<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER: 0-22076
ZYDECO ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
76-0404904
(I.R.S. Employer Identification No.)
1710 TWO ALLEN CENTER, 1200 SMITH STREET
HOUSTON, TEXAS
(Address of principal executive offices)
77002
(Zip Code)
(713) 659-2222
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
As of July 31, 1998, there were 10,357,096 shares of Zydeco Energy, Inc.
Common Stock, $.001 par value, issued and outstanding.
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1
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FORM 10-Q
TABLE OF CONTENTS
Page
Number
------
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets...................... 3
Condensed Consolidated Statements of Operations............ 4
Condensed Consolidated Statements of Cash Flows............ 5
Notes to Condensed Consolidated Financial Statements....... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 7
Part II. Other Information and Signatures
Items 1. to 6. ..................................................... 13
Signatures.......................................................... 15
2
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PART I.-FINANCIAL INFORMATION
ITEM 1.
ZYDECO ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
---------------------- ----------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents $ 3,535,586 $ 12,200,306
Receivables 843,541 254,481
Prepaid Expenses and Other Assets 467,398 1,028,515
---------------------- ----------------------
Total Current Assets 4,846,525 13,483,302
---------------------- ----------------------
Oil & Gas Properties, using successful efforts method of accounting
Proved Properties 334,972 334,972
Unproved Properties 5,718,574 27,600
Equipment and Software, at cost 2,349,978 2,254,139
---------------------- ----------------------
8,403,524 2,616,711
Less: Accumulated Depreciation, Depletion and Amortization (1,913,934) (1,667,021)
---------------------- ----------------------
6,489,590 949,690
---------------------- ----------------------
Investment in Wavefield Imaging Technology 915,841 933,409
Operating Bond and Other Assets 321,852 310,049
---------------------- ----------------------
TOTAL ASSETS $ 12,573,808 $ 15,676,450
====================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 275,170 $ 436,941
Accrued Liabilities 121,616 52,541
---------------------- ----------------------
Total Current Liabilities 396,786 489,482
---------------------- ----------------------
Stockholders' Equity
Common Stock, Par Value $.001 Per Share; 50,000,000 Shares
Authorized; 11,338,351 and 11,318,351 Shares Issued; 10,357,096
and 10,537,096 Shares Outstanding, Respectively 11,338 11,318
Additional Paid-In Capital 24,531,668 24,499,688
Accumulated Deficit (11,929,732) (9,316,786)
Less: Treasury Stock, at Cost; 981,255
and 781,225 Shares, Respectively (436,252) (7,252)
---------------------- ----------------------
Total Stockholders' Equity 12,177,022 15,186,968
---------------------- ----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,573,808 $ 15,676,450
====================== ======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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ZYDECO ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- -------------------------------------
1998 1997 1998 1997
------------------ ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
REVENUES
Oil and Gas Sales $ 113,506 $ 257,329 $ 237,646 $ 631,323
------------ ------------- ------------- -------------
113,506 257,329 237,646 631,323
EXPENSES
Exploration 616,019 1,402,979 1,280,520 1,863,668
Production 4,807 3,735 9,631 9,424
Research and Development 97,282 - 218,307 -
Depreciation, Depletion and Amortization 125,245 148,050 274,428 316,693
General and Administrative 775,148 448,768 1,304,382 804,889
------------ ------------- ------------- -------------
1,618,501 2,003,532 3,087,268 2,994,674
------------ ------------- ------------- -------------
OPERATING LOSS (1,504,995) (1,746,203) (2,849,622) (2,363,351)
OTHER INCOME (EXPENSE)
Interest Income and Expense, net 97,823 44,803 236,676 96,334
------------ ------------- ------------- -------------
97,823 44,803 236,676 96,334
------------ ------------- ------------- -------------
NET LOSS $ (1,407,172) $ (1,701,400) $ (2,612,946) $ (2,267,017)
============ ============= ============= =============
PER COMMON SHARE -
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (BASIC AND DILUTED) 10,357,096 6,605,439 10,373,117 6,599,543
============= ============= ============= =============
NET LOSS PER COMMON SHARE
(BASIC AND DILUTED) $ (0.14) $ (0.26) $ (0.25) $ (0.34)
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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ZYDECO ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30
