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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1998
Commission File No. 0-9092
CHENIERE ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4352386
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 SMITH STREET, SUITE 1740
HOUSTON, TEXAS 77002-4312
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (713) 659-1361
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $ 0.003 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's common stock held by non-
affiliates of the registrant was approximately $16,262,562 as of March 26, 1999
(based upon the March 26, 1999 closing sales price of such common stock as
reported by the Nasdaq SmallCap Market). 21,786,277 shares of the registrant's
Common Stock were outstanding as of March 26, 1999.
Documents incorporated by reference: Proxy Statement for the registrant's
Annual Meeting of Stockholders to be held June 4, 1999 (to be filed within 120
days of the close of the registrant's fiscal year) is incorporated by reference
into Part III. Certain disclosures included in Current Report on Form 8-K filed
May 22, 1998 are incorporated by reference into Item 9.
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CHENIERE ENERGY, INC.
Index to Form 10-K
PART I
Items 1 and 2. Business and Properties.......................................................... 3
Item 3. Legal Proceedings....................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders..................................... 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................... 13
Item 6. Selected Financial Data................................................................. 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations... 14
Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................. 17
Item 8. Financial Statements and Supplementary Data............................................. 18
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.... 34
PART III
Items 10-13. (Incorporated by reference to Proxy Statement)..................................... 34
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 35
SIGNATURES...................................................................................... 38
2
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
GENERAL
Cheniere Energy, Inc. is a Delaware corporation engaged in exploration for
oil and gas reserves. The terms "Cheniere" and "Company" refer to Cheniere
Energy, Inc. and its subsidiaries. The Company principally operates through its
wholly-owned subsidiary, Cheniere Energy Operating Co., Inc. ("Cheniere
Operating"). Cheniere is a Houston-based company formed for the purpose of oil
and gas exploration, development and exploitation. The Company is currently
involved in a joint exploration program, which is engaged in the exploration for
oil and natural gas along the Gulf Coast of Louisiana, onshore and in the
shallow waters of the Gulf of Mexico. The Company commenced its oil and gas
activities through such joint program in April 1996.
The Company has not yet established oil and gas production nor proven oil and
gas reserves. The Company is currently a development stage enterprise with no
operating revenues to date.
Cheniere is involved with one major project, a joint exploration program
pursuant to an Exploration Agreement between Cheniere and Zydeco Exploration,
Inc. ("Zydeco"), an operating subsidiary of Zydeco Energy, Inc. (the
"Exploration Agreement"), with regard to a 3-D seismic exploration project in
southern Louisiana (the "3-D Exploration Program"). Cheniere has earned a 50%
participation in the 3-D Exploration Program. The 3-D Exploration Program
consists of a proprietary 3-D seismic survey (the "Survey") which covers 228
square miles within a 310 square-mile area running three to five miles north and
generally eight miles south of the coastline in the most westerly 28 miles of
Cameron Parish, Louisiana (the "Survey AMI"). The Survey AMI includes areas
outside and adjacent to the Survey over which the 3-D Exploration Program has
purchased and plans to purchase non-proprietary seismic data. Cheniere and
Zydeco have designated the entire Survey AMI (onshore and offshore) as an area
of mutual interest for five years ending May 15, 2001, during which period the
two companies may continue to drill, test, and develop prospects within the
Survey AMI.
Field acquisition of seismic data in the Survey was completed in July 1997.
Area-wide processing of the data was completed in June 1998. Since beginning
its interpretation work in July 1997, Cheniere and Zydeco have identified
fifteen prospects for inclusion in an initial drilling program within the Survey
AMI. The companies have leased acreage over most of the prospects in this
initial drilling program, and drilling operations commenced in February 1999.
Cheniere has been publicly traded since July 3, 1996 under the name Cheniere
Energy, Inc. The Company's principal executive offices are located at 1200
Smith Street, Suite 1740, Houston, Texas 77002, and its telephone number is
(713) 659-1361.
On April 7, 1998, the Company's Board of Directors approved a change in
fiscal year-end from August 31 to December 31. The change in year-end resulted
in a transition period from September 1, 1997 to December 31, 1997.
BUSINESS STRATEGY
The Company's objective is to expand the net value of its assets by building
an oil and gas reserve base in a cost-efficient manner. The Company intends to
pursue this objective by following an integrated strategy that includes the
following elements:
Focus On Few Projects With Large Reserve Potential
The Company plans to focus its resources on relatively few projects that
possess large reserve potential and favorable risk/reward characteristics. The
Company believes that attractive oil and gas exploration opportunities are
becoming difficult to identify and develop, and that the expertise of management
and staff is best utilized by focusing on like projects that may have a
meaningful impact on the value of its shares. Cheniere's current activities are
focused on its proprietary 3-D Exploration Program in South Louisiana, an area
which the Company believes has significant remaining undiscovered oil and gas
reserve potential. The Company continually evaluates new investment
opportunities, including exploration projects similar to the 3-D Exploration
Program, as well as acquisitions of producing and undeveloped properties.
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Maintain A Significant Working Interest In Each Project
Consistent with its intent to focus on a few meaningful projects, the Company
aims to maintain a significant working interest in each project. As an example,
Cheniere owns a 50% interest in the 3-D Exploration Program. Cheniere intends
to be the operator for certain prospects in this project in order to better
control costs and the timing of activity. For those prospects it does not
operate, Cheniere intends to maintain a significant working interest to better
leverage its administrative and technical resources and to better influence
outside operator decisions.
Utilize the Latest Exploration, Development and Production Technology
The Company uses the latest technology to enhance the efficiency and economy
of its exploration, development and production efforts. These include the use
of advanced 3-D seismic acquisition and processing techniques in the Survey AMI.
Control Overhead Costs
The Company maintains a small, but experienced working staff, which leverages
its talents through its relationships with outside directors who are experienced
in the oil and gas industry, industry partners and outside consultants with
appropriate geographic and technical experience. Beginning in July 1997,
Cheniere engaged a consulting geophysicist through INEXS (Interactive
Exploration Solutions, Inc.), a leading seismic consulting firm in Houston, to
complement Zydeco's in-house interpretation effort. Further, in November 1997,
Cheniere engaged a consulting geologist to assist in the interpretation process.
These consultants became employees of Cheniere on January 1, 1998 and they are
continuing to interpret the seismic data from the Survey and to generate
prospects from such data. In February 1999, the Company retained an additional
geologist as a consultant to assist in its exploration activities.
THE 3-D EXPLORATION PROGRAM IN CAMERON PARISH, LOUISIANA TRANSITION ZONE
The 3-D Exploration Program is located within an area referred to as the
Transition Zone of Louisiana, which defines an area extending roughly three to
five miles on either side of the coastline. The Company believes that the
Transition Zone, including the westernmost 28 miles of Louisiana coastline that
are within the Survey AMI, has significant remaining undiscovered oil and gas
reserve potential. Substantial infrastructure along the Gulf Coast and in the
shallow Gulf of Mexico should permit Cheniere to lower its development costs
compared to those in other geographic regions and facilitate timely development
of oil and gas discoveries. The Company's officers and technical staff have
extensive experience both onshore and offshore in the Gulf Coast and believe the
3-D Exploration Program is well positioned to evaluate, explore and develop
properties in the area.
Exploration Agreement
Under the terms of the Exploration Agreement and its Amendments, Cheniere was
obligated to pay 100% of the Seismic Costs (as defined below) up to $13.5
million, and 50% of the excess of any such costs, to earn a 50% working interest
participation in the leasing and drilling of all Prospects (as defined below)
generated within the Survey AMI. "Seismic Costs" are defined in the Exploration
Agreement to include the following: acquiring and processing seismic data;
legal costs; options to lease land and leases of land; and the cost of seismic
permits including the seismic permit granted by the State of Louisiana discussed
below.
Under the terms of the Exploration Agreement, Zydeco has the responsibility to
perform, or cause to be performed, all of the planning, land, geologic, and
interpretative functions necessary to the project, and to design and oversee the
acquisition and processing of seismic data, interpret results, acquire leases
and generate Prospects. The term "Prospect" is defined in the Exploration
Agreement as a block of acreage suitable for exploration including the
leasehold, operating, nonoperating, mineral and royalty interests, licenses,
permits, and contract rights thereto. Cheniere owns a 50% share of all the
seismic data and has elected to generate its own Prospects, which it has offered
to Zydeco pursuant to the AMI provisions of the Exploration Agreement. Neither
party to the 3-D Exploration Program is permitted to sell or license the data
without the other party's approval.
Cheniere paid 100% of the first $13.5 million of Seismic Costs. Cheniere's
50% share of excess Seismic Costs through December 31, 1997, was estimated in
the Seventh Amendment to the Exploration Agreement to be approximately $2.9
million, which amount was payable to Zydeco on December 31, 1997. Cheniere made
such payment on December 31, 1997, completing its payment obligations to earn a
50% participation in the 3-D Exploration Program.
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The Exploration Agreement includes a joint operating agreement (the "Joint
Operating Agreement") providing for the funding of prospect, exploratory and
development costs subsequent to completion of the data acquisition, processing,
and interpretation phases of the seismic work. Each party will pay its
proportionate share of these costs and either Cheniere or Zydeco, as operator,
will conduct all operations in accordance with the terms of the Joint Operating
Agreement.
Description of the Louisiana Transition Zone Survey AMI
The Survey AMI, which contains the Survey, lies within the Gulf Coast/Gulf of
Mexico basin, a highly prolific hydrocarbon province. Nevertheless, the
Transition Zone represents a relatively less explored area within that region as
compared to exclusively onshore or offshore areas because of the high relative
cost and logistical and technical difficulties associated with conducting modern
seismic surveys over the diverse surface environments encountered along the
coast. Compounding the problem of scarce seismic data is the fact that the
state waters area commonly fell between the jurisdictional responsibilities of
onshore and offshore divisions of the major oil companies. These conditions
have limited the drilling density of deep exploration wells within the Survey
area to roughly one well per five square miles (outside of known fields).
The entire Survey AMI is located within an existing pipeline infrastructure.
As a result, it will generally be more efficient to develop and connect reserves
found onshore and in the shallow offshore areas to markets than would be the
case for reserves found in the federal waters of the Gulf of Mexico. The
Louisiana Gulf Coast/Gulf of Mexico region enjoys easy access to the premium-
priced natural gas consumer markets of the East Coast.
Permit and Lease Status Within the Survey AMI
The Survey AMI covers onshore lands, State Waters, and Federal Outer
Continental Shelf ("OCS") acreage. The permit and lease status of the three
areas is described below.
Onshore Area. Permits, lease options and/or farmouts had been obtained over
the Survey AMI prior to the acquisition of the Survey. Subsequent to shooting,
individual options were either exercised or dropped as they neared expiration,
based on the prospectivity of the area. In addition, onshore acreage has been
leased to supplement the exercised options over identified prospects. As of
December 31, 1998, Cheniere owns an interest in leases covering 2,114 gross
acres (1,330 net) onshore in the State of Louisiana and has the right to
participate in approximately 1,345 additional gross acres (673 net) which have
been leased by Zydeco.
State Waters. On February 14, 1996, the State of Louisiana awarded Zydeco the
exclusive right (the "Louisiana Seismic Permit") to shoot and gather seismic
data over the 51,360 net unleased acres of Louisiana State Waters (extending to
a 3 1/2 mile limit located within the Survey AMI) in the western half of Cameron
Parish. The initial term of the Louisiana Seismic Permit was 18 months; and in
1997 it was extended for an additional six months. As discussed below in
"Seismic Results to Date," the shooting and gathering of seismic data has been
completed. During the term of the Louisiana Seismic Permit, Zydeco and Cheniere
had the exclusive right to nominate blocks of acreage for leasing in the covered
state waters. Although the period of exclusivity expired in February 1998, the
Company and Zydeco may nominate blocks of acreage for leasing at any time.
As of December 31, 1998, Cheniere owns an interest in leases covering 3,191
gross acres (2,103 net) in the state waters of Louisiana and has the right to
participate in 4,522 additional gross acres (2,261 net) which have been leased
by Zydeco.
Federal Waters. The Survey AMI includes an area extending southward
generally up to 5 miles into federal waters. The Minerals Management Service
holds periodic lease sales at which open federal acreage is available for
bidding. Zydeco has acquired leases over 3,095 gross acres (1,547 net) within
the Survey AMI, which Cheniere has the right to participate in should it elect
to do so.
Seismic Results to Date
In the fourth quarter of 1996 approximately 12% of the Survey was shot
prior to a shutdown for the winter. Shooting resumed in April 1997 and was
completed in July 1997. During the winter months, the initial data was
processed and the optimal processing sequence was determined for the remainder
of the data which was acquired in 1997. A second phase of processed data,
created using pre-stack time migration techniques, became available beginning in
November 1997 and was completed in June 1998. (Prestack time migration is a
state of the art processing technique which provides a geologically correct
image of subsurface structures.) Interpretation of the Survey data, including
prospect generation, continues to be conducted by Cheniere and Zydeco personnel.
