-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C9PGzMWWJm69GQ6ewUGZOCmbvTz88ZqO3/dcmS59ZgVEUxC1xZaBHibNHl6cvjIM ZXyP5KQWtrXjZOGWSz3QfA== 0000899243-96-001108.txt : 19960816 0000899243-96-001108.hdr.sgml : 19960816 ACCESSION NUMBER: 0000899243-96-001108 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZYDECO ENERGY INC CENTRAL INDEX KEY: 0000908246 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 760404904 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22076 FILM NUMBER: 96615205 BUSINESS ADDRESS: STREET 1: 1710 TWO ALLEN CENTER STREET 2: 1200 SMITH STREET CITY: HOUSTON STATE: TX ZIP: 77002-4312 BUSINESS PHONE: 7136592222 MAIL ADDRESS: STREET 1: 1710 TWO ALLEN CENTER STREET 2: 1200 SMITH STREET CITY: HOUSTON STATE: TX ZIP: 77002-4312 FORMER COMPANY: FORMER CONFORMED NAME: TN ENERGY SERVICES ACQUISITION CORP DATE OF NAME CHANGE: 19930701 10-Q 1 FORM 10-Q 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 EX-10.10 2 EXPLORATION AGREEMENT EXPLORATION AGREEMENT BETWEEN ZYDECO EXPLORATION, INC. AND FX ENERGY, INC. DATED APRIL 4, 1996 EXPLORATION AGREEMENT i INDEX 1. USE OF THE SEISMIC FUNDS.............................................. 2 2. SEISMIC FUNDS......................................................... 3 3. EXCESS SEISMIC COSTS DUE TO TURNKEY CONTRACTS......................... 4 4. DAMAGES TO THE STATE OF LOUISIANA UNDER THE EXCLUSIVE SEISMIC PERMIT.. 4 5. DISCONTINUANCE OF SEISMIC FUND PAYMENTS............................... 4 6. PROSPECTS............................................................. 6 7. PROSPECT DEVELOPMENT.................................................. 6 9. PROSPECT TEST WELL.................................................... 8 10. NON-PROPOSING PARTY'S ELECTION TO PARTICIPATE......................... 8 11. ZEI'S OBLIGATIONS..................................................... 9 12. ACCOUNTING OF SEISMIC FUNDS........................................... 9 13. RECORD TITLE..........................................................10 14. AREA OF MUTUAL INTEREST...............................................10 15. SEISMIC DATA..........................................................11 16. GENERAL PROVISIONS....................................................12 ii EXPLORATION AGREEMENT This Exploration Agreement is made and entered into this 4th day of April, 1996, by and between Zydeco Exploration, Inc. ("ZEI") and FX Energy, Inc. ("FX"). W I T N E S S E T H : WHEREAS, ZEI has considerable expertise in exploration and production activities in the formerly seismically-blind trends of southern Louisiana; and WHEREAS, ZEI utilizes advanced seismic imaging and comprehensive well log analysis and integration to identify new drilling opportunities in an attempt to minimize the risk in each of the prospects so identified; and WHEREAS, FX desires to acquire and explore for oil and gas reserves in the on- and off-shore area of coastal Louisiana; and WHEREAS, FX and ZEI desire to work together to generate, develop, and exploit oil and gas exploration prospects in the coastal Louisiana area; and WHEREAS, the parties desire to establish an area of mutual interest within which to develop exploration and drilling prospects to be shared by them; and WHEREAS, the parties desire to delegate to ZEI the responsibility of managing the acquisition of seismic options and/or permits, managing the acquisition, processing, and reprocessing of seismic data, identifying potential prospects, acquiring leases and farmouts, interpreting geological and geophysical data, making drilling recommendations, and managing the exploration process, including selecting and monitoring a production operator, or alternately, acting itself as production operator; and WHEREAS, ZEI will contribute to the exploration program for costs a State of Louisiana exclusive seismic survey permit obtained at the State of Louisiana tender on February 14, 1996 (the "Exclusive Seismic Permit"), a copy of which is attached hereto as Exhibit "A," and all overhead costs associated with the development and interpretation of drillable prospects except for the costs of processing and re-processing seismic data and well logs; and WHEREAS, FX will pay 100% of Seismic Costs, as hereafter defined, up to $13,500,000 and 50% of Seismic Costs thereafter; and WHEREAS, the parties memorialize their undertakings pursuant to the terms hereinafter set forth; NOW, THEREFORE, in consideration of the foregoing, and of the mutual and dependent covenants hereinafter set forth, and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: 1. USE OF THE SEISMIC FUNDS ------------------------ ZEI shall obtain seismic data (the "Program Data") covering the lands depicted on Exhibit "B" and modified by Exhibit "B-1" (the "Initial Prospect Lands") using funds ("Seismic Funds") contributed by FX, subject to the understanding that should Seismic Costs, as defined herein, exceed $13,500,000 (the "Target Costs"), ZEI and FX shall jointly bear all