--------------------------------------
1998 1997
----------------- ------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (2,612,946) $ (2,267,017)
Adjustments to Reconcile Net Loss to Net Cash
Provided by (Used in) Operating Activities:
Depreciation, Depletion and Amortization 274,428 316,693
Exploration Costs 664,501 1,863,668
Changes in Operating Assets and Liabilities 216,724 112,768
------------ ------------
Net Cash Used in Operating Activities (1,457,293) 26,112
------------ ------------
Cash Flows from Investing Activities:
Net Change in Exploration Obligations/Receivables $ (323,744) $ (1,707,306)
Exploration Costs (424,229) (868,668)
Proceeds from (Investment in) Marketable Securities - 845,852
Purchases of Equipment and Software (394,080) (165,666)
Additions to Oil and Gas Properties (5,657,797) (1,688)
Distributions to exploration partner - (2,171,615)
Other (7,735) -
------------ ------------
Net Cash Used in Investing Activities (6,807,585) (4,069,091)
------------ ------------
Cash Flows from Financing Activities:
Acquisition of Treasury Stock $ (429,000) $ -
Other 29,158 (105,139)
------------ ------------
Net Cash Used in Financing Activities (399,842) (105,139)
------------ ------------
Net Increase in Cash and Cash Equivalents $ (8,664,720) $ (4,148,118)
Cash and Cash Equivalents at Beginning of Period 12,200,306 6,906,650
------------ ------------
Cash and Cash Equivalents at End of Period $ 3,535,586 $ 2,758,532
============ ============
Cash Paid During the Period for:
Interest $ - $ 10,740
Income Taxes $ - $ -
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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ZYDECO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. PREPARATION OF INTERIM FINANCIAL STATEMENTS.
The accompanying unaudited condensed consolidated financial statements of
Zydeco Energy, Inc. and its wholly owned subsidiaries have been prepared by the
Company without audit pursuant to the rules and regulations of the Securities
and Exchange Commission. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments necessary to present fairly the
financial position as of June 30, 1998 and December 31, 1997, the results of
operations for the three month and six month periods ended June 30, 1998 and
1997 and the statements of cash flows for the six month periods then ended have
been included. 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. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes to consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997. As
used herein, unless the context indicates otherwise, the term "Company" refers
to Zydeco Energy, Inc. and its wholly owned subsidiaries.
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.
Reclassifications. Certain reclassifications of prior period amounts have
been made to conform to current presentation.
Forward-looking Statements. When used in this document, the words
"anticipate", "believe", "expect", "estimate", "project" and similar expressions
are intended to identify forward-looking statements. Such statements are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, believed,
expected, estimated or projected.
2. CHENIERE LITIGATION
On April 17, 1998, Zydeco Exploration, Inc., a wholly owned subsidiary of the
Company, filed a petition with the American Arbitration Association for
arbitration in order to resolve certain contract disputes that arose with
Cheniere Energy, Inc. and Cheniere Energy Operating Co., Inc. ("Cheniere").
Cheniere is a party to an exploration agreement with Zydeco Exploration, Inc.
covering the Company's West Cameron Seismic Project, located in western Cameron
Parish, Louisiana. Under this exploration agreement, Cheniere may receive up to
50% interest in leases acquired in the project area by the Company provided it
meets certain funding obligations, including payment of certain seismic costs
and its share of leasehold acquisition costs. The arbitration claim seeks to
resolve differences over Cheniere's funding obligations, the parties' current
ownership interests in various leases and prospects, the scope of pre-drilling
activities that Cheniere can conduct within the Project Area, the dissemination
by Cheniere of confidential seismic data covering the Project Area, and other
related issues. Cheniere has filed a counterclaim in the arbitration action,
and the pleadings have been amended to include Zydeco Energy, Inc., as well as
Zydeco Exploration, Inc. The parties are seeking conflicting declaratory and
injunctive relief and damages from each other. The arbitration is scheduled for
a final hearing beginning on October 19, 1998 before a panel of three
arbitrators, and the Company estimates that the case will require ten days of
hearing time. Pursuant to the terms of the exploration agreement, the
arbitration panel's decision will be binding and conclusive.
