly, solicit business, of the type in which the Company is then engaged,
from any person (whether an individual or a business organization) who was,
within two years prior to such termination, a customer (i.e., a party who paid
funds to the Company other than investors) of the Company, or to whom the
Employee was introduced during the course of his engagement. Employee
acknowledges that (i) he is an officer of the Company, (ii) he is involved in
the development of the Company's products and services, (iii) it is intended
that such products and services will be sold nationally and internationally,
(iv) a company producing products and services similar to those of the Company
regardless of its geographic location is likely to jeopardize the Company's
business and (v) the ability of the Company to attain its goals is likely to be
materially jeopardized and its value
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<PAGE>
reduced if Employee competes with the Company or assist other persons in
competing with the Company. Employee agrees that during the term of his
engagement with the Company and for a period of one year after termination of
his employment by the Company he will not, directly or indirectly (through one
or more intermediaries), whether individually, or as an officer, director,
employee or consultant, compete in whole or in part with, or assist any
corporation or business enterprise in competing in whole or in part with, the
business then engaged in by the Company, nor will Employee directly or
indirectly interfere with employees of the Company or suppliers, manufacturers,
distributors, wholesalers or other such companies with which the Company
transacts business for any purpose. Notwithstanding anything contained herein to
the contrary, this Section 9 shall not be applicable if Employee is terminated
without Cause or if Employee terminates this Agreement for Good Reason.
10. Other Obligations. Notwithstanding anything contained herein to
the contrary, Company and Employee agree that during the first six (6) months of
the Initial Term Employee may devote a portion of his time to fulfilling
Employee's existing obligations under various consulting agreements. Employee
and Vice Chairman shall agree upon a monthly schedule regarding the proportion
of Employee's time to be devoted to such obligations. Employee's salary shall be
proportionately reduced during such period, and Employee agrees to pay to
Company the same proportionate amount of the rent, utility, equipment costs and
similar expenses, based on Wavefield Image, Inc.'s current obligations, incurred
during such period.
11. Other Agreements.
(a) Employee shall execute and comply with the Confidentiality
Agreement in the form attached as Exhibit A hereto and incorporated herein by
reference. Employee acknowledges that the terms of such Confidentiality
Agreement are agreed to in consideration of the Company's agreement to employ
Employee and the consideration set out in this Agreement.
(b) The Company shall, to the fullest extent permitted by applicable
Delaware law, and in accordance with the Company's Bylaws and Charter, indemnify
Employee and hold him harmless from any cost, expense or liability arising out
of or relating to any acts or decisions made by him in the course of performing
his duties hereunder. Employee shall be added as an additional named insured
under all appropriate insurance policies now in force or hereinafter obtained by
the Company. Any termination of the Employee's employment or of this Agreement
shall have no effect on the continuing operation of this Section.
12. License Option Grant. If Employee serves as an employee for the
entire Initial Term, or is terminated by the Company without Cause prior to the
end of the Initial Term,
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<PAGE>
then, upon termination of employment, Employee shall have an option to obtain a
"Personal License," as defined below, to the "Wavefield Image Technology," as
defined below, for a one time payment of Five Hundred Thousand Dollars
($500,000.00). The option must be exercised, and the payment made, within sixty
(60) days of termination of the Employee's employment. If not exercised and paid
within such period, the option shall terminate. The payment may be made in cash
or by delivery of shares of Zydeco Energy, Inc. common stock. Such shares shall
be valued at the average of the closing bid price on a national exchange, or if
not traded on a national exchange, on a Nasdaq market, for the twenty days
preceding the payment date; if shares of Zydeco Energy, Inc. common stock are
not so listed or quoted, the payment must be made in cash.
"Personal License" shall mean a personal, nonexclusive, worldwide license
to use the Wavefield Image Technology for (i) analysis of seismic data as a
service to third parties subject to the limitations below and (ii) analysis of
seismic data from properties in which Employee has at least a twenty-five
percent (25%) interest in the property or mineral rights or in the entity owning
the property or mineral rights. If the licensed rights are used to provide
services to third parties, such services may only be rendered in exchange for
payment in cash and not in exchange for a property or royalty interest or any
other form of consideration unless consented to in writing; provided further,
Employee may not in any one year sell an amount of such services the "Net Price"
of which exceeds One Million Dollars ($1,000,000). "Net Price" shall mean the
gross price Employee charges for the service less any costs of required computer
processing time included in the gross price. The Company shall be entitled to
audit Employee's books and records relating to the sale of services and use of
the licensed technology to confirm compliance with the restrictions herein. In
addition to the foregoing limitations, whenever Employee desires to exercise its
rights under (ii) above, it shall first notify the Company in writing of the
country or U.S. state in which the property is located. If the Company is
currently involved in a project using the Wavefield Image Technology (a
"Project"), or is considering in good faith to commence a Project within one
year of such notice, in such country or U.S. state, Employee may not exercise
the licensed rights in such country or U.S. state unless the Company consents in
writing. The Personal License shall not include the right to sublicense, assign
or otherwise transfer, directly or indirectly, the licensed rights to any other
person. The Personal License shall automatically terminate upon the earlier of
Employee's breach of any of the license restrictions or his death. Within sixty
(60) days of Employee's exercise of the foregoing option, the parties shall
execute a license agreement memorializing the Personal License. Such license
agreement shall include such other terms as are customary for such agreements.
