<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 25, 1997
REGISTRATION NO. 333-27679
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 2
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
CHIEF FINANCIAL OFFICER
ZYDECO ENERGY, INC.
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. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT TO MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF BE OFFERING OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PRICE(1) PRICE(1) FEE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, par value $.001 per
share(2)......................... 3,680,000 $5.00 $18,400,000 $3,571.97*
$2,090.91
- -------------------------------------------------------------------------------
Underwriter Warrants to Purchase
Common Stock..................... 2 N/A $ 100 $ .03
- -------------------------------------------------------------------------------
Common stock, par value $.001 per
share(3)......................... 320,000 $6.00 $ 1,920,000 $ 581.82
- -------------------------------------------------------------------------------
Total........................................................... $6,244.73*
- -------------------------------------------------------------------------------
</TABLE>
* A fee of $3,571.97 was previously paid with the initial filing of the
Registration Statement, which covered 2,300,000 shares of common stock.
(1) Estimated solely for purpose of calculating the registration fee pursuant
to Rule 457(a) and (c) based on last sale price on July 22, 1997.
(2) Includes an additional 1,380,000 shares registered pursuant to this
Amendment No. 2.
(3) Issuable upon the exercise of Underwriter Warrants. Includes such
indeterminate number of shares as may be issued pursuant to the anti-
dilution provisions of the Underwriter Warrants.
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
Cover Page of Prospectus...... Forepart of Registration Statement and
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back
Cover Pages of
Prospectus.................... Inside Front Cover Page of Prospectus;
Table of Contents; Additional Information
3. Summary Information, Risk Fac-
tors and Ratio of Earnings to
Fixed Charges................. Prospectus Summary; Risk Factors
4. Use of Proceeds................ Use of Proceeds
5. Determination of Offering
Price......................... Underwriting
6. Dilution....................... Dilution
7. Selling Security Holders....... *
8. Plan of Distribution........... Underwriting
9. Description of Securities to be
Registered.................... Description of Company's Securities
10. Interests of Named Experts and
Counsel....................... *
11. Information with Respect to the
Registrant.................... Outside Front Cover Page of Prospectus;
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 JULY 25, 1997
PROSPECTUS
3,200,000 SHARES
[LOGO OF ZYDECO ENERGY APPEARS HERE]
COMMON STOCK
-----------
All of the 3,200,000 shares (the "Shares") of common stock, par value $.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 22,
1997, the last reported sale price for the Common Stock was $5.00 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) Excludes the value of warrants to be issued to the Underwriters to purchase
up to 320,000 shares of Common Stock (the "Underwriter Warrants"). 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 $485,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of 480,000 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. GAINES, BERLAND INC.
-----------
The date of this Prospectus is , 1997.
<PAGE>
[Graphic--Sample 3D seismic image with indicated geophysically interpreted
features including geologic horizons and faults, with the caption described
below.]
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 using
Zydeco'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 STOCK 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 STOCK MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
<PAGE>
ZYDECO'S WEST CAMERON 3D SEISMIC PROJECT
[Graphic--Image depicts map of geographic region and boundaries of the 228
square mile 3D Seismic Survey of Zydeco Energy, Inc. in Cameron Parish,
Louisiana and offshore waters. Also depicted are (i) the boundaries of the
55,000 acre State of Louisiana exclusive seismic permit and (ii) the location
and names of productive oil and gas fields in the region with historical
cumulative production. A listing of such fields is included in a table within
the map, as described below, followed by the caption described below.]
CUMULATIVE PRODUCTION(/1/) FROM
FIELDS NEAR THE WEST CAMERON
SEISMIC PROJECT
<TABLE>
<CAPTION>
FIELD DESIGNATIONS BCFE(2)
------------------ -------
<S> <C>
Second Bayou/East Must Lake/Holly Beach........................... 1,232
Cameron Meadows................................................... 221
Johnson Bayou..................................................... 283
West Cameron Block 49............................................. 286
West Cameron Blocks 17 & 19....................................... 1,071
West Cameron Block 45............................................. 922
-----
Total........................................................... 4,015
=====
</TABLE>
- --------
(1) Includes data supplied by Petroleum Information/Dwights LLC; Copyright
(1997) Petroleum Information/Dwights LLC.
(2) Net equivalent billion cubic feet of natural gas (Bcfe) assuming crude oil
production converted at one barrel per six thousand cubic feet of natural
gas.
As of the date of this Prospectus, Zydeco does not own any significant oil and
gas leases in the West Cameron Seismic Project area. Certain acreage in the
West Cameron Seismic Project area is held by third parties under existing
leases. See "Risk Factors--Dependence upon Successful Lease Acquisition
Activities." The locations of producing fields and cumulative production are
approximate. The existence of producing fields or historical production in
areas within or near the project area does not assure the existence of oil and
gas in commercial quantities on project acreage.
<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 the Company's Securities.............................. 48
Principal Stockholders............................................... 50
Underwriting......................................................... 51
Legal Matters........................................................ 52
Change of Accountants................................................ 52
Experts.............................................................. 53
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 Stock 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 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 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.
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 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
4
<PAGE>
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 June 30, 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. On July 6, 1997, the Company completed seismic
data acquisition for the West Cameron Seismic Project. The Company presently
expects to 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. The Company estimates that the cost of seismic data acquisition and
processing and obtaining seismic permits for the West Cameron Seismic Project
through December 31, 1997 will aggregate approximately $18.5 million. As of
July 21, 1997, Cheniere had paid $12.0 million and the Company had paid $2.3
million of such costs. Of the $4.2 million remaining to be paid, Cheniere is
expected to pay $4.0 million and the Company will pay the remaining $.2
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. If Cheniere
elects to cease payment, the Company will be obligated to pay the entire
remaining expected costs and Cheniere's interest in the West Cameron Seismic
Project will be 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 June 30, 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. 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......................... 3,200,000 shares
Common Stock Outstanding after
the Offering(1)................. 9,907,098 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) Does not include (i) 6,029,799 shares issuable upon exercise of outstanding
options, unit options and warrants (assuming adjustment to outstanding unit
options based upon an assumed public offering price of $5.00 per share) and
(ii) 320,000 shares issuable upon exercise of the Underwriter 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,
SIX MONTHS YEAR ENDED 1994)
ENDED JUNE 30, DECEMBER 31, THROUGH
-------------------- -------------------- DECEMBER 31,
1997 1996 1996 1995 1994
--------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Operating revenues...... $ 631 $ 605 $ 1,470 $ 587 $ --
Operating expenses...... 2,994 1,341 3,577 1,737 110
--------- --------- --------- --------- ---------
Operating loss.......... (2,363) (736) (2,107) (1,150) (110)
Other income (expense).. 96 143 249 (24) (23)
--------- --------- --------- --------- ---------
Net loss................ $ (2,267) $ (593) $ (1,858) $ (1,174) $ (133)
========= ========= ========= ========= =========
Net loss per share of
Common Stock and Common
Stock equivalent ...... $ (0.34) $ (0.10) $ (0.30) $ (0.30) $ (0.03)
========= ========= ========= ========= =========
Weighted average shares
of Common Stock and
Common Stock
equivalents
outstanding............ 6,599,543 5,804,929 6,168,798 3,906,706 4,468,777
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1997
--------------------
ACTUAL AS ADJUSTED(2)
------ -------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities.......... $2,759 $17,154
Working capital........................................... 2,243 16,638
Total assets.............................................. 7,383 21,778
Stockholders' equity...................................... 4,091 18,486
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 17,
SIX MONTHS YEAR ENDED 1994)
ENDED JUNE 30, DECEMBER 31, THROUGH
--------------- -------------- DECEMBER 31,
1997 1996 1996 1995 1994
------- ------- ------- ------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Production:
Oil (Bbls)........................ 6,209 8,004 20,186 1,118 --
Natural gas (Mcf)................. 198,936 148,020 372,678 84,546 --
Average sales prices:
Oil ( per Bbl).................... $ 21.54 $ 21.50 $ 22.39 $18.37 $ --
Natural gas ( per Mcf)............ $ 2.50 $ 2.60 $ 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 3,200,000 Shares offered hereby at an
assumed public offering price of $5.00 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 six month period ended June 30,
1997 was approximately $2.3 million. At June 30, 1997, the Company had
accumulated a deficit of $5.4 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 $1.9 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. There can be no
assurance that the patent will provide meaningful protection for the Wavefield
Imaging Technology or that, after the patent is issued, it will not be
invalidated, circumvented or successfully challenged, allowing the Company's
competitors to use the Wavefield Imaging Technology.
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, and John O. Smith, President and Chief
Operating Officer, 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, 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 9,907,098 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 4,149,668
shares of Common Stock exercisable at an average price of $5.50 per share
(assuming certain adjustments to the unit options); (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 former shareholders of Wavefield as a result of 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>
DILUTION
The purchasers of the shares of Common Stock offered hereby will experience
immediate dilution in the net tangible book value of their shares of $3.12 per
share (assuming a public offering price of $5.00 per share). See "Dilution."
In the event the Company issues additional shares of Common Stock in the
future, including shares which may be issued in connection with acquisitions
or other public or private financings, purchasers of Common Stock in the
Offering may experience further dilution in the net tangible book value per
share of the Common Stock of the Company.
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 the
Company's Securities."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,200,000 Shares
offered hereby are estimated to be approximately $14,395,000, ($16,627,000 if
the Underwriters' over-allotment option is exercised in full) based on an
assumed public offering price of $5.00 per share, after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company. The Company expects to use the net proceeds as follows:
<TABLE>
<CAPTION>
APPROXIMATE
AMOUNT(1)
-----------
(IN
MILLIONS)
<S> <C>
Payment to Grant for Seismic Data Acquisition on the West
Cameron Seismic Project.................................... $ 0.1
Processing of Seismic Data from the West Cameron Seismic
Project.................................................... 0.1
Payment to Extend Seismic Permit from State of Louisiana.... 0.1
Lease Acquisition Costs and Overhead(2)..................... 14.1
-----
Total..................................................... $14.4
=====
</TABLE>
- --------
(1) Assumes Cheniere will contribute the $4.2 million it is obligated to
contribute in order to maintain its 50% interest in the West Cameron
Seismic Project. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." If
Cheniere fails to make all or any part of such contribution, the Company
will use up to $4.2 million of the net proceeds for West Cameron Seismic
Project seismic data acquisition and processing costs.
(2) Actual amount of leasehold acquisition costs depends upon the
identification of prospects, the number and extent of prospects, and, in
the case of state leases, the success of the Company's bids for such
leases.
The allocation of the Company's net proceeds from this Offering among these
categories of anticipated expenditures is discretionary and will depend upon
future events that cannot be predicted, including (i) the identification and
number of potentially drillable prospects on the West Cameron Seismic Project
after analysis of the Company's seismic data; (ii) the degree of competition
and success in acquiring oil and gas leases for any such potential prospects
in the West Cameron Seismic Project area; (iii) the election of Cheniere to
contribute costs to the Project; and (iv) the degree to which the industry
partners may participate in the leasehold acquisition and drilling of any such
prospects. The Company is continually evaluating other potential oil and gas
prospects for drilling and other oil and gas exploration areas for 3-D seismic
acquisition and analysis. The Company may also use a portion of the net
proceeds from the Offering, in a manner consistent with its business strategy,
to participate in other drilling opportunities, or seismic data acquisition
and analysis in areas where the Company can utilize its technology
capabilities. The amount of net proceeds used for such purposes will depend on
the availability and risk profile of such opportunities and in part upon the
results of the West Cameron Seismic Project data analysis. 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 the leasehold acquisitions and possible drilling
operations 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 upon the future events described above.
