-----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, DnogLYXebjwArS1Q+x3Q1oQ6Y/dTyTYdLu69MhjwGfqbmcWCBtpkzmeyCRTRQVhg /z8WMARo0da2xhr5ycqS/Q== 0000899243-96-001500.txt : 19961118 0000899243-96-001500.hdr.sgml : 19961118 ACCESSION NUMBER: 0000899243-96-001500 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 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: 96665125 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 SEPTEMBER 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 September 30, 1996, there were 6,593,651 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................... 14 PART II. OTHER INFORMATION.............................................. 17 SIGNATURES.............................................................. 18
Page 2 of 18 ZYDECO ENERGY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 DECEMBER 31, 1995 -------------------- -------------------- ASSETS (Unaudited) CURRENT ASSETS Cash and equivalents $ 6,353,431 $ 517,781 Marketable Securities 1,788,557 10,938,674 Oil and gas revenue receivable 357,478 67,024 Other receivable 282,518 46,546 Prepaid expenses 38,065 - -------------------- -------------------- TOTAL CURRENT ASSETS 8,820,049 11,570,025 -------------------- -------------------- Oil & gas propertics, using successful efforts method of accounting Proved properties 300,784 309,110 Unproved properties 496,332 - Equipment and sothware, at cost 1,551,551 789,710 -------------------- -------------------- 2,384,667 1,098,820 Less: Accumulated depreciation, depletion and amortization (843,032) (399,541) -------------------- -------------------- 1,505,635 699,279 Operation bond and other assets 358,358 313,101 -------------------- -------------------- TOTAL ASSETS $ 10,684,042 $ 12,582,405 ==================== ==================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 122,759 $ 284,219 Accrued liabilities 244,650 355,833 Exploration obligations 3,405,847 3,210,477 Short-term bridge financing notes payable - 225,028 Capital lease obligation-current portion 183,601 160,693 -------------------- -------------------- TOTAL CURRENT LIABILITIES 3,956,857 4,236,250 -------------------- -------------------- CAPITAL LEASE OBLIGATION 16,824 157,537 -------------------- -------------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Convertible preferred stock, par value $.001 per share; 1,000,000 shares authorized; 781,255 shares issued and outstanding at December 31, 1995 - 781 Common stock, par value $.001 per share; 50,000,000 shares authorized; 7,374,906 and 6,562,530 shares issued; 6,593,651 and 5,781,275 shares outstanding, respectively 7,375 6,563 Additional paid-in capital 9,503,943 9,495,053 Accumulated deficit (2,793,705) (1,306,527 Less-Treasury stock, at cost; 781,255 shares (7,252) (7,252) -------------------- -------------------- TOTAL STOCKHOLDERS' EQUITY 6,710,361 8,188,618 -------------------- -------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,684,042 $ 12,582,405 ==================== ====================
The accompanying notes are an integral part of these financial statements. Page 3 of 18 ZYDECO ENERGY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 1996 1995 1996 1995 --------------- ---------------- --------------- --------------- REVENUES Oil and gas production $ 461,038 $ 31,735 $ 1,017,784 $ 88,204 Gain on sales of unproved leases - - 16,319 117,517 Seismic services - - 31,500 300,000 Interest income 58,869 10,354 227,978 38,365 TOTAL REVENUES 519,907 42,089 1,293,581 544,086 EXPENSES Lease operating expenses 6,073 11,492 17,306 16,860 Exploration and dry hole costs 681,218 - 719,690 259,368 Seismic service costs - - - 200,000 General and administrative expenses 535,318 227,125 1,564,400 638,503 Depreciation, depletion and amortization 181,763 94,770 443,492 276,202 Interest expenses 10,200 16,878 35,871 54,090 --------------- ---------------- --------------- --------------- TOTAL EXPENSES 1,414,572 350,265 2,780,759 1,445,023 NET LOSS $ (894,665)$ (308,176) $ (1,487,178)$ (900,937) =============== ================ =============== =============== PER COMMON SHARE AND SHARE EQUIVALENT -- WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON SHARE EQUIVALENTS OUTSTANDING 6,472,122 3,906,280 6,027,182 3,733,011 =============== ================ =============== =============== LOSS PER COMMON EQUIVALENT SHARE $ (0.14)$ (0.08) $ (0.25)$ (0.24) =============== ================ =============== ===============
The accompanying notes are an integral part of these financial statements. Page 4 of 18 ZYDECO ENERGY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Convertible Preferred Stock Common Stock Additional -------------------------- ------------------------- Paid-in Shares Amount Shares Amount Capital -------------------------- ------------------------- ---------------- Balance at December 31, 1994 781,255 $ 781 4,468,777 $ 4,469 $ 2,195,278 (Unaudited): Acquisition of treasury stock - - (781,255) Net Loss - - - - - Private issuance of Common Stock - - 218,753 219 (175) ----------------------------------------------------------------------- Balance at September 30, 1995 781,255 $ 781 3,906,275 $ 4,688 $ 2,195,103 ============ ========== =========== =========== ================ Balance at December 31, 1995 781,255 $ 781 5,781,275 $ 6,363 $ 9,495,053 (Unaudited): Net Loss - - - - - Options and warrants exercised for Common Stock - - 31,154 31 8,890 Adjustment for fractional shares paid in cash - - (33) - - Conversion of Preferred Stock to Common Stock (781,255) (781) 781,255 781 - ------------------------------------------------------------------------ Balance at September 30, 1996 - $ - 6,593,651 $ 7,375 $ 9,503,943 ============ ========== =========== =========== ================
Total Accumulated Teasury Stockholders' Deficit Stock Equity ------------ --------- --------------- Balance at December 31, 1994 $ (132,881) $ - $ 2,067,647 (Unaudited): Acquisition of treasury stock - (7,252) $ (7,252) Net Loss (900,937) - $ (900.937) Private issuance of Common Stock - - $ 44 --------------------------------------------------------------- Balance at September 30, 1995 $ (1,033,818) $ (7,252) $ 1,159,502 ============= =========== =============== Balance at December 31, 1995 $ (1,306,527 $ (7,252) $ 8,188,618 (Unaudited): Net Loss (1,487,178) - (1,487,178) Options and warrants exercised for Common Stock - - 8,921 Adjustment for fractional shares paid in cash - - - Conversion of Preferred Stock to Common Stock - - - --------------------------------------------------------------- Balance at September 30, 1996 $ (2,793,705) $ (7,252) $ 6,710,361 ============= =========== ===============
The accompanying notes are an integral part of these financial statements. Page 5 of 18 ZYDECO ENERGY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------- 1996 1995 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(1,487,178) $ (900,937) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation, depletion, and amortization 443,492 276,202 Gain on sales of unproved leases (16,319) (117,517) Exploration and dry hole costs 719,690 259,368 Changes in operating assets and liabilities (Increase) in oil & gas revenue receivable (290,454) (23,215) (Increase) in other current assets (274,037) (5,385) (Decrease) in accounts payable (161,460) (81,068) Increase (Decrease) in accrued liabilities (111,183) 117,036 ------------ ------------ NET CASH (USED IN) OPERATING ACTIVITIES (1,177,449) (475,516) CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition and exploration of oil and gas properties $(1,209,459) $ (421,622) Proceeds from the sale of unproved leases 16,319 150,000 Cost recovery on exploration agreement - 698,675 Net advance on exploration obligation 5,000,000 4,000,000 Expenditures against exploration obligation (4,805,644) (1,257,819) Purchase of equipment and software (761,841) (325,025) Other capital expenditures (42,450) - Proceeds from sale of marketable securities 9,150,117 - ------------ ------------ NET CASH PROVIDED BY INVESTING ACTIVITIES 7,347,042 2,844,209 CASH FLOWS FROM FINANCING ACTIVITIES: Principal repayments of short-term Bridge Financing $ (225,028) $ - Principal payments of capital lease obligations (117,805) - Common stock proceeds 8,890 44 ------------ ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (333,943) 44 ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS $ 5,835,650 $ 2,368,737 Cash and cash equivalents at beginning of period 517,781 875,927 ------------ ------------ CASH AND CASH EQUIVALENT AT END OF PERIOD $ 6,353,431 $ 3,244,664 ============ ============
