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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE PERIOD FROM INCEPTION (FEBRUARY 21, 1996) TO AUGUST 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-9092
CHENIERE ENERGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
95-4352386
DELAWARE (I.R.S. EMPLOYER
(STATE OR OTHER JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
77002-4312
1200 SMITH ST. SUITE 1710 (ZIP CODE)
HOUSTON, TEXAS
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
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, $0.03 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 voting stock held by non-affiliates of the
registrant was approximately $19,446,458 as of November 22, 1996.
10,624,794 shares of the registrant's Common Stock were outstanding as of
November 22, 1996.
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CHENIERE ENERGY, INC.
INDEX TO FORM 10-K
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PAGE
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PART I
Items 1 and 2. Business and Properties.................................... 3
Item 3. Legal Proceedings................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders............... 15
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters.................................................................. 16
Item 6. Selected Financial Data........................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 17
Item 8. Financial Statements and Supplementary Data....................... 19
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................... 34
PART III
Item 10. Directors and Executive Officers of the Registrant............... 34
Item 11. Executive Compensation........................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and Management... 36
Item 13. Certain Relationships and Related Transactions................... 37
PART IV
Item 14. Exhibits, Consolidated Financial Statements and Reports on Form
8-K...................................................................... 37
SIGNATURES................................................................ 39
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PART 1
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
THE COMPANY
Cheniere Energy, Inc. ("Cheniere," together with Cheniere Operating (as
defined below), the "Company") is the owner of 100% of the outstanding common
stock of Cheniere Energy Operating Co., Inc. ("Cheniere Operating"). Cheniere
Operating is a Houston-based company formed for the purpose of oil and gas
exploration and if warranted, development and exploitation. Cheniere Operating
was incorporated in Delaware in February 1996 under the name FX Energy, Inc.
The Company has not yet established oil and gas production, nor has it
booked proven oil and gas reserves. The Company is currently a development
stage enterprise with no operating revenues and no expectation of generating
meaningful operating revenues before calendar year 1998.
On July 3, 1996 Cheniere Operating consummated 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 (7%)
of the outstanding Bexy stock. This 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.
The Common Stock of the Company is traded on the over-the-counter market and
quoted on the OTC Bulletin Board (the "Bulletin Board") of the National
Association of Securities Dealers (the "NASD") (ticker symbol "CHEX") with
10,624,794 shares outstanding as of November 22, 1996. The Company has applied
for a Nasdaq SmallCap Market listing.
The Company's principal executive offices are located at Two Allen Center,
1200 Smith Street, Suite 1710, Houston, Texas 77002. The Company's telephone
number is (713) 659-1361.
GENERAL
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 in April 1996 through such joint
exploration program, and since July 3, 1996 has been publicly traded under the
name Cheniere Energy, Inc.
The Company is involved with one major project in the pre-development stage.
The Company entered into a joint exploration program pursuant to an
Exploration Agreement dated April 4, 1996 between FX Energy, Inc., now known
as Cheniere Operating, and Zydeco Exploration, Inc. ("Zydeco"), an operating
subsidiary of Zydeco Energy, Inc. (the "Exploration Agreement"), with regard
to a new proprietary 3-D seismic exploration project in southern Louisiana
(the "3-D Exploration Program"). The Company has the right to earn up to a 50%
participation in the 3-D Exploration Program. The Company believes that the 3-
D seismic survey (the "Survey") is the first of its size that crosses the
coastline within the Transition Zone of Louisiana, an area extending a few
miles on either side of the Louisiana State coastline. The Survey is to be
conducted over certain areas located within a total area of approximately 255
square miles running 5 miles south and generally 3 to 5 miles north of the
coastline in the most westerly 28 miles of West Cameron Parish, Louisiana (the
"Survey AMI"). Currently,
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the 3-D Exploration Program has permits and similar rights to survey
approximately 84% (210 square miles) of the Survey AMI and is attempting to
acquire rights to survey additional portions of the Survey AMI. Accordingly,
the 3-D Exploration Program does not currently have rights to survey the
entire Survey AMI and the extent of the Survey AMI which the 3-D Exploration
Program will be entitled to survey is dependent upon its ability to obtain
survey permits and similar rights. The 3-D Exploration Program will survey
specific sections selected by it within the areas covered by such permits and
rights. See "--Permit and Lease Status Within the Survey AMI." A seismic data
acquisition contract has been signed and the 3-D Exploration Program has begun
to conduct the Survey.