Seismic Costs in excess of Target Costs. The Seismic Funds shall be advanced by FX according to the schedule described in Section 2. The Seismic Funds shall be applied by ZEI as follows: a. To ZEI as reimbursement for the expenses, including bonus, incurred to date in acquisition of the Exclusive Seismic Permit; then b. toward costs incurred by ZEI in acquiring and processing Program Data, including: i. acquisition of proprietary seismic data, including, without limitation, the seismic data required under the Exclusive Seismic Permit, including quality control expenses and feasibility tests prior to commencement of acquisition of seismic data; ii. obtaining permits to acquire seismic data; iii. payments for options to obtain seismic data, and out of pocket costs incident thereto, including the state permit for 51,350 acres, (to the extent such permit is not reimbursed under the other provisions hereof); iv. seismic processing and reprocessing costs; v. licensing of seismic data owned by third parties; vi. third party legal and professional expenses relating to the Exclusive Seismic Permit, or the acquisition or processing of Program Data; vii. weather insurance, as applicable for non-turnkey agreements; viii. turnkey contracts; ix. damages paid by ZEI to landowners for damages to lands or 2 possessions; x. the cost of legal defense, judgments, and settlements relating to any claim or cause of action brought by a land or mineral owner relating to or arising out of the acquisition of seismic data hereunder; xi. the cost of transmission or transportation of data from field to office and insurance costs associated therewith; xii. any other third party expense reasonably incurred by ZEI in connection with the items enumerated under this Section. c. toward costs incurred by ZEI in acquiring permits, options to lease lands within the AMI, and leases of lands within the AMI when necessary including: i. bonus and other payments made to parties for such options; ii. out-of-pocket costs incurred by ZEI in obtaining such options, e.g., landman costs, broker expenses, abstract charges, etc.; iii. third party legal, accounting, and professional expenses incurred in obtaining such options, both in examination of title and in negotiating options; iv. any other third party expense reasonably incurred by ZEI in connection with the items enumerated under this Section. The term "Seismic Costs" shall include all items referred to in this Section 1. 2. SEISMIC FUNDS ------------- FX shall pay the Seismic Funds to ZEI for deposit in the segregated account described in Section 12.a on the following schedule.
DATE AMOUNT ---- ------ 1996-05-15 $3,000,000.00 1996-06-30 1,000,000.00 1996-07-30 1,000,000.00 1996-08-30 1,000,000.00
3
1996-09-30 2,000,000.00 1996-10-30 1,000,000.00 1996-11-30 1,000,000.00 1996-12-30 1,000,000.00 1997-01-30 1,000,000.00 1997-02-28 1,500,000.00
Should FX fail to make the initial advance by May 15, 1996, this agreement shall terminate and be of no further force or effect. 3. EXCESS SEISMIC COSTS DUE TO TURNKEY CONTRACTS --------------------------------------------- The parties anticipate that ZEI may enter into one or more turnkey contracts. The parties estimate that the premium required for turnkey contracts may bring total Seismic Costs to $15,000,000. Should turnkey costs cause Seismic Costs to exceed the Target Costs, the parties agree: (i) In lieu of FX bearing 100% of Seismic Costs up to $13,500,000, FX shall bear 100% of Seismic Costs up to $13,000,000. (ii) FX and ZEI shall bear Seismic Costs between $13,000,000 and $15,000,000 equally; and (iii)Any Seismic Costs in excess of $15,000,000 shall be borne equally. 4. DAMAGES TO THE STATE OF LOUISIANA UNDER THE EXCLUSIVE SEISMIC PERMIT -------------------------------------------------------------------- The Exclusive Seismic Permit requires the payment of liquidated and other damages in certain situations. Should such be required, the parties agree that such damages shall be borne equally by FX and ZEI. 5. DISCONTINUANCE OF SEISMIC FUND PAYMENTS --------------------------------------- a. Should FX fail to make a Seismic Fund payment within thirty days of the date due (a "Discontinuance"), the parties shall proceed as follows: i. The obligation of FX to make additional Seismic Fund payments 4 shall terminate, as well as the right of FX to make such payments. ii. ZEI shall, individually, or with the cooperation or assistance of one or more companies, complete acquiring or processing Program Data; provided however, it shall incur no liability to FX for failing to do so. iii. At such time as ZEI acquires an interest in a lease covering a portion of the Initial Prospect Lands (which may be acquired by direct lease, assignment from an existing lease, or acquiring a farmout), ZEI shall determine the aggregate amount of Seismic Costs incurred to that date. iv. FX shall be entitled to a prospect ownership interest (the "FX Prospect Interest") which, expressed