-----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, BT+IY7u8Fbl12mxh0KHH8XDzHNHOCp5beQBaQ+avEwJlYakpffA2UKZMWoEDFj7y bxnqddZVhPaWqF7mjXmdsw== 0000899243-97-001047.txt : 19970526 0000899243-97-001047.hdr.sgml : 19970526 ACCESSION NUMBER: 0000899243-97-001047 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19970523 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: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-27679 FILM NUMBER: 97613312 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 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 23, 1997 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- ZYDECO ENERGY, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 1311 76-0404904 (STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER) INCORPORATION OR ORGANIZATION) ---------------- 1710 TWO ALLEN CENTER, 1200 SMITH STREET HOUSTON, TEXAS 77002 (713) 659-2222 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) W. KYLE WILLIS ZYDECO ENERGY, INC. CHIEF FINANCIAL OFFICER 1710 TWO ALLEN CENTER, 1200 SMITH STREET HOUSTON, TEXAS 77002 (713) 659-2222 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ---------------- COPIES TO: MICHAEL C. BLANEY, ESQ. JAMES R. TANENBAUM, ESQ. ANDREWS & KURTH L.L.P. STROOCK & STROOCK & LAVAN LLP 4200 TEXAS COMMERCE TOWER 180 MAIDEN LANE HOUSTON, TEXAS 77002 NEW YORK, NEW YORK 10038 TELEPHONE: (713) 220-4200 TELEPHONE: (212) 806-5400 ---------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after effectiveness of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED PROPOSED MAXIMUM TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE AMOUNT TO BE OFFERING OFFERING REGISTRATION REGISTERED REGISTERED PRICE(1) PRICE(1) FEE - ---------------------------------------------------------------------------------- Common stock, par value $.001 per share........ 2,300,000 $5.125 $11,787,500 $3,571.97 - ----------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) based on the last sale price on May 20, 1997. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ZYDECO ENERGY, INC. CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
ITEM NUMBER AND CAPTION IN FORM S-1 LOCATION OR CAPTION IN PROSPECTUS -------------------------- --------------------------------- 1. Forepart of the Registration Statement and Outside Front Forepart of Registration Statement and Cover Page of Prospectus...... Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Inside Front Cover Page of Prospectus; Prospectus.................... Table of Contents; Additional Information 3. Summary Information, Risk Fac- tors and Ratio of Earnings to Prospectus Summary; Risk Factors Fixed Charges................. 4. Use of Proceeds................ Use of Proceeds 5. Determination of Offering Underwriting Price......................... 6. Dilution....................... Dilution 7. Selling Security Holders....... * 8. Plan of Distribution........... Underwriting 9. Description of Securities to be Description of Company's Securities Registered.................... 10. Interests of Named Experts and * Counsel....................... 11. Information with Respect to the Outside Front Cover Page of Prospectus; Registrant.................... Prospectus Summary; Risk Factors; Price Range of Common Stock and Dividend Policy; Dilution; Capitalization; Selected Consolidated Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business and Properties; Management; Principal Stockholders; Legal Matters; Change of Accountants; Experts; Consolidated Financial Statements 12. Disclosure of Commission Posi- tion on Indemnification for * Securities Act Liabilities....
- -------- * Omitted from the Prospectus because item is inapplicable. ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED , 1997 PROSPECTUS 2,000,000 SHARES LOGO COMMON STOCK ----------- All of the 2,000,000 shares (the "Shares") of common stock, par value $0.001 per share (the "Common Stock"), offered hereby are being sold by Zydeco Energy, Inc. ("Zydeco" or the "Company"). Since December 21, 1995, the Common Stock has been included on The Nasdaq Stock Market's SmallCap Market (the "Nasdaq SmallCap Market") under the trading symbol "ZNRG." From December 21, 1993 until December 21, 1995, the Common Stock was quoted on the OTC Bulletin Board under the symbol "TNER." On May 21, 1997, the last reported sale price for the Common Stock was $5.125 per share. See "Price Range of Common Stock." ----------- THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8 OF THIS PROSPECTUS. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) - ------------------------------------------------------------------------------- Per Share....................... $ $ $ - ------------------------------------------------------------------------------- Total(3)........................ $ $ $ - -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- (1) The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses of the offering payable by the Company estimated to be $ . (3) The Company has granted the Underwriters a 30-day option to purchase up to an aggregate of 300,000 additional shares of Common Stock on the same terms and conditions as the Shares offered hereby solely to cover over- allotments, if any. If the Underwriters exercise this option in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." The Shares offered hereby are offered by the Underwriters, subject to prior sale when, as and if delivered to and accepted by the Underwriters and subject to certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the certificates representing the Shares will be made at the offices of Brean Murray & Co., Inc. in New York, New York on or about , 1997. ----------- BREAN MURRAY & CO., INC. ----------- The date of this Prospectus is , 1997. [Graphic--Map of Louisiana Transition Zone indicating location of the Company's West Cameron Seismic Project.] [Graphic--Seismic Image] High resolution 3D image from seismic data over Cameron Parish, Louisiana at depths ranging from 8,000 feet to 25,000 feet. The image was processed with Zydeco Energy's Wavefield Imaging Technology with a 220 x 220 foot input spacing that yielded an image with a 55 x 55 foot output spacing; included are the interpreted geologic structures, faults and stratigraphic features correlated with known well control information. ---------------- IN CONNECTION WITH THIS OFFERING THE UNDERWRITERS MAY OVER-ALLOT OR ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY, INCLUDING STABILIZING, SYNDICATE SHORT COVERING AND PENALTY BID TRANSACTIONS. SUCH TRANSACTIONS MAY BE EFFECTED THROUGH THE NASDAQ SMALLCAP MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON SHARES ON THE NASDAQ SMALL CAP MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING." 2 TABLE OF CONTENTS
PAGE ---- Prospectus Summary................................................... 4 Risk Factors......................................................... 8 Use of Proceeds...................................................... 14 Price Range of Common Stock and Dividend Policy...................... 15 Capitalization....................................................... 16 Dilution............................................................. 17 Selected Consolidated Financial Data................................. 18 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................... 19 Business and Properties.............................................. 25 Management........................................................... 39 Description of Company's Securities.................................. 48 Principal Stockholders............................................... 50 Underwriting......................................................... 51 Legal Matters........................................................ 52 Change of Accountants................................................ 52 Experts.............................................................. 52 Available Information................................................ 53 Glossary of Certain Industry Terms................................... 54 Index to Consolidated Financial Statements........................... F-1
---------------- No dealer, sales representative or any other person has been authorized to give any information or to make any representations in connection with this offer other than those contained in this Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or the Underwriters. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than in connection with the offer made by this Prospectus, nor does it constitute an offer to sell or a solicitation of any offer made by this Prospectus, nor does it constitute an offer to sell or a solicitation of any offer to buy the Common Shares offered hereby in any jurisdiction in which such an offer or solicitation is not authorized, or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that the information contained herein is correct as of any time subsequent to its date. 3 PROSPECTUS SUMMARY The following is a summary of certain significant matters discussed elsewhere in this document. This Summary is qualified in its entirety by reference to the more detailed information appearing elsewhere in this Prospectus including information under "Risk Factors." Prospective investors are urged to read the entire Prospectus. Certain terms used in this Summary and elsewhere in this Prospectus are used as defined in the Summary or elsewhere in this Prospectus. See the "Glossary of Certain Industry Terms" appearing at the end of this Prospectus for the definitions of certain terms used herein. Unless otherwise indicated, all information contained in this Prospectus assumes that the Underwriters' over-allotment option as described in "Underwriting" is not exercised. The Shares offered hereby involve a high degree of risk and investors should carefully consider information set forth in "Risk Factors." THE COMPANY Zydeco Energy, Inc. ("Zydeco" or the "Company") is an independent energy company engaged in the exploration for oil and gas in areas it believes have high potential for hydrocarbon reserves utilizing advanced 3D seismic and computer aided exploration ("CAEX") techniques. The Company believes it is one of the few independent exploration companies with comprehensive in-house technology and expertise enabling it to use the most recent advances in such 3D seismic and CAEX technology. Zydeco's geophysicists design the seismic data acquisition survey, manage the acquisition of seismic data and process and interpret the resulting data. The Company believes that its technology and expertise will enable it to acquire and efficiently analyze seismic data, over large geographical areas previously unexplored with advanced 3D seismic technology, in order to identify and acquire leasehold rights for potential oil and gas prospects. The Company intends to enter into agreements with experienced industry partners for the development of such prospects and retain significant non-operating production interests in those prospects. Zydeco's present exploration efforts are focused in the Louisiana Transition Zone, the region of land and shallow water extending several miles both onshore and offshore from the coastline of Louisiana. The Louisiana Transition Zone is part of a geologically complex trend in which large oil and natural gas reserves have been discovered and produced. However, the Company believes that the Louisiana Transition Zone has historically been underexplored relative to nearby and geologically related deeper waters and lands inland from the coastline, primarily due to characteristics that make seismic data acquisition difficult and expensive. The Company believes that the Louisiana Transition Zone has the potential for containing substantial undeveloped oil and gas reserves and that such reserves have remained undiscovered due to comparatively low levels of exploration. The Company's three senior executives have an average of 29 years experience in the oil and gas exploration business. In addition, the Company has assembled an experienced exploration team of geophysicists and geologists with substantial industry experience in exploration and advanced seismic technology and analysis. This team has successfully assembled an integrated hardware and software seismic processing system which allows the Company to capitalize on the most recent developments in 3D seismic and CAEX technology. These recent developments include a processing technique licensed by the Company ("Wavefield Imaging Technology") which substantially reduces the cost of seismic data acquisition for certain surveys while improving the resolution of the subsurface image. The Company has signed a letter of intent to acquire Wavefield Image, Inc., the owner of the Wavefield Imaging Technology. The Company's primary objective is to discover and develop oil and gas reserves and increase cash flow through exploration, prospect identification and participation in projects to develop such prospects. Key elements of the Company's strategy include: (i) focusing its efforts in geologic areas that it believes are underexplored and have the potential for substantial oil and gas reserves; (ii) continuing to develop and apply its advanced in-house 3D seismic technology and expertise; and (iii) pursuing joint ventures with industry partners to drill and develop producing properties from such prospects. In August 1996, the Company commenced an extensive 3D seismic exploration program in a part of the Louisiana Transition Zone in western Cameron Parish, Louisiana (the "West Cameron Seismic Project") 4 utilizing the Wavefield Imaging Technology. As of March 31, 1997, the Company had acquired seismic permits and exclusive seismic options on approximately 141,000 contiguous acres onshore and in state waters, including 51,000 acres with respect to which the Company has exclusive seismic options and 36,127 acres with respect to which the Company has lease options. As of May 19, 1997, seismic data acquisition has been completed over approximately 40.2% of the West Cameron Seismic Project acreage. The Company presently expects to complete data acquisition in the summer of 1997 and commence lease acquisition for identified prospects in late 1997. While the Company believes the preliminary data results from the West Cameron Seismic Project are promising, the analysis of the exploration potential of the West Cameron Seismic Project will be dependent on further seismic processing and analysis and the availability of additional seismic data covering the West Cameron Seismic Project area. No assurances can be made as to the existence of recoverable hydrocarbons on the West Cameron Seismic Project acreage or in any other areas in which the Company explores. The Company is financing the West Cameron Seismic Project in part through an exploration agreement (the "Cheniere Exploration Agreement") with Cheniere Energy Operating Co., Inc. ("Cheniere"). Pursuant to the Cheniere Exploration Agreement, Cheniere agreed to pay for all of the costs of permits, options and seismic data acquisition and processing for the West Cameron Seismic Project up to a maximum of $13.5 million, plus 50% of such costs in excess of $13.5 million, in exchange for an interest of up to 50% in the West Cameron Seismic Project. As of May 2, 1997, Cheniere had paid $10.0 million. Under the terms of the Cheniere Exploration Agreement, Cheniere may elect to cease payment of costs at any time, in which case its interest in the West Cameron Seismic Project would be proportionately reduced. In addition to its interests in the West Cameron Seismic Project, the Company has identified a number of other potential prospects in the Louisiana Transition Zone, most of which were identified prior to conducting any 3D seismic surveys. As of March 31, 1997, the Company held oil and gas leases covering approximately 21,480 gross acres (11,326 net acres) in Louisiana State and Federal waters. Approximately two-thirds of these potential prospects are owned equally by Fortune Petroleum Corp. ("Fortune") pursuant to an agreement (the "Fortune Exploration Agreement") between the Company and Fortune. Although the Company plans to pursue further evaluation of certain of these potential prospects, including the possible sale of some of these prospects, there can be no assurance that any of the potential prospects will be drilled or will contain any commercially recoverable amounts of oil and gas. The Company's principal offices are located at Two Allen Center, 1200 Smith Street, Suite 1710, Houston Texas 77002. Its telephone number is (713) 659- 2222. THE OFFERING Common Stock Offered by the Company......................... 2,000,000 shares Common Stock Outstanding after the Offering(1)................. 8,607,098 shares Use of Proceeds.................. To finance leasehold acquisition costs, seismic data acquisition costs, and processing and analysis costs principally in respect of the Company's West Cameron Seismic Project, drilling participation costs, and, to a lesser extent, for general corporate purposes, including working capital. Nasdaq SmallCap Market symbol.... "ZNRG"
- -------- (1) Excludes 5,663,799 shares issuable upon exercise of outstanding options, unit options and warrants. See "Capitalization." 5 SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (1) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SALES PRICE DATA)
PERIOD FROM INCEPTION (MARCH 17, THREE MONTHS YEAR ENDED 1994) ENDED MARCH 31, DECEMBER 31, THROUGH -------------------- -------------------- DECEMBER 31, 1997 1996 1996 1995 1994 --------- --------- --------- --------- ------------ CONSOLIDATED STATEMENT OF OPERATIONS DATA: Operating revenues...... $ 374 $ 252 $ 1,470 $ 587 $ -- Operating expenses...... 991 713 3,577 1,737 110 --------- --------- --------- --------- --------- Operating loss.......... (617) (461) (2,107) (1,150) (110) Other income (expense).. 51 72 249 (24) (23) --------- --------- --------- --------- --------- Net loss................ $ (566) $ (389) $ (1,858) $ (1,174) $ (133) ========= ========= ========= ========= ========= Net loss per Common Share and Common Share equivalent ............ $ (0.09) $ (0.07) $ (0.30) $ (0.30) $ (0.03) ========= ========= ========= ========= ========= Weighted average Common Shares and Common Share equivalents outstanding............ 6,593,648 5,799,117 6,168,798 3,906,706 4,468,777 ========= ========= ========= ========= =========
AT MARCH 31, 1997 -------------------- ACTUAL AS ADJUSTED(2) ------ ------------- CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and marketable securities.......... $7,645 $ Working capital........................................... 4,149 Total assets.............................................. 9,539 Stockholders' equity...................................... 5,774
PERIOD FROM INCEPTION THREE MONTHS (MARCH 17, ENDED MARCH YEAR ENDED 1994) 31, DECEMBER 31, THROUGH -------------- -------------- DECEMBER 31, 1997 1996 1996 1995 1994 ------- ------ ------- ------ ------------ OPERATING DATA: Production: Oil (Bbls)......................... 3,280 3,481 20,186 1,118 -- Natural gas (Mcf).................. 103,241 74,278 372,678 84,546 -- Total Equivalent (Mcfe) Average sales prices: Oil ( per Bbl)..................... $ 23.37 $19.64 $ 22.39 $18.37 $-- Natural gas ( per Mcf)............. $ 2.88 $ 2.47 $ 2.60 $ 1.76 $--
- -------- (1) On December 20, 1995, TN Acquisition Corp. ("TN Acquisition"), a wholly- owned subsidiary of the Company, merged with and into Zydeco Exploration, Inc. ("Zydeco Exploration") in a reverse triangular merger (the "Merger"). As a result, Zydeco Exploration became a wholly-owned subsidiary of the Company and the Company, formerly known as "TN Energy Services Acquisition Corp." changed its name to "Zydeco Energy, Inc." Under accounting rules applicable to the Merger, the historical financial statements of Zydeco Exploration became the historical financial statements of the Company. For the years ended December 31, 1996 and 1995 and the period from Inception (March 17, 1994) through December 31, 1994, the historical financial data has been derived from financial statements audited by independent public accountants as indicated in their report included in this Prospectus. The financial data set forth above should be read in conjunction with the consolidated financial statements of the Company together with the related notes thereto included elsewhere herein and "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) Adjusted to reflect the sale of 2,000,000 Shares offered hereby at an assumed offering price of $ per share (after deducting underwriting discounts and commissions and estimated offering expenses) and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." 6 SUMMARY OIL AND GAS RESERVE INFORMATION The following table sets forth summary information with respect to the Company's estimated proved oil and gas reserves as of December 31, 1996. The reserve and present value data as of December 31, 1996 have been prepared by Ryder Scott Company Petroleum Engineers, independent petroleum engineering consultants. For additional information relating to the Company's proved reserves, see "Business and Properties--Oil and Gas Reserves."
RESERVES ------------------ PROVED TOTAL DEVELOPED PROVED --------- -------- Oil (Bbls)............................................. 10,052 10,052 Natural gas (Mcf)...................................... 243,000 243,000 Net equivalent Mcf's................................... 303,312 303,312 Present value of estimated future net cash flows, discounted at 10%...................................... $999,818 $999,818
7 RISK FACTORS Statements contained in this Prospectus concerning expected results or estimates of future capital expenditures, production volumes, reserve volumes, reserve values, number of development and exploration projects, total assets, cash flow and earnings are forward-looking statements. When used in this Prospectus the words "expect," "estimate," "project" and similar expressions are also intended to identify forward-looking statements. All such statements are based on assumptions concerning, among other things, the timing and completion of projects, commodity prices, recompletion and drilling results, lease operating expenses, administrative expenses, interest, and other financing costs that management believes are reasonable based on currently available information. The Company's assumptions and the Company's actual future performance, however, are both subject to a wide range of business risks and there is no assurance that these goals and projections can or will be met. The securities offered hereby involve a high degree of risk. Each prospective investor should carefully consider, among other factors, the following risks inherent in, and affecting the business of the Company and the securities offered hereby before making an investment decision. Some of these risks are described in summary form below. Investors should read the section or sections of this Prospectus cross-referenced below for a more complete discussion of certain of these risks. LIMITED OPERATING HISTORY AND SIGNIFICANT HISTORICAL OPERATING LOSSES The Company has a limited operating history. Potential investors, therefore, have limited historical financial and operating information upon which to base an evaluation of the Company's performance and an investment in the Shares. The Company's potential must be considered in light of the risks, expenses and difficulties frequently experienced by companies in the early stages of their development. As a result of operating expenses, the Company has incurred significant operating and net losses to date. Net losses for the period from inception on March 17, 1994 through December 31, 1994, and for the years ended December 31, 1995 and 1996 were approximately $0.1 million, $1.2 million and $1.9 million respectively. Net loss for the three month period ended March 31, 1997 was approximately $0.6 million. At March 31, 1997, the Company had accumulated a deficit of $3.7 million. The Company's future financial results will depend primarily on its ability to locate hydrocarbons economically in commercial quantities, to identify drillable prospects that result in profitable productive wells and on the market prices for oil and gas. There can be no assurance that the Company will achieve or sustain profitability or positive cash flows from operating activities in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." NEED FOR ADDITIONAL FINANCING Most of the Company's operations are in the early stages of oil and gas exploration. The Company's operations have not generated and, in the near future, are not expected to generate, cash flows sufficient to fund operations and exploration expenditures. Accordingly, the Company expects that it will need substantial additional capital in order to sustain operations, to fund anticipated expenditures for the acquisition of additional oil and gas leases and to drill wells on the Company's prospects, if any. The Company incurred capital expenditures of $2.0 million (including exploration costs of $460,688) in the quarter ended March 31, 1997 and plans to incur capital expenditures of $13.3 million (including exploration costs of $1.8 million) in the remaining three quarters of 1997. Management believes that the Company will have sufficient cash, including the net proceeds of the offering made by this Prospectus (the "Offering"), to fund planned expenditures to January 1, 1999. Additional capital may be secured from a combination of funding sources that may include borrowings from financial institutions, joint venture partnerships, vendor financings, production payment financings, debt offerings, or additional offerings of the Company's stock. The timing and extent of the need for additional financing will depend, in part, on whether Cheniere elects to continue to provide funds pursuant to the Cheniere Exploration Agreement. The Company's ability to access additional capital will depend on its success in acquiring and developing oil and gas exploration prospects with commercial oil and gas reserve potential and on the productivity of the oil and gas leases which the Company owns, or controls or acquires in the future. The Company's ability to meet its needs for additional financing will also depend on the status of various capital 8 markets and industry conditions at the time such additional capital is sought. There is no assurance that capital will be available to the Company from any source or that, if available, it will be on terms acceptable to the Company. There can be no assurance that the Company will be able to generate or raise sufficient capital to enable it to realize fully all of its strategic objectives. Should sufficient financing not be available because costs are higher than estimated, a partner on a project fails to meet its financing obligations or otherwise, the development and exploration of any prospect developed by the Company would be delayed or possibly lost and, accordingly, the implementation of the Company's business strategy could be adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business and Properties--Strategy." OIL AND GAS INDUSTRY CONDITIONS AND PRICE VOLATILITY As an independent energy company, the Company's revenues and profits will be substantially dependent on the oil and gas industry in general and the prevailing prices for oil and gas in particular. Historically, the markets for oil and gas have been volatile and are likely to continue to be volatile in the future. Prices for oil and gas are subject to wide fluctuations in response to small changes in supply of and demand for oil and gas, market uncertainty and a variety of additional factors that are beyond the control of the Company. These factors include political conditions in the Middle East, the domestic and foreign supply of oil and gas, the price of foreign imports, the level of consumer demand, weather conditions, domestic and foreign government regulations, the price and availability of alternative fuels and overall economic conditions. It is impossible to predict future oil and gas price movements with any certainty. Declines in oil and gas prices would adversely affect the Company's cash flow, liquidity and profitability, and will reduce the amount of the Company's oil and gas reserves that can be economically produced or make some potential prospects uneconomical to develop. In addition, various factors, including the availability and capacity of gas gathering systems and pipelines, the effect of federal regulations on production and transportation, general economic conditions and changes in supply and demand, may materially adversely affect the Company's ability to market its oil and gas production. See "Business and Properties--Competition and Markets" and "--Governmental Regulation." RELIANCE ON TECHNOLOGY The Company uses the recently developed Wavefield Imaging Technology to gather and analyze the seismic data it acquires. The Company has a nonexclusive license to use the Wavefield Imaging Technology throughout the world and an exclusive license to use it in the Louisiana Transition Zone. If the Company defaults for any reason under the license agreement, it may lose the right to use the Wavefield Imaging Technology. The Company has signed a letter of intent to acquire Wavefield Image, Inc., the owner of the Wavefield Imaging Technology. There is no assurance, however, that the Company will consummate such acquisition. The Wavefield Imaging Technology has not yet been used to identify a prospect which was then drilled and shown to have proved reserves. The inventor of the Wavefield Imaging Technology has filed a patent application with respect to the technology. If the patent application is not successful or if the patent is issued but is invalidated, circumvented or successfully challenged for any reason, the Company's competitors may have the right to use the Wavefield Imaging Technology even in the areas for which the Company has exclusive licenses. A number of other companies are engaged in the research and development of seismic acquisition and analysis technology. In the future, such companies may develop more advanced seismic imaging and analysis technology which could be made available to the Company's competitors, but may not be made available to the Company. If the Company is unable to utilize the most advanced commercially available technology, the Company's business, financial condition and results of operations could be materially and adversely affected. See "Business and Properties--Technology." DEPENDENCE UPON SUCCESSFUL IDENTIFICATION OF PROSPECTS The Company will, for the near future, dedicate substantial capital resources to identifying and developing potential prospects on existing or future acquired leases utilizing its enhanced 3D seismic technology. A significant investment will be required to obtain, process and interpret the additional geophysical and geological data necessary to complete this analysis, particularly with respect to the West Cameron Seismic Project. There 9 can be no assurance that after such expenditures the Company will identify any prospects suitable for drilling on its current leases or on future acquired leases. Because of the inherent uncertainties in developing specific exploratory prospects pursuant to this analysis, there is also no assurance as to the timing or amount of drilling operations that the Company may undertake. The inability to identify sufficient prospects suitable for drilling will have a material adverse effect on the Company's business, financial position and results of operations. See "Business and Properties." DEPENDENCE UPON SUCCESSFUL LEASE ACQUISITION ACTIVITIES If the Company identifies areas with significant potential for oil and gas reserves, the success of the Company's business plan will be dependent upon the successful acquisition of leasehold or other drilling rights in the identified properties. Governmental entities generally award oil and gas leases on a competitive bidding basis. For example, while the Company has retained the exclusive right to nominate for bid any acreage covered by its state waters seismic permit relating to the West Cameron Seismic Project until February 1998, the bidding for such acreage will be competitive. The acquisition of onshore oil and gas leaseholds and related seismic rights is often extremely competitive. The Company expects that other major and independent oil and gas companies having financial resources significantly greater than those of the Company will compete with the Company for the acquisition of oil and gas leases in areas targeted by the Company. Accordingly, there can be no assurance that the Company will be successful in acquiring any leases on which it bids even after incurring significant expenditures. See "Business and Properties." EXPLORATION AND OPERATING RISKS OF OIL AND GAS OPERATIONS The Company's oil and gas operations are subject to all of the risks and hazards typically associated with the exploration for, and the development and production of, oil and gas in the Louisiana Transition Zone and any other areas in which the Company may conduct such activities. Risks in exploratory drilling include the risk that no commercially productive oil and gas reservoirs will be encountered. Risks in exploration also include liability to landowners for damage caused by seismic charges and delays due to weather and sea conditions. The cost of drilling, completing and operating wells is often uncertain and drilling operations may be curtailed, delayed or canceled as a result of a variety of factors including unexpected formation and drilling conditions, pressure or other irregularities in formations, equipment failures or accidents and delays in the delivery of equipment. Risks in drilling operations also include blowouts, oil spills, fires and offshore risks such as capsizing, collision, hurricanes and other adverse weather and sea conditions. Such risks can result in personal injury, loss of life, substantial damage to or destruction of oil and gas wells, platforms, production facilities or other property, suspension of operations and liabilities to third parties, any or all of which could adversely affect the Company. The Company's operations could also result in liability for oil spills, discharge of hazardous materials, other environmental damages and other property damage. In accordance with customary industry practices, the Company intends to maintain insurance against some, but not all, of such risks and some, but not all, of such losses. There can be no assurance, however, that any insurance coverage the Company intends to carry will be available to the Company when applied for or, if available and carried, will be adequate to cover the Company's liability in all circumstances. See "Business and Properties--Operational Risks and Insurance." The occurrence of an event not fully covered by insurance could have a material and adverse effect on the financial position and results of operations of the Company. In addition, the Company may be liable for environmental damages caused by previous owners of any property which may be purchased by the Company, which liabilities would not be covered by insurance. See "Business and Properties--Governmental Regulation." Most of the oil and gas leases the Company has acquired or currently expects to acquire are or will be located offshore in water depths of less than 130 feet. Drilling operations offshore in such water depths are by their nature more remote, exposed and, consequently, more susceptible to the risks described above. COMPETITION The exploration for and production of oil and gas are highly competitive. Many companies and individuals are engaged in the business of exploring for, acquiring interests in and developing onshore and near onshore oil and gas properties in the United States. The Company competes with major and independent oil and gas 10 companies for the acquisition of oil and gas leases and producing properties as well as for the capital, equipment and experienced labor required to locate, develop and operate such properties. Many of these competitors have financial, technical, human and other resources substantially greater than those of the Company. Such competitive disadvantages could affect the Company's ability to successfully identify, obtain rights to, and develop prospects. See "Business and Properties--Competition and Markets" FLUCTUATIONS IN QUARTERLY OPERATING RESULTS The Company may experience significant fluctuations in its quarterly operating results. The Company's future operating results are dependent upon a number of factors, including, but not limited to, the success of the exploration and drilling activities of the Company and its industry partners, the timing of the expenses incurred for such activities, the demand for oil and gas and economic conditions, both generally and in the oil and gas industry. In particular, a dry hole or failure to obtain a lease for a prospect on which the Company has incurred substantial exploration costs could have an almost immediate impact on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operation." CONFLICTS OF INTEREST Certain of the Company's officers, directors, employees and stockholders own working and overriding royalty interests in leases owned by the Company or that adjoin, or are in the vicinity of, some of the potential prospects described herein. Such officers, directors, employees and stockholders will continue to conduct operations on such leases, including, without limitation, acquiring or shooting, processing and/or reprocessing seismic data, remediating or recompleting existing wells and/or the drilling of new wells. Hence, a conflict of interest may exist if the Company proposes to drill or farmout for the drilling of a well or wells upon leases it currently owns and leases immediately offsetting the leases owned by its officers, directors, employees or stockholders. Certain members of the Company's management team are also investors, executive officers and/or directors of other small privately owned independent oil companies with limited operations. Though these members of the Company's management team intend to spend the substantial majority of their business time managing the affairs of the Company, there may be a conflict of interest in the apportionment of management time between the business matters of the Company and any other positions they hold. Company transactions with related parties have been and will be subject to the approval of the independent directors. See "Management--Conflicts of Interest." DEPENDENCE ON MANAGEMENT AND KEY PERSONNEL The Company believes that its success will be highly dependent upon its continued ability to attract and retain skilled senior management, including Sam B. Myers, Jr., Chairman and Chief Executive Officer, Edward R. Prince, Jr., Vice Chairman, and John O. Smith, President and Chief Operating Officer, and skilled exploration personnel. Furthermore, due to the recent increase in exploration activity in the Gulf Coast, it is becoming increasingly more difficult to attract and retain experienced and skilled exploration personnel. Although the Company's employees intend to devote substantially all of their time to the Company, they may devote a minor portion of their business time to other business ventures. In the event that the Company loses the services of any of its key personnel, there could be a material adverse effect on the Company's business and prospects. See "Management." COMPLIANCE WITH GOVERNMENTAL REGULATIONS The Company's business is regulated by certain federal, state and local laws and regulations relating to the development, production, marketing and transportation of oil, gas and related products as well as certain environmental and safety matters. These laws may be changed from time to time in response to economic or 11 political conditions. Matters subject to regulation include permits for drilling operations, drilling and abandonment bonds, reports concerning operations, the spacing of wells, unitization and forced pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and gas wells below actual production capacity in order to conserve supplies of oil and gas. In addition, the production, handling, storage, transportation and disposal of oil and gas, by-products therefrom and other substances and materials produced or used in connection with oil and gas operations are subject to regulation under federal, state and local laws and regulations primarily relating to the protection of human health and the environment. These laws and regulations have imposed increasingly strict requirements for water and air pollution control and solid waste management. The Company believes the trend of more expansive and stricter environmental legislation and regulations will continue and such legislation may result in increasing costs to the Company in the future. Amendments to laws regulating the disposal of oil and gas exploration and production wastes have been considered by Congress and may be adopted. Moreover, new and additional taxes have been proposed on energy consumption in the form of a BTU tax or a gasoline tax. Any new legislation or taxes, if enacted, could have a significant adverse impact on the Company's operating costs. See "Business and Properties--Governmental Regulation." UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES There are numerous uncertainties inherent in estimating oil and gas reserves and in projecting future rates of production. Petroleum engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact manner. Estimates of economically recoverable oil and gas reserves and of future net cash flows depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effects of regulations by governmental agencies, and assumptions concerning future oil and gas prices, future operating costs, severance and excise taxes, development costs, and workover and remedial costs, all which may vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of oil and gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of the future net cash flows, expected therefrom prepared by different engineers or by the same engineers at different times may vary substantially. Actual production, revenues and expenditures with respect to the Company's reserves will likely vary from estimates, and such variances may be material. See "Business and Properties--Oil and Gas Reserves." SHARES ELIGIBLE FOR FUTURE SALES; POTENTIAL ADVERSE EFFECT ON MARKET PRICE AND DILUTION FROM EXERCISE OF WARRANTS AND OPTIONS The Company's Certificate of Incorporation authorizes the issuance of 50,000,000 shares of Common Stock, of which 8,607,098 shares would be outstanding as of the date of this Prospectus after giving effect to completion of the Offering. In addition, as of the date of this Prospectus, the Company had outstanding (i) unit options and warrants to acquire 4,005,668 shares of Common Stock exercisable at an average price of $5.50 per share; (ii) options to acquire 993,131 shares of Common Stock at an average price of $1.60 per share, granted by Zydeco Exploration to its employees and assumed by the Company; and (iii) 995,000 shares eligible for issuance pursuant to the Company's 1996 Incentive Equity Plan and the Company's 1996 Non-employee Directors Stock Option Plan, of which options for the purchase of 665,000 shares have been granted and currently remain outstanding as of the date of this Prospectus and are exercisable at an average price of $6.11 per share. See "Description of the Company's Securities." Most of the shares issuable upon the exercise of outstanding options and warrants will become immediately available for resale in the public market. The Company and its officers, directors and certain stockholders have agreed to not offer, sell, grant any option (except pursuant to stock option plans) to purchase or otherwise dispose of a total of 4,357,710 shares held by such parties during the 180 days following the sale of the shares being offered hereby without the prior consent of Brean Murray & Co., Inc. See "Underwriting" and "Principal Stockholders." Sales of substantial numbers of such shares in the public market could adversely affect the market price of the Common Stock. 12 STOCK PRICE VOLATILITY; LIMITED MARKET FOR THE COMPANY'S COMMON STOCK Factors such as announcements of technological innovations by the Company or its competitors, as well as market conditions generally or in the oil and gas industry, or changes in earnings estimates by securities analysts may cause the market price of the Common Stock to fluctuate significantly. In addition, the stock market in recent years has experienced significant price and volume fluctuations which have particularly affected the market prices of equity securities of many high technology and oil and gas exploration companies and which often have been unrelated to the operating performance of such companies. These market fluctuations may adversely affect the price of the Common Stock. See "Price Range of Common Stock and Dividend Policy." In addition, although the Common Stock is listed on the Nasdaq SmallCap Market, the public market for the Common Stock has been relatively small. Stocks with small markets and limited liquidity may experience fluctuations in their prices due to imbalances between orders to buy and orders to sell the stock. There can be no assurance as to when an active public market for the Common Stock will develop, if at all. If, during the time in which the Common Stock is quoted on the Nasdaq SmallCap Market, the Common Stock in any transaction is priced below $5.00 per share, trading of the Common Stock may become subject to federal regulations governing "penny stocks" (the "Penny Stock Rules"). Application of the Penny Stock Rules may make it more difficult for brokers to sell the Common Stock, and purchasers of the Common Stock offered hereby may have difficulty in selling their shares in the future in the secondary trading market. POTENTIAL ADVERSE IMPACT OF ANTI-TAKEOVER PROVISIONS The Company's Certificate of Incorporation and Bylaws and the provisions of Delaware General Corporation Law contain provisions which may be deemed to have the effect of discouraging a third party from pursuing a non-negotiated takeover of the Company because they have the effect of delaying, deterring or preventing a change in control of the Company. The Company's Certificate of Incorporation authorizes the issuance of "blank check" preferred stock with such rights and preferences as may be determined from time to time by the Board of Directors without stockholder approval. In the event of issuance, the preferred stock could be used, under certain circumstances, to discourage, delay or prevent a change in control of the Company even though such an attempt might be economically beneficial to the stockholders of the Company. Such provisions may have an adverse impact on the price of the securities of the Company that are traded in the public market. See "Description of Company's Securities." 13 USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,000,000 Shares offered hereby are estimated to be approximately $ , ($ if the Underwriters' over-allotment option is exercised in full) based on an assumed public offering price of $ per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company currently intends to use such net proceeds to finance leasehold acquisition costs, seismic data acquisition costs, processing and analysis costs primarily in connection with the West Cameron Seismic Project, and, to a lesser extent, for general corporate purposes, including working capital. The Company may use a portion of the net proceeds from the Offering to participate in the drilling of oil and gas wells if an opportunity to do so arises. Pending such uses, the Company intends to invest the net proceeds in short- term, interest bearing, investment grade securities. The Company expects to require funds, in addition to the proceeds from this Offering, to complete all of the leasehold acquisitions for the West Cameron Seismic Project. There can be no assurance that the Company will be able to generate or raise sufficient capital to enable it to realize fully all of its strategic objectives. The timing of the need for additional funds will depend, in part, on whether or not Cheniere continues to provide funds for the West Cameron Seismic Project. See "Risk Factors--Need for Additional Financing" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 14 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY Shares of the Company's Common Stock and warrants (the "Warrants"), each entitling the holder thereof to purchase one share of Common Stock for $5.50 per share ,were quoted on the OTC Bulletin Board under the symbols "TNER," and "TNERW," respectively, from December 21, 1993 until December 21, 1995 and on the Nasdaq SmallCap Market under the symbols "ZNRG" and "ZNRGW" respectively since that time. The following table sets forth the range of high and low bid quotations of the Common Stock for each of the fiscal quarters or portion thereof for the period from January 1, 1995 through December 21, 1995, as reported by the OTC Bulletin Board and since December 22, 1995 as reported by the Nasdaq SmallCap Stock Market. The quotes represent "inter-dealer" prices without retail markups, markdowns or commissions and may not necessarily represent actual transactions.