On July 26, 1996, the Company signed a Letter of Intent with Poseidon
Petroleum, LLC ("Poseidon") to purchase Poseidon's 47% working interest in
undeveloped reserves in the Bonito Unit of the Pacific Outer Continental
Shelf, offshore Santa Barbara County, California (the "Poseidon Interest").
The parties are conducting due diligence and are negotiating a definitive
purchase and sale agreement and related documentation. The transactions
contemplated in the Letter of Intent may be terminated by either party upon
the occurrence of certain events and there can be no assurance that the
Company will successfully consummate such transactions. Moreover, if such
transactions are consummated, the Company expects that development of the
reserves will not occur for at least five years. There can be no assurance
economically feasible oil and gas reserves exist in Poseidon's leases in the
Bonito Unit until economic feasibility studies have been concluded.
BUSINESS STRATEGY
The Company's objective is to increase the net value of its assets per share
by growing its oil and gas reserves 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.
Louisiana Gulf Coast Transition Zone. The Company's current activities are
focused within one area, the Transition Zone of Louisiana. 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 reserves. The 3-D Exploration Program therefore
plans to focus its efforts on certain areas, all located within The Survey
AMI. In addition, the substantial infrastructure along the Gulf Coast and
in the shallow Gulf of Mexico facilitates the timely development of oil and
gas discoveries at relatively attractive capital costs compared to those in
some other geographic regions. The Company's officers and the Zydeco 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.
Offshore California. The Company has signed a Letter of Intent with
Poseidon to purchase Poseidon's 47% working interest in undeveloped
reserves in the Bonito Unit of the Pacific Outer Continental Shelf,
offshore Santa Barbara County, California. An independent reserve report is
being prepared to determine an estimate of the volume of undeveloped oil
and gas reserves attributable to the Poseidon Interest. The parties are
conducting due diligence and are negotiating a definitive purchase and sale
agreement and related documentation. The transactions contemplated in the
Letter of Intent may be terminated by either party upon the occurrence of
certain events and there can be no assurance that the Company will
successfully consummate such transactions. Moreover, if such transactions
are consummated, the Company expects that development of the reserves will
not occur for at least five years. There can be no assurance that
economically feasible oil and gas reserves exist in Poseidon's leases in
the Bonito Unit until economic feasibility studies have been concluded.
. MAINTAIN A SIGNIFICANT WORKING INTEREST IN EACH PROJECT. The Company has
the right to earn up to a 50% participation in the 3-D Exploration Program.
Under the terms of the Exploration Agreement, the Company must timely meet
its payment obligations to the 3-D Exploration Program in order to reach a
50% participation. The Company does not intend to be an operator in the
area, but intends to maintain a significant working interest to better
leverage its administrative and technical resources and to better influence
operator decisions.
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. UTILIZE THE LATEST EXPLORATION, DEVELOPMENT AND PRODUCTION TECHNOLOGY. The
Company intends to use 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. Toward that end, Zydeco has leased for use by
the 3-D Exploration Program a Hewlett Packard/Convex SPP-1600 parallel
processing system and has purchased software to process seismic data from
the 3-D Exploration Program.
. CONTROL OVERHEAD COSTS. The Company plans to maintain a small, but
experienced working staff, and to leverage their talents by focusing on a
relatively few projects which have high reserve potential in which it can
obtain a high working interest, and to employ outside consultants and seek
industry partners with the appropriate geographic and technical experience.
Currently, the Company has no employees other than its executive officers
and one administrative assistant.
THE 3-D EXPLORATION PROGRAM IN WEST CAMERON PARISH, LOUISIANA TRANSITION ZONE
The Company's first exploration project is the 3-D Exploration Program, in
which the Company has the right to earn up to a 50% participation, in a new
proprietary 3-D seismic exploration project that the Company believes will be
the largest of its kind that crosses the coastline within the Louisiana
Transition Zone. The Survey AMI covers approximately 255 square miles situated
onshore and offshore over the most westerly 28 miles of the shoreline in West
Cameron Parish, Louisiana.
