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.
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.
PART II
ITEM 5.
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.
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
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.
ITEM 7.
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.
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.
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.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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
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
CHENIERE ENERGY, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED BALANCE SHEET
The accompanying notes are an integral part of the financial statements.
CHENIERE ENERGY, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENT OF OPERATIONS
CHENIERE ENERGY, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
*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.
CHENIERE ENERGY, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
**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.
CHENIERE ENERGY, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENT OF CASH FLOWS
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.
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.
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.
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
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.
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
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.
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:
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.
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:
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.
ITEM 9.
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).
PART IV
ITEM 14.
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))
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
(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.
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.