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 March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________to ___________
COMMISSION FILE NUMBER: 0-22076
ZYDECO ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
76-0404904
(I.R.S. Employer Identification No.)
333 NORTH SAM HOUSTON PARKWAY EAST, SUITE 1160
HOUSTON, TEXAS
(Address of principal executive offices)
77060
(Zip Code)
(713) 820-2481
(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 March 31, 1996, there were 5,807,170 shares of Zydeco Energy, Inc. Common
Stock, $.001 par value, issued and outstanding.
FORM 10-Q
TABLE OF CONTENTS
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
PART II. OTHER INFORMATION AND SIGNATURES
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Page 2 of 17
ZYDECO ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, 1996 December 31, 1995
-------------- -----------------
ASSETS (Unaudited)
Current Assets
Cash and cash equivalents $ 475,287 $ 517,781
Marketable securities 9,082,923 10,938,674
Oil and gas revenue receivable 150,101 67,024
Other receivables 964,019 46,546
Prepaid expenses 25,600 -
----------- -----------
Total Current Assets 10,697,930 11,570,025
----------- -----------
Oil & gas properties, using successful efforts method of accounting
Proved properties 319,182 309,110
Unproved properties - -
Equipment and software, at cost 995,626 789,710
----------- -----------
1,314,808 1,098,820
Less: Accumulated depreciation, depletion and amortization (509,905) (399,541)
----------- -----------
804,903 699,279
Operating bond and other assets 317,187 313,101
----------- -----------
TOTAL ASSETS $11,820,020 $12,582,405
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 366,464 $ 284,219
Accrued liabilities 252,601 355,833
Exploration obligation 3,120,211 3,210,477
Short-term bridge financing notes payable - 225,028
Capital lease obligations-current portion 167,992 160,693
----------- -----------
Total Current Liabilities 3,907,268 4,236,250
----------- -----------
Capital lease obligation 112,700 157,537
----------- -----------
Commitments and contingencies
Stockholders' Equity
Convertible preferred stock, par value $.001 per share; 1,000,000
shares authorized; 781,255 shares issued and outstanding 781 781
Common stock, par value $.001 per share; 50,000,000 shares
authorized; 6,588,425 and 6,562,530 shares issued; 5,807,170
and 5,781,275 shares outstanding, respectively 6,589 6,563
Additional paid-in capital 9,495,027 9,495,053
Accumulated deficit (1,695,093) (1,306,527)
Less Treasury stock, at cost; 781,255 shares (7,252) (7,252)
----------- -----------
Total Stockholders' Equity 7,800,052 8,188,618
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,820,020 $12,582,405
=========== ===========
The accompanying notes are an integral part of these financial statements.
Page 3 of 17
ZYDECO ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months
Ended March 31,
------------------------
1996 1995
----------- ---------
Revenues
Oil and gas production $251,535 $ 21,094
Gain on sales of unproved leases - 50,000
Seismic services - 200,000
Interest income 86,499 17,823
-------- --------
Total Revenues 338,034 288,917
Expenses
Lease operating expenses 6,549 3,126
Exploration and dry hole costs - 259,368
Seismic service costs - 200,000
General and administrative expenses 595,998 185,342
Depreciation, depletion and amortization 110,365 83,220
Interest expense 13,688 30,404
-------- --------
Total Expenses 726,600 761,460
NET LOSS $(388,566) $(472,543)
========= =========
Per Common Share and Share Equivalent --
Weighted average number of common shares
and common share equivalents outstanding 5,799,117 3,708,088
========= =========
Loss per common equivalent share $(0.07) $(0.13)
========= =========
The accompanying notes are an integral part of these financial statements.