HIGH LOW ----- ----- Year Ended December 31, 1995 First Quarter.............................................. $4.66 $4.25 Second Quarter............................................. 4.84 4.62 Third Quarter.............................................. 5.00 4.76 Fourth Quarter............................................. 6.00 4.94 Year Ended December 31, 1996 First Quarter.............................................. $7.00 $5.12 Second Quarter............................................. 8.00 5.75 Third Quarter.............................................. 7.25 4.50 Fourth Quarter............................................. 6.87 4.37 Year Ending December 31, 1997 First Quarter.............................................. $7.87 $6.12 Second Quarter (through May 21, 1997)...................... 6.75 5.12
On May 21, 1997, the last reported sales price for the Company's Common Stock on the Nasdaq SmallCap Market was $5.125 per share. At May 15, 1997, the Company had approximately 53 stockholders of record. The Company believes that certain holders of record hold a substantial number of shares of Common Stock as nominees for a significant number of beneficial owners. The Company has not paid any dividends on its shares of Common Stock to date and the payment of future dividends is in the discretion of the Board of Directors. It is the present intention of the Board of Directors to retain all earnings, if any, for use in the Company's business operations and, accordingly, the Board does not anticipate declaring any dividends in the foreseeable future. 15 CAPITALIZATION The following table sets forth the actual capitalization of the Company as of March 31, 1997 and as adjusted to reflect the issuance and sale of the 2,000,000 Shares offered hereby at an assumed offering price of $ per share (after deducting underwriting discounts and commissions and estimated offering expenses) as if the Offering had occurred March 31, 1997. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes to Consolidated Financial Statements included elsewhere in this Prospectus.
AT MARCH 31, 1997(1) -------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Long-term debt........................................... $ -- $ -- Stockholders' equity: Convertible preferred stock; $.001 par value; 1,000,000 shares authorized; no shares outstanding................................. -- -- Common Stock, $.001 par value; 50,000,000 shares authorized; 7,374,903 (9,374,903 as adjusted) shares issued; and 6,593,648 (8,593,648 as adjusted) shares outstanding........................................... 7 Additional paid-in capital............................. 9,504 Accumulated deficit.................................... (3,730) (3,730) Less treasury stock (at cost, 781,255 shares).......... (7) (7) ------- ------- Total stockholders' equity............................. 5,774 ------- ------- Total capitalization................................. $ 5,774 $ ======= =======
- -------- (1) As of March 31, 1997, the Company had outstanding (i) options to acquire 150,000 units, exercisable at $6.60 per unit, composed of one share of Common Stock and two warrants to purchase one share of Common Stock each for $5.50; (ii) warrants to acquire 3,558,129 shares of Common Stock exercisable at an average price of $5.45 per share; (iii) options to acquire 1,004,693 shares of Common Stock at an average price of $1.60 per share, granted by Zydeco Exploration to its employees and assumed by the Company; and (iv) 995,000 shares of Common Stock eligible for issuance pursuant to the Company's 1996 Incentive Equity Plan and the Company's 1996 Non-employee Director Stock Option Plan, of which options for the purchase of 615,000 shares of Common Stock were outstanding with a weighted average exercise price of $6.06 per share. Since March 31, 1997, the Company has (i) issued 13,450 shares of Common Stock as a result of the exercise of 11,562 employee options and 1,888 Zydeco Exploration Warrants (net of 573 Zydeco Exploration Warrants tendered as payment of the exercise price) and (ii) granted options to purchase 50,000 shares of Common Stock pursuant to the 1996 Incentive Equity Plan. The Company recently signed a letter of intent to acquire Wavefield Image, Inc., which if consummated would result in the issuance of 100,000 shares of Common Stock and an additional 150,000 shares contingent upon the occurrence of certain future events. 16 DILUTION The net tangible book value of the Company as of March 31, 1997 was $5,766,290 or $0.87 per share of Common Stock. Net tangible book value per share of Common Stock represents the net tangible assets, less the total liabilities, divided by the number of shares of Common Stock outstanding. After giving effect to the sale by the Company of the 2,000,000 Shares offered hereby at an assumed public offering price of $ per share, and after deducting underwriting discounts and commissions and estimated offering expenses, the net tangible book value of the Company as of March 31, 1997 would have been $ or $ per share of Common Stock. This represents an immediate increase in such net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors. The following table illustrates this per share dilution: Assumed public offering price per share........................ $ Net tangible book value per share at March 31, 1997.......... $ Increase in net tangible book value per share attributable to new investors............................................... ---- Net tangible book value per share after giving effect to this offering.................................................... ---- Dilution per share to new investors.......................... $ ====
The foregoing assumes no exercise of the Underwriters over-allotment option or options, unit options and warrants after March 31, 1997. As of March 31, 1997, there were outstanding options, unit options or warrants to purchase an aggregate of 5,613,799 shares of Common Stock, and the Company had also reserved up to an additional 380,000 shares of Common Stock for issuance upon the exercise of options which had not yet been granted under the Company's 1996 Incentive Equity Plan and 1996 Non-employee Director Stock Option Plan. To the extent options, unit options or warrants are exercised, there will be further dilution to new investors. See "Capitalization." 17 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth the selected consolidated financial data with respect to the Company, for the periods and at the dates indicated, which have been derived from the audited financial statements, except for the interim financial statements, of the Company included in this Prospectus. On December 20, 1995, TN Acquisition, Corp. a wholly-owned subsidiary of the Company, merged with and into Zydeco Exploration in a reverse triangular merger. As a result, Zydeco Exploration became a wholly-owned subsidiary of the Company. Under accounting rules applicable to the Merger, the historical financial statements of Zydeco Exploration became the historical financial statements of the Company. The data set forth below should be read in conjunction with the consolidated financial statements of the Company together with the related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations," each included elsewhere herein.
PERIOD FROM INCEPTION (MARCH 17, THREE MONTHS YEAR ENDED DECEMBER 1994) ENDED MARCH 31, 31, THROUGH -------------------- -------------------- DECEMBER 31, 1997 1996 1996 1995 1994 --------- --------- --------- --------- ------------ (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Operating Revenues Oil and Gas Sales...... $ 374 $ 252 $ 1,422 $ 169 $ -- Gain on Sales of Properties............ -- -- 16 118 -- Seismic Services....... -- -- 32 300 -- --------- --------- --------- --------- --------- 374 252 1,470 587 -- Operating Expenses Dry Hole and Production Costs................. 21 7 722 290 30 Geological and Geophysical Expenses.. 445 209 968 399 -- Seismic Services Costs. -- -- -- 200 -- General and Administrative Expenses.............. 356 387 1,256 456 73 Depreciation, Depletion, and Amortization.......... 169 110 631 392 7 --------- --------- --------- --------- --------- 991 713 3,577 1,737 110 Operating Loss.......... (617) (461) (2,107) (1,150) (110) Other Income (Expense) Interest Income........ 58 86 293 46 49 Interest Expense....... (7) (14) (44) (70) (72) --------- --------- --------- --------- --------- 51 72 249 (24) (23) --------- --------- --------- --------- --------- Net Loss................ $ (566) $ (389) $ (1,858) $ (1,174) $ (133) ========= ========= ========= ========= ========= Net loss per Common Share and Common Share equivalent............. $ (0.09) $ (0.07) $ (0.30) $ (0.30) $ (0.03) ========= ========= ========= ========= ========= Weighted Average Common Shares and Common Share Equivalents Outstanding............ 6,593,648 5,799,117 6,168,798 3,906,706 4,468,777 ========= ========= ========= ========= ========= AT DECEMBER 31, AT MARCH 31, ---------------------------------- 1997 1996 1995 1994 ------------ --------- --------- ------------ (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash, Cash Equivalents and Marketable Securities............ $ 7,645 $ 7,753 $ 11,456 $ 876 Working Capital........ 4,149 4,660 7,334 564 Total Assets........... 9,539 9,912 12,582 2,696 Long-term Capital Lease Obligation............ -- -- 158 304 Total Stockholders' Equity................ 5,774 6,339 8,189 2,068
18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company (formerly "TN Energy Services Acquisition Corp.") was incorporated in June 1993. Other than raising capital and reviewing acquisition candidates, the Company did not engage in any significant business activities prior to December 1995. Zydeco Exploration, the Company's wholly owned subsidiary, was incorporated as an independently owned corporation in March 1994. Zydeco Exploration immediately commenced exploration activities in the Louisiana Transition Zone. On December 20, 1995, the Company acquired all the outstanding common stock and preferred stock of Zydeco Exploration pursuant to a merger (the "Merger") and changed its name to Zydeco Energy, Inc. For accounting purposes, the Merger has been treated as a recapitalization of Zydeco Exploration with Zydeco Exploration as the acquiror (a reverse acquisition). Accordingly, the historical financial statements prior to December 20, 1995, are those of Zydeco Exploration. No pro forma information giving earlier effect to the transaction has been presented since the transaction was accounted for as a recapitalization. In May 1996, the Company entered into a license agreement with Dr. Norman Neidell for the use of the Wavefield Imaging Technology, the benefits of which may substantially reduce the Company's total costs of seismic data acquisition for certain surveys. The Company currently has a nonexclusive license to use the Wavefield Imaging Technology worldwide and has an exclusive license to use it in the Louisiana Transition Zone. In May 1997, the Company entered into a letter of intent to acquire Wavefield Image, Inc., the owner of the rights to the Wavefield Imaging Technology. See "Business and Properties--Technology." In February 1996, the Company obtained an exclusive seismic permit from the State of Louisiana covering approximately 51,000 acres of state waters in western Cameron Parish, Louisiana, which will expire on August 18, 1997. The Company paid a fee of $783,754 for the permit. The Company may extend the permit period to February 18, 1998 by payment of an additional fee of $391,877. During such period the Company has the exclusive right to nominate parcels of such area for competitive bidding for drilling rights. Under the permit, the State of Louisiana is required to keep the information obtained from the survey confidential for a period of ten years. See "Business and Properties--West Cameron Seismic Project." In April 1996, the Company executed the Cheniere Exploration Agreement with Cheniere, for the West Cameron Seismic Project, covering an area of land and waters in western Cameron Parish, Louisiana, including the area covered by the seismic permit described above. Cheniere holds an interest of 50% in the West Cameron Seismic Project. In exchange for such interest, Cheniere has agreed to fund the costs of seismic acquisition up to $13.5 million and 50% of such costs in excess of $13.5 million. Such costs include the purchase of seismic rights, the cost of lease options on the related onshore acreage of the West Cameron Seismic Project, and data acquisition and processing of a 3D seismic survey of the onshore and offshore areas. Cheniere may elect to discontinue funding of the West Cameron Seismic Project at any time, in which case its interest would be reduced pro rata in relation to total project costs. As of May 2, 1997, Cheniere had made payments of $10.0 million against costs incurred on the West Cameron Seismic Project of approximately $9.7 million. See "Risk Factors--Need for Additional Financing." In connection with the West Cameron Seismic Project, the Company began onshore leasing and permitting in February 1996. Seismic data acquisition commenced in August 1996 and was discontinued in early December due to weather conditions and recommenced in April 1997. By December 1996, approximately 17,500 acres (of approximately 148,000 acres in the Project) had been surveyed and data acquired. As of May 19, 1997, approximately 59,000 acres had been surveyed and seismic data acquired. The Company had originally negotiated a turnkey seismic services agreement with a survey contractor, Grant Geophysical, Inc. ("Grant"), in an effort to control some of the costs and risks associated with the West Cameron Seismic Project survey. In December 1996, after Grant informed the Company it was ceasing survey operations due to winter weather conditions, Grant filed for protection and reorganization under Chapter 11 of 19 the U. S. Bankruptcy Code and is currently restructuring its operations. In March 1997, the Company and Grant executed a new Master Geophysical Data Acquisition Agreement (the "Grant Agreement"), providing for reimbursement of Grant under a "cost plus" services arrangement, which could have the effect of increasing seismic data acquisition costs. See "--Liquidity and Capital Resources." The Company accounts for its oil and gas exploration and production activities using the successful efforts method of accounting. Under this method, acquisition costs for proved and unproved properties are capitalized when incurred. Exploration costs, including geological and geophysical costs and the costs of carrying and retaining unproved properties, are expensed. Exploratory drilling costs are initially capitalized, but charged to expense if and when the well is determined not to have found proved reserves. Costs of productive wells, developmental dry holes, and productive leases are capitalized and amortized on a property-by-property basis using the unit-of- production method. The estimated costs of future plugging, abandonment, restoration, and dismantlement are considered as a component of the calculation of depreciation, depletion and amortization. Unproved properties with significant acquisition costs are assessed periodically on a property-by- property basis and any impairment in value is charged to expense. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996 Oil and Gas Sales. Oil and gas sales increased by $122,459, or 49%, to $373,994 for the quarter ended March 31, 1997 from $251,535 for the quarter ended March 31, 1996. The increase was attributable to an increase in production volumes of $67,482 and an increase in the average prices for oil and natural gas of $54,977. The increased prices and volumes from oil and gas in first quarter 1997, compared to the same quarter in 1996, demonstrate the sensitivity of the Company's operations to price fluctuations and its current dependence on a small number of producing wells. The following table sets forth information concerning crude oil, and natural gas sales volumes, average sales prices, and per barrel oil equivalent ("NBOE") operating costs (excluding depreciation, depletion, and amortization hereinafter referred to as "DD&A") for the Company's exploration and production activities for the indicated periods:
THREE MONTHS ENDED MARCH 31, -------------- 1997 1996 ------- ------ Sales volumes: Natural gas (mcf)............................................. 103,241 74,278 Crude oil (bbl)............................................... 3,280 3,481 NBOE (bbl).................................................... 20,487 15,861 Average sales prices: Natural gas ($/mcf)........................................... $ 2.88 $ 2.47 Crude oil ($/bbl)............................................. $ 23.37 $19.64 Lease operating expense ($/NBOE)................................ $ 0.28 $ 0.41 DD&A ($/NBOE) (1)............................................... $ 1.66 $ 2.00
- -------- (1) Excludes depreciation on seismic computer hardware and software of $136,640 and $78,686 for the three months ended March 31, 1997 and 1996 respectively. Operating Expenses. Exploration (including geological and geophysical costs) and production expenses increased $251,229, or 117%, to $466,378 for the quarter ended March 31, 1997 from $215,149 for the quarter ended March 31, 1996. The increase was primarily a result of increased personnel associated with the 20 Company's two exploration projects. DD&A expense in first quarter 1997 increased $58,278, or 53%, to $168,643 from $110,365 for the first quarter of 1996. The increase was principally a result of additional depreciation and amortization on additions of computer equipment and geophysical software. Other Income (Expense). Net other income decreased $21,280, or 29%, to $51,531 for the three months ended March 31, 1997 compared to net other income of $72,811, for the three months ended March 31, 1996, principally as a result of decreased interest income due to the decrease in available cash. Net Loss. For the quarter ended March 31, 1997, operations resulted in a net loss of $565,617 ($.09 per share) compared to a net loss of $388,566 ($.07 per share) for the comparable period in 1996. The increase in net loss of $177,051, or 46%, was due to increased revenue of $122,459, increased operating expenses of $278,230, and a decrease in net other income of $21,280. The $.02 increase in per share loss was also affected by the increased number of shares of common stock outstanding in the first quarter of 1997, principally due to the conversion of the preferred stock in July 1996. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 During 1996 and 1995, the Company's primary operations consisted of the acquisition of federal and state oil and gas leases, the acquisition of 3D seismic analysis hardware and software, the purchase of an interest in a gas well which commenced production in January 1995, and the farmout of two leases (one of which resulted in commercial production commencing in December 1995). Exploration activities in 1995 also included a one-eighth participation in the drilling of an exploratory well which resulted in a dry hole in March 1995. Exploration activities in 1996 included a joint venture participation in the drilling of one well that was abandoned in September 1996 without reaching the well's primary objectives. The Company also initiated two seismic exploration joint ventures, one in 1995 and one in 1996, with industry partners who are required under the agreements to fund substantially all the Company's share of the seismic project costs, up to certain limits. See "Note 2--Exploration Agreements" in Notes to Consolidated Financial Statements. The following table sets forth information concerning crude oil and natural gas sales volumes, average sales prices, and per NBOE operating costs (excluding DD&A) for the Company's exploration and production activities for the indicated periods:
YEAR ENDED PERIOD FROM INCEPTION DECEMBER 31, (MARCH 17, 1994) -------------- THROUGH 1996 1995 DECEMBER 31, 1994 ------- ------ --------------------- Sales volumes: Natural gas (mcf)................... 372,678 84,546 -- Crude oil (bbl)..................... 20,186 1,118 -- NBOE (bbl).......................... 82,299 15,209 -- YEAR ENDED PERIOD FROM INCEPTION DECEMBER 31, (MARCH 17, 1994) -------------- THROUGH 1996 1995 DECEMBER 31, 1994 ------- ------ --------------------- Average sales prices: Natural gas ($/mcf)................. $ 2.60 $ 1.76 $-- Crude Oil ($/bbl)................... $ 22.39 $18.37 $-- Lease operating expense ($/NBOE)...... $ 0.27 $ 1.81 $-- DD&A ($/NBOE) (1)..................... $ 1.73 $ 7.50 $--
- -------- (1) Excludes depreciation on seismic computer hardware and software of $488,521 and $278,297 for the years ended December 31, 1996 and 1995 respectively. Oil and Gas Sales. Oil and gas sales increased by $1,252,992, or 740%, to $1,422,227 for the year ended December 31, 1996 from $169,235 for the year ended December 31, 1995. Of this increase, $856,961 was attributable to an increase in production volumes and $396,031 was due to increases in the average prices for oil and gas. Of the increase in oil and gas sales, production from one well aggregated $1,007,613. This well commenced initial production in December 1995 from a completion by Bois D'Arc Resources in which 21 the Company has an overriding royalty interest of 7.33% after payout (4.33% before payout). Payout on this well occurred in June 1996. The Company's share of production from this well was 229,501 mcf and 18,866 barrels of oil in 1996. The increased prices and volumes from oil and gas in 1996, compared to 1995, demonstrate the sensitivity of the Company's operations to price fluctuations and its current dependence on a small number of producing wells. Operating Expenses. Exploration (including geological and geophysical costs) and production expenses increased $1,001,980, or 146%, to $1,690,031 for the year ended December 31, 1996 from $688,051 for the year ended December 31, 1995. The increase was primarily a result of one well abandoned in September 1996 ($647,355) and increased exploration expense ($569,354) related to increased personnel associated with the Company's two exploration projects. DD&A expense increased $238,478, or 61%, to $630,865 in 1996 from $392,387 in 1995. DD&A expense on oil and gas properties was $142,344 in 1996 compared to $114,090 in 1995 and represented a significant per equivalent barrel decrease as a result of increased reserves due to revisions in engineering estimates (34,952 net equivalent barrels) principally associated with the Bois D'Arc well. Depreciation and amortization expense of equipment and software increased $210,224, or 76%, to $488,521 in 1996 from $278,297 in 1995 principally as a result of additions aggregating $818,497 in computer equipment and geophysical software. General and administrative expense increased $800,343, or 175%, to $1,256,489 in 1996 from $456,146 in 1995 principally due to increases in personnel of $262,587 and estimated additional costs of being a public company of approximately $172,549. Other Income (Expense). Net other income increased $273,021 for the year ended December 31, 1996 compared to a net expense of $23,814, for the year ended December 31, 1995, principally as a result of increased interest income due to the increase in available cash resulting from the Merger in December 1995. Net Loss. For the year ended December 31, 1996, operations resulted in a net loss of $1,858,132 ($.30 per share) compared to a net loss of $1,173,646 ($.30 per share) for the year ended December 31, 1995. The increase in net loss of $684,486 is comprised of increased revenue of $883,294, increased expenses of $1,840,801, and increased other income of $273,021. PERIOD FROM INCEPTION, MARCH 17, 1994, TO DECEMBER 31, 1995 From March 17, 1994, (the inception of Zydeco Exploration) through December 31, 1995, Zydeco Exploration's primary operations consisted of the acquisition of federal and state oil and gas leases, the acquisition of 3D seismic analysis hardware and software, the purchase of an interest in a gas well which commenced production in early 1995, the farmout of two leases (one of which resulted in commercial production in late 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 Exploration had completed only one full fiscal year, analysis of comparable interim periods is not meaningful. Oil and Gas Sales. The Company had no revenue or oil and gas reserves during 1994. The Company's primary operations, prior to January 1, 1995, related to (i) an initial capitalization, primarily through a private placement of 781,255 shares of convertible preferred stock at $3.20 per share which closed on December 2, 1994; (ii) the acquisition of computer hardware equipment and software; and (iii) the acquisition of certain oil and gas leases. Operating Costs and Expenses. Expenses incurred from inception through December 31, 1994, consisted primarily of $72,981 of general and administrative expenses and $71,268 of interest expense on advances to the Company totaling approximately $1.3 million from related parties. These advances were repaid with proceeds from the issuance of convertible preferred stock. For the year ended December 31, 1995, the Company had revenues of $586,752 consisting of seismic services revenue of $300,000, oil and gas sales, primarily from one gas well which began production in January 1995 of $169,235, and gains on sales of unproved leases of $117,517. Seismic services revenue of $200,000 and the related cost of service were recognized under an exchange agreement between the Company and a related party. Under this agreement, the Company agreed to 22 provide 3D seismic analysis services in exchange for a license to use the underlying seismic data owned by the related party. As this exchange agreement represented an exchange of dissimilar goods, income and expense for 1995 reflects the gross value of seismic service revenues and related data costs associated with this transaction. The remaining $100,000 of seismic services revenue was realized in connection with performing certain seismic analysis services under the Fortune Exploration Agreement. The Company had no revenues for the comparable period from inception (March 17, 1994,) to December 31, 1994, since it had not yet commenced revenue producing activities following organization. During the year ended December 31, 1995, the Company had exploration costs of $261,956 primarily related to dry hole costs and related costs of plugging and abandoning a well in which the Company participated in drilling in March 1995. Geological and geophysical expense of $398,603 was composed principally of salaries and related personnel cost of $275,399 and geological and geophysical software maintenance expense of $91,593. The principal components of the $456,146 of general and administrative expenses for 1995 included $294,527 of employee salaries and related costs, $41,225 of legal and accounting costs, and $43,149 of office and facilities rent. DD&A expense totaling $392,387 for 1995 was comprised of DD&A of $114,090 on oil and gas properties and depreciation of $278,297 primarily related to geophysical software (which is depreciated over two years because of rapid changes in seismic-analysis technology) and related equipment (which is depreciated over three to seven years). General and administrative expenses for the comparable period from inception (March 17, 1994) to December 31, 1994, were $72,981 consisting primarily of legal and office expense related to initial office operations. The Company paid no salaries in 1994. Increased revenues and expenses for the year ended December 31, 1995, reflect increased operations resulting from lease prospecting activities under the Fortune Exploration Agreement and increased expense from the addition of employees. Other Income (Expense). Net other expense increased $1,175, or 5%, to $23,814 for the year ended December 31, 1995 compared to net other expense of $22,639 for the period from inception (March 17, 1994) through December 31, 1994. Net Loss. For the year ended December 31, 1995, operations resulted in a net loss of $1,173,646 ($.30 per share) compared to a net loss of $132,881 ($.03 per share) for the prior period. The increase in net loss of $1,040,765 was due to increased revenue of $586,752, increased operating expenses of $1,626,342 and increased net other expenses of $1,175. LIQUIDITY AND CAPITAL RESOURCES The Company has generated funds from public and private equity offerings, revenues from the Company's operations, and cash payments made to it under the Fortune Exploration Agreement and the Cheniere Exploration Agreement. 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 approximately $10.1 million from the sale of securities in 1993, 1994 and 1995, cash payments of $4.8 million advanced in 1995 under the Fortune Exploration Agreement and $10.0 million, as of May 2, 1997, provided under the Cheniere Exploration Agreement. As discussed in "Overview," the original turnkey seismic services agreement with Grant has been replaced by the Grant Agreement which is a "cost plus" agreement. The nature of such an agreement increases both the risks and the management efforts associated with the seismic data acquisition phase of the West Cameron Seismic Project. The Company has never attempted such a contract and there is no assurance that the Company's estimates of costs or the amount of actual costs will be less than or equal to that which might have been estimated or incurred under the original turnkey contract. The Company currently estimates that the cost to complete the survey may run significantly higher than the previously anticipated cost under the original turnkey contract with Grant. Under the Grant Agreement, the Company has the ability to reduce the size of the survey area. Any such reduction would limit overall costs but increase the costs on a per acre basis due to the fixed nature of mobilization and demobilization costs. The Company paid a commitment fee of $150,000 and advanced $350,000 upon execution of the Grant Agreement. The Company expects that capital needs for 1997 will be satisfied through cash on hand (including the proceeds from this Offering and internal cash reserves) and cash available under the Fortune Exploration Agreement and the Cheniere Exploration Agreement. Although Cheniere may elect to discontinue its funding at 23 any time (and thus reduce its interest in the West Cameron Seismic Project), the Company believes that the Company has adequate existing cash to meet its obligations incurred in connection with the West Cameron Seismic Project. The Company has budgeted approximately $12.6 million of costs in 1997 related to the West Cameron Seismic Project, of which,Cheniere had advanced $4.0 million as of May 2, 1997 and is expected to advance an additional $6.1 million. The Company's share of 1997 costs budgeted for the West Cameron Seismic Project is $2.5 million, which is included in its capital expenditure budget discussed below. As a result of the cost plus nature of the Grant Agreement, the Company may be required to increase its capital budget for seismic data acquisition for the West Cameron Seismic Project. Such additional costs in West Cameron (and Cheniere's share of costs in the event it elects to discontinue funding) would either be funded from available cash of the Company or from new industry participants in the West Cameron Seismic Project. Alternatively, the Company could elect to reduce the contract area of the West Cameron Seismic Project in order to reduce costs. Other capital needs may be met through the issuance of additional 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 Company's projects. Depending upon the results of the West Cameron Seismic Project, the Company may need additional funds in the future, principally in order to undertake leasehold acquisitions, exploratory drilling or other related costs. 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. There can be no assurance that the Company will be successful in securing additional partners or additional project financing or credit financing. See "Risk Factors--Need for Additional Financing." The Company's current budget for its capital expenditures for 1997 is approximately $3.0 million, including $2.5 million of West Cameron Seismic Project costs (prior to any revisions for seismic acquisition costs) and $393,000 related to the purchase of computer equipment and software. Other significant additional capital expenditures may include the acquisition of additional oil and gas leases, the drilling of prospects identified by the Company, the acquisition of interests in producing wells, and other oil and gas exploration and production related investment opportunities determined by management and the Board of Directors to be in the interest of the Company. The amount and timing of these expenditures will be dependent upon numerous factors including the availability of capital to the Company, availability of seismic data, the number and type of drilling prospects, if any, identified as a result of the Company's 3D seismic analysis, the terms under which industry partners may participate in the Company's prospects and the cost of drilling and completing wells in the Louisiana Transition Zone and the Timbalier Trench. The Company currently maintains a $300,000 bond required 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 a 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. 24 BUSINESS AND PROPERTIES THE COMPANY Zydeco Energy, Inc. is an independent energy company engaged in the exploration for oil and gas in areas it believes have high potential for hydrocarbon reserves utilizing advanced 3D seismic and computer aided exploration ("CAEX") techniques. The Company believes it is one of the few independent exploration companies with comprehensive in-house technology and expertise enabling it to use the most recent advances in such 3D seismic and CAEX technology. Such technology includes the Wavefield Imaging Technology, a data processing technique designed to substantially reduce the cost of 3D seismic data acquisition for certain surveys while improving the resolution of the subsurface image. Zydeco's geophysicists design the seismic data acquisition survey, manage the acquisition of seismic data and process and interpret the resulting data. The Company believes that its technology and expertise will enable it to acquire and efficiently analyze seismic data over large geographical areas previously unexplored with advanced 3D seismic applications in order to identify and acquire leasehold rights for potential oil and gas drilling prospects. The Company intends to enter into agreements with experienced industry partners for the development of its prospects and retain significant non-operating production interests in those prospects. Zydeco's current exploration efforts are focused on the Louisiana Transition Zone. STRATEGY The Company's primary objective is to discover and develop oil and gas reserves and increase cash flow through exploration, prospect identification and participation in projects to develop such prospects. In pursuing this strategy the Company intends to: Continue Focused Exploration Activities. The Company focuses its efforts in geologic areas worldwide that it believes are underexplored and have the potential for substantial oil and gas reserves. Such areas include geologically complex trends with characteristics that have discouraged exploration in the past due to difficult seismic data acquisition and analysis using conventional methods. The Company believes that use of the Wavefield Imaging Technology and the most advanced available 3D seismic processing techniques provides it with the capability to economically collect and evaluate seismic data for such areas. Continue Development of Industry Leading Seismic Technology and Expertise. The Company believes the seismic data collection, processing and analysis techniques it employs are significantly more advanced than those commonly used in the industry. The Company intends to continue to expand its exploration expertise through acquisition of high speed computers and parallel processing software as they become available, integration of in-house capabilities and, when appropriate, collaboration with individuals and other companies in the development of new seismic technologies. The Company believes its rights to the Wavefield Imaging Technology gives it a current advantage over exploration companies that do not have access to it by substantially reducing the costs of seismic data acquisition for certain surveys and improving spacial resolution in the seismic imaging process. The Company may exploit its rights to the Wavefield Imaging Technology by application to both its own seismic surveys and, through joint ventures or similar arrangements, to seismic surveys by other companies. Pursue Joint Ventures. The Company intends to pursue exploration and development joint ventures with strategic industry partners in order to (i) obtain funds necessary to explore for and identify potential prospects; (ii) control and reduce the Company's exposure to the risks related to the drilling, completion, production operation, and abandonment of properties; and, where applicable, (iii) utilize the bonding and insurance capabilities of experienced operating partners in order to be able to purchase leases and drill wells in the offshore federal domain without having to collateralize these activities with the substantial bonding and insurance amounts required pursuant to governmental legislation. IMPLEMENTATION Identify Areas Believed to Have Underexplored Potential. The Company intends to continue to identify areas that it believes have underexplored potential for substantial oil and gas reserves. Such areas include coastal transition zones and similar areas that have characteristics that make seismic data acquisition and analysis 25 difficult and expensive using conventional methods. For example, seismic data in the coastal transition zones is difficult and expensive to acquire due to the combinations of land and marine recordings that must be obtained across the marshlands, bays, highland, and open water areas. Different types of sources and receivers may be required for a true transition survey over a beach area which complicates the processing and quality control of a seismic survey. Surf related noise creates additional complications for a coastal transition zone seismic survey. The Company's West Cameron Seismic Project in the Louisiana Transition Zone is an example of such a survey. Acquire Seismic Rights or Proprietary Data. Once the Company has identified an area of interest, it then seeks to obtain the rights to acquire seismic data and engages a contractor to shoot 3D seismic data in a survey designed by the Company for processing with the Wavefield Imaging Technology. The Company may also purchase existing seismic data if it is available and can be usefully processed with the Company's technical resources. The ability to assemble the rights to shoot seismic data over large areas may be important to the success of a 3D survey. A seismic survey for 3D analysis must gather data over an area broader than the subsurface area intended for analysis, especially for deeper objectives. Data from a broader area is necessary because the data from the edges of a seismic survey cannot produce 3D imaging of the immediate subsurface. To effect a proper 3D image requires a significant distance between the sources and receivers which is not available at the edges of the survey. In its West Cameron Seismic Project, the Company has assembled survey rights over approximately 140,000 acres from highly fragmented ownership. Identify Prospects. The seismic data is then processed or reprocessed and then interpreted to identify potential prospects. Such processing includes correlating the seismic data with subsurface well control and historical production data from similar properties, and integrating all such available data with enhanced 3D structural and stratigraphic imaging and attribute analysis techniques by the Company's expert geophysicists and geologists. The decision to drill any exploratory prospect is based on an analysis of the economic risk associated with the potential return. Such analysis involves a number of factors, including: (i) the availability of leases on reasonable terms and permits for the prospect; (ii) the results of the review and analysis of the seismic data, including the results of 3D seismic surveys; (iii) the availability of sufficient capital resources to the Company and the other participants for the drilling of the prospect; (iv) the approval of other participants in the drilling of the prospect after additional data has been compiled; (v) rig availability; and (vi) economic conditions at the time of drilling, including prevailing and anticipated prices for crude oil and natural gas. Acquire Leases and Drilling Rights. The Company acquires leases and concessions for the potential prospects it identifies. Depending on whether governmental or private individuals own the property in the area of interest to the Company, the Company may be able, or required, to acquire such rights prior to acquisition of the seismic data or it may wait until after identifying potential prospects before acquiring any leases or drilling rights. In the case of state properties, an interested party must nominate a property for bid. The right to survey and/or lease the property is then publicly auctioned by the state government. Leases for federal properties available for drilling are publicly auctioned at least once each year. In the case of privately held land or foreign concessions the right to explore the property is normally privately negotiated. Establish Exploration Joint Ventures and Partnerships. Once the Company has identified potential prospects and obtained leases and drilling rights for the potential prospects, the Company may enter into agreements with experienced industry partners for drilling and development. The Company may enter into a joint venture for the drilling and development of the prospect or it may farmout or sell the prospect for a combination of cash and/or a retained interest. The Company will seek partners with proven records at managing drilling and production activities in the area of the prospect. Generally, the Company intends to retain only a nonoperating production interest with respect to its prospects. TECHNOLOGY Traditionally, seismic analysis involved the acquisition, processing and interpretation of seismic data collected along a single line of seismic detectors and sources. Processing of the resulting data created a two dimensional cross section of the earth's subsurface beneath this line. This technique constitutes 2D seismic 26 surveying ("2D seismic"). The advent of high speed, large storage capacity computers and advanced geophysical software development has permitted the acquisition, processing and interpretation of seismic data collected in an areal array, usually from multiple relatively closely spaced lines of seismic detectors and sources. Processing of the resulting data creates a three dimensional image of the earth's subsurface. This technique constitutes 3D seismic surveying ("3D seismic"). 