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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________to ___________
COMMISSION FILE NUMBER: 0-22076
ZYDECO ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
76-0404904
(I.R.S. Employer Identification No.)
1710 TWO ALLEN CENTER
1200 SMITH STREET
HOUSTON, TEXAS
(Address of principal executive offices)
77002-4312
(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 June 30, 1996, there were 5,812,396 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
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
ASSETS (UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents $ 9,026,012 $ 517,781
Marketable securities 1,713,925 10,938,674
Oil and gas revenue receivable 185,722 67,024
Other receivables 70,847 46,546
Prepaid expenses 52,667 --
----------- -----------
TOTAL CURRENT ASSETS 11,049,173 11,570,025
----------- -----------
Oil & gas properties, using successful efforts method of
accounting
Proved properties 308,036 309,110
Unproved properties 303,540 --
Equipment and software, at cost 1,508,324 789,710
----------- -----------
2,119,900 1,098,820
Less: Accumulated depreciation, depletion and amortization (661,269) (399,541)
----------- -----------
1,458,631 699,279
Operating bond and other assets 361,627 313,101
----------- -----------
TOTAL ASSETS $12,869,431 $12,582,405
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 267,712 $ 284,219
Accrued liabilities 241,347 355,833
Exploration obligations 4,513,895 3,210,477
Short-term bridge financing notes payable -- 225,028
Capital lease obligation-current portion 175,624 160,693
----------- -----------
TOTAL CURRENT LIABILITIES 5,198,578 4,236,250
----------- -----------
CAPITAL LEASE OBLIGATION 65,827 157,537
----------- -----------
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; 6,593,651 and 6,562,530 shares issued; 5,812,396
and 5,781,275 shares outstanding, respectively 6,594 6,563
Additional paid-in capital 9,503,943 9,495,053
Accumulated deficit (1,899,040) (1,306,527)
Less-Treasury stock, at cost; 781,255 shares (7,252) (7,252)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 7,605,026 8,188,618
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,869,431 $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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1996 1995 1996 1995
------------ ------------ ------------ ----------
REVENUES
Oil and gas production $ 305,211 $ 35,375 $ 556,746 $ 56,469
Gain on sales of unproved leases 16,319 67,517 16,319 117,517
Seismic services 31,500 100,000 31,500 300,000
Interest income 82,610 10,188 169,109 28,011
---------- ---------- ---------- ----------
TOTAL REVENUES 435,640 213,080 773,674 501,997
EXPENSES
Lease operating expenses 4,684 2,242 11,233 5,368
Exploration and dry hole costs 38,472 -- 38,472 259,368
Seismic service costs -- -- -- 200,000
General and administrative expenses 433,084 226,036 1,029,082 411,378
Depreciation, depletion and amortization 151,364 98,212 261,729 181,432
Interest expense 11,983 6,808 25,671 37,212
---------- ---------- ---------- ----------
TOTAL EXPENSES 639,587 333,298 1,366,187 1,094,758
NET LOSS $ (203,947) $ (120,218) $ (592,513) $ (592,761)
========== ========== ========== ==========
PER COMMON SHARE AND SHARE EQUIVALENT--
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON
SHARE EQUIVALENTS OUTSTANDING 5,810,453 3,986,660 5,804,929 3,986,660
========== ========== ========== ==========
LOSS PER COMMON EQUIVALENT SHARE $ (0.04) $ (0.03) $ (0.10) $ (0.15)
========== ========== ========== ==========
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
------------------ ------------------ 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 -- -- -- -- -- (592,761) -- $ (592,761)
Private issuance of Common Stock -- -- 140,001 140 (96) -- -- $ 44
------- ---- --------- ------ ---------- ----------- ------- ----------
BALANCE AT JUNE 30, 1995 781,255 $781 3,827,523 $4,609 $2,195,182 $ (725,642) $(7,252) $1,467,678
======= ==== ========= ====== ========== =========== ======= ==========
BALANCE AT DECEMBER 31, 1995 781,255 $781 5,781,275 $6,563 $9,495,053 $(1,306,527) $(7,252) $8,188,168
(UNAUDITED):
Net Loss -- -- -- -- -- (592,513) -- (592,513)
Warrants exercised for Common
Stock -- -- 31,154 31 8,890 -- -- 8,921
Adjustment for fractional shares
paid in cash (33) --
------- ---- --------- ------ ---------- ----------- ------- ----------
BALANCE AT JUNE 30, 1996 781,255 $781 5,812,396 $6,594 $9,503,943 $(1,899,040) $(7,252) $7,604,026
======= ==== ========= ====== ========== =========== ======= ==========
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)
SIX MONTHS ENDED JUNE 30,
--------------------------
1996 1995
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (592,512) $ (592,761)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization 261,729 181,432
Gain on sales of unproved leases (16,319) (117,517)
Exploration and dry hole costs 38,472 259,368
Changes in operating assets and liabilities
(Increase) in oil & gas revenue receivable (118,698) (24,000)
(Increase) Decrease in other current assets (76,968) (21,154)
Increase (Decrease) in accounts payable (16,507) (74,004)
Increase in accrued liabilities (114,486) 105,236
Other (38,442) --
----------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (673,731) (283,400)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of oil and gas properties $ (302,466) $ (302,198)
Proceeds from the sale of unproved leases 16,319 150,000
Cost recovery on exploration agreement -- 698,675
Net advance on exploration obligation 3,000,000 1,603,062
Expenditures against exploration obligation (1,696,582) --
Purchase of equipment and software (718,614) (209,289)
Other capital expenditures (48,527) --
Proceeds from sale of marketable securities 9,224,749 --
Investment in marketable securities -- --
----------- ----------