The accompanying notes are an integral part of these financial statements. Page 6 of 18 ZYDECO ENERGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (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 September 30, 1996, and September 30, 1995, and the results of operations and changes in cash flows for the nine months ended September 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 Companys 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 Companys 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 Companys ability to access capital sources necessary for continued growth. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates with regard to these financial statements include the estimate of proved oil and gas reserve volumes and the related discounted future net cash flows therefrom. Page 7 of 18 ZYDECO ENERGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (Unaudited) 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 (the "West Cameron Seismic Project") which includes the area covered by the permit and additional contiguous land acreage. 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 is utilizing the processing technology in the West Cameron Seismic Project. 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. In August 1996, the Company purchased non-producing leasehold interests and agreed to participate in the drilling of an exploratory well 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 to an affiliate of the Company's Chief Executive Officer (see "Note 7 - Related Party Transactions"). Drilling of the well commenced in August 1996 and was abandoned in September 1996 for mechanical reasons without testing the well's primary objectives. The Company charged $657,385 to exploration expense in September in connection with the drilling and abandonment of the well. 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 the 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 September 30, 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 September 30, 1996, inception to date expenditures under the Fortune Agreement aggregated approximately $2,020,037, net of undistributed interest earned of $134,526. 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 Page 8 of 18 ZYDECO ENERGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (Unaudited) 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 at any time and its interest would then be reduced pro rata based on the West Cameron Seismic Project's total cost. The Company began onshore leasing and seismic permitting in February and commenced seismic operations in August 1996. At September 30, 1996, the Company had incurred costs of approximately $4,374,116 in connection with the West Cameron Seismic Project net of interest earned on the unused project funds ($24,028). The Chemiere 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 West Cameron Seismic Project, and to complete data acquisition and processing of a 3D seismic survey of the onshore and offshore areas. Effective October 31, 1996, the Company and Cheniere amended the Cheniere Agreement to delay the timing of the remaining payments required to be paid by Cheniere consistent with the Company's current expectations of the timing of costs to be incurred on the Project. At September 30, 1996, Cheniere had advanced $5 million under the Cheniere Agreement, as amended, with the remaining payments due as follows:
October 31, 1996 $1,000,000* February 28, 1997 $1,000,000 November 30, 1996 $2,000,000 March 31, 1997 $1,000,000 January 31, 1997 $2,000,000 April 30, 1997 $1,500,000
_______________________________ *Received October 31, 1996 5. INDEBTEDNESS. Long-term Obligations. Balances of the Companys long-term obligations at September 30, 1996, and December 31, 1995, consist of the following:
September 30, 1996 December 31, 1995 ----------------------------- ---------------------------- Current Long-term Current Long-term ----------- -------------- ----------- ------------- Capital Lease - Computer Hardware & Software $ 183,601 $ 16,824 $ 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 Energys 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. Options for 150,000 shares were granted by the stockholders to the Bridge Lenders as an inducement to make the Bridge Financing, and options for 75,000 shares were granted by certain stockholders 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. Page 9 of 18 ZYDECO ENERGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (Unaudited) 6. CONVERTIBLE PREFERRED STOCK AND COMMON STOCK. During the nine month period ended September 30, 1995, the Company issued 218,753 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 a 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 Stock exceeded the minimum price for the required period in June 1996, and, accordingly, the Company exercised its option to convert all shares of Convertible Preferred Stock to Common Stock effective July 15, 1996. Warrants. In connection with the original 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 ("Underwriter Warrants"), 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 nine months ended September 30, 1996, warrants were exercised for 29,592 shares of Common Stock, net of 9,575 warrant shares tendered upon exercise leaving 33,101 Underwriter Warrants outstanding. 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 Companys 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 Page 10 of 18 ZYDECO ENERGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (Unaudited) 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 Companys 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, with the approval of the Board of Directors (Mr. Sam B. Myers, Jr. abstaining), 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 Chief Executive Officer, Mr. Sam B. Myers, Jr. The Company paid $302,464 (represented by the Myers Affiliate as its accumulated cost 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% back-in after payout by the Myers Affiliates. The Myers 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 overriding royalty interests aggregating 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. In August 1996, the Company, with the approval of the Board of Directors (Mr. Sam B. Myers, Jr. abstaining), 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 Affiliate owns 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 participated in the well with a working interest of 41.2% and paid their proportionate share of the estimated cost of drilling and abandonment costs of the well. The Myers Affiliates can also back-in for 25% of Zydeco's working interest 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 and was abandoned in September 1996 for mechanical reasons without testing the well's primary objectives. The Company and its partners are continuing to evaluate the exploration alternatives of this prospect. The Company charged $657,385 to exploration expense in September in connection with the drilling and abandonment of the well and at September 30, 1996, had a receivable due from the Myers Affiliate of $266,857, subject to a final accounting of the well's actual expenses. 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 $56,550 and $113,676 to this firm during the nine months ended September 30, 1996, and 1995, respectively. 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 nine months ended September 30, 1995. Effective January 1, 1995, Zydeco assumed an obligation for office facilities under an operating lease agreement, expiring in March 1997, from a Myers Affiliate where certain officers of the Company were, at Page 11 of 18 ZYDECO ENERGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (Unaudited) the time, also officers and/or directors of the Myers Affiliate. 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 $24,615. Rental expense related to this lease was $20,273 and $40,585 which is included in general and administrative expenses for the nine months ended September 30, 1996, and 1995, respectively. 8. STOCK OPTION PLANS. Common Stock was issued in the amount of 1,562 shares during the nine months ended September 30, 1996, in connection with stock options exercised under the Company's 1995 Employee Stock Option Plan. Shares exercisable under this Plan aggregated 501,564 shares and 251,564 shares at September 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 nine months ended September 30, 1996, options to purchase 175,000 shares were granted to employees at exercise prices ranging between $6 and $7 per share. At September 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 September 30, 1996, no options had been exercised or were exercisable 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 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 EVENTS. Effective October 31, 1996, the Company and Cheniere amended the Cheniere Agreement to delay the timing of the remaining payments required to be paid by Cheniere consistent with the Company's current expectations of the timing of costs to be incurred on the Project (see "Note 4 -- Exploration Agreements"). Also on October 31, 1996, Cheniere paid the $1 million payment due for such date under the revised payment schedule. In October 1996, the Company granted options to purchase 220,000 shares of Common Stock at $5 per share under the 1996 Equity Incentive Plan to two employees, including the Company's new President. The grants are 45,000 shares in excess of the 175,000 shares authorized and available for grant, and, Page 12 of 18 ZYDECO ENERGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (Unaudited) accordingly, the excess grants are subject to shareholder approval of an increase in the total authorized for the 1996 Equity Incentive Plan. Page 13 of 18 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 Companys 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 Companys ability to access capital sources necessary for continued growth. The Companys 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 Companys 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 Companys 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 