5
Schedule for the 3-D Exploration Program
Interpretation of the Survey data is continuing. Cheniere and Zydeco have
identified fifteen prospects in the West Cameron area of Louisiana for inclusion
in an initial drilling program in the area. The prospects for the initial
program were selected to stay within a reasonable range of drilling depth, cost
and risk, while maximizing hydrocarbon exposure. The initial prospects can be
tested by wells drilled to depths of 10,000 to 16,000 feet. Drilling of the
initial well commenced in February 1999.
Cheniere and Zydeco have designated the entire Survey AMI (onshore and
offshore) as an area of mutual interest for five years ending May 15, 2001,
during which period the two companies may continue to participate in drilling,
testing, and developing prospects within the Survey AMI.
COMPETITION AND MARKETS
Competition in the industry 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 producing and non-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.
The Company anticipates selling a portion of its interest in certain of the
prospects within the Survey AMI as a means of funding its participation in the
development of these properties. Cheniere is also investigating with certain
oil and gas service companies the possibility of obtaining vendor financing for
a portion of its drilling activities. The Company anticipates that competition
will arise from other companies also seeking drilling funds from vendors and
potential working interest partners. There can be no assurance that the Company
will be successful in securing funds in this manner.
The availability of a ready market for and the price of any hydrocarbons
produced by the Company 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 international oil-producing
regions, the effect of federal and state regulation of allowable rates of
production, taxation, 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 wells. The Company can give no assurance that such problems will not
arise again.
In addition, the restructuring of the natural gas pipeline industry has
eliminated the gas purchasing activity of traditional interstate gas
transmission pipeline buyers. Producers of natural gas, therefore, have been
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.
GOVERNMENT REGULATION
The Company's oil and gas exploration, production, and related operations
are subject to federal and state statutes and extensive rules and regulations
promulgated by federal and state agencies. Failure to comply with such laws 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 laws are frequently amended or reinterpreted, the
Company is unable to predict the future cost or impact of complying with them.
Production
In most, if not all, areas in which the Company conducts activities,
statutes concerning the production of oil and natural gas authorize
administrative agencies to adopt rules which, among others matters, (i) regulate
the operation of, and production from, both oil and gas wells, (ii) determine
the reasonable market demand for oil and gas, and (iii) establish allowable
rates of production. Such regulation may restrict the rate at which the
Company's wells may produce oil or gas, with the result that the amount or
timing of the Company's revenues could be adversely affected.
6
MMS Regulation
The Company may conduct certain activities on federal oil and gas leases,
which the Minerals Management Service ("MMS") administers. The MMS grants
leases through competitive bidding. These leases contain relatively
standardized terms and require compliance with detailed MMS regulations and
orders pursuant to The Outer Continental Shelf Lands Act ("OCSLA") (which
regulations and orders 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), lessees
must obtain a permit from the MMS prior to the commencement of drilling. The
MMS has adopted regulations requiring offshore production facilities located on
the Outer Continental Shelf ("OCS") to meet stringent engineering and
construction specifications. The MMS also has regulations restricting the
flaring or venting of natural gas, and has amended such regulations to prohibit
the flaring of liquid hydrocarbons and oil without prior authorization except
under certain limited circumstances. Also, the MMS has promulgated other
regulations governing the plugging and abandonment of wells located offshore and
the removal of all production facilities. To cover the various obligations of
lessees on the OCS, the MMS generally requires that lessees post substantial
bonds or other acceptable assurances that such obligations will be met. The
cost of such bonds or other surety can be substantial and there is no assurance
that the Company will be able to obtain such bonds or other surety in all cases.
The MMS has issued a notice of proposed rulemaking in which it proposes to
amend its regulations governing the calculation of royalties and the valuation
of crude oil produced from federal leases. This proposed rule would modify the
valuation procedures for both arm's length and non-arm's length crude oil
transactions to decrease reliance on oil posted prices and assign a value to
crude oil that better reflects its market value, establish a new MMS form for
collecting differential data, and amend the valuation procedure for the sale of
federal royalty oil. The Company cannot predict what action the MMS will take
on this matter, nor can it predict how the Company will be affected by any
change to this regulation.
In April 1997, after two years of study, the MMS withdrew proposed changes
to the way it values natural gas for royalty payments and requested comment on
two alternative options for natural gas valuation. The changes as originally
proposed would have established an alternative market-based method to calculate
royalties on certain natural gas sold to affiliates or pursuant to non-arm's
length sales contracts. Informal discussions among the MMS and industry
officials are continuing, although it is uncertain whether, and what, changes
may be proposed regarding gas royalty valuation.
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 an owner or
operator on such leases or of exploration and production related facilities.
These bonds may cover such obligations as plugging and abandonment of
unproductive wells, removal and closure of related exploration, production
facilities, and pollution liabilities. The costs of such bonding and financial
responsibility requirements can be substantial, and there can be no assurance
that the Company will be able to obtain such bonds and/or otherwise demonstrate
financial responsibility in all cases.
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 (the "NGPA"). In the past, the federal government has regulated the
prices at which natural gas could be sold. Deregulation of wellhead sales of
natural gas began with the enactment of the NGPA in 1978. In 1989, Congress
enacted the Natural Gas Wellhead Decontrol Act (the "Decontrol Act") which
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.
Commencing in April 1992, the FERC issued its Order No. 636 and related
clarifying orders ("Order No. 636"), which, among other things, restructured the
interstate natural gas industry and required interstate pipelines to provide
transportation services separate, or "unbundled," from the pipelines' sales of
natural gas. Order No. 636 and certain related proceedings have been the
subject of a number of judicial appeals and orders on remand by the FERC.
Although Order No. 636 has largely been upheld on appeal, several appeals remain
pending in related restructuring proceedings. The Company cannot predict when
these remaining appeals will be completed or their impact on the Company. FERC
continues to address Order 636-related issues (including capacity brokering,
7
alternative and negotiated ratemaking and transportation policy matters) in a
number of pending proceedings. It is unclear what impact, if any, increased
competition within the natural gas industry under Order Nos. 636, et al. will
have on the Company's activities. Although Order No. 636 could provide the
Company with additional market access and more fairly applied transportation
service rates, Order No. 636 could also subject the Company to more restrictive
pipeline imbalance tolerances and greater penalties for violations of these
tolerances.
FERC has announced its intention to re-examine certain of its
transportation-related policies, including the appropriate manner in which
interstate pipelines release transportation capacity under Order No. 636, and
the use of market-based rates for interstate gas transmission. While any
resulting FERC action would affect the Company only indirectly, FERC's current
rules and policy statements may have the effect of enhancing competition in
natural gas markets by, among other things, encouraging non-producer natural gas
marketers to engage in certain purchase and sale transactions. The Company
cannot predict what action FERC will take on these matters, nor can it
accurately predict whether FERC's actions will achieve the goal of increasing
competition in markets in which the Company's natural gas is sold. However, the
Company does not believe that it will be treated materially differently than
other natural gas producers and marketers with which it competes.
OCSLA requires that all pipelines operating on or across the OCS provide
open-access, non-discriminatory service. Although FERC has opted not to impose
the regulations of Order No. 509, in which FERC implemented OCSLA, on gatherers
and other non-jurisdictional entities, FERC has retained the authority to
exercise jurisdiction over those entities if necessary to permit non-
discriminatory access to service on OCS. In this regard, FERC issued a
Statement of Policy ("Policy Statement") regarding the application of its
jurisdiction under the NGA and OCSLA over natural gas facilities and service on
OCS. In the Policy Statement, FERC concluded that facilities located in water
depths of 200 meters or more shall be presumed to have a primary purpose of
gathering up to the point of interconnection with the interstate pipeline grid.
FERC has determined that gathering facilities are outside of its jurisdiction,
and thus, it will no longer regulate the rates and services of such OCS
facilities under the NGA. While it is not possible to determine what the actual
impact of this new policy will be, it is possible that the Company could
experience an increase in transportation costs associated with its OCS natural
gas production and, possibly, reduced access to OCS transmission capacity.
The FERC has also issued numerous orders approving the sale and abandonment
of natural gas gathering facilities previously owned by interstate pipelines and
has acknowledged that if the FERC does not have jurisdiction over services
provided thereon, then such facilities and services may be subject to regulation
by state authorities in accordance with state law. A number of states have
either enacted new laws or are considering the inadequacy of existing laws
affecting gathering rates and/or services. In addition, FERC's approval of
transfers of previously regulated gathering systems to independent or pipeline-
affiliated gathering companies that are not subject to FERC regulation may
affect both the costs and the nature of gathering services that will be
available to interested producers or shippers in the future. The effects, if
any, of state and federal gathering policies on the Company's operations are
uncertain.
Oil Sales and Transportation Rates
Sales of crude oil, condensate, and gas liquids by the Company are not
currently regulated under federal or state law and are made at market prices.
FERC regulates the transportation of oil in interstate commerce pursuant to the
Interstate Commerce Act. 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, 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. Over time, these regulations could increase the cost of
transporting crude oil, liquids, and condensate by pipeline. The Company is not
able to predict with certainty what effect, if any, these regulations will have
on it; but other factors being equal, these regulations may tend to increase
transportation costs or reduce wellhead prices for such commodities.
Operating Hazards and Environmental Matters
The oil and gas business involves a variety of operating risks, including
the risk of fire, explosions, blow-outs, pipe failure, casing collapse,
abnormally pressured formations and environmental hazards such as oil spills,
natural gas leaks, ruptures and discharge of toxic gases, the occurrence of any
of which could result in substantial losses to the Company due to injury or loss
of life, severe damage to or destruction of property, natural resources and
equipment, pollution or other environmental damage, clean-up responsibilities,
regulatory investigation and penalties and suspension of operations. Such
hazards may hinder or delay drilling, development and on-line production
operations.
Extensive federal, state and local laws and regulations applicable to oil
and gas operations regulate the discharge of substances into the environment or
otherwise relate to the protection of the environment. These laws
8
and regulations may require the acquisition of a permit before drilling
commences, restrict or prohibit the types, quantities and concentration of
substances that can be released into the environment or wastes that can be
disposed of in connection with drilling and production activities, prohibit
drilling activities on certain lands lying within wetlands or other protected
areas and impose substantial liabilities for pollution or releases of hazardous
substances resulting from drilling and production operations. Failure to comply
with these laws and regulations may also result in civil and criminal fines and
penalties. Moreover, state and federal environmental laws and regulations may
become more stringent.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the original conduct, on certain classes of persons who are
considered to be responsible for 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 or arranged for
the disposal of the hazardous substances. Under CERCLA, such persons may be
subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment, for damages
to natural resources and for the costs of certain health studies, and it is not
uncommon for neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by the release of hazardous
substances.
The Company's operations may be subject to the Clean Air Act ("CAA") and
comparable state and local requirements. Amendments to the CAA were adopted in
1990 and contain provisions that may result in the gradual imposition of certain
pollution control requirements with respect to air emissions from the operations
of the Company. The EPA and states have been developing regulations to
implement these requirements. The Company may be required to incur certain
capital expenditures in the next several years for air pollution control
equipment in connection with maintaining or obtaining permits and approvals
addressing other air emission-related issues. The Company does not believe,
however, that its operations will be materially adversely affected by any such
requirements.
In addition, the U.S. Oil Pollution Act ("OPA") requires owners and
operators of facilities that could be the source of an oil spill into "waters of
the United States" (a term defined to include rivers, creeks, wetlands, and
coastal waters) to adopt and implement plans and procedures to prevent any spill
of oil into any waters of the United States. OPA also requires affected
facility owners and operators to demonstrate that they have at least $35 million
in financial resources to pay for the costs of cleaning up an oil spill and
compensating any parties damaged by an oil spill. Such financial assurances may
be increased to as much as $150 million if a formal assessment indicates such an
increase is warranted.
Operations of the Company are also subject to the federal Clean Water Act
("CWA") and analogous state laws. In accordance with the CWA, the state of
Louisiana has issued regulations prohibiting discharges of produced water in
state coastal waters effective July 1, 1997. Producers may be required to incur
certain capital expenditures in the next several years in order to comply with
the prohibition against the discharge of produced waters into Louisiana coastal
waters or increase operating expenses in connection with offshore operations in
Louisiana coastal waters. Pursuant to other requirements of the CWA, the EPA
has adopted regulations concerning discharges of storm water runoff. This
program requires covered facilities to obtain individual permits, participate in
a group permit or seek coverage under an EPA general permit. The Company
believes that it will be able to obtain, or be included under, such storm water
discharge permits, where necessary.
In addition, the disposal of wastes containing naturally occurring
radioactive material, which are commonly generated during oil and gas
production, is regulated under state law. Typically, wastes containing
naturally occurring radioactive material can be managed on-site or disposed of
at facilities licensed to receive such waste at costs that are not expected to
be material.