Page 4 of 17
ZYDECO ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Convertible
Preferred Stock Common Stock Additional Total
----------------- ----------------- Paid-in Accumulated Treasury Stockholders'
Shares Amount Shares Amount Capital Deficit Stock Equity
------- -------- -------- ------- ---------- ----------- --------- -------------
Balance at December 31, 1994 781,255 $781 4,468,777 $4,469 $2,195,278 $ (132,881) $ - $2,067,647
(Unaudited):
Acquisition of Treasury Stock - - (781,255) - - - (7,252) $ (7,252)
Net Loss - - - - - (472,543) - $ (472,543)
Private issuance of Common Stock - - 76,688 77 (77) - - -
------- ------ --------- ------- ---------- ----------- -------- ----------
Balance at March 31, 1995 781,255 $781 3,764,210 $4,546 $2,195,201 $ (605,424) $(7,252) $1,587,852
------- ------ --------- ------- ---------- ----------- -------- ----------
Balance at December 31, 1995 781,255 $781 5,781,275 $6,563 $9,495,053 $(1,306,527) $(7,252) $8,188,618
(Unaudited):
Net Loss - - - - - (388,566) - (388,566)
Warrants Exercised for Common Stock - - 25,895 26 (26) - - -
------- ------ --------- ------- ---------- ----------- -------- ----------
Balance at March 31, 1996 781,255 $781 5,807,170 $6,589 $9,495,027 $(1,695,093) $(7,252) $7,800,052
======= ====== ========= ======= ========== =========== ======== ==========
The accompanying notes are an integral part of these financial statements.
Page 5 of 17
ZYDECO ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
----------------------
1996 1995
---------- ----------
Cash flows from operating activities:
Net loss $ (388,566) $ (472,543)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization 110,365 83,220
Gain on sales of unproved leases 0 50,000
Exploration and dry hole costs 0 259,368
Changes in operating assets and liabilities
Decrease in marketable securities 1,855,751 -
(Increase) in oil & gas revenue receivable (83,077) (21,094)
(Increase) Decrease in other current assets (6,390) 9,697
Increase (Decrease) in accounts payable 82,245 87,131
Increase in accrued liabilities (103,232) -
Other (4,088) (7,277)
----------- ----------
Net cash provided by (used in) operating activities 1,463,008 (111,498)
Cash flows from investing activities:
Acquisition of oil and gas properties $ (10,072) $ (319,064)
Proceeds from the sale of unproved leases - 50,000
Cost recovery on exploration agreement (936,683) 628,547
Net advance on exploration obligation - 60,298
Expenditures against exploration obligation (90,266) -
Purchase of equipment and software (205,916) (58,356)
Investment in marketable securities - -
----------- ----------
Net cash (used in) investing activities (1,242,937) 361,425
Cash flows from financing activities:
Principal repayments of short-term Bridge Financing $ (225,028) $ -
Principal payments of capital lease obligations (37,537) (105,868)
Common stock proceeds - 26
----------- ----------
Net cash provided by financing activities (262,565) (105,842)
----------- ----------
Net increase (decrease) in cash and cash equivalents $ (42,494) $ 144,085
Cash and cash equivalents at beginning of period 517,781 875,927
----------- ----------
Cash and cash equivalents at end of period $ 475,287 $1,020,012
=========== ==========
The accompanying notes are an integral part of these financial statements.
Page 6 of 17
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. PREPARATION OF INTERIM FINANCIAL STATEMENTS.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with instructions to Form 10-Q and, therefore, do
not include all disclosures required by generally accepted accounting
principles. However, in the opinion of management, these statements
include all adjustments, which are of a normal recurring nature, necessary
to present fairly the financial position at March 31, 1996 and March 31,
1995 and the results of operations and changes in cash flows for the three
months ended March 31, 1996 and 1995, respectively. These financial
statements should be read in conjunction with the consolidated financial
statements and notes to consolidated financial statements included in the
Company's annual report on Form 10-K for the year ended December 31, 1995.
2. ORGANIZATION AND BUSINESS OPERATIONS.
Zydeco Energy, Inc. was incorporated in Delaware in June 1993 as a "special
purpose acquisition corporation" under the name TN Energy Services
Acquisition Corp. ("TN Energy"), for the purpose of raising funds and
acquiring an operating business engaged in the energy services industry.
Other than its efforts to acquire an energy services business, TN Energy
did not engage in any business activities prior to December 1995. On
December 20, 1995, the Company acquired all the outstanding common stock
and preferred stock of Zydeco Exploration, Inc. ("Zydeco") pursuant to a
merger and changed its name to Zydeco Energy, Inc. As used herein, unless
the context indicates otherwise, the term "Company" refers to Zydeco
Energy, Inc. and Zydeco, its wholly-owned subsidiary. See "Note 4--Reverse
Acquisition by Zydeco".