3D seismic provides a substantially improved image for interpretation and analysis than the cross section created by 2D seismic. As a result, the industry's success rate with respect to the drilling of prospects has risen with the adoption of 3D seismic technology. Basic 3D seismic imaging and analysis are now routinely used in oil and gas exploration. The goal of 3D seismic processing is to image the subsurface for detailed structural and stratigraphic interpretation. When sound waves from seismic sources move through various strata of rock, the speed and the angle of transmission of these waves change from one strata to another. If the strata is tilting or "dipping", the path of the sound waves is further complicated. These factors will cause the seismic events indicating structural changes to be misplaced from their true locations unless the data is corrected by processing. The basic processes used in 3D seismic processing are Dip- Moveout ("DMO"), Common Depth Point stacking ("CDP") and poststack migration. Each of these processes is intended to adjust the collected seismic data to more accurately image the subsurface. Migration is an imaging process that "relocates" seismic events to account for changes in the dip of the underlying strata and moves those events into their proper location. This process requires knowledge of the velocity of the sound waves as they are transmitted and reflected through the strata. For approximately the past thirty-five years, the most commonly used technique to improve the signal quality of seismic data has been CDP stacking. This technique simply adds or "stacks" the seismic traces which have a common mid-point between each source and receiver after time correcting the data for the offset or distance between the sources and the receivers. Dip-Moveout (DMO) is a more recently developed process to correct the CDP data so that dipping events will stack or focus better using a common velocity. This technique is sometimes referred to as a partial migration. Nevertheless, migration is a necessary process applied poststack, i.e. after summation of the common midpoint traces. Continuing improvements in computing speed and capacity resulted in the development of more advanced 3D processing techniques. These advanced 3D processing techniques include prestack migration which migrates the individual data traces prior to any summation of the data with respect to either time or depth. Prestack migration requires a more accurate analysis of sound velocity through the various subsurface strata present in the area surveyed than the more commonly used sequence of CDP and poststack migration. Determining an accurate velocity model is an iterative process requiring close coordination between the processing and interpretation experts. Not all oil and gas exploration companies are capable of performing prestack migration processing. Most recently, the Wavefield Imaging Technology, developed by Dr. Norman S. Neidell, an independent researcher, represents a further advancement of 3D seismic processing and analysis. Wavefield Imaging is a method of producing a more finely resolved image of the subsurface than is possible with previously existing 3D processing techniques. Consequently, Wavefield Imaging Technology permits the Company to use more broadly spaced seismic receivers in its surveys thereby reducing the cost of data acquisition for certain surveys and improving the resolution of the subsurface image. Under the present survey configuration used by the Company in its West Cameron Seismic Survey, the Wavefield Imaging Technology is limited to analysis of seismic objectives below 8,000 feet. The Company believes the technology may also be applied in the analysis of shallower objectives by increasing receiver and sound source densities, although with diminishing cost advantages. In May 1996, the Company entered into a license with Dr. Neidell for the Wavefield Imaging Technology. The Company's license is for nonexclusive use worldwide and exclusive use in the Louisiana Transition Zone. Currently, the Company is not aware of any other company employing Wavefield Imaging Technology in the design of its seismic surveys and processing of its seismic data. In May 1997, the Company signed a letter of intent to acquire Wavefield Image, Inc., the owner of the Wavefield Imaging Technology. The letter of intent provides for the issuance of 100,000 shares of Common Stock 27 to shareholders of Wavefield Image, Inc., including its principal shareholder, Dr. Norman S. Neidell, inventor of the Wavefield Imaging Technology. An additional 150,000 shares of Common Stock may be issued if a U.S. patent for the Wavefield Imaging Technology is issued. The acquisition is subject to negotiation and execution of a definitive merger agreement acceptable to the Company and Wavefield Image, Inc. The Company expects to negotiate an agreement with Dr. Neidell regarding his employment with the Company. If the acquisition is completed, the Company will own the Wavefield Imaging Technology subject to licenses granted previously by Wavefield Image, Inc. There can be no assurance a definitive agreement for the acquisition of Wavefield Image, Inc. will be executed or, if executed, that the acquisition will be completed. The Company, however, believes its current license for the use of Wavefield Imaging Technology is sufficient for its planned operations. The Company believes it is one of the few independent exploration companies to perform both 3D seismic data processing and seismic interpretation in- house. As described above, prestack migration involves an iterative process. Most independent exploration companies use outside contractors to process their 3D data in this iterative process. However, this iterative process requires continual free exchange of information between the data processing experts and the interpretation experts. Use of outside contractors can result in slower turn-around time for processing. In addition, exploration companies are often reluctant, for confidentiality reasons, to disclose more than the necessary data to the outside processing experts and this may further limit the effectiveness of the process. Finally, outside processing contractors generally do not specialize in processing data from any particular area. The Company believes processes such as prestack migration analysis can be most effectively and efficiently accomplished by performing seismic survey design, data processing and interpretation in-house. The Company believes performance of such work in-house allows the Company to integrate all of those processes and thereby produce a more accurate image of the subsurface to identify prospects for leasing and drilling. The Company has selected and assembled the computers and software necessary to perform this advanced 3D seismic imaging and analysis. This equipment is specifically designed to handle the scale and complexity of large scale seismic projects such as the Company's West Cameron Seismic Project. The Company has also assembled a team of geophysicists and geologists with expertise in these advanced 3D processes. The Company believes its personnel, software and Wavefield Imaging Technology combined with its hardware processing capacity represents unique in-house capabilities with respect to advanced 3D seismic analysis leading to more accurate 3D images at a reduced cost. See "Risk Factors--Technology." GEOLOGIC AND GEOPHYSICAL EXPERTISE The Company has employed a group of talented and experienced geologists and geophysicists. The Company currently employs three geologists and five geophysicists and engages one geophysicist as a consultant. These experts have an average of 20 years of experience in seismic imaging and analysis. As discussed above, the Company believes this in-house expertise is a critical factor in enabling the Company to effectively and efficiently use the most recent developments in 3D seismic imaging. LOUISIANA TRANSITION ZONE AND OTHER AREAS OF INTEREST The Company has identified and is evaluating numerous potential prospects offshore in the Louisiana Transition Zone and the Timbalier Trench, the Company's current principal areas of concentration. Louisiana Transition Zone. The Louisiana Transition Zone is a narrow trend paralleling the coastline of Louisiana. It is approximately six miles wide (three miles on either side of the beach) and extends approximately 300 miles from the Sabine River eastward to the Mississippi River. Water depths in the Louisiana Transition Zone range up to approximately 40 feet. The Louisiana Transition Zone contains the Miocene Trend which has produced many of the largest oil and gas fields developed in the continental United States and its territorial waters. Productive zones within the Miocene Trend have excellent reservoir characteristics and have historically exhibited multiple pay zones, which allow a single strategically placed well bore to drain multiple reservoirs. The western portion of the Louisiana Transition Zone contains the gas prolific Planulina sands. The Louisiana Transition Zone is populated with salt domes with numerous radial and tangential faults surrounding the salt domes. The use of advanced 3D seismic technology is essential to the exploration of such 28 salt features and fault blocks. Historically, there have been relatively few 3D surveys conducted in the Louisiana Transition Zone because of the relatively high cost of such surveys compared to land or deepwater surveys. The high cost is a result of the problems associated with seismic surveys in coastal transition zones discussed in "Implementation" above. Seismic activity has also been limited due to wildlife sanctuaries. Leases in this area are controlled by sophisticated land owners onshore and the State of Louisiana within three miles of the beach offshore. Permits for 3D acquisition require the consent of all landholders and all leaseholders. Such consents are not required in Federal waters. Thus, seismic contractors have been reluctant to conduct speculative 3D surveys due to the difficulty of permitting acreage in the Louisiana Transition Zone. Due to these limitations, this zone is considered a "seismically blind" area and is thus reflected on virtually every onshore and offshore 2D seismic coverage map for the State of Louisiana as an area of "no seismic coverage." Given this low level of historical exploration and the high recovery factors characterizing the Louisiana Transition Zone, the Company believes that this zone has the potential for containing substantial undeveloped oil and gas reserves. Many of these prospective areas in the Louisiana Transition Zone are located in shallow waters near existing pipeline infrastructure. As a result, reserves underlying these areas are generally less costly to develop and connect to pipeline infrastructure than reserves in deeper water areas. Timbalier Trench. The Timbalier Trench is a narrow, circuitous channel approximately seven miles wide and situated 600 feet beneath the floor of the Gulf of Mexico. This trench is an ancestral channel of the Mississippi River. Water depths range from 40 to 130 feet in the Company's prospect areas. The Timbalier Trench contains an irregular shale section deposited over a normal sedimentary section. The differences in the reflective qualities of these sections cause a distortion in the penetration and recording of energy from a seismic source which results in a lack of data continuity and resolution. This lack of continuity and resolution with respect to seismic shot in the Timbalier Trench has historically been considered a "poor quality data" area because abnormally low seismic velocities in the shale "Trench" create data processing problems. Due to the lack of high quality seismic data, this area also remains relatively unexplored. WEST CAMERON SEISMIC PROJECT In August 1996, the Company commenced the West Cameron Seismic Project, an extensive 3D seismic exploration program in a part of the Louisiana Transition Zone in western Cameron Parish, Louisiana. The Company anticipates the West Cameron Seismic Project will encompass approximately 148,000 gross acres. At the core of the West Cameron Seismic Project is a 51,000 acre exclusive seismic permit on state waters obtained by the Company from the State of Louisiana. Options and Permits. In connection with the West Cameron Seismic Project, the Company has negotiated seismic options covering approximately 35,775 gross acres (32,398 net acres) and has secured seismic permits covering approximately 98,454 gross acres (97,762 net acres). Options and permits aggregating 57,913 gross acres (54,325 net acres) are located onshore in Cameron Parish, Louisiana, including the exclusive seismic permit with the State of Louisiana. In connection with the exclusive seismic permit, for eighteen months, commencing February 1996, the Company has the exclusive right to acquire seismic data on the State's acreage and nominate any of the acreage for competitive lease bids. In Louisiana, a public auction of leases is held approximately 90 days after the property is nominated for bid and the auction is generally announced only 30 days prior to the auction date. A bidder at the auction may bid on all or only a portion of the property nominated for bid. The Company is obligated to deliver to the State of Louisiana a copy of a 3D seismic survey over the state acreage included in the permit or pay a substantial penalty. Under the Company's seismic permit, the State of Louisiana is required to keep the information obtained from the survey confidential for a period of ten years. The Company can, and currently intends to, extend the time period for delivery of the survey for a six month period ending February 14, 1998 for an additional payment of $391,877. Exploration Agreement. In April, 1996, the Company executed the Cheniere Exploration Agreement covering the West Cameron Seismic Project. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--General". The Cheniere Exploration Agreement provides for aggregate payments to Zydeco of at least $13.5 million to fund the costs of seismic acquisition, including the purchase of 29 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. The Cheniere Exploration Agreement, as amended, provides that Cheniere may receive a 50% interest in the West Cameron Seismic Project and any leases acquired as a result thereof through May 2001, based on Cheniere completing its funding of the initial $13.5 million and 50% of any costs incurred thereafter. As of May 2, 1997, Cheniere had funded a total of $10.0 million pursuant to the Cheniere Exploration Agreement. The Cheniere Exploration 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. Cheniere has the right to farm out a portion or all of its interest in each prospect identified in the project to Zydeco under a put arrangement in the Cheniere Exploration Agreement. In the event of such a farmout, Cheniere would retain a 1% overriding royalty interest, as to its interest in the project, convertible into a 10% working interest as to its interest in the project, after Zydeco, or its partners, has recouped the cost of drilling, completion, and hook-up of completed wells. Should Cheniere farm out a smaller working interest to Zydeco, the overriding royalty and after-payout working interests would be proportionately reduced. Zydeco has similar farmout rights under the Cheniere Exploration Agreement. Seismic Data Acquisition. In September 1996, seismic data acquisition commenced under a turnkey seismic contract with Grant. Data acquisition operations were suspended for the winter in December 1996. In December 1996, Grant filed for protection under Chapter 11 of the U. S. Bankruptcy statutes. The Company executed a new contract with Grant in March 1997, and seismic data acquisition operations recommenced in April 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Data Analysis. In January 1997, the Company completed the assembly of an exploration team of geophysicists, geologists, and seismic analysts and the integration of its 3D seismic interpretive hardware and software. As of May 19, 1997, the Company had collected seismic data for analysis and interpretation on approximately 40.2% of the original West Cameron contract acreage. The Company is presently analyzing such data and applying various advanced 3D seismic processing techniques to improve data resolution and to develop routines for more complicated processes, including pre-stack migration and velocity analyses. These techniques will also be used in analyzing future data obtained for the West Cameron Seismic Project. While the Company believes the preliminary data results are promising, the exploration potential of the data is still not known and identification of prospects would be premature. The analysis of the exploration potential of the data will be dependent on further seismic processing and analysis and the availability of additional data covering the West Cameron Seismic Project area. FORTUNE PROJECT In February 1995, Zydeco Exploration entered into the Fortune Exploration Agreement with a predecessor of Fortune. Pursuant to the Fortune Exploration Agreement, in a series of payments, Fortune paid Zydeco $4.8 million and agreed to pay 50% of any additional funds necessary for the acquisition and processing of seismic data and acquiring leases on certain of the potential prospects described in "Potential Prospects and Leases" below in exchange for Fortune's right to maintain up to a 50% interest in such prospects. Fortune's interest in such potential prospects may drop below 50% if it elects not to contribute to development costs for such potential prospects. In addition to the initial potential prospects, Zydeco and Fortune have established areas of mutual interest ("AMIs") adjoining each potential prospect. No assurance can be given that any new projects within the AMIs will be identified. Fortune has the right to farm out a portion or all of its interest in each prospect to Zydeco under a put arrangement in the Fortune Exploration Agreement. In the event of such a farmout, Fortune would retain a 1% overriding royalty interest, as to its interest in the prospect, convertible into a 10% working interest in its interest in the prospect after Zydeco or its partners, have recouped the cost of drilling, completion, and hook-up 30 of the well. Should Fortune farm out a smaller working interest to Zydeco, the overriding royalty and after-payout working interests would be proportionately reduced. Zydeco has similar farmout rights under the Fortune Exploration Agreement. POTENTIAL PROSPECTS AND LEASES Undeveloped Properties. The Company has identified and is evaluating a number of potential prospects outside of the West Cameron Seismic Project under oil and gas leases in which the Company has an interest. These leases are located primarily in the Miocene Trend of southern Louisiana. The potential prospects have generally been identified by shooting or purchasing certain 2D and 3D seismic data; processing or reprocessing thereof, and correlating the seismic data with subsurface well control and historical production data from similar properties. As of March 31, 1996, the Company held oil and gas leases covering approximately 21,480 gross acres (11,326 net acres) in the Louisiana Transition Zone and the Timbalier Trench. The Company owns 100% of the interest in five of the potential prospects in the Bay Marchand and Timbalier Bay areas. The Company owns a 50% interest in 17 of the potential prospects in which Fortune owns the remaining 50% interest, and the Company owns limited interests in the four other potential prospects which are all located in the Louisiana Transition Zone. The Company is currently offering to sell interests or farmout five of the potential prospects in which it has an interest in the Bay Marchand area. The Company is currently in the process of acquiring 3D seismic data and analyzing such data for certain of the other potential prospects. As of December 31, 1996, the Company had licensed 3D seismic data covering approximately 138 square miles offshore Louisiana encompassing approximately 10,366 gross acres in which the Company has leases covering all or portions of the potential prospects. The Company is in the process of collecting and analyzing the seismic data for the West Cameron Seismic Project. As a result, the Company has not commenced any lease acquisitions in that area. The Company acquired Fortune's interest in a 116 acre potential prospect in the area of the West Cameron Seismic Project to eliminate any conflict between the AMIs for the West Cameron Seismic Project and the Fortune project. Lease Terms. All the leases currently held by the Company are Federal or State of Louisiana offshore leases. The Company's leases have expiration dates ranging from 1997 to 2001. Federal offshore leases generally provide for a minimum royalty of 16.67%, have a primary lease term of five years, comprise an approximately 5,000 acre lease block, and are administered by the U.S. Department of Interior Minerals Management Service (the "MMS"). Annual rentals on Federal leases are $5.00 per acre. In general, the Company's federal leases consist of portions of 5,000 acre lease blocks. If production is not established or an extension is not obtained during the primary term, the lease terminates. Louisiana state leases are administered by the State Mineral Board of the State of Louisiana and generally provide for: (i) a minimum royalty of 20%; (ii) a five year primary term; and (iii) annual rentals in an amount equal to 50% of the original lease acquisition cost. Generally, title to state and federal leases is merchantable in all respects and operations thereon are not normally subject to litigation resulting from the legal doctrine of adverse possession or any other similar challenge to title. DRILLING ACTIVITIES In May 1994, Zydeco purchased a 10% working interest in a tested but unproven well in the Falcon Prospect. In January 1995, the well began production of natural gas. In April 1995, Bois D'Arc Exploration successfully tested a well in the Thunder West prospect as a farmout from Zydeco. Zydeco has a 7.33% overriding royalty interest in the well. In October 1994, Zydeco purchased a one-eighth working interest and participated in an exploratory well in the Bon Ton Prospect. In March 1995, the well was determined to be a dry hole and was plugged and abandoned. Subsequently in August 1995, the Company acquired a 50% interest in an adjacent state lease in the Bon Ton Prospect. In March 1996, Zydeco and Fortune farmed out the Polaris Prospect to FW Oil Interests, Inc. ("FW"). FW commenced drilling a well in July 1996, which was unsuccessful and abandoned in October 1996. In August 1996, the Company purchased certain non-producing leasehold interests from Neomar Resources, Inc., an affiliate of Mr. Sam B. Myers, Jr., Chief Executive Officer of the Company, and participated in the 31 drilling of an exploratory well located in Timbalier Bay in state waters offshore Louisiana. See "Management--Certain Relationships and Related Transactions." The Company paid $187,500 for a 37.5% working interest in the prospect leases, subject to a 25% back-in interest by Neomar after payout. Drilling of the exploratory well commenced in August 1996 and was abandoned in September 1996 for mechanical reasons without testing the well's primary objectives. Neomar Resources, Inc. participated for a 41.2% working interest in the well. The Company incurred $647,355 in exploration expense in 1996 in connection with the drilling and abandonment of the well. At December 31, 1996, the Company had undertaken to sell or farm out all or a portion of its interest in this prospect. OIL AND GAS RESERVES The Company engaged Ryder Scott Company, Petroleum Engineers ("Ryder Scott") to estimate the proved oil and gas reserves of the Company as of December 31, 1996, for all of the Company's proved properties. Ryder Scott is an independent oil and gas reserve engineering firm. Prior to 1995, the Company had no proved oil and gas reserves. Ryder Scott was also engaged to estimate the future net revenues to be derived from such properties. In preparing their report, Ryder Scott reviewed and examined such geological, economic, engineering, and other data provided by the Company as considered necessary under the circumstances, and examined the reasonableness of certain economic assumptions regarding estimated operating and development costs and recovery rates in light of economic circumstances as of December 31, 1996. As of December 31, 1996, the proved oil reserves were estimated to be 10,052 Bbls. and the proved natural gas reserves were estimated to be 243,000 Mcf. There are numerous uncertainties inherent in estimating quantities of reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond the control of the producer. The reserve data set forth in this Prospectus represent only estimates. Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way, and the accuracy of any reserve estimate is a function of the quality and quantity of available data and of engineering and geological interpretation and judgment. As a result, estimates of different engineers often vary. In addition, results of drilling, testing, and production subsequent to the date of an estimate may justify revision of such estimate. Accordingly, reserve estimates at a specific point in time are often different from the quantities of oil and gas that are ultimately recovered, which differences may be significant. Additionally, the estimates of future net revenues from proved reserves of the Company and the present value of future net revenues are based upon certain assumptions about future production levels, prices, and costs that may not prove correct over time. The meaningfulness of such estimates is highly dependent upon the accuracy of the assumptions upon which they were based. INFORMATION RELATING TO OIL AND GAS PROPERTIES Production. The Company had no oil and gas reserves or production prior to 1995. The following table summarizes the sales volumes of the Company's net oil and gas production in the United States in barrels of oil and thousands of cubic feet of natural gas for each of the periods indicated:
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, -------------- 1997 1996 1995 --------- ------- ------ Crude oil and natural gas liquids (Bbls)............... 3,280 20,186 1,118 Natural gas (Mcf)...................................... 103,241 372,678 84,546
The sales volumes in the table represent sales of "net production", i.e., production which is net to the Company and produced to its interest after deducting royalty and other similar interests. 32 Average Prices and Production Costs. Average unit prices and unit production costs are set forth below with respect to the Company's net share of production of oil and gas in the United States:
AVERAGE SALES AVERAGE OPERATING PRICE(1) COSTS PER NBOE(2) ------------ ----------------- PER PER BBL MCF PRODUCTION OIL GAS (LIFTING) DD&A(3) ------ ----- ---------- ------ Three Months Ended March 31, 1997............... $23.37 $2.88 $0.28 $1.66 Year Ended December 31, 1996.................... $22.39 $2.60 $0.27 $1.73 Year Ended December 31, 1995.................... $18.37 $1.76 $1.81 $7.50
- -------- (1) Crude oil revenues are recorded at time of sale rather than as produced. (2) Net barrel of oil equivalent (NBOE) assuming natural gas converted at six mcf per equivalent barrel. (3) Excludes depreciation of seismic computer hardware and software of $136,640 for the three months ended March 31, 1997 and $488,521 and $278,297 for the years ended December 31, 1996 and 1995, respectively. Acreage and Well Summary. The information presented below relates to properties in the United States in which the Company has "working interests" which bear the cost of operations. The Company's total gross and net interests in productive wells and in developed and undeveloped acres at December 31, 1996, are summarized as follows:
GROSS NET ------- ------- OIL GAS OIL GAS --- --- --- --- Productive wells(1)............................................. -- 1 -- .10 Developed acres(2).............................................. 349 35 Undeveloped acres(3)............................................ 21,479 11,326
- -------- (1) "Productive Wells" are producing wells and wells capable of production, and include gas wells awaiting pipeline connections or necessary governmental certifications to commence deliveries and oil wells to be connected to production facilities. (2) "Developed Acres" include all acreage (on a leasehold basis in the United States) as to which proved reserves are attributed, whether or not currently producing, but exclude all producing acreage as to which the Company's interest is limited to royalty, overriding royalty, and other similar interests. (3) "Undeveloped Acres" are considered to be those lease acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil or gas regardless of whether such acreage contains proved reserves. 33 Drilling Activities. The following table summarizes the oil and gas drilling activities of the Company in the United States for each of the two years ended December 31, 1996 and 1995, respectively:
YEAR ENDED DECEMBER 31, --------------------- 1996 1995 ---------- ---------- GROSS NET GROSS NET ----- ---- ----- ---- DEVELOPMENT WELLS DRILLED(1)(2): Productive.............................................. -- -- -- -- Dry..................................................... -- -- -- -- EXPLORATORY WELLS DRILLED(1)(2): Productive -- -- -- -- Dry..................................................... 1.0 .375 1.0 .125 --- ---- --- ---- Total................................................. 1.0 .375 1.0 .125 === ==== === ====
- -------- (1) "Wells Drilled" refers to the number of wells completed at any time during the fiscal year, regardless of when drilling was initiated. The term "completed" refers to the installation of permanent equipment for the production of oil or gas, or, in the case of a dry hole, to the reporting of abandonment to the appropriate agency. (2) A dry well is an exploratory or a development well found to be incapable of producing either oil or gas in sufficient quantities to justify completion as an oil or gas well. A productive well is an exploratory or a development well that is not a dry well. At December 31, 1996, the Company was not participating in any drilling wells. PROPRIETARY RIGHTS AND LICENSES The Company believes that its success depends primarily on the innovative skills, technical competence, and sales and marketing abilities of its personnel rather than upon the ownership of patents or other intellectual property. The Company has obtained licenses to use all software necessary to its business. The Company presently has no patents. As discussed above, the Company has acquired a non-exclusive license to use the Wavefield Imaging Technology throughout the world and an exclusive license to use it in the Louisiana Transition Zone. See "--Strategy" and "--Technology." COMPETITION AND MARKETS Competition in the Louisiana Transition Zone and the Timbalier Trench is intense, particularly with respect to the acquisition of producing properties and proved undeveloped acreage. The Company competes with the major oil companies and other independent producers of varying sizes, all of which are engaged in the exploration, development, and acquisition of leases and producing properties. Many of the Company's competitors have financial resources and exploration and development budgets that are substantially greater than those of the Company, which may adversely affect the Company's ability to compete, particularly in regions other than the Gulf Coast. The availability of a ready market for and the price of any hydrocarbons produced will depend on many factors beyond the control of the Company, including the extent of domestic production and imports of foreign oil, the marketing of competitive fuels, the proximity and capacity of natural gas pipelines, the availability of transportation and other market facilities, the demand for hydrocarbons, the political conditions in the Middle East, the effect of federal and state regulation of allowable rates of production, taxation and the conduct of drilling operations, and federal regulation of natural gas. In the past, as a result of excess deliverability of natural gas, many pipeline companies have curtailed the amount of natural gas taken from producing wells, shut-in some producing wells, significantly reduced gas taken under existing contracts, refused to make payments under applicable "take-or- pay" provisions, and have not contracted for gas available from some newly completed 34 wells. The Company can give no assurance that such problems will not arise again. In addition, the ongoing restructuring of the natural gas pipeline industry will eliminate the gas purchasing activity of traditional interstate gas transmission pipeline buyers. See "--Governmental Regulation" and "Risk Factors--Competition." Producers of natural gas, therefore, will be required to develop new markets among gas marketing companies, end users of natural gas, and local distribution companies. All of these factors, together with economic factors in the marketing area, generally may affect the supply and/or demand for oil and gas and thus the prices available for sales of oil and gas. GOVERNMENTAL REGULATION The Company's oil and gas exploration, development, production, and related operations are subject to extensive rules and regulations promulgated by Federal and state agencies. Failure to comply with such rules and regulations can result in substantial penalties. The regulatory burden on the oil and gas industry increases the Company's cost of doing business and affects its profitability. Because such rules and regulations are frequently amended or reinterpreted, the Company is unable to predict the future cost or impact of complying with such rules and regulations. Production. In most, if not all, areas where the Company may conduct activities, there may be statutory provisions regulating the production of oil and natural gas under which administrative agencies may promulgate rules in connection with the operation and production of both oil and gas wells, determine the reasonable market demand for oil and gas, and establish allowable rates of production. Such regulations may restrict the rate at which the Company's wells produce oil or gas below the rate at which such wells would be produced in the absence of such regulations, with the result that the amount or timing of the Company's revenues could be adversely affected. Louisiana State Regulation. The State of Louisiana requires permits for seismic or drilling operations, drilling bonds, and reports concerning operations and imposes other requirements relating to the exploration and production of oil and gas. The State of Louisiana also has statutes or regulations addressing conservation matters, including provisions for the unitization or pooling of oil and gas properties, the establishment of maximum rates of production from wells, and the regulation of spacing, plugging, and abandonment of such wells. Offshore Leasing. The Company has acquired and plans to acquire additional oil and gas leases in the Gulf of Mexico, which will be granted by the Federal government and administered by the MMS. Such leases are issued through competitive bidding, contain relatively standardized terms, and require compliance with detailed MMS regulations and orders pursuant to the Outer Continental Shelf Lands Act ("OCSLA") (which are subject to change by the MMS). For offshore operations, lessees must obtain MMS approval for exploration plans and development and production plans prior to the commencement of such operations. In addition to permits required from other agencies such as the Coast Guard, the Army Corps of Engineers, and the Environmental Protection Agency (the "EPA"), lessees must obtain a permit from the MMS prior to the commencement of drilling. The MMS has promulgated regulations requiring offshore production facilities located on the Outer Continental Shelf to meet stringent engineering and construction specifications. Similarly, the MMS has promulgated other regulations governing the plugging and abandoning of wells located offshore and the removal of all production facilities. With respect to any Company operations conducted on offshore federal leases, liability may generally be imposed under the OCSLA for the costs of clean-up and damages caused by pollution resulting from such operations, other than damages caused by acts of war or the negligence of third parties. Under certain circumstances, including but not limited to, conditions deemed a threat or harm to the environment, the MMS may also require any Company operations on federal leases to be suspended or terminated in the affected area. Under the OCSLA, all oil and natural gas pipelines operating on the Outer Continental Shelf must provide "open and non-discriminatory" access to both owner and non-owner shippers. Consequently, the Company's gathering and transportation facilities located on the Outer Continental Shelf must be made available to third parties. 35 Bonding and Financial Responsibility Requirements. The Company is required to obtain bonding, or otherwise demonstrate financial responsibility, at varying levels by governmental agencies in connection with obtaining state or federal leases or acting as operator on such leases. These bonds may cover such obligations as plugging and abandonment of unproductive wells, removal of related production facilities, and pollution liabilities on federal and state leases. A substantially larger bond than the current $300,000 bond currently issued on behalf of the Company is required in order to act as operator on federal offshore leases. The Company will have to satisfy these increased bonding requirements in the event that it elects to operate any wells on federal leases. The Company expects to be able to enter into participation arrangements on its prospects with industry partners who are qualified to act as operators on Federal leases. In addition, the State of Louisiana recently adopted financial responsibility requirements with respect to plugging and abandonment liabilities on Louisiana leases. Natural Gas Marketing and Transportation. The Federal Energy Regulatory Commission ("FERC") regulates the transportation and sale for resale of natural gas in interstate commerce pursuant to the Natural Gas Act of 1938 ("NGA") and the Natural Gas Policy Act of 1978 ("NGPA"). In the past, the Federal government has regulated the prices at which oil and gas could be sold. Deregulation of wellhead sales in the natural gas industry began with the enactment of the NGPA in 1978. In 1989, Congress enacted the Natural Gas Wellhead Decontrol Act (the "Decontrol Act"). The Decontrol Act removed all NGA and NGPA price and nonprice controls affecting wellhead sales of natural gas effective January 1, 1993. While sales by producers of natural gas can currently be made at uncontrolled market prices, Congress could reenact price controls in the future. On April 8, 1992, the FERC issued Order No. 636, as amended by Order No. 636-A (issued in August 1992) and Order No. 636-B (issued in November 1992) as a continuation of its efforts to improve the competitive structure of the interstate natural gas pipeline industry and maximize the consumer benefits of a competitive wellhead gas market. The FERC proposed to generally require interstate pipelines to "unbundle," or separate their traditional merchant sales services from their transportation and storage services and to provide comparable transportation and storage services with respect to all gas supplies whether purchased from the pipeline or from other merchants such as marketers or producers. The pipelines must now separately state the applicable rates for each unbundled service (e.g., for natural gas transportation and for storage). This unbundling process has been implemented through negotiated settlement in individual pipeline services restructuring proceedings. On July 16, 1996, the Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") issued its opinion on review of Order No. 636. The opinion upheld most elements of Order No. 636 including the unbundling of sales and transportation services, curtailment of pipeline capacity, implementation of the capacity release program and the mandatory imposition of straight-fixed- variable ("SFV") rate design for interstate pipeline companies. The D.C. Circuit did remand certain aspects of Order No. 636 to the FERC for further explanation including, inter alia, the FERC's decision to exempt pipelines from sharing in gas supply realignment ("GSR") costs caused by restructuring; FERC's selection of a twenty-year term matching cap for the right -of-first- refusal mechanism; the FERC's restriction on the entitlement of no-notice transportation service to only those customers receiving bundled sales service at the time of restructuring; and FERC's determination that pipelines should focus on individual customers, rather than customer classes, in mitigating the effects of SFV rate design. On February 27, 1997, the FERC issued its order on remand. The order reaffirmed the holding of Order No. 636 that pipelines should be entitled to recover 100 percent of their prudently incurred GSR costs. Moreover, since Order No. 636, few, if any, pipeline customers have been willing, or required, to commit to twenty-year contracts for existing capacity. Thus, FERC reduced the contract-matching cap for the right-of-first- refusal mechanism to five years. In light of the varied post-restructuring experience with no-notice service, the FERC also decided to no longer limit a pipeline's no-notice service to its bundled sales customers at the time of restructuring. Finally, the FERC reaffirmed that pipelines should focus on individual customers, rather than customer classes, in mitigating the effects of SFV rate design. Four petitions were filed with the Supreme Court on January 27, 1997 for writ of certiorari to review those portions of the D.C. Circuit's opinion which affirmed the capacity release and right-of-first- refusal provisions adopted in Order No. 636. Those petitions are still pending before the Court. 36 Although the Company is unable to predict the consequences of Order No. 636, the Company believes that Order No. 636 could have a significant effect on all segments of the natural gas industry. While Order No. 636 will not directly regulate the production and sale of gas that may be produced from the Company's properties, the FERC has stated that the order was intended primarily to foster increased competition in the natural gas industry and to allow for the transmission of more accurate price signals. Thus, the order could affect the market conditions in which the gas is sold and the availability of transportation services to deliver the gas to market. Oil Sales and Transportation Rates. The FERC regulates the transportation of oil in interstate commerce pursuant to the Interstate Commerce Act. Sales of crude oil, condensate, and gas liquids by the Company are not regulated and are made at market prices. However, the price a company receives from the sale of these products is affected by the cost of transporting the products to market. Effective as of January 1, 1995, the FERC implemented regulations establishing an indexing system for transportation rates for oil pipelines, which would generally index such rates to inflation, subject to certain conditions and limitations. Under the new regulations petroleum pipelines are able to change their rates within prescribed ceiling levels that are tied to the Producer Price Index for Finished Goods, minus one percent. Rate increases made pursuant to the index will be subject to protest, but such protests must show that the portion of the rate increase resulting from application of the index is substantially in excess of the pipeline's increase in costs. The new indexing methodology can be applied to any existing rate, even if the rate is under investigation. If such rate is subsequently adjusted, the ceiling level established under the index must be likewise adjusted. In the order adopting the new regulations the FERC said that as a general rule pipelines must utilize the indexing methodology to change their rates. FERC indicated, however, that it was retaining cost-of-service ratemaking, market-based rates, and settlements as alternatives to the indexing approach. A cost-of-service proceeding will be instituted to determine just and reasonable initial rates for new services. A pipeline can also follow a cost- of-service approach when seeking to increase its rates above index levels for uncontrollable circumstances. A pipeline can seek to charge market-based rates if it can establish that it lacks market power. Finally, a pipeline can establish rates pursuant to settlement if agreed upon by all current shippers. On May 10, 1996, the D.C. Circuit affirmed the new regulations. The Court held that by establishing a general indexing methodology along with limited exceptions to indexed rates, FERC had reasonably balanced its dual responsibilities of ensuring just and reasonable rates and streamlining ratemaking through generally applicable procedures. Because of the novelty and uncertainty surrounding the indexing methodology, as well as the possibility of the use of cost-of-service ratemaking and market-based rates, the Company is not able to predict with certainty what effect, if any, these regulations will have on it. However, other factors being equal, the regulations may tend to increase transportation costs or reduce wellhead prices for such commodities. Environmental. The Company's operations are subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations may require the acquisition of a permit before drilling commences, restrict the types, quantities, and concentration of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit drilling activities on certain lands lying within wilderness, wetlands, and other protected areas, and impose substantial liabilities for pollution resulting from the Company's operations. Moreover, the recent trend toward stricter standards in environmental legislation and regulation is likely to continue. For instance, legislation has been proposed in Congress from time to time that would reclassify certain oil and gas exploration and production wastes as "hazardous wastes" which would make the reclassified wastes subject to much more stringent handling, disposal, and clean-up requirements. If such legislation were to be enacted, it could have a significant impact on the operating costs of the Company, as well as the oil and gas industry in general. State initiatives to further regulate the disposal of oil and gas wastes are also pending in certain states, and these various initiatives could have a similar impact on the Company. See "-- Governmental Regulations." The Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without regard to fault or the legality of the original conduct, on 37 certain classes of persons that are considered to have contributed to the release of a "hazardous substance" into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that disposed of or arranged for the disposal of the hazardous substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources. It is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage. OPERATIONAL RISKS AND INSURANCE The drilling of wells is subject to the usual drilling hazards such as cratering, explosions, uncontrollable flows of oil, gas or well fluids, fires, pollution, and other environmental risks. The Company's activities are also subject to perils specific to marine operations, such as capsizing, collision, and damage or loss from severe weather. These hazards can cause personal injury and loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage, and suspension of operations. In accordance with customary industry practices, the Company maintains insurance against some, but not all, of such risks and some, but not all, of such losses. The occurrence of a significant event not fully insured or indemnified against could materially and adversely affect the Company's financial condition and operations. Moreover, no assurance can be given that the Company will be able to maintain adequate insurance in the future at rates it considers reasonable. See "Risk Factors--Exploration and Operating Risks of National Gas and Oil Operations." FACILITIES The Company leases approximately 12,600 square feet of office space in Houston, Texas under a lease expiring in 1999. EMPLOYEES As of March 31, 1997, the Company had 22 full-time employees and one consultant, including three geologists, six geophysicists and three landmen. The Company considers its relations with its employees to be good. 38 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The executive officers and directors of the Company are as follows:.