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, 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
Third Quarter (through July 22, 1997)...................... 5.56 5.00
</TABLE>
As of July 22, 1997, the last reported sales price for the Company's Common
Stock on the Nasdaq SmallCap Market was $5.00 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.
Application has been made for trading of the Common Stock of the Company on
the Nasdaq National Market ("NMS"). There is no assurance, however, that the
Common Stock will be accepted for trading on the NMS or, if accepted, that the
commencement date of such trading will occur concurrently with the completion
of the Offering.
15
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of June 30, 1997 and as adjusted to reflect the issuance and sale of the
3,200,000 Shares offered hereby at an assumed public offering price of $5.00
per share and after deducting underwriting discounts and commissions and
estimated offering expenses as if the Offering had occurred June 30, 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 JUNE 30, 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; 7,388,353 (10,588,353 as adjusted) shares
issued; and 6,607,098 (9,807,098 as adjusted) shares
outstanding............................................ 7 10
Additional paid-in capital.............................. 9,522 23,914
Accumulated deficit..................................... (5,431) (5,431)
Less treasury stock (at cost, 781,255 shares)........... (7) (7)
------- -------
Total stockholders' equity.............................. 4,091 18,486
------- -------
Total capitalization.................................. $ 4,091 $18,486
======= =======
</TABLE>
- --------
(1) As of June 30, 1997, the Company had outstanding (i) options to acquire
150,000 units ("Unit Options"), 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 3,555,668 shares of Common
Stock exercisable at an average price of $5.45 per share; (iii) 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 (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 687,000 shares of Common Stock were outstanding with a
weighted average exercise price of $6.07 per share. Since June 30, 1997,
the Company has (i) granted options to purchase 200,000 shares of Common
Stock pursuant to the 1996 Incentive Equity Plan, and (ii) 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. Upon
consummation of the Offering, the Unit Options will adjust to be
exercisable for 198,000 units based upon an assumed public offering price
of $5.00 per share. See "Description of the Company's Securities--Unit
Options." The Company will also reserve 320,000 shares of Common Stock for
issuance upon exercise of the Underwriter Warrants.
16
<PAGE>
DILUTION
The net tangible book value of the Company as of June 30, 1997 was
$4,054,223 or $0.61 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 3,200,000 Shares offered
hereby at an assumed public offering price of $5.00 per share, and after
deducting underwriting discounts and commissions and estimated offering
expenses, the net tangible book value of the Company as of June 30, 1997 would
have been $18,449,223 or $1.88 per share of Common Stock. This represents an
immediate increase in such net tangible book value of $1.27 per share to
existing stockholders and an immediate dilution of $3.12 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share...................... $5.00
Net tangible book value per share at June 30, 1997......... $0.61
Increase in net tangible book value per share attributable
to new investors.......................................... 1.27
-----
Net tangible book value per share after giving effect to
this offering............................................. 1.88
-----
Dilution per share to new investors........................ $3.12
=====
</TABLE>
The foregoing assumes no exercise of the Underwriters over-allotment option
or options, unit options and warrants after June 30, 1997. As of June 30,
1997, there were outstanding options, unit options or warrants to purchase an
aggregate of 5,685,799 shares of Common Stock, and the Company had also
reserved up to an additional 308,000 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.
The Company will also reserve 320,000 shares of Common Stock for issuance upon
exercise of the Underwriter Warrants. 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
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE 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,
SIX MONTHS YEAR ENDED DECEMBER 1994)
ENDED JUNE 30, 31, THROUGH
-------------------- -------------------- DECEMBER 31,
1997 1996 1996 1995 1994
--------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Operating revenues
Oil and gas sales...... $ 631 $ 557 $ 1,422 $ 169 $ --
Gain on sales of
properties............ -- 16 16 118 --
Seismic services....... -- 32 32 300 --
--------- --------- --------- --------- ---------
631 605 1,470 587 --
Operating costs and
expenses
Exploration expenses
Geological and
geophysical expenses.. 1,806 402 968 399 --
Dry hole costs......... 57 17 700 262 30
Production costs....... 9 11 22 28 --
Seismic services costs. -- -- -- 200 --
Depreciation,
depletion, and
amortization.......... 317 262 631 392 7
General and
administrative
expenses.............. 805 649 1,256 456 73
--------- --------- --------- --------- ---------
2,994 1,341 3,577 1,737 110
Operating loss.......... (2,363) (736) (2,107) (1,150) (110)
Other income (expense)
Interest income........ 107 169 293 46 49
Interest expense....... (11) (26) (44) (70) (72)
--------- --------- --------- --------- ---------
96 143 249 (24) (23)
--------- --------- --------- --------- ---------
Net loss................ $ (2,267) $ (593) $ (1,858) $ (1,174) $ (133)
========= ========= ========= ========= =========
Net loss per share of
Common Stock and Common
Stock equivalent....... $ (0.34) $ (0.10) $ (0.30) $ (0.30) $ (0.03)
========= ========= ========= ========= =========
Weighted average shares
of Common Stock and
Common
Stock equivalents
outstanding............ 6,599,543 5,804,929 6,168,798 3,906,706 4,468,777
========= ========= ========= ========= =========
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, ----------------------------------
1997 1996 1995 1994
----------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash, cash equivalents
and marketable
securities............ $ 2,759 $ 7,753 $ 11,456 $ 876
Working capital........ 2,243 4,660 7,334 564
Total assets........... 7,383 9,912 12,582 2,696
Long-term capital lease
obligation............ -- -- 158 304
Total stockholders'
equity................ 4,091 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 21, 1997, Cheniere had made payments of $12.0 million against costs
incurred by the Company through June 30, 1997 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. On July 6, 1997, the seismic data
acquisition phase, comprising approximately 146,000 acres, was completed.
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
19
<PAGE>
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
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Oil and Gas Sales. Oil and gas sales increased by $74,577, or 13%, to
$631,323 for the first half of 1997, from $556,746 for the first half of 1996.
The increase was attributable to an increase in production volumes of $93,718
and a decrease in the average prices for oil and natural gas of $19,141. The
price and volume variances from oil and gas in the first half of 1997,
compared to the same period in 1996, demonstrate the sensitivity of the
Company's operations to price fluctuations and its current dependence on a
small number of producing wells. The following table sets forth information
concerning crude oil, and natural gas sales volumes, average sales prices, and
per barrel oil equivalent ("NBOE") operating costs (excluding depreciation,
depletion, and amortization hereinafter referred to as "DD&A") for the
Company's exploration and production activities for indicated periods:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
---------------
1997 1996
------- -------
<S> <C> <C>
Sales volumes:
Natural gas (mcf)....................................... 198,936 148,020
Crude oil (bbl)......................................... 6,209 8,004
NBOE (bbl).............................................. 39,365 32,674
Average sales prices:
Natural gas ($/mcf)..................................... $ 2.50 $ 2.60
Crude oil ($/bbl)....................................... $ 21.54 $ 21.50
Lease operating expense ($/NBOE).......................... $ 0.24 $ .34
Depletion, depreciation, and amortization ($/NBOE)(1)..... $ 1.17 $ 2.00
</TABLE>
- --------
(1) Excludes depreciation on seismic computer hardware and software of
$270,654 and $196,468 for the six months ended June 30, 1997 and 1996,
respectively.
Operating Expenses. Exploration expenses increased $1,445,024, or 345%, to
$1,863,667 for the first half of 1997, from $418,643 for the first half of
1996. Of this increase, $995,149 represented the Company's 50% share of
geological and geophysical expenses of the West Cameron Seismic Project, and
the remainder was principally related to additional personnel cost associated
with the Company's exploration projects. Production costs from the one working
interest well decreased 16% to $9,425. DD&A expense in the first half of 1997
increased $54,964, or 21%, to $316,693 from $261,729 for the first half of
1996 principally as a result of additional depreciation and amortization of
additions to computer equipment and geophysical software. General and
administrative expense in the first six months of 1997 increased $155,978, or
24%, to $804,889 from $648,911 for the six months of 1996, principally due to
increases in personnel and related costs.
Other Income (Expense). Net other income decreased $47,104, or 33%, to
$96,334 for the six months ended June 30, 1997, compared to net other income
of $143,438 for the six months ended June 30, 1996, principally as a result of
decreased interest income due to the decrease in available cash.
Net Loss. For the six months ended June 30, 1997, operations resulted in a
net loss of $2,267,017 ($.34 per share) compared to a net loss of $592,513
($.10 per share) for the comparable period in 1996. The increase
20
<PAGE>
in net loss of $1,674,504, or 283%, is comprised of increased revenue of
$26,758, increased operating expenses of $1,654,158, and a decrease in net
other income of $47,104. The $.24 increase in per share loss was also affected
by the increased number of shares of common stock outstanding in the first half
of 1997 principally due to the conversion of the preferred stock in July 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
During 1996 and 1995, the Company's primary operations consisted of the
acquisition of federal and state oil and gas leases, the acquisition of 3D
seismic analysis hardware and software, the purchase of an interest in a gas
well which commenced production in January 1995, and the farmout of two leases
(one of which resulted in commercial production commencing in December 1995).
Exploration activities in 1995 also included a one-eighth participation in the
drilling of an exploratory well which resulted in a dry hole in March 1995.
Exploration activities in 1996 included a joint venture participation in the
drilling of one well that was abandoned in September 1996 without reaching the
well's primary objectives. The Company also initiated two seismic exploration
joint ventures, one in 1995 and one in 1996, with industry partners who are
required under the agreements to fund substantially all the Company's share of
the seismic project costs, up to certain limits. See "Note 2--Exploration
Agreements" in Notes to Consolidated Financial Statements.
The following table sets forth information concerning crude oil and natural
gas sales volumes, average sales prices, and per NBOE operating costs
(excluding DD&A) for the Company's exploration and production activities for
the indicated periods:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM INCEPTION
DECEMBER 31, (MARCH 17, 1994)
-------------- THROUGH
1996 1995 DECEMBER 31, 1994
------- ------ ---------------------
<S> <C> <C> <C>
Sales volumes:
Natural gas (mcf)................... 372,678 84,546 --
Crude oil (bbl)..................... 20,186 1,118 --
NBOE (bbl).......................... 82,299 15,209 --
Average sales prices:
Natural gas ($/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 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
21
<PAGE>
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 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
22
<PAGE>
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 21,
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 now due on July 31, 1997, and thus substantially reduce its interest in
the West Cameron Seismic Project, Cheniere is responsible for funding 50% of
the costs in excess of $13.5 million. The Company estimates that the costs of
seismic data acquisition and processing and obtaining seismic permits for the
West Cameron Seismic Project through December 31, 1997, will aggregate
approximately $18.5 million, of which the Company's share is $2.5 million and
$16.0 million is allocable to Cheniere. The Company expects that approximately
$17.3 million of these costs will have been incurred through July 31, 1997, of
which $14.3 million has been paid. As of July 21, 1997, Cheniere had advanced
$12.0 million and the Company had funded the remaining $2.3 million. Of the
$4.2 million of expected costs remaining to be paid, Cheniere will be obligated
to advance to Zydeco $3.4 million in order to maintain its full 50% interest in
the West Cameron Seismic Project. The Company would pay the remaining $200,000
of such expected costs. As of July 21, 1997, the Company had approximately $1.1
million in cash. Of such remaining costs, the Company expects approximately
$3.0 million will be due in August 1997. On July 21, 1997, the Company agreed
to grant Cheniere an extension until July 31, 1997 to fund $1.5 million and
until August 8, 1997 to fund an additional $1.9 million representing its share
of these costs. If Cheniere elects to discontinue funding, or is unable to
raise further funds to pay for its full share of costs of the West Cameron
Seismic Project, the Company will not have sufficient funds to pay all of the
costs incurred when due until it receives the proceeds of this Offering. In
either event, the Company will require funding from the
23
<PAGE>
proceeds of this Offering, or other equity capital infusion or may be required
to borrow against its interest in the Project or sell a portion of its
interest. The Company does not presently maintain any credit facilities. In
addition, the Company may sell an interest in the West Cameron Seismic Project
to an industry partner in order to pay the remaining costs of the Project.