Zydecos 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 Technology License Agreement 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 $783,754 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 (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"). Cheniere's interest of up to 50% in the West Cameron Seismic Project is conditioned upon payment of an aggregate of $13.5 million to fund the estimated costs of seismic acquisition. Such costs include the purchase of seismic rights or lease options on the related onshore acreage of the West Cameron Seismic Project, and data acquisition and processing of a 3D seismic survey of the onshore and offshore areas. Cheniere may elect to discontinue funding of the Project at any time, in which case its interest would be reduced pro rata in relation to total project costs. As of November 12, 1996, Cheniere has made payments of $6,000,000 under the Cheniere Page 14 of 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Agreement. The Company and Cheniere have amended to the Cheniere Agreement to delay the scheduled advance by Cheniere (see "Liquidity and Capital Resources" below). The Company began onshore leasing and permitting in February and commenced seismic operations in August 1996. RESULTS OF OPERATIONS-THIRD QUARTER 1996 COMPARED TO THIRD 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 September 30, 1996, operations resulted in a net loss of $894,665 ($.14 per share) compared to a net loss of $308,176 ($.08 per share) for the comparable period in 1995. The increase in net loss of $586,489 is comprised of increased revenue of $477,818 and increased expenses of $1,064,307. Oil and gas sales in third quarter 1996 increased $429,303 compared to third 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 7.33% after payout (4.33% before payout). Payout on this well occurred during the second quarter of 1996. In third quarter 1996, the Company's oil and gas revenue represented production from two wells of 7,966 barrels of oil and 119,359 mcf of natural gas which was sold for prices averaging approximately $21.34 per barrel and $2.44 per mcf, respectively. This compared to third quarter 1995 production from one well of 190 barrels and 21,084 mcf at prices averaging $17.00 per barrel and $1.46 per mcf, respectively. Interest income increased $48,515 as a result of the increase in available cash resulting from the Merger in December 1995. Exploration costs increased $681,218 in 1996 primarily as a result of the drilling and abandonment of an exploratory well in Timbalier Bay, Louisiana ($657,385). General and administrative expense increased $308,193 primarily as a result of increases in (i) office expenses related to the company's office relocation in June 1996 ($97,660), (ii) the increase in employees and related personnel costs ($110,077), and (iii) increases in public company expenses ($82,186). Depletion, depreciation and amortization increased $86,993 primarily due to increased oil and gas production and additions of computer hardware and software used in connection with the Company's seismic processing activities. RESULTS OF OPERATIONS-FIRST NINE MONTHS 1996 COMPARED TO FIRST NINE MONTHS 1995. For the first nine months of 1996, operations resulted in a net loss of $1,487,178 ($.25 per share) compared to a net loss of $900,937 ($.24 per share) for the comparable period in 1995. This represented increased revenue of $749,495 and increased expenses of $1,335,736. The loss per share was also affected by the increase in weighted average shares outstanding as a result of the additional dilution from shares issued in the Merger. Oil and gas sales in 1996 increased $929,580 primarily due to new production from the well discussed above. In the first nine months 1996, the Company's oil and gas revenue represented production from two wells of 15,970 barrels of oil and 267,379 mcf of natural gas which was sold for prices averaging approximately $21.42 per barrel and $2.53 per mcf, respectively. This compared to first nine months 1995 production from one well of approximately 477 barrels and 52,612 mcf at prices averaging $17.72 per barrel and $1.54 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 ($101,198) as compared to the first nine months of 1995. Interest income increased $189,613 as a result of the increase in available cash resulting from the Merger in December 1995. Exploration costs increased $460,322 in the first nine months of 1996 primarily as a result of the drilling and abandonment of the exploratory well discussed above. Also during the first nine months of 1995, the Company incurred dry hole costs of $259,368 related to the plugging and abandonment of a well drilled by North Central Oil Corporation in which Zydeco participated. General and administrative expense increased $925,897 primarily as a result of increases in (i) office expenses related to the company's office relocation in June 1996 ($142,563), (ii) the increase in employees and related personnel costs ($387,952), and (iii) increases in public company expenses ($350,565). Depletion, depreciation and amortization increased $167,290 primarily due to increased oil and gas production and additions of computer hardware and software used in connection with the Company's seismic processing activities. Page 15 of 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. 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. Sources of funds include the December 1993 public offering of the Companys 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. The Cheniere Agreement executed in April 1996, provides for funding of $13.5 million of project expenditures of which $6,000,000 had been advanced through October 31, 1996. The parties have amended the Cheniere Agreement effective October 31, 1996, to delay the timing of the remaining payments required to be paid by Cheniere consistent with the Company's current expectations of the timing of the costs to be incurred on the Project. The Company currently anticipates that the survey contractor will not complete the seismic survey until late in the first quarter of 1997. The Company has consistently paid for all project costs as incurred under the Cheniere Agreement, including the prepayment of long-term leases of computer hardware and software to be utilized in the processing of the seismic data. At September 30, 1996, the Company had prepaid hardware and software leases aggregating $960,575 to secure more attractive pricing, discounts and terms from its vendors. 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 cash on hand (including cash available from liquidation of cash equivalents and marketable securities)and cash available under the Fortune Agreement and the Cheniere 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 West Cameron Seismic Project. The Company has the ability to reduce the size of the survey area under its contract with the survey contractor and thereby limit certain costs of the West Cameron Seismic 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 projects. There can be no assurance that the Company will be successful in securing such partners or funds. The Company currently estimates only limited capital expenditures for the remainder of 1996, excluding the costs of the Fortune and Cheniere projects. At September 30, 1996, the Company had incurred capital expenditures (excluding exploration joint venture expenditures) aggregating $2,013,749. In connection with the West Cameron Seismic Project, the Company currently estimates costs to complete the two-year project at approximately $15 million. Other significant additional capital expenditures may include the acquisition of additional oil and gas leases, the drilling of prospects identified on the Companys 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 Companys 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 16 of 18 PART II- OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. (a) The Company held its 1996 Annual Meeting of Stockholders on July 9, 1996. At the meeting, the Board of Directors was re- elected in its entirety. (b) Other matters voted upon at the meeting: 1. 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; 2. 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 3. 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 ------ ----------- 10.11 Master Geophysical Data Acquisition Agreement dated June 12, 1996, (executed August 5, 1996) between Zydeco Exploration, Inc. and Grant Geophysical, Inc. 10.12 Second Amendment to the Exploration Agreement between Zydeco Exploration, Inc. and Cheniere Energy Operating Co., Inc. (formerly FX Energy, Inc.) dated August 5, 1996 10.13 Third Amendment to the Exploration Agreement between Zydeco Exploration, Inc. and Cheniere Energy Operating Co., Inc. (formerly FX Energy, Inc.) dated October 31, 1996 27 Financial Data Schedule (B) REPORTS ON FORM 8-K. None Page 17 of 18 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 (Principal Executive Officer) /s/ W. Kyle Willis ---------------------------------------- W. Kyle Willis, Vice President and Treasurer (Principal Financial Officer) Dated: November 14, 1996 Page 18 of 18 EX-10.11 2 MASTER GEOPHYSICAL DATA ACQUISITION AGREEMENT EXHIBIT 10.11 ------------- MASTER GEOPHYSICAL DATA ACQUISITION AGREEMENT --------------------------------------------- (DOMESTIC) This MASTER GEOPHYSICAL DATA ACQUISITION AGREEMENT (the MASTER AGREEMENT or AGREEMENT) made as of the 12th day of June A.D. 1996, between Zydeco ---- ---- ------ Exploration, Inc., having an office located in Houston, Texas (hereinafter - ------------------ -------- ----- called "Company") and Grant Geophysical, Inc., a Delaware corporation having an office in Houston, Texas (hereinafter called "Contractor"). Company and Contractor may each be referred to as Party or collectively as Parties. For and in consideration of the covenants and promises of the Parties herein set forth, the Parties do hereby agree as follows: 1. NATURE OF WORK The Company shall select and in writing designate to Contractor from time to time each area to be surveyed geophysically in search of subsurface geological structures favorable to the accumulation of oil and gas, and Contractor shall, if it has the resources available to do so, conduct the said geophysical survey(s) (hereinafter called the Survey(s)) in those areas so designated by Company. 