6
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On April 22, 1998, Zydeco Energy, Inc. and Zydeco Exploration, Inc.
(collectively "Zydeco") initiated a civil suit in state district court in Harris
County, Texas against two individuals who are parties to confidentiality
agreements with Zydeco and who currently are employees of Cheniere. In this
suit, Zydeco sought and obtained a Temporary Restraining Order on April 22,
1998, restraining the individuals from breaching the terms of their
confidentiality agreements with Zydeco. Cheniere intervened in the litigation
on April 27, 1998. On May 4, 1998, Zydeco, Cheniere and the two individuals
agreed to the entry of an Agreed Temporary Injunction. The Agreed Temporary
Injunction expired on June 15, 1998, and the dispute which led to the filing of
this civil suit has been included in the arbitration action by agreement of the
parties, and will be resolved in that forum.
3. ACQUISITION OF TREASURY SHARES
On January 15, 1998, the Company executed a termination agreement with a
former employee of the Company. Pursuant to the terms of the termination
agreement, the Company purchased 200,000 shares of the Company's common stock at
the then current price of $2.125 per share from a trust established for the
benefit of the former employee's descendants and assigned to the former employee
a 1/2% of 8/8ths overriding royalty interest in certain Company-owned non-
productive leases. No overriding royalty interest was assigned to leases in
connection with the Company's West Cameron Seismic Project.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Formed in December 1995 as the result of a merger, the Company is an
independent oil and gas exploration company engaged in acquiring leases,
drilling and producing reserves utilizing focused geologic concepts and advanced
3D seismic and computer-aided exploration (CAEX) technology, including enhanced
structural and stratigraphic depth imaging and attribute analysis. The Company
has developed comprehensive in-house technology, software and expertise enabling
it to use the most recent advances in such 3D seismic and CAEX technology.
Currently, the Company's efforts are focused primarily in the Louisiana
Transition Zone, a narrow trend paralleling the coastline of Louisiana. This
trend is approximately six miles wide (three miles on either side of the beach)
and extends about 300 miles from the Sabine River eastward to the Mississippi
River.
During 1996, the Company negotiated seismic options covering approximately
37,000 gross acres (33,000 net acres) and secured other seismic permits covering
approximately 171,000 gross acres (170,000 net acres) in the Louisiana
Transition Zone. At the core of this project, named the West Cameron Seismic
Project ("Project") was a 51,000-acre exclusive seismic permit obtained from the
State of Louisiana. The Company commenced seismic data acquisition for this
Project over approximately 230 square miles during the second half of 1996 and
completed this phase in July 1997. The seismic processing and interpretive phase
of this Project immediately commenced during mid 1997 and will continue during
most of 1998. Pursuant to the terms of the State of Louisiana permit, the state
is required to keep the information obtained from the survey confidential for a
period of ten years. Through three State of Louisiana lease sales, private land
negotiations and a Federal lease sale, the Company has acquired more than 12,000
gross acres. Currently, the Company is continuing negotiations with several
property owners for leasehold rights or drilling rights and is preparing for
State of Louisiana lease sales scheduled during the second half of 1998. The
Company intends to evaluate its participation in future federal and state
competitive bid lease sales on a continuing basis.
In April 1996, the Company executed the Cheniere Exploration Agreement with
Cheniere Energy Operating Co., Inc. ("Cheniere"), formerly known as FX Energy,
Inc., for the West Cameron Seismic
7
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Project, covering an area of land and waters in western Cameron Parish,
Louisiana, including the area covered by the seismic permits described above. In
exchange for earning a 50% interest, Cheniere 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 permits, the cost of lease
options on the related onshore acreage of the West Cameron Seismic Project, the
purchase of other 3D seismic data, and data acquisition, processing and
interpretations of a 3D seismic survey of the onshore and offshore areas.
