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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER: 0-22076
ZYDECO ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
76-0404904
(I.R.S. Employer Identification No.)
1710 TWO ALLEN CENTER, 1200 SMITH STREET
HOUSTON, TEXAS
(Address of principal executive offices)
77002
(Zip Code)
(713) 659-2222
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of May 5, 1998, there were 10,357,096 shares of Zydeco Energy, Inc.
Common Stock, $.001 par value, issued and outstanding.
1
FORM 10-Q
TABLE OF CONTENTS
Page
Number
------
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets.................. 3
Condensed Consolidated Statements of Operations........ 4
Condensed Consolidated Statements of Cash Flows........ 5
Notes to Condensed Consolidated Financial Statements... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 7
Part II. Other Information and Signatures
Items 1. to 6.................................................. 11
Signatures..................................................... 12
2
PART I. - FINANCIAL INFORMATION
ITEM 1.
ZYDECO ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 9,977,888 $ 12,200,306
Receivables 633,184 254,481
Prepaid Expenses and Other Assets 751,604 1,028,515
------------ ------------
TOTAL CURRENT ASSETS 11,362,676 13,483,302
Oil & Gas Properties, using successful
efforts method of accounting
Proved Properties 334,972 334,972
Unproved Properties 418,801 27,600
Equipment and Software, at cost 2,276,551 2,254,139
------------ ------------
3,030,324 2,616,711
Less: Accumulated Depreciation, Depletion
and Amortization (1,802,447) (1,667,021)
------------ ------------
1,227,877 949,690
------------ ------------
Investment in Wavefield Imaging Technology 925,961 933,409
Operating Bond and Other Assets 311,942 310,049
------------ ------------
TOTAL ASSETS $ 13,828,456 $ 15,676,450
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 133,106 $ 436,941
Accrued Liabilities 111,154 52,541
------------ ------------
TOTAL CURRENT LIABILITIES 224,260 489,482
------------ ------------
STOCKHOLDERS' EQUITY
Common Stock, Par Value $.001 Per Share;
50,000,000 Shares Authorized; 11,338,351
and 11,318,351 Shares Issued; 10,357,096
and 10,537,096 Shares Outstanding
Respectively 11,338 11,318
Additional Paid-In Capital 24,531,668 24,499,688
Accumulated Deficit (10,522,558) (9,316,786)
Less: Treasury Stock, at Cost; 981,255
and 781,255 Shares at March 31, 1998 and
December 31, 1997, Respectively (436,252) (7,252)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 13,584,196 15,186,968
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,828,456 $ 15,676,450
============ ============
The accompanying notes are an integral part of these financial statements.
3
ZYDECO ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
-----------------------------
1998 1997
----------- ----------
REVENUES
Oil and Gas Sales $ 124,140 $ 373,994
----------- ----------
124,140 373,994
EXPENSES
Exploration 664,501 460,688
Production 4,824 5,690
Research and Development 121,025 -
Depreciation, Depletion and Amortization 149,183 168,643
General and Administrative 529,234 356,121
---------- ----------
1,468,767 991,142
----------- ----------
OPERATING LOSS (1,344,627) (617,148)
OTHER INCOME (EXPENSE)
Interest Income and Expense, net 138,853 51,531
----------- ----------
138,853 51,531
----------- ----------
NET LOSS $(1,205,774) $ (565,617)
=========== ==========
PER COMMON SHARE -
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (BASIC AND DILUTED) 10,389,139 6,593,648
=========== ==========
NET LOSS PER COMMON SHARE (BASIC AND DILUTED) $ (0.12) $ (0.09)
=========== ==========
The accompanying notes are an integral part of these financial statements.