2. SUPPLEMENTARY AGREEMENTS 2.1 Whenever a Survey is requested, Contractor and Company will enter into an agreement supplemental hereto which will be attached to and considered a part of this Master Agreement. Each such agreement will be designated as a "Supplemental Agreement". This first supplement will be "Supplemental Agreement 1"; successive supplements will be identified in numerical order. 2.2 Each Supplemental Agreement shall provide for the following: (a) The area(s) (state, county/parish, etc.) where the Survey(s) will be conducted (the Area of Operations). (b) The approximate commencement date, if applicable, of the Survey(s) (the Commencement Date). (c) The approximate period of time or number of miles, if applicable, that will be required to complete the Survey(s). (d) The type of Survey(s) to be conducted. The equipment, instruments, personnel and other items (the Crew) which will be required for the Survey(s). (e) The compensation to be paid Contractor for conducting the Survey(s) (the Compensation). (f) Any other matters of a business, operational or technical nature as may be agreed by the Parties. 2.3 Each Supplemental Agreement will be executed and dated by a duly authorized representative of each Party. 3. PERSONNEL, EQUIPMENT AND SUPPLIES 3.1 The Contractor shall furnish, immediately place in service and maintain, at its sole cost and expense, for the performance of Survey(s) hereunder, the Crew more particularly described in Supplemental Agreements hereunto annexed. 3.2 Varying operating conditions may require the Crew personnel and equipment set forth in said Supplemental Agreements to be augmented and accordingly Contractor shall, when authorized by Company, furnish such auxiliary or replacement personnel, equipment, supplies and services as may be required in connection therewith all as more particularly set forth and described in the Supplemental Agreements or amendments thereto, which shall clearly set forth the additional compensation, if any, to be paid to the Contractor as a result of such changes. 4. PERMITS 4.1. Contractor shall, at the Company's request and expense, obtain such permits, licenses, and clearances from land owners, mineral owners, appropriate governmental agencies, lessors, tenants, and all other persons having permissible interests in the land or its subsurface minerals, in the Area of Operations, as may be required in connection with all such Survey(s) to be performed by Contractor under this Agreement (the LAND ENTRY PERMITS). COMPANY'S COST SHALL INCLUDE PAYMENTS TO GOVERNMENTAL AGENTS, THEIR PER DIEM, IF ANY, AND CONTRACTORS' PERSONNEL AND EQUIPMENT NEEDED TO SECURE SUCH PERMITS AND LICENSES. CONTRACTOR WILL USE ITS BEST EFFORTS TO SECURE WRITTEN OR ORAL PERMITS FROM THE PERSON OR PERSONS REPRESENTING THEMSELVES TO BE OWNERS OR LESSORS OF THE AREAS INVOLVED. 4.2 In the event it becomes necessary to pay for permission to enter upon any area connected with the Survey, Contractor will notify Company of such area involved and the price required in order to obtain the Land Entry Permits and will proceed with the consent of Companys authorized representative. Company will reimburse Contractor the cost of all such permits unless otherwise provided in the applicable Supplementary Agreement. 4.3 In the event Company assumes the responsibility for obtaining Land Entry Permits from owners or occupants of the land to be surveyed, either by utilizing Company personnel or those of third party contractors (whether individuals, corporate or otherwise) Contractor shall not be responsible for any delays in its operations caused by (i) the inability of Company to acquire any permit on a timely basis or (ii) onerous provisions contained in such permits which impede the operations of Contractor hereunder. 5. CONDUCT OF OPERATIONS 5.1 The Contractor covenants and agrees with Company that during the term of this Agreement, it will: (a) Enter upon no lands in respect of which all necessary Land Entry Permits shall not have been first obtained, as provided in Clause 4 above. (b) Equip its Crew with instruments and equipment herein specified and maintain such equipment in good operating condition. (c) Provide its Crew with qualified and experienced personnel. (d) Perform all Survey(s) hereunder in an orderly, efficient and workmanlike manner in strict compliance with all applicable laws, ordinances, rules and regulations for the time being in force in every state and locality wherein the Survey(s) hereunder is to be performed. (e) Comply fully with the provisions of all workmen's compensation legislation, ordinances, rules and regulations in force in every state wherein the Survey(s) is to be performed. (f) Exercise reasonable diligence in the care, use and maintenance of any and all materials and/or equipment which may be furnished to it by Company hereunder. (g) Initiate all energy source units at a safe distance from water wells, buildings and structures owned by third persons with a view to avoiding, as far as reasonably possible and consistent with prudent geophysical operations, all risk of damage to such wells, buildings and other structures. (h) Make every reasonable effort to conduct operations so as to result in minimum disturbance to the surface and to restore the surface as nearly as possible to its original condition. After Contractor has obtained releases for surface restoration, whether of government origin or otherwise, liability for any subsequent requirements for erosional or pollution repair or prevention shall rest with Company which liability shall survive the termination of this Agreement. (i) Pay and satisfy all labor and materialmen's claims validly made or incurred in connection with the Survey(s) performed hereunder. 5.2 The Company covenants and agrees with Contractor as follows: (a) It will not require Contractor to do any matter, act or thing in the performance of the Survey(s) hereunder that is contrary to or in violation of any law, ordinance, rule or regulation governing the subject matter of this Agreement. (b) It will, in writing, designate to Contractor its authorized representative through whom all communications between the Parties hereto shall be directed relative to the Survey(s) to be performed hereunder. (c) The Company shall furnish Contractor with all land and base maps, subsurface well data and all other information that may be necessary or helpful to the conduct of the Survey(s), all of which shall be considered the property of Company to be held by Contractor as strictly confidential information and returned to the Company after the completion of the Survey(s). 6. REPORTS 6.1 The Contractor shall at all times keep Company fully informed directly or through Company's authorized representative as to the progress of the Survey(s) and the results currently obtained during the course thereof and shall consult with Company's representative concerning the data collected and the planning of the Survey(s) by Contractor's Crew. 6.2 During the course of the Survey(s), Contractor shall furnish Company with such periodic production and progress reports as Company shall reasonably require, including such reports as may be required by the various agencies of the federal, state and local authorities where the Survey is being performed. 6.3 As soon as possible upon completion of each Survey, Contractor shall furnish Company with reports and data as follows: (a) A final report consisting of a written description of the Survey(s) performed and the results thereof accompanied by maps on a base supplied by Company of all data considered necessary by Company. (b) All field data sheets, computation sheets, seismograph records, weathering data, and engineering data as may have been generated in the performance of the Survey(s), which reports and materials shall be permanent property of Company but accessible to Contractor for technical examination any time prior to the expiration of this Agreement. The Company shall not require Contractor to reveal proprietary technical data regarding design and method of operation of its geophysical instruments. (c) Any other reports or data as may be provided for in the applicable Supplemental Agreement. 