Cheniere may elect to discontinue Project funding under certain circumstances,
in which case its interest would be reduced pro rata in relation to total
Project costs. Pursuant to the terms of the Cheniere Exploration Agreement, as
of June 30, 1998 the Company had incurred third party and processing costs in
connection with the West Cameron Seismic Project aggregating approximately
$20,992,377, net of certain reimbursements amounting to $95,184. Cheniere's and
Zydeco's share of these costs under this agreement was approximately $17,198,791
and $3,793,586, respectively. The Company's portion of geological and
geophysical costs is expensed as exploration expense. As of July 31, 1998,
billings to Cheniere for their share of such costs amounting to $813,386 have
not been paid and are included in accounts receivable. Of this total amount,
billings amounting to $583,946 have been outstanding more than 90 days.
On April 17, 1998, the Company filed a petition with the American Arbitration
Association for arbitration in order to resolve certain contract disputes under
the Cheniere Exploration Agreement, including funding obligations, the parties'
current ownership interests in various leases and prospects, the scope of pre-
drilling activities that Cheniere can conduct within the Project Area, the
dissemination by Cheniere of confidential seismic data covering the Project
Area, and other related issues. The parties are seeking conflicting declaratory
and injunctive relief and damages from each other. The arbitration is scheduled
for a final hearing beginning on October 19, 1998 before a panel of three
arbitrators, and the Company estimates that the case will require ten days of
hearing time. On April 22, 1998, Zydeco initiated a civil action in state
district court in Harris County, Texas, against two individuals who are parties
to confidentiality agreements with Zydeco and who are currently employed by
Cheniere. In this suit, the Company sought and obtained a Temporary Restraining
Order on April 22, 1998, enjoining the individuals from breaching the terms of
their confidentiality agreements with the Company. On April 27, 1998, Cheniere
Energy, Inc. intervened in the state district court litigation. On May 4, 1998,
the Company, Cheniere and the two individuals agreed to the filing of an Agreed
Temporary Injunction. The Agreed Temporary Injunction expired on June 15, 1998,
and the dispute which led to the filing of this civil suit has been included in
the arbitration action by agreement of the parties, and will be resolved in that
forum.
On July 1, 1997, the Company acquired all of the outstanding capital stock
of 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 agreement executed in May 1996.
Pursuant to the terms of the acquisition agreement between the Company and the
shareholders of Wavefield, the Company issued 100,000 shares of the Company's
common stock at closing to the shareholders of Wavefield and an additional
150,000 shares of such stock to the former Wavefield shareholders in connection
with the issuance of a patent on the Wavefield Imaging Technology by the United
States Patent and Trademark Office. In connection with the issuance of Common
Stock, the Company recorded an investment in the Wavefield Imaging Technology of
about $950,000 based on the prices of the Company's Common Stock on July 1,
1997, and December 2, 1997, the date of the patent issuance. The Company is
amortizing this investment over approximately 19 years (the life of the patent
received).
On August 26, 1997, the Company completed an offering of 3,680,000 shares of
Common Stock and warrants to purchase 320,000 shares of Common Stock (the
"Offering"). Proceeds from the Offering were approximately $14.1 million, net of
Offering expenses of approximately $1.6 million.
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
8
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reserves. Costs of productive wells, developmental dry holes, and productive
leases are capitalized and amortized on a property-by-property basis using the
units-of-production method. The estimated costs of future plugging, abandonment,
restoration, and dismantlement are considered as a component of the calculation
of depreciation, depletion, and amortization. Unproved properties with
significant acquisition costs are assessed periodically on a property-by-
property basis and any impairment in value is charged to expense.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
The Company recorded a loss of $1,407,172, or $.14 per share, for the three
months ended June 30, 1998 compared to a loss of $1,701,400, or $.26 per share,
in the three months ended June 30, 1997. The decrease in the loss is primarily
due to a decline in exploration expenses. However, this decline was partly
offset by increases in general and administrative expenses, research and
development expenses and a decrease in oil and gas revenues.