The 3-D Exploration Program must obtain permits or similar rights to survey
the areas located within the Survey AMI. Currently, the 3-D Exploration
Program has rights to Survey 51,360 net acres of Louisiana State Waters,
pursuant to an exclusive permit, approximately 23,000 acres of Federal OCS
Waters and certain privately held areas onshore which together constitute
approximately 84% (210 square miles) of the Survey AMI and is attempting to
acquire rights from additional private owners. There can be no assurance that
the 3-D Exploration Program will successfully obtain rights to survey
additional portions of the Survey AMI. The 3-D Exploration Program intends to
survey specific sections selected by it within the areas covered by its
permits and similar rights. See "--Permit and Lease Status Within the Survey
AMI." An acquisition contract with Grant Geophysical, Inc. has been signed and
the 3-D Exploration Program has begun to conduct the Survey.
Exploration Agreement
Under the terms of the Exploration Agreement, Cheniere Operating is
obligated to pay 100% of the Seismic Costs (as defined below) up to $13.5
million (subject to adjustment as described in the following sentence) in
accordance with a fixed schedule of monthly payments, and 50% of the excess of
any such costs, to acquire a 50% working interest participation in the leasing
and drilling of all Prospects (as defined below) generated by Zydeco within
the Survey AMI. If premiums required for turnkey contracts cause total Seismic
Costs to exceed $13.5 million, Cheniere Operating will bear 100% of Seismic
Costs only up to $13 million, and Seismic Costs greater than $13 million will
be borne equally by Cheniere Operating and Zydeco. "Seismic Costs" are defined
in the Exploration Agreement to include the following, inter alia: costs paid
to third parties for acquiring and processing seismic data; turnkey contracts;
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. See "--Permit and Lease Status Within the Survey AMI-Offshore
Area."
Under the terms of the Exploration Agreement, Zydeco will perform, or cause
to be performed, all of the planning, land, geologic and interpretative
functions necessary to the project and will 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 and includes the leasehold,
operating, nonoperating, mineral and royalty interests, licenses, permits and
contract rights relating thereto. Cheniere Operating has the right to review
all data and may elect to generate its own Prospects. Neither party to the 3-D
Exploration Program is permitted to sell or license the data without the other
party's approval.
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As described above, under the terms of the Exploration Agreement, Cheniere
Operating is obligated to make payments for the Seismic Costs into a joint
venture account (the "Joint Venture Account"). The Exploration Agreement
originally provided for an initial installment of $3 million to be paid by May
15, 1996, which was extended to June 14, 1996 by agreement of the parties.
Subsequent payments were due on the last day of each of the months of June
1996 through February 1997. Each of the payments was required to be in the
amount of $1 million with the exception of the payments at the end of
September 1996 and February 1997 which were required to be for $2 million and
$1.5 million, respectively (although the February 1997 payment may be reduced
to $1.0 million under certain circumstances described above).
Pursuant to the Second Amendment to the Exploration Agreement dated August
5, 1996, Cheniere Operating was required to make the payments due on June 30,
1996 and July 30, 1996 on August 5, 1996 and October 31, 1996, respectively.
Such payments have been timely made. At August 31, 1996, Cheniere Operating
had paid $4 million to the Joint Venture Account, and subsequently advanced
payments of $1 million each on September 4, 1996 and October 31, 1996. Total
such payments for Seismic Costs at October 31, 1996 were $6 million. Effective
October 31, 1996, the Company and Zydeco amended the Cheniere Agreement (Third
Amendment to the Exploration Agreement dated October 31, 1996) to delay the
timing of the remaining payments required to be paid consistent with Zydeco's
current expectations of the timing of costs to be incurred on the project. The
remaining payments are due on the last days of November 1996, and January,
February and March of 1997. A failure by Cheniere to make the November payment
on such date will be treated as a Discontinuance (as defined below). Each of
the payments is required to be in the amount of $2 million, with the exception
of the final payment due at the end of March 1997, which is required to be in
the amount of $1.5 million. Cheniere intends to make its future payments under
the amended Exploration Agreement, however, the Company does not have
sufficient capital to cover such payments and there can be no assurance that
the Company will secure the necessary funds.