6.4 The results stated and the conclusions drawn in all reports furnished by Contractor to Company hereunder shall represent the best opinion and judgment of the Contractor; however, Contractor cannot and does not warrant or guarantee the accuracy or correctness thereof. Any action which Company (or those associated with Company) may take as a result of such reports shall be on its own responsibility and Contractor shall not be liable or responsible for any loss, cost, damages or expenses whatsoever, including incidental or consequential damages, incurred or sustained by Company resulting therefrom. 7. CONFIDENTIALITY 7.1 Contractor shall treat all maps, logs, records, data, reports and other information used in or obtained from operations hereunder as strictly confidential and shall report any loss of such items immediately to Company in writing. Contractor shall not allow any person, other than a duly authorized representative of Contractor or Company, to have access to such confidential items and shall not divulge any information obtained from operations to any third persons nor permit any of its officers, employees or agents to do so. Contractor shall take all reasonable and necessary precautions to prevent any of Contractor's officers, employees or agents from disclosing information obtained from operations to any person other than a duly authorized representative of Contractor or Company. The obligations contained in this paragraph shall survive the termination of this Agreement regardless of the cause or reason for termination. 7.2 Contractor shall require that all subcontractors agree to the confidentiality provision stated above. Contractor shall, upon receipt of a written request from Company, obtain from each subcontractor performing services pursuant to or in connection with any Survey, prior to commencement of such services, a written confidentiality agreement and acknowledgment of the proprietary status of all related information, in favor of Company. 8. INDEMNITY 8.1 The Company will release, defend, protect, indemnify and save harmless Contractor of, from and against the following claims, liabilities, causes of action, damages, judgments and settlements, including costs and reasonable attorneys fees (hereinafter collectively the Liabilities): (a) All Liabilities occasioned by or attributable to the failure of Company to obtain timely and adequate Land-Entry Permits, in the event Company has the obligation to obtain Land-Entry Permits, as set forth in Clause 4 above. (b) All Liabilities arising out of damage to the land, and all crops, trees, water wells, buildings and other structures on or in such land (collectively the Land), which Land is owned or occupied by third parties, and which damage was: (i) necessary or unavoidable in conducting prudent operations or (ii) resulted from the placing or detonating the energy source at distances equal to or further than the distances from structures on the Land which Company may, from time-to-time, approve in writing, EXCEPTING, however, to the extent any such damage is occasioned by or attributable to: (iii) a negligent act or omission to act on the part of Contractor or its subcontractors or (iv) the failure by Contractor or its subcontractors to conduct operations hereunder in a professional and prudent manner, for which Contractor shall be responsible, as provided in Clause 8.2 below. (c) All Liabilities arising out of damage to or destruction of property of Company or any injury or death sustained by the employees, agents or other contractors of Company including any such damage or injury which is caused by the sole or contributing negligence of Contractor, the risk of which Company hereby expressly assumes. (d) All Liabilities arising from property damage or injury or death sustained by any person or persons, excluding (i) employees of Contractor or any of its subcontractors and (ii) damages to Land covered by sub-clause (b) above, arising out of or in any way connected with the operations of Contractor hereunder, to the extent that the same is occasioned by or attributed to the negligent or willful acts or omissions to act on the part of Company. 8.2 The Contractor will release, defend, protect, indemnify and save harmless the Company of, from and against: (a) All Liabilities occasioned by or attributable to the failure of Contractor to obtain timely and adequate Land-Entry Permits as provided in Clause 4 above. (b) All Liabilities arising from damage to Land which is owned or occupied by third persons resulting from Contractors operations hereunder to the extent that the same is occasioned by or attributable to (i) a negligent act or omission to act on the part of Contractor or its subcontractors or (ii) the failure by Contractor or its subcontractors to conduct operations hereunder in a professional and prudent manner. (c) All Liabilities arising out of damage to or destruction of any property of Contractor or any injury or death sustained by the employees or agents of Contractor or of its subcontractors, including any such damage or injury which is caused by the sole or contributing negligence of Company, the risk of which Contractor hereby expressly assumes. (d) All Liabilities arising from property damage or injury or death sustained by any person or persons, excluding (i) employees of Company and (ii) damages to Land covered by sub-clause (b) above to the extent that the same is occasioned by or attributed to the negligent acts or omissions to act on the part of Contractor or its subcontractors. 8.3 Contractor agrees to compensate, on a timely basis, all of its suppliers and subcontractors which provide materials, supplies or services to Contractor in support of the Services of Contractor rendered to Company under the terms hereof. In the event Contractor fails to so compensate its suppliers and subcontractors and if, as a result thereof, (I ) any lien or other encumbrance attaches against Company or any property of Company of (ii) Company otherwise sustains any loss or damage as a result of any such lien or encumbrance, Contractor shall fully indemnify, defend and hold Company harmless from and against same and, in the event of a lien or other encumbrance affecting Company or its property to promptly discharge same and secure its release and to provide evidence thereof to Company. 8.4 Contractor shall be responsible for the safekeeping of field tapes while such tapes are in the custody of Contractor until such time as Contractor delivers said tapes to a representative of Company or places them in the possession of a carrier designated by Company (or if Company does not so designate a carrier, any reputable carrier selected by Contractor) for delivery to Company or a third party designated by Company. In the event of loss of or damage to any tapes for which Contractor is responsible, as provided herein, Contractor's sole and only responsibility to Company shall be, at the option of Company, either (i) reacquire the data affected by such loss or damage or to (ii) refund (or grant credit) to Company for all Compensation paid (or payable) to Contractor with respect to such data so affected. Notwithstanding the foregoing, Contractors obligations herein shall be fully satisfied in the event Contractor or Company has duplicate, undamaged copies, of the affected data. 8.5 As used herein, the acts or omissions of the Parties shall include those of their respective employees, agents and representatives and, in the case of Company, its other contractors and, in the case of Contractor, its subcontractors, and their respective employees, agents and representatives. 8.6 If a claim or suit for damages is made or brought against one of the Parties hereto in respect of which it claims or will claim defense and indemnify against the other Party pursuant to Subclauses 8.1, and/or 8.2 and/or 8.4 above, the Parties hereto covenant and agree that the Party against whom the claim or suit is made shall give immediate notice in writing to the other Party of such claim or suit and all available information with reference to the facts upon which same is based. Further, the Party against whom said claim or suit is made will be given complete control of the defense of any such claim or suit, including the right to defend, resist, compromise or settle same. However, the other Party shall have the right to participate in the defense, compromise or settlement of any such claims or suit, at its expense. 8.7 In case of asserted claims for damage to Land of third Parties against the Company, for which Company is responsible under Sub-clause 8.1 above, Contractor will, on request and for the account of Company, investigate and, with approval of Company, settle such claims on behalf of and at the sole cost of the Company, provided that such obligation on Contractor's part shall not extend beyond thirty (30) days from the date which Contractor's field crew concludes the applicable Survey. After such thirty (30) day period, Company shall investigate and settle such claims at its sole risk and cost. 8.8 Neither Party hereto shall be liable to the other Party for any special, incidental, consequential or punitive damages arising, in any event, from the conduct of the Parties under the terms hereof. 9. INSURANCE The Contractor shall, at its sole cost maintain, so long as this Agreement remains in force, and cause its subcontractors to maintain, with one or more reputable insurance companies, the following insurance: 9.1 Workmen's compensation and/or employer/s liability insurance in compliance with the laws or ordinances of all states in which Survey(s) is to be performed hereunder covering all employees engaged by Contractor in such Survey(s). 