Exploration expenses decreased from $1,402,979 in the 1997 second quarter
to $616,019 in the comparable 1998 period primarily due to a decline in
geological and geophysical costs associated with the West Cameron Seismic
Project. During the 1998 second quarter, the Company incurred $215,524 in this
project's seismic costs. Because the seismic acquisition phase of this project
is substantially more expensive than the processing and interpretive phases and
because such acquisition phase was completed during the 1997 third quarter, the
Company's share of this project's seismic costs declined $779,625 from the 1997
second quarter. The Company incurred $97,282 in research and development
expenses during the 1998 second quarter. Because the company commenced a
research and development program in mid 1997, it had no comparable research and
development expense for the three months ended June 30, 1997. General and
administrative expenses rose $326,380 from $448,768 in the 1997 second quarter
to $775,148 in the comparable 1998 period mostly due to legal costs associated
with the Cheniere litigation and additional personnel costs. The Company
expects that its current level of exploration, general and administrative, and
research and development expenses will continue into the near future. However,
because the Company utilizes the successful efforts method of accounting,
exploration expenses typically vary materially from period to period based upon
exploration program activities, the Company's cost participation and other
factors.
Total revenues decreased from $257,329 in the three months ended June 30,
1997 to $113,506 in the comparable 1998 period due mostly to a 52% decline in
gas sales volumes and an 87% decline in oil sales volumes. Gas sales volumes
fell from 95,695 thousand cubic feet ("MCF") in the 1997 second quarter to
45,619 MCF in the comparable 1998 period. In addition, oil sales volumes fell
from 2,929 barrels ("Bbls") to 384 Bbls in the respective periods. The decline
in such sales volumes is attributable to natural production declines for the two
producing wells in which the Company has interests. Although it expects that
the production rates of these wells will continue to decline during the near
term, the Company cannot ascertain whether the rate of decline experienced from
the 1997 second quarter to the comparable 1998 period will continue throughout
1998. In addition, the Company has not assigned any proved oil and gas reserves
to one of these wells.
During the three-month periods ended June 30, 1998 and 1997, the Company
did not record any gains or losses from the sales of properties. Because the
Company expects to continue the development and sale of some portion or all of
its interest in prospects to other industry participants, the Company will from
time to time record gains or losses for these transactions. However, the timing
of such sales and the extent of their gain or loss are due to a number of
factors such as, but not limited to, the timing and cost of lease acquisitions,
the availability of leaseholds in particular prospect areas and market
conditions, both generally and in the oil and gas industry, at the time of sale.
The decrease in the net loss per share from $.26 in the 1997 second quarter
to $.14 in the comparable 1998 period was also affected by an increase in the
weighted average number of the
9
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Company's Common Shares (basic and diluted) due to the issuance of 3,680,000
shares in the Offering in August 1997 and the acquisition of 200,000 treasury
shares in January 1998.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
For the six months ended June 30, 1998, the Company recorded a loss of
$2,612,946, or $.25 per share, compared to a loss of $2,267,017, or $.34 per
share, in the six months ended June 30, 1997. The increase in the loss is
mostly due to increases in general and administrative expenses, research and
development expenses and a decrease in oil and gas revenues.
General and administrative expenses rose $499,493 from $804,889 in the
first half of 1997 to $1,304,382 in the comparable 1998 period mostly due to
legal costs associated with the Cheniere litigation and additional personnel
costs. The Company incurred $218,307 in research and development expenses during
the first six months of 1998. Because the company commenced a research and
development program in mid 1997, it had no comparable research and development
expense during the six months ended June 30, 1997. Total revenues decreased
from $631,323 in the 1997 first half to $237,646 in the comparable 1998 period
due mostly to a 52% decline in gas sales volumes and an 86% decline in oil sales
volumes. Gas sales volumes fell from 198,936 MCF in the 1997 first half to
95,451 MCF in the comparable 1998 period. In addition, oil sales volumes fell
from 6,209 Bbls to 883 Bbls in the respective periods. As discussed in the
analysis of results for the three month comparison, the Company expects that the
production rates of its two wells will continue to decline during the near term,
but that it cannot ascertain whether the rate of decline experienced from the
1997 period to the comparable 1998 period will continue throughout 1998.