as a percentage, is equal to the Seismic Funds FX paid divided by twice the total Seismic Funds expended. Thus a contribution of $3.0 of Seismic Funds by FX when total Seismic Costs were $12.0 million entitle FX to a FX Prospect Interest equal to 12.5%. b. Where ZEI itself, following a Discontinuance, contributes funds that otherwise would be provided by FX under the terms hereof, ZEI shall be entitled to receive back such funds, together with interest thereon at the prime interest rate, from revenues attributable to the FX Prospect Interest (including, without limitation, any working interest or overriding royalty interest revenues from production or front end proceeds attributable to such interest when owned by FX under the applicable operating agreement or proceeds from the sale or license of seismic data). c. Subject to the provision immediately below, if a Discontinuance occurs, and ZEI does not itself fund the deficient Seismic Costs, ZEI may sell, trade, farm-out, lease, sublease or otherwise trade (collectively, a "Trade") the aggregate (i.e., both that of ZEI and FX) prospect interests to any party on arms' length terms. For this purpose the aggregate prospect interests includes all seismic data acquired hereunder, and revenues from a Trade include seismic data sale or license proceeds. Any revenues accruing from a Trade shall be applied toward the cost of completing the project contemplated hereunder. . d. Should ZEI do a Trade and FX have funded $8,000,000 or more prior to the Discontinuance, then the parties shall treat FX as having earned a vested prospect ownership interest of 25%, which shall be treated under the applicable operating agreement and not subject to any Trade, and any revenues from a Trade, which would in this instance cover a 75% prospect ownership interest, shall be shared 33 1/3% by FX and 66 2/3% by ZEI. 5 6. PROSPECTS --------- As used herein, "prospect" shall mean a block of acreage suitable for exploration, including leasehold, operating, nonoperating, mineral and royalty interests, licenses, permits, and contract rights relating thereto. Upon acquisition of the Program Data, ZEI shall evaluate such data for prospects. Prospects found during the initial review of such seismic data are hereinafter referred to as the "Prospects." 7. PROSPECT DEVELOPMENT -------------------- a. Prospect Preparation ZEI will prepare the Prospects for evaluation, which shall include, among other things, the following: i. examination of land and lease titles to determine lands and leases available for lease or farmout; ii. leasing of lands within the Prospect perimeters, and, where such lands are under lease, acquiring farmouts; iii. geological and geophysical interpretation; iv. mapping; and v. permitting. b. Operating Agreement for Prospects Each Prospect will be drilled and operated under an operating agreement in the form of that attached hereto as Exhibit "C" (the "Default Operating Agreement"). Each such operating agreement shall cover the Prospect Lands for the applicable Prospect. The parties acknowledge that for one or more of the Prospects, third parties may participate in the drilling of wells. Such parties may request changes in the applicable operating agreement. ZEI and FX agree to negotiate changes as may be requested in good faith. On one or more Prospects, ZEI may itself not wish to act as operator. In such event ZEI may designate a qualified third party to act as operator of the Prospect. In the event of any inconsistency or conflict between the terms and provisions of this Agreement and of the operating agreement covering any Prospect or other prospect developed hereunder, the terms and provisions of this Agreement shall prevail. 6 c. Notice to FX of Completion of Prospect Assembly and Development ZEI will notify FX when a Prospect's assembly and development is complete. Subject to any applicable restrictions imposed in confidentiality agreements or license agreements, ZEI will make available to FX in ZEI's office all seismic materials, maps, geological reports leases, farmout agreements or other materials in its possession reasonably relevant to a decision to participate in the drilling of the Prospect test well and prospect. ZEI shall give FX access to ZEI's 3D work stations during normal business hours as necessary or appropriate to allow FX to evaluate 3D seismic data relevant to the prospect. 