"Wavefield Image Technology" shall mean all technology owned by Wavefield
Image, Inc. as of the date hereof and such improvements thereto as are developed
primarily by Employee
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<PAGE>
during his employment, and the source code for software applying such technology
to seismic analysis.
13. Notice. (a) All notices, requests, demands and other
communications required by or permitted under this Agreement shall be in writing
and shall be sufficiently delivered if delivered by hand, by courier service, or
sent by registered or certified mail, postage prepaid, to the parties at their
respective addresses listed below:
(b) If to the Employee, to the address set out in the beginning of
this Agreement;
(c) If to the Company:
Zydeco Energy, Inc.
1710 Two Allen Center
Houston, Texas 77002
Attention: Chairman
Either party may change such party's address by such notice to the other party.
14. Assignment. This Agreement is personal to the Employee, and he
shall not assign any of his rights or delegate any of his duties hereunder
without the prior written consent of the Company. The Company shall have the
right to assign this Agreement, subject to the provisions of Section 6(d)(i)
hereof, to a successor in interest in connection with a merger, sale of
substantially all assets, or similar transaction.
15. Survival. The provisions of this Agreement shall survive the
termination of the Employee's employment hereunder in accordance with their
terms.
16. Governing Law. This Agreement shall be governed by, and
construed and enforced in accordance with, the laws of Texas, without regard to
its conflicts of laws principles. The parties agree that venue and jurisdiction
shall be proper with the state and/or federal courts situated in Houston, Texas
to hear any disputes arising under this Agreement.
17. Binding Upon Successors. This Agreement shall be binding upon,
and shall inure to the benefit of, the parties hereto and their respective
heirs, legal representatives, successors and permitted assigns. All rights of
the Employee hereunder shall inure to the benefit
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<PAGE>
of and be enforceable by the Employee's personal and legal representatives,
executors, administrators, successors, heirs, distributees, devices and
legatees.
18. Entire Agreement. This Agreement and the exhibit hereto
constitute the entire agreement between the Company and the Employee with
respect to the terms of employment of the Employee by the Company and supersedes
all prior agreements and understandings, whether written or oral, between them
concerning such terms of employment except for any contemporaneous written
letter agreements signed by the parties.
19. Waiver and Amendments; Cumulative Rights and Remedies.
(a) This Agreement may be amended, modified or supplemented, and any
obligation hereunder may be waived, only by a written instrument executed by the
parties hereto. The waiver by either party of a breach of any provision of this
Agreement shall not operate as a waiver of any subsequent breach.
(b) No failure on the part of any party to exercise, and no delay in
exercising, any right or remedy hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right or remedy by such party
preclude any other or further exercise thereof or the exercise of any other
right or remedy. All rights and remedies hereunder are cumulative and are in
addition to all other rights and remedies provided by law, agreement or
otherwise.
20. Severability. Wherever there is any conflict between any
provision of this Agreement and any statute, law, regulation or judicial
precedent, the latter shall prevail, but in such event the provisions of this
Agreement thus affected shall be curtailed and limited only to the extent
necessary to bring it within the requirement of the law. In the event that any
part, section, paragraph or clause of this Agreement shall be held by a court of
proper jurisdiction to be indefinite, invalid or otherwise unenforceable, the
entire Agreement shall not fail on account thereof, but the balance of the
Agreement shall continue in full force and effect unless such construction would
clearly be contrary to the intention of the parties or would result in an
unconscionable injustice.
21. Arbitration. Upon the demand of either party, whether made
before or after the institution of any judicial proceeding, any Dispute shall be
resolved by binding arbitration in accordance with the terms of the arbitration
provisions contained on Annex "A" attached hereto and incorporated herein for
all purposes. Either party to this Agreement may, by summary proceedings (e.g.,
a plea in abatement or motion to stay further proceedings), bring any action in
court to compel arbitration of any Dispute. Either party who fails or refuses
to submit to binding arbitration
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<PAGE>
following a lawful demand by the other party shall bear all costs and expenses
incurred by such other party in compelling arbitration of any Dispute.
22. Counterparts. This Agreement may be executed in one or more
counterparts each of which shall be an original but all of which taken together
shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Company and the Employee have executed this
Agreement effective as of the date first above written.