Exploration expenses decreased from $1,863,667 in the 1997 first half to
$1,280,520 in the comparable 1998 period primarily due to a decline in
geological and geophysical costs associated with its West Cameron Seismic
project. Compared to 1997 first half project expenses of $995,149, the Company
expensed $544,789 during the comparable 1998 period. The Company expects that
its current level of exploration, general and administrative, and research and
development expenses will continue into the near future. However, because the
Company utilizes the successful efforts method of accounting, exploration
expenses typically vary materially from period to period based upon exploration
program activities, the Company's cost participation and other factors. As
discussed in the analysis of results for the three-month comparison, the Company
expects that it will continue to develop and then sell some portion or all of
its interest in prospects to other industry participants. However, the timing of
such sales and their resulting gain or loss are due to a number of factors such
as, but not limited to, the timing and cost of lease acquisitions, the
availability of leaseholds in particular prospect areas and market conditions,
both generally and in the oil and gas industry, at the time of sale.
The decrease in the net loss per share from $.34 in the 1997 first half to
$.25 in the comparable 1998 period was also affected by an increase in the
weighted average number of the Company's Common Shares (basic and diluted) due
to the issuance of 3,680,000 shares in the Offering in August 1997 and the
acquisition of 200,000 treasury shares in January 1998.
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
exploration agreements. The Company may use its cash for any general corporate
purposes except for the funds advanced under such exploration agreements, which
are committed to the project operations for which they were intended. Sources of
funds include approximately $24.1 million from the sale of securities in 1993,
1994, 1995 and 1997; $21.2 million in advances under exploration agreements in
1995, 1996, 1997 and the six months ended June 30, 1998. The Company does not
currently hold any funds advanced under any such exploration agreement.
10
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The Company has expended approximately $5.7 million on the acquisition
of oil and gas leases during the first six months of 1998. The Company expects
that capital needs for the remainder of 1998 will be satisfied through cash on
hand of approximately $3.5 million at June 30, 1998, cash expected to be made
available under the Cheniere Exploration Agreement, and sales of the Company's
interests in leases acquired during the first half of 1998. For the near term,
the Company believes that most of its capital needs will be centered on the
continued acquisition of leases and development of potential prospects in the
West Cameron Seismic Project area and for other general corporate purposes.
However, the total amount of expenditures is unknown at this time due to factors
such as, but not limited to, leasehold availability, lease terms of potential
leaseholds which may yet be negotiated or bid on in lease sales, future
potential operations proposed under the terms of operating or other agreements
to which the Company is a participant or may become a participant and the timing
of expenditures related to the performance of these activities. The Company's
ability to access additional capital will also depend on a number of factors
including its success in acquiring oil and gas leaseholds, attracting industry
participants to participate in the exploration of and sharing of costs of such
leaseholds and finding commercially productive hydrocarbon deposits. The
Company does not presently maintain any credit facilities.
During the first six months of 1998, the Company's cash outflow has
increased due to Cheniere's failure to tender its share of billings for West
Cameron Seismic Project costs and its proportionate share of certain lease
acquisitions. As of July 31, 1998, billings to Cheniere for West Cameron
Seismic Project costs amounting to $813,386 have not been paid and are included
in accounts receivable. Of this total amount, billings amounting to $583,946
have been outstanding more than 90 days. In addition, Cheniere failed to tender
its 50% billed share of costs for the June 8, 1998 State of Louisiana lease sale
at which the Company was awarded leases at an aggregate cost of $2,898,343.
However, Cheniere did tender its 50% billed share of costs for the April 8 and
July 8, 1998 State of Louisiana lease sales at which the Company was awarded
leases for gross costs of $146,841 and $147,471, respectively. There is no
assurance that Cheniere will fund any future share of costs under the Cheniere
Exploration Agreement. On April 17, 1998, the Company filed a petition with the
American Arbitration Association for arbitration in order to resolve certain
disputes, including cost reimbursement issues that have arisen with Cheniere.
The arbitration is scheduled for a final hearing beginning on October 19, 1998
before a panel of three arbitrators. Pursuant to the terms of the exploration
agreement, the arbitration panel's decision will be binding and conclusive. The
Company expects to incur and expense legal and other costs of the arbitration
and related litigation during the second half of 1998.