4
ZYDECO ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
--------------------------------------
1998 1997
----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (1,205,772) $ (565,617)
Adjustments to Reconcile Net Loss to Net Cash
Provided by (Used in) Operating Activities:
Depreciation, Depletion and Amortization 149,183 168,643
Exploration Costs 664,501 460,688
Changes in Operating Assets and Liabilities 102,191 (128,564)
---------------- -----------------
Net Cash Used in Operating Activities (289,897) (64,850)
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net Change in Exploration Obligations/Receivables $ (232,178) $ 593,780
Exploration Costs (567,414) (460,688)
Proceeds from (Investment in) Marketable Securities - (416,901)
Purchases of Equipment and Software (340,130) (111,438)
Additions to Oil and Gas Properties (391,201) (1,688)
Other (1,756) (17,970)
---------------- -----------------
Net Cash Used in Investing Activities (1,532,679) (414,905)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of Treasury Stock $ (429,000) $ -
Other 29,158 (44,837)
---------------- -----------------
Net Cash Used in Financing Activities (399,842) (44,837)
---------------- -----------------
Net Decrease in Cash and Cash Equivalents $ (2,222,418) $ (524,592)
Cash and Cash Equivalents at Beginning of Period 12,200,306 6,906,650
---------------- -----------------
Cash and Cash Equivalents at End of Period $ 9,977,888 $ 6,382,058
================ ==================
Cash Paid During the Period for:
Interest $ - $ 6,388
Income Taxes $ - $ -
The accompanying notes are an integral part of these financial statements.
5
ZYDECO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. PREPARATION OF INTERIM FINANCIAL STATEMENTS.
The accompanying unaudited condensed consolidated financial statements of
Zydeco Energy, Inc. and its wholly owned subsidiaries have been prepared by the
Company without audit pursuant to the rules and regulations of the Securities
and Exchange Commission. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position as of March 31, 1998 and December 31, 1997 and the results of
operations and cash flows for the three-month periods ended March 31, 1998 and
1997 have been included. Certain information and notes normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although management believes that the disclosures are adequate to
make the information presented not misleading. Interim period results are not
necessarily indicative of the results to be achieved for an entire year. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes to consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997. As used herein, unless the context indicates otherwise, the term
"Company" refers to Zydeco Energy, Inc. and its wholly owned subsidiaries.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications. Certain reclassifications of prior period amounts have
been made to conform to current presentation.
Forward-looking Statements. When used in this document, the words
"anticipate", "believe", "expect", "estimate", "project" and similar expressions
are intended to identify forward-looking statements. Such statements are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, believed,
expected, estimated or projected.
2. CHENIERE LITIGATION
On April 17, 1998, Zydeco Exploration, Inc., a wholly owned subsidiary of the
Company, filed a petition with the American Arbitration Association for
arbitration in order to resolve certain disputes that arose with Cheniere
Energy, Inc. ("Cheniere"). Cheniere is a party to an exploration agreement with
Zydeco Exploration, Inc. covering the Company's West Cameron Seismic Project,
located in western Cameron Parish, Louisiana. Under this exploration agreement,
Cheniere may receive up to 50% interest in leases acquired in the project area
by the Company provided it meets certain funding obligations, including payment
of certain seismic costs and its share of leasehold acquisition costs. The
filing of the petition seeks to resolve differences over the scope of pre-
drilling activities that Cheniere can conduct within the Project Area. The
Company is also seeking to limit the dissemination by Cheniere of confidential
seismic data covering the Project Area and to resolve recent cost reimbursement
disputes.
On April 22, 1998, Zydeco Energy, Inc. and Zydeco Exploration, Inc.
(collectively "Zydeco"), initiated a civil suit in state district court in
Harris County, Texas against two individuals who are parties to confidentiality
agreements with Zydeco and who currently are employees of Cheniere. Through this
litigation, Zydeco sought and obtained a Temporary Restraining Order on April
22, 1998, engaging the
6
individuals from breaking the terms of their confidentiality agreements with
Zydeco. Cheniere intervened in the litigation on April 27, 1998. On May 4, 1998,
Zydeco, Cheniere and the two individuals agreed to the filing of an Agreed
Temporary Injunction, pending ultimate resolution of the disputes that exist
between such parties through the arbitration proceedings mentioned above.