To the extent that Cheniere funds its share of such costs, the proceeds of
this Offering are expected to be used to acquire potential prospects in the
West Cameron area and for other general corporate purposes. 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. The Company may in
the future explore the possibility of obtaining a credit facility in the event
the Company increases oil and gas production through the successful completion
of oil and gas wells. 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.
The Company has incurred net losses and negative cash flows from operations
since its inception in 1994, except that cash flow from operating activities
was $26,112 for the six months ended June 30, 1997. 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 exploration efforts are presently 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
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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 three months after nomination.
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
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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.
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Neidell, inventor of the Wavefield Imaging Technology. In addition, the
Company expects to issue an additional 150,000 shares of Common Stock to the
former shareholders of Wavefield, pursuant to the terms of the acquisition
agreements, upon the issuance of a patent of the Wavefield Imaging Technology.
The Company has received notice that the patent 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
acquisition of Wavefield also gives the Company the capability to perform
stratigraphic sequencing analysis, which involves using seismic processing and
interpretive techniques to determine the sequencing and characteristics of
geologic strata with hydrocarbon potential.
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
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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.
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 West Cameron Seismic Project
encompasses 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
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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 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. Cheniere has funded a total of $12.0 million
pursuant to the Cheniere Exploration Agreement and has agreed to fund $1.5
million by July 31, 1997 and an additional $1.9 million by August 8, 1997 in
order to maintain its 50% interest. 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.
Data Acquisition and 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. The Company completed seismic data acquisition for the West Cameron
Seismic Project on July 6, 1997. 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. 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.
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. Substantially all the cost of
lease acquisition and seismic data acquisition had been incurred at the time
of Fortune's election. The Company will continue to evaluate certain of the
prospects that merit further evaluation or development. 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.
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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 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. 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
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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 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. The Company is negotiating 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>
SIX
MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, --------------
1997 1996 1995
-------- ------- ------
<S> <C> <C> <C>
Crude oil and natural gas liquids (Bbls)................ 6,209 20,186 1,118
Natural gas (Mcf)....................................... 198,936 372,678 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.
32
<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>
Six Months Ended June 30, 1997.................. $21.54 $2.50 $0.24 $1.17
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 $270,654
for the six months ended June 30, 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.
33
<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. The Company has not participated in the drilling of any wells during
1997.
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. The Company has obtained licenses to use all software necessary to
its business. On July 3, 1997, the Company received notice that a patent
application claiming 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 four
geologists, seven geophysicists and three landmen. None of the Company's
employees are employed pursuant to a collective bargaining agreement, and the
Company has not experienced any work stoppages. The Company considers its
relations with its employees to be good. Three employees of the Company have
employment agreements with the Company. See "Management--Agreements with
Directors, Officers and Key Employees."
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., a publicly held developer and manufacturer of fax
related products. 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 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, Dr. Neidell 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, NRG Resources,
Inc. and Neomar 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 1995 -- -- -- --
Operating Officer
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, OFFICERS AND KEY EMPLOYEES
In 1995, Zydeco Exploration entered into employment agreements with Messrs.
Knecht and McTigue. Each of the agreements provides: (i) for a four year term
ending December 31, 1998 (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, Zydeco Exploration granted the options
summarized in the table below 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. The Board of
Directors, then including 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 of Directors included analysis of possible reserves, typical
reservoir economics, representative costs of drilling and completion of wells
and costs of production platform construction. 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
46
<PAGE>
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 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 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,
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.
48
<PAGE>
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 holders of Unit Options are entitled to certain demand and
piggyback registration rights with respect to the Unit Options and all
underlying securities. The Unit Options expire if not exercised on or prior to
December 13, 1998. As of the date of this Prospectus there were 150,000 Unit
Options outstanding.
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 market trading price of
Common Stock and the then current Unit Option exercise price, divided by the
market trading 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 public
offering price 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.
1995 BRIDGE WARRANTS
In connection with providing funding commitments pursuant to the Merger, 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 Redeemable 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% 15.8%
David M. Fender..................... 1,544,018(4) 23.0% 15.6%
Elizabeth I. Magness................ 390,627(5) 5.8% 3.9%
John W. McTigue, Jr................. 312,502(6) 4.5% 3.1%
Sam B. Myers, Jr.................... 269,925 4.0% 2.7%
Edward R. Prince, Jr................ 171,876(6) 2.5% 1.7%
Norman S. Neidell................... 75,000 1.1% 0.8%
Philip A. Tuttle.................... 57,512(6) 0.9% 0.6%
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% 9.0%
</TABLE>
- --------
(1) Based on 6,707,098 shares of Common Stock outstanding as of July 1, 1997.
(2) Based on 9,907,098 shares of Common Stock, assuming all 3,200,000 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"), 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.....................................
Gaines, Berland Inc. .......................................
---------
Total..................................................... 3,200,000
=========
</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 Shares set forth in the above table if any of the 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 Underwriters.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 480,000 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 4,436,470 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 Brean Murray & Co., Inc.
In connection with the Offering made hereby, the Company has agreed to sell
to the Underwriters, for nominal consideration, the Underwriter Warrants to
purchase 320,000 shares of Common Stock from the Company (10% of the number of
shares issued in this offering). The Underwriter Warrants are exercisable, in
whole or in part, at an exercise price equal to 120% of the public offering
price set forth on the cover page of this Prospectus at any time during the
four-year period commencing one year after the effective date of the
Registration Statement of which this Prospectus is a part. The warrant
agreement pursuant to which the Underwriter Warrants will be issued will
contain provisions providing for adjustment of the exercise price and the
number and type of securities issuable upon exercise of the Underwriter
Warrants should any one or more of certain specified events occur. The
Underwriter Warrants grant to the holders thereof demand and piggy-back
registration rights for the securities issuable upon exercise of the
Underwriter Warrants.
The Company has agreed to reimburse the Underwriters for up to $175,000 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.
51
<PAGE>
Brean Murray & Co., Inc. and its affiliates were issued and presently own
(i) 75,000 1995 Bridge Warrants issued in connection with a funding commitment
pursuant to the Merger and (ii) 8,868 Zydeco Exploration Warrants purchased by
an officer of Brean Murray & Co., Inc. for investment. Gaines, Berland Inc.
purchased for nominal consideration 50,000 Unit Options in connection with a
1993 public offering of the Company.
In connection with this Offering, certain Underwriters may engage in passive
market making transactions in the Common Stock on the Nasdaq Stock 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 Stock 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 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 Underwriters 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.
52
<PAGE>
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.
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 a 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 is March 14, 1997)
F-2
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------- ------------------------
ASSETS 1997 1996 1995
------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets
Cash and Cash Equivalents............. $ 2,758,532 $ 6,906,650 $ 517,781
Marketable Securities................. -- 845,852 10,938,674
Oil and Gas Revenue Receivables....... 180,704 327,975 67,024
Exploration Receivable................ 2,446,160 -- --
Other Receivables..................... 12,607 21,244 46,546
Prepaid Expenses...................... 137,473 130,495 --
----------- ----------- -----------
Total Current Assets................ 5,535,476 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......... 1,773,873 1,608,207 789,710
----------- ----------- -----------
2,564,635 2,397,281 1,098,820
Less: Accumulated Depreciation,
Depletion, and Amortization............ (1,340,560) (1,026,046) (399,541)
----------- ----------- -----------
1,224,075 1,371,235 699,279
Operating Bond, Deferred Costs and Other
Assets................................. 623,400 308,151 313,101
----------- ----------- -----------
Total Assets........................ $ 7,382,951 $ 9,911,602 $12,582,405
=========== =========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current Liabilities
Accounts Payable...................... $ 2,648,132 $ 692,188 $ 284,219
Accrued Liabilities................... 575,863 232,738 355,833
Exploration Obligations............... 2,239 2,489,732 3,210,477
Short-Term Bridge Financing Notes
Payable.............................. -- -- 225,028
Capital Lease Obligation--Current
Portion.............................. 65,827 157,537 160,693
----------- ----------- -----------
Total Current Liabilities........... 3,292,061 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 7,388,353 and 7,374,905 and
6,562,530 Shares; Outstanding
6,607,098 and 6,593,650 and 5,781,275
Shares, Respectively................. 7,388 7,375 6,563
Additional Paid-In Capital............ 9,522,430 9,503,943 9,495,053
Accumulated Deficit................... (5,431,676) (3,164,659) (1,306,527)
Less: Treasury Stock, at Cost; 781,255
Shares............................... (7,252) (7,252) (7,252)
----------- ----------- -----------
Total Stockholders' Equity.......... 4,090,890 6,339,407 8,188,618
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY................................. $ 7,382,951 $ 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>
SIX MONTHS ENDED JUNE YEARS ENDED DECEMBER PERIOD FROM INCEPTION
30, 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 ..... $ 631,323 $ 556,746 $ 1,422,227 $ 169,235 $ --
Gain on Sales of
Properties............ -- 16,319 16,319 117,517 --
Seismic Services....... -- 31,500 31,500 300,000 --
----------- --------- ----------- ----------- ---------
631,323 604,565 1,470,046 586,752 --
Operating Costs and
Expenses
Exploration Expenses
Geological and