For accounting purposes the acquisition has been treated as a
recapitalization of Zydeco with Zydeco as the acquiror (reverse
acquisition). Accordingly, the historical financial statements prior to
December 20, 1995 are those of Zydeco. No pro forma information giving
earlier effect to the transaction has been presented since the transaction
is accounted for as a recapitalization. The consolidated financial
statements at December 31, 1995 and for all periods and dates subsequent to
such date include the accounts of the Company and Zydeco Exploration, Inc.,
the wholly-owned subsidiary of the Company. All significant intercompany
transactions have been eliminated in consolidation.
The Company is engaged in acquiring leases, drilling, and producing
reserves from those properties utilizing focused geologic concepts and
advanced 3D seismic technology. In addition to utilizing advanced 3D
seismic technology to evaluate and analyze prospects for the Company, the
Company performs advanced geophysical seismic analysis services for third
parties. The Company's current focus is to explore for oil and gas in the
Louisiana Transition Zone, the region of land and shallow waters within a
few miles of the shoreline.
The Company's future operations are dependent upon a variety of factors,
including, but not limited to, successful application of 3D seismic
evaluation and interpretation expertise in developing oil and gas
prospects, profitable exploitation of future prospects, and the Company's
ability to access capital sources necessary for continued growth.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements 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.
Page 7 of 17
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(UNAUDITED)
3. FORTUNE EXPLORATION AGREEMENT.
In February 1995, Zydeco entered into an Exploration Agreement (the
"Fortune Agreement") with a predecessor of Fortune Petroleum Corporation
("Fortune"). Under the Fortune Agreement, Fortune advanced $4.8 million in
a series of payments to purchase a 50% interest in certain potential
prospects ("Prospects") owned by the Company and fund the initial
development of the potential Prospects. Pursuant to the Fortune Agreement,
$628,547 represented a reimbursement of certain of the costs previously
incurred by the Company on the potential Prospects. The remaining
$4,171,453 is designated to fund all third-party costs of preparing
potential Prospects for evaluation, including lease acquisition, lease
maintenance, and the acquisition, processing and interpretation of seismic
data. Thereafter, the Fortune Agreement provides that the parties shall
bear any additional costs equally. At March 31, 1996 and December 31,
1995, the portion not yet expended is recorded as an exploration obligation
and classified as a current liability. Future expenditures incurred on
Prospect leads will be charged against the obligation. No expenditures
incurred pursuant to the Fortune Agreement will be capitalized by the
Company until the parties begin sharing equally in such costs, if any. At
March 31, 1996, inception to date expenditures under the Fortune Agreement
aggregated $1,831,159, net of income from prospect sales and interest
earned of $151,370.
4. 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 has been treated as a reverse acquisition for accounting
purposes with Zydeco as the acquiror and TN Energy as the acquiree based
upon Zydeco's 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 effect of 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 was $7,971,255
and, accordingly, the common shares of TN Energy on such date have been
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.
Page 8 of 17
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(UNAUDITED)
5. INDEBTEDNESS.
Long-term Obligations. Balances of the Company's long-term obligations at
March 31, 1996 and December 31, 1995 consist of the following:
March 31, 1996 December 31, 1995
------------------- -------------------
Current Long-term Current Long-term
-------- --------- -------- ---------
Capital Lease -
Computer Hardware & Software $ 167,992 $112,700 $160,693 $ 157,537
Bridge Financing. In connection with the Merger, TN Energy entered into a
financing arrangement ("Bridge Financing") and ultimately borrowed $225,028
from three investors ("Bridge Lenders") to finance TN Energy's share of
legal, accounting and printing costs of the Merger. The notes, including
accrued interest at 10%, were repaid in January 1996. In December 1995, in
connection with arranging the Bridge Financing, the Company issued to the
Bridge Lenders, five-year warrants to purchase, at a purchase price of
$5.33 per share, 225,028 shares of Common Stock.
Options to purchase 225,000 outstanding shares of the Company were granted
in December 1995 by certain stockholders of the Company. The options were
granted by the stockholders for 150,000 shares to the Bridge Lenders as an
inducement to make the Bridge Financing and for 75,000 shares to other
Principals in connection with discussions with TN Energy that resulted in
the introduction of Zydeco. The aggregate exercise price for all the
options granted was approximately $30. The cost of such options was
reflected as a financing expense and capital contribution by the Company
prior to the Merger.