9.2 Automobile public liability insurance covering all vehicles performing Survey(s) hereunder, with limits of $1,000,000.00 for one or more persons injured or killed, or property damage incurred in any one accident. 9.3 Comprehensive public liability insurance covering all operations hereunder with limits of One Million Dollars for one or more persons injured or killed in any one accident, and with property damage limits of One Million Dollars ($1,000,000.00). 9.4 If aircraft is used in the operations hereunder, Aviation Liability Insurance covering all airplanes and helicopters, whether non-owned, chartered, or hired, and furnished by Contractor and used in the operations hereunder in an amount of not less than $3,000,000 per occurrence combined single limit. 9.5 If waterborne vessels are used in operations hereunder, hull and machinery insurance in an amount at least equal to the market value of each vessel owned by Contractor and used in operations hereunder. In the event the vessel is chartered by Contractor, then Contractor shall require the owner of the vessel to procure such insurance. Before any Survey(s) are commenced by Contractor hereunder, Contractor shall, if requested by Company, furnish certificates showing the above insurance coverages to be in force and permitting cancellations or major modifications of the policies only after ten (10) days' advance notice to Company. It is understood and agreed that Contractor's insurance coverage as detailed in the foregoing sections shall afford Company protection and coverage with respect to those matters covered by specific indemnity agreements extended by Contractor elsewhere provided herein and, except for workers compensation insurance, Company shall be named an additional insured Party under said policies but only to the extent of the liabilities assumed by Contractor under the terms hereof. All insurance policies required by this Agreement to be maintained by Contractor shall be endorsed whereby Contractors insurers shall waive their rights of subrogation against Company, entities affiliated with Company and their respective insurers. Any and all deductibles or retentions applicable to Contractors insurance policies shall be assumed by Contractor at its sole expenses. 10. COMPLIANCE WITH LAWS/HES 10.1 Contractor shall comply with all applicable laws, rules and regulations, both federal, state and local, applicable to any Survey performed by Contractor hereunder, and shall also comply with, observe and abide by the Health, Environment and Safety standards of any applicable governmental agency or of Company. 10.2 Contractor will perform the Survey(s) using the most current of either the IAGC Land Geophysical Operations Safety Manual or the IAGC Marine Geophysical Operations Safety Manual, as applicable, as a minimum set of standards supplemented by both Contractor and Company HES rules and work procedures. Contractor shall abide by these minimum health, environment and safety requirements. The more stringent of Company's or Contractor's policy and standards shall apply. Company reserves the right to intervene and consult with Contractor in development of solutions for hazards identified in execution of the work. 10.3 Contractor will equally apply HES standards to and enforce compliance with all such standards by all contractors of any tier, agents, employees, servants or other personnel under their control and will replace at Contractors expense those who fail to comply. Contractor shall ensure that each of its personnel shall have completed a work safety orientation immediately prior to commencing work under this Agreement. 10.4 Contractor shall report all accidents to Company. In the event there is an accident involving damage to the property or injury to the personnel of Contractor, Company or any third party, any environmental damage, or any incidents involving media attention, which arise out of, result from, or is in any way connected with Contractors work under to this Agreement, Contractor shall immediately report all such incidents to Companys designated representative within twelve (12) hours after occurrence. In addition, a copy of any written report which is required of Contractor by any governmental agency of such accident will be provided to Companys designated representative within twenty-four (24) hours of such accident. This report should contain factual information only and will not contain opinion, speculation or supposition as to fault, liability or prevention. Company reserves the right to participate in the investigation of any incident or accident resulting from the work conducted pursuant to this Agreement. 11. COMPANY REPRESENTATIVE Company shall designate in writing one or more representatives in the Survey area to whom Contractor's Party Chief or other representative may deliver reports and other confidential information developed from Survey(s). Such representatives shall have the right to be present during the conduct of the Survey(s). Contractor agrees to accept instructions in connection with the operations hereunder within the scope of this Agreement from such designated representatives, provided such instructions are given in writing. 12. TAXES 12.1 Contractor will be solely responsible for all taxes, duties, rates and assessments that may be levied in respect of any vehicles, equipment, instruments or supplies furnished by Contractor in the performance of the Survey hereunder. 12.2 The Contractor will be solely responsible for all payroll taxes, unemployment insurance assessment, federal and/or pension contributions and all other payroll deductions required to be made according to law in respect of the personnel of Contractor engaged in the performance of any of the Survey hereunder. 12.3 Contractor shall be solely responsible for any and all taxes assessed against it by the government of the U.S.A. or any state thereof having jurisdiction, which taxes are assessed against Contractor as a result of fees or other payments made to Contractor by Company hereunder and Contractor shall defend, protect, indemnify and hold Company harmless from and against any such tax assessments, as well as those described in Clauses 12.1 and 12.2 above. 12.4 Notwithstanding the foregoing, Contractor shall in no event be liable for sales, use and similar taxes and charges assessed by any applicable government agency, even though those taxes are generally measured by revenue or income of the Contractor, as such incidental taxes are not usually considered as income or profits taxes as those terms are generally understood in the geophysical industry. All such sales, use and similar taxes and charges shall be for the account of Company and, if paid by Contractor, shall be reimbursed by Company under applicable provisions hereof. 13. COMPENSATION/CONTRACTORS RIGHTS 13.1 The Company agrees to pay Contractor and Contractor agrees to accept payment for the Survey to be performed hereunder at the applicable rates set forth in Supplemental Agreements. 13.2 The Contractor shall on or before the 15th day of each month render to Company an itemized statement showing the amount due for services rendered, reimbursable costs and charges incurred by Contractor on behalf of Company hereunder during the preceding calendar month, such statement to be accompanied in each case by supporting vouchers and receipts. The Company shall, within thirty (30) days following receipt of such statement, remit payment of the same in full in United States funds by check, bank draft or money order payable to Contractor at its offices at the City of Houston, in the State of Texas. 13.3 If Company fails to pay any properly submitted statement, or portions thereof, of Contractor within the said thirty (30) day period, the unpaid amount thereof (unless otherwise in bona fide dispute) shall, at the opinion of Contractor, bear interest until paid at a rate equal to one and one half percent (1.5%) or such lesser maximum rate allowed by applicable law, per month until paid. Payment of any statement by Company hereunder shall not prejudice the right of Company to protest or dispute the correctness of any statement before the expiration of one (1) year following the end of the calendar month during which such statement was submitted. The passage of one (1) year without protest shall conclusively establish its correctness. 