NET CASH (USED IN) INVESTING ACTIVITIES 9,474,879 1,940,250
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments of short-term Bridge Financing $ (225,028) $ --
Principal payments of capital lease obligations (76,779) --
Common stock proceeds 8,890 44
---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (292,917) 44
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $8,508,231 $1,656,894
Cash and cash equivalents at beginning of period 517,781 875,927
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $9,026,012 $2,532,821
========== ==========
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 June 30, 1996 and June 30, 1995
and the results of operations and changes in cash flows for the six months
ended June 30, 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.
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
Page 7 of 17
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(UNAUDITED)
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.
3. PROPERTY ADDITIONS.
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 seismic 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. In August, the
Company commenced operations for a 3D survey project, including the area
covered by the permit.
In February 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 exercised its
option in May 1996 and paid the first year's royalty fee of $40,000. The
Company intends to utilize the processing technology in the project
described above. The license provides for annual royalty payments, at the
option of the Company.
In June 1996, the Company purchased all the working interest in certain
unproved properties consisting of five non-producing offshore oil and gas
leases from the Myers Affiliates (see "Note 7 ---Related Party
Transactions") for $302,464. In May 1996, the Company purchased certain
proprietary geologic and geophysical data and computer equipment from a
Myers Affiliate for $145,490.
4. 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 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 June 30, 1996, inception to date expenditures under the Fortune
Agreement aggregated approximately $2,010,000, net of income from prospect
sales and interest earned of $185,029.
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, including the area covered by the
seismic option permit described above ("West Cameron Seismic Project").
The Cheniere Agreement, as amended, provides that Cheniere may receive up
to a 50% interest in the West Cameron Seismic Project, based on Cheniere
completing its funding of the entire $13.5 million. The Cheniere Agreement
provides that Cheniere may discontinue funding and
Page 8 of 17
ZYDECO ENERYG, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(UNAUDITED)
its interest be reduced pro rata based on Projects total cost. At June 30,
1996, the Company had incurred costs of approximately $1,696,582 in
connection with the Project. 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 3D seismic survey of the onshore and
offshore areas. At June 30, 1996, Cheniere had advanced $3 million under
the Cheniere Agreement, as amended, with payments aggregating $3 million,
$4 million and $2.5 million due during the three months ended September 30,
1996, December 31, 1996 and March 31, 1997, respectively. The Company began
onshore leasing and seismic permitting in February and commenced seismic
operations in August 1996.
5. INDEBTEDNESS.
Long-term Obligations. Balances of the Company's long-term obligations at
June 30, 1996 and December 31, 1995 consist of the following:
JUNE 30, 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.
Also, in connection with the Bridge Financing, options to purchase 225,000
outstanding shares of the Company were granted in December 1995 by certain
stockholders of the Company from shares owned by them. 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 six month period ended June 30, 1995, the Company issued 141,001
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). The
outstanding shares of convertible preferred stock were issued in a
$2,500,000 private placement offering completed by Zydeco in December 1994.
Conversion of Preferred Stock. Shares of Convertible Preferred Stock, par
value $.001, were subject to conversion at 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
Page 9 of 17
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
Stock exceeded the minimum price for the required period in June 1996, and,
accordingly, the Company exercised its option to convert all shares of
Preferred Stock to Common Stock effective July 15, 1996.
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 six months ended June 30, 1996, warrants were exercised for
29,818 shares of Common Stock, net of 9,575 warrant 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 June 30, 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 June 1996, the Company 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 President and Chief Executive Officer,
Mr. Sam B. Myers, Jr. The Company paid $302,464 (represented by Myers as
the accumulated cost of the Myers Affiliates in the property interests) for
the leases which are located in Bay Marchand Blocks #4 and #5 in state
waters offshore Louisiana. The leases are subject to 7.5% backin after
payout by the Myers Affiliates. The Myers
Page 10 of 17
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
Affiliates also own an aggregate of between 4% and 8% overriding royalty
interest in these leases, which interests were owned by the Myers
Affiliates prior to this transaction with the Company. In addition, two
Vice Presidents and an employee of the Company own an aggregate of
approximately 2.2% net revenue interest under the leases. 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. Each of the above transactions was approved by the
Company's Board of Directors, with Mr. Myers abstaining.