NAME AGE POSITION - ---- --- -------- Sam B. Myers, Jr................. 59 Chairman of the Board, Chief Executive Officer and Director Edward R. Prince, Jr............. 67 Vice Chairman and Director John O. Smith.................... 48 President, Chief Operating Officer and Director W. Kyle Willis................... 49 Vice President, Treasurer, Chief Financial Officer and Secretary John W. McTigue, Jr.............. 41 Vice President Charles E. Bradley, Sr........... 67 Director Harry C. Johnson................. 64 Director Philip A. Tuttle................. 55 Director
Sam B. Myers, Jr. has served, since December 1995, as Chairman of the Board of the Company and Chief Executive Officer and, until October 1996, President of the Company and in the same capacity for Zydeco Exploration since its formation in March, 1994. Mr. Myers has been an independent oil and gas operator and private investor since 1961. In addition, Mr. Myers has served as Chairman of the Board of Directors of Search Capital Group, Inc. ("Search"), a publicly held specialty financial services company, from August 1985 until May 1995 when he voluntarily resigned and as President and Chief Executive Officer from August 1985 until August 1993 and from November 1994 to January 1995. Mr. Myers served as interim President and Chief Executive Officer of Search, and certain of its finance subsidiaries, for 30 days commencing December 1994, after the resignation of Search's former President and Chief Executive Officer. After Mr. Myers' departure, eight finance subsidiaries, whose assets consist primarily of automobile loan portfolios, voluntarily filed for protection under Chapter 11 of the federal bankruptcy code in August 1995. Mr. Myers graduated from Texas A & M University with a BBA in Finance. Edward R. Prince, Jr. has served as Vice Chairman of the Board of the Company since December 1995 and served in the same capacity for Zydeco Exploration since August 1994. Mr. Prince has been involved in the geophysical service and exploration industry for 37 years. Mr. Prince was a founder of Digicon Inc., a publicly held geophysical contractor, which is now part of Veritas DGC, Inc. In 1994, he retired as Chief Executive Officer of Digicon, a position he held for more than 24 years. Mr. Prince has served the geophysical industry in various capacities including Chairman of the International Association of Geophysical Contractors and as a director of the National Ocean Industries Association. Mr. Prince also serves as a director of GeoScience Corporation, a publicly held designer and manufacturer of seismic data acquisition systems, geoscientific software and related products, and as a director of JetFax, Inc. Mr. Prince graduated with a BS from the U.S. Military Academy at West Point and received his MS in Applied Mathematics from North Carolina State College. John O. Smith joined the Company as President and Chief Operating Officer in October 1996. In January 1997, Mr. Smith was named a Director of the Company. Mr. Smith has 26 years experience in the exploration and production sector of the oil and gas business. Since 1984, Mr. Smith has been President and owner of JOS Energy Corp., an independent operator in the domestic Gulf Coast and Mid-Continent areas. Additionally, since 1984, Mr. Smith has provided oil and gas project management and consulting services to selected domestic and foreign clients. Prior to 1984 he held positions of increasing responsibility with independent oil and gas companies (Inexco Oil Company 1974-75; Tomlinson Interests, Inc. 1975-78; Longhorn Oil & Gas Company 1978-83). From 1971-1974 he was employed as a landman for Mobil Oil Corporation. Mr. Smith is a 1970 graduate of the University of Texas with a BBA in Petroleum Land Management. W. Kyle Willis joined the Company in January 1996 as Vice President, Treasurer, and Chief Financial Officer. From July 1992 to January 1996 Mr. Willis was a director, Executive Vice President, and Chief Financial 39 Officer of Reunion Resources Company (formerly Buttes Gas & Oil Co.). From 1977 to 1996, Mr. Willis' executive experience included more than 14 years with public companies engaged in the energy industry where he served nine of those years as the principal financial officer. For the period from 1983 to 1990, Mr. Willis was engaged by four national venture capital firms where he conducted financial restructurings and operational workouts of technology investments and assisted emerging technology business startups. During this period, he served as President of TCS Software, Inc., a software developer, Vice President of Image Data Corporation, a video imaging communications manufacturer, and Southwest Network Services, a wide-area data network services company. Mr. Willis is a certified public accountant and practiced with Deloitte, Haskins & Sells for four years. Mr. Willis received his BBA in Accounting from Texas A & M University. John W. McTigue, Jr. has served as Vice President of the Company since December 1995. He has served in the same position for Zydeco Exploration since August 1994. Mr. McTigue has been involved in developing 3D seismic workstation technology and interpretation techniques for over ten years while working in various capacities with Paradigm Geophysical Corp. (1993 to 1994), INEXS, Inc. (1992 to 1993), GeoQuest Systems, Inc. (1990 to 1992) and Shell Development Company (1984 to 1990). Mr. McTigue holds BS and MS in Geology/Geophysics from Yale University and the University of Arizona, respectively. Charles E. Bradley, Sr. has served as a Director of the Company since December 1995. He is one of the founders of Stanwich Partners, Inc., a private investment firm which engages in leveraged buyouts, and has been President, a director and a shareholder of that company since its formation in 1982. Mr. Bradley serves in executive capacities for numerous companies, including Chairman of the Board of Consumer Portfolio Services, Inc., Reunion Industries Corp. (also Chief Executive Officer), DeVlieg-Bullard, Inc., Chatwins Group, Inc., Texon Energy Corporation (also President), Sanitas, Inc. (also President) and as a director of General Housewares Corp. and Audit & Survey's, Inc., all of which are publicly-held corporations. Mr. Bradley's previous experience also includes a position as a general partner at Price Waterhouse. Mr. Bradley received a BS in Economics from Yale University and an MBA from the New York University Graduate School of Business. Harry C. Johnson has served as a Director of the Company since December 1995. He has over 40 years experience in the oil and gas industry. He was founder and served as Chief Executive Officer of Red Eagle Resources Corporation until February 1995. Mr. Johnson has also been actively involved as a principal in various businesses, including banking, agriculture and aviation. Mr. Johnson was formerly a registered principal with the National Association of Securities Dealers, Inc. and was an allied member of The New York Stock Exchange. Mr. Johnson is a registered professional engineer with a degree in petroleum engineering from the University of Oklahoma. Philip A. Tuttle served as President, Chief Executive Officer, Chairman of the Board and a Director of the Company from its formation in June 1993 to December 1995. Mr. Tuttle has continued to serve as a Director. Since June 1989, he has been a general partner of Davis Tuttle Venture Partners, L.P., a private investment partnership. From November 1990 to October 1995, Mr. Tuttle was a director of Quality Tubing, Inc., a manufacturer of steel coil tubing for the energy services industry, becoming Chairman of the Board in May 1992. Mr. Tuttle is a founder and was formerly President of the Houston Venture Capital Association. He was also President and a director of the Houston Chapter of the Association for Corporate Growth, Chairman of the Accounting Council at Rice University-Jones Graduate School of Administration and a member of the Board of Governors of the National Association of Small Business Investment Companies. In addition, Mr. Tuttle serves on the Board of Drypers Corp., a publicly traded company that manufactures and distributes disposable diapers. He is a Certified Public Accountant and Fellow of the Institute of Directors, London, England. Mr. Tuttle received a BA in Economics from Rice University and a MBA from Northwestern University. The directors named above were elected at the Company's 1997 Annual Meeting to serve in such capacities until the Company's 1998 Annual Meeting or until their respective successors have been duly elected and have been qualified, or until their earlier death, resignation, disqualification or removal from office. There is no family relationship between any of the directors and executive officers of Zydeco. 40 GEOSCIENTISTS In addition to Mr. Prince and Mr. McTigue the Company has employed a group of talented and experienced geologists and geophysicists. Information with respect to those experts is set forth below. Stephen W. Knecht. Mr. Knecht is a geologist and was a co-founder of Zydeco Exploration. Mr. Knecht has over 22 years experience in oil and gas exploration. Prior to the formation of Zydeco Exploration, Mr. Knecht worked as an exploration geologist for privately held exploration companies and Standard Oil Company of Ohio, Williams Exploration Company and NRG Resources, Inc. Mr. Knecht holds a BS in Geology from Texas A&M University. William L. Weibel. Mr. Weibel joined the Company as a geophysicist in 1996. Mr. Weibel has over 15 years experience in oil and gas exploration. Prior to joining the Company, Mr. Weibel worked as a geophysicist for Amoco Production Company and Landmark Graphics, Inc. Mr. Weibel holds a BS in Geology from Northern Illinois University and an MS in Geosciences from the University of Arizona. Stephen H. Allen. Mr. Allen is a geologist and joined the Company in 1996. He has 27 years experience in oil and gas exploration. Mr. Allen has worked as a geologist at Atlantic Richfield Company, Hanson Minerals, Cockrell Oil Corporation and other small and medium sized oil and gas exploration companies. Mr. Allen holds a BS in Geology from Southern Methodist University and an MS in Geology from Louisiana State University. Charles Gartmann. Mr. Gartmann joined the Company as a geophysicist in 1996. Prior to joining the Company Mr. Gartmann worked as a geophysicist at Energy Development Corporation, Apache Corporation, Placid Oil Company and Amoco Production Company. Mr. Gartmann holds a BA in Geology and an MS in Geology/Geophysics from the University of Wisconsin--Milwaukee. James Sobczak. Mr. Sobczak joined the Company as a geophysicist in 1997. Mr. Sobczak has over 16 years experience in oil and gas exploration and related businesses at Digicon Inc., CogniSeis Development, Inc. and Texaco, Inc. Mr. Sobczak holds a BS in Mechanical Engineering from Purdue University and a BS in Geophysical Engineering from Colorado School of Mines. Jim Taylor. Mr. Taylor joined the Company as a geologist in 1997. Mr. Taylor has over 22 years experience in oil and gas exploration. He has worked as a geologist at Union Oil of California, Quintana Corporation, Apache Corporation and JAPEX (US) Corp. Mr. Taylor holds a BS and an MS in Geology from the University of Memphis. 41 COMPENSATION The following table reflects all forms of compensation for services to the Company and its subsidiaries for the years ended December 31, 1996, and 1995, of those individuals who were at December 31, 1996, (i) the Chief Executive Officer and (ii) each of the five other most highly compensated executive officers of the Company (the "Named Executives"): SUMMARY COMPENSATION TABLE
LONG TERM ANNUAL COMPENSATION COMPENSATION(1) AWARDS --------------------------------- SECURITIES NAME AND PRINCIPAL OPTIONS ALL OTHER POSITION YEAR SALARY BONUS UNDERLYING COMPENSATION - ------------------ ---- ---------- ------------------- ------------ Sam B. Myers, Jr........ 1996 $ 150,000 $ -- -- $9,651(2) Chief Executive Officer 1995 69,500 -- -- 724(2) Edward R. Prince, Jr.... 1996 150,000 -- -- -- Vice Chairman 1995 -- -- -- -- John O. Smith........... 1996 37,500(3) -- 200,000 28,670(2)(4) President and Chief Operating Officer 1995 -- -- -- -- W. Kyle Willis.......... 1996 100,000 -- 150,000 8,841(2) Vice President, 1995 -- -- -- -- Treasurer and Chief Financial Officer Stephen W. Knecht(5).... 1996 150,000 -- -- 8,159(2) Vice President 1995 39,250 -- -- 701(2) John W. McTigue, Jr..... 1996 100,000 -- -- 6,656(2) Vice President 1995 18,665 -- -- 518(2)
- -------- (1) From January 1, 1995, to December 20, 1995, no officer received any compensation other than reimbursement for any reasonable business expense incurred in connection with activities on behalf of the Company. After December 20, 1995, the date of the acquisition by merger of Zydeco Exploration (the "Merger"), the Company paid all officers' salaries for the remainder of 1995 in amounts which did not exceed $6,250 for any one person. In addition, after December 20, 1995, Zydeco Exploration paid accrued compensation which had been deferred from earlier in 1995 to Messrs. Myers, Knecht, and McTigue in the amounts of $66,000, $33,000, and $12,498 respectively. (Prior to December 20, 1995, Zydeco Exploration was an independent, privately held company.) (2) Includes the Company's portion of expenses incurred under the Company's health and long-term disability plans under the same terms and conditions as available to all employees. (3) Mr. Smith's salary for 1997 is anticipated to be $150,000. (4) Includes $27,156 in consulting fees paid to Mr. Smith in 1996 for services rendered prior to his employment by the Company. (5) Mr. Knecht ceased to be an executive officer of the Company as of May 15, 1997. The Company's Named Executives receive health and disability insurance benefits which do not exceed 10% of their respective salaries. These benefits are also provided to all other employees of the Company. The Company's 1996 Incentive Equity Plan is described below. AGREEMENTS WITH DIRECTORS AND EXECUTIVE OFFICERS In 1995, Zydeco Exploration entered into employment agreements with Messrs. Knecht and McTigue. Each of the agreements provides: (i) for a five year term ending December 31, 1999 (the "Primary Term"); (ii) that 42 Zydeco Exploration may terminate employment with or without cause during the Primary Term; (iii) for a base salary of $150,000 and $100,000 for Messrs. Knecht and McTigue, respectively, subject to the Zydeco Exploration Board's discretion to elect to defer up to 50% of the base salary for not more than one year; (iv) for the payment of base salary for the entirety of the Primary Term if the employee is terminated other than for death, disability or for cause; (v) if terminated for "cause" during the Primary Term, the agreement is terminated immediately and Zydeco Exploration shall have no further payment obligations; and (vi) that the employee will retain confidentiality of certain information and will not compete in the Timbalier Trench or Louisiana Transition Zone with Zydeco Exploration for a period ending one year after the expiration of the Primary Term or the termination of the agreement, whichever occurs first. Mr. McTigue's agreement also provided for the issuance of certain employee stock options under the employee stock option plan then in effect for Zydeco Exploration. Mr. Knecht's agreement entitles him to receive a 1% overriding royalty interest in Zydeco Exploration's interest in all oil and gas prospects generated for Zydeco Exploration by Mr. Knecht. Mr. Knecht relinquished 500,000 shares of Zydeco Exploration Common Stock to Zydeco Exploration in exchange for the right to receive the overriding royalties under this agreement. Zydeco Exploration has not entered into any other employment agreements. The Company has not entered into any employment agreements. The Company has entered into confidentiality agreements with all of its employees. COMPENSATION OF DIRECTORS The Company does not compensate its directors, who are executive officers, for their services other than their compensation as officers and employees of the Company. The Company pays an annual fee of $12,000, in equal monthly amounts, to directors who are not executive officers or employees. In 1996 the Company adopted the 1996 Non-employee Directors Stock Option Plan (the "Directors Plan"). The Board has granted 15,000 options to each of Messrs. Tuttle, Bradley and Johnson, pursuant to the Directors Plan. The options granted vest in one-third increments annually with the first one-third vesting April 1, 1997. The exercise price of the options granted is $6.69, the average of the high bid price and low asked price for the Common Stock on the date of grant. 1996 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN The Directors Plan was adopted by the Company in 1996. Pursuant to the Directors Plan, each Non-employee Director is granted an option (a "Director Option") to purchase 15,000 shares of Common Stock at the average of the closing bid price and asked price on the date appointed or elected. As of March 31, 1997, three persons were eligible for, and had been granted, Director Options covering 45,000 shares under the Directors Plan. Each Director Option that is vested may be exercised in full at one time or in part from time to time. The exercise price may be paid in cash or shares of Common Stock. Unless sooner terminated, the Directors Plan will expire on December 31, 2005, and any Director Option outstanding on such date will remain outstanding until it has either expired or has been fully exercised. The Directors Plan provides for adjustments to the maximum number of shares for which Director Options may be granted, the number of shares subject to outstanding Director Options and the exercise price of such outstanding Director Options in the event of a declaration of a stock dividend or any recapitalization resulting in a stock split-up, combination or exchange of shares of Common Stock in order to prevent dilution or enlargement of the rights of optionee. In the event of a "Change in Control," as defined in the Directors Plan, options granted more than six months prior to the "Change in Control" will be canceled in exchange for a cash payment equal to the value of such options. The Company has filed a registration statement registering the sale of the shares of Common Stock acquired upon exercise of the Directors Options. 43 EMPLOYEE STOCK OPTIONS 1995 Zydeco Exploration Employee Options. Zydeco Exploration adopted as of February 22, 1995, the Zydeco 1995 Employee Stock Option Plan (the "1995 Plan"). Pursuant to the 1995 Plan, the Company granted the options summarized in the table under "1995 Employee Options" on March 3, 1995. These Zydeco Exploration options (the "1995 Employee Options") were assumed by the Company pursuant to the Merger. The following table summarizes the 1995 Employee Options granted by Zydeco Exploration and which have been assumed by the Company pursuant to the Merger. The Company did not assume or adopt the Zydeco 1995 Employee Stock Option Plan. ZYDECO EXPLORATION EMPLOYEE STOCK OPTIONS GRANTED PURSUANT TO THE 1995 PLAN
INDIVIDUAL GRANTS --------------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL NUMBER OF PERCENT OF EXERCISE RATES OF STOCK SECURITIES TOTAL OR BASE PRICE APPRECIATION UNDERLYING OPTIONS PRICE FOR OPTION TERM(1) OPTIONS GRANTED PER EXPIRATION ------------------- NAME GRANTED TO EMPLOYEES SHARE DATE 5% 10% ---- ---------- ------------ -------- ---------- -------- ---------- John W. McTigue, Jr..... 625,004 62.1% $1.60 3/03/05 $628,899 $1,593,753 Edward R. Prince, Jr.... 312,502 31.1 1.60 3/03/05 314,449 796,876
- -------- (1) These amounts represent assumed rates of appreciation in the price of the Company's Common Stock during the terms of the options. Actual gains, if any, on stock option exercises will depend on the future price of the Common Stock and overall stock market conditions. There is no representation that the rates of appreciation reflected in this table will be achieved. The exercise price of a 1995 Employee Option may be paid in cash or delivery of already owned shares of Common Stock having a fair market value equal to the exercise price. Thirty days prior to certain major corporate events such as, among other things, certain changes in control, mergers or sales of substantially all of the assets of Zydeco, each 1995 Employee Option shall immediately become exercisable in full. All the 1995 Employee Options expire on March 3, 2005. The number of shares subject to the 1995 Employee Options and the exercise price of the 1995 Employee Options are subject to adjustment in the event of a declaration of a stock dividend or any recapitalization resulting in a stock split-up, combination or exchange of shares of Common Stock. The shares issuable pursuant to the exercise of the 1995 Employee Options are registered under the Securities Act of 1933, as amended (the "Securities Act"). 1996 Incentive Equity Plan. In 1996, the Company adopted the 1996 Incentive Equity Plan (the "1996 Incentive Plan"). The 1996 Incentive Plan provides for the granting of stock options, stock appreciation rights, phantom shares, restricted stock, performance units and bonus shares. The aggregate amount of Common Stock with respect to which awards may be made may not exceed 950,000 shares of Common Stock. The 1996 Incentive Plan is administered by the Compensation Committee of the Board of Directors (the "Committee"). Subject to the terms of the 1996 Incentive Plan, the Committee determines to whom discretionary awards will be made and the terms and conditions of such awards. 44 No awards other than stock options have been granted under the 1996 Incentive Plan. The following table sets forth information with respect to the options to purchase shares of Common Stock granted under all stock option plans to each executive officer named in the Summary Compensation Table in the fiscal year ended December 31, 1996: OPTIONS GRANTED PURSUANT TO THE 1996 INCENTIVE PLAN
INDIVIDUAL GRANTS ---------------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL NUMBER OF PERCENT OF RATES OF STOCK SECURITIES TOTAL EXERCISE PRICE APPRECIATION UNDERLYING OPTIONS OR BASE FOR OPTION TERM(3) OPTIONS GRANTED PRICE PER EXPIRATION ------------------- NAME GRANTED(1) TO EMPLOYEES SHARE(2) DATE 5% 10% ---- ---------- ------------ --------- ---------- -------- ---------- John O. Smith........... 200,000 40.4% $5.22 10/7/06 $656,440 $1,663,548 W. Kyle Willis.......... 150,000 30.3 6.69 1/4/06 630,860 1,598,723
- -------- (1) One fourth of these options vest on the first anniversary of the date of grant and on each of the succeeding three anniversary dates. Options are exercisable within the ten-year period from the date of grant subject to the vesting schedule. (2) The exercise price of all options granted during 1996 was equal to the market value of the underlying Common Stock on the date of grant. (3) These amounts represent assumed rates of appreciation in the price of the Company's Common Stock during the terms of the options. Actual gains, if any, on stock option exercises will depend on the future price of the Common Stock and overall stock market conditions. There is no representation that the rates of appreciation reflected in this table will be achieved. In the event of a "change in control" (as defined in the 1996 Incentive Plan), all awards that have been granted under the 1996 Incentive Plan more than six months prior to the date of such event may be canceled by action of the Board, effective on the date of such event. Upon cancellation a participant would be paid in cash an amount equal to the net value of the cancelled award. The Board may make or provide for such adjustments in the numbers of shares of Common Stock covered by outstanding option rights, appreciation rights and phantom shares granted hereunder, in the option price or grant price applicable to any such option rights and appreciation rights, and/or in the kind of shares covered thereby (including shares of another issuer), as the Board may determine is equitably required to prevent dilution or enlargement of the rights of participants that otherwise would result from any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, merger, consolidation, reorganization, partial or complete liquidation, issuance of rights or warrants to purchase securities or any other corporation transaction or event having an effect similar to any of the foregoing. The Company has filed a registration statement under the Securities Act registering the sale of the shares of Common Stock granted or acquired upon exercise of awards granted pursuant to the 1996 Incentive Plan. 45 YEAR-END OPTIONS VALUE TABLE The following table summarizes the options granted by the Company to the Named Executives pursuant to the 1995 Plan and the 1996 Incentive Plan. All of the options granted pursuant to the 1996 Incentive Plan have an exercise price equal to the fair market value of a share of Common Stock on the date granted. The value of the in-the-money options in the following table was determined using the closing bid price of the Company's Common Stock, which was $6.25 per share, as of December 31, 1996 less the exercise price of such option. OPTION VALUES AT DECEMBER 31, 1996
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT DECEMBER 31, 1996 DECEMBER 31, 1996 ------------------------- ------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Sam B. Myers, Jr............ -- -- $ -- $ -- Edward R. Prince, Jr........ 156,251 156,251 726,567 726,567 John O. Smith............... -- 200,000 -- 206,000 Stephen W. Knecht........... -- -- -- -- John W. McTigue, Jr......... 312,502 312,502 1,453,134 1,453,134 W. Kyle Willis.............. -- 150,000 -- --
CERTAIN RELATIONSHIPS AND RELATED 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 (the "Myers Family Interests") owned by the adult children of the Company's Chief Executive Officer, Mr. Sam B. Myers, Jr., who subsequently became an officer of certain of the entities. At the time of the purchase, Mr. Knecht and Mr. Reed were President and Vice President, respectively, of one of the sellers. The Company paid $302,464 (represented by the Myers Family Interests as their accumulated cost in the property interests) for the leases which are located in state waters offshore Louisiana. The leases are subject to a 7.5% working interest back-in after payout by the Myers Family Interests. The Myers Family Interests also own an aggregate of between 4.5% and 7.5% overriding royalty interest in these leases, which interests were owned by the Myers Family Interests prior to this transaction with the Company. In addition, Messrs. Knecht and Reed and an employee of the Company own overriding royalty interests under the leases and Mr. Knecht received an additional 1.0% overriding royalty interest in three of the leases pursuant to his employment contract. In addition, at the time of purchase of the property interests, Messrs. Knecht and Reed also received an aggregate one-half percent overriding royalty interest in two of the leases directly from the Myers Family Interests. 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 Family Interest for $145,490 (represented by the seller to the Company as the depreciated book value of the purchased property). In August 1996, the Company, with the approval of the Board of Directors (Mr. Sam B. Myers, Jr. abstaining), purchased non-producing leasehold interests owned by certain Myers Family Interests and agreed to participate with a Myers Family Interest in the drilling of an exploratory well located in Timbalier Bay in state waters offshore Louisiana. Mr. Myers was at the time of the sale, and remains, President of both of the selling entities. The Company paid $187,500 for a 37.5% working interest in the drilling prospect. The Myers Family Interests own an aggregate of between 33.1% and 37.3% net revenue interest in the prospect leases and Mr. Myers owns an approximate 1.6% overriding royalty interest under portions of the leases. The Myers Family Interests participated in the well with a working interest of 41.2% and paid their proportionate share of the estimated cost of drilling and well completion. The Myers Family Interests can also back-in for a 25.0% working interest of a well after payout. In addition, an affiliate of a director of the Company also purchased a 5.0% working interest in the properties on the same basis as the terms of the Company's participation. Messrs. Knecht and 46 Reed also own net revenue interests in the prospect leases, one of which also purchased an additional 1% working interest participation in the property at the same time and on the same basis as the terms of the Company's participation. Drilling of the exploratory well commenced in August 1996 and was abandoned in September 1996 for mechanical reasons without testing the well's primary objectives. The Company has undertaken to sell a portion or farmout its interest in this prospect and at December 31, 1996, reflected $187,500 in unproved and unevaluated properties related to the prospect. The Company charged $647,355 to exploration expense in 1996 in connection with the drilling and abandonment of the well. In 1996, the Company licensed software and purchased related software maintenance services aggregating $325,768 from a subsidiary of GeoScience Corporation. Subsequently, in October 1996, Mr. Prince became a director of GeoScience Corporation. The Company believes all of the transactions with related parties have been on terms no less favorable to the Company than those terms which may have been obtained from unrelated third parties. None of the officers or directors of the Company is related to any other executive officer or director of the Company. CONFLICTS OF INTEREST Certain of the Company's officers, directors, employees and stockholders own working and overriding royalty interests in leases owned by the Company or that adjoin, or are in the vicinity of, some of the potential prospects described herein. Such officers, directors, employees and stockholders will continue to conduct operations on such leases, including, without limitation, acquiring or shooting, processing and/or reprocessing seismic data, remediating or recompleting existing wells and/or the drilling of new wells. Hence, a conflict of interest may exist if the Company proposes to drill or farmout for the drilling of a well or wells upon leases it currently owns and leases immediately offsetting the leases owned by its officers, directors, employees or stockholders. Certain members of the Company's management team are also investors, executive officers and/or directors of small privately owned companies with limited oil and gas operations. Though the Company's management team intends to devote their full time to managing the affairs of the Company, they may occasionally devote a minimal amount of time to other positions they hold. Company transactions with related parties have been and will be subject to the approval of the independent directors. See "Risk Factors--Conflicts of Interest." 47 DESCRIPTION OF THE COMPANY'S SECURITIES GENERAL The Company is authorized to issue 50,000,000 shares of Common Stock, par value $.001 per share, and 1,000,000 shares of Preferred Stock, par value $.001 per share. As of the date of this Prospectus, 6,607,098 shares of Common Stock are outstanding, and such shares are owned by approximately 53 persons of record and are owned beneficially by approximately 750 persons. As of the date of this Prospectus, there are no shares of Preferred Stock outstanding. COMMON STOCK The holders of shares of Common Stock are entitled to one vote for each share held of record on all matters to be voted on by stockholders. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voting for the election of directors can elect all of the directors then being elected. The holders of shares of Common Stock are entitled to receive dividends when, as and if declared by the Board of Directors out of funds legally available therefor. In the event of liquidation, dissolution or winding up of the Company, the holders of shares of Common Stock are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision has been made for each class of stock, if any, having preference over the shares of Common Stock. Holders of shares of Common Stock, as such, have no conversion, redemption, preemptive or other subscription rights. All of the outstanding shares of Common Stock and the shares of Common Stock included in the Units, described below, are fully paid and nonassessable. PREFERRED STOCK The Company's Certificate of Incorporation authorizes the issuance of 1,000,000 shares of Preferred Stock with such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue shares of Preferred Stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of shares of Common Stock. In addition, the shares of Preferred Stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. In July 1996, all 781,255 shares of Preferred Stock then outstanding were converted into 781,255 shares of Common Stock. There are no shares of Preferred Stock currently outstanding. REDEEMABLE COMMON STOCK PURCHASE WARRANTS Each Redeemable Common Stock Purchase Warrant (a "Redeemable Warrant") entitles the registered holder to purchase one share of Common Stock for $5.50, subject to adjustment in certain circumstances. The Redeemable Warrants expire on December 13, 2000. The Company may call the Redeemable Warrants for redemption, in whole and not in part, at a price of $.01 per Redeemable Warrant at any time if the last sale price of the shares of Common Stock has been at least $10.00 per share for the 20 consecutive trading days ending on the third day prior to the date on which the notice of redemption is given. The notice of redemption must be given at least 30 days in advance of the redemption date. The holders of Redeemable Warrants have exercise rights until the close of business on the redemption date. The exercise price, number of shares of Common Stock issuable on exercise of the Redeemable Warrants and redemption price are subject to adjustment in certain circumstances including in the event of a stock dividend, recapitalization, reorganization, merger or consolidation of the Company. However, the Redeemable Warrants are not subject to adjustment for issuances of shares of Common Stock at a price below their exercise price. The Company has the right, in its sole discretion, to decrease the exercise price of the Redeemable Warrants for a period of not less than 30 days on not less than 30 days prior written notice to the warrant holders. In addition, 48 the Company has the right, in its sole discretion, to extend the expiration date of the Redeemable Warrants on five business days prior written notice to the holders of the Redeemable Warrants. The Redeemable Warrants are quoted on the Nasdaq SmallCap Market. As of the date of this Prospectus there are 3,300,000 Redeemable Warrants outstanding. UNIT OPTIONS The Company's Unit Options are currently exercisable at $6.60 per Unit. Each Unit consists of one share of Common Stock and two Common Stock Purchase Warrants ("Unit Option Warrants"). Each Unit Option Warrant will entitle the holder to purchase one share of Common Stock under terms similar to the terms of the Redeemable Warrants except that the Unit Option Warrants are not redeemable. The exercise price of the Unit Options and the number of Units issuable upon exercise of a Unit Option are subject to adjustment in the event Common Stock (or warrants, options or convertible securities exercisable or convertible into Common Stock) (including the Shares offered hereby) are issued at less than either the Unit Option exercise price or trading price of the Common Stock. The holders of Unit Options may elect to convert Unit Options into a number of Units equal to the difference between the trading price of Common Stock and the then current Unit Option exercise price, divided by the exercise price. The result of the foregoing provisions is that the number of Unit Options will adjust upward and the related exercise price will adjust downward in the event the Shares are sold in the Offering at a Price to the Public of less than $6.60 per share. The foregoing provisions could, under certain circumstances, afford the holders of the Unit Options the opportunity to purchase a substantial amount of the Company's securities at a price significantly below market. The holders of Unit Options are entitled to demand and piggyback registration rights with respect to the Unit Options and all underlying securities. The demand registration rights expire December 13, 1998 and the piggyback registration rights expire on December 13, 2000. As of the date of this Prospectus there were 150,000 Unit Options outstanding. 1995 BRIDGE WARRANTS In connection with certain private financing, the Company issued a total of 225,028 warrants (the "1995 Bridge Warrants") to certain persons. The terms and conditions of the 1995 Bridge Warrants are substantially the same as the terms and conditions of the $5.50 Warrants except as described in this paragraph. The exercise price for the 1995 Bridge Warrants is $5.33 per share, and they include a "cashless" exercise right pursuant to which 1995 Bridge Warrants may be surrendered in order to pay the exercise price on other 1995 Bridge Warrants. In addition, the 1995 Bridge Warrants may not be redeemed by the Company. The 1995 Bridge Warrants were not registered with the Securities and Exchange Commission (the "Commission"). One of the Underwriters owns 75,000 of the 1995 Bridge Warrants. ZYDECO EXPLORATION WARRANTS Certain Company warrants (the "Zydeco Exploration Warrants") were issued by Zydeco Exploration, Inc. prior to the Merger with TN Energy and assumed by the Company in connection with the Merger. Each Zydeco Exploration Warrant entitles the registered holder to purchase one share of Common Stock for $1.60, subject to adjustment in certain circumstances, at any time ending on December 1, 1999, at which time the Warrants will expire. The Zydeco Exploration Warrants are not redeemable. The exercise price and the number of shares of Common Stock issuable on exercise of the Zydeco Exploration Warrants are subject to adjustment in certain circumstances including in the event of a stock dividend, recapitalization, reorganization, merger or consolidation of the Company. The exercise price may be paid in cash or with shares of Common Stock. The holders of Zydeco Exploration Warrants do not have the rights or privileges of holders of shares of Common Stock prior to the exercise of the Zydeco Exploration Warrants. The Company has registered the resale of the shares of Common Stock issuable upon exercise of the Zydeco Exploration Warrants with the Commission. As of the date of this Prospectus there were 30,640 Zydeco Exploration Warrants outstanding. 49 PRINCIPAL STOCKHOLDERS The following table sets forth certain information as of May 15, 1997, regarding beneficial ownership of Common Stock and as adjusted to reflect the sale of the Shares offered hereby of (i) each stockholder who is known by the Company to beneficially own more than 5% of Common Stock; (ii) each Director; (iii) each Named Executive; and (iv) all directors and executive officers as a group.