OPERATIONAL RISKS AND INSURANCE
The Company anticipates that any wells established by it will be
drilled by proven industry contractors. Based on financial considerations, the
Company may choose to utilize turnkey contracts that limit its financial and
legal exposure. However, circumstances may arise where the Company is unable to
secure a turnkey contract on satisfactory terms. In this case, the Company may
decide to drill, or cause to be drilled, the applicable test well(s) on either a
footage or day-work basis, and the drilling thereof will be 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
intends to maintain insurance against some, but not all,
9
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 considered reasonable by the Company.
REORGANIZATION
On July 3, 1996, Cheniere Operating underwent a reorganization by
consummating the transactions (the "Reorganization") contemplated in the
Agreement and Plan of Reorganization (the "Reorganization Agreement") dated
April 16, 1996, between Cheniere Operating and Bexy Communications, Inc., a
publicly held Delaware corporation ("Bexy"). Under the terms of the
Reorganization Agreement, Bexy transferred its existing assets and liabilities
to Mar Ventures, Inc., its wholly-owned subsidiary ("Mar Ventures"). As part of
such Reorganization, the stock of Mar Ventures was distributed to the original
Bexy shareholders, and since that time Mar Ventures has not been affiliated with
the Company. Buddy Young, the former President and Chief Executive Officer of
Bexy, has agreed to indemnify the Company, the former shareholders of Cheniere
Operating and their respective officers, directors, attorneys, and other agents
from and against all claims which they may suffer, incur, or pay arising under
or incurred in connection with: (i) the operation of the business of Bexy prior
to the closing of the Reorganization; (ii) any error or omission with respect to
a material fact stated or required to be stated in the proxy materials filed by
Bexy in connection with the Reorganization or the registration statement filed
by Mar Ventures in connection with the distribution of its common stock to the
original Bexy stockholders; and (iii) certain taxes.
YOUNG CONSULTING AGREEMENT
Pursuant to a consulting agreement dated as of July 3, 1996, the Company
engaged Mr. Buddy Young, the former President and Chief Executive Officer of
Bexy, as a consultant to provide Cheniere with advice regarding the management
and business of the Company. Mr. Young provided such consulting services to the
Company for two years at a rate of $75,000 per year. The agreement terminated
on July 3, 1998.
EMPLOYEES
The Company had nine full-time employees as of March 26, 1999.
PROPERTIES
Until March 1998, the Company subleased its Houston, Texas headquarters
from Zydeco under a month-to-month sublease covering approximately 1,498 square
feet at a monthly rental of $1,179. In March 1998, Cheniere terminated its
sublease from Zydeco and leased 2,678 square feet of office space through March
2003 at a monthly rental rate of $4,190. In February 1999, Cheniere amended its
office lease to cover a total of 12,102 square feet at a monthly rental of
$19,612.
FORWARD-LOOKING STATEMENTS
This annual report contains certain statements that may be deemed "forward-
looking statements" within the meaning of Section 27A of the Securities Act, and
Section 21E of the United Stated Securities Exchange Act of 1934, as amended.
Readers of this annual report are cautioned that such forward-looking statements
are not guarantees of future performance and that actual results, developments
and business decisions may differ from those envisaged by such forward-looking
statements.
All statements, other than statements of historical facts so included in
this annual report that address activities, events or developments that the
Company intends, expects, projects, believes, or anticipates will or may occur
in the future, including, without limitation: statements regarding the Company's
business strategy, plans and objectives; statements expressing beliefs and
expectations regarding the ability of the Company to successfully raise the
additional capital necessary to meet its obligations under the Exploration
Agreement, the ability of the Company to secure the leases necessary to
facilitate anticipated drilling activities and the ability of the Company to
attract additional working interest owners to participate in the exploration and
development within the Survey AMI; and statements about non-historical Year 2000
information, are forward-looking statements within the meaning of the Act.
These forward-looking statements are, and will be, based on management's then-
current views and assumptions regarding future events.
10
The following are some of the important factors that could affect the
Company's financial performance or could cause actual results to differ
materially from estimates contained in the Company's forward-looking statements.
-- The Company's ability to generate sufficient cash flows to support
capital expansion plans, obligations to repay debt and general
operating activities.
-- The Company's ability to obtain additional financing from lenders,
through debt or equity offerings, through sales of a portion of its
interest in the 3-D Exploration Program or through vendor financing
arrangements with oil and gas service companies.
-- The Company's ability to encounter hydrocarbons in sufficient
quantities to be economically viable, and its ability to overcome the
operating hazards that are inherent in the oil and gas industry.
-- Changes in laws and regulations, including changes in accounting
standards, taxation requirements (including tax rate changes, new tax
laws and revised tax law interpretations) and environmental laws in
domestic or foreign jurisdictions.
-- The uncertainties of potential litigation as well as other risks and
uncertainties detailed from time to time in the Company's Securities
and Exchange Commission filings.
-- The Company's or its business partners' ability to replace, modify or
upgrade computer programs in ways that adequately address the Year
2000 issue.
The foregoing list of important factors is not exclusive.
YEAR 2000 ISSUES
The Year 2000 presents significant issues for many computer systems. Much
of the software in use today may not be able to accurately process data beyond
the year 1999. The vast majority of computer systems process transactions using
two digits for the year of the transaction, rather than the full four digits,
making such systems unable to distinguish January 1, 2000 from January 1, 1900.
Such systems may encounter significant processing inaccuracies or become
inoperable when Year 2000 transactions are processed. Such matters could impact
not only the Company in its day-to-day operations but also the Company's
financial institutions, customers and vendors as well as state, provincial and
federal governments with jurisdictions where the Company maintains operations.
The Company is currently addressing Year 2000 issues and is presently
focussing on its internal business systems and processes. To the extent
necessary, the Company will assess the readiness of any key business partners
(financial institutions, customers, vendors, oil and gas operators, etc.).
It has been the Company's strategy to use, wherever possible, industry
prevalent products and processes with minimal customization. As a result, the
Company does not expect any extensive in-house hardware, software or process
conversions in an effort to be Year 2000 compliant nor does the Company expect
its Year 2000 compliance related costs to be material to its operations.
The Company's goal is to be Year 2000 compliant by June 30, 1999 wherever
possible and to have contingency plans in place where compliance is not possible
in a timely manner. While it is the Company's goal to be Year 2000 compliant,
there can be no assurance that there will not be a material adverse effect on
the Company as a result of a Year 2000 related issue. The Company's business
partners may present the area of greatest risk to the Company, in part because
of the Company's limited ability to influence actions of third parties, and in
part because of the Company's inability to estimate the level and impact of
noncompliance of third parties. Additionally, there are many variables and
uncertainties associated with judgments regarding any contingency plans
developed by the Company.
11
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings currently pending against the Company.
In December 1998, the Company received the binding award of an independent
panel of arbitrators reviewing claims against the Company by Zydeco and
counterclaims by the Company related to certain rights and obligations pursuant
to the Exploration Agreement.
The panel confirmed Cheniere's 50% ownership in the proprietary 3-D Seismic
Data, including the right to possess field tapes and all volumes of such data
acquired prior to December 31, 1997. The panel also confirmed Cheniere's right
to review Zydeco's seismic interpretations within the AMI and to purchase an
interest of up to 50% in any prospects generated by Zydeco in the AMI and
Cheniere's right to acquire ownership of all seismic data processing volumes
generated after December 1997 related to such prospects. The arbitration panel
confirmed Zydeco's right to manage the exploration process for a period of 90
days after it declares a prospect's assembly and development to be complete. In
addition, the panel affirmed Cheniere's right to generate prospects and manage
the exploration process for any prospect generated by Cheniere and rejected, or
not accepted within 30 days, by Zydeco (subject to Zydeco's right to acquire a
50% interest in any lease acquired by Cheniere).
Ownership of the existing prospects was also determined by the panel. All
ownership in prospects acquired by either party, where the non-acquiring party
declined to participate, was confirmed to belong to the acquiring party.
Consequently, Cheniere has 100% ownership in six prospects, Cheniere and Zydeco
have 50% ownership each in three prospects and 25% each in another prospect, and
Zydeco has 100% ownership in one Federal lease which covers a portion of one
prospect.
In addition, the panel decreed that all prospects on leases acquired by
Zydeco in the June 1998 Louisiana state lease sale must be offered to Cheniere
and that Cheniere would have 30 days from such offer to review the prospects and
elect or decline to participate.
The panel found that in future state lease sales, Zydeco may require
Cheniere to advance its 50% share of the proposed bid at the time of the sale or
forfeit its right to acquire an interest in such leases, but only if the lease
relates to a prospect which Zydeco has notified Cheniere is completely assembled
and developed, and only if adequate decision-making data is provided 30 days
prior to the sale.
The panel has found that certain activities related to the selling of
prospects are the equivalent of marketing, sale or licensure of the proprietary
seismic data acquired under the Exploration Agreement. In the event such
marketing, sale or licensure of data occurs, the Exploration Agreement provides
that 100% of the proceeds related to seismic data will be directed to Cheniere
until Cheniere recoups $13,500,000 of its investment; thereafter the proceeds
will be shared 50/50 between Cheniere and Zydeco.
The panel found that Zydeco was not authorized to issue cash calls to
Cheniere for seismic costs incurred after December 31, 1997. Accordingly,
$1,115,143 in billings made by Zydeco to Cheniere were not allowed under the
Exploration Agreement and Cheniere has no liability for such costs as billed.
The panel also stated that some portion of such costs may be appropriately
charged to Cheniere as a component of prospects in which Cheniere elects to
acquire an interest.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted for a vote by security holders during the
year ended December 31, 1998.
12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock of the Company has traded on The Nasdaq SmallCap Market under
the symbol "CHEX" since April 11, 1997. From the time the Company first traded
publicly until April 11, 1997, the Company traded on the OTC Bulletin Board.
The table below presents the high and low daily closing sales prices of the
common stock during each quarter. The Company changed its fiscal year end from
August 31 to December 31, and as a result had a four-month transition period at
the end of 1997. The quotes represent "inter-dealer" prices without retail
markups, markdown, or commissions and may not necessarily represent actual
transactions.
High ($) Low ($)
------------ ----------
Three Months Ended
November 30, 1996 5-1/2 2-13/32
February 28, 1997 5-5/8 2-3/4
May 31, 1997 5-1/2 3
August 31, 1997 4-1/4 2-31/32
Four Months Ended December 31, 1997 3-15/16 1-7/8
Three Months Ended
March 31, 1998 3-1/16 2
June 30, 1998 3-5/8 1-3/4
September 30, 1998 2-15/16 13/16
December 31, 1998 1-7/16 7/16
As of March 26, 1999, there were 21,786,277 shares of the Company's common
stock outstanding held by 773 stockholders of record.
The Company has never paid a cash dividend on its common stock. The Company
currently intends to retain earnings to finance the growth and development of
its business and does not anticipate paying any cash dividends on the common
stock in the foreseeable future. Any future change in the Company's dividend
policy will be made at the discretion of the Company's Board of Directors in
light of the financial condition, capital requirements, earnings and prospects
of the Company, and any restrictions under any credit agreements, as well as
other factors the Board of Directors deems relevant.
With respect to equity securities sold by the Company during the fourth
quarter of 1998 that were not registered under the Securities Act of 1933, as
amended ("Securities Act"), see "Liquidity and Capital Resources Private
Placements of Equity" under Item 6 of this report.
13
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data set forth below are derived from the Consolidated
Financial Statements of the Company for the periods indicated. The financial
data should be read in conjunction with the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
report.
From
For the For the Four Months Ended For the Period Ended Inception to
Year Ended December 31, August 31, December 31,
December 31, --------------------------- --------------------------- ------------
1998 1997 1996 1997 1996 1998
------------ ------------ ----------- ------------ ----------- ------------
(Unaudited)
Net operating revenues $ - $ - $ - $ - $ - $ -
Loss from operations (1,658,478) (447,023) (192,330) (1,713,461) (103,814) (3,922,776)
Net loss (1,637,844) (388,361) (193,553) (1,676,468) (121,847) (3,824,520)
Net loss per share (basic and diluted) $ (0.10) $ (0.03) $ (0.02) $ (0.14) $ (0.01) (0.29)
December 31, August 31,
------------------------------------------ ---------------------------
1998 1997 1996 1997 1996
------------ ------------ ----------- ------------ -----------
(Unaudited)
Cash $ 143,868 $ 787,523 $2,419,264 $ 234,764 $1,093,180
Oil and gas properties, unevaluated 20,000,425 16,534,054 6,000,000 13,500,000 4,000,000
Total assets 20,840,474 17,705,627 8,476,710 13,841,712 5,145,310
Long-term notes payable 2,025,020 2,025,020 - - -
Total liabilities 4,523,144 4,285,599 262,798 888,291 718,855
Total stockholders' equity 16,317,330 13,420,028 8,213,912 12,953,421 4,426,455
Cash dividends per share - - - - -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Cheniere Operating was incorporated in Delaware in February 1996 for the
purpose of engaging in the oil and gas exploration business, initially on the
Louisiana Gulf Coast. On July 3, 1996, Cheniere Operating underwent a
reorganization whereby Bexy Communications, Inc., a publicly held Delaware
corporation ("Bexy"), received 100% of the outstanding shares of Cheniere
Operating, and the former shareholders of Cheniere Operating received
approximately 93% of the issued and outstanding Bexy shares. As a result of the
share exchange, a change in the control of the Company occurred. The
transaction was accounted for as a recapitalization of Cheniere Operating. Bexy
spun off its existing assets and liabilities to its original shareholders and
changed its name to Cheniere Energy, Inc.