ZYDECO ENERGY, INC.
By: /s/ EDWARD R. PRINCE, JR.
----------------------------
Name: Edward R. Prince, Jr.
---------------------------
Title: Vice Chairman
---------------------------
EMPLOYEE:
/s/ NORMAN S. NEIDELL
---------------------------------
Norman S. Neidell
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<PAGE>
ANNEX "A"
ARBITRATION PROVISIONS
----------------------
(a) All Disputes between the parties submitted to arbitration shall be resolved
by binding arbitration administered by the American Arbitration Association
(the "AAA") in accordance with, and in the following order of priority: (i)
the terms of these arbitration provisions; (ii) the Commercial Arbitration
Rules of the AAA; (iii) the Federal Arbitration Act (Title 9 of the United
States Code); and (iv) to the extent the foregoing are inapplicable,
unenforceable or invalid, the Laws of the State of Texas. The validity and
enforceability of these arbitration provisions shall be determined in
accordance with this same order of priority. In the event of any
inconsistency between these arbitration provisions and such rules and
statutes, these arbitration provisions shall control. Judgment upon any
award rendered hereunder shall be entered in any court having jurisdiction.
(b) All statutes of limitation applicable to any Dispute shall apply to any
proceeding in accordance with these arbitration provisions.
(c) Arbitrators are empowered to resolve Disputes by summary rulings
substantially similar to summary judgments and motions to dismiss.
Arbitrators shall resolve all Disputes in accordance with the applicable
substantive Law. Any arbitrator selected shall be required to be
experienced and knowledgeable in the substantive Laws applicable to the
subject matter of the Dispute. A single arbitrator shall be chosen by
mutual agreement of the parties and shall resolve the Dispute. In such
case, the arbitrator shall be required (unless all parties to the
proceeding shall otherwise agree in writing) to make specific, written
findings of fact and conclusions of law and shall have the authority to
issue monetary or other awards, including all amounts properly payable and
costs, fees and expenses. In the event the parties cannot agree on the
selection of a single arbitrator, each party shall select an arbitrator,
which two arbitrators shall then select a third arbitrator, which panel of
three arbitrators so selected (an "Arbitration Panel") shall resolve the
Dispute. Disputes resolved by an Arbitration Panel shall be decided by a
majority vote of a panel of three arbitrators, the determination of any two
of the three arbitrators constituting the determination of the Arbitration
Panel; provided, however, that all three arbitrators on the Arbitration
Panel must actively participate in all hearings and deliberations.
Arbitrators, including any Arbitration Panel, may grant any remedy or
relief deemed just and equitable and within the scope of these arbitration
provisions and may also grant such ancillary relief as is necessary to make
effective any award. Arbitration Panels shall be required (unless all
parties to the proceeding shall otherwise agree in writing) to make
specific, written findings of fact and conclusions of law. The
determination of an arbitrator or Arbitration Panel shall be binding on all
parties and shall not be subject to review or appeal.
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<PAGE>
(d) To the maximum extent practicable, the AAA, the arbitrator (or the
Arbitration Panel, as appropriate) and the parties shall take any action
necessary to require that an arbitration proceeding hereunder shall be
concluded within 60 days of the filing of the Dispute with the AAA. Unless
the parties shall agree otherwise, arbitration proceedings hereunder shall
be conducted in Houston, Texas. Arbitrators shall be empowered to impose
sanctions, permit or order depositions and discovery and to take such other
actions as they deem necessary to the same extent a judge could pursuant to
the Federal Rules of Civil Procedure and applicable law. With respect to
any Dispute, each party agrees that all discovery activities shall be
expressly limited to matters directly relevant to the Dispute and any
arbitrator, Arbitration Panel and the AAA shall be required to fully
enforce this requirement. The provisions of these arbitration provisions
shall survive any termination, amendment or expiration of this Agreement,
unless the parties otherwise expressly agree in writing. To the extent
permitted by applicable Law, arbitrators, including any Arbitration Panel,
shall have the power to award recovery of all costs and fees (including
attorneys' fees, administrative fees and arbitrators' fees) to the
prevailing party or, if no clear prevailing party, as the arbitrator (or
Arbitration Panel, if applicable) shall deem just and equitable. Each
party agrees to keep all Disputes and arbitration proceedings strictly
confidential, except for disclosures of information required by applicable
Law.
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EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all other references to our Firm included in or made a part of
this registration statement.
ARTHUR ANDERSEN LLP
Houston, Texas
July 2, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the reference to our firm in this Registration
Statement on Form S-1, for Zydeco Energy, Inc. under the headings "Oil and Gas
Reserves" and "Supplemental Information on Oil and Gas Producing Activities".
/s/ Ryder Scott Company Petroleum
Engineers
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
July 2, 1997