Geophysical Expenses. 1,806,196 401,569 967,957 398,603 --
Dry Hole Costs........ 57,471 17,074 699,566 261,956 30,108
Production Costs....... 9,425 11,233 22,508 27,492 --
Seismic Service Costs.. -- -- -- 200,000 --
Depreciation,
Depletion, and
Amortization.......... 316,693 261,729 630,865 392,387 7,153
General and
Administrative
Expenses.............. 804,889 648,911 1,256,489 456,146 72,981
----------- --------- ----------- ----------- ---------
2,994,674 1,340,516 3,577,385 1,736,584 110,242
Operating Loss.......... (2,363,351) (735,951) (2,107,339) (1,149,832) (110,242)
Other Income (Expense)
Interest Income........ 107,074 169,109 293,414 46,555 48,629
Interest Expense....... (10,740) (25,671) (44,207) (70,369) (71,268)
----------- --------- ----------- ----------- ---------
96,334 143,438 249,207 (23,814) (22,639)
Net Loss................ $(2,267,017) $(592,513) $(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............ 6,599,543 5,804,929 6,168,798 3,906,706 4,468,777
=========== ========= =========== =========== =========
Loss Per Share of Common
Stock Equivalent ...... $ (0.34) $ (0.10) $ (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................ -- -- -- -- -- (2,267,017) -- (2,267,017)
Options and Warrants
Exercised for Common
Stock.................. -- -- 13,450 13 18,487 -- -- 18,500
Adjustment for
Fractional Shares Paid
in Cash................ -- -- (2) -- -- -- -- --
--------- ---- ---------- ------ ---------- ----------- ------- ----------
Balance at June 30,
1997................... -- $ -- 6,607,098 $7,388 $9,522,430 $(5,431,676) $(7,252) $4,090,890
========= ==== ========== ====== ========== =========== ======= ==========
</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>
SIX MONTHS ENDED PERIOD FROM INCEPTION
JUNE 30, YEARS ENDED DECEMBER 31, (MARCH 17, 1994)
------------------------ -------------------------- THROUGH
1997 1996 1996 1995 DECEMBER 31, 1994
------------ ---------- ------------ ------------ ---------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Loss................ $(2,267,017) $ (592,512) $ (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.......... 316,693 261,729 630,865 392,387 7,153
Abandonment of Unproved
Leases................ -- -- 28,005 -- --
Gain on Sales of
Properties............ -- (16,319) (16,319) (117,517) --
Exploration and Dry
Hole Costs............ 1,863,668 418,643 1,639,519 660,559 30,108
Changes in Operating
Assets and Liabilities
(Increase) Decrease in
Oil & Gas Revenue
Receivables.......... 147,271 (118,698) (260,951) (67,024) --
(Increase) Decrease in
Other Current Assets. 1,659 (76,968) (105,193) (34,638) --
Increase (Decrease) in
Accounts Payable..... (93,788) (160,664) (185,288) 183,070 101,149
Increase (Decrease) in
Accrued Liabilities.. 58,126 (114,486) (123,095) (145,487) --
Other................. (500) (48,497) -- 3,040 --
------------ ---------- ------------ ------------ -----------
Net Cash Provided by
(Used in) Operating
Activities............ 26,112 (447,772) (250,589) (299,256) 5,529
Cash Flows from
Investing Activities:
Additions to Oil and
Gas Properties........ $ (1,688) $ (302,466) $ (507,377) $ (77,573) $ (870,000)
Exploration and Dry
Hole Costs............ (868,668) (418,643) (1,639,519) (660,559) (30,108)
Proceeds from the Sale
of Properties......... -- 16,319 16,319 100,000 --
Cost Recovery on
Exploration Agreement. -- -- -- 628,547 --
Advances on Exploration
Obligations........... 6,000,000 3,000,000 6,000,000 4,171,453 --
Net Expenditures
against Exploration
Obligations........... (7,707,306) (1,552,425) (5,909,786) (960,976) --
Distributions to
Exploration Partner... (2,171,615) -- (217,704) -- --
Purchases of Equipment
and Software.......... (165,666) (718,614) (818,497) (140,352) (131,849)
Proceeds from the Sale
of (Investment in)
Marketable Securities,
Net................... 845,852 9,224,749 10,092,822 (10,938,674) (298,173)
------------ ---------- ------------ ------------ -----------
Net Cash Provided by
(Used in) Investing
Activities............ (4,069,091) 9,248,920 7,016,258 (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........... (91,710) (76,779) (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)
Deferred Costs......... (31,928) -- -- -- --
Proceeds from Options
and Warrants
Exercised............. 18,499 8,890 8,921 -- --
Proceeds from Common
Stock Issuances....... -- -- -- 44 955
------------ ---------- ------------ ------------ -----------
Net Cash Provided by
(Used in) Financing
Activities............ (105,139) (292,917) (376,800) 7,819,244 2,200,528
------------ ---------- ------------ ------------ -----------
Net Increase (Decrease)
in Cash and Cash
Equivalents............ $ (4,148,118) $8,508,231 $ 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................. $ 2,758,532 $9,026,012 $ 6,906,650 $ 517,781 $ 875,927
============ ========== ============ ============ ===========
Cash Paid during the
Period for:
Interest............... $ 10,740 $ 25,671 $ 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 presentation.
Unaudited Interim Financial Information. The consolidated financial
statements for the six months ended June 30, 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 June 30, 1997, aggregated $2,474,761 (unaudited) net
of interest earned of $209,731 (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
June 30, 1997, aggregated $15,490,298 (unaudited) net of interest earned of
$48,989 (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. Substantially all the cost of
lease acquisition and seismic data acquisition had been incurred at the time
of Fortune's election. The Company will continue to evaluate certain of the
prospects that merit further evaluation or development.
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.
On July 21, 1997, the Company agreed to grant Cheniere an extension until
July 31, 1997, to fund $1.5 million and until August 8, 1997 to fund an
additional $1.9 million in order to maintain their 50% interest in the West
Cameron Seismic Project. The amount represents their share of costs incurred
or estimated through July 31, 1997. If Cheniere elects to discontinue funding,
or is unable to raise further funds to pay for its full share of costs of the
West Cameron Seismic Project, the Company currently does not have sufficient
funds to pay all of such Project costs when due. If necessary, the Company
would use a portion of the proceeds to be received from an anticipated public
offering of 3,200,000 common shares in the third quarter of 1997, to pay for
such Project expenditures. Such offering proceeds are otherwise anticipated to
be used for leasehold acquisition and other general corporate purposes. In the
event that Cheniere elects to discontinue funding and the anticipated offering
does not occur, the Company would be required to seek funds from another
source. In such event, the Company may be required to borrow against its
interest in the Project or may sell an interest in the West Cameron Seismic
Project to an industry partner in order to finance the costs of the Project.
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>
[LOGO OF ZYDECO ENERGY INC. APPEARS HERE]
<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............. $ 6,245
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
Underwriters' expense allowance................................. 175,000
Legal fees and expenses......................................... 120,000
Accounting fees and expenses ................................... 60,000
Miscellaneous fees and expenses................................. 4,076
--------
Total......................................................... $485,000
========
</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
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)
4.8* --Form of Warrant Agreement by and among the Company and Brean
Murray & Co., Inc. and Gaines, Berland Inc. (for Underwriter
Warrants).
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, 1997 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
10.20* --Fifth Amendment to Exploration Agreement between Zydeco
Exploration, Inc. and Cheniere Energy Operating Co., Inc.
(formerly FX Energy, Inc.) dated April 28, 1997
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.21* --Sixth Amendment to Exploration Agreement between Zydeco
Exploration, Inc. and Cheniere Energy Operating Co., Inc.
(formerly FX Energy, Inc.) dated July 21, 1997.
11.1+ --Statement regarding computation of per share earnings.
21.1+ --List of Subsidiaries (filed as Exhibit 21.1 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995)
23.1* --Consent of Arthur Andersen LLP
23.2* --Consent of Ryder Scott Company Petroleum Engineers
23.3* --Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1)
27* --Financial Data Schedule
</TABLE>
- --------
+ Incorporated herein by reference to the indicated filing.
* Filed with this Amendment No. 2.
(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. 2 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 24th 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>
Sam B. Myers, Jr. Director, Chairman of the July 24, 1997
____________________________________ Board and Chief Executive
Sam B. Myers, Jr. Officer (Principal Executive
Officer)
/s/ W. Kyle Willis Vice President, Treasurer, July 24, 1997
____________________________________ and Chief Financial Officer
W. Kyle Willis (Chief Accounting Officer)
/s/ Edward R. Prince, Jr. Director, Vice Chairman of July 24, 1997
____________________________________ the Board
Edward R. Prince, Jr.
/s/ John O. Smith Director, President and July 24, 1997
____________________________________ Chief Operating Officer
John O. Smith
/s/ Philip A. Tuttle* Director July 24, 1997
____________________________________
Philip A. Tuttle
/s/ Harry C. Johnson* Director July 24, 1997
____________________________________
Harry C. Johnson
/s/ Charles E. Bradley, Sr.* Director July 24, 1997
____________________________________
Charles E. Bradley, Sr.
</TABLE>
/s/ Sam B. Myers, Jr.
*By ___________________________
Attorney-in-Fact
(under power of attorney
filed as part of the
initial registration
statement)
II-5
<PAGE>
EXHIBIT 4.8
WARRANT AGREEMENT
By and Among
ZYDECO ENERGY, INC.
and
BREAN MURRAY & CO., INC.
and
GAINES, BERLAND INC.
Dated as of _____ __,1997
<PAGE>
EXHIBIT 4.8
WARRANT AGREEMENT
WARRANT AGREEMENT dated as of _____ __,1997 by and among ZYDECO ENERGY,
INC., a Delaware corporation (the "Company"), and BREAN MURRAY & CO., INC. and
GAINES, BERLAND INC. (the "Underwriters") (the Company and the Representatives
are referred to collectively herein as the "Parties").
The Company proposes to issue to the Underwriters warrants as
hereinafter described (the "Warrants") to purchase up to an aggregate of 320,000
shares of the Company's Common Stock, $0.01 par value per share (the "Common
Stock"), subject to adjustment as provided in Section 8 hereof (such 320,000
shares, as adjusted, being hereinafter referred to as the "Shares"), each
Warrant entitling the holder ("Holder") thereof to purchase one share of Common
Stock. All capitalized terms used herein and not otherwise defined herein shall
have the same meanings as in that certain underwriting agreement, of even date
herewith, by and between the Company and the Underwriters (the "Underwriting
Agreement").
NOW, THEREFORE, in consideration of the following promises and mutual
agreements and for other good and valuable consideration, the Parties agree as
follows:
1. Issuance of Warrants; Form of Warrant. On the Closing Date the
Company will issue, sell and deliver the Warrants to the Representatives or
their bona fide officers for an aggregate price of $100. The Warrants shall be
issued to the Underwriters or such designees in the amounts set forth on
Schedule I attached hereto. The form of the Warrant and of the form of election
to purchase Shares to be attached thereto shall be substantially as set forth on
Exhibit A attached hereto. The Warrants shall be executed on behalf of the
Company by the manual or facsimile signature of the present or any future
President or any Vice President of the Company, under its corporate seal,
affixed or in facsimile, and attested by the manual or facsimile signature of
the present or any future Secretary or Assistant Secretary of the Company.
2. Registration. The Warrants shall be numbered and shall be registered
in a warrant register maintained by the Company or its designated agent (the
"Warrant Register"). The Company or its designated agent shall be entitled to
treat the registered holder of any Warrant on the Warrant Register as the owner
in fact thereof for all purposes and shall not be bound to recognize any
equitable or other claim to or interest in such Warrant on the part of any other
person, and shall not be liable for any registration or transfer of Warrants
which are registered or are to be registered in the name of a fiduciary or the
nominee of a fiduciary unless made with the actual knowledge that a fiduciary or
nominee is committing a breach of trust in requesting such registration or
transfer, or with such knowledge of such facts that its participation therein
amounts to bad faith. The Warrants shall be registered initially in the name of
the Underwriters in such denominations as the Underwriters may request in
writing from the Company; provided, however, that the Underwriters may designate
that all or a portion of the Warrants be issued in varying amounts directly to
their bona fide officers and not to the Underwriters. Such designation will only
be made by the Underwriters if it determines that
<PAGE>
such issuances would not violate the interpretation of the Board of Governors of
the National Association of Securities Dealers, Inc. (the "NASD"), relating to
the review of corporate financing arrangements.