13.4 Contractor shall have the option, exercisable at any time, to (i) retain possession of raw tapes containing the geophysical data (the Data) acquired under the terms of this Master Agreement or any Supplemental Agreement hereto and, (ii) regardless of any other provision of this Master Agreement to the contrary, not be required to deliver said Data to Company until such time as all fees and other charges owed by Company to Contractor under the terms hereof (other than those which are subject to a bona fide question or dispute) are paid in full. However, in the event Contractor delivers said Data to Company prior to being paid in full for all monies due and owing by Company to Contractor under the terms hereof, Contractor does hereby reserve, and Company does hereby grant to Contractor, a purchase money security interest in said Data, including the results of any processing and/or interpretation thereof, and Company shall execute all such security agreements, financing statements and other documents as may be reasonably required by Contractor to perfect such purchase money security interest, pursuant to applicable law. Company hereby appoints Contractor as its agent to execute all such documents on behalf of Company, such appointment of Contractor being coupled with an interest and therefore irrevocable. Upon being paid, in full, all sums due and owing Contractor under the terms hereof, Contractor shall, upon request, immediately release any such security interest which Contractor may have in said Data so affected. Nothwithstanding the foregoing provision of this Section 13.4, in no event shall any such security interest or lien of Contractor attach to any of said Data which is tendered to, accepted by and fully paid for by Company. Likewise, Company shall have the right, upon request, to obtain any such Data so tendered, accepted and paid for notwithstanding any claim by Contractor against Company for compensation relative to any other Data. 13.5. In the event Contractor is entitled, under the terms of this Master Agreement or any Supplemental Agreement hereto, to (i) an ownership interest in the Data acquired under the terms hereof and/or (ii) the right to a share of the revenues received by Company or Contractor as the result of marketing such Data to others, Company agrees to execute such documentation as is reasonably necessary to vest in Contractor such ownership and/or revenue-sharing rights and hereby appoints Contractor as the agent of Company to execute said documentation on behalf of Company, such appointment of Contractor being coupled with an interest and therefore irrevocable. 13.6 Company hereby grants to Contractor the right to audit the books and records of Company for the purpose of verifying any marketing of the Data to others in those cases where Contractor has either an ownership interest in the Data or the right to share in the revenues generated in the marketing of said Data to others, but where Company has retained the right to perform such marketing. Also, if Contractor has the right to share in revenues generated by the marketing of the Data to others and if Company becomes more than thirty (30) days in arrears in any payments due Contractor hereunder, Contractor may, at its election and by giving written notice thereof to Company, assume the sole authority to market said Data on behalf of Company and Contractor. In no event shall such Data be offered by Company to third parties for prices or terms of payment less or different from those approved by Contractor, from time-to-time, in advance. 14. PATENTS 14.1 The Contractor shall, at its sole cost and expense, defend and save harmless Company from and against any and all claims, demands and legal proceedings brought against it and/or Company for the alleged infringement or misappropriation of any United States Letters Patent held or licensed by Contractor provided that (i) Company notifies Contractor in writing of the receipt of the claim or demand or the filing of such proceeding within ten (10) days after the receipt of notice of such claim, demand or service of process thereof, and (ii) Contractor is given complete control of the defense of such proceedings, including the right to defend, settle and make changes in equipment, methods, or processes for the purpose of avoiding any such alleged infringement or misappropriation. 14.2 If Contractor is prevented from performing any of its obligations hereunder by injunction or other legal proceedings based upon any claims for alleged infringement or misappropriation of any United States Letters Patent, or if on account of claims or alleged patent infringement or misappropriation Contractor shall discontinue its use of or change equipment, methods, or processes contemplated in this Agreement Contractor shall, in every such event, be relieved from performance of its obligations hereunder insofar as such nonperformance is the result of such alleged patent infringement or misappropriation or any injunction or other legal proceeding pertaining thereto. The Company shall be relieved of its obligation or make payment hereunder in respect of any Survey(s) to the extent Contractor is unable to perform same by reason of the alleged patent infringement or misappropriation as aforesaid. 15. INDEPENDENT CONTRACTOR No oral agreements or provisions of this Agreement shall be construed so as to constitute Contractor as the agent, servant, or employee of Company, and the exclusive management, direction and control of the employees of Contractor and the Survey(s) to be done under the provisions hereof shall, subject to the general supervision of Companys field representative, always reside in Contractor, Company being interested only in the results obtained. 16. ASSIGNMENT AND SUBCONTRACTS 16.1 The Contractor may subcontract to such subcontractor or subcontractors as shall be approved by Company such portions of the Survey(s) to be performed hereunder as is customary and usual in the performance of same, but Company shall in no way be held liable for payment of any monies due to any subcontractors. The Contractor shall, notwithstanding the subcontracting of any Survey(s) to be performed hereunder, remain liable and responsible to Company for the proper performance of every portion of the Survey(s) herein contracted to be performed. 16.2 Subject to Subclause 16.1 above, neither Party shall assign this Agreement in whole or in part without prior written consent of the other Party except to a company which is affiliated to the assigning Party. Contractor reserves the right to pledge its receivables to be received under the terms hereof to the financial institution which provides financing to the Contractor. 17. FORCE MAJEURE Neither Contractor nor Company shall be responsible for failure to perform the terms of this Agreement or any Supplemental Agreement when performance is hindered or prevented by strikes, lockouts, or other labor difficulty, war or acts of war, riots or civil commotion, fire, storm, flood, earthquake, terrorism, vandalism, interference by any government authority, or any other cause beyond the reasonable control of the affected Party, whether or not similar to the matters herein enumerated (Force Majeure). Compensation shall be payable to Contractor for work stoppages due to Force Majeure at the applicable standby rate or such other rate, if any, as may be set forth in the applicable Supplemental Agreement or as mutually agreed upon in writing by Company and Contractor for up to thirty (30) days; and if stoppage for such cause persists after said thirty (30) day period (i) compensation shall be at a rate agreed upon by Company and Contractor if Company requests Contractor to continue to stand by to resume operations; or (ii) Company or Contractor may forthwith terminate this Agreement or the affected Supplemental Agreement. 18. AUDIT Contractor shall maintain full and complete records concerning invoices which are based on Contractor's costs or other reimbursable billing basis in such manner and detail as to permit verification of all such charges made to Company. Company shall have the right to audit such records at any reasonable time upon written request to Contractor for a period of two (2) years from the date such costs were incurred. Contractor shall assist and cooperate with Company in making any audits provided for above. 19. TERM AND RENEWAL 19.1 This Master Agreement is effective from the day and year above written and will remain in effect until either Party terminates it by giving the other ten (10) day's advance written or electronically dispatched notice. However, if a Supplemental Agreement is in effect when such notice is given, termination of the Master Agreement shall not be effective until the date of termination of such Supplemental Agreement. This Master Agreement will automatically terminate if no Supplemental Agreement is made within twelve (12) months from the date hereof; or, if for twelve (12) consecutive months following the termination of the last Supplemental Agreement in effect, no new Supplemental Agreement is made. 19.2 This Agreement may be renewed and extended from time to time on such terms and subject to such conditions as the Parties may in writing agree upon. 20. NOTICES 20.1 The address for service of the Parties hereto shall be as follows: The Company: Zydeco Exploration, Inc. Two Allen Center, Suite 1710 Houston, Texas 77002 Attn: Mr. Rudy Prince Phone: (713) 659-2222 Fax: (713) 659-2221 The Contractor: Grant Geophysical, Inc. 16850 Park Row Houston, Texas 77084 Attn: D. Hugh Fraser, Jr. Tel: (713) 398-9503 Fax: (713) 398-9506 20.2 Either Party hereto may from to time to time change its address for service by giving written notice to the other. Any notice may be served by personal delivery or by mailing the same registered post, postage prepaid, in a properly addressed envelope addressed to the Party to whom the notice is to be given at such Party's address for service, and any such notice so served shall be deemed to have been given and received by the addressee forty-eight (48) hours after the mailing thereof, Saturdays, Sundays and statutory holidays excepted. Notice may also be given by fax or other electronic means and shall be effective immediately when received. 