3. ACQUISITION OF TREASURY SHARES
On January 15, 1998, the Company executed a termination agreement with a
former employee of the Company. Pursuant to the terms of the termination
agreement, the Company purchased 200,000 shares of the Company's common stock at
the then current price of $2.125 per share from a trust established for the
benefit of the former employee's descendants and assigned to the former employee
a 1/2% of 8/8ths overriding royalty interest in certain Company-owned non-
productive leases. No overriding royalty interest was assigned to leases in
connection with the Company's West Cameron Seismic Project.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Formed in December 1995, the Company is an independent oil and gas
exploration company engaged in acquiring leases, drilling and producing reserves
utilizing focused geologic concepts and advanced 3D seismic and computer-aided
exploration (CAEX) technology, including enhanced structural and stratigraphic
depth imaging and attribute analysis. The Company has developed comprehensive
in-house technology, software and expertise enabling it to use the most recent
advances in such 3D seismic and CAEX technology. Currently, the Company's
efforts are focused primarily in the Louisiana Transition Zone, a narrow trend
paralleling the coastline of Louisiana. This trend is approximately six miles
wide (three miles on either side of the beach) and extends about 300 miles from
the Sabine River eastward to the Mississippi River.
During 1996, the Company negotiated seismic options covering
approximately 37,000 gross acres (33,000 net acres) and secured other seismic
permits covering approximately 171,000 gross acres (170,000 net acres) in the
Louisiana Transition Zone. At the core of this project, named the West Cameron
Seismic Project ("Project") was a 51,000-acre exclusive seismic permit obtained
from the State of Louisiana. The Company commenced seismic data acquisition for
this Project over approximately 230 square miles during the second half of 1996
and completed this phase in July 1997. The seismic processing and interpretive
phase of this Project immediately commenced during mid 1997 and will continue
during most of 1998. Pursuant to the terms of the State of Louisiana permit, the
state is required to keep the information obtained from the survey confidential
for a period of ten years. The Company nominated approximately 55,000 net acres
for bid at State of Louisiana sales set for April and June 1998. In the April
lease sale, the Company was awarded a lease of 328 acres and a participant in an
exploration agreement covering this Project was awarded three oil and gas leases
comprising 1,502 acres. The Company possesses rights to acquire fifty percent
of the leases awarded to the other Project participant. The Company is
continuing negotiations with several property owners for leasehold rights or
drilling rights and is preparing for the State of Louisiana sale scheduled for
June 1998. The Company intends to evaluate its participation in future federal
and state competitive bid lease sales during 1998 and 1999.
In April 1996, the Company executed the Cheniere Exploration Agreement with
Cheniere Energy Operating Co., Inc. ("Cheniere"), formerly known as FX Energy,
Inc., for the West Cameron Seismic Project, covering an area of land and waters
in western Cameron Parish, Louisiana, including the area covered by the seismic
permits described above. In exchange for earning a 50% interest, Cheniere
agreed to fund the costs of seismic acquisition up to $13.5 million and 50% of
such costs in excess of $13.5 million. Such costs include the purchase of
seismic rights, the cost of lease options on the related onshore acreage of the
West Cameron Seismic Project, the purchase of other 3D seismic data, and data
acquisition
7
and processing of a 3D seismic survey of the onshore and offshore areas.
Cheniere may elect to discontinue Project funding under certain circumstances,
in which case its interest would be reduced pro rata in relation to total
Project costs. Pursuant to the terms of the Cheniere Exploration Agreement, the
Company had incurred third party and processing costs in connection with the
West Cameron Seismic Project aggregating approximately $20,499,179, net of
interest earned of approximately $49,000 on the unused project funds and $46,000
for a reimbursement of seismic costs. Through March 31, 1998, Cheniere's and
Zydeco's share of these costs under this agreement was approximately $16,921,028
and $3,578,151, respectively. The Company's portion of geological and
geophysical costs is expensed as exploration expense. As of May 5, 1998,
billings to Cheniere for their share of such costs amounted to $637,000 and have
not been paid.
On April 17, 1998, the Company filed a petition with the American
Arbitration Association for arbitration in order to resolve certain disputes
under the Cheniere Exploration Agreement, including project control during the
pre-drilling phase, dissemination of confidential seismic data and cost
reimbursement issues that arose with Cheniere. On April 22, 1998, Zydeco
initiated a civil action in state district court in Harris County, Texas,
against two individuals who are parties to confidentiality agreements with
Zydeco and who are currently employed by Cheniere. Through this litigation, the
Company sought and obtained a Temporary Restraining Order on April 22, 1998,
enjoining the individuals from breaching the terms of their confidentiality
agreements with the Company. On April 27, 1998, Cheniere Energy, Inc.
intervened in the state district court litigation. On May 4, 1998, the Company,
Cheniere and the two individuals agreed to the filing of an Agreed Temporary
Injunction pending ultimate resolution of the disputes that exist between such
parties through the arbitration proceedings. The Company believes that the
arbitration hearings will commence during the 1998 second quarter.