3. Transfer of Warrants. The Warrants will not be sold, transferred,
assigned or hypothecated, in part or in whole, prior to the first anniversary of
the effective date of the Registration Statement, and thereafter only to bona
fide officers, directors, shareholders, employees or registered representatives
of the Representatives upon written request to the Company delivered in
accordance with Section 12 and upon delivery of the Warrant Certificate duly
endorsed by the Holder or by its duly authorized attorney or representative, or
accompanied by proper evidence of succession, assignment or authority to
transfer. In all cases of transfer by an attorney, the original power of
attorney, duly approved, or an official copy thereof, duly certified, shall be
deposited with the Company. In case of transfer by executors, administrators,
guardians or other legal representatives, duly authenticated evidence of their
authority shall be produced, and may be required to be deposited with the
Company in its discretion. Upon any registration of transfer, the Company shall
deliver a new Warrant or Warrants to the persons entitled thereto. Any of the
Warrants may be exchanged at the option of its Holder for other Warrants of
different denominations, of like tenor and representing in the aggregate the
right to purchase a like number of shares of Common Stock upon surrender to the
Company or its duly authorized agent. The Company may require payment of a sum
sufficient to cover all taxes and other governmental charges that may be imposed
in connection with any voluntary transfer, exchange or other disposition of the
Warrants. However, the Company shall have no obligation to cause Warrants to be
transferred on its books to any person, if such transfer would violate the
Securities Act of 1933, as amended (the "Act"), or applicable state securities
laws.
4. Term of Warrants; Exercise of Warrants.
(a) Term of Warrants. Each Warrant entitles the registered owner
thereof to purchase one Share at a purchase price of $____ per Share (as
adjusted from time to time pursuant to the provisions hereof, the "Exercise
Price") at any time from the first anniversary of the effective date of the
Registration Statement until 5:00 p.m., New York City time, on _______ __,
2002 (the "Warrant Expiration Date").
(b) Exercise of Warrants. The Exercise Price and the Shares issuable
upon exercise of Warrants are subject to adjustment upon the occurrence of
certain events, pursuant to the provisions of Section 8 of this Agreement.
Subject to the provisions of this Agreement, and in addition to the right
to surrender warrants without any cash payment as set forth in subsection
(c) below, each Holder shall have the right, which may be exercised as set
forth in such Warrants, to purchase from the Company (and the Company shall
issue and sell to such Holder) the number of fully paid and nonassessable
Shares specified in such Warrants, upon surrender to the Company, or its
duly authorized agent, of such Warrants, with the form of election to
purchase attached thereto duly completed and signed, with signatures
guaranteed by an eligible guarantor institution participating in an
approved signature guarantee medallion program and upon payment to
-2-
<PAGE>
the Company of the Exercise Price, as adjusted in accordance with the
provisions of Section 8 of this Agreement, for the number of Shares in
respect of which such Warrants are then exercised. No adjustment shall be
made for any dividends on any Shares issuable upon exercise of a Warrant.
Upon each surrender of Warrants and payment of the Exercise Price, the
Company shall issue and cause to be delivered with all reasonable dispatch,
but in no event later than three trading days following such surrender, to
or upon the written order of the Holder of such Warrants and in such name
or names as such Holder may designate, a certificate or certificates for
the number of full Shares so purchased upon the exercise of such Warrants,
together with cash, as provided in Section 9 of this Agreement, in respect
of any fractional Shares otherwise issuable upon such surrender. Such
certificate or certificates shall be deemed to have been issued and any
person so designated to be named therein shall be deemed to have become a
holder of record of such Shares as of the date of the surrender of Warrants
and payment of the Exercise Price as aforesaid; provided, however, that if,
at the date of surrender of such Warrants, the transfer books for the
Common Stock or other class of securities issuable upon the exercise of
such Warrants shall be closed, the certificates for the Shares shall be
issuable as of the date on which such books shall next be opened (whether
before, on or after the Warrant Expiration Date) and until such date the
Company shall be under no duty to deliver any certificate for such Shares;
provided, further, however, that the transfer books of record, unless
otherwise required by law, shall not be closed at any one time for a period
longer than twenty (20) days. The rights of purchase represented by the
Warrants shall be exercisable, at the election of the Holder(s) thereof,
either in full or from time to time in part and, in the event that any
Warrant is exercised in respect of less than all of the Shares issuable
upon such exercise at any time prior to the Warrant Expiration Date, a new
Warrant or Warrants will be issued for the remaining number of Shares
specified in the Warrant so surrendered.
(c) Payment of Exercise Price. Payment of the Exercise Price may be
made in cash or by certified check or official bank check payable to the
order of the Company. In addition and in lieu of any cash payment, the
Holder of the Warrants shall have the right at any time and from time to
time to exercise the Warrants in full or in part by surrendering the
Warrant in exchange for the number of Shares equal to the product of (x)
the number of shares as to which the Warrants are being exercised
multiplied by (y) a fraction, the numerator of which is the Market Price
(as defined below) of the Shares less the Exercise Price and the
denominator of which is such Market Price. Solely for the purposes of this
paragraph, "Market Price" shall be the average last reported sale price of
the Common Stock as calculated over the five (5) trading day period
preceding the date on which the Election to Purchase is surrendered to the
Company.
5. Payment of Taxes. The Company will pay all documentary stamp taxes,
if any, attributable to the issuance of Shares upon the exercise of Warrants;
provided, however, that the Company shall not be required to pay any taxes
payable in respect of any transfer involved in the issue or delivery of any
certificates for Shares in a name other than that of the Holder of Warrants in
respect of which such Shares are issued.
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6. Mutilated or Missing Warrants. In case any of the Warrants shall be
mutilated, lost, stolen or destroyed, the Company shall issue and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant, or
in lieu of and substitution for the Warrant lost, stolen or destroyed, a new
Warrant of like tenor and representing an equivalent right or interest, but only
upon receipt of evidence reasonably satisfactory to the Company of such
mutilation, loss, theft or destruction of such Warrant and indemnity, if
requested, reasonably satisfactory to the Company. An applicant for such
substitute Warrants shall also comply with such other reasonable regulations and
pay such other reasonable charges and expenses as the Company may prescribe.
7. Reservation of Shares, etc. The Company has reserved, and shall at
all times keep reserved, out of the authorized and unissued Common Stock, a
number of shares of Common Stock sufficient to provide for the exercise of the
rights of purchase represented by the outstanding Warrants. Continental Stock
Transfer & Trust Company, transfer agent for the Common Stock (the "Transfer
Agent"), and any subsequent transfer agent for the Company's securities issuable
upon the exercise of the Warrants will be irrevocably authorized and directed at
all times until the Warrant Expiration Date to reserve such number of authorized
and unissued shares as shall be required for such purpose. The Company will keep
a copy of this Agreement on file with the Transfer Agent and with every
subsequent transfer agent for any shares of the Company's securities issuable
upon the exercise of the Warrants. The Company will supply the Transfer Agent or
any subsequent transfer agent with duly executed certificates for such purpose
and will itself provide or make available any cash distributable as provided in
Section 9 of this Agreement. All Warrants surrendered in the exercise of the
rights thereby evidenced shall be cancelled, and such cancelled Warrants shall
constitute sufficient evidence of the number of Shares that have been issued
upon the exercise of such Warrants. No shares of Common Stock shall be subject
to reservation in respect of unexercised Warrants after the Warrant Expiration
Date.
8. Adjustments of Exercise Price and Number of Shares. The Exercise
Price and the number and kind of securities issuable upon exercise of each
Warrant shall be subject to adjustment from time to time upon the happening of
certain events, as follows:
(a) If the Company (i) declares a dividend on its Common Stock in shares
of Common Stock or makes a distribution in shares of Common Stock, (ii)
subdivides its outstanding shares of Common Stock, (iii) combines its
outstanding shares of Common Stock into a smaller number of shares of
Common Stock or (iv) issues by reclassification of its shares of Common
Stock other securities of the Company (including any such reclassification
in connection with a consolidation or merger in which the Company is the
surviving entity), the number of Shares purchasable upon exercise of each
Warrant immediately prior thereto shall be adjusted so that the Holder of
each Warrant shall be entitled to receive the kind and number of Shares or
other securities of the Company which he would have owned or have been
entitled to receive after the happening of any of the events described
above, had such Warrant been exercised immediately prior to the happening
of such event or any record date with respect thereto. An adjustment made
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pursuant to this paragraph (a) shall become effective immediately after the
effective date of such event retroactive to immediately after the record
date, if any, for such event.
(b) If the Company issues rights, options or warrants to all holders of
its shares of Common Stock, without any charge to such holders, entitling
them (for a period expiring within 45 days after the record date mentioned
below in this paragraph (b)) to subscribe for or to purchase shares of
Common Stock at a price per share lower than the then current market price
per share of Common Stock at the record date mentioned below (as defined in
paragraph (d) below), the number of Shares thereafter purchasable upon
exercise of each Warrant shall be determined by multiplying the number of
Shares theretofore purchasable upon exercise of each Warrant by a fraction,
of which the numerator shall be the number of shares of Common Stock
outstanding on such record date plus the number of additional shares of
Common Stock offered for subscription or purchase, and of which the
denominator shall be the number of shares of Common Stock outstanding on
such record date plus the number of shares which the aggregate offering
price of the total number of shares of Common Stock so offered would
purchase at the then current market price per share of Common Stock. Such
adjustment shall be made whenever such rights, options or warrants are
issued, and shall become effective retroactively to immediately after the
record date for the determination of shareholders entitled to receive such
rights, options or warrants.
(c) If the Company distributes to all holders of its shares of Common
Stock shares of stock other than Common Stock or evidences of its
indebtedness or assets (excluding cash dividends payable out of capital
surplus and dividends or distributions referred to in paragraph (a) above)
or rights, options or warrants or convertible or exchangeable securities
containing the right to subscribe for or purchase shares of Common Stock
(excluding those referred to in paragraph (b) above), then in each case the
number of Shares thereafter issuable upon the exercise of each Warrant
shall be determined by multiplying the number of Shares theretofore
issuable upon the exercise of each Warrant, by a fraction, of which the
numerator shall be the current market price per share of Common Stock (as
defined in paragraph (d) below) on the record date mentioned below in this
paragraph (c), and of which the denominator shall be the current market
price per share of Common Stock on such record date, less the then fair
value (as determined in good faith by the Board of Directors of the
Company, whose determination shall be conclusive) of the portion of the
shares of stock other than Common Stock or assets or evidences of
indebtedness so distributed or of such subscription rights, options or
warrants, or of such convertible or exchangeable securities applicable to
one share of Common Stock. Such adjustment shall be made whenever any such
distribution is made, and shall become effective on the date of
distribution retroactive to immediately after the record date for the
determination of shareholders entitled to receive such distribution.