PERCENTAGE BENEFICIALLY OWNED NUMBER OF SHARES ----------------------- OF COMMON STOCK BEFORE THE AFTER THE NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING(1) OFFERING(2) - ------------------------ ------------------ ----------- ----------- Richard L. Morgan................... 1,562,510(3) 23.6% 18.2% David M. Fender..................... 1,544,018(4) 23.4% 17.9% Elizabeth I. Magness................ 390,627(5) 5.9% 4.5% John W. McTigue, Jr................. 312,502(6) 4.7% 3.6% Sam B. Myers, Jr.................... 269,925 4.1% 3.1% Edward R. Prince, Jr................ 171,876(6) 2.6% 2.0% Philip A. Tuttle.................... 56,252(6) 0.9% 0.7% W. Kyle Willis...................... 37,500(6) 0.6% 0.4% Charles E. Bradley, Sr.............. 8,750(6) 0.1% 0.1% Harry C. Johnson.................... 3,750(6) 0.1% -- John O. Smith....................... -- -- -- Directors and Officers as a group (8 persons)........................... 860,565(6) 13.0% 10.0%
- -------- (1) Based on 6,607,098 shares of Common Stock outstanding as of May 15, 1997. (2) Based on 8,607,098 shares of Common Stock, assuming all 2,000,000 Shares offered hereby are sold to third parties. (3) Includes 781,255 shares owned by The SBM III Trust and 781,255 shares owned by The MFM Trust; Mr. Morgan is trustee of both trusts. The SBM III Trust was established for the benefit of the children of Sam B. Myers, III. The MFM Trust was established for the benefit of the children of Melanie F. Myers. Mr. Morgan has sole voting and dispositive power with respect to such shares. Mr. Sam B. Myers, Jr. disclaims any beneficial ownership of the shares owned by the trusts. Mr. Morgan's address is 700 N. Pearl Street, Suite 2170, Dallas, Texas 75201. (4) Includes 15,625 shares owned personally by Mr. Fender and 1,528,393 shares owned by The Bon Temps Trust for which Mr. Fender is trustee. The Bon Temps Trust is a trust established for the benefit of the children of Sam B. Myers, Jr. Mr. Fender has sole voting and dispositive power with respect to such shares. Mr. Myers disclaims any beneficial ownership of the shares owned by the trust. Mr. Fender's address is 116 East Front Street, Tyler, Texas 75702. (5) Includes 390,627 shares held by The Knecht 1994 Descendants Trust, a trust established for the benefit of the children of Stephen W. Knecht. Mrs. Magness has sole voting and dispositive power with respect to such shares. Mr. Knecht disclaims any beneficial ownership of the shares owned by the trust. Mrs. Magness' address is 3202 Wild Candle, Spring, Texas 77388. (6) These amounts include shares of Common Stock covered by options exercisable within 60 days. 50 UNDERWRITING Subject to the terms and conditions set forth in an underwriting agreement (the "Underwriting Agreement"), the Company has agreed to sell to each of the underwriters named below (the "Underwriters"), for which Brean Murray & Co., Inc. is acting as representative (the "Representative"), and each of the Underwriters severally has agreed to purchase from the Company the aggregate number of shares of Common Stock set forth opposite its name below:
UNDERWRITERS NUMBER OF SHARES ------------ ---------------- Brean Murray & Co., Inc.................................. --------- Total.................................................. 2,000,000 =========
Upon the terms and subject to the conditions of the Underwriting Agreement, the Company is obligated to sell, and the Underwriters are obligated to purchase, all of the Common Shares set forth in the above table if any of the Common Shares are purchased. The Underwriters propose to offer the Shares to the public initially at the public offering price set forth on the cover page of this Prospectus, and to selected dealers at such public offering price less a concession not to exceed $ per share. The Underwriters or such dealers may reallow a commission to certain other dealers not to exceed $ per share. After the Offering to the public, the offering price, the concession to selected dealers and the reallowance to other dealers may be changed by the Representative. The Company has granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to 300,000 additional Shares to cover over-allotment, if any, at the public offering price, less underwriting discounts and commissions, as set forth on the cover page of this Prospectus. If the Underwriters exercise this option, then each of the Underwriters will have a firm commitment, subject to certain conditions, to purchase a number of option shares proportionate to such Underwriters' initial commitment as indicated in the table above. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of the Shares offered hereby. The Company, its officers and directors and certain stockholders (who beneficially hold in the aggregate 4,357,710 shares of Common Stock) have agreed not to sell, offer to sell, issue, distribute or otherwise dispose of any shares of Common Stock of the Company for a period of 180 days from the date of this Prospectus (subject to certain limited exceptions) without the prior written consent of the Representative. The Company has agreed to reimburse the Underwriters for up to $150,000 of the Underwriters' out-of-pocket expenses (including fees of their counsel) in connection with the sale of the Shares offered hereby. The Company has also agreed to indemnify the Underwriters or contribute to losses arising out of certain liabilities that may be incurred in connection with this Offering, including liabilities under the Securities Act. In connection with this Offering, certain Underwriters may engage in passive market making transactions in the Common Stock on the Nasdaq SmallCap Market immediately prior to the commencement of sales in this Offering, in accordance with Rule 103 of Regulation M. Passive market making consists of displaying bids on the Nasdaq SmallCap Market limited by the bid prices of independent market makers and purchases limited by such prices and effected in response to order flow. Net purchases by a passive market maker on each day are limited to a specified percentage of the passive market maker's average daily trading volume in the Common Stock during a specified period and must be discontinued when such limit is reached. Passive market making 51 may stabilize the market price of the Common Stock at a level above that which might otherwise prevail and, if commenced, may be discontinued at any time. In connection with this offering, the Underwriters may engage in stabilizing, syndicate short covering transactions, penalty bids or other transactions during the offering that may stabilize, maintain or otherwise affect the market price of the Common Stock at a level above that which might otherwise prevail in the open market. Stabilizing transactions are bids for and purchases of the Common Stock for the purpose of preventing or retarding a decline in the market price of the Common Stock to facilitate the Offering. Syndicate short covering transactions are bids to purchase and actual purchases of Common Stock on behalf of the Underwriters to provide them with enough Common Stock to deliver to those purchasing Common Stock in the Offering. A penalty bid is an arrangement that permits the Representative to reclaim a selling concession when the Common Stock originally sold by the syndicate member are purchased in a syndicate covering transaction. Such stabilizing, syndicate short covering transactions, penalty bids and other transactions, if commenced, may be discontinued at any time. LEGAL MATTERS Andrews & Kurth L.L.P., Houston, Texas, has passed upon certain matters with respect to the validity of shares of Common Stock offered hereby, as counsel for the Company. A partner of that firm who has rendered services to the Company in connection with this Registration Statement is the son of Mr. Edward R. Prince, Jr., Vice Chairman of the Company. Certain legal matters will be passed upon for the Underwriters by Stroock & Stroock & Lavan LLP, New York, New York. CHANGE OF ACCOUNTANTS On January 17, 1996, the Company advised BDO Seidman, LLP that its services would no longer be required as independent accountants for auditing the annual financial statements of the Company. As a result of the Merger of the Company with Zydeco Exploration, the historical financial statements of Zydeco Exploration became the financial statements of the Company. Arthur Andersen LLP were the independent accountants for Zydeco Exploration prior to the Merger and became the independent accountants of the Company commencing with the audit of the Company's consolidated financial statements for the year ended December 31, 1995. During the two most recent fiscal years prior to January 17, 1996, there were no disagreements with BDO Seidman, LLP on any matter of accounting principles or practices, financial statement disclosure, auditing scope or procedure, or any reportable events. The report of BDO Seidman, LLP for fiscal years 1993 and 1994 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. BDO Seidman, LLP, at the request of the Company, furnished a letter addressed to the Commission stating their agreement with the above statements. A copy of the BDO Seidman letter to the Commission, dated January 19, 1996, was filed as Exhibit 16.1 to the Company's Form 8-K, dated January 22, 1996. EXPERTS The audited financial statements included in this Prospectus, and elsewhere in the registration statement, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said report. The information regarding proved reserves in the "Summary" and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" is based on a Reserve Report by Ryder Scott and has been included herein in reliance upon the authority of that firm as an expert in petroleum engineering. 52 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, accordingly, files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information filed with the Commission are available for inspection and copying at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549, and at the Commission's Regional Offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; 1801 California Street, Suite 4800, Denver, Colorado 80202; 5670 Wilshire Blvd., 11th Floor, Los Angeles, California 90036; 1401 Brickell Ave., Suite 200, Miami, Florida 33131; and at Seven World Trade Center, Suite 1300, New York, New York 10048 or may be obtained on the Internet at http:www.sec.gov. Copies of such documents may also be obtained from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549, at prescribed rates. In addition, such materials and other information concerning the Company can be inspected at the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, DC 20006. The Company has filed with the Commission a registration statement (the "Registration Statement") under the Securities Act on Form S-1 (Reg. No. ) with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits thereto, certain parts of which are omitted in accordance with the rules and regulations of the Commission. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved. The Registration Statement and any amendments thereto, including exhibits filed or incorporated by reference as a part thereof, are available for inspection and copying at the Commission's offices as described above. ---------------- 53 GLOSSARY OF CERTAIN INDUSTRY TERMS The definitions set forth below shall apply to the indicated terms as used in this Prospectus. All volumes of natural gas referred to herein are stated at the legal pressure base of the state or area where the reserves exist and at 60 degrees Fahrenheit and in most instances are rounded to the nearest major multiple. Area of Mutual Interest. An area designated by exploration contract or other oil and gas agreement in which the contract parties have mutual and exclusive rights to conduct exploration and development for oil and gas. 2-D Seismic. The method by which a cross-section of the earth's subsurface is created through the processing of reflected seismic data collected along a single source profile. 3-D Seismic. The method by which a three dimensional image of the earth's subsurface is created through the processing of reflected seismic data collected over surface grid. 3-D seismic surveys allow for a more detailed understanding of the subsurface than do 2-D seismic surveys and contribute significantly to field appraisal, development and production. Back-in Interest. A portion of an economic interest in an oil and gas lease that may be returned to its former owner after a predetermined amount of production or income has been produced. Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in reference to crude oil or other liquid hydrocarbons. CAEX. Computer aided exploration for oil and gas. Completion. The installation of permanent equipment for the production of oil or gas, or in the case of a dry hole, the reporting of abandonment to the appropriate agency. Common Depth Point stacking or CDP. A method of improving the signal quality of seismic data by adding or "stacking" the seismic traces which have a common midpoint between each source and receiver after time-correcting the data for the offset or distance between the sources and receivers. Dip-Moveout or DMO. A process to correct CDP data so that dipping events will stack or focus better using a common velocity. Discounted Present Value. A method of determining the present value of proved reserves in accordance with Commission requirements. Under the Commission method, the future net revenues before income taxes from proved reserves are estimated assuming that oil and natural gas prices and production costs remain constant. The resulting stream of revenues is then discounted at the rate of 10% per year to obtain the present value. Dry hole or well. A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes. Exploratory well. A well drilled to find and produce oil or gas reserves not classified as proved, to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir, or to extend a known reservoir. Farmout. An agreement whereunder the owner of a working interest in an oil and gas lease assigns the working interest or a portion thereof to another party who desires to drill on the leased acreage. Generally, the assignee is required to drill one or more wells in order to earn its interest in the acreage. The assignor usually retains a royalty or reversionary interest in the lease. The interest transferred by the assignor is a "farmout." Field. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition. 54 Gross acres or gross wells. The total acres or wells, as the case may be, in which a working interest is owned. Nonoperating Interest. An interest in a well which does not include the responsibility for the development and operation of the well. Operating Interest. An interest in a well which includes responsibility for the development and operation of the well. MBbls. One thousand barrels of crude oil or other liquid hydrocarbons. Mcf. One thousand cubic feet of natural gas. Mcf/d. One thousand cubic feet of natural gas per day. Mcfe. One thousand cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids. Migration. An imaging process that "relocates" seismic events to account for changes in the dip of the underlying strata. Net acres or net wells. The sum of the fractional working interests owned in gross acres or gross wells. Pay or Pay Zone. An industry term used to describe reservoirs in the subsurface which contain hydrocarbons. Poststack Migration. Migration applied to seismic traces after the traces have been "stacked." Present Value. When used with respect to oil and gas reserves, the estimated future gross revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices and costs in effect as of the date indicated, without giving effect to non- property related expenses such as general and administrative expenses, debt service and future income tax expense or to depreciation, depletion and amortization, discounted using an annual discount rate of 10%. Prestack Migration. Migration applied to individual seismic traces prior to "stacking." Productive Well. A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes. Proved developed producing reserves. Proved developed reserves that are expected to be recovered from completion intervals currently open in existing wells and able to produce to market. Proved developed reserves. Proved reserves that can be expected to be recovered from existing wells with existing equipment and operating methods. Proved developed nonproducing reserves. Proved developed reserves expected to be recovered from zones behind casing in existing wells. Proved reserves. The estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved undeveloped reserves. Proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion. 55 Recompletion. The completion for production of an existing well bore in another formation from that in which the well has been previously completed. Reservoir. A porous and permeable underground formation containing a natural accumulation of producible oil and/or gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs. Stacking. A seismic processing technique involving the addition of seismic traces. Transition Zone. The area of land and water extending several miles both onshore and offshore of a coastline. Undeveloped acreage. Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas regardless of whether such acreage contains proved reserves. Working interest. The operating interest which gives the owner the right to drill, produce and conduct operating activities on the property and a share of production. 56 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................... F-2 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets.............................................. F-3 Consolidated Statements of Operations.................................... F-4 Consolidated Statements of Stockholders' Equity.......................... F-5 Consolidated Statements of Cash Flows.................................... F-6 Notes to Consolidated Financial Statements............................... F-7 Supplemental Information on Oil and Gas Producing Activities............. F-19
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE STOCKHOLDERS AND THE BOARD OF DIRECTORS OF ZYDECO ENERGY, INC.: We have audited the accompanying consolidated balance sheets of Zydeco Energy, Inc. (a Delaware corporation) and subsidiary as of December 31, 1996, and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended and the period from inception (March 17, 1994) through December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Zydeco Energy, Inc. and subsidiary as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years ended December 31, 1996, and 1995, and the period from inception (March 17, 1994) through December 31, 1994, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas February 28, 1997 (except with respect to the matter discussed in Note 10, as to which the date is March 14, 1997) F-2 ZYDECO ENERGY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, ----------- ------------------------ ASSETS 1997 1996 1995 ------ ----------- ----------- ----------- (UNAUDITED) Current Assets Cash and Cash Equivalents............. $ 6,382,058 $ 6,906,650 $ 517,781 Marketable Securities................. 1,262,753 845,852 10,938,674 Oil and Gas Revenue Receivables....... 177,662 327,975 67,024 Other Receivables..................... 12,524 21,244 46,546 Prepaid Expenses...................... 78,969 130,495 -- ----------- ----------- ----------- Total Current Assets................ 7,913,966 8,232,216 11,570,025 Oil & Gas Properties, Using Successful Efforts Method of Accounting Proved Properties..................... 302,472 300,784 309,110 Unproved Properties................... 488,290 488,290 -- Equipment and Software, at Cost......... 1,719,645 1,608,207 789,710 ----------- ----------- ----------- 2,510,407 2,397,281 1,098,820 Less: Accumulated Depreciation, Depletion, and Amortization............ (1,193,600) (1,026,046) (399,541) ----------- ----------- ----------- 1,316,807 1,371,235 699,279 Operating Bond and Other Assets......... 308,062 308,151 313,101 ----------- ----------- ----------- Total Assets........................ $ 9,538,835 $ 9,911,602 $12,582,405 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities Accounts Payable...................... $ 351,244 $ 692,188 $ 284,219 Accrued Liabilities................... 235,559 232,738 355,833 Exploration Obligations............... 3,065,542 2,489,732 3,210,477 Short-Term Bridge Financing Notes Payable.............................. -- -- 225,028 Capital Lease Obligation--Current Portion.............................. 112,700 157,537 160,693 ----------- ----------- ----------- Total Current Liabilities........... 3,765,045 3,572,195 4,236,250 Capital Lease Obligation................ -- -- 157,537 Commitments and Contingencies (Note 10) 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; Authorized 50,000,000 Shares; Issued 7,374,903 and 7,374,905 and 6,562,530 Shares; Outstanding 6,593,648 and 6,593,650 and 5,781,275 Shares, Respectively................. 7,375 7,375 6,563 Additional Paid-In Capital............ 9,503,943 9,503,943 9,495,053 Accumulated Deficit................... (3,730,276) (3,164,659) (1,306,527) Less: Treasury Stock, at Cost; 781,255 Shares............................... (7,252) (7,252) (7,252) ----------- ----------- ----------- Total Stockholders' Equity.......... 5,773,790 6,339,407 8,188,618 ----------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................. $ 9,538,835 $ 9,911,602 $12,582,405 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-3 ZYDECO ENERGY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED YEARS ENDED DECEMBER PERIOD FROM INCEPTION MARCH 31, 31, (MARCH 17, 1994) -------------------- ------------------------ THROUGH 1997 1996 1996 1995 DECEMBER 31, 1994 --------- --------- ----------- ----------- --------------------- (UNAUDITED) Operating Revenues Oil and Gas Sales .... $ 373,994 $ 251,535 $ 1,422,227 $ 169,235 $ -- Gain on Sales of Properties........... -- -- 16,319 117,517 -- Seismic Services...... -- -- 31,500 300,000 -- --------- --------- ----------- ----------- --------- 373,994 251,535 1,470,046 586,752 -- Operating Costs and Expenses Dry Hole and Production Costs..... 21,539 6,549 722,074 289,448 30,108 Geological and Geophysical Expenses. 444,839 208,600 967,957 398,603 -- Seismic Service Costs. -- -- -- 200,000 -- General and Administrative Expenses............. 356,121 387,398 1,256,489 456,146 72,981 Depreciation, Depletion, and Amortization......... 168,643 110,365 630,865 392,387 7,153 --------- --------- ----------- ----------- --------- 991,142 712,912 3,577,385 1,736,584 110,242 Operating Loss.......... (617,148) (461,377) (2,107,339) (1,149,832) (110,242) Other Income (Expense) Interest Income....... 57,919 86,499 293,414 46,555 48,629 Interest Expense...... (6,388) (13,688) (44,207) (70,369) (71,268) --------- --------- ----------- ----------- --------- 51,531 72,811 249,207 (23,814) (22,639) Net Loss................ $(565,617) $(388,566) $(1,858,132) $(1,173,646) $(132,881) ========= ========= =========== =========== ========= Per Common Share and Share Equivalent -- Weighted Average Number of Common Shares and Common Share Equivalents Outstanding............ 6,593,648 5,799,117 6,168,798 3,906,706 4,468,777 ========= ========= =========== =========== ========= Loss Per Common Equivalent Share....... $ (0.09) $ (0.07) $ (0.30) $ (0.30) $ (0.03) ========= ========= =========== =========== =========
The accompanying notes are an integral part of these financial statements. F-4 ZYDECO ENERGY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK COMMON STOCK ----------------- ------------------ ADDITIONAL TOTAL PAID-IN ACCUMULATED TREASURY STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK EQUITY --------- ------ ---------- ------ ---------- ----------- -------- ------------- Balance at Inception (March 17, 1994)....... -- $ -- -- $ -- $ -- $ -- $ -- $ -- Net Loss................ -- -- -- -- -- (132,881) -- (132,881) Issuance of Common Stock.................. -- -- 4,468,777 4,469 (3,514) -- -- 955 Issuance of Convertible Preferred Stock........ 781,255 781 -- -- 2,499,219 -- -- 2,500,000 Convertible Preferred Stock Issuance Costs... -- -- -- -- (300,427) -- -- (300,427) --------- ---- ---------- ------ ---------- ----------- ------- ---------- Balance at December 31, 1994................... 781,255 781 4,468,777 4,469 2,195,278 (132,881) -- 2,067,647 Net Loss................ -- -- -- -- -- (1,173,646) -- (1,173,646) Issuance of Common Stock Prior to Merger........ -- -- 218,753 219 (175) -- -- 44 Acquisition of Treasury Stock.................. -- -- (781,255) -- -- -- (7,252) (7,252) Issuance of Common Stock to Acquire TN Energy... -- -- 1,875,000 1,875 7,969,650 -- -- 7,971,525 Costs of the Merger..... -- -- -- -- (669,700) -- -- (669,700) --------- ---- ---------- ------ ---------- ----------- ------- ---------- Balance at December 31, 1995................... 781,255 781 5,781,275 6,563 9,495,053 (1,306,527) (7,252) 8,188,618 Net Loss................ -- -- -- -- -- (1,858,132) -- (1,858,132) Options and Warrants Exercised for Common Stock.................. -- -- 31,154 31 8,890 -- -- 8,921 Adjustment for Fractional Shares Paid in Cash................ -- -- (34) -- -- -- -- -- Conversion of Preferred Stock to Common Stock.. (781,255) (781) 781,255 781 -- -- -- -- --------- ---- ---------- ------ ---------- ----------- ------- ---------- Balance at December 31, 1996................... -- -- 6,593,650 7,375 9,503,943 (3,164,659) (7,252) 6,339,407 Unaudited: Net Loss................ -- -- -- -- -- (565,617) -- (565,617) Adjustment for Fractional Shares Paid in Cash................ -- -- (2) -- -- -- -- -- --------- ---- ---------- ------ ---------- ----------- ------- ---------- Balance at March 31, 1997................... -- $ -- 6,593,648 $7,375 $9,503,943 $(3,730,276) $(7,252) $5,773,790 ========= ==== ========== ====== ========== =========== ======= ==========
The accompanying notes are an integral part of these financial statements. F-5 ZYDECO ENERGY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED PERIOD FROM INCEPTION MARCH 31, YEARS ENDED DECEMBER 31, (MARCH 17, 1994) ---------------------- -------------------------- THROUGH 1997 1996 1996 1995 DECEMBER 31, 1994 ----------- --------- ------------ ------------ --------------------- --- (UNAUDITED) Cash Flows from Operating Activities: Net Loss................ $ (565,617) $(388,566) $ (1,858,132) $ (1,173,646) $ (132,881) Adjustments to Reconcile Net Loss to Net Cash Provided by (Used in) Operating Activities: Depreciation, Depletion, and Amortization.......... 168,643 110,365 630,865 392,387 7,153 Abandonment of Unproved Leases................ -- -- 28,005 -- -- Gain on Sales of Properties............ -- -- (16,319) (117,517) -- Exploration and Dry Hole Costs............ 460,688 208,600 1,639,519 660,559 30,108 Changes in Operating Assets and Liabilities (Increase) Decrease in Oil & Gas Revenue Receivables.......... 150,313 (83,077) (260,951) (67,024) -- (Increase) Decrease in Other Current Assets. 60,246 (6,390) (105,193) (34,638) -- Increase (Decrease) in Accounts Payable..... (340,944) 82,245 407,969 183,070 101,149 Increase (Decrease) in Accrued Liabilities.. 2,821 (103,232) (123,095) (145,487) -- Other................. (1,000) (4,088) -- 3,040 -- ----------- --------- ------------ ------------ ----------- Net Cash Provided by (Used in) Operating Activities............ (64,850) (184,143) 342,668 (299,256) 5,529 Cash Flows from Investing Activities: Additions to Oil and Gas Properties........ $ (1,688) $ (10,072) $ (507,377) $ (77,573) $ (870,000) Exploration and Dry Hole Costs............ (460,688) (208,600) (1,639,519) (660,559) (30,108) Proceeds from the Sale of Properties......... -- -- 16,319 100,000 -- Cost Recovery on Exploration Agreement. -- (936,683) -- 628,547 -- Advances on Exploration Obligations........... 2,000,000 -- 6,000,000 4,171,453 -- Net Expenditures against Exploration Obligations........... (1,406,220) (90,266) (6,503,043) (960,976) -- Distributions to Exploration Partner... (17,970) -- (217,704) -- -- Purchases of Equipment and Software.......... (111,438) (205,916) (818,497) (140,352) (131,849) Proceeds from the Sale of (Investment in) Marketable Securities, Net................... (416,901) 1,855,751 10,092,822 (10,938,674) (298,173) ----------- --------- ------------ ------------ ----------- Net Cash Provided by (Used in) Investing Activities............ (414,905) 404,214 6,423,001 (7,878,134) (1,330,130) Cash Flows from Financing Activities: Common Stock Issued in Reverse Acquisition of TN Energy............. $ -- $ -- $ -- $ 8,196,553 $ -- Costs of Acquisition of TN Energy............. -- -- -- (168,380) -- Principal Payments of Capital Lease Obligations........... (44,837) (37,537) (160,693) (208,973) -- Borrowings of Short- Term Debt............. -- -- -- -- 1,330,000 Repayments of Short- Term Debt............. -- (225,028) (225,028) -- (1,330,000) Convertible Preferred Stock Proceeds........ -- -- -- -- 2,500,000 Convertible Preferred Stock Offering Costs.. -- -- -- -- (300,427) Proceeds from Options and Warrants Exercised............. -- -- 8,921 -- -- Proceeds from Common Stock Issuances....... -- -- -- 44 955 ----------- --------- ------------ ------------ ----------- Net Cash Provided by (Used in) Financing Activities............ (44,837) (262,565) (376,800) 7,819,244 2,200,528 ----------- --------- ------------ ------------ ----------- Net Increase (Decrease) in Cash and Cash Equivalents............ $ (524,592) $ (42,494) $ 6,388,869 $ (358,146) $ 875,927 Cash and Cash Equivalents at Beginning of Period.... 6,906,650 517,781 517,781 875,927 -- ----------- --------- ------------ ------------ ----------- Cash and Cash Equivalents at End of Period................. $ 6,382,058 $ 475,287 $ 6,906,650 $ 517,781 $ 875,927 =========== ========= ============ ============ =========== Cash Paid during the Period for: Interest............... $ 6,388 $ 13,688 $ 46,296 $ 70,369 $ 71,268 Income Taxes........... $ -- $ -- $ -- $ -- $ --
The accompanying notes are an integral part of these financial statements. F-6 ZYDECO ENERGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. Organization. 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 (the "TN Acquisition") and changed its name to Zydeco Energy, Inc. As used herein, unless the context indicates otherwise, the term "Company" refers to Zydeco Energy, Inc. and Zydeco, its wholly-owned subsidiary. See "Note 3--Reverse Acquisition by Zydeco". The Company is engaged in identifying drilling prospects, acquiring leases, drilling, and producing reserves from those properties and 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, principally for its exploration partners. The Company's current focus is to explore for oil and gas in the Louisiana Transition Zone, the region of land and shallow waters within a few miles of the shoreline. The Company's future operations are dependent upon a variety of factors, including, but not limited to, successful application of 3D seismic evaluation and interpretation expertise in developing oil and gas prospects, future generation of 3D seismic analysis fees, profitable exploitation of future prospects, and the Company's ability to access capital sources necessary for continued growth. Significant Accounting Policies Basis of Presentation. For accounting purposes the TN 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. The consolidated financial statements at December 31, 1996, and 1995, 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. Cash and Cash Equivalents. The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Marketable Securities. The Company's investments in marketable securities primarily consisted of short-term U. S. Treasury bills at December 31, 1996, and short-term investments in federal agency obligations under guaranteed bank repurchase agreements at December 31, 1995. As the Company's investments in marketable securities are all short-term in nature, their carrying values at December 31, 1996 and 1995 approximate fair value. Oil and Gas Properties. The Company accounts for its oil and gas exploration and production activities using the successful efforts method of accounting. Under this method, acquisition costs for proved and unproved properties are capitalized when incurred. Exploration costs, including geological and geophysical costs and the costs of carrying and retaining unproved properties, are expensed. Exploratory drilling costs are initially capitalized, but charged to expense if and when the well is determined not to have found proved reserves. Costs of productive wells, developmental dry holes and productive leases are capitalized and amortized on a property-by-property basis using the unit-of-production method. The estimated costs of future plugging, abandonment, restoration and dismantlement are considered as a component of the calculation of depreciation, depletion, and amortization. Unproved properties with significant acquisition costs are assessed periodically on a property-by-property basis and any impairment in value is charged to expense. F-7 ZYDECO ENERGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Equipment. Hardware and software associated with the 3D seismic technology equipment, office furniture, and leasehold improvements are recorded at cost, and the related depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, which range from 2 to 7 years. Impairment of Long-Lived Assets. The Company elected to adopt Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" effective in 1994. Management reviews its long-lived assets (i.e., oil and gas properties and equipment) whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. If the carrying amounts of any of the Company's oil and gas properties or equipment are greater than their projected undiscounted future cash flows, an impairment loss to adjust the properties or equipment to fair value is recognized. Through December 31, 1996, no such provision for impairment was necessary. This determination of future cash flows from proved properties is based on current proved oil and gas reserve estimates and current oil and gas prices and costs. Management's estimates of fair value also reflect a discount factor on future cash flows consistent with the rate used by the Company in other fair-value determinations. Income Taxes. The Company accounts for income taxes under SFAS No. 109 which requires the asset and liability approach to accounting for income taxes. Under this approach, deferred income taxes are determined based upon differences between the financial statement and tax bases of the Company's assets and liabilities and operating loss carryforwards using enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred tax assets are recognized if it is more likely than not that the future tax benefit will be realized. Oil and Gas Revenues. Oil and gas revenues are recorded using the entitlements method of accounting, whereby the Company recognizes oil and gas revenues as their entitlement share is produced. Individually and in the aggregate, the Company has no material gas imbalances as of December 31, 1996. Seismic Service Revenues. Seismic service revenues are recognized as services are performed. Earnings Per Share. Earnings per common share and common share equivalent (primary earnings per share) is based on the weighted average number of shares of common stock and common equivalent shares outstanding during the period. The common stock options, common stock warrants, and convertible preferred stock are common stock equivalents but were anti-dilutive in all periods presented. In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128--"Earnings per Share" effective for interim and annual periods after December 15, 1997. This statement replaces primary earnings per share ("EPS") with a newly defined basic EPS and modifies the computation of diluted EPS. The Company's basic and diluted EPS computed using the requirements of SFAS 128, are the same as the currently disclosed primary EPS. Treasury Stock. Treasury stock is recorded at cost and represents the value of 781,255 common shares purchased in January 1995, from an officer of the Company in consideration for an overriding royalty interest in certain properties in which the Company had an interest at the time of the treasury stock purchase. The Company had no proved reserves at the time of the transaction. The cost of treasury stock of $7,252 was determined on the basis of a pro-rata allocation of the Company's accumulated cost in unproved properties at the time of the transaction in comparison to the net revenue interest transferred. 