8. PROSPECT EXPENSES ----------------- a. Program expenses ("Prospect Expenses") are to be borne equally by ZEI and FX and include the following costs of preparing the Prospects for evaluation, development, and drilling: i. lease bonuses and brokerage for additional leases wholly or partly within the Prospect Lands; ii. delay or shut in rental payments on leases or interests acquired hereunder; iii. third party legal and professional expenses relating to the acquisition or maintenance of leases or farmouts; iv. any other third party expense reasonably incurred by ZEI in connection with the items enumerated under this Section or in Section 7; v. engineering costs provided, however, if FX fails to pay the full amount of the Target Costs, FX shall bear a percentage of the Prospect Expenses equal to its FX Prospect Interest. FX shall have the opportunity to participate for a working interest in Prospect leases and farmouts equal to its FX Prospect Interest. b. Should FX fail to pay Prospect Expenses within thirty days of receipt of a billing therefor, and ZEI demand payment of such Prospect Expenses by written demand delivered by certified mail, return receipt requested, and FX not pay the delinquent Prospect Expenses within fifteen (15) days of receipt of the certified mail demand; then i. FX shall have no liability for such Prospect Expenses; 7 ii. FX shall be deemed to have declined to participate in the Prospect in question; and iii. FX shall promptly, upon request, quitclaim to ZEI any interest it has or might have in the Prospect in question. 9. PROSPECT TEST WELL ------------------ For a period of ninety days following ZEI's delivery of the notice provided in Section 7.c advising that a Prospect's assembly and development is complete, ZEI shall have the exclusive right to propose a well. Thereafter, either party may propose a well. The proposing party shall include the following information with its notice: a. the spud date scheduled for the initial test well on the Prospect, which shall not be less than 90 days from the date of notice (subject to rig availability) unless a farmout requirement or lease termination necessitates a shorter period; b. the target formation; c. an AFE for the test well, with dry hole and completion costs shown; d. whether the well is recommended to be drilled on a turnkey, daywork, or footage basis; e. an estimated economic evaluation of the Prospect; and f. the Default Operating Agreement for signature, revised to include the legal description of the Prospect in question. 10. NON-PROPOSING PARTY'S ELECTION TO PARTICIPATE --------------------------------------------- Within 30 days of its receipt of the notice described in Section 9 above, the non-proposing party shall advise the proposing party of the working interest, if any, with which the non-proposing party will either take itself or sell to a third party. If the aggregate working interest for which the non- proposing party will either itself participate or sell to a third party is less than the working interest owned by the non-proposing party, the non-proposing party shall assign the balance of its working interest to proposing party or its designee. Such assignment shall be in the form of that attached hereto as Exhibit "D" (the "Assignment"). As provided in the Assignment, the non- proposing party will reserve a 2% of 8/8ths overriding royalty until payout, as therein defined, together with an option to convert said overriding royalty interest to a 20% of 8/8ths working interest at payout, both the overriding royalty and working interest to be proportionately reduced to reflect the working interest assigned. 8 Any consideration received by a party for the sale or farming out of a portion of its working interest shall be solely for such party's account. Should a non-proposing party fail to assign its excess interest under the Assignment prior to ten days before the scheduled spud date, the excess interest will be drilled subject to the non-consent provisions of the Default Operating Agreement, which provides for a forfeiture of interest on Exploratory Operations, as defined therein. 11. ZEI'S OBLIGATIONS ----------------- Without further consideration, ZEI shall undertake the following: a. to provide all management and administration necessary to prepare the Prospects for drilling, as more fully described under Section 7.a; b. all bonding requirements necessary to maintain leases acquired pursuant hereto; c. geophysical and geological evaluations of the Prospects; and d. estimated economic evaluations of the Prospects. Notwithstanding the foregoing, FX shall reimburse ZEI for one-half the cost of bonding a Lease at the time ZEI delivers an assignment of an interest in the Lease to FX. ZEI shall have the sole authority to determine the specifications of acquiring, processing, and reprocessing seismic data and well logs. Further, ZEI has the option of performing all or partial sequencing of the seismic data or well log processing utilizing its own facilities. 