In the event Cheniere Operating fails to make a scheduled payment into the
Joint Venture Account within 30 days after the date such payment is due (a
"Discontinuance"):
(i) The obligation and right of Cheniere Operating to make such payments
will terminate. Zydeco would have the right to complete the acquisition and
processing of seismic data with the cooperation or assistance of other
companies. In addition, Cheniere Operating's Prospect ownership interest
would be limited to the total amount of its contribution to the Joint
Venture Account, divided by twice the amount of funds expended for Seismic
Costs, expressed as a percentage. For example, if Cheniere Operating made a
total contribution of $6 million to the Exploration Program Account, prior
to a Discontinuance, and total Seismic Costs were $13.5 million, Cheniere
Operating's Prospect ownership interest would be limited to 22.2%;
(ii) If following a Discontinuance, Zydeco contributes funds that
otherwise were required to have been provided by Cheniere Operating under
the terms of the Exploration Agreement, Zydeco shall be entitled to receive
back such funds, together with interest thereon at the prime interest rate,
from revenues attributable to Cheniere Operating's interest in any Prospect
(including, without limitation, any working interest or overriding royalty
interest revenues from production or front end proceeds attributable to
such interest when owned by Cheniere Operating under the applicable
operating agreement or proceeds from the sale or license of seismic data);
(iii) Subject to (iv) immediately below, if a Discontinuance occurs, and
Zydeco does not itself fund the deficient Seismic Costs, Zydeco may sell,
trade, farm-out, lease, sublease or otherwise trade (collectively, a
"Trade") the aggregate (i.e., both that of Zydeco and Cheniere Operating)
Prospect interests to any party on arms' length terms. For this purpose the
aggregate Prospect interests includes all seismic data acquired, and
revenues from a Trade include seismic data sale or license proceeds. Any
revenues accruing from a Trade shall be applied toward the cost of
completing the project contemplated under the Exploration Agreement; and
(iv) Should Cheniere Operating have funded $8,000,000 or more prior to
the Discontinuance, then the parties will treat Cheniere Operating as
having earned a vested Prospect ownership interest of 25%, which
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shall not be subject to any Trade, and any revenues from a Trade, which
would in this instance cover a 75% Prospect ownership interest, shall be
shared 33 1/3% by Cheniere Operating and 66 2/3% by Zydeco.
Prospect Expenses (as defined below) are to be borne equally by Zydeco and
Cheniere Operating; provided, however, that in the event of a Discontinuance,
Cheniere Operating shall bear a percentage of the Prospect Expenses equal to
its Prospect ownership interest. "Prospect Expenses" are defined in the
Exploration Agreement as: lease bonuses and brokerage for leases; delay or
shut in rental payments on leases or interest acquired under the Exploration
Agreement; engineering costs; and certain other costs related to Prospects. If
Cheniere Operating fails to pay its share of Prospect Expenses within 30 days
of receipt of a bill therefor, it will be deemed to have declined to
participate in the Prospect and will have no interest or liability related to
the Prospect in question.
In the event that Zydeco incurs a contractual liability to a third party in
performing its undertakings under the Exploration Agreement, such contractual
liability shall be treated as a Prospect Expense. In the event that Zydeco
incurs a tort liability to a third party in performing its undertakings under
the Exploration Agreement, and such liability is a result of gross negligence
or willful malfeasance, such liability, and all attorneys fees and expenses
relating thereto, shall be solely Zydeco's responsibility. In the event that
Zydeco incurs a tort liability to a third party in performing its undertakings
under the Exploration Agreement, and such liability is not a result of gross
negligence or willful malfeasance, such liability, and all attorneys' fees and
expenses relating thereto, shall be borne equally by the Company and Zydeco.
Zydeco and Cheniere Operating have entered into an Exploration Program
Operating Agreement which provides for the funding of prospect, exploratory
and development costs subsequent to completion of the seismic acquisition,
processing and interpretation. Each party will pay its proportionate share of
these costs and Zydeco, as Operator, will conduct all operations in accordance
with the terms of the Joint Operating Agreement.
Location and Hydrocarbon Potential of the Survey Area
The Survey AMI, which contains the specific areas to be covered by the
Survey, lies within a highly prolific natural gas region. Nevertheless, the
Transition Zone has been relatively less explored to date as compared to
exclusively onshore or offshore regions because of the relatively high cost
and logistical and technical difficulties associated with conducting modern
seismic surveys over the diverse environments encountered along the coast. An
additional impediment has been the difficulty of negotiating with
sophisticated landowners who control most of the area close to the Louisiana
coastline. The paucity of modern seismic data has limited the drilling
density: the spacing of exploration wells testing the primary objective
section, outside of the known fields, is less than one well per five square
miles. Importantly, recent declines in the cost of supercomputing workstations
which can be employed in processing and interpreting seismic data have made
projects such as this Transition Zone venture technically and economically
feasible.