6. CONVERTIBLE PREFERRED STOCK AND COMMON STOCK.
During the three month period ended March 31, 1995, the Company issued
76,688 common shares for nominal consideration. In connection with the
Merger, 1,875,000 shares of Common Stock were effectively issued to the
shareholders of TN Energy with entries to common stock and additional paid-
in capital for $7,971,525, the net assets of TN Energy on the date of the
Merger (comprised primarily of cash and marketable securities).
Outstanding shares of convertible preferred stock were issued in a
$2,500,000 private placement offering completed by Zydeco in December 1994.
Convertible Preferred Stock. Shares of Convertible Preferred Stock, par
value $.001, are entitled to one vote (non-voting prior to December 20,
1995) together with the Company's Common Stock on all matters as a single
class. No dividends accrue on Convertible Preferred Stock. The preference
in liquidation of such shares is $3.20 per share. The Convertible
Preferred Stock is subject to a conversion rate of one share of Common
Stock for each share of Convertible Preferred Stock upon the occurrence of
an "Automatic Conversion Triggering Event", which as defined, occurs if the
Company undertakes a public offering of shares of Common Stock for $5
million or more, and the price per share paid in such offering is $7.00 or
more.
Additionally, the Convertible Preferred Stock may be converted, at the
option of the Company, upon the occurrence of an "Optional Conversion
Triggering Event", which as defined, occurs if the Closing Price for the
Common Stock, as reported on a national securities exchange or certain
other trading facilities shall be $6.50 or more for a period of 30
consecutive trading days. The conversion rate is subject to adjustment in
certain circumstances.
Page 9 of 17
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(UNAUDITED)
Warrants. In connection with the private placement offering and subject
to certain terms and conditions, Zydeco issued or is obligated to issue up
to 72,268 Common Stock purchase warrants to the underwriters, each of which
entitles the holder to purchase one share of Common Stock at an exercise
price of $1.60 per share at any time during the five-year period commencing
from the Closing Date, December 2, 1994. The initial value of such
warrants issued in connection with the private placement was immaterial.
During the three months ended March 31, 1996, warrants were exercised for
25,895 shares of Common Stock, net of 9,575 shares tendered upon exercise.
On December 21, 1993, the Company sold 1,500,000 units ("Units") in its
initial public offering ("Public Offering"). Each Unit consists of one
share of the Company's Common Stock, $.001 par value, and two Redeemable
Common Stock Purchase Warrants ("Public Warrants"). Each Public Warrant
entitles the holder to purchase, during the period commencing on the later
of the consummation by the Company of a Business Combination or one year
from the effective date of the Public Offering and ending seven years from
the effective date of the Public Offering, from the Company one share of
Common Stock at an exercise price of $5.50. The Public Warrants will be
redeemable at a price of $.01 per warrant upon 30 days' notice at any time,
only in the event that the last sale price of the Common Stock is at least
$10.00 per share for 20 consecutive trading days ending on the third day
prior to date on which notice of redemption is given.
The Company also issued, in connection with the Public Offering, an
aggregate of $150,000 of promissory notes to certain accredited investors.
These notes bore interest at the rate of 10% per annum and were repaid on
the consummation of the Public Offering with accrued interest thereon. In
addition, the investors were issued 300,000 warrants (valued at a nominal
amount) which are identical to the Public Warrants discussed above.
On December 21, 1993, the Company sold to the underwriters in the Public
Offering and their designees, for nominal consideration, the right to
purchase up to 150,000 units ("Unit Purchase Option"). The underwriters'
units issuable upon the exercise of the Unit Purchase Option are identical
to the Units discussed above except that the Public Warrants contained
therein expire five years from the effective date of the Public Offering
and cannot be redeemed. At March 31, 1996, no Public Warrants or Unit
Purchase Options had been exercised.
Treasury Stock. Treasury stock is recorded at cost and represents the
value of 781,255 common shares purchased in January 1995 from an officer of
the Company in consideration for an overriding royalty interest in certain
properties in which the Company had an interest at the time of the treasury
stock purchase. The Company had no proved reserves at the time of the
transaction. The cost of treasury stock of $7,252 was determined on the
basis of a pro-rata allocation of the Company's accumulated cost in
unproved properties at the time of the transaction in comparison to the net
revenue interest transferred.