On July 1, 1997, the Company acquired all of the outstanding capital stock
of Wavefield Image, Inc. ("Wavefield"), a privately held company that develops
and licenses a seismic data processing technique known as Wavefield Imaging
Technology. The Company is utilizing Wavefield Imaging Technology in its West
Cameron Seismic Project pursuant to a license agreement entered in May 1996.
Pursuant to the terms of the acquisition agreement between the Company and the
shareholders of Wavefield, the Company issued 100,000 shares of the Company's
common stock at closing to the shareholders of Wavefield and an additional
150,000 shares of such stock to the former Wavefield shareholders in connection
with the issuance of a patent on the Wavefield Imaging Technology by the United
States Patent and Trademark Office. In connection with the issuance of Common
Stock, the Company recorded an investment in the Wavefield Imaging Technology of
about $950,000 based on the prices of the Company's Common Stock on July 1,
1997, and December 2, 1997, the date of the patent issuance. The Company is
amortizing this investment over approximately 19 years (the life of the patent
received).
On August 26, 1997, the Company completed an offering of 3,680,000 shares
of Common Stock and warrants to purchase 320,000 shares of Common Stock (the
"Offering"). Proceeds from the Offering were approximately $14.1 million, net of
Offering expenses of approximately $1.6 million.
The Company accounts for its oil and gas exploration and production
activities using the successful efforts method of accounting. Under this method,
acquisition costs for proved and unproved properties are capitalized when
incurred. Exploration costs, including geological and geophysical costs and the
costs of carrying and retaining unproved properties, are expensed. Exploratory
drilling costs are initially capitalized, but charged to expense if and when the
well is determined not to have found proved reserves. Costs of productive wells,
developmental dry holes, and productive leases are capitalized and amortized on
a property-by-property basis using the units-of-production method. The estimated
costs of future plugging, abandonment, restoration, and dismantlement are
considered as a component of the calculation of depreciation, depletion, and
amortization. Unproved properties with significant acquisition costs are
assessed periodically on a property-by-property basis and any impairment in
value is charged to expense.
8
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
The Company recorded a loss of $1,205,774, or $.12 per share, for the three
months ended March 31, 1998 compared to a loss of $565,617 or $.09 per share, in
the three months ended March 31, 1997. The increase in the loss is primarily
due to increases in geological and geophysical expenses, research and
development expenses, and general and administrative expenses as well as a
decrease in oil and gas revenues.
Exploration expenses increased from $460,688 in the 1997 first quarter to
$664,501 in the comparable 1998 period primarily due to the Company's
participation under the Cheniere Exploration Agreement governing activities on
the West Cameron Seismic Project. The Company's 50% share of costs directly
attributable to this project amounted to $453,743 in the 1998 first quarter.
The Company had no comparable exploration expense in the 1997 first quarter
because, pursuant to the terms of such agreement, Cheniere paid all of this
project's costs in that quarter. The Company incurred $121,025 in research and
development expenses during the 1998 first quarter. Because the company
commenced a research and development program in mid 1997, it had no comparable
research and development expense in the first three months of 1997. General and
administrative expenses rose $173,113 from $356,121 in the 1997 first quarter to
$529,234 in the comparable 1998 period mostly due to additional personnel costs.
The Company expects that its current level of exploration, general and
administrative, and research and development expenses will continue into the
near future. However, because the Company utilizes the successful efforts
method of accounting, exploration expenses typically vary materially from period
to period based upon exploration program activities, the Company's cost
participation and other factors.
Total revenues decreased from $373,994 in the three months ended March 31,
1997 to $124,140 in the comparable 1998 period due mostly to a 52% decline in
gas sales volumes and an 85% decline in oil sales volumes. While gas sales
volumes fell from 103,241 thousand cubic feet ("MCF") in the 1997 first quarter
to 49,831 MCF in the comparable 1998 period, oil sales volumes fell from 3,280
barrels to 498 barrels in the respective periods. The decline in such sales
volumes is attributable to natural production declines for the two producing
wells in which the Company has interests. Although it expects that the
production rates of these wells will continue to decline during the near term,
the Company cannot ascertain whether the rate of decline experienced from the
1997 first quarter to the 1998 first quarter will continue throughout 1998. In
addition, the Company has not assigned any proved oil and gas reserves to one of
these wells.