The additional costs of Cheniere's failure to tender payments 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 on the Company's common stock, securing additional industry
participants, or the sale of interests in prospects. The Company anticipates
that it may sell an interest in the West Cameron Seismic Project as a whole. In
the future, in the event the Company increases oil and gas production through
the successful completion of oil and gas wells, the Company may consider
obtaining a credit facility. There can be no assurance that the Company will be
successful in securing additional participants, additional project financing or
credit financing.
Should the Company sell interests in the West Cameron Seismic Project
and/or prospects generated from such project, the amount of capital expenditures
may be impacted by the extent of proceeds from such sales and/or reduced
expenditures attributed to the reduced working interest share of expenditures.
The Company may also engage in the drilling of other 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
participants may participate in the Company's prospects, and the cost of
drilling and completing wells in the Louisiana Transition Zone.
The Company has incurred net losses and negative cash flows from operations
since its inception. The Company does not expect to generate cash flow or net
income in 1998 unless it sells substantial interests in prospects generated from
the West Cameron Seismic Project or interests in such project. The
11
<PAGE>
Company contemplates that the sale of such interests would include prospect
development commitments and financing provided by the purchasers coupled with
retained interests and back-in rights to the Company, and additional cash
consideration to the Company for recoupment of costs incurred in identifying
such prospective interests. As generally required by the successful efforts
method of accounting, the Company has expensed all of its geological and
geophysical costs in the West Cameron Seismic Project as of June 30, 1998, and
accordingly, reimbursements for such non-capitalized costs would be treated as
revenue to the Company. There can be no assurance that the Company will be
successful in the selling of significant interests or in receiving payments for
the recoupment of the Company's costs incurred to date on this project or
continue to develop prospects in such project and sell interests in the
project's individual prospects or group of prospects.
The Company currently maintains a $300,000 bond required to hold its
present federal oil and gas leases. A United States Treasury Note
collateralizes this bond. In the event that the Company would act as operator
on a federal offshore lease or is otherwise required to increase its bonding by
federal or state authorities, significant amounts of capital may be required for
additional collateral to satisfy bonding requirements.
The Company is unaware of any possible exposure from actual or potential
claims or lawsuits involving environmental matters. As such, no liability is
accrued at June 30, 1998.
The Company does not expect to incur any material cost to modify and
replace its information technology infrastructure to be Year 2000 compliant.
The Company does not anticipate any material disruption in its operations as a
result of any failure by the Company to be in compliance. The Company does not
currently have any information concerning the Year 2000 compliance status of its
suppliers and customers. In the event that any of the Company's significant
suppliers or customers do not successfully and timely achieve Year 2000
compliance, the Company's business or operations could be adversely affected.
The Company has not incurred significant costs related to Year 2000 compliance
prior to June 30, 1998, other than immaterial internal costs to evaluate the
extent of compliance.
12
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
On April 17, 1998, Zydeco Exploration, Inc., a wholly owned subsidiary of the
Company, filed a petition with the American Arbitration Association for
arbitration in order to resolve certain contract disputes that arose with
Cheniere Energy, Inc. and Cheniere Energy Operating Co., Inc. ("Cheniere").
Cheniere is a party to an exploration agreement with Zydeco Exploration, Inc.
covering the Company's West Cameron Seismic Project, located in western Cameron
Parish, Louisiana. Under this exploration agreement, Cheniere may receive up to
50% interest in leases acquired in the project area by the Company provided it
meets certain funding obligations, including payment of certain seismic costs
and its share of leasehold acquisition costs. The arbitration claim seeks to
resolve differences over Cheniere's funding obligations, the parties' current
ownership interests in various leases and prospects, the scope of pre-drilling
activities that Cheniere can conduct within the Project Area, the dissemination
by Cheniere of confidential seismic data covering the Project Area, and other
related issues. Cheniere has filed a counterclaim in the arbitration action,
and the pleadings have been amended to include Zydeco Energy, Inc., as well as
Zydeco Exploration, Inc. The parties are seeking conflicting declaratory and
injunctive relief and damages from each other. The arbitration is scheduled for
a final hearing beginning on October 19, 1998 before a panel of three
arbitrators, and the Company estimates that the case will require ten days of
hearing time. Pursuant to the terms of the exploration agreement, the
arbitration panel's decision will be binding and conclusive.