Cheniere is a development stage company with no operating revenues to date.
The Company has not yet established oil and gas production nor proven oil and
gas reserves. The independent accountants' report on Cheniere's financial
statements includes a reference to the Company's ability to continue as a going
concern. See "Management's Plans and Continued Capital Raising Activities"
below.
On April 7, 1998, the Company's Board of Directors approved a change in
fiscal year-end from August 31 to December 31. The change in year-end resulted
in a transition period from September 1, 1997 to December 31, 1997.
RESULTS OF OPERATIONS - COMPARISON OF THE FISCAL YEARS ENDED DECEMBER 31, 1998
AND AUGUST 31, 1997
The Company's financial results for the year ended December 31, 1998,
reflect a loss of $1,637,844 or $0.10 per share (both basic and diluted) as
compared to a loss of $1,676,468, or $0.14 per share (both basic and diluted)
for the fiscal year ended August 31, 1997. The Company did not generate revenues
from operations in either of the periods. The 2% decrease in net loss in 1998 as
compared to that in fiscal 1997 is primarily due to a 3% decrease in general and
administrative ("G&A") expenses to $1,658,478 in 1998 compared to $1,713,461 in
the 1997 fiscal year. Both periods included significant non-recurring expenses.
In 1998, the Company incurred $817,870 in expenses related to arbitration
proceedings between Cheniere and Zydeco. In the fiscal year ended August 31,
1997, the Company incurred a non-cash charge of $624,400 related to financial
advisory services, and it incurred $164,812 in professional fees related to an
acquisition that was not consummated.
14
Salaries and benefits increased to $698,973 for 1998 compared with $270,209
in fiscal year 1997 as a result of the Company's hiring of additional technical
employees early in 1998 to assist in the interpretation of seismic data and the
generation of prospects. Beginning in the fourth quarter of calendar 1997,
Cheniere began capitalizing as oil and gas property costs that portion of G&A
related to its exploration and development activities. Cheniere capitalized
$444,000 of G&A expenses in 1998 but it did not capitalize any such costs in the
fiscal year ended August 31, 1997. The remaining variance in G&A expenses is the
net effect of several offsetting factors but is principally the result of a
decrease in routine legal fees to $79,647 in 1998 from $144,538 in fiscal 1997,
which is largely accounted for by the Company's change in 1997 from a New York
based law firm to a Houston based law firm.
Other factors affecting the Company's net loss for the year ended
December 31, 1998 were lower interest income (down by $35,527) related
principally to lower average balances in its short-term investment funds and the
absence of net interest expense in 1998 compared with expense of $19,168 in
fiscal 1997. Beginning in the fourth quarter of calendar 1997, Cheniere began
capitalizing interest expense related to its 3-D exploration and development
project.
RESULTS OF OPERATIONS - COMPARISON OF THE FOUR-MONTH PERIODS ENDED DECEMBER 31,
1997 AND 1996
The Company's operating results for the four months ended December 31,
1997, reflect a loss of $388,361 or $0.03 per share (both basic and diluted) as
compared to a loss of $193,553, or $0.02 per share (both basic and diluted) for
the four months ended December 31, 1996. The Company did not generate revenues
from operations in either of the periods. The increased loss in the most recent
four-month period is primarily due to higher G&A expenses of $447,023, as
compared to $192,330 a year earlier. G&A expenses are higher in the most recent
period as the result of: (a) increased professional fees related to financing
activities and to the Company's initial annual stockholders' meeting in November
1997, (b) fees related to recruiting technical professionals who were hired
January 1, 1998 and (c) insurance expenses for coverages not carried in the
earlier period. Interest income of $58,662 in the four months ended December 31,
1997 includes $49,000 related to an agreement that interest earned from
inception to date on funds advanced by Cheniere into the 3-D Exploration Program
accrues to the benefit of the Company.
RESULTS OF OPERATIONS - COMPARISON OF THE PERIODS ENDED AUGUST 31, 1997 AND 1996
The Company's operating results for the fiscal year ended August 31, 1997,
reflect a loss of $1,676,468 or $0.14 per share (both basic and diluted) as
compared to a loss of $121,847, or $0.01 per share (both basic and diluted) for
the six-month period from inception (February 21, 1996) to August 31, 1996. The
Company did not generate revenues from operations in either of the periods. The
increased loss in the most recent fiscal year is primarily due to higher G&A
expenses of $1,713,461, as compared to $103,814 in the period ended August 31,
1996. The higher level of G&A expenses in the more recent period is the result
of: (a) a one-time, non-cash charge of $624,400 for investment banking services,
(b) increased professional fees related to registrations of previously issued
shares of the Company's common stock, (c) insurance expenses for coverages not
carried in the earlier period, and (d) the inclusion of a full year of salary
and compensation, occupancy and office expenses as compared to a partial year
for the period ended August 31, 1996. The increased loss is additionally due to
professional fees of $164,812 related to an acquisition that was not
consummated. Interest income of $56,161 in the latter period exceeded the $1,800
earned in the prior period, based on larger average cash balances and the
comparatively longer period.
RESULTS OF OPERATIONS - PERIOD FROM INCEPTION (FEBRUARY 21, 1996) TO
DECEMBER 31, 1998
The Company's financial results reflect accumulated losses of $3,824,520 or
$0.29 per share, (both basic and diluted) as the Company has yet to generate
revenues from operations. G&A expenses of $3,922,776 included significant non-
recurring items such as $817,870 in legal and other expenses related to
arbitration proceedings between the Company and Zydeco in 1998 as well a
$624,400 non-cash charge related to financial advisory services and $164,812 in
professional fees related to an acquisition that was not consummated in the
fiscal year ended August 31, 1997. The balance of the G&A expense is comprised
primarily of the costs of professional expenses, salary and compensation,
insurance, occupancy and office expense. Interest expense of $39,001 was
incurred with respect to two short-term promissory notes. Interest income of
$137,257 was generated on the Company's cash balances and on funds it has
advanced into the 3-D Exploration Program.
15
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that future liquidity requirements, including
future commitments to the 3-D Exploration Program, will be met by cash balances,
the sale of equity, further borrowings, vendor financing arrangements and/or the
sale of portions of its interest in the 3-D Exploration Program or in the
prospects generated thereunder. At this time, no assurance can be given that
such sales of equity, future borrowings, future vendor agreements or sales of
portions of its interest in the 3-D Exploration Program will be accomplished.
Private Placements of Equity
Since its inception, Cheniere's primary source of financing for operating
expenses and payments to the 3-D Exploration Program has been the sale of its
equity securities. Through December 31, 1998, the Company has issued
approximately 19.0 million shares of its common stock, generating net proceeds
of $20.1 million. Cash proceeds from the sales totaled $18.6 million; non-cash
issuances of stock and warrants were valued at $1.5 million; and the issuance of
bridge notes raised an additional $4.0 million. As of December 31, 1998,
Cheniere has invested $20.0 million in oil and gas properties.
From inception through the Reorganization, Cheniere Operating raised $2.8
million, net of offering costs, from the sale of common stock (which was
exchanged for common stock of Cheniere Energy, Inc. following the
Reorganization) to "accredited investors" (as defined in Rule 501(a) promulgated
under the Securities Act) pursuant to Rule 506 of Regulation D promulgated under
the Securities Act ("Regulation D"). The proceeds, together with proceeds of a
$425,000 short-term note, were used to fund Cheniere's initial $3 million
payment to the 3-D Exploration Program.
Subsequent to the Reorganization and prior to August 31, 1996, the Company
raised $1.7 million, net of offering costs, from the sale of common stock
pursuant to Regulation D and common stock and warrants to purchase common stock
pursuant to Regulation S promulgated under the Securities Act ("Regulation S").
Proceeds were used to fund a $1 million payment to the 3-D Exploration Program
in August 1996.
During the year ended August 31, 1997, the Company raised $9.4 million, net
of offering costs, from the sale of common stock to accredited investors
pursuant to Regulation D and to offshore investors pursuant to Regulation S.
From the $9.4 million net proceeds and other available funds, $9.5 million was
invested in the 3-D Exploration Program.
During the four months ended December 31, 1997, the Company raised $0.5
million, net of offering costs, from the sale of common stock to accredited
investors pursuant to Regulation D and to offshore investors pursuant to
Regulation S. The proceeds, together with cash balances and proceeds from a
$4.0 million December 1997 bridge financing, were used to fund a $2.9 million
payment to the 3-D Exploration Program.
In 1998, the Company raised approximately $4.2 million, net of offering
costs, from the sale of common stock to accredited investors pursuant to
Regulation D. Proceeds of the offerings were used for the acquisition of leases
and other exploration costs, as well as for general corporate purposes. Sales
during the fourth quarter of 1998 consisted of: the November 1998 sale of
1,200,000 shares for a total purchase price of $800,000, and the December 1998
sale of 666,667 shares for a total purchase price of $500,000. All of the
purchasers were accredited investors, and the sales were made pursuant to
Rule 506 of Regulation D without the participation of any underwriters.
Short-Term Promissory Notes
In June 1996, Cheniere borrowed $425,000 through a private placement of
short-term promissory notes (the "Notes"). In connection with the placement of
the Notes, Cheniere issued warrants (the "June Warrants") which, following the
Reorganization, were exchanged for an aggregate of 141,666 and 2/3 warrants to
purchase shares of common stock, to the holders of the Notes (the
"Noteholders"), each of which warrants entitles the holder to purchase one share
of the common stock at an exercise price of $3.00 per share at any time on or
before June 14, 1999. The exercise price was determined at a 100% premium to the
sale price of Cheniere common stock by private placement during May 1996, as the
Company's common stock was not publicly traded at that time. The Company
satisfied all of its obligations under the Notes in the principal amount of
$210,000 by paying the accrued interest on such Notes and by agreeing to issue
105,000 shares of the common stock at a price of $2.00 per share to the holders
of such Notes pursuant to Regulation D. In addition, an individual Noteholder
(the "Remaining Noteholder") purchased several outstanding Notes, following
which such Noteholder held Notes in the aggregate amount of $215,000. In
exchange for such Notes, Cheniere issued a new promissory note in the amount of
$215,000 to the Remaining Noteholder, which Cheniere paid on December 13, 1996.
The Remaining Noteholder also received 64,500 warrants to purchase shares of the
common stock in accordance with the terms of the original Note Agreement. Such
additional warrants have identical terms as the June Warrants, in accordance
with the terms of the original Note Agreement.
16
On July 31, 1997, Cheniere borrowed $500,000 from a related party,
evidenced by a promissory note bearing interest at 10% per annum and due on
August 29, 1997. On August 28, 1997, the maturity date was extended to
September 29, 1997. The note was repaid by the Company on September 22, 1997,
including all incurred interest. The collateral securing the note has been
released.
In December 1997, Cheniere completed the private placement of a $4,000,000
bridge financing (the "December 1997 Bridge Financing"). The notes payable
issued by Cheniere had an initial maturity date of March 15, 1998, which was
extended to September 15, 1998 and further extended to January 15, 1999. In
December 1998, Cheniere received commitments from certain noteholders to
exchange notes payable for an aggregate of 2,812,528 shares of Cheniere common
stock at a price of $0.72 per share. Accordingly, the $2,025,020 face amount of
the exchanged notes is classified as a long-term obligation as of December 31,
1998. For those notes which were not exchanged for common stock, the maturity
date has been extended to April 15, 1999. The notes bear interest at a rate of
LIBOR plus 4% (ranging from 9.5% to 9.9% through December 31, 1998). The
securities purchase agreements which govern such bridge financing specify that,
during the term of the notes, capital raised by the Company in excess of
$5,000,000 must be directed to repayment of the notes.
In connection with the December 1997 Bridge Financing, Cheniere issued
100,000 shares of common stock and four-year warrants to purchase 1,333,334
shares of common stock at $2-3/8 per share. Additional warrants to purchase
1,600,000 shares of Cheniere common stock were issued on September 15, 1998 in
consideration for the extension to that date. In connection with the extension
to January 15, 1999, the Company offered two alternatives of consideration.