The Louisiana Transition Zone contains the Miocene Trend which has produced
many of the largest oil and gas fields in the continental United States and
its territorial waters. Objectives within the Miocene Trend have excellent
reservoir characteristics and have historically exhibited multiple pay zones,
which can allow a single strategically placed well bore to drain multiple
reservoirs. Miocene age reservoirs in fields overlapping the Survey AMI have
produced in excess of 3 trillion cubic feet (tcf) of natural gas. Along the
northeast quadrant of the Survey AMI the Mud Lake and Second Bayou Fields have
cumulatively produced more than 1.3 tcf of natural gas to date, with more than
250 billion cubic feet (bcf) having been produced from one well. In the
southwestern quadrant of the Survey AMI, the West Cameron Block 17 Field in
the State and Federal waters has cumulatively produced more than 980 bcf to
date. Numerous other smaller, but still significant, oil and gas fields
surround and overlay the area.
Immediately to the south of the Survey Area, a successful industry drilling
program based partly on a speculative 3-D survey provides an analogy that
illustrates the remaining potential for new discoveries in an area already
densely shot with 2-D seismic, and the contribution which new 3-D seismic can
make. In 1989, a 3-D seismic survey shot by an independent geophysical
services company along the shallow Federal waters in the western part of the
Western Cameron area led to 3 new field discoveries. Together with another
discovery made
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coincident with the 3-D survey, these four new fields have produced
approximately 320 bcfe of natural gas to date from 15 boreholes. The middle to
lower Miocene reservoir section has excellent flow characteristics, as can be
seen by the per well recoveries, 21 bcfe of natural gas to date, in the area
of the adjacent shoot. In addition to the volumes produced from these
discoveries, additional reserves have been brought on through exploitation
wells drilled into existing fields.
The entire Survey AMI is located within an existing pipeline infrastructure.
As a result, it will generally be quicker and less costly to develop and
connect reserves found onshore and in the shallow offshore areas to markets
than would be the case for reserves found in deeper water areas. The Louisiana
Gulf Coast/Gulf of Mexico region enjoys easy access to the premium-priced
markets of the East Coast.
Permit and Lease Status Within the Survey AMI
The 3-D Exploration Program will survey only certain sections lying within
the Survey AMI. The area to be covered by the Survey is dependent upon the
status of permits granting the 3-D Joint Venture the right to Survey certain
areas and its ability to obtain such permits or similar rights in the future.
Offshore Area--State Waters Exclusive Permit and Federal Offshore Permits.
On February 14, 1996, the State of Louisiana awarded Zydeco the exclusive
right (the "Louisiana Seismic Permit", dated February 19, 1996) to shoot and
gather seismic data over the 51,360 net unleased acres of Louisiana State
waters (running out to a 3 1/2 mile limit located within the Survey AMI) in
the western half of West Cameron Parish. The term of the Louisiana Seismic
Permit is for 18 months and may be extended at Zydeco's option for an
additional 6 months by payment of an additional fee of $391,876.80. During
this term Zydeco has the exclusive right to nominate blocks of acreage for
leasing in the covered State waters.
The Survey AMI includes an area running southward up to 2 miles into Federal
waters. Zydeco's seismic contractor, Grant Geophysical, Inc., has received
approval from the U.S. Government to survey over approximately 23,000 acres of
Federal offshore lands located within the Survey AMI. Although Zydeco has no
exclusive rights regarding leases in the Federal waters, several offshore
lease blocks held by industry and covered by the Survey are scheduled to
expire within the next two years and may then be available for leasing.
Onshore Area--Prospective Permits, Lease Options, and Farmouts. Zydeco is in
negotiations to obtain variously, farmouts, seismic permits or lease options,
with owners of the mineral interests covering approximately 85,000 additional
acres of privately owned lands lying under the onshore portion of the Survey
AMI ("Onshore Area"). The outcome of these discussions will effect the exact
delineation of the areas which will be subject to the Survey within the Survey
AMI. As of this date, seismic permits or options covering over 54,000 acres of
the Onshore Area have already been obtained.
Technological Aspects of 3-D Seismic Shoot and Prospect Generation
The Company believes that recently developed seismic processing and
interpretation technology, including some key technology which Zydeco has
licensed for use in Southern Louisiana on an exclusive basis, has now evolved
to a point where quality control for a Transition Zone survey will be improved
significantly. The Survey will incorporate certain of these new techniques for
the first time in a major seismic survey. Moreover, the Company believes that
the areal extent of the Survey, which is unusually large for a shallow
water/onshore seismic survey should permit better imaging of the subsurface,
particularly of the deeper zones.