12. ACCOUNTING OF SEISMIC FUNDS --------------------------- a. Segregated Account For ease of accounting, ZEI shall segregate the Seismic Funds into a separate account (the "Seismic Fund Account"). Such account shall be styled to put third parties on notice that the funds are held for the joint account of FX and ZEI. Except where impractical, all Seismic Costs shall be withdrawn directly from the Seismic Fund Account. b. Accounting Not less than 45 days after the end of each calendar quarter, ZEI shall 9 give FX a detailed accounting of all funds withdrawn from the Seismic Fund Account. ZEI shall furnish documentation supporting Seismic Fund expenditures to FX upon request. c. Right to Audit FX shall have such rights of audit as are available to a non-operator under the Default Operating Agreement. d. Internally Generated Statements Prior to the end of each month ZEI shall forward to FX internally prepared statements for the prior month showing revenues and expenses charged to the Seismic Fund Account. e. Joint Signature Account Should the timing of Seismic Costs and payment of the Seismic Funds be such that the Seismic Fund Account would have in excess of $2,000,000 at one time, ZEI and FX shall jointly deposit the excess funds (i.e., those over $2,000,000) into a joint signature account. 13. RECORD TITLE ------------ a. ZEI shall obtain title to leases acquired pursuant hereto (the "Leases"). ZEI shall assign to FX its leasehold interest in a Lease utilizing the form of assignment provided herein. Such assignment shall be delivered after FX has paid all Prospect Expenses billed to it hereunder and: i. a well is ready for drilling; or ii. front end costs have been paid to ZEI by a third party working interest owner, or iii. a farmout of the prospect has been signed. b. Each of ZEI and FX agree not to pledge, mortgage, or hypothecate any Lease without the consent of the other prior to the time a well is spudded on such Lease or a unit containing such Lease. Each of ZEI and FX further agree not to pledge, mortgage or hypothecate any seismic data obtained hereunder. 14. AREA OF MUTUAL INTEREST ----------------------- 10 The parties hereby designate an Area of Mutual Interest ("AMI"). The AMI shall encompass the Initial Prospect Lands. Should ZEI acquire as a Seismic Cost data covering lands outside the Initial Prospect Lands, the AMI shall be deemed enlarged to cover all lands covered by such seismic data. Any interest taken by either party after May 16, 1996 and prior to May 15, 2001 in an oil and gas lease, exploration option, operating agreement, farm-in, deed coupled with mineral interest, or any similar agreement which creates or effects an interest in hydrocarbons in lands within the AMI (an "Interest"), or acquisition of a contractual right to acquire an Interest, shall be deemed taken for development under this agreement. The party acquiring an Interest shall, within thirty (30) days of the time of such acquisition, notify, in writing, the non-acquiring party. The notice shall describe the interest and set forth the terms of such acquisition, the consideration paid, any other acquisition costs, and other obligations assumed. The non-acquiring party will then have the right, within thirty (30) days of the receipt of such notice, to elect in writing to receive an assignment of one half (or, if smaller, its working interest ownership determined by the FX Prospect Interest, as applicable) of each such acquired Interest and the obligations connected therewith. If the non-acquiring party elects to take such an assignment, the non-acquiring party shall tender to the acquiring party, at the time it gives notice of its election, its share of the consideration and acquisition costs actually paid by the acquiring party, and in consideration thereof, shall receive an assignment of its share of the Interest with covenants of special warranty. The failure to make such election and to tender its share of the consideration and costs within such thirty (30) day period shall constitute a waiver of the non-acquiring party's right to receive such an interest. During such thirty (30) day notice period, the non-acquiring party shall have the right to inspect all leases, documents, title information, and contracts reflecting the interest to be acquired. 15. SEISMIC DATA ------------ a. Licensed Data When licensing data for use in evaluation of the Prospects, ZEI shall endeavor to secure a joint license which would allow FX and ZEI to use the licensed data independently. However, if a joint license can be obtained only by the payment of an additional premium, ZEI shall license such data with only itself as the licensee. b. Marketing of Proprietary Data ZEI will acquire proprietary seismic data in its prospect development program. Absent the agreement of both parties, such data shall not be marketed to third parties. FX shall own an interest in such seismic data equal to the FX Prospect Interest and ZEI the own the remaining interest in such data. Notwithstanding the ownership in the seismic data described above, if FX funds the entire seismic acquisition program contemplated hereunder, then until 11 such time, if any, as proceeds from the sale or license of proprietary seismic data equal Seismic Funds advanced by FX, FX shall receive all proceeds from any license or sale of proprietary seismic data. After such proceeds equal the Seismic Funds advanced by FX, any further proceeds shall be shared equally by ZEI and FX. 16. GENERAL