Holders of $3,000,000 of the notes elected to reduce the exercise price of their
warrants to $1.50 per share. The holder of $1,000,000 of the notes elected to
reduce the exercise price of its warrants to $2.00 per share, to extend the term
of such warrants to five years from the latter of September 15, 1998 or the date
of issue, to receive additional warrants to purchase 387,500 shares of common
stock and to receive 50,000 shares of common stock. In January 1999, the
maturity date was extended to March 15, 1999. In March 1999, the maturity date
was extended to April 15, 1999. As consideration for the extension to April 15,
1999, the Company reduced the exercise price by $0.25 per share for all warrants
issued in connection with the issuance or extensions of the notes. The common
stock issued in connection with the December 1997 closing and the September 1998
extension was recorded as a debt issuance cost at the then-market price for the
shares. Proceeds from the December 1997 Bridge Financing were used to fund the
Company's activities related to the 3-D Exploration Program and for general
corporate purposes.
In June 1998, the Company issued $180,000 in short-term notes with
detachable warrants to purchase 83,334 shares of common stock at an exercise
price of $2.00 per share on or before June 4, 2002. Such notes bore interest at
LIBOR plus 4% (9.7%) and matured on August 14, 1998. After extensions to dates
on or about August 31, 1998, the notes were repaid in full.
Management's Plans and Continued Capital Raising Activities
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Cheniere is a
development stage company which has not yet generated any operating revenues.
At various times during the life of the Company to date, it has been necessary
for the Company to raise additional capital through private placements of debt
or equity financing. When such a need has arisen, the Company has met it
successfully. It is management's belief that it will continue to be able to
meet its needs for additional capital as such needs arise in the future.
At December 31, 1998, the Company had $4,000,000 outstanding in senior term
notes payable which matured on January 15, 1999. These notes were issued as
part of a bridge financing in conjunction with an offering of units comprised of
preferred stock and warrants to purchase common stock. The units offering was
subsequently withdrawn. The Company has issued 2,812,528 shares of common stock
in exchange for notes totaling $2,025,020. The remaining notes have been
extended and mature on April 15, 1999. Cheniere intends to raise additional
capital for the repayment of the notes through the sale of common stock.
In the event that the Company should not be successful in future efforts to
raise capital for its operations, management believes that trades or sales of
partial interests to industry partners would be utilized to explore and develop
the Company's oil and gas properties, but the ownership interest which would be
retained by the Company would be reduced accordingly.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
CHENIERE ENERGY, INC. AND SUBSIDIARIES
Report of Independent Accountants........................................ 19
Consolidated Balance Sheet............................................... 20
Consolidated Statement of Operations..................................... 21
Consolidated Statement of Stockholders' Equity........................... 22
Consolidated Statement of Cash Flows..................................... 24
Notes to Consolidated Financial Statements............................... 25
18
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Cheniere Energy, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Cheniere
Energy, Inc. and its subsidiaries (a development stage company) at December 31,
1998 and 1997, and the results of their operations and their cash flows for the
year ended December 31, 1998, the four-month period ended December 31, 1997, the
year ended August 31, 1997, the period from inception (February 21, 1996)
through August 31, 1996 and the period from inception (February 21, 1996)
through December 31, 1998 in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 13 to the
financial statements, the Company is a development stage enterprise which has
not yet generated any operating revenues and which, since its inception in
February 1996, has been dependent on capital contributions to finance its oil
and gas exploration activities. The recoverability of the Company's unevaluated
oil and gas properties is dependent on future events, including obtaining
adequate financing for its exploration and development program, the successful
completion of its planned drilling program, and the achievement of a level of
operating revenues that is sufficient to support the Company's cost structure.
In addition, at December 31, 1998 the Company has $1,974,980 of senior term
notes outstanding which are due on or before April 15, 1999. Management's plans
in regard to these matters are also described in Note 13. The uncertainties
associated with these matters raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 15, 1999, except
as to Note 12 which is
as of March 26, 1999
19
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
December 31,
--------------------------------------
1998 1997
----------------- -----------------
ASSETS
CURRENT ASSETS
Cash $ 143,868 $ 787,523
Accounts Receivable 97,837 102,330
Subscriptions Receivable 500,000 -
Debt Issuance Costs, net - 224,306
Prepaid Expenses and Other Current Assets 8,833 10,543
----------------- -----------------
TOTAL CURRENT ASSETS 750,538 1,124,702
OIL AND GAS PROPERTIES, full cost method
Unevaluated 20,000,425 16,534,054
FIXED ASSETS, net 89,511 46,871
----------------- -----------------
TOTAL ASSETS $ 20,840,474 $ 17,705,627
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Liabilities $ 523,144 $ 369,766
Notes Payable 1,974,980 1,974,980
Less: Cost of Detachable Warrants - (84,167)
----------------- -----------------
Total Current Liabilities 2,498,124 2,260,579
----------------- -----------------
LONG-TERM NOTES PAYABLE
Related Party 2,000,000 2,000,000
Other 25,020 25,020
----------------- -----------------
2,025,020 2,025,020
----------------- -----------------
TOTAL LIABILITIES 4,523,144 4,285,599
----------------- -----------------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY
Common Stock, $.003 par value; 40,000,000 shares authorized
Issued and Outstanding: 18,973,749 and 14,457,866 shares at
December 31, 1998 and 1997, respectively 56,922 43,374
Preferred Stock, $.0001 par value; 5,000,000 shares authorized
Issued and Outstanding: none - -
Additional Paid-in-Capital 20,084,928 15,563,330
Deficit Accumulated During the Development Stage (3,824,520) (2,186,676)
----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 16,317,330 13,420,028
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,840,474 $ 17,705,627
================= =================
The accompanying notes are an integral part of the financial statements.
20
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
Four Months Ended
Year Ended December 31, Year Ended
December 31, --------------------------------- August 31,
1998 1997 1996 1997
---------------- --------------- --------------- ---------------
(Unaudited)
Revenue $ - $ - $ - $ -
---------------- --------------- --------------- ---------------
General and Administrative Expenses 1,658,478 447,023 192,330 1,713,461
---------------- --------------- --------------- ---------------
Loss from Operations Before Other Income
and Income Taxes (1,658,478) (447,023) (192,330) (1,713,461)
Interest Income 20,634 58,662 7,329 56,161
Interest Expense - - (8,552) (19,168)
---------------- --------------- --------------- ---------------
Loss From Operations Before Income Taxes (1,637,844) (388,361) (193,553) (1,676,468)
Provision for Income Taxes - - - -
---------------- --------------- --------------- ---------------
Net Loss $ (1,637,844) $ (388,361) $ (193,553) $ (1,676,468)
================ =============== =============== ===============
Net Loss Per Share (basic and diluted) $ (0.10) $ (0.03) $ (0.02) $ (0.14)
================ =============== =============== ===============
Weighted Average Number of Shares
Outstanding 16,015,455 14,348,128 10,601,368 12,143,919
================ =============== =============== ===============
Period Ended Cumulative
August 31, from the Date
1996 of Inception
Revenue ---------------- ---------------
General and Administrative Expenses $ - $ -
---------------- ---------------
Loss from Operations Before Other Income 103,814 3,922,776
and Income Taxes ---------------- ---------------
Interest Income
Interest Expense (103,814) (3,922,776)
1,800 137,257
Loss From Operations Before Income Taxes (19,833) (39,001)
---------------- ---------------
Provision for Income Taxes
(121,847) (3,824,520)
Net Loss - -
---------------- ---------------
Net Loss Per Share (basic and diluted) $ (121,847) $ (3,824,520)
================ ===============
Weighted Average Number of Shares $ (0.01) $ (0.29)
Outstanding ================ ===============
8,610,941 13,267,925
================ ===============
21
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock Additional Total
--------------------- Paid-In Retained Stockholders'
Per Share Shares Amount Capital Deficit Equity
---------- ---------- ---------- -------------- ------------- -----------------
Sale of Shares on April 9, 1996 $0.012 6,242,422 $ 18,727 $ 56,276 $ - $ 75,003
Sale of Shares on May 5, 1996 1.50 2,000,000 6,000 2,994,000 - 3,000,000
Issuance of Shares to an Employee
on July 1, 1996 1.00 30,000 90 29,910 - 30,000
Issuance of Shares in Reorganization to
Former Bexy Shareholders - 600,945 1,803 (1,803) - -
Sale of Shares on July 30, 1996 2.00 50,000 150 99,850 - 100,000
Sale of Shares on August 1, 1996 2.00 508,400 1,525 1,015,275 - 1,016,800
Sale of Shares on August 30, 1996 2.00 500,000 1,500 998,500 - 1,000,000
Expenses Related to Offerings - - - (686,251) - (686,251)
Issuance of Warrants - - - 12,750 - 12,750
Net Loss - - - - (121,847) (121,847)
---------- ------- ---------- --------- ----------
Balance - August 31, 1996 9,931,767 29,795 4,518,507 (121,847) 4,426,455
Sale of Shares on September 12, 1996 2.00 50,000 150 99,850 - 100,000
Sale of Shares on September 16, 1996 2.00 80,250 241 160,259 - 160,500
Conversion of Debt 2.00 105,000 315 209,685 - 210,000
Sale of Shares on October 30, 1996 2.25 457,777 1,373 1,028,627 - 1,030,000
Issuance of Warrants - - - 6,450 - 6,450
Sale of Shares on December 6, 1996 2.25 475,499 1,426 1,068,448 - 1,069,874
Sale of Shares on December 9, 1996 2.50 400,000 1,200 998,800 - 1,000,000
Sale of Shares on December 11, 1996 2.25 22,222 67 49,933 - 50,000
Sale of Shares on December 19, 1996 2.50 200,000 600 499,400 - 500,000
Sale of Shares on December 20, 1996 2.50 220,000 660 549,340 - 550,000
Sale of Shares on February 28, 1997 4.25 352,947 1,059 1,498,967 - 1,500,026
Sale of Shares on March 4, 1997 4.25 352,947 1,059 1,498,966 - 1,500,025
Sale of Shares on May 22, 1997 3.00 535,000 1,605 1,603,395 - 1,605,000
Issuance of Shares to Adjust Prices of
Shares Sold on February 28 and March 4 * - 294,124 883 (883) - -
Sale of Shares on June 26, 1997 3.00 33,333 100 99,900 - 100,000
Sale of Shares on July 24, 1997 3.00 250,000 750 749,250 - 750,000
Issuance of Shares in Connection with
Financial Advisory Services 3.125 200,000 600 624,400 - 625,000
Sale of Shares on July 30, 1997 3.00 100,000 300 299,700 - 300,000
Sale of Shares on August 19, 1997 3.00 100,000 300 299,700 - 300,000
Expenses Related to Offerings - - - (1,153,441) - (1,153,441)
Net Loss - - - - (1,676,468) (1,676,468)
---------- ------- ---------- --------- ----------
Balance - August 31, 1997 14,160,866 42,483 14,709,253 (1,798,315) 12,953,421
*Additional shares were issued to the purchasers of shares sold on February 28,
1997 and March 4, 1997 pursuant to the terms of those sales.
All of the sales of shares indicated above were made pursuant to private
placement transactions.
The accompanying notes are an integral part of the financial statements.
22
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
Common Stock Additional Total
--------------------- Paid-In Retained Stockholders'
Per Share Shares Amount Capital Deficit Equity
---------- ---------- ---------- -------------- ------------- -----------------
Balance - August 31, 1997 14,160,866 42,483 14,709,253 (1,798,315) 12,953,421
Sale of Shares on September 15, 1997 3.00 67,000 201 200,799 - 201,000
Sale of Shares on September 16, 1997 3.00 130,000 390 389,610 - 390,000
Expenses Related to Offerings - (74,532) (74,532)
Issuance of Warrants and Shares with
Bridge Notes on December 15, 1997 2.375 100,000 300 338,200 338,500
Net Loss - - - - (388,361) (388,361)
---------- -------- ----------- ---------- ----------
Balance - December 31, 1997 14,457,866 43,374 15,563,330 (2,186,676) 13,420,028
Sale of Shares on April 8, 1998 2.00 530,000 1,590 1,058,410 - 1,060,000
Issuance of Shares in Settlement of
Charges for Previous Legal Services 1.40 70,000 210 97,790 - 98,000
Sale of Shares on May 29, 1998 2.00 22,000 66 43,934 - 44,000
Sale of Shares on June 4, 1998 1.40 890,644 2,672 1,244,230 - 1,246,902
Expenses Related to Offerings - - - (168,000) - (168,000)
Issuance of Shares to Adjust Prices of
Shares Sold on April 8 and May 29** - 236,572 710 (710) - -
Issuance of Warrants with
Bridge Notes on June 4, 1998 - - - 3,661 - 3,661
Issuance of Shares on August 26, 1998
Pursuant to Exercise of Warrants 1.00 100,000 300 99,700 - 100,000
Sale of Shares on August 31, 1998 0.67 750,000 2,250 499,000 - 501,250
Issuance of Warrants and Shares to
Extend Bridge Notes on March 15 and
September 15, 1998 0.67 50,000 150 349,183 - 349,333
Sale of Shares on November 15, 1998 0.67 1,200,000 3,600 796,400 - 800,000
Sale of Shares on December 30, 1998 0.75 666,667 2,000 498,000 - 500,000
Net Loss - - - - (1,637,844) (1,637,844)
---------- -------- ----------- ---------- ----------
Balance - December 31, 1998 18,973,749 56,922 20,084,928 (3,824,520) 16,317,330
========== ======== =========== ========== ==========
**Additional shares were issued to the purchasers of shares sold on April 8,
1998 and May 29, 1998 at $2.00 per share in order to adjust the purchase
price to the $1.40 per share price offered and received on June 4, 1998.