(d) For the purpose of any computation under paragraphs (b) and (c) of
this Section 8, the current market price per share of Common Stock at any
date shall be the average of the daily closing prices for fifteen (15)
consecutive trading days commencing
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twenty (20) trading days before the date of such computation. The closing
price for each day shall be the last reported sale price regular way or, in
case no such reported sale takes place on such day, the average of the
closing bid and asked prices regular way for such day, in either case on
the principal national securities exchange on which the shares are listed
or admitted to trading, or if they are not listed or admitted to trading on
any national securities exchange, but are traded in the over-the-counter
market, the closing sale price of the Common Stock or, in case no sale is
publicly reported, the average of the representative closing bid and asked
quotations for the Common Stock, on the NASDAQ system or any comparable
system, or if the Common Stock is not listed on the NASDAQ system or a
comparable system, the closing sale price of the Common Stock or, in case
no sale is publicly reported, the average of the closing bid and asked
prices as furnished by two members of the NASD selected from time to time
by the Company for that purpose.
(e) No adjustment in the number of Shares purchasable hereunder shall be
required unless such adjustment would require an increase or decrease of at
least one percent (1%) in the number of Shares purchasable upon the
exercise of each Warrant; provided, however, that any adjustments which by
reason of this paragraph (e) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment but not later
than three years after the happening of the specified event or events. All
calculations shall be made to the nearest one thousandth of a share.
(f) Whenever the number of Shares purchasable upon exercise of each
Warrant is adjusted, as herein provided, the Exercise Price shall be
adjusted by multiplying the Exercise Price in effect immediately prior to
such adjustment by a fraction, of which the numerator shall be the number
of Shares purchasable upon the exercise of each Warrant immediately prior
to such adjustment, and of which the denominator shall be the number of
Shares so purchasable immediately thereafter.
(g) For the purpose of this Section 8, the term "shares of Common Stock"
shall mean (i) the class of stock designated as the Common Stock of the
Company at the date of this Agreement or (ii) any other class of stock
resulting from successive changes or reclassifications of such shares
consisting solely of changes in par value, or from no par value to par
value, or from par value to no par value. If at any time, as a result of an
adjustment made pursuant to paragraph (a) above, the Holders become
entitled to purchase any shares of capital stock of the Company other than
shares of Common Stock, thereafter the number of such other shares so
purchasable upon exercise of each Warrant and the Exercise Price of such
shares shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to
the Shares contained in paragraphs (a) through (f), inclusive, and
paragraphs (h) through (m), inclusive, of this Section 8, and the
provisions of Sections 4, 5, 7 and 10, with respect to the Shares, shall
apply on like terms to any such other shares.
(h) Upon the expiration of any rights, options, warrants or conversion
rights or exchange privileges, if any thereof have not been exercised, the
Exercise Price and the
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number of shares of Common Stock purchasable upon the exercise of each
Warrant shall, upon such expiration, be readjusted and shall thereafter be
such as it would have been had it originally been adjusted (or had the
original adjustment not been required, as the case may be) as if (i) the
only shares of Common Stock so issued were the shares of Common Stock, if
any, actually issued or sold upon the exercise of such rights, options,
warrants or conversion rights or exchange privileges and (ii) such shares
of Common Stock, if any, were issued or sold for the consideration actually
received by the Company upon such exercise plus the aggregate
consideration, if any, actually received by the Company for the issuance,
sale or grant of all of such rights, options, warrants or conversion rights
or exchange privileges whether or not exercised; provided, however, that no
such readjustment shall have the effect of decreasing the number of shares
issuable upon the exercise of each Warrant or increasing the Exercise Price
by an amount in excess of the amount of the adjustment initially made in
respect of the issuance, sale or grant of such rights, options, warrants or
conversion rights or exchange privileges.
(i) The Company may, at its option at any time during the term of the
Warrants, reduce the then current Exercise Price for all Warrants to any
amount deemed appropriate by the Board of Directors of the Company. Such
reduction may be for all or any portion of the remaining term of the
Warrants; provided, that the expiration of the reduction may not be less
than 30 days following the mailing of the notice required by paragraph (j)
below.
(j) Whenever the number of Shares issuable upon the exercise of each
Warrant or the Exercise Price of such Shares is adjusted, as herein
provided, the Company shall promptly mail by first class mail, postage
prepaid, to each Holder notice certified by its Chief Financial Officer of
such adjustment or adjustments. Such notice shall set forth the number of
Shares issuable upon the exercise of each Warrant and the Exercise Price of
such Shares after such adjustment, setting forth a brief statement of the
facts requiring such adjustment and setting forth the computation by which
such adjustment was made. Such certificate shall be conclusive as to the
correctness of such adjustment and each Holder shall have the right to
inspect such certificate during reasonable business hours.
(k) Except as provided in this Section 8, no adjustment in respect of
any dividends shall be made during the term of a Warrant or upon the
exercise of a Warrant.
(l) If the Company consolidates with or merges into another corporation
or if the Company sells or conveys all or substantially all its property to
another corporation, the Company or such successor or purchasing
corporation (or an affiliate of such successor or purchasing corporation),
as the case may be, agrees that each Holder shall have the right thereafter
upon payment of the Exercise Price in effect immediately prior to such
action to purchase upon exercise of each Warrant the kind and amount of
shares and other securities and property (including cash) which such Holder
would have owned or been entitled to receive after the happening of the
consolidation, merger, sale or conveyance had such Warrant been exercised
immediately prior to such action. The
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<PAGE>
provisions of this paragraph (l) shall apply to successive consolidations,
mergers, sales or conveyances.
(m) Notwithstanding any adjustment in the Exercise Price or the number
or kind of shares purchasable upon the exercise of the Warrants pursuant to
this Agreement, certificates for Warrants issued prior or subsequent to
such adjustment may continue to express the same price and number and kind
of Shares as are initially issuable pursuant to this Agreement.
9. Fractional Interests. The Company shall not be required to issue
fractions of Shares on the exercise of Warrants. If more than one Warrant is
presented for exercise in full at the same time by the same Holder, the number
of Shares issuable upon the exercise thereof shall be computed on the basis of
the aggregate number of Shares issuable on exercise of the Warrants so
presented. If any fraction of a Share would, except for the provisions of this
Section 9, be issuable on the exercise of any Warrant (or specified portions
thereof), the Company shall purchase such fraction for an amount in cash equal
to the same fraction of the current market price per share of Common Stock
(determined as provided in Section 8(d) of this Agreement) on the date of
exercise.
10. Registration Rights.
(a) Demand Registration Rights. The Company covenants and agrees with
the Underwriters and any other or subsequent Holders of the Registrable
Securities (as defined in paragraph (f) of this Section 10) that, subject
to the availability of audited financial statements complying with
Regulation S-X under the Act, upon written request of the then Holder(s) of
at least a majority of the Warrants or the Registrable Securities, or both,
which were originally issued to the Underwriters or their designees, made
at any time within the period commencing one year and ending five years
after the Effective Date, the Company will file as promptly as practicable
and, in any event, within 60 days after receipt of such written request, at
its expense (other than the fees of counsel and sales commissions for such
Holders), no more than once, a new registration statement under the Act,
registering or qualifying the Registrable Securities for sale. Within
fifteen (15) days after receiving any such notice, the Company shall give
notice to the other Holders of the Registrable Securities advising that the
Company is proceeding with such registration statement and offering to
include the Registrable Securities of such Holders. The Company shall not
be obligated to any other such Holder unless that other Holder accepts such
offer by notice in writing to the Company within ten (10) days thereafter.
The Company will use its best efforts, through its officers, directors,
auditors and counsel in all matters necessary or advisable, to file and
cause such registration statement to become effective as promptly as
practicable (but in no event within 90 days of the initial filing of such
registration statement) and for a period of 24 months thereafter to reflect
in the registration statement financial statements which are prepared in
accordance with Section 10(a)(3) of the Act and any facts or events arising
that, individually, or in the aggregate, represent a fundamental or
material change in the information set forth in the registration statement
to enable any Holders of the Warrants to exercise such Warrants and sell
Shares, or to enable any holders of Shares to sell such Shares,
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<PAGE>
during that nine-month period. If any registration pursuant to this
paragraph (a) is an underwritten offering, the Holders of a majority of the
Registrable Securities to be included in such registration shall be
entitled to select the underwriter or managing underwriter (in the case of
a syndicated offering) of such offering, subject to the Company's approval
which shall not be unreasonably withheld.
(b) Piggyback Registration Rights. The Company covenants and agrees with
the Underwriters and any other Holders or subsequent Holders of the
Registrable Securities that if, at any time within the period commencing
one year and ending five years after the Effective Date, it proposes to
file a registration statement with respect to any class of equity or
equity-related security (other than in connection with an offering to the
Company's employees or in connection with an acquisition, merger or similar
transaction) under the Act in a primary registration on behalf of the
Company and/or in a secondary registration on behalf of holders of such
securities and the registration form to be used may be used for
registration of the Registrable Securities, the Company will give prompt
written notice (which, in the case of a registration statement or
notification pursuant to the exercise of demand registration rights other
than those provided in Section 10(a) of this Agreement, shall be within ten
(10) business days after the Company's receipt of notice of such exercise
and, in any event, at least 30 days prior to such filing) to the Holders of
Registrable Securities (regardless of whether some of the Holders have
theretofore availed themselves of the right provided in Section 10(a) of
this Agreement) at the addresses appearing on the records of the Company of
its intention to file a registration statement and will offer to include in
such registration statement any of the Registrable Securities subject to
paragraphs (i) and (ii) of this paragraph (b), such number of Registrable
Securities with respect to which the Company has received written requests
for inclusion therein within ten (10) days after the giving of notice by
the Company. All registrations requested pursuant to this paragraph (b) are
referred to herein as "Piggyback Registrations". All Piggyback
Registrations pursuant to this paragraph (b) will be made solely at the
Company's expense (other than as provided in Section 10(d) hereof). This
paragraph is not applicable to a registration statement filed by the
Company with the Commission on Forms S-4 or S-8 or any successor forms.
(i) Priority on Primary Registrations. If a Piggyback
Registration includes an underwritten primary registration for the Company,
and the underwriter(s) for such offering determine in good faith and advise
the Company in writing that in their opinion the number of Registrable
Securities requested to be included in such registration exceeds the number
that can be sold in such offering without materially adversely affecting
the distribution of such securities by the Company, the Company will
include in such registration (A) first, the securities that the Company
proposes to sell and (B) second, the Registrable Securities requested to be
included in such registration, apportioned pro rata among the Holders of
Registrable Securities, provided, however, the Company will use its best
efforts to include not less than 20% of the Registrable Securities, and (C)
third, securities of the holders of other securities requesting
registration.
(ii) Priority on Secondary Registrations. If a Piggyback
Registration consists only of an underwritten secondary registration for
holders of securities of the
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Company (other than pursuant to Section 10(a)), and the underwriter(s) for
such offering advise the Company in writing that in their opinion the
number of Registrable Securities requested to be included in such
registration exceeds the number which can be sold in such offering without
materially adversely affecting the distribution of such securities by the
Company, the Company will include in such registration (A) first, the
securities requested to be included therein by the holders requesting such
registration and the Registrable Securities requested to be included in
such registration, pro rata among all such holders on the basis of the
number of shares requested to be included by each such holder, provided,
however, the Company will use its best efforts to include not less than 20%
of the Registrable Securities, and (B) second, other securities requested
to be included in such registration.