7. RELATED-PARTY TRANSACTIONS.
In September 1995, the Company engaged the services of a law firm,
including the services of a partner in the firm who is a relative of a
Zydeco officer. The Company incurred expenses of approximately $119,000,
primarily related to the Merger, to this firm during 1995 and approximately
$21,980 during the three months ended March 31, 1996.
The Company entered into an exchange agreement, dated January 1, 1995, with
an entity where certain officers and/or directors are officers and/or
directors of the Company, and agreed to provide 3D seismic
analysis services in exchange for a license to such data. The value of
this exchange was determined by the parties to be $200,000. As this
exchange agreement represents an exchange of dissimilar goods, income
and expense for 1995 reflects the gross value of seismic service revenues
and related data costs associated with this transaction for the three
months ended March 31, 1995.
Page 10 of 17
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(UNAUDITED)
Effective January 1, 1995, the Company assumed an obligation for office
facilities under an operating lease agreement, expiring in March 1997, from
an entity where certain officers and/or directors are officers and/or
directors of the Company. The agreement contains typical renewal options
and escalation clauses, and required no deposit or prepayment at
assumption. The lease agreement provides for a base monthly payment of
$3,122 plus a defined percentage of the landlord's operating expenses which
are subject to adjustment. Rental expense related to this lease was $9,861
and $9,735 which is included in general and administrative expenses for the
three months ended March 31, 1996 and 1995, respectively.
8. STOCK OPTION PLAN.
On January 4, 1996 the Board of Directors approved and adopted, subject to
stockholder approval, the Zydeco Energy, Inc. 1996 Equity Incentive Plan.
The Plan authorizes the grant of various stock and stock-related awards to
key management and other personnel on the basis of individual and corporate
performance. The Plan provides for the granting of stock options to
purchase an aggregate of 350,000 shares of Common Stock, which are reserved
for such purpose. During the three months ended March 31, 1996, options to
purchase 175,000 shares were granted to employees at exercise prices
ranging between $6 and $7 per share. The grants are subject to stockholder
approval of the Plan, which approval is expected to be sought at the
Company's 1996 Annual Meeting of Stockholders. At March 31, 1996, no such
options had been exercised. 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, subject to
stockholder approval, the 1996 Non-employee Director Stock Option Plan and
granted an aggregate of 45,000 shares of Common Stock to three non-employee
directors. The options granted become exercisable, one third on April 1,
1997 and one third each of the next two succeeding years. The options were
granted at $7, the average of the high and low sales price of the Company's
Common Stock on the date of grant. The grants are subject to stockholder
approval of the Plan, which approval is expected to be sought at the
Company's 1996 Annual Meeting of Stockholders. At March 31, 1996, no such
options had been exercised. The options terminate no later than ten years
after the date of grant.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 123, a new standard for
accounting for stock-based compensation. This standard established a fair-
value based method of accounting for stock options awarded after December
31, 1995 and encourages companies to adopt SFAS No. 123 in place of the
existing accounting method, which requires expense recognition only in
situations where stock compensation plans award intrinsic value to
recipients at the date of grant. Companies that do not follow SFAS No. 123
for accounting purposes must make annual pro forma disclosures of its
effects. Adoption of the standard is required in 1996, although earlier
implementation is permitted. The Company does not intend to adopt SFAS No.
123 for accounting purposes; however, it will make annual pro forma
disclosures of its effects commencing in 1996.
9. WEST CAMERON SEISMIC PROJECT.
On February 14, 1996, the Company purchased an exclusive seismic option
permit from the state of Louisiana covering approximately 51,000 acres of
state waters in western Cameron Parish, Louisiana. The Company paid
$783,753 for the seismic permit and is required to provide a 3D survey over
the area within 18 months. Under the Agreement with the state of
Louisiana, the Company is obligated to deliver a 3D seismic survey over the
state acreage included in the permit or pay a penalty equivalent to the
initial payment for the permit and/or unspecified damages.