All of the sales of shares indicated above were made pursuant to private
placement transactions.
The accompanying notes are an integral part of the financial statements.
23
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
Four Months Ended
Year Ended December 31,
December 31, --------------------------------
1998 1997 1996
---------------- --------------- ---------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (1,637,844) $ (388,361) $ (193,553)
Adjustments to Reconcile Net Loss to
Net Cash Used by Operating Activities:
Depreciation and Amortization 39,171 2,936 2,695
Compensation Paid in Common Stock - - -
(Increase) Decrease in Accounts Receivable 4,493 (102,330) -
(Increase) Decrease in Subscriptions Receivable (500,000) - -
(Increase) Decrease in Prepaid Expenses and Other Current Assets 1,710 46,598 (1,832)
Increase (Decrease) in Accounts Payable and Accrued Liabilities 251,378 (18,525) (31,056)
Increase (Decrease) in Advances from Officers - - -
Non-Cash Interest Expense (Issuance of Warrants) - - -
---------------- --------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ (1,841,092) $ (459,682) (223,746)
---------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Fixed Assets (81,810) - (6,180)
Proceeds from Sales of Oil and Gas Seismic Data - 46,000 -
Oil and Gas Property Additions (2,804,905) (3,050,027) (2,000,000)
---------------- --------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (2,886,715) (3,004,027) (2,006,180)
---------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Notes with Detachable Warrants 180,000 4,000,000 -
Proceeds from Issuance of Notes Payable or Advances 697,000 - -
Repayment of Notes Payable or Advances (877,000) (500,000) (215,000)
Sale of Common Stock 4,252,152 591,000 4,460,375
Offering Costs (168,000) (74,532) (689,365)
---------------- --------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,084,152 4,016,468 3,556,010
---------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH (643,655) 552,759 1,326,084
CASH - BEGINNING OF PERIOD 787,523 234,764 1,093,180
---------------- --------------- ---------------
CASH - END OF PERIOD $ 143,868 $ 787,523 $ 2,419,264
================ --------------- ---------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest (net of amounts capitalized) $ - $ 6,718 $ 8,552
================ =============== ===============
Cash Paid for Income Taxes $ - $ - $ -
================ =============== ===============
Year Ended Period Ended Cumulative
August 31, August 31, from the Date
1997 1996 of Inception
---------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (1,676,468) $ (121,847) $ (3,824,520)
Adjustments to Reconcile Net Loss to
Net Cash Used by Operating Activities:
Depreciation and Amortization 8,268 3,603 53,978
Compensation Paid in Common Stock 624,400 30,000 654,400
(Increase) Decrease in Accounts Receivable - - (97,837)
(Increase) Decrease in Subscriptions Receivable - - (500,000)
(Increase) Decrease in Prepaid Expenses and Other Current Assets (52,341) (4,800) (8,833)
Increase (Decrease) in Accounts Payable and Accrued Liabilities 95,397 292,894 621,144
Increase (Decrease) in Advances from Officers (961) 961 -
Non-Cash Interest Expense (Issuance of Warrants) 6,450 12,750 19,200
---------------- --------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (995,255) 213,561 (3,082,468)
---------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Fixed Assets (10,745) (50,933) (143,488)
Proceeds from Sales of Oil and Gas Seismic Data - - 46,000
Oil and Gas Property Additions (9,500,000) (4,000,000) (19,354,932)
---------------- --------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (9,510,745) (4,050,933) (19,452,420)
---------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Notes with Detachable Warrants - 425,000 4,605,000
Proceeds from Issuance of Notes Payable or Advances 500,000 - 1,197,000
Repayment of Notes Payable or Advances (215,000) - (1,592,000)
Sale of Common Stock 10,516,025 5,191,803 20,550,980
Offering Costs (1,153,441) (686,251) (2,082,224)
---------------- --------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,647,584 4,930,552 22,678,756
---------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH (858,416) 1,093,180 143,868
CASH - BEGINNING OF PERIOD 1,093,180 - -
---------------- --------------- ---------------
CASH - END OF PERIOD $ 234,764 $ 1,093,180 $ 143,868
---------------- --------------- ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest (net of amounts capitalized) $ 15,635 $ - $ 22,353
================ =============== ===============
Cash Paid for Income Taxes $ - $ - $ -
================ =============== ===============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
The Company issued 105,000 shares of common stock upon the conversion of
$210,000 of notes payable in September 1996.
In conjunction with its December 1997 Bridge Financing, the Company issued
at closing 100,000 shares of common stock (valued at $237,500) and upon
extension of the maturity date 50,000 shares (valued at $33,500), which were
recorded as debt issuance costs. In the same financing, the Company issued
1,333,334 warrants (valued at $101,000) and 1,987,500 warrants (valued at
$315,833) related to extensions of the maturity dates. In conjunction with a
short-term bridge financing in June 1998, the Company issued 83,334 warrants
(valued at $3,661). The amortization of such warrant costs was included in
interest expense which was capitalized as a cost of oil and gas properties.
In 1998, the Company issued 70,000 shares of common stock (valued at
$98,000) in settlement of invoices for previously rendered legal services.
The accompanying notes are an integral part of the financial statements.
24
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-ORGANIZATION AND NATURE OF OPERATIONS
Cheniere Energy, Inc., a Delaware corporation, is a development stage
company engaged in exploration for oil and gas reserves. The terms "Cheniere"
and "Company" refer to Cheniere Energy, Inc. and its subsidiaries. The Company
operates principally through its wholly-owned subsidiary, Cheniere Energy
Operating Co., Inc. ("Cheniere Operating"). Cheniere Operating is a Houston-
based company formed for the purpose of oil and gas exploration, development and
exploitation. The Company is currently involved in a joint exploration program,
which is engaged in the exploration for oil and natural gas along the Gulf Coast
of Louisiana, onshore and in the shallow waters of the Gulf of Mexico. The
Company commenced its oil and gas activities through such joint program in April
1996.
On July 3, 1996, Cheniere Operating underwent a reorganization by
consummating the transactions (the "Reorganization") contemplated in the
Agreement and Plan of Reorganization (the "Reorganization Agreement") dated
April 16, 1996, between Cheniere Operating and Bexy Communications, Inc., a
publicly held Delaware corporation ("Bexy"). Under the terms of the
Reorganization Agreement, Bexy transferred its existing assets and liabilities
to Mar Ventures, Inc., its wholly-owned subsidiary ("Mar Ventures"). Bexy
received 100% of the outstanding shares of Cheniere Operating (which aggregated
824.2422 common shares outstanding prior to a 10,000-to-1 stock split which was
effected immediately prior to the Reorganization) and the former shareholders of
Cheniere Operating received 8,242,422 newly issued shares of Bexy common stock,
representing 93% of the then-issued and outstanding Bexy shares. Immediately
following the Reorganization, the original Bexy stockholders held the remaining
600,945 shares (7%) of the outstanding Bexy stock. The stock split has been
given retroactive effect in the financial statements. As a result of the
completion of the share exchange, a change in the control of the Company
occurred. The transaction has been accounted for as a recapitalization of
Cheniere Operating. In accordance with the terms of the Reorganization
Agreement, Bexy changed its name to Cheniere Energy, Inc. Subsequently, the
Company distributed the outstanding capital stock of Mar Ventures to the
original holders of Bexy common stock.
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Cheniere
Energy, Inc. and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain prior
period amounts have been reclassified to conform to the current period
presentation.
The financial statements presented include the accounts of the Company
since the inception of Cheniere Operating (February 21, 1996). While Cheniere
Operating did obtain a presence in the public market through the
recapitalization, it did not succeed to the business or assets of Bexy. For this
reason, the value of the shares issued to the former Bexy shareholders has been
deemed to be de minimis and, accordingly, no value has been assigned to those
shares.
On April 7, 1998, the Company's Board of Directors approved a change in
fiscal year-end from August 31 to December 31. The change in year-end resulted
in a transition period from September 1, 1997 to December 31, 1997.
Oil and Gas Properties
The Company follows the full cost method of accounting for its oil and gas
properties. Under this method, all productive and nonproductive exploration and
development costs incurred for the purpose of finding oil and gas reserves are
capitalized. Such capitalized costs include lease acquisition, geological and
geophysical work, delay rentals, drilling, completing and equipping oil and gas
wells, together with internal costs directly attributable to property
acquisition, exploration and development activities. Interest is capitalized on
oil and gas properties not subject to amortization and in the process of
development. The Company capitalized interest in the amount of $1,058,595 for
the year ended December 31, 1998 and $49,616 during the four-month period ended
December 31, 1997. No interest was capitalized prior to the four-month period
ended December 31, 1997.
25
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The costs of the Company's oil and gas properties, including the estimated
future costs to develop proved reserves, will be depreciated using a composite
units-of-production rate based on estimates of proved reserves. Investments in
unproved properties and major development projects are not amortized until
proved reserves associated with the projects can be determined or until
impairment occurs. If the results of an assessment indicate that the properties
are impaired, the amount of the impairment is added to the capitalized costs to
be amortized. Net capitalized costs are limited to a capitalization ceiling,
calculated on a quarterly basis as the aggregate of the present value,
discounted at 10%, of estimated future net revenues from proved reserves, based
on current economic and operating conditions, plus the lower of cost or fair
market value of unproved properties, less related income tax effects.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved oil
and gas reserves.
Debt Issuance Costs
Costs incurred in connection with the issuance of debt are capitalized and
amortized into interest expense (which is then capitalized as a cost of oil and
gas properties) using the straight-line method over the term of the related
debt. Accumulated amortization was $271,000 as of December 31, 1998 and $13,194
as of December 31, 1997.
Fixed Assets
Fixed assets are recorded at cost. Repairs and maintenance costs are
charged to operations as incurred. Depreciation is computed using the straight
line method calculated to amortize the cost of assets over their estimated
useful lives which range from three to seven years. Upon retirement or other
disposition of property and equipment, the cost and related depreciation is
removed from the accounts and the resulting gains or losses recorded.
Offering Costs
Offering costs consist primarily of placement fees, professional fees and
printing costs. These costs are charged against the related proceeds from the
sale of common stock in the periods in which they occur.
Income Taxes
Provisions for income taxes are based on taxes payable or refundable for
the current year and deferred taxes on temporary differences between the amount
of taxable income and pretax financial income and between the tax bases of
assets and liabilities and their reported amounts in the financial statements.
Deferred tax assets and liabilities are included in the financial statements at
currently enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or settled as
prescribed in Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the current period's
provision for income taxes.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related Interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock. The Company grants options at or above the market
price of its common stock at the date of each grant.
26
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings (Loss) Per Share
Earnings (loss) per share ("EPS") is computed in accordance with the
requirements of SFAS No. 128, "Earnings Per Share," which the Company adopted
effective December 31, 1997. Basic EPS excludes dilution and is computed by
dividing net income (loss) by the weighted average number of shares outstanding
during the period. Diluted EPS reflects potential dilution and is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding during the period increased by the number of additional common
shares that would have been outstanding if the potential common shares had been
issued. Basic and diluted EPS for all periods presented are the same since the
effect of the Company's options and warrants is antidilutive to its net loss per
share under SFAS No. 128.
Cash Equivalents
The Company classifies all investments with original maturities of three
months or less as cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value because of the short maturity of those
instruments. The carrying value of the Company's notes payable is considered to
approximate the fair value of those instruments based on the borrowing rates
currently available to the Company for loans with similar terms and maturities.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires that the Company make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates. Management
believes its estimates are reasonable.
NOTE 3-FIXED ASSETS
Fixed assets consist of the following:
December 31,
--------------------------
1998 1997
---------- ---------
Furniture and Fixtures $ 37,442 $ 29,914
Computers and Office Equipment 84,904 31,764
Other 21,143 -
---------- ---------
143,489 61,678
Less Accumulated Depreciation (53,978) (14,807)
---------- ---------
Fixed Assets, Net 89,511 46,871
========== =========
NOTE 4- OIL AND GAS PROPERTIES
The Company's investment in oil and gas properties has been made pursuant
to an Exploration Agreement between Cheniere Operating and Zydeco Exploration,
Inc. ("Zydeco"), an operating subsidiary of Zydeco Energy, Inc. (the
"Exploration Agreement"). The Exploration Agreement defines a proprietary 3-D
seismic exploration project in southern Louisiana (the "3-D Exploration
Program"). The 3-D seismic survey covers 228 square miles
27
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
within a 310 square-mile area running three to five miles north and generally
eight miles south of the coastline in the most westerly 28 miles of Cameron
Parish, Louisiana.