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 F-8 ZYDECO ENERGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. See "Supplemental Information on Oil and Gas Producing Activities". Reclassifications. Certain reclassifications of prior period amounts have been made to conform with current year presentation. Unaudited Interim Financial Information. The consolidated financial statements for the three months ended March 31, 1997 and 1996 included herein have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these statements reflect all adjustments (consisting only of normal recurring entries) which are, in the opinion of management, necessary for a fair statement of the financial results for the interim periods. Certain information and notes normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. Interim period results are not necessarily indicative of the results to be achieved for an entire year. 2. 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 to 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 funds are designated for 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 December 31, 1996, and 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 recognized by the Company until the parties begin sharing equally in such costs, if any. At December 31, 1996, inception-to-date expenditures under the Fortune Agreement aggregated approximately $2,352,770, net of interest earned of $161,758 and revenue from farmout of interests of $66,319. Inception-to- date expenditures through March 31, 1997, aggregated $2,393,498 (unaudited) net of interest earned of $185,279 (unaudited). The Fortune Agreement provides that the Company may, at its option, perform seismic data or well log processing on the Prospects utilizing its own facilities rather than engaging third parties. Revenues related to in-house processing of the Prospects were $31,500 and $100,000 for the years ended December 31, 1996, and 1995, respectively. Cheniere Exploration Agreement--In April 1996, the Company executed an Exploration Agreement (the "Cheniere Agreement") with Cheniere Energy Operating Co., Inc. ("Cheniere") covering an area of land and waters in western Cameron Parish, Louisiana ("West Cameron Seismic Project"). The Cheniere Agreement provides for aggregate payments to Zydeco of $13.5 million to fund the 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. The Cheniere Agreement, as amended, provides that Cheniere may receive up to a 50% interest in the West Cameron Seismic Project and in any leases acquired as a result thereof through May 2001, based on Cheniere completing its funding of the entire $13.5 million. The Cheniere Agreement provides that Cheniere F-9 ZYDECO ENERGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. Seismic operations commenced in August 1996. At December 31, 1996, the Company had incurred costs of approximately $5,806,113 in connection with the West Cameron Seismic Project net of interest earned of $31,067 on the unused project funds. Inception-to-date expenditures through March 31, 1997, aggregated $7,171,605 (unaudited) net of interest earned of $41,471 (unaudited). As amended, the Cheniere Agreement provides for the remaining payments to be paid by Cheniere consistent with the Company's current expectations of the timing of costs to be incurred on the Project. At December 31, 1996, Cheniere had advanced $6 million under the Cheniere Agreement. Each of the above exploration agreements contains provisions whereby either party to the agreement has the right to "farmout" a portion or all of its interest in a prospect under a put arrangement. In the event of such a farmout, the farmor would retain a two percent of eight eighths overriding royalty interest in the project, convertible into a 20% of eight eighths working interest after the other party recouped its drilling, completion, and hook-up costs of the well from production. Should either party farmout a smaller working interest, the overriding royalty and after-payout working interests would be proportionately reduced. 3. REVERSE ACQUISITION BY ZYDECO. On December 20, 1995, the shareholders of TN Energy approved a merger with Zydeco ("the Merger"). Pursuant to the Merger Agreement, each outstanding share of common stock of Zydeco, par value $.000333 per share, was converted into the right to receive 1.56251 shares of Common Stock of TN Energy, par value $.001 per share; each share of convertible preferred stock of Zydeco, par value $5.00 per share, was converted into the right to receive 1.56251 shares of Convertible Preferred Stock of TN Energy, par value $.001 per share, and any fractional shares settled in cash. In addition, TN Energy assumed Zydeco's existing stock options issued in connection with Zydeco's 1995 Employee Stock Option Plan (the "Plan"), substituting shares of Common Stock of TN Energy as the shares subject to purchase under the Plan. Further, TN Energy assumed each existing common stock warrant issued by Zydeco, substituting Common Stock of TN Energy as the shares subject to purchase under the warrants. The number of shares subject to purchase under option and warrant agreements was adjusted by multiplying the number of Zydeco option or warrant shares by the exchange ratio of 1.56251 shares. The exercise prices for Zydeco options and warrants were adjusted by dividing the stated exercise price by the exchange ratio. After completion of the Merger, TN Energy changed its name to Zydeco Energy, Inc. At the conclusion of the Merger on December 21, 1995, Zydeco Energy, Inc. had 5,781,275 shares of Common Stock outstanding and 781,255 shares of Convertible Preferred Stock outstanding. The Merger was treated as a reverse acquisition for accounting purposes with Zydeco as the acquiror and TN Energy as the acquiree based upon Zydeco's then current officers and directors assuming management control of the resulting entity and the value and ownership interest being received by current Zydeco stockholders exceeding that received by TN Energy stockholders. The Merger, for accounting purposes, was treated as if Zydeco issued additional capital stock to TN Energy shareholders for cash. The net assets of TN Energy on the date of the Merger were $7,971,525 and, accordingly, the common shares of TN Energy on such date were recorded as an increase in common stock and additional paid-in capital. The costs incurred in connection with the Merger of approximately $669,700 were charged to additional paid-in capital at December 31, 1995. F-10 ZYDECO ENERGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. INCOME TAXES Significant components of the Company's deferred tax liabilities and assets are as follows:
DECEMBER 31, ---------------------- 1996 1995 ----------- --------- Deferred Tax Liability $ -- $ -- =========== ========= Deferred Tax Assets Net Operating Loss Carryforwards.................. $ 845,499 $ 272,513 Book/Tax Differences in Bases of Oil and Gas Assets........................................... $ 211,457 $ 138,263 Less Valuation Allowance.......................... $(1,056,956) $(410,776) ----------- --------- Total Deferred Tax Assets........................... $ -- $ -- =========== ========= Net Deferred Tax Liability.......................... $ -- $ -- =========== =========
As of December 31, 1996, the Company had a net operating loss carryforward for federal income tax purposes approximately equal to the accumulated deficit recognized for book purposes, which will be available to reduce future taxable income. The full realization of the tax benefit associated with the carryforward depends predominantly upon the Company's ability to generate taxable income during the carryforward period. Because of the current uncertainty of realizing such tax asset in the future, a valuation allowance has been recorded equal to the amount of the net deferred tax asset, which caused the Company's effective tax rate to differ from the statutory income tax rate. The net operating loss carryforward, if not utilized, will begin to expire in the year 2009. 5. INDEBTEDNESS. Long-term Obligations. Balances of the Company's long-term obligations at December 31, 1996 and 1995 consist of the following:
1996 1995 ------------------ ----------------- LONG- CURRENT LONG-TERM CURRENT TERM -------- --------- -------- -------- Computer Hardware Lease.................... $157,537 $ -- $160,693 $157,537 ======== ========= ======== ========
Capital Lease--Computer Hardware. Amortization is calculated on a three- year, straight-line basis and aggregated $316,747 as of December 31, 1996. This lease has a stated interest rate of 19.45%. The lease is collateralized by the computer equipment utilized under the lease. Bridge Financing. In connection with the Merger, TN Energy entered into a financing arrangement ("Bridge Financing") and ultimately borrowed $225,028 from three investors ("Bridge Lenders") to finance TN Energy's share of legal, accounting, and printing costs of the Merger. The notes, including accrued interest at 10%, were repaid in January 1996. In December 1995, in connection with arranging the Bridge Financing, the Company issued to the Bridge Lenders warrants to purchase 225,028 shares of Common Stock ("Non-Redeemable Bridge Warrants") at a purchase price of $5.33 per share. See "Note 6--Convertible Preferred Stock, Common Stock, and Warrants". In addition, options to purchase 225,000 outstanding shares of the Company were granted in December 1995, by certain stockholders of the Company. The options were granted by the stockholders for 150,000 shares to the Bridge Lenders as an inducement to make the Bridge Financing and for 75,000 shares to other Principals in connection with discussions with TN Energy that resulted in the introduction of Zydeco. The aggregate F-11 ZYDECO ENERGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) exercise price for all the options granted was approximately $30. The cost of such options was reflected as a financing expense and capital contribution, respectively, by the Company prior to the Merger. Maturities. The Company's existing indebtedness matures in 1997. The aggregate amount of the remaining lease payments for the Company's capital lease obligation discussed above is $170,750 in 1997, including interest of $13,213. Operating Leases. The Company incurred rental expense of $125,734 and $37,465 in 1996, and 1995, respectively, in connection with its office leases. See "Note 7--Related-Party Transactions". At December 31, 1996, future minimum lease payments for leases having initial or remaining noncancelable lease terms in excess of one year are presented below:
YEAR AMOUNT ---- -------- 1997 $126,481 1998 123,947 1999 11,851
6. CONVERTIBLE PREFERRED STOCK, COMMON STOCK, AND WARRANTS. In connection with a $2.5 million private placement in December 1994 (the "1994 Private Placement"), Zydeco issued 781,255 shares of convertible preferred shares. During the six month period ended June 30, 1995, Zydeco 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 totaling $7,971,525, the net assets of TN Energy on the date of the Merger (comprised primarily of cash and marketable securities). 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. Placement Warrants. In connection with the 1994 Private Placement, Zydeco issued 72,268 Common Stock purchase warrants ("Placement Warrants") to the participating placement agents, 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 prior to their expiration on December 1, 1999. These warrants are subject to a cashless exercise provision (i.e., the exercise price may be satisfied by canceling a number of unexercised warrants valued by the difference between the exercise price and the market value of the shares). The initial value of such warrants issued in connection with the private placement was immaterial. No Placement Warrants had been exercised prior to 1996. In 1996, Placement Warrants were exercised for 29,592 shares of Common Stock, net of 9,575 warrant shares tendered in satisfaction of the exercise price. At December 31, 1996, there were 33,101 unexercised Placement Warrants outstanding. Redeemable Warrants. On December 21, 1993, the Company sold 1,500,000 units ("Units") in its initial public offering ("IPO"). Each Unit consists of one share of the Company's Common Stock, $.001 par value, and two redeemable Common Stock Purchase Warrants ("Redeemable Warrants"). Each Redeemable Warrant entitles the holder to purchase from the Company one share of Common Stock at an exercise price of $5.50, during the period commencing on the later of the consummation by the Company of a Business Combination or F-12 ZYDECO ENERGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) one year from the effective date of the IPO, effectively December 20, 1995, and ending seven years from the effective date of the IPO, effectively December 13, 2000. The Merger constituted a business combination under the terms of the Redeemable Warrants. The Redeemable 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 the date on which notice of redemption is given. The Company also issued, in connection with the IPO, 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 Redeemable Warrants valued at a nominal amount. At December 31, 1996, no Redeemable Warrants had been exercised. Unit Purchase Options. Also on December 21, 1993, the Company sold to the underwriters in the IPO and their designees, for nominal consideration, the right to purchase up to 150,000 units ("Unit Purchase Options"). The Unit Purchase Options are exercisable initially at $6.60 per Unit ("Option Exercise Price") until December 13, 1998, when they expire. The Unit Purchase Options contain anti-dilution provisions providing for adjustment of the Option Exercise Price upon the occurrence of certain events, including the issuance of shares of Common Stock or other securities convertible into or exercisable for shares of Common Stock at a price per share less than the Option Exercise Price or the market price of the Common Stock, or in the event of any recapitalization, reclassification, stock dividend, stock split, stock combination, or similar transaction. The Unit Purchase Options grant to the holders thereof certain "piggyback" and demand registration rights for periods of seven and five years, respectively, from the date of the IPO. The underwriters' units issuable upon the exercise of the Unit Purchase Options are identical to the Units discussed above, except that the warrants contained therein expire five years from the effective date of the IPO, or December 13, 1998, and cannot be redeemed. At December 31, 1996, no Unit Purchase Options had been exercised. Non-Redeemable Bridge Warrants. In December 1995, in connection with arranging the Bridge Financing, the Company issued to the Bridge Lenders warrants to purchase 225,028 shares of Common Stock ("Non-Redeemable Bridge Warrants"), at an exercise price of $5.33 per share. The terms of the Non- Redeemable Bridge Warrants are identical to the terms of the Redeemable Warrants, except that they are not redeemable and are subject to a cashless exercise provision. At December 31, 1996, no Non-Redeemable Bridge Warrants had been exercised. 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 Affiliates as its accumulated cost in the property interests) for the leases which are located 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 4.5% and 7.5% 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 (formerly officers of certain Myers Affiliates) own overriding royalty interests under the leases and one such employee received an additional 1% overriding royalty interest pursuant to an employment contract. In addition, at the time of purchase of the property interests, the two Vice Presidents also received an aggregate one-half percent overriding royalty interest in the properties directly from the Myers Affiliate. 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. F-13 ZYDECO ENERGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In August 1996, the Company, with the approval of the Board of Directors (Mr. Sam B. Myers, Jr. abstaining), purchased non-producing leasehold interests owned by a Myers Affiliate 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. 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 completion of the well. The Myers Affiliates can also back-in for 25% of the well after payout. In addition, an affiliate of a director of the Company also purchased a 5% working interest in the properties on the same basis as the terms of the Company's participation. Two of the Company's Vice Presidents also own net revenue interests in the prospect leases, one of which also purchased an additional 1% working interest participation in the property at the same time and on the same basis as the terms of the Company's participation. 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 has undertaken to sell a portion or farmout its interest in this prospect and at December 31, 1996, reflected $187,500 in unproved and unevaluated properties related to the prospect. The Company charged $647,355 to exploration expense in 1996 in connection with the drilling and abandonment of the well. In 1996, the Company licensed software and purchased related software maintenance services aggregating $325,768 from an unaffiliated vendor. Subsequently, in October 1996, an officer and director of the Company became a director of the vendor. 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 $109,902 and $118,970 to this firm during the years ended December 31, 1996, and 1995, respectively. Zydeco entered into an exchange agreement, dated January 1, 1995, with an entity beneficially owned by certain Myers Affiliates 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 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 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 $44,887 and $37,340 which is included in general and administrative expenses for the years ended 1996, and 1995, respectively. Effective December 15, 1994, Zydeco assumed an obligation related to certain computer equipment and related software under a capital financing lease expiring October 1997, from a Myers Affiliate where certain officers of the Company were, at the time, also officers and/or directors of the Myers Affiliate. The leased equipment was assigned to the Company by such entity, and the original lender has released the entity from all liability in the event of the Company's non-performance. 8. STOCK OPTION PLANS. At December 31, 1996, the Company had three stock-based compensation plans, which are described below. Each Plan provides for the granting of options generally at not less than the per share market price on the date of F-14 ZYDECO ENERGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) grant. The Company applies APB Opinion 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company's three stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123 "Accounting for Stock-Based Compensation", the Company's net loss and loss per share would have been reduced to the pro forma amounts indicated below:
1996 1995 ----------- ----------- Net Loss As Reported $(1,858,132) $(1,173,646) Pro Forma $(2,296,904) $(1,291,163) Loss Per Common Equivalent Share As Reported $ (0.30) $ (0.30) Pro Forma $ (0.37) $ (0.33)
For purposes of the above pro forma disclosure, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option- pricing model with the following weighted average assumptions used for grants in 1996 and 1995, respectively: no dividend yield for both years, expected volatility of .52 and .10, risk-free interest rates of 5.2% for both years, and expected lives of 10 years for all options. In connection with the above assumptions, the estimated weighted average fair value of options granted in 1996 and 1995 is $4.07 and $.56 per share, respectively. In February 1995, Zydeco's board of directors approved the 1995 Employee Stock Option Plan (the "Zydeco Plan") for certain employees of the Company and any subsequently incorporated subsidiaries of the Company. The Zydeco Plan provides for the granting of stock options to purchase up to an aggregate of one million (pre-Merger) common shares. Options to purchase 1,006,256 (post- Merger) shares of stock at a price of $1.60 per share, as adjusted pursuant to the Merger, were granted in March 1995. Such options are non-compensatory, vest over a four-year period and terminate no later than March 2005. Pursuant to the terms of the Merger, options granted pursuant to the Zydeco Plan were assumed by the Company and an equivalent number of shares of Common Stock are reserved for issuance upon exercise of the assumed Zydeco Plan options. See "Note 3--Reverse Acquisition by Zydeco". Common Stock was issued in the amount of 1,562 shares in connection with stock options exercised in 1996, under the Zydeco Plan. Shares exercisable under vested options issued under the Zydeco Plan aggregated 501,565 shares and 251,564 shares at December 31, 1996, and 1995, respectively. On January 4, 1996 the Board of Directors approved and adopted the Zydeco Energy, Inc. 1996 Incentive Equity Plan (the "1996 Incentive Plan"). The 1996 Incentive 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 1996 Incentive 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. In 1996, options to purchase 495,000 shares were granted to employees at exercise prices ranging between $5.22 and $6.69 per share. Options for 100,000 shares of Common Stock granted in January 1996, expired in February 1996, upon termination of an employee. The net 45,000 option shares granted in excess of the authorized limit of the 1996 Incentive Plan were granted subject to the approval of shareholders at the Company's next Annual Meeting scheduled in May 1997. At December 31, 1996, no options had been exercised or were exercisable under the 1996 Incentive Plan. The weighted average exercise price of stock options outstanding under the 1996 Incentive Plan at December 31, 1996, was $5.83 per share. 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 Directors Stock Option Plan (the "1996 Directors Plan") and granted an aggregate of 45,000 shares of Common Stock to three non- F-15 ZYDECO ENERGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) employee directors. The options vest, one third on April 1, 1997, 1998, and 1999, and have an exercise price of $6.69 per share. The options terminate no later than ten years after the date of grant. Both the 1996 Incentive Plan and the 1996 Directors Plan were approved by the Company's shareholders at the Annual Meeting on July 9, 1996. 9. SEGMENT INFORMATION. The Company operates principally in one industry segment--oil and gas exploration and production ("E&P"). In 1995, the Company also had operations in one other reportable segment: 3D seismic analysis services. The assets reported in the 3D seismic analysis services segment in 1995 were used in both segments and are included in the oil and gas E&P segment in 1996. During 1994, the Company had limited operations and no revenue, other than interest income. The following table sets forth key operating information for each business segment:
PERIOD FROM INCEPTION YEAR ENDED DECEMBER 31, (MARCH 17, 1994) ---------------------------- THROUGH 1996 1995 DECEMBER 31, 1994 ----------- ----------- --------------------- Operating Revenues Oil and Gas E&P....... $ 1,470,046 $ 286,752 $ -- 3D Seismic Analysis Services............. -- 300,000 -- ----------- ----------- ---------- Consolidated Total.... $ 1,470,046 $ 586,752 $ -- =========== =========== ========== Operating (Loss) Oil and Gas E&P....... $ (812,981) $ (555,009) $ (30,108) 3D Seismic Analysis Services............. -- (108,716) -- Corporate General & Administrative....... (1,294,358) (486,107) (80,134) ----------- ----------- ---------- Consolidated Total.... $(2,107,339) $(1,149,832) $ (110,242) =========== =========== ========== Capital Expenditures Oil and Gas E&P....... $ 1,077,350 $ 226,770 $ 870,000 3D Seismic Analysis Services............. -- -- 468,162 Corporate General & Administrative....... 248,524 -- 178,982 ----------- ----------- ---------- Consolidated Total.... $ 1,325,874 $ 226,770 $1,517,144 =========== =========== ========== Depreciation, Depletion and Amortization Oil and Gas E&P....... $ 592,996 $ 153,710 $ -- 3D Seismic Analysis Services............. -- 208,716 -- Corporate General & Administrative....... 37,869 29,961 7,153 ----------- ----------- ---------- Consolidated Total.... $ 630,865 $ 392,387 $ 7,153 =========== =========== ========== AT DECEMBER 31, ------------------------------------------------------- 1996 1995 1994 ----------- ----------- --------------------- Identifiable Assets Oil and Gas E&P....... $ 5,048,109(/1/) $ 3,501,290(/1/) $1,168,173 3D Seismic Analysis Services............. -- 364,770 468,162 Corporate General & Administrative....... 4,863,493 8,716,345 1,059,664 ----------- ----------- ---------- Consolidated Total.... $ 9,911,602 $12,582,405 $2,695,999 =========== =========== ==========
- -------- (1) Identifiable assets of the Oil and Gas E&P segment include $3,172,378 and $3,210,477 at December 31, 1996 and 1995, respectively, related to the Exploration Agreements. See "Note 2--Exploration Agreements". F-16 ZYDECO ENERGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Major Customers. Oil and gas sales to two customers of $1,030,424 and $391,803, respectively, in 1996, and $133,589 to one customer in 1995, each constituted more than 10% of consolidated revenue for such years. In addition, 3D seismic services revenue of $100,000 in 1995, from one customer represented more than 10% of consolidated revenue for 1995. 10. COMMITMENTS AND CONTINGENCIES. 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 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. Under the option, the State of Louisiana is required to keep the information obtained from the survey confidential for a period of ten years. The Company can extend the time period for delivery of the survey for a six month period for an additional payment of $391,877. In August, 1996, 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 May 1996, the Company entered into a license agreement with an individual to use a proprietary 3D seismic processing and wavefield imaging technology ("Wavefield Imaging"). The Company is authorized to use Wavefield Imaging worldwide and exclusively in certain transition zone areas of the Gulf of Mexico, including the area covered by the West Cameron Seismic Project. The Company paid the first year's royalty fee of $40,000 in May 1996, and can, at its option, renew the license annually by payment of annual royalties as follows: 1997 $40,000 1998 $60,000 1999 $80,000 2000 $80,000 Thereafter $100,000
In August 1996, the Company negotiated and executed a turnkey seismic services agreement with its survey contractor Grant Geophysical, Inc. ("Grant") in an effort to control some of the risks associated with a survey as large as the West Cameron Seismic Project. In December 1996, after Grant informed the Company it was ceasing survey operations due to winter weather conditions, Grant filed for protection and reorganization under Chapter 11 of the U. S. Bankruptcy statutes and currently is attempting to restructure its operations. On March 14, 1997, the Company and Grant executed a new Master Geophysical Data Acquisition Agreement ("the Agreement") to commence survey operations in mid-April 1997 under a "cost plus" services arrangement. The nature of such an agreement increases both the risks and the management efforts associated with the seismic acquisition phase of the West Cameron Seismic Project. The current estimates of the cost to complete the survey (assuming no reduction in the survey area) are substantially higher than the estimates or the actual costs incurred (approximately $44,000 per square mile) under the former turnkey contract with Grant. The Company paid a commitment fee of $150,000 and advanced $350,000 upon execution of the Agreement. Management currently believes that it will be able to meet its obligations under the Permit. F-17 ZYDECO ENERGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED). Results of operations by quarter for the year ended December 31, 1996, are set forth in the following table. The Company had no operations prior to the Merger in December 1995.
1996 QUARTER ENDED ---------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 --------- --------- ------------ ----------- OPERATING REVENUES Oil and Gas Sales............. $ 251,535 $ 305,211 $ 461,038 $ 404,443 Gain on Sales of Properties... -- 16,319 -- -- Seismic Services.............. -- 31,500 -- -- --------- --------- --------- --------- 251,535 353,030 461,038 404,443 OPERATING COSTS AND EXPENSES Dry Hole and Production Costs. 6,549 21,758 675,424 18,343 Geological and Geophysical Expenses..................... 208,600 192,969 224,895 341,493 General and Administrative Expenses..................... 387,398 261,513 322,290 285,288 Depreciation, Depletion and Amortization................. 110,365 151,364 181,763 187,373 --------- --------- --------- --------- 712,912 627,604 1,404,372 832,497 OPERATING LOSS.................. (461,377) (274,574) (943,334) (428,054) OTHER INCOME (EXPENSE) Interest Income............... 86,499 82,610 58,869 65,436 Interest Expense.............. (13,688) (11,983) (10,200) (8,336) --------- --------- --------- --------- 72,811 70,627 48,669 57,100 NET LOSS........................ $(388,566) $(203,947) $(894,665) $(370,954) ========= ========= ========= ========= LOSS PER COMMON EQUIVALENT SHARE.......................... $ (0.07) $ (0.04) $ (0.14) $ ( 0.05) ========= ========= ========= =========
12. SUBSEQUENT EVENT (UNAUDITED) On May 20, 1997, the Company executed a letter of intent to acquire Wavefield Image, Inc. ("Wavefield"), a privately held company that develops and licenses seismic data processing technology known as Wavefield Imaging. The Company is utilizing Wavefield Imaging in its West Cameron Seismic Project pursuant to a license negotiated in May 1996. The letter of intent provides for the issuance of 100,000 shares of the Company's Common Stock to shareholders of Wavefield, including its founder, Dr. Norman S. Neidell, in exchange for all of the outstanding stock of Wavefield. An additional 150,000 shares of Common Stock may be issued to Wavefield's stockholders if a patent is issued for the technology. The acquisition is subject to negotiation and execution of a definitive merger agreement acceptable to the Company and Wavefield. The Company also expects to negotiate an agreement with Dr. Neidell regarding his employment by the Company. The historical operations of Wavefield are not believed to be significant to the Company's financial statements or operations. F-18 ZYDECO ENERGY, INC. AND SUBSIDIARY SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES The following unaudited information has been provided pursuant to Statement of Financial Accounting Standards No. 69 "Disclosures about Oil and Gas Producing Activities". There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond the control of the Company. Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way. Accordingly, reserve estimates are often different from quantities of oil and gas that are ultimately recovered. The Company's proved oil and gas reserves were estimated by Ryder Scott Company, Petroleum Engineers. PROVED DEVELOPED RESERVE QUANTITIES The Company's oil and gas producing activities have been conducted solely in the United States. The Company had no proved undeveloped reserves at December 31, 1996, 1995, or 1994. The following table sets forth the changes in the Company's total proved reserves (all of which are developed) for the periods ended December 31, 1996, 1995, and 1994:
DECEMBER 31, -------------------------- 1996 1995 1994 -------- ------- ------- OIL (BBLS) Total Proved Reserves: Proved Oil Reserves at the Beginning of the Period........................................ 15,899 -- --(1) Extensions, Discoveries, and Other Additions... -- 17,017 -- Revisions of Previous Estimates................ 14,339 -- -- Production..................................... (20,186) (1,118) -- -------- ------- ------- Proved Oil Reserves at the End of the Period... 10,052 15,899 -- ======== ======= ======= GAS (MCF) Proved Gas Reserves at the Beginning of the Period........................................ 492,000 -- --(1) Extensions, Discoveries, and Other Additions... -- 576,546 -- Revisions of Previous Estimates................ 123,678 -- -- Production..................................... (372,678) (84,546) -- -------- ------- ------- Proved Gas Reserves at the End of the Period... 243,000 492,000 -- ======== ======= ======= Proved Developed Reserves: End of Period--Oil (Bbls)...................... 10,052 15,899 -- ======== ======= ======= Gas (Mcf)...................................... 243,000 492,000 -- ======== ======= =======
- -------- (1) At Inception, March 17, 1994. F-19 RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES The results of operations for oil and gas producing activities for the periods indicated are presented below:
YEAR ENDED DECEMBER PERIOD FROM INCEPTION 31, (MARCH 17, 1994) --------------------- THROUGH 1996 1995 DECEMBER 31, 1994 ---------- --------- --------------------- Oil and Gas Sales................. $1,422,227 $169,235 $ -- Production (Lifting) Costs........ (22,508) (27,492) -- Dry Hole Costs.................... (699,566) (261,956) (30,108) Geological and Geophysical Expenses......................... (967,957) (398,603) -- Depreciation, Depletion, and Amortization..................... (592,996) (153,710) -- Income Tax Provision (Benefit).... -- -- -- ---------- --------- -------- Results of Operations from Oil and Gas Producing Activities......... $ (860,800) $(672,526) $(30,108) ========== ========= ========
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES The following table presents total capitalized costs of proved and unproved oil and gas properties and associated accumulated depreciation, depletion and amortization:
DECEMBER 31, -------------------- 1996 1995 ---------- -------- Proved Oil and Gas Properties, at Cost................... $ 300,784 $309,110 Unproved Oil and Gas Properties, at Cost................. 488,290 -- Equipment and Software................................... 1,343,655 -- Less--Accumulated Depreciation, Depletion, and Amortization............................................ (955,422) (114,090) ---------- -------- Net Capitalized Costs.................................... $1,177,307 $195,020 ========== ========
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT ACTIVITIES Presented below are costs incurred in oil and gas property acquisition, exploration and development activities:
YEAR ENDED DECEMBER PERIOD FROM INCEPTION 31, (MARCH 17, 1994) ------------------- THROUGH 1996 1995 DECEMBER 31, 1994 ---------- -------- --------------------- Proved Property Acquisition Costs..... $ 7 $ 77,573 $ -- Unproved Property Acquisition Costs... 507,370 -- 726,030 Exploration Costs..................... 1,639,519 660,559 174,078 Equipment and Software Additions...... 569,973 -- -- ---------- -------- -------- Total for Period...................... $2,716,869 $738,132 $900,108 ========== ======== ========
F-20 STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVE QUANTITIES Future cash inflows from the sale of production of proved reserves, net of estimated production and development costs, as calculated by the Company's independent reserve engineers, are discounted at 10%. The calculations are based on year-end prices and costs and statutory tax rates that relate to existing proved oil and gas reserves in which the Company has mineral interests. Actual oil and gas sales prices continue to be subject to wide fluctuations due to market changes. The standardized measure is not intended to represent the market value of reserves and, in view of the uncertainties involved in the reserve estimation process, including the instability of energy markets, may be subject to material future revisions. See "Note 1-- Organization and Summary of Significant Accounting Policies".