In April 1996, the Company executed an Exploration Agreement with Cheniere
Energy Operating Co., Inc. ("Cheniere", a company formed by and to be
funded by a group of private investors) covering an area of land and waters
in western Cameron Parish, Louisiana, including the area covered by the
seismic option
Page 11 of 17
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(UNAUDITED)
permit described above ("West Cameron Seismic Project"). The Agreement, as
amended, provides that Cheniere may receive up to a 50% interest in the
West Cameron Seismic Project, conditioned upon receipt of $3 million cash
from Cheniere before June 14, 1996. At March 31, 1996, the Company had
incurred costs of approximately $937,000 in connection with the Project,
which are to be reimbursed upon the initial funding, and, accordingly, such
costs have been classified as a receivable from Cheniere. The agreement
provides for aggregate payments to Zydeco of $13.5 million to fund the
estimated costs of seismic acquisition, including the purchase of seismic
rights or lease options on the related onshore acreage of the Project, and
to complete data acquisition and processing of a 3-D seismic survey of the
onshore and offshore areas. The data will be used to identify seismically
controlled drilling prospects, if any, within the Project area. The Company
expects to begin seismic field work in June 1996.
On February 7, 1996, the Company entered into a technology agreement with
an individual to develop, test and evaluate certain proprietary technology
related to 3D seismic processing and imaging. The Company committed to
providing the test environment including personnel, computing hardware,
software and certain data in exchange for an option to receive a license to
use the resulting technology in certain exclusive areas of the Gulf of
Mexico. The Company completed its testing in April 1996 and expects to
exercise its option in May 1996. The Company's intends to utilize the
processing technology in the project described above. The license provides
for annual royalty payments, at the option of the Company, upon exercise of
the option.
Page 12 of 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company was incorporated in June 1993 as a "special purpose acquisition
corporation" for the purpose of raising funds and acquiring an operating
business engaged in the energy services industry. In December 1995 the Company
acquired Zydeco Exploration, Inc. ("Zydeco") by merger (the "Merger"). Other
than its efforts to acquire an energy services business, the Company did not
engage in any business activities prior to December 1995. The Company, through
its operating subsidiary, Zydeco, is now active as an independent oil and gas
exploration company. The Company's future operations will be dependent upon a
variety of factors, including successful application of 3D seismic evaluation
and interpretation expertise to develop potential drilling prospects, profitable
exploration and exploitation of such prospects, the ability to joint venture
with third parties utilizing the Company's 3D seismic analysis and experience
and the Company's ability to access capital sources necessary for continued
growth. The Company's revenues, profitability and future rate of growth will be
substantially dependent upon prevailing prices for natural gas, oil and
condensate, which are dependent upon numerous factors beyond the Company's
control.
The Company has been acquiring, and will continue to acquire, oil and gas
leases in the Louisiana Transition Zone and the Timbalier Trench. From such
lease positions, the Company is developing and intends to develop 3D seismic
survey programs or obtain existing non-exclusive 3D seismic data for analysis.
The Company intends to analyze such data with the goal of developing a number of
drilling prospects. Prior to drilling such prospects, the Company will likely
seek participation in such prospects from industry partners or by including as
drilling participants oil and gas companies owning working interests in
adjoining or nearby acreage. There is no assurance, however, that the Company
will be able to generate any particular number of drilling prospects, or that
the Company will achieve a particular success rate in finding paying quantities
of oil and gas. The Company also intends to offer its technical expertise in 3D
seismic analysis and interpretation to other oil and gas companies in
negotiating joint venture or property interests.
On December 20, 1995, TN Energy Acquisition, the Company's wholly-owned
subsidiary, merged with and into Zydeco. For accounting purposes, the Merger
was treated as a recapitalization of Zydeco with Zydeco as the acquiror, or a
reverse acquisition, based upon Zydeco's officers and directors assuming
management control of the resulting entity and Zydeco Exploration's stockholders
receiving value and ownership interest exceeding that received by the TN Energy
stockholders. Under this accounting treatment, the historical financial
statements of Zydeco prior to the Merger have become those of the Company.
On February 7, 1996, the Company entered into a technology agreement with
an individual to develop, test and evaluate certain proprietary technology
related to 3D seismic processing and imaging ("Technology License Agreement").
The Company committed to providing the test environment including personnel,
computing hardware, software and certain data in exchange for an option to
receive a license to use the resulting technology worldwide and exclusively in
certain areas of the Gulf of Mexico. The Company completed its testing in April
1996 and expects to exercise its option in May 1996. The Company's intends to
utilize the processing technology in the project described below. The license
provides for annual royalty payments, at the option of the Company, upon
exercise of the option.