As of December 31, 1997, August 31, 1997, and August 31, 1996, payments
made by Cheniere to Zydeco relative to the 3-D Exploration Program totaled
$16,427,000, $13,500,000 and $4,000,000, respectively. As the result of its cash
payments through December 31, 1997, the Company earned a 50% interest in the 3-D
Exploration Program. Under the terms of the Exploration Agreement and its
amendments, additional payments will be required as prospects are generated
within the 3-D Exploration Program. The Company's level of participation in such
prospects will depend upon its making such required payments when due.
The Company's financial statements reflect its proportionate interest in
the revenues, costs, expenses, and capital with respect to the 3-D Exploration
Program. Because the exploration project had not reached the drilling phase as
of December 31, 1998, a determination had not yet been made as to the extent of
any oil and gas reserves that should be classified as proved. Consequently, all
of the Company's oil and gas property costs are classified as unevaluated and
are not yet subject to depreciation, depletion and amortization. The Company
estimates that during 1999 a portion of these costs will become evaluated and
subject to depreciation, depletion and amortization as well as subject to the
ceiling test limitations on capitalized costs described in Note 2.
NOTE 5-NOTES PAYABLE
December 1997 - $4,000,000 Bridge Financing
In December 1997, Cheniere completed the private placement of a $4,000,000
bridge financing (the "December 1997 Bridge Financing"). The notes payable
issued by Cheniere had an initial maturity date of March 15, 1998, which was
extended to September 15, 1998 and further extended to January 15, 1999. In
December 1998, Cheniere received commitments from certain noteholders to
exchange notes payable for an aggregate of 2,812,528 shares of Cheniere common
stock at a price of $0.72 per share. Accordingly, the $2,025,020 face amount of
the exchanged notes is classified as a long-term obligation as of December 31,
1998. For those notes which were not exchanged for common stock, the maturity
date has been extended to April 15, 1999. The notes bear interest at a rate of
LIBOR plus 4% (ranging from 9.5% to 9.9% through December 31, 1998). The
securities purchase agreements which govern such bridge financing specify that,
during the term of the notes, capital raised by the Company in excess of
$5,000,000 must be directed to repayment of the notes.
In connection with the December 1997 Bridge Financing, Cheniere issued
100,000 shares of common stock and four-year warrants to purchase 1,333,334
shares of common stock at $2-3/8 per share. Additional warrants to purchase
1,600,000 shares of Cheniere common stock were issued on September 15, 1998 in
consideration for the extension to that date. In connection with the extension
to January 15, 1999, the Company offered two alternatives of consideration.
Holders of $3,000,000 of the notes elected to reduce the exercise price of their
warrants to $1.50. The holder of $1,000,000 of the notes elected to reduce the
exercise price of its warrants to $2.00 per share, to extend the term of such
warrants to five years from the latter of September 15, 1998 or the date of
issue, to receive additional warrants to purchase 387,500 shares of common stock
and to receive 50,000 shares of common stock. In January 1999, the maturity
date was extended to March 15, 1999. In March 1999, the maturity date was
extended to April 15, 1999. As consideration for the extension to April 15,
1999, the Company reduced the exercise price by $0.25 per share for all warrants
issued in connection with the issuance or extensions of the notes. The common
stock issued in connection with the December 1997 closing and the September 1998
extension was recorded as a debt issuance cost at the then-market price for the
shares.
June 1998 - $180,000 Bridge Notes
In June 1998, the Company issued $180,000 in short-term notes with
detachable warrants to purchase 83,334 shares of common stock at an exercise
price of $2.00 per share on or before June 4, 2002. Such notes bore interest at
LIBOR plus 4% (9.7%) and matured on August 14, 1998. After extensions to dates
on or about August 31, 1998, the notes were repaid in full.
July 1997 - $500,000 Notes Payable - Related Party
On July 31, 1997, Cheniere Operating borrowed $500,000 from Sam B. Myers,
Jr., Chairman of Zydeco Energy, Inc., evidenced by a promissory note bearing
interest at 10% per annum and due on August 29, 1997. On August 28, 1997, the
maturity date was extended to September 29, 1997. The Company repaid the
$500,000 promissory note, including all accrued interest, on September 22, 1997.
28
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6-INCOME TAXES
From its inception the Company has recorded losses for both financial
reporting purposes and for federal income tax reporting purposes. Accordingly,
the Company is not presently a taxpayer and has not recorded a provision for
income taxes in any of the periods presented in the accompanying financial
statements.
At December 31, 1998, the Company had net operating loss ("NOL")
carryforwards for tax reporting purposes of approximately $4,571,000. In
accordance with SFAS No. 109, a valuation allowance equal to the tax benefit for
deferred taxes has been established due to the uncertainty of realizing the
benefit of such NOL carryforwards.
Deferred tax assets and liabilities reflect the net tax effect of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities at December 31,
1998 and 1997 are as follows:
December 31,
--------------------------
Deferred Tax Assets 1998 1997
------------ ----------
NOL Carryforwards $ 1,554,000 $ 997,000
Less: Valuation Allowance (1,554,000) (997,000)
------------ ----------
Net Deferred Tax Assets $ - $ -
============ ==========
Net operating loss carryforwards expire starting in 2006 extending through
2013. Per year availability of losses incurred prior to July 3, 1996 of
approximately $747,000 is subject to change of ownership limitations under
Internal Revenue Code Section 382.
NOTE 7-WARRANTS
As of December 31, 1998 the Company has issued and outstanding 4,703,334
and 2/3 warrants. The Company has reserved an equal number of shares of common
stock for issuance upon the exercise of its outstanding warrants. Warrants
issued by the Company do not confer upon the holders thereof any voting or other
rights of a stockholder of the Company. The issuances and terms of the warrants
are described below.
December 1997 Bridge Financing Warrants
In connection with Cheniere's $4,000,000 December 1997 Bridge Financing
(Note 5), the Company issued warrants to purchase 1,333,334 shares of common
stock at $2-3/8 per share. Additional warrants to purchase 1,600,000 shares of
Cheniere common stock were issued on September 15, 1998 in consideration for the
extension to that date. In connection with the extension to January 15, 1999,
the Company offered two alternatives of consideration. Holders of warrants to
purchase 2,200,000 shares of common stock elected to reduce the exercise price
of their warrants to $1.50. The holder of warrants to purchase 733,334 shares
of common stock elected to reduce the exercise price of its warrants to $2.00
per share, to extend the term of such warrants to five years from the latter of
September 15, 1998 or the date of issue, to receive additional warrants to
purchase 387,500 shares of common stock and to receive 50,000 shares of common
stock. In January 1999, the maturity date was extended to March 15, 1999. In
March 1999, the maturity date was extended to April 15, 1999. As consideration
for the extension to April 15, 1999, the Company reduced the exercise price by
$0.25 per share for all warrants issued in connection with the issuance or
extensions of the notes. Pursuant to APB Opinion No. 14, the warrants have been
valued at the differential between the stated interest rate (LIBOR plus 4%) and
the Company's then-estimated market interest rate (20%), applied to the
principal balance outstanding for the initial term of the notes and the term
29
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of the extension for which shares were issued as consideration. These amounts
($420,494 in the aggregate) have been credited to additional paid-in capital and
recorded as interest expense, which has been capitalized to oil and gas
properties ($403,661 in the year ended December 31, 1998 and $16,833 in the
four-month period ended December 31, 1997).
Unit Warrants
In August, September, November, and December 1998, the Company sold
1,950,000 units, each such unit consisting of one share of common stock and one-
half warrant to purchase one share of common stock. Each such warrant is
exercisable within two years from the date of issue at an exercise price of
$2.00 per share.
Adviser Warrants
In consideration of certain investment advisory and other services to the
Company, and pursuant to warrant agreements, each dated as of August 21, 1996,
the Company issued warrants to purchase 13,600 and 54,400 shares of common
stock, (collectively the "Adviser Warrants"). The Adviser Warrants are
exercisable at any time on or before May 15, 1999, at an exercise price of $3.00
per share. The exercise price represents the approximate market price of the
underlying common stock at the time of the transaction.
June Warrants
In conjunction with the issuance of the $425,000 in notes payable, the
Company issued and continues to have outstanding 141,666 and 2/3 warrants
(collectively, the "June Warrants"), each of which entitles the registered
holder thereof to purchase one share of common stock. The June Warrants are
exercisable at any time on or before June 14, 1999, at an exercise price of
$3.00 per share. The exercise price was determined at a 100% premium to the
sales price of Cheniere stock by private placement during May 1996. The June
Warrants were originally issued by Cheniere and were converted to warrants of
Cheniere following the Reorganization. The June Warrants were issued to a group
of eleven investors in connection with a private placement of unsecured
promissory notes. Pursuant to APB Opinion No. 14, the warrants issued have been
valued at the differential rate between the initial interest rate (8%) and the
Company's then-estimated market rate (20%), applied to the outstanding principal
balance. This value, $12,750, has been credited to additional paid-in capital
and charged to interest expense for the period ended August 31, 1996.
Effective September 14, 1996, the Company had not paid all amounts due and
payable under the notes by the Maturity Date. Certain of the noteholders
converted their notes into 105,000 shares of common stock. One of the
noteholders purchased the promissory notes of the remaining noteholders. As per
the terms of the notes, the holder was entitled to receive up to an aggregate of
21,500 additional warrants for each month, or partial month, any amounts
remained due and payable after September 14, 1996, up to a maximum aggregate
number of 86,000 such additional warrants. These notes were repaid on
December 14, 1996, and upon repayment the Company issued 64,500 warrants in
accordance with the loan agreement. The terms of the warrants are similar to the
June Warrants. Pursuant to APB Opinion No. 14, these additional warrants have
been valued at the differential rate between the rate charged (13%) and the
Company's then-estimated market rate (25%), applied to the principal balance for
each month outstanding after September 14, 1996. This value, $6,450, has been
credited to additional paid-in capital and charged to interest expense for the
period ended August 31, 1997.
Commission Warrants
In connection with the July and August 1996 placement of 508,400 shares of
common stock, the Company issued warrants to purchase 12,500 shares of common
stock to one of two distributors who placed the shares. Such warrants are
exercisable on or before the second anniversary of the sale of the shares of
common stock at an exercise price of $3.125 per share. The exercise price
represents the approximate market price of the underlying common stock at the
time of the transaction.
30
CHENIERE ENERGY, INC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8-STOCK OPTIONS
In 1997 the Company established the Cheniere Energy, Inc. 1997 Stock Option
Plan (the "Option Plan"). The Option Plan allows for the issuance of options to
purchase up to 950,000 shares of Cheniere common stock, and the Company has
reserved 950,000 shares of common stock for issuance upon the exercise of
options which have been granted or which may be granted. The term of options
granted under the Option Plan is generally five years. The vesting schedule
varies, but vesting generally occurs over four years, 25% on each anniversary of
the grant date. Grants made by the Company are summarized in the following
table:
December 31,
---------------------------
1998 1997
----------- -----------
Outstanding at beginning of period 539,444.67 319,444.67
Options granted at an exercise price of $3.00 per share 135,000.00 220,000.00
Options granted at an exercise price of $1.50 per share 12,000.00 -
Options canceled - -
----------- -----------
Outstanding at end of period 686,444.67 539,444.67
=========== ===========
Exercisable at end of period 320,694.67 131,944.67
=========== ===========
Weighted average exercise price of options outstanding $ 1.68 $ 2.96
=========== ===========
Weighted average exercise price of options exercisable $ 1.67 $ 2.82
=========== ===========
Weighted average fair value of options granted during the period $ 0.79 na
=========== ===========
Weighted average remaining contractual life of options outstanding 3.4 years 4.0 years
The following table summarizes information about fixed options
outstanding at December 31, 1998.
Weighted Average
Exercise Number Remaining
Prices Outstanding Contractual Life
-------- ----------- ----------------
$1.50 587,000.00 4.9
$1.80 19,444.67 3.2
$3.00 80,000.00 4.0
The fair value of options is calculated using the Black-Scholes option
pricing model. Assumptions used for the year ended December 31, 1998 were: no
dividend yield, weighted average volatility of 88%, risk-free interest rate of
4.6% and a 2.5 year expected life of the options. The pro forma effect on the
Company's net loss had it adopted the optional recognition provisions of SFAS
No. 123 for 1998 would be to increase the reported net loss by $155,000 or $0.01
per share (both basic and diluted). The disclosure only provisions of SFAS
No. 123 for periods earlier than 1998 do not have a material effect on the
Company's financial statements.
On December 11, 1998, the Company adjusted the exercise price from $3.00 to
$1.50 per share for the 575,000 options then issued and outstanding to
management and employees.
NOTE 9-SUBSCRIPTIONS RECEIVABLE
At December 31, 1998, the Company had received and accepted a subscription
for the purchase of 666,667 shares of common stock at a price of $0.75 per
share. Funding of the stock sale took place on January 6, 1999.