Notwithstanding the foregoing, if any such underwriter determines in
good faith and advises the Company in writing that the distribution of the
Registrable Securities requested to be included in the registration concurrently
with the securities being registered by the Company would materially adversely
affect the distribution of such securities by the Company, then the Holders of
such Registrable Securities shall delay their offering and sale for such period
ending on the earliest of (1) 90 days following the effective date of the
Company's registration statement, (2) the day upon which the underwriting
syndicate, if any, for such offering has been disbanded or, (3) such date as the
Company, managing underwriter and Holders of Registrable Securities otherwise
agree. If such a delay occurs, the Company shall file such supplements, post-
effective amendments and take any other steps necessary to permit such Holders
to make their proposed offering and sale for a period of 180 days immediately
following the end of such delay. If any party disapproves of the terms of any
such underwriting, it may elect to withdraw therefrom by written notice to the
Company, the underwriter, and the Underwriters. However, the Company shall not
be required to file a registration statement to include Shares pursuant to
Section 10(a) or this Section 10(b) if counsel, reasonably satisfactory to the
Company, renders an opinion to the Company that the Shares proposed to be
disposed of may be transferred pursuant to the provisions of Rule 144 under the
Act or otherwise without registration under the Act.
(c) Other Registration Rights. In addition to the rights above provided,
the Company will cooperate with the then Holders of the Registrable Securities
in preparing and signing any registration statement, in addition to the
registration statements discussed above, required in order to sell or transfer
the Registrable Securities and will supply all information required therefor,
but such additional registration statement, shall be at the then Holders' cost
and expense; provided, however, that if the Company elects to register or
qualify additional shares of Common Stock, the cost and expense of such
registration statement will be pro rated between the Company and the Holders of
the Registrable Securities according to the aggregate sales price of the
securities being issued. However, the Company will not be required to file a
registration statement pursuant to this paragraph (c), (i) at a time when the
audited financial statements required to be included therein are not available,
which time shall be limited to the period commencing 45 days after the end of
the Company's last fiscal year and ending 90 days after the end of such fiscal
year, or (ii) within 90 days after completion of a public offering by the
Company of any of its Common Stock or equity-related securities or (iii) if it
would adversely impact the
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Company in its capital raising plans or otherwise (in which latter case
filing may be delayed no longer than 120 days).
(d) Action to be Taken by the Company. In connection with the registration of
Registrable Securities in accordance with paragraphs (a), (b) or (c) of this
Section 10, the Company agrees to:
(i) Bear the expenses of any registration or qualification under
paragraphs (a) or (b) of this Section 10, including, but not limited to,
legal, accounting and printing fees; provided, however, that in no event
shall the Company be obligated to pay (A) any fees and disbursements of
special counsel for Holders of Registrable Securities, or (B) any
underwriters' discount or commission in respect of such Registrable
Securities, (C) any stock transfer taxes attributable to the sale of the
Registrable Securities, or (D) upon the exercise of any demand registration
right provided for in paragraph (a) of this Section 10, the cost of any
liability or similar insurance required by an underwriter, to the extent
that such costs are attributable solely to the offering of such Registrable
Securities, payment of which shall, in each case, be the sole
responsibility of the Holders of the Registrable Securities; and
(ii) Use its best efforts to register or qualify the Registrable
Securities for offer or sale under state securities or Blue Sky laws of
such jurisdictions in which the Underwriters or such Holders shall
reasonably request, provided, however, that no qualification shall be
required in any jurisdiction where, as a result thereof, the Company would
be subject to service of general process or to taxation as a foreign
corporation doing business in such jurisdiction to which it is not then
subject, and to do all other acts necessary or advisable to enable the
holders to consummate the proposed sale, transfer or other disposition of
such securities in any jurisdiction.
(e) Action to be Taken by the Holders. In connection with the registration of
Registrable Securities in accordance with paragraphs (a), (b) or (c) of this
Section 10, the Company's obligation shall be conditioned as to each such public
offering upon a timely receipt by the Company in writing of:
(i) Information as to the terms of such public offering furnished
by or on behalf of each Holder intending to make a public offering of his
or its Registrable Securities; and
(ii) Such other information as the Company may reasonably require
from such Holders, or any underwriter for any of them, for inclusion in
such Registration Statement.
(f) For purposes of this Section 10, (i) the term "Holder" shall include
holders of Shares, and (ii) the term "Registrable Securities" shall mean the
Shares, if issued.
11. Notices to Holders.
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(a) Nothing in this Agreement or in any Warrants shall be construed as
conferring upon the Holders the right to vote or to receive dividends or to
consent or to receive notice as shareholders in respect of the meetings of
shareholders or the election of directors of the Company or any other matter, or
any rights whatsoever as shareholders of the Company; provided, however, that in
the event that a meeting of shareholders shall be called to consider and take
action on a proposal for the voluntary dissolution of the Company, other than in
connection with a consolidation, merger or sale of all, or substantially all, of
its property, assets, business and good will as an entirety, the Company shall
cause a notice thereof to be sent by first-class mail, postage prepaid, at least
twenty (20) days prior to the date fixed as a record date or the date of closing
the transfer books in relation to such meeting, to each registered Holder of
Warrants at such Holder's address appearing on the Warrant Register; but failure
to mail or to receive such notice or any defect therein or in the mailing
thereof shall not affect the validity of any action taken in connection with
such voluntary dissolution.
(b) If the Company intends to make any distribution on its Common Stock
(or other securities which may be issuable in lieu thereof upon the exercise of
Warrants), including, without limitation, any such distribution to be made in
connection with a consolidation or merger in which the Company is the surviving
entity, or to issue subscription rights or warrants to holders of its Common
Stock, the Company shall cause a notice of its intention to make such
distribution to be sent by first-class mail, postage prepaid, at least twenty
(20) days prior to the date fixed as a record date or the date of closing the
transfer books in relation to such distribution, to each registered Holder of
Warrants at such Holder's address appearing on the Warrant Register, but failure
to mail or to receive such notice or any defect therein or in the mailing
thereof shall not affect the validity of any action taken in connection with
such distribution.
12. Notices. Any notice pursuant to this Agreement to be given by the
Holder of any Warrant or the holder of any Share to the Company shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed as follows or to such other address as the Company may designate by
notice given in accordance with this Section 12, to the Holders of Warrants or
the holders of Shares:
Zydeco Energy, Inc.
1710 Two Allen Center
1200 Smith Street
Houston, Texas 77002
Attention: W. Kyle Willis
Notices or demands authorized by this Agreement to be given or made by
the Company to or on the Holder of any Warrant or the holder of any Share shall
be sufficiently given or made (except as otherwise provided in this Agreement)
if sent by first-class mail, postage prepaid, addressed to such Holder or such
holder of Shares at the address of such Holder or such holder of Shares as shown
on the Warrant Register or the books of the Company, as the case may be.
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13. Governing Law. This Agreement and each Warrant issued hereunder
shall be governed by and construed in accordance with the substantive laws of
the State of New York. The Company hereby agrees to accept service of process by
notice given to it pursuant to the provisions of Section 12.
14. Counterparts. This Agreement may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original; but
such counterparts together shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly
executed as of the day, month and year first above written.
ZYDECO ENERGY, INC.
By:_____________________________
Its: ________________________
BREAN MURRAY & CO., INC.
GAINES, BERLAND INC.
By: Brean Murray & Co. Inc.
By:_____________________________
Its:_________________________
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SCHEDULE I
Name of Number of
Underwriter Warrants
- ----------- ---------
Brean Murray & Co., Inc.
Gaines, Berland Inc.
---------
Total 320,000
-15-
<PAGE>
No. ____ _____ Warrants
VOID AFTER 5:00 P.M. NEW YORK CITY TIME
ON ________ __, 2002
ZYDECO ENERGY, INC.
Warrant Certificate
THIS CERTIFIES THAT for value received ________________, or registered
assigns, is the owner of the number of Warrants set forth above, each of which
entitles the owner thereof to purchase at any time from ________ __, 1998, until
5:00 p.m., New York City time on ________ __, 2002 (the "Warrant Expiration
Date"), one fully paid and nonassessable share of common stock, $0.01 par value
per share (the "Common Stock"), of ZYDECO ENERGY, INC., a Delaware corporation
(the "Company"), at the purchase price of $____ per share (as adjusted from time
to pursuant to the Warrant Agreement referenced below, the "Exercise Price")
upon presentation and surrender of this Warrant Certificate with the Form of
Election to Purchase duly executed, as provided in the Warrant Agreement
together with payment of the aggregate Exercise Price for the shares of Common
Stock being purchased (defined below). The number of Warrants evidenced by this
Warrant Certificate (and the number of shares which may be purchased upon
exercise thereof) set forth above, and the Exercise Price per share set forth
above, are the number and Exercise Price as of the date of original issuance of
the Warrants, based on the shares of Common Stock of the Company as constituted
at such date. As provided in the Warrant Agreement referred to below, the
Exercise Price and the number or kind of shares which may be purchased upon the
exercise of the Warrants evidenced by this Warrant Certificate are, upon the
happening of certain events, subject to modification and adjustment.
This Warrant Certificate is subject to, and entitled to the benefits of,
all of the terms, provisions and conditions of an agreement dated as of ________
__, 1997 (the "Warrant Agreement") by and among the Company and Brean Murray &
Co., Inc. and Gaines, Berland Inc., which Warrant Agreement is hereby
incorporated herein by reference and made a part hereof and to which Warrant
Agreement reference is hereby made for a full description of the rights,
limitations of rights, duties and immunities hereunder of the Company and the
holders of the Warrant Certificates. Copies of the Warrant Agreement are on
file at the principal office of the Company.
This Warrant Certificate, with or without other Warrant Certificates,
upon surrender at the principal office of the Company, may be exchanged for
another Warrant Certificate or Warrant Certificates of like tenor and date
evidencing Warrants entitling the holder to purchase a
1
<PAGE>
like aggregate number of shares of Common Stock as the Warrants evidenced by the
Warrant Certificate or Warrant Certificates surrendered entitled such holder to
purchase. If this Warrant Certificate shall be exercised in part, the holder
hereof shall be entitled to receive upon surrender hereof another Warrant
Certificate or Warrant Certificates for the number of whole Warrants not
exercised.
No fractional shares of Common Stock will be issued upon the exercise of
any Warrant or Warrants evidenced hereby, but in lieu thereof a cash payment
will be made, as provided in the Warrant Agreement.
No holder of this Warrant Certificate shall be entitled to vote, receive
dividends, subscription rights or be deemed the holder of Common Stock or any
other securities of the Company which may at any time be issuable on the
exercise hereof for any purpose, nor shall anything contained in the Warrant
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action (whether
upon any recapitalization, issue of stock, reclassification of stock, change of
par value or change of stock to no par value, consolidation, merger, conveyance,
or otherwise) or, except as provided in the Warrant Agreement, to receive notice
of meetings, until the Warrant or Warrants evidenced by this Warrant Certificate
shall have been exercised and the Shares shall have become deliverable as
provided in the Warrant Agreement.
If this Warrant shall be surrendered for exercise within any period
during which the transfer books for the Company's Common Stock or other class of
stock purchasable upon the exercise of this Warrant are closed for any purpose,
the Company shall not be required to make delivery of certificates for shares
purchasable upon such exercise until the date of the reopening of said transfer
books, provided, however, that such books shall not be closed for longer than a
20-day period.
2
<PAGE>
IN WITNESS WHEREOF, ZYDECO ENERGY, INC. has caused the signature (or
facsimile signature) of its President and its Secretary to be printed hereon and
its corporate seal (or facsimile) to be printed hereon.