The design of the Survey has been led by Rudy Prince, Zydeco's Vice-
Chairman, who was formerly CEO and a founder of Digicon Geophysical Corp., a
seismic services company. A primary objective of the Survey is to provide for
accurate and consistent data sufficient for analysis of hydrocarbon indicators
in a depth range of 8,000-20,000 feet at an attractive price. The design will
employ technology referred to as "wavefield imaging", for which Zydeco has
obtained an exclusive license for use in the Louisiana Transition Zone (from
Wavefield
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Imaging, Inc.). The approach combines a relatively lower density array of
shots and receivers with 3-D prestack migration.
Data Acquisition. The Company believes that use of similar source (dynamite)
and receiver (hydrophone) components laid out in a symmetrical array across
the shoreline will eliminate the problems of integrating two different types
of data sets (land and marine) and improve data consistency. A limited amount
of airgun source data will be acquired in the Federal waters and around the
few producing fields. A primary consideration in the design, the relatively
deep zones of interest (8,000-20,000 feet), calls for long north-south
transects (up to 10 miles) to improve the quality of deep data.
Data Transmission, Processing and Interpretation. 3-D seismic technology
differs from standard 2-D seismic technology primarily in the higher
concentrations of seismic shots fired and recordings received over a given
area. With the availability of faster computers, this large data set can be
processed and then displayed on a computer workstation screen to portray a
three-dimensional image of the subsurface. Subsequent interpretation of the
data is facilitated by the use of workstation software.
In the 3-D Exploration Program area, seismic data gathered on tape is
transferred daily from the field crew to Zydeco's headquarters in Houston,
where processing begins immediately. This procedure allows Zydeco technicians
to closely monitor the seismic data quality and if needed, alert field
personnel to make adjustments to the manner in which the data is acquired.
This close coordination between the field and the office will significantly
reduce the time between acquisition of the survey itself and ultimate drilling
decisions. In processing the seismic data for visual imaging and
interpretation on the workstation, Zydeco will utilize modern processing
software to obtain as accurate a view as possible of the potentially
productive subsurface horizons in order to then define areas for drilling.
Schedule for the 3-D Joint Venture
While the Louisiana Seismic Permit, whose primary 18 month term expires in
August 1997, may be extended at Zydeco's option until February 19, 1998 by
payment of an additional fee of $391,876.80, Zydeco presently plans to adhere
to the schedule summarized below:
2nd Quarter 1996-1st Quarter 1997--Onshore Permitting and Lease Optioning
3rd Quarter 1996-2nd Quarter 1997--Conduct Seismic Survey and Simultaneously
Begin Processing & Interpretation of Data Received
2nd Quarter 1997-3rd Quarter 1997--Continue Survey, Processing &
Interpretation, and Identify Prospects
4th Quarter 1997--Nominate and Bid State Leases, Exercise Lease Options
Onshore; Propose, Contract for Drilling, and Commence Drilling of First
Prospects
Under the terms of the Louisiana Seismic Permit, the 3-D Joint Venture will
be liable to pay penalties of $783,753.60 in the event it fails to (i)
complete the acquisition of the seismic data covering the entire area subject
to such Permit or (ii) provide access to such data to the State of Louisiana
in a timely manner. Under the terms of the Exploration Agreement, any such
penalties payable under the Louisiana Seismic Permit shall be borne equally by
Zydeco and the Company. There can be no assurance that the 3-D Joint Venture
will complete its scheduled activities within the time period of the Louisiana
Seismic Permit. Failure of the 3-D Joint Venture to complete its scheduled
activities within the term of the Louisiana Seismic Permit would materially
and adversely affect the value of the Company's interest in the Joint Venture.
Zydeco and the Company 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. Any interest taken by either Zydeco or the
Company,
9
<PAGE>
during such period, in any agreement or arrangement which creates or effects
an interest in hydrocarbons in lands within the Survey AMI, or an acquisition
of a contractual right to acquire such an interest shall be deemed taken for
development under the Exploration Agreement. The party acquiring such an
interest must offer to the other party the right, which may be waived by such
other party, to participate in the rights and obligations associated with such
interest in proportion to their respective Prospect ownership interests.