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 an
officer and director of the Company. The Company incurred expenses of
approximately $99,600 to this firm during six months ended June 30, 1996.
Zydeco 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 reflects the
gross value of seismic service revenues and related data costs associated
with this transaction for the six months ended June 30, 1995.
Effective January 1, 1995, Zydeco 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 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 $24,000. Rental expense related to this lease was
$9,861 and $9,735 which is included in general and administrative expenses
for the six months ended June 30, 1996 and 1995, respectively.
8. STOCK OPTION PLANS.
Common Stock was issued in the amount of 1,562 shares during the six months
ended June 30, 1996 in connection with stock options exercised under the
Company's 1995 Employee Stock Option Plan. Shares exercisable under this
Plan aggregated 250,001 shares and no shares at June 30, 1996 and 1995,
respectively, with an exercise price of $1.60 per share.
On January 4, 1996 the Board of Directors approved and adopted 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 six months ended June 30, 1996, options to purchase 175,000
shares were granted to employees at exercise prices ranging between $6 and
$7 per share. At June 30, 1996, no options had been exercised or were
exercisable under this Plan. Such options are non-compensatory, vest over
a four-year period and terminate no later than ten years after the date of
grant unless otherwise determined by the Compensation Committee.
Also on January 4, 1996, the Board of Directors adopted the 1996 Non-
employee Director Stock Option Plan 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. At June 30, 1996, no options had been exercised or were
exercised under the Plan. The options terminate no later than ten years
after the date of grant. Both of the above plans were approved by the
Company's shareholders at the Annual Meeting on July 9, 1996.
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
Page 11 of 17
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
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. SUBSEQUENT EVENT.
In August 1996, the Company, with the approval of the Board of Directors,
purchased non-producing leasehold interests and agreed to participate in
the drilling of an exploratory well owned by a Myers Affiliate located in
Timbalier Bay in state waters offshore Louisiana. The Company paid $187,500
for a 37.5% working interest in the drilling prospect and advanced
estimated dry-hole drilling and completion costs of $924,242. The Myers
Affiliates own 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 are
participating in the drilling and completion of 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. Two of the Company's Vice Presidents
also own approximately 2.2% net revenue interest in the prospect leases.
Drilling of the well commenced in August 1996.
In June 1996, the Company exercised its option to convert all outstanding
shares of Convertible Preferred Stock to Common Stock effective July 15,
1996 (See "Note 6--Convertible Preferred Stock and Common Stock").
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 operations are subject to 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 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 coastal areas of the Gulf of Mexico. The Company completed its testing
in April 1996 and exercised its option in May 1996 and paid a royalty fee of
$40,000. The license provides for annual royalty payments in fixed amounts,
except that the Company may elect to terminate the license at any time.
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") covering an area of land and waters in
western Cameron Parish, Louisiana, including the area covered by the seismic
option permit described above ("West Cameron Seismic Project"). Cheniere's
interest of up to 50% in the Project is conditioned upon receipt of aggregate
payments 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 3D
seismic survey of the onshore and offshore areas. Cheniere may elect to
discontinue funding of the Project, in which case its interest would be reduced
pro rata in relation to
Page 13 of 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(Continued)
total Project costs. The Company began onshore leasing and permitting in
February and commenced seismic operations in August 1996.
RESULTS OF OPERATIONS-SECOND QUARTER 1996 COMPARED TO SECOND QUARTER 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 three months ended June 30, 1996, operations resulted in a net loss
of $203,947 ($.04 per share) compared to a net loss of $120,218 ($.03 per share)
for the comparable period in 1995. The increase in net loss of $83,729 is
comprised of increased revenue of $222,560 and increased expenses of $306,289.
Oil and gas sales in second quarter 1996 increased $269,836 compared to second
quarter 1995 primarily due to the commencement of new production in December
1995 from a well completed by Bois d' Arc Resources in which the Company has an
overriding royalty interest of 4.33% before payout (7.33% after payout). In
second quarter 1996, the Company's oil and gas revenue represented production
from two wells of 4,523 barrels of oil and 73,742 mcf of natural gas which was
sold for prices averaging approximately $22.93 per barrel and $2.73 per mcf,
respectively. This compared to second quarter 1995 production from one well of
166 barrels and 18,693 mcf at prices averaging $18.64 per barrel and $1.66 per
mcf, respectively. Offsetting the increased oil and gas production were
decreases in revenue from seismic services ($68,500) and sales of unproved
property interests ($51,198) as compared to the second quarter of 1995. Interest
income increased $72,422 as a result of the increase in available cash resulting
from the Merger in December 1995. Exploration costs increased in 1996 primarily
as a result of increases in delay rentals pertaining to unproved properties.