During the three-month periods ended March 31, 1998 and 1997, the Company
did not record any gains or losses from the sales of properties. Because the
Company will continue to develop and then sell some portion or all of its
interest in prospects to other industry participants, the Company will from time
to time record gains or losses for these transactions. However, the timing of
such sales and the extent of their gain or loss are due to a number of factors
such as, but not limited to, the timing and cost of lease acquisitions, the
availability of leaseholds in particular prospect areas and market conditions,
both generally and in the oil and gas industry, at the time of sale.
The increase in the net loss per share from $.09 in the 1997 first quarter
to $.12 in the comparable 1998 period was also affected by an increase in the
weighted average number of the Company's Common Shares (basic and diluted) due
to the issuance of 3,680,000 shares in the Offering in August 1997 and the
acquisition of 200,000 treasury shares in January 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has generated funds from public and private equity offerings,
cash flow from the Company's operations, and cash payments made to it under
exploration agreements. The Company may use its cash for any general corporate
purposes except for the funds advanced under such exploration agreements, which
are committed to the project operations for which they were intended. Sources of
funds include approximately $24.1 million from the sale of securities in 1993,
1994, 1995 and 1997; $21.2
9
million in advances under exploration agreements in 1995, 1996, 1997 and the
three months ended March 31, 1998. The Company does not currently hold any
funds advanced under either the Fortune Exploration Agreement or the Cheniere
Exploration Agreement.
The Company expects that capital needs for the remainder of 1998 will be
satisfied through cash on hand of approximately $10.0 million at March 31, 1998,
and cash expected to be made available under the Cheniere Exploration Agreement.
However, the total amount of expenditures is unknown at this time due to factors
such as, but not limited to, leasehold availability, lease terms of potential
leaseholds which may yet be negotiated or bid on in lease sales, future
potential operations proposed under the terms of operating or other agreements
to which the Company is a participant or may become a participant and the timing
of expenditures related to the performance of these activities. The Company's
ability to access additional capital will also depend on a number of factors
including its success in acquiring oil and gas leaseholds, attracting industry
participants to participate in the exploration of and sharing of costs of such
leaseholds and finding commercially productive hydrocarbon deposits. The Company
does not presently maintain any credit facilities.
The Company expects to use its available cash to acquire leases and develop
potential prospects in the West Cameron Seismic Project area and for other
general corporate purposes. The Company's share of the budgeted costs could
increase if Cheniere discontinues its share of funding of the West Cameron
Seismic Project costs or elects not to participate in any or all of the
potential prospects. There is no assurance that Cheniere will continue to fund
its full share of costs under the Cheniere Exploration Agreement. As of May 5,
1998, billings to Cheniere amounting to $637,000 have not been paid. In
addition, on April 17, 1998, the Company filed a petition with the American
Arbitration Association for arbitration in order to resolve certain disputes,
including cost reimbursement issues that have arisen with Cheniere. The Company
believes that the arbitration hearings will commence during the 1998 second
quarter. The Company expects to incur and expense legal and other costs of the
arbitration and related litigation during the second and third quarters of 1998.
Such additional costs and other capital needs may be funded from available cash
of the Company, the issuance of additional equity securities, including the
exercise of outstanding warrants and options on the Company's common stock,
securing additional industry participants, or the sale of interests in
prospects, if any, identified in the Company's projects. The Company
anticipates that it may sell an interest in the West Cameron Seismic Project as
a whole for the exploration and development of potential prospects, or may seek
to develop its potential prospects, if any, in the West Cameron Seismic Project
by selling interests in individual prospects or groups of prospects. In the
future, in the event the Company increases oil and gas production through the
successful completion of oil and gas wells, the Company may consider obtaining a
credit facility. There can be no assurance that the Company will be successful
in securing additional participants, additional project financing or credit
financing.