PROVISIONS ------------------ a. Additional Documents The parties agree to execute such further documents as may be necessary or appropriate to more fully reflect the agreements and understandings reflected herein. b. Amendment. This Agreement may be amended only by an instrument signed by the party against whom such amendment is sought to be enforced. c. Arbitration. Subject to any restriction imposed by law on agreements for compulsory arbitration, the parties agree that any controversy or dispute arising out of, in connection with, or related to this Agreement, any provision or breach thereof, or any transaction contemplated hereby shall be submitted to and settled by binding and conclusive arbitration before a panel of three (3) arbitrators in Houston, Texas in accordance with the applicable rules of the American Arbitration Association (or any other form of arbitration agreed to by the parties) then in effect; provided, however, that only actual damages and attorney fees of the prevailing party reasonably incurred in connection with the arbitration proceeding shall be awarded in connection therewith. Judgment on any award rendered pursuant to any such arbitration proceeding may be entered in any court, Federal or state, having jurisdiction thereof, and the parties shall be deemed to have waived their right to any form of appeal of such award to the extent permitted by law. d. Assignment This agreement may be assigned in whole or part by FX with the approval of ZEI, which approval shall not be unreasonably denied. e. Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 12 f. Consequential Damages. Neither party hereto shall be liable to the other for special, indirect, consequential or incidental damages resulting from or arising out of this Agreement or the obligations contemplated hereunder, including, but not limited to, loss of production, loss of anticipated profits or business interruptions, however same may be caused. g. Contractual Liabilities Should ZEI incur a contractual liability to a third party in performing its undertakings hereunder, such contractual liability shall be treated as a Prospect Expense. Should ZEI incur a tort liability to a third party in performing its undertakings hereunder, and such liability be a result of gross negligence or willful malfeasance, such liability, and all attorneys fees and expenses relating thereto, shall be solely for ZEI's account. Should ZEI incur a tort liability to a third party in performing its undertakings hereunder, and such liability not be a result of gross negligence or willful malfeasance, such liability, and all attorneys fees and expenses relating thereto, shall be borne equally by FX (or its assigns) and ZEI. h. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. i. WAIVER OF CONSUMER RIGHTS ------------------------- (Texas Deceptive Trade Practices Act) It is the belief of the parties that this agreement is exempt from the provisions of the Texas Deceptive Trade Practices-Consumer Protection Act (the "Act"). Should, however, the Act be construed to not exempt this transaction, the following waiver shall apply. For the purpose of the following waiver, ZEI is deemed the Seller and FX the Purchaser: PURCHASER REPRESENTS AND STIPULATES TO SELLER THAT: (I) THE PURCHASER IS NOT IN A SIGNIFICANTLY DISPARATE BARGAINING POSITION; (II) THE PURCHASER IS REPRESENTED BY LEGAL COUNSEL IN SEEKING OR ACQUIRING THE GOODS OR SERVICES WHICH IT ACQUIRES UNDER THIS AGREEMENT; AND (III) CONSUMER'S LEGAL COUNSEL WAS NOT DIRECTLY OR INDIRECTLY IDENTIFIED, SUGGESTED, OR SELECTED BY SELLER OF AN AGENT OF THE SELLER. 13 (IV) I (THE PURCHASER) WAIVE MY RIGHTS UNDER THE DECEPTIVE TRADE PRACTICES-CONSUMER PROTECTION ACT, SECTION 17.41 ET SEQ., BUSINESS & COMMERCE CODE, A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND PROTECTIONS. AFTER CONSULTATION WITH AN ATTORNEY OF MY OWN SELECTION, I VOLUNTARILY CONSENT TO THIS WAIVER." j. Due Authorization. Each party hereto represents that the execution, delivery and performance of this Agreement by such party has been duly authorized by all necessary corporate action. k. Entire Agreement. This Agreement, including the schedules and exhibits hereto constitutes the entire Agreement, and supersedes all other prior agreements, understandings, representations and warranties both written and oral, among the parties, with respect to the subject matter hereto. l. Force Majeure In the event that any party is rendered unable, in whole or in part, by force majeure to carry out its obligations under this Agreement (other than the obligation to make payments of money due), upon such party giving notice and reasonably full particulars of such force majeure in writing to the other party within a reasonable time after the occurrence of the cause relied upon, the obligations of the party giving such notice, so far as they are affected by such force majeure, shall be suspended during the continuance of any inability so caused, but