31
CHENIERE ENERGY, INC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10-RELATED PARTY TRANSACTIONS
The Company's $4,000,000 December 1997 Bridge Financing included two
tranches: one domestic and one European. In conjunction with the European
tranche, BSR Investments, Ltd., a major stockholder of the Company controlled by
the mother of Charif Souki, Co-Chairman of Cheniere, purchased $2,000,000 of the
notes and pledged a portion of its investment in Cheniere common stock to fund
its participation. In conjunction with the financing, BSR received warrants to
purchase 166,667 shares of the Company's common stock. On September 15, 1998,
BSR received warrants to purchase an additional 400,000 shares of common stock
as consideration for extending the maturity of the notes to that date. Also in
September 1998, the exercise price of the warrants held by BSR was reduced from
$2.375 to $1.50 per share as consideration to extend the maturity date of the
notes to January 15, 1999. In December 1998, BSR agreed to exchange notes
payable of $2,000,000 for 2,777,778 shares of Cheniere common stock ($0.72 per
share).
In conjunction with certain of the Company's private placements of equity,
placement fees have been paid to Investors Administration Services, Limited
("IAS"), a company in which the brother of Charif Souki, Cheniere's Co-Chairman,
is a principal. Placement fees paid to IAS totaled $138,000 for the year ended
December 31, 1998 and $255,000 for the year ended August 31, 1997. Such
payments were recorded as offering costs and reflected as a reduction of
additional paid-in capital.
During June 1998, the Company received and repaid short-term advances from
Co-Chairman of the Board, William D. Forster, and members of his family or
entities under their control, totaling $592,000. Interest was paid at LIBOR
plus 4% and totaled $1,622. In addition, non-interest bearing, short-term
advances totaling $105,000 were made to the Company by Co-Chairman Forster
($75,000) and BSR ($30,000) in October and November 1998. Such advances were
repaid by the Company in October and November 1998.
NOTE 11-COMMITMENTS AND CONTINGENCIES
The Company subleased its Houston, Texas headquarters from Zydeco under a
month-to-month sublease until March 1998. In March 1998, the Company terminated
its sublease from Zydeco for office space and entered into a lease for 2,678
square feet of office space from an unrelated third party at a monthly rental of
$4,190. The term of the lease is six years. In February 1999, Cheniere amended
its office lease agreement to cover a total of 12,102 square feet with a monthly
rental of $19,612.
Rent expense recorded in the financial statements is as follows:
Four-Month Period Ended
Year Ended Period Ended August 31,
December 31, December 31, --------------------------
1998 1997 1997 1996
------------ ------------ ---------- ------------
Office Rental (including parking) $ 52,558 $ 6,887 $ 22,403 $ 3,884
Other Rental Property (terminated June 1997) - - 48,000 13,920
------------ ------------ ---------- ------------
$ 52,558 $ 6,887 $ 70,403 $ 17,804
============ ============ ========== ============
32
CHENIERE ENERGY, INC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12-SUBSEQUENT EVENTS
In January 1999, Cheniere sold for $658,000 a 15% working interest in each
of three prospects and an option for the same company to participate in three
additional prospects. Cheniere also sold for $275,000 a seismic option covering
three more prospects within the Survey AMI. In February 1999, the Company
commenced drilling a test well on the first prospect of its exploration program.
On March 26, 1999, the Company abandoned its completion attempt on the first
well and began drilling a test well on its second prospect.
On February 2, 1999 and March 15, 1999, the Company issued 2,812,528 shares
of common stock in exchange for certain notes payable with an aggregate face
amount of $2,025,020.
NOTE 13-MANAGEMENT'S PLANS AND CONTINUED CAPITAL RAISING ACTIVITIES
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Cheniere is a
development stage company which has not yet generated any operating revenues.
At various times during the life of the Company to date, it has been necessary
for the Company to raise additional capital through private placements of debt
or equity financing. When such a need has arisen, the Company has met it
successfully. It is management's belief that it will continue to be able to
meet its needs for additional capital as such needs arise in the future.
At December 31, 1998, the Company had $4,000,000 outstanding in senior term
notes payable which matured on January 15, 1999. These notes were issued as
part of a bridge financing in conjunction with an offering of units comprised of
preferred stock and warrants to purchase common stock. The units offering was
subsequently withdrawn. The Company has issued 2,812,528 shares of common stock
in exchange for notes totaling $2,025,020. The remaining notes have been
extended and mature on April 15, 1999. Cheniere intends to raise additional
capital for the repayment of the notes through the sale of common stock.
In the event that the Company should not be successful in future efforts to
raise capital for its operations, management believes that trades or sales of
partial interests to industry partners would be utilized to explore and develop
the Company's oil and gas properties, but the ownership interest which would be
retained by the Company would be reduced accordingly.
33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required to be presented under this item, concerning the
Company's change in certifying accountants, is incorporated by reference to the
Current Report on Form 8-K filed by the Company on May 22, 1998.
PART III
In accordance with paragraph (3) of General Instruction G to form 10-K,
Part III of this Report is omitted because the Company will file with the
Securities and Exchange Commission not later than 120 days after the end of the
fiscal year ended December 31, 1998 a definitive proxy statement pursuant to
Regulation 14A involving the election of directors, which proxy statement is
incorporated herein by reference (with the exception of certain portions noted
therein that are not so incorporated by reference).
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Schedules and Exhibits
(1) Financial Statements
Report of Independent Accounts................... 19
Consolidated Balance Sheet....................... 20
Consolidated Statement of Operations............. 21
Consolidated Statement of Stockholders' Equity... 22
Consolidated Statement of Cash Flows............. 24
Notes to Consolidated Financial Statements....... 25
(2) Financial Statement Schedule
All consolidated financial statement schedules have been omitted
because they are not required, are not applicable, or the information
has been included elsewhere.
(3) Exhibits
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of Cheniere
Energy, Inc. ("Cheniere") (Incorporated by reference to
Exhibit 3.1 of the Company's Registration Statement on Form S-1
filed on August 27, 1996 (File No. 333-10905))
3.2 By-laws of Cheniere as amended through April 7, 1997
4.1 Specimen Common Stock Certificate of Cheniere (Incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement
on Form S-1 filed on August 27, 1996 (File No. 333-10905))
10.1 Exploration Agreement between FX Energy, Inc. (now known as
Cheniere Energy Operating Co., Inc. ("Cheniere Operating")) and
Zydeco Exploration, Inc. ("Zydeco") (Incorporated by reference to
Exhibit 10.1 of the Company's Registration Statement under the
Securities Act of 1933 on Form S-1 filed on August 27, 1996 (File
No. 333-10905))
10.2 First Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco (Incorporated
by reference to Exhibit 10.2 of the Company's Registration
Statement on Form S-1 filed on August 27, 1996 (File
No. 333-10905))
10.3 Second Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco (Incorporated
by reference to Exhibit 10.3 of the Company's Registration
Statement on Form S-1 filed on August 27, 1996 (File
No. 333-10905))
10.4 Third Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco (Incorporated
by reference to Exhibit 10.4 of the Annual Report on Form 10-K
filed on November 27, 1996 (File No. 2-63115))
10.5 Form of Noteholders Agreement between Cheniere and the holders of
promissory notes in the aggregate principal amount of $425,000
(Incorporated by reference to Exhibit 10.4 of the Company's
Registration Statement on Form S-1 filed on August 27, 1996 (File
No. 333-10905))
10.6 Asset Transfer, Assignment and Assumption Agreement between Bexy
Communications, Inc. and Mar Ventures, Inc. (Incorporated by
reference to Exhibit 10.6 of the Company's Registration Statement
on Form S-1 filed on August 27, 1996 (File No. 333-10905))
10.7 Indemnification Agreement between Buddy Young, Cheniere, Cheniere
Operating and the shareholders of Cheniere Operating named
therein (Incorporated by reference to Exhibit 10.7 of the
Company's Registration Statement on Form S-1 filed on August 27,
1996 (File No. 333-10905))
35
10.8 Form of Warrant Agreement between Cheniere and each of C.M.
Blair, W.M. Foster & Co., Inc. and Redliw Corp. (Incorporated by
reference to Exhibit 10.8 of the Company's Registration Statement
on Form S-1 filed on August 27, 1996 (File No. 333-10905))
10.9 Fourth Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco (Incorporated
by reference to Exhibit 10.12 of the Company's Registration
Statement on Form S-1 filed on March 17, 1997 (File
No. 333-23421))
10.10 Form of Letter Agreement between Cheniere and certain purchasers
of Common Stock pursuant to Regulation S (Incorporated by
reference to Exhibit 10.13 of the Company's Registration
Statement on Form S-1 filed on March 17, 1997 (File
No. 333-23421))
10.11 Form of Warrant Agreement between Cheniere and Reefs & Co., Ltd.
(Incorporated by reference to Exhibit 10.16 of the Annual Report
on Form 10-K filed on October 14, 1997 (File No. 0-9092))
10.12 Form of Warrant Agreement governing warrants issued pursuant to
Noteholders Agreement (Incorporated by reference to Exhibit 10.17
of the Annual Report on Form 10-K filed on October 14, 1997 (File
No. 0-9092))
10.13 Fifth Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco (Incorporated
by reference to Exhibit 10.18 of the Annual Report on Form 10-K
filed on October 14, 1997 (File No. 0-9092))
10.14 Sixth Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco (Incorporated
by reference to Exhibit 10.19 of the Annual Report on Form 10-K
filed on October 14, 1997 (File No. 0-9092))
10.15 10.21 10.22 10.23 Seventh Amendment to the Exploration
Agreement between FX Energy, Inc. (now known as Cheniere
Operating) and Zydeco (Incorporated by reference to Exhibit 10.23
of the Annual Report on Form 10-K filed on October 14, 1997 (File
No. 0-9092))
10.16 Cheniere Energy, Inc. 1997 Stock Option Plan (Incorporated by
reference to Exhibit 10.25 of the Quarterly on Form 10-Q filed on
January 14, 1998 (File No. 0-9092))
10.17 Eighth Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco (Incorporated
by reference to Exhibit 10.26 of the Transition Report in
Form 10-K for the period from September 1, 1997 to December 31,
1997 (File No. 0-9092))
10.18 Form of Securities Purchase Agreement dated December 15, 1997
(Incorporated by reference to Exhibit 10.27 of the Transition
Report in Form 10-K for the period from September 1, 1997 to
December 31, 1997 (File No. 0-9092))
10.19 Form of First Amendment to Securities Purchase Agreement dated
December 15, 1997 (Incorporated by reference to Exhibit 10.28 of
the Transition Report in Form 10-K for the period from
September 1, 1997 to December 31, 1997 (File No. 0-9092))
10.20 Securities Purchase Agreement among Cheniere, Arabella S.A., Alba
Limited and Scorpion Energy Partners dated December 15, 1997
(Incorporated by reference to Exhibit 10.29 of the Transition
Report in Form 10-K for the period from September 1, 1997 to
December 31, 1997 (File No. 0-9092))
10.21 Letter Agreement between Cheniere and Zydeco dated December 31,
1997 (Incorporated by reference to Exhibit 10.30 of the
Transition Report in Form 10-K for the period from September 1,
1997 to December 31, 1997 (File No. 0-9092))
10.22 Services Agreement dated October 1, 1998 between Cheniere and
Charif Souki
10.23 Form of Second Amendment to Securities Purchase Agreement dated
December 15, 1997
10.24 Form of Third Amendment to Securities Purchase Agreement dated
December 15, 1997
10.25 Form of Fourth Amendment to Securities Purchase Agreement dated
December 15, 1997
10.26 Form of Fifth Amendment to Securities Purchase Agreement dated
December 15, 1997
10.27 Exchange Agreement between Cheniere and BSR Investments, Ltd.
21.1 Subsidiaries of Cheniere Energy, Inc. (Incorporated by reference
to Exhibit 21.1 of the Annual Report on Form 10-K filed on
October 14, 1997 (File No. 0-9092))
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
36
(b) Reports On Form 8-K
The Company filed a Current Report on Form 8-K on December 14,
1998, regarding its binding award from an independent panel of arbitrators.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHENIERE ENERGY, INC.
By: /s/ WALTER L. WILLIAMS
-----------------------
Walter L. Williams
President and Chief Executive Officer
Date: March 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ WILLIAM D. FORSTER Co-Chairman of the Board March 26, 1999
- ----------------------
William D. Forster
/s/ CHARIF SOUKI Co-Chairman of the Board March 26, 1999
- ----------------
Charif Souki
/s/ WALTER L. WILLIAMS President and Chief Executive Officer, March 26, 1999
- ---------------------- Director
Walter L. Williams
/s/ DON A. TURKLESON Chief Financial Officer, Secretary and March 26, 1999
- -------------------- Treasurer
Don A. Turkleson
/s/ MICHAEL L. HARVEY Director March 26, 1999
- ---------------------
Michael L. Harvey
/s/ KENNETH R. PEAK Director March 26, 1999
- -------------------
Kenneth R. Peak
/s/ CHARLES M. REIMER Director March 26, 1999
- ---------------------
Charles M. Reimer
/s/ EFREM ZIMBALIST, III. Director March 26, 1999
- -------------------------
Efrem Zimbalist, III
38