21. APPLICABLE LAWS/DISPUTES This Master Agreement and all Supplemental Agreements hereto shall be interpreted and construed in accordance with the laws, both statutory and common law, of the State of Louisiana, excluding only those choice-of-law provisions which would require the law of some other jurisdiction to be applicable. All disputes between the Parties related to this Master Agreement or any Supplemental Agreement shall be resolved by negotiation and mutual agreement, if possible. If such resolution of any such dispute is not so resolved within ninety (90) days after it has arisen, and notice thereof has been given to the other Party, either Party may submit the matter to the applicable State District Court, or other appropriate court, of the State of Texas sitting in Harris County or, if applicable, a Federal District Court sitting in Harris County, Texas. 22. WAIVER The rights herein given to either Party hereto may be exercised from time to time, singularly or in combination, and the waiver of one or more of such rights shall not be deemed to be a waiver of such rights in the future or of any one or more of the other rights which the exercising Party may have. No waiver of any breach of a term, provision or condition of this Master Agreement or any Supplement Agreement by one Party shall be deemed to have been made by the other Party hereto unless which waiver is expressed in writing and signed by an authorized representative of such Party, and the failure of either Party to insist upon the strict performance of any term, provision or condition of this Agreement or any Supplemental Agreement, or to exercise any option herein given, shall not be construed as a waiver or relinquishment in the future of the same or any other term, provision, condition or option. 23. DEFAULT In the event either Party hereto should, at any time during the term hereof, commit an act of bankruptcy or assign, voluntarily or involuntarily, its assets for the benefit of its creditors or should proceedings be commenced against or by either Party under any bankruptcy, insolvency or similar statute or should either Party fail to comply with any material term or provision hereof (any such action or condition being hereinafter referred to as Default) the other Party may terminate this Master Agreement, or the appropriate Supplemental Agreement, at its option exercisable at any time after fifteen (15) days have elapsed after giving notice to the defaulting Party of such Default and the defaulting Party has failed,, during such period, to cure such Default or to commence such cure to the reasonable satisfaction of the other Party. 24. INUREMENT Subject to Clause 16 above, this Master Agreement shall inure to the benefit of and be binding upon the Parties hereto and their respective successors and assigns. 25. CONFLICTS In the event of a conflict between a term or provision of the Master Agreement and one or more term or provision of a Supplemental Agreement, the applicable term or provision of the Master Agreement shall govern and prevail unless specifically provided to the contrary in the applicable Supplemental Agreement. The fact that additional terms or provisions are contained in one or the other document shall not, in and of itself, create a conflict. 26. ENTIRE AGREEMENT/MODIFICATION This Agreement together with each Supplemental Agreement, as written, embodies the entire contract between the Parties hereto with respect to the subject matter hereof and supersedes and replaces any previous agreement, oral or written, made and entered into between the Parties hereto respecting the Survey(s) to be performed hereunder. No modification of this Master Agreement or any Supplemental Agreement shall be valid unless in writing, referencing this Master Agreement and signed by an authorized representative of both Parties. IN WITNESS WHEREOF, the Parties hereto have executed and delivered these presents the day and year first above written. COMPANY: ZYDECO EXPLORATION, INC. CONTRACTOR: GRANT GEOPHYSICAL, INC. - -------- ----------- /s/ Rudy Prince /s/ D. Hugh Fraser - ------------------------------------- ------------------------------------- D. Hugh Fraser, Jr. Title Vice President North American Title Vice Chairman Operations - ------------------------------------- ------------------------------------- Date: August 5, 1996 Date: August 5, 1996 - ------------------------------------- ------------------------------------- EX-10.12 3 SECOND AMENDMENT TO THE EXPLORATION AGREEMENT EXHIBIT 10.12 August 5, 1996 Cheniere Energy Operating Co., Inc. 237 Park Avenue, Suite 2100 New York, NY 10017 Re: Second Amendment Gentlemen: I am writing with respect to that certain Exploration Agreement dated April 4, 1996, by and between FX Energy, Inc. and Zydeco Exploration, Inc., as amended by that certain First Amendment dated May 15, 1996 (the "Agreement"). For convenience, terms defined therein shall have the same meaning when used herein. FX Energy, Inc. has changed its name to Cheniere Energy Operating Co., Inc. ("FX"). We desire to amend the Agreement as follows: 1. FX did not make the payment of $1,000,000 to the segregated account which was due on June 30, 1996 under Section 2 of the Agreement. FX shall make the $1,000,000 payment originally due June 30, 1996 to the segregated account on or before August 9, 1996. A failure to make such a payment by such date shall, notwithstanding anything in the Agreement to the contrary, be treated as a Discontinuance under Section 5. 2. FX did not make the payment of $1,000,000 to the segregated account which was due on July 30, 1996. FX shall make the $1,000,000 payment originally due July 30, 1996, to the segregated account on or before October 31, 1996. A failure to made such a payment by such date shall, notwithstanding anything in the Agreement to the contrary, be treated as a Discontinuance under Section 5. 3. It is the intent of the parties that no grace period apply to the payments required under this letter to be paid on August 9, 1996 and October 31, 1996. 4. The parties agree that the agreements by Zydeco to defer payments under Section 2 do not obligate Zydeco to grant further waivers nor waive the right of Zydeco to have payments made at the times provided in the Agreement, as modified hereby. Cheniere Energy Operating Co., Inc. August 5, 1996 Page 2 If I have correctly set forth our agreements, kindly so indicate by executing one counterpart of this letter and returning it to the undersigned. Yours very truly, ZYDECO EXPLORATION, INC. /s/ Sam B. Myers ------------------------------ Sam B. Myers, Jr., President ACCEPTED AND AGREED TO THIS 8TH DAY OF AUGUST, 1996. CHENIERE ENERGY OPERATING CO., INC. /s/ William D. Forster - ----------------------------------- President EX-10.13 4 THIRD AMENDMENT TO THE EXPLORATION AGREEMENT EXHIBIT 10.13 October 31, 1996 Cheniere Energy Operating Company, Inc. 237 Park Avenue, Suite 2100 New York, NY 10017 RE: Third Amendment Gentlemen: I am writing with respect to that certain Exploration Agreement dated April 4, 1996, by and between FX Energy, Inc., and Zydeco Exploration, Inc., as amended by that certain First Amendment dated May 15, 1996, and that certain Second Amendment dated August 5,1996 (the Agreement). For convenience, terms defined therein shall have the same meaning when used herein. FX Energy, Inc. (FX) has changed its name to Cheniere Energy Operating Co., Inc. (Cheniere). Section 2 of the Agreement originally provided: 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 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
Cheniere Energy Operating Company, Inc. October 31, 1996 Page 2 Through yesterday, October 30, 1996, Cheniere had paid $5,000,000.00. We wish to provide an alternate schedule for the remaining payments, which is:
DATE AMOUNT ---- ------ 1996-10-31 $1,000,000.00 1996-11-30 2,000,000.00 1997-01-31 2,000,000.00 1997-02-28 2,000,000.00 1997-03-31 1,500,000.00
Further: 1. Should Cheniere fail to make the payment of $2,000,000.00 due November 30, 1996, by such date, such failure shall be treated as a Discontinuance under Section 5. 2. As to the payments due January 31, 1997, February 28, 1997, and March 31, 1997, the normal grace period shall apply. 3. The parties agree that the agreements by Zydeco to defer payments under Section 2 do not obligate Zydeco to grant further waivers nor waive the rights of Zydeco to have payments made at the times provided in the Agreement, as modified hereby. If I have correctly set forth our agreements, kindly so indicate by executing one counterpart of this letter and returning it to the undersigned. Yours very truly, ZYDECO EXPLORATION, INC. /s/ W. Kyle Willis ------------------------------ W. Kyle Willis Vice President ACCEPTED AND AGREED TO THIS 31ST DAY OF OCTOBER, 1996. CHENIERE ENERGY OPERATING COMPANY, INC. /s/ William D. Forster - --------------------------------------- President EX-27 5 ARTICLE 5 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 6,353,431 1,788,557 639,996 0 0 8,820,049 2,348,667 (843,032) 10,684,042 3,956,857 0 0 0 7,375 6,702,986 10,684,042 1,017,784 1,293,581 17,306 17,306 2,284,090 0 35,871 (1,487,178) 0 (1,487,178) 0 0 0 (1,487,178) (0.25) (0.25)
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