On April 22, 1998, Zydeco Energy, Inc. and Zydeco Exploration, Inc.
(collectively "Zydeco") initiated a civil suit in state district court in Harris
County, Texas against two individuals who are parties to confidentiality
agreements with Zydeco and who currently are employees of Cheniere. Through
this litigation, Zydeco sought and obtained a Temporary Restraining Order on
April 22, 1998, restraining the individuals from breaching the terms of their
confidentiality agreements with Zydeco. Cheniere intervened in the litigation
on April 27, 1998. On May 4, 1998, Zydeco, Cheniere and the two individuals
agreed to the entry of an Agreed Temporary Injunction. The Agreed Temporary
Injunction expired on June 15, 1998, and the dispute which led to the filing of
this civil suit has been included in the arbitration action by agreement of the
parties, and will be resolved in that forum.
Items 2 and 3 for which provision is made in the applicable regulations of the
Securities and Exchange Commission are not required under the related
instructions or are inapplicable and, therefore, have been omitted.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its 1998 Annual Meeting of Stockholders on June 11, 1998. At
such meeting, the board of directors was re-elected in its entirety. There were
no other matters brought forward at this meeting for a shareholder vote. The
results of the board of directors election is as follows:
<TABLE>
<CAPTION>
SHAREHOLDER VOTES
-------------------------------------------------
NOMINIEE FOR WITHDRAWAL TOTAL
--------- ---------- ---------
<S> <C> <C> <C>
Sam B. Myers, Jr. 8,125,710 54,493 8,180,203
Edward R. Prince, Jr. 8,131,110 49,093 8,180,203
John O. Smith 8,131,910 48,293 8,180,203
Harry C. Johnson 8,139,610 40,593 8,180,203
Charles E. Bradley, Sr. 8,137,610 42,593 8,180,203
Philip A. Tuttle 8,141,910 38,293 8,180,203
</TABLE>
13
<PAGE>
Item 5. Stockholder Proposals for 1999 Annual Meeting of Stockholders
Any proposal of stockholders to be included in the Company's proxy statement
and proxy relating to the Company's 1999 Annual Meeting of Stockholders pursuant
to Rule 14a-8 under the Exchange Act must be received by the Company at its
principal executive offices not later than December 31, 1998; any notice of a
shareholder proposal received after such date will be considered untimely for
inclusion in the Company's proxy statement and proxy pursuant to Rule 14a-8
promulgated under the Securities Exchange Act of 1934, as amended. All such
proposals must comply with all the requirements of Rule 14a-8. The Company may
exercise discretionary voting authority with respect to any stockholder proposal
made at the 1999 Annual Meeting and not included in the Company's proxy
statement and proxy unless notice of such proposal is received by the Company
not later than March 15, 1999.
Item 6.
(a) Exhibits.
Exhibit 21 Subsidiaries of the Registrant (follows signature page)
Exhibit 27 Financial Data Schedule (follows signature page).
(b) Report on Form 8-K.
None
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZYDECO ENERGY, INC.
/s/ John Misitigh
--------------------------------------------------
John Misitigh
Controller, Chief Accounting Officer and Secretary
(Duly Authorized and Principal Financial Officer)
Dated: August 4, 1998
15
<PAGE>
Exhibit 21
Listing of Zydeco Energy, Inc. Subsidiaries
Zydeco Exploration, Inc.
Wavefield Image, Inc.
Eastern Energy, Inc.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,535,586
<SECURITIES> 0
<RECEIVABLES> 843,541
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,846,525
<PP&E> 8,403,524
<DEPRECIATION> (1,913,934)
<TOTAL-ASSETS> 12,573,808
<CURRENT-LIABILITIES> 396,786
<BONDS> 0
0
0
<COMMON> 11,338
<OTHER-SE> 12,165,684
<TOTAL-LIABILITY-AND-EQUITY> 12,573,808
<SALES> 237,646
<TOTAL-REVENUES> 237,646
<CGS> 9,631
<TOTAL-COSTS> 9,631
<OTHER-EXPENSES> 3,077,637
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,612,946)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,612,946)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,612,946)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