On February 14, 1996, the Company purchased an exclusive seismic option
permit from the state of Louisiana covering approximately 51,000 acres of state
waters in western Cameron Parish, Louisiana. The Company paid $783,753 for the
seismic permit and is required to provide a 3D survey over the area within 18
months. On April 4, 1996, the Company executed an Exploration Agreement with
Cheniere Energy Operating Co., Inc. ("Cheniere", a company formed by and to be
funded by a group of private investors) covering an area of land and waters in
western Cameron Parish, Louisiana, including the area covered by the seismic
option permit described above ("West Cameron Seismic Project"). Cheniere's
interest in the Project is conditioned upon receipt of $3 million cash from
Cheniere by June 14, 1996. The agreement, as amended, provides for aggregate
payments to Zydeco of $13.5 million to fund the estimated costs of seismic
acquisition, including the purchase of
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(Continued)
seismic rights or lease options on the related onshore acreage of the Project,
and to complete data acquisition and processing of a 3-D seismic survey of the
onshore and offshore areas. The data will be used to identify seismically
controlled drilling prospects within the Project area. The Company expects to
begin seismic field work in June 1996.
RESULTS OF OPERATIONS- MARCH 31, 1996 COMPARED TO MARCH 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, and the purchase of an interest in a gas
well which commenced production in January 1995, the farmout of two leases (one
of which resulted in commercial production commencing in December 1995) and a
one-eighth participation in the drilling of an exploratory well, which resulted
in a dry hole. Due to its limited operations and because Zydeco had completed
only one full fiscal year prior to 1996, analysis of comparable interim periods
prior to 1995 is not meaningful.
For the first three months of 1996, operations resulted in a net loss of
$389,566 ($.07 per share) compared to a net loss of $472,543 for the comparable
period in 1995. The decrease in net loss of $83,977 is comprised of increased
revenue of $49,117 and decreased expenses of $34,860. The loss per share also
decreased as a result of the additional dilution from shares outstanding which
increased due to the shares issued in the Merger. First quarter revenues in
1996 represented an increase of $99,117 when compared to the same quarter in
1995. Oil and gas sales in 1996 increased $230,441 primarily due to the
commencement of new production in December 1995 from a well completed by Bois d'
Arc Corporation in which the Company has an overriding royalty interest of 4.33%
(before payout). In first quarter 1996, the Company's oil and gas revenue
represented production from two wells of approximately 3,500 barrels of oil and
74,300 mcf of natural gas which was sold for prices averaging approximately
$19.64 per barrel and $2.47 per mcf, respectively. This compared to first
quarter 1995 production from one well of approximately 120 barrels and 12,800
mcf at prices averaging $17.60 per barrel and $1.48 per mcf, respectively.
Offsetting the increased oil and gas production were decreases in revenue from
seismic services ($200,000) and sales of unproved property interests as compared
to the first quarter of 1995. Interest income increased $68,676 as a result of
the increase in cash of approximately $7.3 million resulting from the Merger in
December 1995. Although total expenses decreased in the first quarter in 1996
when compared to first quarter 1995, the components of expense changed
significantly as a result of the different mix of operating activities between
the two quarters. Exploration costs decreased in 1996 as a result of the
absence of drilling activities in the first quarter. Seismic services costs
represented a single transaction occurring in 1995 and thus accounts for the
decrease in 1996. General and administrative expense increased approximately
$411,000 primarily as a result of increased personnel costs ($219,000) due to
the addition of personnel and increased legal and accounting costs ($117,000)
following the Merger. Depletion, depreciation and amortization increased
$27,145 primarily due to increased oil and gas production and additions of
hardware and software used in connection with the Company's seismic processing
activities.
LIQUIDITY AND CAPITAL RESOURCES
The Company has generated funds from a public offering, private equity
offering, company operations and cash payments under the Fortune Agreement.
Sources of funds include the December 1993 public offering of the Company's
Common Stock and Warrants which raised net proceeds, after offering costs, of
approximately $7.9 million; the December 1994 offering of the convertible
preferred stock by Zydeco Energy with proceeds to the Company, after offering
costs, of approximately $2.2 million, and cash payments of $4.8 million advanced
in 1995 under the Fortune Agreement. Under the Fortune Agreement, approximately
$629,000 represented a direct reimbursement of lease acquisition and seismic
expenses previously incurred by the Company. The remainder received from
Fortune is required to be used by the Company for leasehold acquisitions and
related seismic development on leases in which Fortune has obtained an interest.