for no longer period; and the cause of the force majeure as far as possible shall be remedied with all reasonable dispatch. The term "force majeure" as employed herein shall mean an act of God, strike, lockout or other industrial disturbance, war, blockade, riot, lightning, fire, storm, flood, explosion, governmental restraint and any other cause whether of the kind herein enumerated, or otherwise, not reasonably within the control of the party claiming suspension. The settlement of strikes, lockouts and other labor difficulties shall be entirely within the discretion of the party having the difficulty. The above requirement that any force majeure shall be remedied with all reasonable dispatch shall not require the settlement of labor difficulties by acceding to the demands of opponents therein when such course is inadvisable in the discretion of the party having the difficulty. m. Governing Law Except as otherwise required by mandatory provisions of applicable law, this Agreement shall be governed by and construed in accordance with the laws of 14 the State of Texas, without reference to principles of conflicts of law. n. Headings. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. o. Relationship of the parties The parties to this Agreement are independent contractors. There is no relationship of agency, partnership, joint venture, employment, or franchise between the parties in any way. Neither party nor its employees has the authority to bind or commit the other party in any way or to incur any obligation on its behalf. p. Notices Any notice or report herein required or permitted to be given shall be addressed to the parties as follows: If to FX: FX Energy, Inc. 237 Park Avenue, Suite 2100 New York, NY 10017 Tel: 212 551 3550 Fax: 212 490 0131 If to ZEI: Zydeco Exploration, Inc. Suite 1160 333 North Sam Houston Parkway East Houston, Texas 77060-2403 Tel: 713 820 2481 Fax: 713 820 6054 Any notice required to be given hereunder shall be sufficient if in writing, and sent by nationally recognized overnight courier service, hand delivery, telecopy or registered mail (return receipt requested and first- class postage prepaid), addressed to the address first set forth above for each party (or to such other address as any party shall specify by written notice so given), and shall be deemed to have been delivered as of the date sent. 15 q. Performance Standards In performing their duties or exercising their rights hereunder, one party shall be liable to the other only for gross negligence or willful malfeasance. It is not the intent that either party have a fiduciary obligation to the other, any such obligation being expressly waived and disclaimed. r. Severability If any part of this Agreement is found invalid or unenforceable, that part will be amended to achieve as nearly as possible the same economic effect as the original provision and the remainder of this Agreement will remain in full force. s. Statute of limitations. No action arising under this Agreement may be brought at any time more than thirty six (36) months after discovery or acquisition of knowledge of the facts upon which the cause of action is based occurred. t. Tax Matters As to all operations hereunder, the parties hereto shall be subject to and shall comply and abide with the tax election provisions set out in Exhibit "E" attached hereto and made a part hereof for all purposes. u. Third Party Beneficiary. This Agreement is not intended to benefit or to create any obligations to, or rights in respect of, any persons other than the parties hereto, and their respective legal representatives, heirs or estates. v. Time Time is of the essence in all matters pertaining to this Agreement. w. Titles The parties acknowledge that the determination of adequate or marketable title to Louisiana lands and leases is, to a great extent, subjective. As to any option, permit, or land or lease acquired hereunder, ZEI shall make all title materials in its possession available to FX upon request. ZEI makes no warranty or representation that the title of any party granting any option, permit, land or lease hereunder is adequate, good, or marketable. Further, ZEI shall have no liability to FX of any nature upon the total or partial failure of title to any option, permit, land or lease acquired hereunder. 16 IN WITNESS WHEREOF, this Exploration Agreement is executed as of the date first above written. ZYDECO EXPLORATION, INC. By: /s/ Sam B. Myers, Jr. ----------------------------------- Sam Myers, President FX ENERGY, INC. /s/ William D. Forster By: William D. Forster Its: President_________________________ 17 EX-27 3 ARTICLE 5 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 9,026,012 1,713,925 256,569 0 0 11,049,173 2,119,900 (661,269) 12,869,431 5,198,578 0 0 781 6,594 7,597,651 12,869,431 556,746 773,674 11,233 11,233 1,067,554 0 25,671 (592,513) 0 (592,513) 0 0 0 (592,513) (.10) (.10)
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