YEAR ENDED DECEMBER PERIOD FROM INCEPTION 31, (MARCH 17, 1994) ---------------------- THROUGH 1996 1995 DECEMBER 31, 1994 ---------- ---------- --------------------- (UNAUDITED) (UNAUDITED) Future Cash Inflows.............. $1,116,568 $1,496,181 $ -- Future Production and Development Costs(1)........................ (72,225) (76,500) -- Future Income Tax Expense........ -- -- -- ---------- ---------- ------ Undiscounted Future Net Cash Flows........................... $1,044,343 $1,419,681 $ -- Discount......................... (44,525) (112,344) -- ---------- ---------- ------ Standardized Measure of Discounted Future Net Cash Flows........................... $ 999,818 $1,307,337 $ -- ========== ========== ======
- -------- (1) Estimated future costs associated with property development and plugging, abandonment, site restoration and dismantlement requirements at December 31, 1996 and 1995 were approximately $32,500. PRINCIPAL SOURCES OF CHANGE IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
YEAR ENDED DECEMBER PERIOD FROM INCEPTION 31, (MARCH 17, 1994) ----------------------- THROUGH 1996 1995 DECEMBER 31, 1994 ----------- ---------- --------------------- (UNAUDITED) (UNAUDITED) Balance at the Beginning of the Period......................... $ 1,307,337 $ -- $ -- Sales, Net of Operating Costs... (1,399,719) (141,743) -- Net Changes in Prices and Production Costs............... 343,316 -- -- Extensions, Discoveries and Improved Recovery.............. -- 1,449,080 -- Revisions of Quantity Estimates. 685,619 -- -- Accretion of Discount........... 130,734 -- -- Other .......................... (67,469) -- -- ----------- ---------- ------ Balance at the End of the Period......................... $ 999,818 $1,307,337 $ -- =========== ========== ======
F-21 INSIDE BACK COVER [GRAPHIC- PICTURE OF SEISMIC WORKSTATION] LOGO PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Set forth below are the expenses expected to be incurred in connection with the issuance and distribution of the securities registered hereby. With the exception of the Securities and Exchange Commission registration fee and the NASD filing fee, the amounts set forth below are estimates: Securities and Exchange Commission registration fee............ $3,571.97 NASD filing fee................................................ * Legal fees and expenses........................................ * Accounting fees and expenses .................................. * Placement Agent fees and expenses.............................. * Blue Sky fees and expenses..................................... * Transfer Agent's fees and expenses............................. * Underwriting expenses.......................................... * Miscellaneous expenses......................................... * --------- Total........................................................ * =========
- -------- * To be filed by Amendment ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law ("Section 145") permits indemnification of directors, officers, agents and controlling persons of a corporation under certain conditions and subject to certain limitations. Article Eighth of the Company's Certificate of Incorporation and Section 8.1 of the Company's Bylaws) provide for the indemnification of directors, officers and other authorized representatives of the Company to the maximum extent permitted by the Delaware General Corporation Law. Section 145 empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise. Depending on the character of the proceeding, a corporation may indemnify against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action, suit or proceeding if the person seeking indemnification acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. In the case of an action by or in the right of the corporation, no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine that despite the adjudication of liability such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. Section 145 further provides that to the extent a director or officer of a corporation has been successful in defense of any action, suit or proceeding referred to above or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Section 8.6 of the Company's Bylaws permits it to purchase and maintain insurance on behalf of any such person who is or was a director, officer, employee or agent of the Company or is or was serving at the request of the Company, as a director, officer, employee or agent of another corporation or enterprise against any liability asserted against him and incurred by him in such capacity, or arising out of his status as such, whether or not the Company would have the power to indemnify him against such liability under the foregoing provisions of the Bylaws. II-1 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Set forth below is certain information concerning all sales of securities by the Company during the last three years that were not registered under the Securities Act. In the opinion of the Company, each of these transactions were exempt from registration pursuant to Section 4(2) of the Securities Act as transactions not involving a public offering. (a) In September 1995, the Company issued and sold promissory notes and warrants aggregating $225,028 and 225,028 warrants to the following investors:
AMOUNT PURCHASE NAME OF INVESTOR OF NOTE WARRANTS PRICE ---------------- ------- -------- -------- BSR Investments................................. $75,014 75,014 $75,014 W. Forster & Co., Inc........................... $75,014 75,014 $75,014 Brean Murray, Foster Securities Inc............. $75,000 75,000 $75,000
(b) The Company has issued to its employees options to purchase a total of 620,000 shares of the Company's Common Stock pursuant to the 1996 Incentive Equity Plan adopted by the Company in 1996. 350,000 of such options were granted to two executive officers of the Company. (c) The Company has issued options to purchase a total of 45,000 shares of the Company's Common Stock pursuant to the 1996 Nonemployee Directors Stock Option Plan adopted by the Company in 1996. All such options were granted to the three nonemployee directors of the Company. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following exhibits are filed as part of this Registration Statement:
EXHIBIT NO. DESCRIPTION ----------- ----------- 1.1 --Underwriting Agreement and exhibits thereto 3.1+ --Certificate of Incorporation of the Company and Certificates of Amendment thereto (filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 3.2+ --Form of Amended and Restated Bylaws (filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Reg. No. 33-65286)) 4.1+ --Form of Certificate representing shares of Common Stock (filed as Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 4.2+ --Form of Certificate evidencing Common Stock Purchase Warrants (filed as Exhibit 4.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 4.3+ --Unit Purchase Option Granted to Underwriters by the Company (filed as Exhibit 4.3 to the Company's Registration Statement on Form S-1 (Reg. No. 33-65286)) 4.4+ --Warrant Agreement between Continental Stock Transfer & Trust Company and the Company (filed as Exhibit 4.4 to the Company's Registration Statement on Form S-1 (Reg. No. 33-65286)) 4.5+ --Certificate of Designation evidencing shares of Preferred Stock (filed as Exhibit 4.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 4.6+ --Form of Certificate evidencing shares of Preferred Stock (filed as Exhibit 4.6 to the Company's Annual Report on Form 10-K the year ended December 31, 1995) 4.7+ --Form of Stock Purchase Warrant granted by Zydeco Exploration, Inc. and Letter to holders from the Company (filed as Exhibit 4.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 5.1* --Opinion of Andrews & Kurth L.L.P. 10.1+ --Share Escrow Agreement between the Company and Continental Stock Transfer & Trust Company (filed as Exhibit 10.6 to the Company's Registration Statement on Form S-1 (Reg. No. 33-65286))
II-2
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.2+ --Warrant Agreement for Redeemable Warrants (filed as Exhibit 4.4 to the Company's Registration Statement on Form S-1 (Reg. No. 33- 65286)) 10.3+ --Zydeco 1995 Employee Stock Option Plan and form of letter to Optionees from the Company (filed as Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10.4+ --Employment Agreement between Zydeco Exploration, Inc. and Stephen W. Knecht (filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10.5+ --Employment Agreement between Zydeco Exploration, Inc. and John W. McTigue, Jr. (filed as Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10.6+ --Exploration Agreement between Zydeco Exploration, Inc. and Lagniappe Exploration, Inc. (predecessor to Fortune Petroleum, Inc.) (filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10.7+ --Farmout Agreement between Zydeco Exploration, Inc. and Bois D'Arc Exploration (filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10.8+ --Farmout Agreement between Zydeco Exploration, Inc., Fortune and Southern Gas Company of Delaware (filed as Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10.9+ --Option Agreement dated February 7, 1996, between the Company and Norman S. Neidell concerning certain wavefield imaging technology including, as an exhibit, the form of License Agreement between the Company and Mr. Neidell (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the three months ended March 31, 1996) 10.10+ --Exploration Agreement between Zydeco Exploration, Inc. and Cheniere Energy Operating Co., Inc. (formerly FX Energy, Inc.) dated April 4, 1996 (filed as Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q for the three months ended June 30, 1996) 10.11+ --Master Geophysical Data Acquisition Agreement dated June 12, 1996, (executed August 5, 1996) between Zydeco Exploration, Inc. and Grant Geophysical, Inc. (filed as Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q for the three months ended September 30, 1996) 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 (filed as Exhibit 10.12 to the Company's Quarterly Report on Form 10-Q for the three months ended September 30, 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 (filed as Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q for the three months ended September 30, 1996) 10.14+ --Fourth Amendment to the Exploration Agreement between Zydeco Exploration, Inc. and Cheniere Energy Operating Co., Inc. (formerly FX Energy, Inc.) dated November 29, 1996 (filed as Exhibit 11.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996) 10.15+ --Master Geophysical Data Acquisition Agreement dated March 14, 1997 between Zydeco Exploration, Inc. and Grant Geophysical, Inc. (filed as Exhibit 10.15 to the Company's Quarterly Report on Form 10-Q for the three months ended March 31, 1997) 10.16+ --1996 Incentive Equity Plan (filed on May 20, 1997 as Exhibit 99.1 to the Company's Registration Statement on Form S-8) 10.17+ --1996 Non-employee Directors Stock Option Plan (filed on May 20, 1997 as Exhibit 99.1 to the Company's Registration Statement on Form S-8) 11.1+ --Statement regarding computation of per share earnings. 21.1+ --List of Subsidiaries (filed as Exhibit 21.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
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EXHIBIT NO. DESCRIPTION ----------- ----------- 23.1 --Consent of Arthur Andersen LLP 23.2 --Consent of Ryder Scott Company Petroleum Engineers 23.3* --Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1)
- -------- + Incorporated herein by reference to the indicated filing. * To be filed by amendment. (b) Financial Statement Schedules: Schedules for which provision is made in the applicable accounting regulations of the Commission are not required under the related instructions or are not applicable, and therefore have been omitted. ITEM 17. UNDERTAKINGS (1) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred by paid by a director officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by its against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (2) The undersigned registrant hereby undertakes that: (a) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (b) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1933, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, State of Texas on the 23rd day of May, 1997. Zydeco Energy, Inc. /s/ Sam B. Myers, Jr. By:__________________________________ Sam B. Myers, Jr. Chairman of the Board and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and directors of Zydeco Energy, Inc. (the "Company") hereby constitutes and appoints Sam B. Myers, Jr. and Edward R. Prince, Jr., or either of them (with full power to each of them to act alone), his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and on his behalf and in his name, place and stead, in any and all capacities, to sign, execute and file this Registration Statement under the Securities Act of 1933, as amended, and any or all amendments (including, without limitation, amendments increasing the number of shares offered and post-effective amendments), with all exhibits and any and all documents required to be filed with respect thereto, with the Securities and Exchange Commission or any regulatory authority, granting unto such attorneys-in-fact and agents, and each of them acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same, as fully to all intents and purposes as he himself might or could do if personally present, hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Sam B. Myers, Jr. Director, Chairman of the May 23, 1997 ____________________________________ Board and Chief Executive Sam B. Myers, Jr. Officer (Principal Executive Officer) /s/ W. Kyle Willis Vice President, Treasurer, May 23, 1997 ____________________________________ and Chief Financial Officer W. Kyle Willis (Chief Accounting Officer) /s/ Edward R. Prince, Jr. Director, Vice Chairman of May 23, 1997 ____________________________________ the Board Edward R. Prince, Jr. /s/ John O. Smith Director, President and May 23, 1997 ____________________________________ Chief Operating Officer John O. Smith /s/ Philip A. Tuttle Director May 23, 1997 ____________________________________ Philip A. Tuttle /s/ Harry C. Johnson Director May 23, 1997 ____________________________________ Harry C. Johnson /s/ Charles E. Bradley, Sr. Director May 23, 1997 ____________________________________ Charles E. Bradley, Sr.
II-5 EX-1.1 2 UNDERWRITING AGREEMENT EXHIBIT 1.1 DRAFT 5/20/97 2,000,000 Shares ZYDECO ENERGY, INC. Common Stock (Par Value $0.001 Per Share) UNDERWRITING AGREEMENT _____________, 1997 BREAN MURRAY & CO., INC. As Representative of the several Underwriters 570 Lexington Avenue New York, New York 10022-6822 Ladies and Gentlemen: Zydeco Energy, Inc., a Delaware corporation (the "Company"), proposes to issue and sell an aggregate of 2,000,000 shares (the "Firm Shares") of the Company's Common Stock, par value $0.001 per share (the "Common Stock"), to you and the other underwriters named in Schedule I hereto (collectively, the "Underwriters"), for whom you are acting as representative (the "Representative"). The Company also has agreed to grant to you and the other Underwriters an option ("the Option") to purchase up to an additional 300,000 shares of Common Stock (the "Option Shares"), on the terms and for the purposes set forth in Section 1(b) hereto. The Firm Shares and the Option Shares are collectively referred to herein as the "Shares" or the "Securities". The Company hereby confirms as follows its agreements with the Representative and the several other Underwriters. 1. Agreement to Sell and Purchase. (a) On the basis of the representations, warranties, covenants and agreements herein contained and subject to all the terms and conditions of this Underwriting Agreement (the "Agreement"), the Company agrees to sell to each Underwriter and each Underwriter, severally and not jointly, agrees to purchase from the Company at a purchase price of $[ ] per Share, the number of Firm Shares set forth opposite the name of such Underwriter on Schedule I hereto, plus such additional number of Firm Shares which such Underwriter may become obligated to purchase pursuant to Section 10 hereof. (b) Subject to all the terms and conditions of this Agreement, the Company grants the Option to the several Underwriters to purchase, severally and not jointly, the Option Shares at the same price per share as the Underwriters shall pay for the Firm Shares. The Option may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters and may be exercised in whole or in part at any time and from time to time on or before the 30th day after the date of this Agreement (or on the next business day if the 30th day is not a business day), upon notice (the "Option Shares Notice") in writing or by telephone (confirmed in writing) by the Representative to the Company no later than 5:00 p.m., New York City time, at least two and no more than five business days before the date specified for closing in the Option Shares Notice (the "Option Closing Date") setting forth the aggregate number of Option Shares to be purchased and the time and date for such purchase. On the Option Closing Date, the Company will issue and sell to the Underwriters the number of Option Shares set forth in the Option Shares Notice and each Underwriter will purchase such percentage of the Option Shares as is equal to the percentage of Firm Shares that such Underwriter is purchasing, as adjusted by the Representative in such manner as it deems advisable to avoid fractional shares. 2. Delivery and Payment. (a) Delivery of the Firm Shares shall be made to the Representative for the accounts of the Underwriters against payment of the purchase price by certified or official bank checks payable in New York Clearing House funds drawn to the order of the Company (the "Closing") at the office of Brean Murray & Co., Inc. at 570 Lexington Avenue, New York, New York 10022, or such other location as shall be agreed upon by the Company and the Representative. Such payment shall be made at 10:00 a.m., New York City time, on the third full business day following the date of this Agreement, or at such other time and date not more than seven business days after the date of this Agreement, as may be agreed upon by the Representative and the Company (such date is hereinafter referred to as the "Closing Date"). Time shall be of the essence and delivery at the time and place specified in this Agreement is a further condition of the obligation of each Underwriter hereunder. (b) To the extent the Option is exercised, delivery of the Option Shares against payment by the Underwriters (in the manner specified above) will take place at the offices specified above for the Closing Date at the time and date (which may be the Closing Date) specified in the Option Shares Notice. (c) Certificates evidencing the Shares shall be in definitive form and shall be registered in such names and in such denominations as the Representative shall request at least two business days prior to the Closing Date or the Option Closing Date, as the case may be, by written notice to the Company. For the purpose of expediting the checking and packaging of certificates for the Shares, the Company agrees to make such certificates available for inspection at least 24 hours prior to the Closing Date or the Option Closing Date, as the case may be. (d) The cost of original issue tax stamps, if any, in connection with the issuance, sale and delivery of the Firm Shares and the Option Shares by the Company to the respective Underwriters shall be borne by the Company. The Company will pay and save each Underwriter and any subsequent holder of the Shares harmless from any and all liabilities with respect to or resulting from any failure or delay in paying Federal or state stamp and other transfer taxes, if any, which may be payable or determined to be payable in connection with the original issuance, sale or delivery to such Underwriter of the Firm Shares and the Option Shares. 3. Representations and Warranties of the Company. The Company represents, warrants and covenants to each Underwriter that: -2- (a) A registration statement on Form S-1 (No. 333-[ ]) relating to the Shares, including a preliminary prospectus relating to the Securities and such amendments to such registration statement as may have been required to the date of this Agreement, has been prepared by the Company under the Securities Act of 1933, as amended (the "Act"), and the rules and regulations (collectively referred to as the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder, and has been filed with the Commission. The Commission has not issued any order preventing or suspending the use of the Prospectus (as defined below) or any Preliminary Prospectus (as defined below) or instituted or, to the knowledge of the Company, threatened any proceeding for that purpose. The term "Preliminary Prospectus" as used herein means a preliminary prospectus relating to the Securities included at any time as part of the foregoing registration statement or any amendment thereto before it became effective under the Act and any prospectus filed with the Commission by the Company pursuant to Rule 424(a) of the Rules and Regulations. Copies of such registration statement and amendments and of each related Preliminary Prospectus have been delivered to the Representative. If such registration statement has not become effective, a further amendment to such registration statement, including a form of final prospectus, necessary to permit such registration statement to become effective will be filed promptly by the Company with the Commission. If such registration statement has become effective, a final prospectus relating to the Securities containing information permitted to be omitted at the time of effectiveness by Rule 430A will be filed by the Company with the Commission in accordance with Rule 424(b) of the Rules and Regulations promptly after execution and delivery of this Agreement. The term "Registration Statement" means the registration statement as amended at the time it becomes or became effective (the "Effective Date"), including all financial statements and schedules and all exhibits, documents incorporated therein by reference and all information contained in any final prospectus filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations or in a term sheet described in Rule 434 of the Rules and Regulations in accordance with Section 5 hereof and deemed to be included therein as of the Effective Date by Rule 430A of the Rules and Regulations. The term "Prospectus" means the prospectus relating to the Shares as first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations or, if no such filing is required, the form of final prospectus relating to the Shares included in the Registration Statement at the Effective Date. (b) On the date that any Preliminary Prospectus was filed with the Commission, the date the Prospectus is first filed with the Commission pursuant to Rule 424(b) (if required), at all times subsequent to and including the Closing Date and, if later, the Option Closing Date and when any post- effective amendment to the Registration Statement becomes effective or any amendment or supplement to the Prospectus is filed with the Commission, the Registration Statement, each Preliminary Prospectus and the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment or supplement thereto), including the financial statements included in the Prospectus, did or will comply with all applicable provisions of the Act and the Rules and Regulations and did or will contain all statements required to be stated therein in accordance with the Act and the Rules and Regulations. On the Effective Date and when any post-effective amendment to the Registration Statement becomes effective, no part of the Registration Statement or any such amendment did or will contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading. At the Effective Date, the date the Prospectus or any amendment or supplement to the Prospectus is filed with the Commission and at the Closing Date and, if later, the Option Closing Date, the Prospectus did not or will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. -3- (c) The Company is, and at the Closing Date will be, duly organized, validly existing and in good standing under the laws of the State of Delaware. The Company's subsidiary, Zydeco Exploration, Inc. (the "Subsidiary"), is, and at the Closing Date will be, duly organized, validly existing and in good standing under the laws of the State of Texas. Each of the Company and the Subsidiary has, and at the Closing Date will have, full power and authority to conduct all the activities conducted by it, to own or lease all the assets owned or leased by it and to conduct its business as described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus). Each of the Company and the Subsidiary is, and at the Closing Date will be, duly licensed or qualified to do business and in good standing as a foreign organization in all jurisdictions in which the nature of the activities conducted by it or the character of the assets owned or leased by it makes such licensing or qualification necessary, except where the failure to be so qualified does not and will not have a material adverse effect, singly or in the aggregate, on the business, properties, prospects, assets, condition (financial or otherwise), net worth or results of operations of the Company and the Subsidiary taken as a whole (a "Material Adverse Effect"). Except for the stock of the Subsidiary and as disclosed in the Registration Statement, the Company does not own, and at the Closing Date will not own, directly or indirectly, any shares of stock or any other equity or long-term debt securities of any corporation or have any equity interest in any firm, partnership, joint venture, association or other entity. Complete and correct copies of the articles or certificate of incorporation and of the bylaws of the Company and the Subsidiary and all amendments thereto have been delivered to the Placement Agents, and no changes therein will be made subsequent to the date hereof and prior to the Closing Date. (d) The outstanding shares of capital stock of each of the Company and the Subsidiary have been duly authorized and validly issued, are fully paid and nonassessable and are not subject to any preemptive or similar rights. The issued shares of the Subsidiary are owned by the Company free and clear of any perfected security interest or any liens, encumbrances, claims or other security interests, other than as described in the Registration Statement. The Shares will be, upon such issuance and payment therefor, duly authorized, validly issued, fully paid and nonassessable and will not be subject to any preemptive or similar rights. The Company has and will have, a duly authorized, issued and outstanding capitalization as set forth under the caption "Capitalization" in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) as of the date of the table thereunder and on the Closing Date and the Option Closing Date will have the adjusted capitalization set forth therein as of the date of the table thereunder, based on the assumptions set forth therein. The securities of the Company and the Subsidiary conform in all material respects to the descriptions thereof contained in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). Except as set forth or contemplated in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), neither the Company nor the Subsidiary have outstanding, and at the Closing Date and, if later, the Option Closing Date will not have outstanding, any options to purchase, or any rights or warrants to subscribe for, or any securities or obligations convertible into, or any contracts or commitments to issue or sell, any shares of its capital stock or any such warrants, convertible securities or obligations. (e) The consolidated financial statements and the related notes and schedules thereto included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) fairly present the consolidated financial condition, results of operations, shareholders' equity and cash flows of the Company and its Subsidiary at the dates and for the periods specified therein. Such financial statements and the related notes and schedules thereto have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved (except as otherwise -4- noted therein) and such financial statements as are audited have been examined by Arthur Andersen LLP who are independent public accountants within the meaning of the Act and the Rules and Regulations, as indicated in their reports filed therewith. The selected financial information and statistical data set forth under the captions "Prospectus Summary - Summary Consolidated Financial and Operating Data" and "Selected Consolidated Financial Data" in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) have been prepared on a basis consistent with the financial statements of the Company and its Subsidiary. (f) Each of the Company and the Subsidiary maintain a system of internal accounting control sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorization, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (g) The Company is not required to be registered under the Investment Company Act of 1940, as amended (the "Investment Company Act"). (h) Except as set forth in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), there are no actions, suits, arbitrations, claims, governmental or other proceedings pending or threatened against or affecting the Company, the subsidiary or any respective directors, officers, or, to the Company's knowledge, stockholders of any of the foregoing in their capacity as such before or by any court, regulatory body or administrative agency or any other governmental agency or body, domestic or foreign (collectively, "Governmental Body"), wherein an unfavorable ruling, decision or finding might have a Material Adverse Effect. Neither the Company nor the Subsidiary is in violation of, or in default with respect to, any law, rule, or regulation, or any order, judgment, or decree, except as described in the Prospectus (or if the Prospectus is not in existence, in the most recent Preliminary Prospectus) or such as in the aggregate do not now have and can reasonably be expected in the future not to have a Material Adverse Effect; nor is the Company or the Subsidiary presently required under any order, judgment or decree to take any action in order to avoid any such violation or default. (i) Each of the Company and the Subsidiary has, and at the Closing Date, the Option Closing Date (if any) will have, all governmental licenses, permits, consents, orders, approvals, franchises, certificates, leases and other authorizations (collectively, "Licenses") necessary to carry on its business and lease or own its properties as contemplated in the Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus), except in such case where the failure to have such Licenses will not have a Material Adverse Effect. Each of the Company and the Subsidiary has, and at the Closing Date and the Option Closing Date (if any) will have, complied in all material respects with all laws, regulations and orders applicable to it or its business and properties, except where the failure to so comply will not have a Material Adverse Effect. Neither the Company nor the Subsidiary is, and, at the Closing Date and the Option Closing Date (if any), neither of them will be, in default (nor has any event occurred which, with notice or lapse of time or both, would constitute a default) in the due performance and observation of any term, covenant or condition of any indenture, mortgage, deed of trust, voting trust agreement, loan agreement, bond, debenture, note agreement or other evidence of indebtedness, lease, contract or other agreement or instrument (collectively, a "contract or other agreement") to which either of them is, or will be, a party or by which any of -5- their respective properties is, or will be, bound or affected, which default would have a Material Adverse Effect. To the best knowledge of the Company, no other party under any such contract or other agreement is, or will be, in default in any material respect thereunder. There are no governmental proceedings or actions pending or overtly threatened in writing for the purpose of suspending, modifying or revoking any License held, or to be held, by the Company or the Subsidiary. Neither the Company nor the Subsidiary is in violation of any provision of its articles of incorporation or bylaws, operating agreement or other governing instrument, except where such violation will not have a Material Adverse Effect. (j) No consent, approval, authorization or order of, or any filing or declaration with, any Governmental Body is required for the performance of this Agreement or the consummation of the transactions contemplated hereby, except such as have been obtained under the Act or the Rules and Regulations and such as may be required under state securities or Blue Sky laws or the bylaws and rules of the NASD in connection with the purchase and distribution by the Underwriters of the Shares. (k) The Company has full power (corporate and other) and authority to enter into and consummate the transactions provided for in this Agreement. This Agreement has been duly authorized, executed and delivered by the Company and, assuming that this Agreement is a binding agreement of yours, constitutes a legal, valid and binding agreement of the Company enforceable against the Company in accordance with its terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting the enforcement of creditors' rights and the application of equitable principles relating to the availability of remedies and except as rights to indemnity or contribution may be limited by federal or state securities laws and the public policy underlying such laws). None of the Company's execution, delivery or performance of this Agreement and the transactions contemplated herein, its application of the net proceeds of the offering in the manner set forth under the caption "Use of Proceeds" or the conduct of its business as described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), does now or will in the future conflict with, result in any breach or violation of any of the terms or provisions of, or constitute a default under, cause (or permit) the maturation or acceleration of any liability or obligation or the termination of any right under, or result in the creation or imposition of any lien, charge, or encumbrance upon, any property or assets of the Company or the Subsidiary pursuant to the terms of (A) the charter or by-laws of the Company or the Subsidiary (B) any indenture, mortgage, deed of trust, voting trust agreement, shareholders' agreement, note agreement or other agreement or instrument to which the Company or the Subsidiary is a party or by which any of them may be bound or to which any of their property is or may be subject or (C) any statute, judgment, decree, order, rule or regulation applicable to the Company or the Subsidiary of any government, arbitrator, court, regulatory body or administrative agency or other governmental agency or body, domestic or foreign, having jurisdiction over the Company or the Subsidiary, or any of their activities or properties. (l) All executed agreements or copies of executed agreements, filed as exhibits to the Registration Statement to which the Company or the Subsidiary is a party or by which any of them is or may be bound or to which any of their assets, properties or businesses are or may be subject have been duly and validly authorized, executed and delivered by the Company or such Subsidiary, as the case may be, and constitute the legal, valid and binding agreements of the Company or the Subsidiary, as the case may be, enforceable against each in accordance with their respective terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws relating to enforcement -6- of creditors' rights generally, and general equitable principles relating to the availability of remedies, and except as rights to indemnity or contribution may be limited by federal or state securities laws and the public policy underlying such laws). The descriptions in the Registration Statement of the contracts and other documents are accurate in all material respects and fairly present the information required to be shown with respect thereto by the Act and the Rules and Regulations, and there are no transactions, contracts or other documents which are required by the Act or the Rules and Regulations to be described in the Registration Statement or filed as exhibits to the Registration Statement which are not described or filed as required, and the exhibits which have been filed are complete and correct copies of the documents of which they purport to be copies. (m) Except as set forth in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and prior to the Closing Date and, if later, the Option Closing Date: (i) there has not been, and will not have been, any change in the capitalization of the Company or any material adverse change in the business, properties, prospects, condition (financial or otherwise), net worth or results of operations of the Company arising for any reason whatsoever; (ii) the Company has not incurred, and will not have incurred any material liabilities or obligations, direct or contingent; (iii) the Company has not and will not have entered into any material transactions other than pursuant to this Agreement; (iv) the Company has not and will not have paid or declared any dividends or other distributions of any kind on any class of its capital stock; (v) there has not and will not have been any change in the capitalization of the Subsidiary or any material adverse change in the business, properties, prospects, condition (financial or otherwise), net worth or results of operations of any of them, in any case arising for any reason whatsoever; (vi) the Subsidiary does not have nor will have incurred any material liabilities or obligations, direct or contingent, (vii) the Subsidiary does not have nor will have entered into any material transactions other than as contemplated by this Agreement; and (viii) the Subsidiary has not or will not have paid or declared any dividends or other distributions of any kind on any class of its capital stock, partnership interests or other equity securities. (n) No labor disturbance by the employees of the Company or the Subsidiary exists or, to the Company's knowledge, is imminent which may have a Material Adverse Effect. (o) Since its inception, neither the Company nor the Subsidiary has incurred any material liability arising under or as a result of the application of the provisions of the Act or any state securities or Blue Sky laws. (p) Each of the Company and the Subsidiary owns, or is licensed or otherwise has sufficient right to use, the proprietary knowledge, inventions, patents, trademarks, service marks, trade names, logo marks and copyrights used in or necessary for the conduct of its business (collectively "Rights") as described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). No claims have been asserted against the Company or the Subsidiary by any person with respect to the use of any such Rights or challenging or questioning the validity or effectiveness of any such Rights. The use, in connection with the business and operations of the Company of such Rights does not, to the Company's best knowledge, infringe on the rights of any person. (q) There are no contracts, agreements or understandings between the Company or the Subsidiary and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the -7- Company owned or to be owned by such person or to require the Company to include such securities under the Registration Statement (other than those that have been disclosed in the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), that have not been waived with respect to the Registration Statement. (r) Neither the Company nor any of its officers, directors or affiliates (within the meaning of the Rules and Regulations) has taken, directly or indirectly, any action designed to stabilize or manipulate the price of any security of the Company, or which has constituted or which might in the future reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company, to facilitate the sale or resale of the Shares or otherwise. (s) Each of the Company or Subsidiary, as the case may be, has good and marketable title to all interests in oil and gas properties each owns, title investigations having been conducted by the Company or Subsidiary in accordance with customary practice in the oil and gas industry, good and marketable title in fee simple to all other real property each owns and good and marketable title to all personal property each owns, in each case free and clear of all liens, claims, security interests or other encumbrances and defects except as such are described in the Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus) or such as do not materially adversely affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and the Subsidiary, taken as a whole. The property (real and personal) held under lease or option by each of the Company or the Subsidiary, as the case may be, is held by it under valid, subsisting and enforceable leases or options with only such exceptions as in the aggregate are not materially burdensome and do not interfere in any material respect with the conduct of the business or contemplated conduct of the business of the Company and the Subsidiary, taken as a whole. (t) The partnership agreements, participation agreements, joint development agreements, joint operating agreements, farmout agreements, turnkey contracts and other agreements described in the Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus) relating to the Company's or the Subsidiary's rights with respect to the ownership, lease or operation of oil and gas properties, the acquisition of interests in oil and gas properties or the exploration for, development of or production of oil and gas reserves thereon constitute valid and binding agreements of the Company or its Subsidiary and, to the best knowledge of the Company, of the other parties thereto, enforceable in accordance with their terms, except as enforceability may be subject to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. (u) The Common Stock is currently listed on the Nasdaq Stock Market's Small Cap Market (the "Nasdaq Small Cap Market"). (v) The Subsidiary is not currently prohibited, directly or indirectly, from paying any dividends to the Company, from making any other distribution on the Subsidiary's capital stock from repaying to the Company any loans or advances to such Subsidiary from the Company or from transferring any of the Subsidiary's property or assets to the Company. (w) Neither the Company nor the Subsidiary nor any of their respective employees or agents has made any payment of funds of the Company or the Subsidiary or received, or retained any funds in violation of any law, rule or regulation of a character required to be disclosed in the Prospectus (or, if the Prospectus is not in existence, the most recent -8- Preliminary Prospectus). (x) The business, operations and facilities of the Company and the Subsidiary have been, are being and will be conducted in compliance with all applicable laws, ordinances, rules, regulations, licenses, permits, approvals, plans, authorizations or requirements relating to occupational safety and health, or pollution, or protection of health or the environment (including, without limitation, those relating to emissions, discharges, releases or threatened releases of pollutants, contaminants or hazardous or toxic substances, materials or wastes into ambient air, surface water, groundwater or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of chemical substances, pollutants, contaminants or hazardous or toxic substances, materials or wastes, whether solid, gaseous or liquid in nature) of any governmental department, commission, board, bureau, agency or instrumentality of the United States, any state or political subdivision thereof, or any foreign jurisdiction, and all applicable judicial or administrative agency or regulatory decrees, awards, judgments and orders relating thereto; and neither the Company nor the Subsidiary has received any notice from any governmental instrumentality or any third party alleging any violation thereof or liability thereunder (including, without limitation, liability for costs of investigating or remediating sites containing hazardous substances and/or damages to natural resources). (y) Each of the Company and the Subsidiary own or possess, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, know how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names necessary to carry on their businesses as presently conducted by them, and has filed all necessary federal, state and local and other material tax returns that are required to be filed or has requested extensions thereof and has paid all taxes required to be paid by it and any other assessment, fine or penalty levied against it, to the extent that any of the foregoing is due and payable. (z) Each of the Company and the Subsidiary is insured by insurers of recognized financial responsibility against such losses and risks as are prudent and customary in the business in which the Company or the Subsidiary is engaged; neither the Company nor the Subsidiary has been refused any insurance coverage sought or applied for; and the Company has no reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires. (aa) Each certificate signed by any officer of the Company and delivered to the Representative or counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters covered thereby. (bb) The Company has prepared and filed with the Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") an appropriate registration statement form to register the Common Stock under the Exchange Act effective upon the effectiveness of the Registration Statement. 4. Public Offering of the Shares. It is understood that the Underwriters will make a public offering of the Shares and at the price and upon the other terms set forth in the Prospectus and subject to the terms and conditions hereunder. 