General and administrative expense increased $207,048 primarily as a result of
increases related to the increase in employees and personnel related ($112,000)
and increases in public company expenses ($84,000). Depletion, depreciation and
amortization increased $53,152 primarily due to increased oil and gas production
and additions of hardware and software used in connection with the Company's
seismic processing activities.
RESULTS OF OPERATIONS-FIRST HALF 1996 COMPARED TO FIRST HALF 1995
For the first half of 1996, operations resulted in a net loss of $592,513
($.07 per share) compared to a net loss of $592,761 ($.15 per share) for the
comparable period in 1995. This represented increased revenue of $271,677 and
increased expenses of $271,429. The loss per share decreased as a result of the
additional dilution from shares outstanding which increased due to the shares
issued in the Merger. Oil and gas sales in 1996 increased $500,277 primarily
due to new production from the well discussed above. In the first half 1996, the
Company's oil and gas revenue represented production from two wells of 8,004
barrels of oil and 148,020 mcf of natural gas which was sold for prices
averaging approximately $21.50 per barrel and $2.60 per mcf, respectively. This
compared to first half 1995 production from one well of approximately 287
barrels and 31,528 mcf at prices averaging $18.20 per barrel and $1.59 per mcf,
respectively. Offsetting the increased oil and gas production were decreases in
revenue from seismic services ($268,500) and sales of unproved property
interests ($51,198) as compared to the second quarter of 1995. Interest income
increased $72,422 as a result of the increase in available cash resulting from
the Merger in December 1995. Exploration costs increased in second half 1996
primarily as a result of increases in delay rentals pertaining to unproved
properties. General and administrative expense increased $617,704 primarily as a
result of increases related to the increase in employees and personnel related
costs ($278,484) and increases in public company expenses ($268,400). Depletion,
depreciation and amortization increased $80,297 primarily due to increased oil
and gas production and additions of hardware and software used in connection
with the Company's seismic processing activities.
Page 14 of 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(Continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company has generated funds from a public offering, private equity
offering, company operations and cash payments under the Fortune and Cheniere
Agreements. 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 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. 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
activities.
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. Although
Cheniere may elect to discontinue its funding at any time, the Company believes
that it has adequate internal cash reserves to meet its obligations in
connection with the Project. Additional capital needs may be met through
additional issuance of equity securities, including the exercise of outstanding
warrants and options of the Company, securing additional project partners or the
sale of prospects, if any, identified by the project. There can be no assurance
that the Company will be successful in securing such partners or funds.
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.
The Company currently estimates its capital expenditures for 1996,
excluding the costs of the Fortune and Cheniere Projects, at approximately $2.4
million, including $1.6 million for exploration and development, $80,000 for
capital costs associated with the Technology License Agreement, $573,000 related
to the purchase of computer equipment and software, and $130,000 for office
relocation and improvements. At June 30, 1996, the Company had incurred capital
expenditures totaling $1,069606. 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 collateralized 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
The Company held its 1996 Annual Meeting of Stockholders on July ,
1996. At such meeting:
(i) the board of directors was re-elected in its entirety;
(ii) an amendment to the Company's Certificate of Incorporation to
eliminate classes of directors was approved by the stockholders by a
vote of 4,025,356 for and 7,812 against;
(iii) the Company's 1996 Equity Incentive Plan was approved by the
stockholders by a vote of 4,033,168 for and no votes against; and
(iv) the Company's 1996 Non-employee Director Stock Option Plan was
approved by the stockholders by a vote of 4,033,168 for and no votes
against.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit
Number Description
----------- -------------------------------------------------------
10.10 Exploration Agreement between Zydeco Exploration, Inc.
and Cheniere Energy Operating Co., Inc. (formerly FX
Energy, Inc.) dated April 4, 1996.
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
1. June 27, 1996- Item 5- Other Events
The registrant reported that it had elected to exercise its option to
convert each outstanding share of convertible preferred stock, par
value $.001, (the "Preferred Stock") of Zydeco Energy, Inc. ("Zydeco")
into one share of Zydeco Common Stock, par value $.001, (the "Common
Stock") pursuant to its optional conversion rights in Section 9.B of
the Certificate of Designations for the Preferred Stock.
The conversion is effective July 15, 1996 with holders of shares of
Preferred Stock required to exchange their certificates for Common
Stock certificates.
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: August 14, 1996
Page 17 of 17