The Company's current 1998 budgeted capital expenditures are approximately
$7.9 million, including $5.5 million related to the acquisition of oil and gas
leases and $1.5 million for drilling on these leases. Should the Company sell
interests in the West Cameron Seismic Project and/or prospects generated from
such project, the estimated capital expenditures may be reduced by proceeds from
such sales and/or reduced expenditures attributed to reduced working interest
share of expenditures. The Company may also engage in the drilling of other
prospects identified by the Company, the acquisition of interests in producing
wells, and other oil and gas exploration and production related investment
opportunities determined by management and the Board of Directors to be in the
interest of the Company. The amount and timing of these expenditures will be
dependent upon numerous factors including the availability of capital to the
Company, availability of seismic data, the number and type of drilling
prospects, if any, identified as a result of the Company's 3D seismic analysis,
the terms under which industry participants may participate in the Company's
prospects, and the cost of drilling and completing wells in the Louisiana
Transition Zone.
The Company has incurred net losses and negative cash flows from operations
since its inception in 1994. The Company does not expect to generate operating
cash flow or net income in 1998 unless it sells substantial interests in
prospects generated from the West Cameron Seismic Project or interests in such
project. The Company contemplates that the sale of such interests would include
prospect
10
development commitments and financing provided by the purchasers coupled with
retained interests and back-in rights to the Company, and additional cash
consideration to the Company for recoupment of costs incurred in identifying
such prospective interests. As generally required by the successful efforts
method of accounting, the Company has expensed all of its geological and
geophysical costs in the West Cameron Seismic Project as of March 31, 1998, and
accordingly, payments for the recoupment of such non-capitalized costs would be
treated as revenue to the Company. There can be no assurance that the Company
will be successful in the selling of significant interests or in receiving
payments for the recoupment of the Company's costs incurred to date on this
project.
The Company currently maintains a $300,000 bond required to hold its
present federal oil and gas leases. A United States Treasury Note
collateralizes this bond. In the event that the Company would act as operator
on a federal offshore lease or is otherwise required to increase its bonding by
federal or state authorities, significant amounts of capital may be required for
additional collateral to satisfy bonding requirements.
The Company is unaware of any possible exposure from actual or potential
claims or lawsuits involving environmental matters. As such, no liability is
accrued at March 31, 1998.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
On April 17, 1998, Zydeco Exploration, Inc., a wholly owned subsidiary of
the Company, filed a petition with the American Arbitration Association for
arbitration in order to resolve certain disputes that arose with Cheniere
Energy, Inc. ("Cheniere"). Cheniere is a party to an Exploration Agreement with
Zydeco Exploration, Inc. covering the Company's West Cameron Seismic Project,
located in western Cameron Parish, Louisiana. Under the Exploration Agreement,
Cheniere may receive up to 50% interest in leases acquired in the project area
by the Company provided it meets certain funding obligations, including payment
of certain seismic costs and its share of leasehold acquisition costs. The
filing of the petition seeks to resolve differences over the scope of pre-
drilling activities that Cheniere can conduct within the Project Area. The
Company is also seeking to limit the dissemination by Cheniere of confidential
seismic data covering the Project Area and to resolve recent cost reimbursement
disputes.
On April 22, 1998, Zydeco Energy, Inc. and Zydeco Exploration, Inc.
(collectively "Zydeco"), initiated a civil suit in state district court in
Harris County, Texas against two individuals who are parties to confidentiality
agreements with Zydeco and who currently are employees of Cheniere. Through
this litigation, Zydeco sought and obtained a Temporary Restraining Order on
April 22, 1998, engaging the individuals from breaking the terms of their
confidentiality agreements with Zydeco. Thereafter, Cheniere intervened in the
litigation on April 27, 1998. On May 4, 1998, Zydeco, Cheniere and the two
individuals agreed to the filing of an Agreed Temporary Injunction, pending
ultimate resolution of the disputes that exist between such parties through the
arbitration proceedings mentioned above.
Items 2, 3, 4, and 5 for which provision is made in the applicable regulations
of the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and, therefore, have been omitted.
Item 6.
(a) Exhibits.
Exhibit 27 Financial Data Schedule (follows signature page).
(b) Report on Form 8-K.
None
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZYDECO ENERGY, INC.
/s/ John Misitigh
--------------------------------------------------
John Misitigh
Controller, Chief Accounting Officer and Secretary
(Duly Authorized and Principal Financial Officer)
Dated: May 13, 1998
12