5. Agreements of the Company. The Company covenants and agrees with each of the Underwriters as follows: (a) The Company will use its best efforts to cause the Registration Statement, -9- if not effective at the time of execution of this Agreement, and any amendments thereto, to become effective as promptly as practicable. If required, the Company will file the Prospectus and any amendment or supplement thereto with the Commission in the manner and within the time period required by Rule 424(b) under the Act. During any time when a prospectus relating to the Shares is required to be delivered under the Act, the Company (A) will comply with all requirements imposed upon it by the Act and the Rules and Regulations to the extent necessary to permit the continuance of sales of or dealings in the Shares in accordance with the provisions hereof and of the Prospectus, as then amended or supplemented, and (B) will not file with the Commission the prospectus, any amendment or supplement to such prospectus or any amendment to the Registration Statement of which the Representative shall not previously have been advised and furnished with a copy a reasonable period of time prior to the proposed filing and as to which filing the Representative shall not have given its consent, such consent to not be unreasonably withheld. (b) As soon as the Company is advised or obtains knowledge thereof, the Company will advise the Representative (A) when the Registration Statement, as amended, has become effective; if the provisions of Rule 430A promulgated under the Act will be relied upon, when the Prospectus has been filed in accordance with said Rule 430A and when any post-effective amendment to the Registration Statement becomes effective; (B) of any request made by the Commission for amending the Registration Statement, for supplementing any Preliminary Prospectus or the Prospectus or for additional information, or (C) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto or any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto or the institution or threat of any investigation or proceeding for that purpose, and will use its best efforts to prevent the issuance of any such order and, if issued, to obtain the lifting thereof as soon as possible. (c) The Company will (A) take or cause to be taken all such actions and furnish all such information as the Representative may reasonably require in order to qualify the Shares for offer and sale under the state securities or Blue Sky laws of such jurisdictions as the Representative may designate, (B) continue such qualifications in effect for as long as may be necessary to complete the distribution of the Shares but not to exceed one year from the date of this Agreement, and (C) make such applications, file such documents and furnish such information as may be required for the purposes set forth in clauses (A) and (B); provided, however, that the Company shall not be required to qualify as a foreign corporation or file a general or unlimited consent to service of process in any such jurisdiction. (d) The Company consents to the use of the Prospectus (and any amendment or supplement thereto) by the Underwriters and all dealers to whom the Shares may be sold, in connection with the offering or sale of the Shares and for such period of time thereafter as the Prospectus is required by law or the Rules and Regulations to be delivered in connection therewith. If, at any time when a prospectus relating to the Shares is required to be delivered under the Act or the Rules and Regulations, any event occurs as a result of which the Prospectus, as then amended or supplemented, would include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading, or if it becomes necessary at any time to amend or supplement the Prospectus to comply with the Act or the Rules and Regulations, the Company promptly will so notify the Representative and, subject to Section 5(i) hereof, will prepare and file with the Commission an amendment to the Registration Statement or an amendment or supplement to the Prospectus which will correct such statement or omission or effect such compliance. -10- (e) As soon as practicable, but in any event not later than 45 days after the end of the 12-month period beginning on the day after the end of the fiscal quarter of the Company during which the effective date of the Registration Statement occurs (90 days in the event that the end of such fiscal quarter is the end of the Company's fiscal year), the Company will make generally available to its security holders, in the manner specified in Rule 158(b) of the Rules and Regulations, and to the Representative, an earnings statement which will be in the detail required by, and will otherwise comply with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Rules and Regulations, which statement need not be audited unless required by the Act or the Rules and Regulations, covering a period of at least 12 consecutive months after the effective date of the Registration Statement. (f) The Company will timely file all such reports, forms or other documents as may be required from time to time under the Act (including a report on Form SR, if required), the Rules and Regulations, the Exchange Act, and the rules and regulations thereunder, and all such reports, forms and documents filed will comply in all material respects as to form and substance with the applicable requirements under the Act, the Rules and Regulations, the Exchange Act and the rules and regulations thereunder. (g) During a period of five years after the date hereof, the Company will furnish to its shareholders, as soon as practicable, annual reports (including financial statements audited by independent public accountants) and unaudited quarterly reports of earnings, and will deliver to the Representative: (i) concurrently with furnishing such quarterly reports to its shareholders, statements of income of the Company for each quarter in the form furnished to the Company's shareholders and certified by the Company's principal financial or accounting officer; (ii) concurrently with furnishing such annual reports to its shareholders, a balance sheet of the Company as at the end of the preceding fiscal year, together with statements of operations, shareholders' equity, and cash flows of the Company for such fiscal year, accompanied by a copy of the report thereon of independent public accountants; (iii) as soon as they are available, copies of all information (financial or other) mailed to shareholders; (iv) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, the NASD or any securities exchange; (v) every press release and every material news item or article of interest to the financial community in respect of the Company or its affairs which was released or prepared by the Company; and (vi) any additional information of a public nature concerning the Company or its business which the Representative may reasonably request. During such five-year period, if the Company has active subsidiaries, the foregoing financial statements will be on a consolidated basis to the extent that the accounts of the Company and its subsidiaries are consolidated, and will be accompanied by similar financial statements for any significant subsidiary which is not so -11- consolidated. (h) The Company will maintain a Transfer Agent and, if necessary under the jurisdiction of incorporation of the Company, a Registrar (which may be the same entity as the Transfer Agent) for its Common Stock. (i) The Company will furnish, without charge, to the Representative or on the Representative's order, at such place as the Representative may designate, copies of each Preliminary Prospectus, the Registration Statement and any pre-effective or post-effective amendments thereto (two of which copies will be signed and will include all financial statements and exhibits) and the Prospectus, and all amendments and supplements thereto, in each case as soon as available and in such quantities as the Representative may reasonably request. (j) The Company will not, directly or indirectly, without the prior written consent of the Representative, offer, sell, grant any option to purchase or otherwise dispose (or announce any offer, sale, grant of any option to purchase or other disposition) of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock for a period of 180 days after the date hereof, except pursuant to this Agreement and except pursuant to employee benefit plans discussed in the Prospectus. (k) Neither the Company nor any of its officers or directors, nor affiliates of any of them (within the meaning of the Rules and Regulations) will take, directly or indirectly, any action designed to, or which might in the future reasonably be expected to cause or result in, stabilization or manipulation of the price of any securities of the Company. (l) The Company will apply the net proceeds of the offering received by it in the manner set forth under the caption "Use of Proceeds" in the Prospectus. 6. Expenses. (a) Whether or not the transactions contemplated in this Agreement are consummated, or for any reason this Agreement is terminated, the Company will pay, or reimburse if paid by the Representative, all fees and expenses incident to the performance of the obligations of the Company under this Agreement, including, but not limited to, (i) the preparation, printing and filing of the Registration Statement and exhibits thereto, each Preliminary Prospectus, the Prospectus and any amendment or supplement to the Registration Statement or the Prospectus, (ii) the preparation and delivery of certificates representing the Shares, (iii) the reproduction and distribution of this Agreement, the Warrant Agreement, the Agreement among Underwriters, any Dealer Agreements and any Underwriters' Questionnaire, (iv) furnishing (including costs of shipping and mailing) such copies of the Registration Statement, the Prospectus and any Preliminary Prospectus, and all amendments and supplements thereto, as may be requested for use in connection with the offering and sale of the Shares by the Underwriters or by dealers to whom Shares may be sold, (v) the quotation of the Shares on the Nasdaq Small Cap Market, (vi) any filings required to be made by the Underwriters with the NASD, (vii) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions designated pursuant to Section 5(g), including the reasonable fees, disbursements and other charges of counsel to the Underwriters in connection therewith, and the preparation and printing of preliminary, supplemental and final Blue Sky memoranda, (viii) counsel and accountants to the Company and (ix) the transfer agent for the Shares. (b) Whether or not the transactions contemplated by this Agreement are -12- consummated or if this Agreement shall be terminated by the Company pursuant to any of the provisions hereof, the Company will reimburse the Representative for all of its accountable out-of-pocket fees and expenses (including the fees, disbursements and other charges of its counsel) incurred by it in connection herewith, up to an aggregate amount of $125,000, which amount excludes the expenses to be paid by the Company relating to sub-sections (vi) and (vii) of paragraph (a) above. 7. Conditions of the Underwriters' Obligations. The obligation of each Underwriter to purchase and pay for the Shares set forth opposite the name of such Underwriter in Schedule I is subject to the continuing accuracy of the representations and warranties of the Company herein as of the date hereof and as of the Closing Date as if they had been made on and as of the Closing Date; the accuracy on and as of the Closing Date of the statements of officers of the Company made pursuant to the provisions hereof; the performance by the Company on and as of the Closing Date of its covenants and agreements hereunder; and the following additional conditions: (a) If the Company has elected to rely on Rule 430A under the Act, the Registration Statement shall have been declared effective, and the Prospectus (containing the information omitted pursuant to Rule 430A) shall have been filed with the Commission not later than the Commission's close of business on the second business day following the date hereof or such later time and date to which the Representative shall have consented; if the Company does not elect to rely on Rule 430A, the Registration Statement shall have been declared effective not later than 9:00 A.M., New York time, on the date hereof or such later time and date to which the Representative shall have consented; if required, in the case of any changes in or amendments or supplements to the Prospectus in addition to those contemplated above, the Company shall have filed such Prospectus as amended or supplemented with the Commission in the manner and within the time period required by Rule 424(b) under the Act; no stop order suspending the effectiveness of the Registration Statement or any amendment thereto shall have been issued, and no proceedings for that purpose shall have been instituted or threatened or, to the knowledge of the Company or the Representative, shall be contemplated by the Commission; and the Company shall have complied with any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise). (b) The Company shall not have advised the Representative that the Registration Statement, or any amendment thereto, contains an untrue statement of fact which, in the Representative's opinion, is material, or omits to state a fact which, in the Representative's opinion, is material and is required to be stated therein or is necessary to make the statements therein not misleading, or that the Prospectus, or any supplement thereto, contains an untrue statement of fact which, in the Representative's opinion, is material, or omits to state a fact which, in the Representative's opinion, is material and is required to be stated therein or is necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (c) On or prior to the Closing Date, the Representative shall have received from counsel to the Underwriters, such opinion or opinions with respect to the issuance and sale of the Firm Shares, the Registration Statement and the Prospectus and such other related matters as the Representative reasonably may request and such counsel shall have received such documents and other information as they reasonably request to enable them to pass upon such matters. (d) On the Closing Date the Underwriters shall have received the opinion, -13- dated the Closing Date, of Andrews & Kurth L.L.P., counsel to the Company ("Company Counsel"), to the effect set forth below: (i) Each of the Company and the Subsidiary is a duly incorporated and validly existing corporation in good standing under the laws of its jurisdiction of incorporation with the corporate power and authority to own or lease its properties and to conduct its business as described in the Prospectus. Each of the Company and the Subsidiary is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the ownership or leasing of property or conduct of its business requires such qualification (except for those jurisdictions in which the failure so to qualify can be cured without having a Material Adverse Effect); (ii) The Company has authorized capital stock as set forth in the Prospectus; the securities of the Company conform in all material respects to the description thereof contained in the Prospectus; the outstanding shares of Common Stock have been duly authorized and validly issued by the Company, are fully paid and non-assessable, and are free of any preemptive or, to the knowledge of such counsel, other rights to subscribe for any of the Shares; the Company has duly authorized the issuance and sale of the Shares to be sold by it hereunder; the Shares, when issued by the Company and paid for in accordance with the terms hereof, will be validly issued, fully paid and non-assessable and will conform in all material respects to the description thereof contained in the Prospectus and will not be subject to any preemptive or, to the knowledge of such counsel, subscription or other similar rights; and the Shares have been duly authorized for quotation, subject only to notice of issuance, on the Nasdaq Small Cap Market; (iii) The Registration Statement is effective under the Act; any required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and, to the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement or any amendment thereto has been issued, and no proceedings for that purpose have been instituted or are pending or, to the knowledge of such counsel, are threatened or contemplated under the Act; the Registration Statement, as of the effective date, and the Prospectus, as of the date thereof, and, if any, each amendment and supplement thereto (except for the financial and statements, schedules and other financial and statistical data included therein, as to which such counsel need not express any opinion), complied as to form in all material respects with the requirements of the Act and the Rules and Regulations; the descriptions contained in the Registration Statement and the Prospectus of contracts and other documents are accurate and fairly represent in all material respects the information required to be shown by the Act and the Rules and Regulations; to the knowledge of such counsel, there are no contracts or documents which are required by the Act to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement which are not described or filed as required by the Act and the Rules and Regulations; to the knowledge of such counsel, there is not pending or threatened against the Company any action, suit, proceeding or investigation before or by any court, regulatory body, or administrative agency or any other governmental agency or body, domestic or foreign, of a character required to be disclosed in the Registration Statement or the Prospectus which is not so disclosed therein; the statements set forth in the Prospectus under the captions "Risk Factors," "Business and Properties," "Description of Company's Securities," "Management," and "Principal Stockholders," insofar as such statements constitute matters of law or legal conclusions, have been reviewed by such counsel and are accurate in all material respects; -14- (iv) The Company has full corporate right, power, and authority to enter into this Agreement and the Warrant Agreement and to consummate the transactions provided for herein and therein; this Agreement has been duly authorized, executed and delivered by the Company; and this Agreement, assuming due authorization, execution and delivery by each other party hereto, is a valid and binding agreement of the Company, enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws now or hereafter in effect relating to or affecting creditors' rights generally or by general principles of equity relating to the availability of remedies and except as rights to indemnity and contribution may be limited by federal or state securities laws or the public policy underlying such laws. None of the Company's execution, delivery or performance of this Agreement, its consummation of the transactions contemplated herein and therein, conflicts or will conflict with or results or will result in any breach or violation of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon, any property or assets of the Company or the Subsidiary pursuant to the terms of the charter or by-laws of the Company or the Subsidiary; the terms of any indenture, mortgage, deed of trust, voting trust agreement, stockholder's agreement, note agreement or other agreement or instrument filed as an exhibit to the Registration Statement to which the Company or the Subsidiary is a party or by which the Company or the Subsidiary is or may be bound or to which any of its properties may be subject; any statute, rule or regulation of any regulatory body or administrative agency or other governmental agency or body, domestic or foreign, having jurisdiction over the Company or the Subsidiary, any of their respective activities or properties; or any judgment, decree or order, known to such counsel after reasonable investigation, of any Governmental Body; and no consent, approval, authorization or order of any Governmental Body, has been or is required for the Company's performance of this Agreement or the consummation of the transactions contemplated hereby, except under the Act or as may be required under state securities or Blue Sky laws; (v) To such counsel's knowledge, except as described in the Prospectus, no claims have been asserted against the Company or the Subsidiary by any person to the use of any rights or challenging or questioning the validity or effectiveness of any such rights. The use, in connection with the business and operations of the Company and the Subsidiary of such rights does not, to the best of such counsel's knowledge, infringe on the rights of any person; (vi) The Company is not required to be registered under the Investment Company Act; (vii) The outstanding shares of capital stock of the Subsidiary are duly authorized, validly issued and fully paid; such shares are owned by the Company free and clear of any perfected security interest. No Subsidiary of the Company is currently prohibited, directly or indirectly, by its charter documents or, to such counsel's knowledge, any contract or agreement to which such Subsidiary is a party from paying any dividends to the Company, from making any other distribution on such Subsidiary's capital stock, from repaying to the Company or from transferring any of such Subsidiary's property or assets to the Company or any other Subsidiary of the Company, except as described or contemplated by the Prospectus. In addition, such counsel shall state that in the course of the preparation of the Registration Statement and the Prospectus, such counsel has participated in conferences with officers and representatives of the Company, with the Representative and its counsel and with the Company's independent public accountants, at which conferences the contents of the Registration -15- Statement and the Prospectus and related matters were discussed and (without taking any further action to verify independently the statements made in the Registration Statement and the Prospectus and, except as stated in the foregoing opinion, without assuming responsibility for the accuracy, completeness or fairness of such statements) nothing has come to such counsel's attention that causes such counsel to believe that either the Registration Statement as of the date it is declared effective and as of the Closing Date and any Option Closing Date or the Prospectus as of the date thereof and as of the Closing Date and any Option Closing Date contained or contains any untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading (it being understood that such counsel need not express any opinion with respect to the financial statements, schedules and other financial or statistical data included in the Registration Statement or the Prospectus). In rendering any such opinion, such counsel may rely, as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Company and public officials. References to the Registration Statement and the Prospectus in this paragraph (d) shall include any amendment or supplement thereto at the date of such opinion. (e) On or prior to the Closing Date, counsel to the Underwriters shall have been furnished such documents, certificates and opinions as they may reasonably require in order to evidence the accuracy, completeness or satisfaction of any of the representations or warranties of the Company, or conditions herein contained. (f) At the time that this Agreement is executed by the Company, the Underwriters shall have received from Arthur Andersen LLP a letter as of the date of this Agreement in form and substance satisfactory to you (the "Original Letter"), and on the Closing Date the Underwriters shall have received from such firm a letter dated the Closing Date stating that, as of a specified date not earlier than three (3) days prior to the Closing Date, nothing has come to the attention of such firm to suggest that the statements made in the Original Letter are not true and correct. (g) On the Closing Date, the Underwriters shall have received a certificate, dated the Closing Date, on behalf of the Company the principal executive officer and the principal financial or accounting officer of the Company to the effect that each of such persons has carefully examined the Registration Statement and the Prospectus and any amendments or supplements thereto and this Agreement, and that: (i) The representations and warranties of the Company in this Agreement are true and correct, as if made on and as of the Closing Date, and the Company has complied with all agreements and covenants and satisfied all conditions contained in this Agreement on its part to be performed or satisfied at or prior to the Closing Date; (ii) No stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for that purpose have been instituted or are pending or, to the knowledge of each of such persons are contemplated or threatened under the Act and any and all filings required by Rule 424 and Rule 430A have been timely made; (iii) The Registration Statement and Prospectus and, if any, each amendment and each supplement thereto, contain all statements and information required -16- to be included therein, and neither the Registration Statement nor any amendment thereto includes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading and neither the Prospectus (or any supplement thereto) nor any Preliminary Prospectus includes or included any untrue statement of a material fact or omits or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and (iv) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus up to and including the Closing Date, neither the Company nor the Subsidiary has incurred, other than in the ordinary course of its business, any material liabilities or obligations, direct or contingent; neither the Company nor the Subsidiary has purchased any of its outstanding capital stock or paid or declared any dividends or other distributions on its capital stock; the Company nor the Subsidiary has entered into any transactions not in the ordinary course of business; and there has not been any change in the capital stock or, consolidated long-term debt or, any increase in the short-term borrowings (other than any increase in short-term borrowings in the ordinary course of business) of the Company or any material adverse change to the business, properties, assets, net worth, condition (financial or other), results of operations or prospects of the Company and the Subsidiary, taken as a whole; neither the Company nor the Subsidiary has sustained any material loss or damage to its property or assets, whether or not insured; there is no litigation which is pending or threatened against the Company or the Subsidiary which is required under the Act or the Rules and Regulations to be set forth in an amended or supplemented Prospectus which has not been set forth; and there has not occurred any event required to be set forth in an amended or supplemented Prospectus which has not been set forth. References to the Registration Statement and the Prospectus in this paragraph (g) are to such documents as amended and supplemented at the date of the certificate. (h) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus up to and including the Closing Date there has not been (i) any adverse change or decrease specified in the letter or letters referred to in paragraph (f) of this Section 7 or (ii) any adverse change, or any development involving a prospective adverse change, in the business or properties of the Company or the Subsidiary, which change or decrease in the case of clause (i) or change or development in the case of clause (ii) makes it impractical or inadvisable in the Representative's judgment to proceed with the public offering or the delivery of the Shares as contemplated by the Prospectus. (i) No order suspending the sale of the Shares in any jurisdiction designated by you pursuant to Section 5(iii)(A) hereof has been issued on or prior to the Closing Date and no proceedings for that purpose have been instituted or, to your knowledge or that of the Company, have been or are contemplated. (j) The Company shall have delivered to the Representative written agreements in the form set forth in Exhibit A hereto with each officer and director of the Company, each beneficial owner of the outstanding shares of Common Stock and each beneficial owner of options to purchase shares of Common Stock listed on Exhibit B hereto to the effect that they will not, for a period of 180 days after the commencement of the public offering of the Shares, without the prior written consent of the Representative, directly or indirectly, offer to sell, sell, contract to sell, grant or transfer any -17- option to purchase or otherwise dispose (or announce any offer, sale, grant of any option to purchase or other disposition) of any shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock (other than pursuant to employee stock or nonemployee director option plans). It is acknowledged that the restriction contained in this Section 7(j) shall not be applicable to the Firm Shares or the Option Shares being sold by the Company to the Underwriters pursuant to this Agreement. (k) The Company shall have furnished the Underwriters with such further opinions, letters, certificates or documents as you or counsel for the Underwriters may reasonably request. All opinions, certificates, letters and documents to be furnished by the Company will comply with the provisions hereof only if they are reasonably satisfactory in all material respects to the Underwriters and to counsel for the Underwriters. The Company shall furnish the Underwriters with conformed copies of such opinions, certificates, letters and documents in such quantities as you reasonably request. The certificates delivered under this Section 7 shall constitute representations, warranties and agreements of the Company as to all matters set forth therein as fully and effectively as if such matters had been set forth in Section 2 of this Agreement. (l) The Shares shall have been authorized for quotation, subject only to official notice of issuance, on the Nasdaq Small Cap Market. 8. Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any and all losses, claims, damages or liabilities, joint or several (and actions in respect thereof), to which such Underwriter or such controlling person may become subject, under the Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or the Prospectus or any Preliminary Prospectus, or any amendment or supplement thereto, or any blue sky application or other document executed by the Company specifically for the purpose of qualifying, or based upon written information furnished by the Company filed in any state or other jurisdiction in order to qualify, any or all of the Shares under the securities or Blue Sky laws thereof (any such application, document or information being hereinafter called a "Blue Sky Application"), or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements not misleading and will reimburse, as incurred, such Underwriter or such controlling persons for any legal or other expenses incurred by such Underwriter or such controlling persons in connection with investigating, defending or appearing as a third party witness in connection with any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in any of such documents in reliance upon and in conformity with information relating to any Underwriter furnished in writing to the Company by the Representative on behalf of any Underwriter expressly for inclusion therein, and provided, further, that such indemnity with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) from whom the person asserting any such loss, claim, damage, liability or action purchased Shares which are the subject thereof to the extent that any such loss, claim, damage, liability or action (i) results from the fact that such Underwriter failed to send or give a copy of the Prospectus (as amended or supplemented) to such person at or prior to the -18- confirmation of the sale of such Shares to such person in any case where such delivery is required by the Act and (ii) arises out of or is based upon an untrue statement or omission of a material fact contained in such Preliminary Prospectus that was corrected in the Prospectus (as amended and supplemented), unless such failure resulted from non-compliance by the Company with Section 5(viii) hereof. The indemnity agreement in this paragraph (a) shall be in addition to any liability which the Company may have at common law or otherwise. (b) Each of the Underwriters agrees severally, but not jointly, to indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act against any and all losses, claims, damages or liabilities (and actions in respect thereof) to which the Company or any such director, officer, or controlling person may become subject, under the Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or the Prospectus or any Preliminary Prospectus, or any amendment or supplement thereto or in any Blue Sky Application, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with information furnished in writing by that Underwriter through the Representative to the Company expressly for use therein; and will reimburse, as incurred, all legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person in connection with investigating or defending any such loss, claim, damage, liability or action. The Company acknowledges that the statements with respect to the public offering of the Shares set forth under the heading "Underwriting" and the stabilization legend in the Prospectus have been furnished by the Underwriters to the Company expressly for use therein and constitute the only information furnished in writing by or on behalf of the Underwriters for inclusion in the Prospectus. The indemnity agreement contained in this paragraph (b) shall be in addition to any liability which the Underwriters may have at common law or otherwise. (c) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against one or more indemnifying parties under this Section 8, notify such indemnifying party or parties of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party otherwise than under paragraph (a) or (b) of this Section 8 or to the extent that the indemnifying party was not adversely affected by such omission. In case any such action is brought against an indemnified party and it notifies an indemnifying party or parties of the commencement thereof, the indemnifying party or parties against which a claim is to be made will be entitled to participate therein and, to the extent that it or they may wish, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party has reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and otherwise to participate in the defense of such action on behalf of such indemnified party or parties, in which case the indemnifying -19- party shall only be responsible for the fees and expenses of one counsel (in addition to local counsel) for all similarly situated indemnified parties. Upon receipt of notice from the indemnifying party to such indemnified party of its election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses (other than the reasonable costs of investigation) subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party has employed such counsel in connection with the assumption of such different or additional legal defenses in accordance with the proviso to the immediately preceding sentence, (ii) the indemnifying party has not employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, or (iii) the indemnifying party has authorized in writing the employment of counsel for the indemnified party at the expense of the indemnifying party. (d) If the indemnification provided for in this Section 8 is unavailable to hold harmless an indemnified party under paragraph (a) or (b) above in respect of any losses, claims, damages, expenses or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) (i) in such proportion as is appropriate to reflect the relative benefits received by each of the contributing parties, on the one hand, and the party to be indemnified, on the other hand, from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each of the contributing parties, on the one hand, and the party to be indemnified, on the other hand, in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. In any case where the Company is a contributing party and the Underwriters are the indemnified party, the relative benefits received by the Company, on the one hand, and the Underwriters, on the other, shall be deemed to be in the same proportion as the total net proceeds from the offering of the Shares (before deducting expenses) bear to the total underwriting discounts received by the Underwriters hereunder, in each case as set forth in the table on the cover page of the Prospectus. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Underwriters, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this paragraph (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this paragraph (d), the Underwriters shall not be required to contribute any amount in excess of the underwriting discount applicable to the Shares purchased by the Underwriters hereunder. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this paragraph (d), (i) each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act shall have the same rights to contribution as such Underwriter and (ii) each director of the Company, each officer of the Company who has signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, shall have the same rights to contribution as the Company, subject in each case to this paragraph (d). Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect to which a claim for contribution may be -20- made against another party or parties under this paragraph (d), notify such party or parties from whom contribution may be sought, but the omission so to notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any other obligation (x) it or they may have hereunder or otherwise than under this paragraph (d) or (y) to the extent that such party or parties were not adversely affected by such omission. The contribution agreement set forth above shall be in addition to any liabilities which any indemnifying party may have at common law or otherwise. 9. Right to Increase Offering. At anytime during a period of 30 days from the date of the Prospectus, the Underwriters, by no less than two business days' prior notice to the Company, may designate a closing (which may be concurrent with, and part of, the closing on the Closing Date with respect to the Firm Shares or may be a second closing held on a date subsequent to the Closing Date, in either case such date shall be referred to herein as the "Option Closing Date") at which the Underwriters may purchase all or less than all of the Option Shares in accordance with the provisions of this Section 9 at the purchase price per share to be paid for the Firm Shares. In no event shall the Option Closing Date be later than 10 business days after written notice of election to purchase Option Shares is given. The Company agrees to sell to the several Underwriters on the Option Closing Date the number of Option Shares specified in such notice and the Underwriters agree, severally and not jointly, to purchase such Option Shares on the Option Closing Date. Such Option Shares shall be purchased for the account of each Underwriter in the same proportion as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I bears to the total number of Firm Shares (subject to adjustment by you to eliminate fractions) and may be purchased by the Underwriters only for the purpose of covering over- allotments made in connection with the sale of the Firm Shares. No Option Shares shall be sold or delivered unless the Firm Shares previously have been, or simultaneously are, sold and delivered. The right to purchase the Option Shares or any portion thereof may be surrendered and terminated at any time upon notice by you to the Company. Except to the extent modified by this Section 9, all provisions of this Agreement relating to the transactions contemplated to occur on the Closing Date for the sale of the Firm Shares shall apply, mutatis mutandis, to the Option Closing Date for the sale of the Option Shares. 10. Effective Date and Termination. (a) This Agreement shall become effective at 9:00 A.M., New York time, on the date hereof, or at such later time after the Registration Statement becomes effective as the Representative, in its sole discretion, shall release the Shares for the sale to the public unless prior to such time the Representative shall have received written notice from the Company that it elects that this Agreement shall not become effective, or the Representative shall have given written notice to the Company that the Representative on behalf of the Underwriters elects that this Agreement shall not become effective; provided, however, that the provisions of this Section and of Section 6 and Section 8 hereof shall at all times be effective; provided, further, that this Agreement shall terminate if the Registration Statement is not declared effective. For purposes of this Section 11(a), the Shares to be purchased hereunder shall be deemed to have been so released upon the earlier of notification by the Representative to securities dealers releasing such -21- Shares for offering or the release by the Representative for publication of the first newspaper advertisement which is subsequently published relating to the Shares. (b) This Agreement (except for the provisions of Sections 6 and 8 hereof) may be terminated by the Representative by notice to the Company in the event that the Company has failed to comply in any respect with any of the provisions of this Agreement required on its part to be performed at or prior to the Closing Date or the Option Closing Date, or if any of the representations or warranties of the Company are not accurate in any respect or if the covenants, agreements or conditions of, or applicable to the Company herein contained have not been complied with in any respect or satisfied within the time specified on the Closing Date or the Option Closing Date, respectively, or if prior to the Closing Date or the Option Closing Date: (i) the Company shall have sustained a loss by strike, fire, flood, accident or other calamity of such a character as to interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss was insured; (ii) trading in securities generally on the New York Stock Exchange, the Nasdaq Stock Market's National Market or the Nasdaq Small Cap Market shall have been suspended or limited or minimum or maximum prices shall have been generally established on any of such exchanges or markets, or additional material governmental restrictions, not in force on the date of this Agreement, shall have been imposed upon trading in securities generally by any of such exchanges or markets or by order of the Commission or any court or other governmental authority; (iii) a banking moratorium shall have been declared by New York, California or United States authorities; (iv) there shall have been an outbreak or escalation of hostilities between the United States and any foreign power or an outbreak or escalation of any other insurrection or armed conflict involving the United States; or (v) there shall have been a material adverse change in (A) general economic, political or financial conditions or (B) the present or prospective business or condition (financial or other) of the Company and the Subsidiary, taken as a whole that, in each case, in the Representative's judgment makes it impracticable or inadvisable to make or consummate the public offering, sale or delivery of the Company's Shares on the terms and in the manner contemplated in the Prospectus and the Registration Statement. (c) Termination of this Agreement under this Section 10 or Section 11 after the Firm Shares have been purchased by the Underwriters hereunder shall be applicable only to the Option Shares. Termination of this Agreement shall be without liability of any party to any other party other than as provided in Sections 6 and 8 hereof. 11. Default of Underwriters. If one or more Underwriters default in their obligations to purchase Firm Shares or Option Shares hereunder and the aggregate number of such Shares that such defaulting Underwriter or Underwriters agreed but failed to purchase is ten percent or less of the aggregate number of Firm Shares or Option Shares to be purchased by all of the Underwriters at such time hereunder, the other Underwriters may make arrangements satisfactory to the Representatives for the purchase of such Shares by other persons (who may include one or more of the non-defaulting Underwriters, including the Representatives), but if no such arrangements are made by the Firm Closing Date or the related Option Closing Date, as the case -22- may be, the other Underwriters shall be obligated severally in proportion to their respective commitments hereunder to purchase the Firm Shares or Option Shares that such defaulting Underwriter or Underwriters agreed but failed to purchase. If one or more Underwriters so default with respect to an aggregate number of Shares that is more than ten percent of the aggregate number of Firm Shares or Option Shares, as the case may be, to be purchased by all of the Underwriters at such time hereunder, and if arrangements satisfactory to the Representatives are not made within 36 hours after such default for the purchase by other persons (who may include one or more of the non-defaulting Underwriters, including the Representatives) of the Shares with respect to which such default occurs, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company other than as provided in Section 11 hereof. In the event of any default by one or more Underwriters as described in this Section 11, the Representatives shall have the right to postpone the Firm Closing Date or the Option Closing Date, as the case may be, established as provided in Section 1 hereof for not more than seven business days in order that any necessary changes may be made in the arrangements or documents for the purchase and delivery of the Firm Shares or Option Shares, as the case may be. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section 11. Nothing herein shall relieve any defaulting Underwriter from liability for its default. 12. Survival. The respective representations, warranties, agreements, covenants, indemnities and other statements of the Company, its officers and the several Underwriters set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement shall remain in full force and effect, regardless of (i) any investigation made by or on behalf of the Company, any of its officers or directors, any Underwriter or any controlling person referred to in Section 8 hereof and (ii) delivery of and payment for the Shares. The respective agreements, covenants, indemnities and other statements set forth in Sections 6 and 8 hereof shall remain in full force and effect, regardless of any termination or cancellation of this Agreement. 13. Notices. Notice shall be given pursuant to any of the provisions of this Agreement shall be in writing and, unless otherwise specified, shall be mailed or delivered or telegraphed and confirmed by letter or telecopied and confirmed by letter (a) if to the Underwriters, to the Representative at the office of Brean Murray & Co., Inc., 570 Lexington Avenue, New York, New York 10022-6822, Attention: A. Brean Murray or, if sent to the Company, shall be mailed or delivered or telegraphed and confirmed to the Company at the office of the Company, 1710 Two Allen Center, 1200 Smith Street, Houston, Texas 77002- 4312, Attention: Sam B. Myers, Jr. 14. Successors. This Agreement shall inure to the benefit of and be binding upon the Company and each Underwriter and the Company's and each Underwriter's respective successors and legal representatives, and nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person, except that the representations, warranties, indemnities and contribution agreements of the Company contained in this Agreement shall also be for the benefit of any person or persons, if any, who control any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and except that the Underwriters' indemnity and contribution agreements shall also be for the benefit of the directors of the Company, the officers of the Company who have signed the Registration Statement, and any person or persons, if any, who control the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act. No purchaser of Shares from the -23- Underwriters will be deemed a successor because of such purchase. This Agreement shall not be assignable by either party hereto without the prior written consent of the other party. -24- 15. APPLICABLE LAW. THE VALIDITY AND INTERPRETATION OF THIS AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS. 16. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. Please confirm that the foregoing correctly sets forth the agreement among the Company and the several Underwriters. Very truly yours, ZYDECO ENERGY, INC. By: ------------------------ Name: Title: Confirmed as of the date first above mentioned: BREAN MURRAY & CO., INC. By: Brean Murray & Co., Inc. Acting on its own behalf and as the Representative of the several Underwriters referred to in the foregoing Agreement By: ______________________________ Name: Title: -25- SCHEDULE I UNDERWRITERS Underwriting Agreement dated ________, 1997 Number of Firm Shares to be Name Purchased - ---- ---------- Brean Murray & Co., Inc............................... Total................................................. 2,000,000 ========== -26- EXHIBIT A Brean Murray & Co., Inc. 570 Lexington Avenue New York, New York 10022 Ladies and Gentlemen: Reference is made to an Underwriting Agreement (the "Underwriting Agreement"), which will be executed between Zydeco Energy, Inc., a Delaware corporation (the "Company"), and Brean Murray & Co., Inc. In consideration of the Underwriting Agreement, the undersigned hereby agrees not to, without the prior written consent of Brean Murray & Co., Inc., offer, sell or otherwise dispose of any shares of the Company's Common Stock, par value $.001 per share (the "Common Stock"), or any securities convertible into or exercisable or exchangeable for, or any rights to purchase or acquire, Common Stock owned by the undersigned for a period of 180 days after the date of the Underwriting Agreement. Dated:____________________, 1997 Very truly yours, ---------------------------- Signature --------------------------- Print Name -27- EXHIBIT B -28- EX-23.1 3 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report and to all other references to our Firm included in or made a part of this registration statement. ARTHUR ANDERSEN LLP Houston, Texas May 21, 1997 EX-23.2 4 CONSENT OF RYDER SCOTT COMPANY EXHIBIT 23.2 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS We hereby consent to the incorporation by reference in this Form S-1 of Zydeco Energy, Inc. to the reference to our firm in the current report of Form 10-K for the year ended December 31, 1996, for Zydeco Energy, Inc. under the headings "Oil and Gas Reserves" and "Supplemental Information on Oil and Gas Producing Activities". /s/ Ryder Scott Company Petroleum Engineers RYDER SCOTT COMPANY PETROLEUM ENGINEERS Houston, Texas May 22, 1997 -----END PRIVACY-ENHANCED MESSAGE-----