Dated ________ __, 1997
ZYDECO ENERGY, INC.
By:_____________________________
Its: ____________________________
Attest:
_________________________
3
<PAGE>
FORM OF
ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
Warrant Certificates.)
FOR VALUE RECEIVED __________________ hereby sells, assigns and transfers
unto this Warrant Certificate, together with all right, title and interest
therein, and does hereby irrevocably constitute and appoint
____________________, to transfer the within Warrant Certificate on the books of
the within-named Company, with full power of substitution.
Dated: ______________________, ____
___________________________________
Signature
Signature Guaranteed:
NOTICE
The signature of the foregoing Assignment must correspond to the name as
written upon the face of this Warrant Certificate in every particular, without
alteration or enlargement or any change whatsoever.
<PAGE>
FORM OF
ELECTION TO PURCHASE
(To be executed if holder desires to exercise the Warrant Certificate).
TO: ZYDECO ENERGY, INC.
The undersigned hereby irrevocably elects to exercise Warrants
represented by this Warrant Certificate to purchase ______ shares of Common
Stock issuable upon the exercise of such Warrants and requests that certificates
for such shares be issued in the name of:
Please insert social security, tax identification or other
identifying number
___________________________
___________________________
___________________________
(Please print name and address)
If such number of Warrants is not all the Warrants evidenced by this Warrant
Certificate, a new Warrant Certificate for the balance remaining of such
Warrants shall be registered in the name of and delivered to:
Please insert social security, tax identification or other identifying number
_____________________________
_____________________________
_____________________________
(Please print name and address)
Dated: _______________, ____
______________________________
Signature
(Signature must conform in all
respects to name of holder as
specified on the face of this
Warrant Certificate)
Signature Guaranteed:
<PAGE>
EXHIBIT 5.1
ANDREWS & KURTH
L.L.P.
ATTORNEYS
4200 TEXAS COMMERCE TOWER
HOUSTON, TEXAS 77002
February 25, 1997
Board of Directors
Zydeco Energy, Inc.
1710 Two Allen Center
1200 Smith Street
Houston, Texas 77024
Gentlemen:
We have acted as counsel to Zydeco Energy, Inc., a Delaware corporation
(the "Company") in connection with the Company's Registration Statement on Form
S-1 (Commission File No. 333-27679) (the "Registration Statement") relating to
the registration under the Securities Act of 1933, as amended, of (i) the
offering and sale (the "Offering") of up to 3,680,000 shares of the Company's
Common Stock, par value $.0001 per share ("Common Stock"), which number of
shares includes up to 480,000 shares issuable that may be issued upon exercise
of an underwriters' over-allotment option (collectively, the "Offering Shares"),
(ii) the issuance and sale in connection with the Offering of two Underwriter
Warrants (the "Underwriter Warrants") to purchase an aggregate of 320,000 shares
of Common Stock (the "Underwriter Warrant Shares") and (iii) the issuance and
sale of the Underwriter Warrant Shares upon exercise of the Underwriter
Warrants.
As the basis for the opinion hereinafter expressed, we have examined such
statutes, regulations, corporate records and documents, certificates of
corporate and public officials, and other instruments as we have deemed
necessary or advisable for the purposes of this opinion. In such examination we
have assumed the authenticity of all documents submitted to us as originals and
the conformity with the original documents of all documents submitted to us as
copies.
Based on the foregoing and on such legal considerations as we deem relevant
for purposes of this opinion, we are of the opinion that:
(a) the issuance and sale of the Offering Shares and the Underwriter
Warrants as described in the Registration Statement (and the Underwriter Warrant
Shares issuable upon the exercise of Underwriter Warrants) have been duly and
validly authorized by all necessary corporate action by the Company; and
(b) assuming the due execution and delivery of the stock certificates
evidencing the Offering Shares against payment therefor as provided in the
Underwriting Agreement filed as an exhibit to the Registration Statement, the
Offering Shares will be validly issued, fully-paid and nonassessable; and
(c) assuming the due execution and delivery of the Warrant Agreement
covering the issuance of the Underwriter Warrants filed as an exhibit to the
Registration Statement and the execution and delivery of the related warrant
certificates against payment therefor as provided in the Warrant Agreement, the
Underwriter Warrants will be validly issued, fully-paid and nonassessable, and
when exercised in accordance with the Warrant Agreement against payment provided
therefor (and assuming the execution and delivery of certificates for the
Underwriter Warrant Shares), the Underwriter Warrant Shares will be validly
issued, fully-paid and nonassessable.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and the reference to our firm under the caption "Legal
Matters" in the Prospectus included therein.
Very truly yours,
/s/ Andrews & Kurth L.L.P.
1249/2365
<PAGE>
EXHIBIT 10.20
April 28, 1997
Cheniere Energy Operating Company, Inc.
237 Park Avenue, Suite 2100
New York, NY 10017
Re: Fifth Amendment to Exploration Agreement
dated April 4, 1996 between Zydeco
Exploration, Inc. and FX Energy, Inc.
Gentlemen:
In accordance with the provisions of Section 16.b of the captioned Agreement and
when accepted by you in the manner hereinafter provided, this letter shall
constitute our agreement to amend said document to provide for expansion of the
Area of Mutual Interest as stipulated in Section 14 thereof and depicted on
Exhibit "B" attached thereto as follows, to wit:
The Area of Mutual Interest is hereby expanded to include those Blocks
within the area of 3-D seismic coverage acquired by Zydeco Exploration,
Inc. from Fairfield Industries Inc. by Supplement Agreement No. 1 to Master
License Agreement dated January 9, 1997, lying or being situated outside of
the existing AMI, and being Blocks 24, 25, 40, 41, 42, 43, 44, and 45, West
Cameron Area, Offshore Louisiana.
Except as herein specifically amended, all other provisions of the captioned
Agreement shall remain unchanged. If you are in agreement with the foregoing,
please so indicate by signing and returning the attached copy of this letter for
completion of our files.
Very truly yours,
/s/ John O. Smith
John O. Smith
President & Chief Operating Officer
ACCEPTED AND AGREED TO
THIS 28 DAY OF APRIL, 1997.
CHENIERE ENERGY OPERATING COMPANY, INC.
/s/ Walter Williams
- ------------------------------
Walter Williams
Vice Chairman
<PAGE>
July 18, 1997
Cheniere Energy Operating Co., Inc.
1710 Two Allen Center
1200 Smith Street
Houston, Texas 77002
Re: Sixth Amendment
Gentlemen:
I am writing with respect to that certain Exploration Agreement dated April 4,
1996, between FX Energy, Inc. and Zydeco Exploration, Inc., as amended by that
certain First Amendment dated May 15, 1996, and that certain Second Amendment
dated August 5, 1996, and that certain Third Amendment dated October 31, 1996,
and that certain Fourth Amendment dated as of November 27, 1996, and that
certain Fifth Amendment dated as of April 28, 1997 (as amended, the
"Agreement"). For convenience, terms defined therein shall have the same
meaning when used herein. FX Energy, Inc. ("FX") has changed its name to
Cheniere Energy Operating Co., Inc. ("Cheniere").
Under Section 2 of the Agreement, Cheniere was to have paid $13,500,000 of
Seismic Funds. At the time of the Fourth Amendment. Cheniere had paid
$6,000,000, and the survey had been suspended. Further contributions of Seismic
Funds were suspended until the survey recommenced. It recommenced in March and
has been completed. Following ZEI's Notice to Cheniere to resume payments,
Cheniere resumed payment of Seismic Funds. Through yesterday, Cheniere had paid
$12,000,000, leaving $1,500,000 of the $13,500,000 of contributions to be paid.
Cheniere has requested, and ZEI has agreed, to extend the date by which Cheniere
is to make payment of the balance of its contribution. The rescheduled date is
July 31, 1997.
In addition, Seismic Costs have exceeded $13,500,000. Under the Agreement,
Seismic Costs over $13,500,000 ("Excess Costs") are borne equally by ZEI and
Cheniere. The parties have reached certain understandings on the manner of
payment of Excess Costs.
Accordingly, we agree as follows:
1. Cheniere shall pay the last installment of the $13,500,000 in Seismic
Funds on or before July 31, 1997. The amount of the payment is
$1,500,000. No grace period shall apply to this payment. Should the
funds not be paid by July 31, 1997, the default shall be treated as a
Discontinuance under Section 5.
2. At July 31, 1997, Excess Costs will have accumulated to approximately
$3,765,000 of which Cheniere's 50% share is $1,882,500. Accordingly,
ZEI hereby makes a cash call on Cheniere for $1,882,500. Cheniere
shall pay the requested cash call by August 8, 1997. No grace period
shall
<PAGE>
Cheniere Energy Operating Co., Inc.
July 18, 1997
Page 2
apply to such payment. Should funds not be forwarded by August 8,
1997, the default shall be treated as a Discontinuance under
Section 5.
3. ZEI has advanced to date $2,305,000 toward Seismic Costs. As such, it
has already advanced its share of the current cash call.
4. ZEI estimates that Excess Costs to be incurred in August will be
approximately $422,000, which consist principally of the payment
required for a six-month extension of the Exclusive Seismic Permit.
ZEI estimates that additional Excess Costs for the period September
through December 1997 will be approximately $860,000. Assuming these
costs, total Excess Costs through December 31, 1997, would be
approximately $5,047,303, bringing total Seismic Costs to
approximately $18,500,000.
5. ZEI will make cash calls for payment of Excess Costs for the August
through December 1997 period. It shall do so periodically as required
to meet third party obligations timely. Each cash call shall be
payable by Cheniere thirty days after receipt. No grace periods shall
apply. To the extent that ZEI has not itself already advanced its
share of such sums, it shall do so at the same times required of
Cheniere. Should Cheniere or ZEI fail to forward a cash call within
thirty days of receipt of the cash call request under this paragraph,
the default shall be treated as a Discontinuance under Section 5.
6. In the event of a conflict between the terms of this amendment and the
Agreement as previously amended, the terms hereof shall control.
If I have correctly set forth our agreements, kindly so indicate by executing
one counterpart of this letter and returning it to the undersigned.
Yours very truly,
ZYDECO EXPLORATION, INC.
/s/ W. Kyle Willis
W. Kyle Willis
Vice President and Treasurer
ACCEPTED AND AGREED TO THIS
21ST DAY OF JULY, 1997.
CHENIERE ENERGY OPERATING CO., INC.
By: /s/ Walter Williams
-----------------------------------
Its: Vice Chairman
-----------------------------------
<PAGE>
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 24, 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".
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
July 24, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,758,532
<SECURITIES> 0
<RECEIVABLES> 2,639,471
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,535,476
<PP&E> 2,564,635
<DEPRECIATION> (1,340,560)
<TOTAL-ASSETS> 7,382,951
<CURRENT-LIABILITIES> 3,292,061
<BONDS> 0
0
0
<COMMON> 7,388
<OTHER-SE> 4,083,502
<TOTAL-LIABILITY-AND-EQUITY> 7,382,951
<SALES> 631,323
<TOTAL-REVENUES> 631,323
<CGS> 9,425
<TOTAL-COSTS> 9,425
<OTHER-EXPENSES> 2,985,249
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,740
<INCOME-PRETAX> (2,267,017)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,267,017)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,267,017)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