The Cheniere Exploration Agreement executed in April 1996, provides for funding
of $13.5 million of Project expenditures including $937,000 of costs incurred
by
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(Continued)
the Company during the first quarter of 1996 which are to be reimbursed upon the
initial funding. Other sources of capital for the Company include lease
financing from computer hardware equipment and software vendors. The Company
expects that a significant portion of any additional computer equipment and
software acquired by the Company could be financed under vendor lease financing
arrangements.
The Company does not maintain any credit facilities. The Company may in the
future explore the possibility of obtaining such a facility in the event the
Company increases oil and gas production through the successful completion of
oil and gas wells drilled by the Company or as it increases its seismic services
business.
The Company expects that capital needs for 1996 will be satisfied through
(i) cash on hand (including cash available from liquidation of marketable
securities), (ii) cash made available under the Fortune Agreement, and (iii)
cash to be made available under the Cheniere Exploration Agreement. Additional
capital needs may be met through additional issuances of equity securities,
including the exercise of outstanding warrants and options of the Company.
The Company may use its cash for any general corporate purposes, except for
the funds advanced by Fortune which are committed for geophysical exploration of
the jointly owned leases and additional lease acquisitions under the Fortune
Agreement.
Because of rapidly changing available technology and the uncertainties
associated with the identification of specific exploration prospects, and as a
result of the time and effort that was required to accomplish the Merger, the
Company only began to develop capital expenditure budgets in early 1996. The
Company is in the process of adjusting its activities to a level commensurate
with the amount of capital available to it. Although not complete, the Company
is currently estimating the costs of the projects it has undertaken; especially
the costs expected to be incurred in connection with the seismic project in
western Cameron Parish which was undertaken in February 1996 (the "West Cameron
Seismic Project"). The Company currently estimates its capital expenditures at
approximately $4.6 million, including $1.9 million for exploration and
development, $80,000 for capital costs associated with the Technology License
Agreement, $2.0 million for the acquisition of oil and gas properties, $442,000
related to the purchase of computer equipment and software, and $130,000 for
office relocation and improvements. In connection with the West Cameron Seismic
Project, the Company's preliminary estimates of costs to complete the two-year
project are between $12 million and $15 million. In addition to the Cheniere
Exploration Agreement, the Company is currently negotiating with other potential
partners which may be required to complete the West Cameron Seismic Project.
Other significant additional capital expenditures may include the acquisition of
additional oil and gas leases, the drilling of prospects identified on the
Company's current portfolio of oil and gas leases, the acquisition of interests
in producing wells and other corporate investment opportunities determined by
the board to be in the interest of the Company. The amount and timing of these
expenditures will be dependent upon numerous factors, including the availability
of seismic data, the number and type of drilling prospects identified as a
result of the Company's 3D seismic analysis, the terms under which industry
partners may participate in the Company prospects and the cost of drilling and
completion of wells in the Louisiana Transition Zone and the Timbalier Trench.
The Company currently maintains a required $300,000 bond in order to hold
its present federal oil and gas leases. This bond is collaterlized by a United
States Treasury Note. In the event the Company determines to act as operator on
federal offshore lease or is otherwise required to increase its bonding by
federal or state authorities, such additional bonding may require significant
amounts of capital as collateral.
Page 15 of 17
PART II- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -------------
10.1 Option Agreement dated February 7, 1996 between the Company
and Norman Neidell concerning certain wave field imaging
Technology.
(b) Reports on Form 8-K
1. January 17, 1996- Item 4- Changes in Registrant's
Certifying Accountant-
The registrant reported that Arthur Andersen LLP had
succeeded BDO Seidman, LLP as its independent public
accountants following the merger of the registrant with
Zydeco Exploration, Inc., effective December 20, 1995.
Arthur Andersen LLP had acted as independent public
accountants of Zydeco Exploration, Inc. prior to the merger.
The Company reported no disagreements with BDO Seidman, LLP.
Page 16 of 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZYDECO ENERGY, INC.
/s/ Sam B. Myers, Jr.
----------------------------------------------
Sam B. Myers, Jr., Chief Executive Officer and
President (Principal Executive Officer)
/s/ W. Kyle Willis
----------------------------------------------
W. Kyle Willis, Vice President and Treasurer
(Principal Financial Officer)
Dated: May 15, 1996
Page 17 of 17