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 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 and the conduct of drilling operations and
federal regulation of natural gas. In the past, as a result of excess
deliverability of natural gas, many pipeline companies have curtailed the
amount of natural gas taken from producing wells, shut-in some producing
wells, significantly reduced gas taken under existing contracts, refused to
make payments under applicable "take-or-pay" provisions and have not
contracted for gas available from some newly completed 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.
GOVERNMENTAL REGULATION
The Company's oil and gas exploration, production and related operations are
subject to extensive rules and regulations promulgated by Federal and state
agencies. Failure to comply with such rules and regulations can result in
substantial penalties. The regulatory burden on the oil and gas industry
increases the Company's cost of doing business and affects its profitability.
Because such rules and regulations are frequently amended or reinterpreted,
the Company is unable to predict the future cost or impact of complying with
such laws.
Production. In most, if not all, areas where the Company may conduct
activities, there may be statutory provisions regulating the production of oil
and natural gas under which administrative agencies may promulgate rules in
connection with the operation and production of both oil and gas wells,
determine the reasonable market demand for oil and gas, and establish
allowable rates of production. Such regulation may restrict the rate at which
the Company's wells produce oil or gas below the rate at which such wells
would be produced in the absence of such regulation, with the result that the
amount or timing of the Company's revenues could be adversely affected.
Regulation of Operations on Outer Continental Shelf. The Company plans to
acquire oil and gas leases in the Gulf of Mexico. The Outer Continental Shelf
Lands Act ("OCSLA") requires that all pipelines operating on or across the
Outer Continental Shelf (the "OCS") provide open-access, non-discriminatory
service. Although the Federal Energy Regulatory Commission ("FERC") has opted
not to impose the regulations of Order No. 509, in which the FERC implemented
the OCSLA, on gatherers and other non-jurisdictional entities, the FERC
10
<PAGE>
has retained the authority to exercise jurisdiction over those entities if
necessary to permit non-discriminatory access to service on the OCS. In this
regard, the FERC recently issued a Statement of Policy ("Policy Statement")
regarding the application of its jurisdiction under the Natural Gas Act of
1938 ("NGA") and the OCSLA over natural gas facilities and service on the OCS.
In the Policy Statement the 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. While it is not possible to determine what the actual impact of
this new policy will be, since FERC has determined that it will no longer
regulate the rates and services of OCS transmission facilities under the NGA,
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.
Certain operations the Company conducts are on federal oil and gas leases,
which the Minerals Management Service (the "MMS") administers. The MMS issues
such leases through competitive bidding. These leases contain relatively
standardized terms and require compliance with detailed MMS regulations and
orders pursuant to the OCSLA (which are subject to change by the MMS). For
offshore operations, lessees must obtain MMS approval for exploration plans
and development and production plans prior to the commencement of such
operations. In addition to permits required from other agencies (such as the
Coast Guard, the Army Corps of Engineers and the Environmental Protection
Agency), lessees must obtain a permit from the MMS prior to the commencement
of drilling. The MMS has promulgated regulations requiring offshore production
facilities located on the OCS to meet stringent engineering and construction
specifications. It has proposed regulations to update production measurement
and surface commingling requirements for gas produced in the OCS. In addition,
the MMS has proposed additional safety-related regulations concerning the
design and operating procedures for OCS production platforms and pipelines.
The MMS has postponed its decision regarding the adoption of these regulations
in order to gather more information on the subject. The MMS also has
regulations restricting the flaring or venting of natural gas, and has
recently amended such regulations to prohibit the flaring of liquid
hydrocarbons and oil without prior authorization except under certain limited
circumstances. Similarly, 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 can continue to obtain bonds or other surety in all cases.
In addition, the MMS is conducting an inquiry into certain contract
agreements for which producers on MMS leases have received settlement proceeds
that are royalty bearing and the extent to which producers have paid the
appropriate royalties on those proceeds. The Company believes that this
inquiry will not have a material impact on its financial condition, liquidity
or results of operations.
The MMS has recently issued a notice of proposed rulemaking in which it
proposes to amend its regulations governing the calculation of royalties and
the valuation of natural gas produced from federal leases. The principal
feature in the amendments, as proposed, would establish an alternative market-
index based method to calculate royalties on certain natural gas production
sold to affiliates or pursuant to non-arm's-length sales contracts. The MMS
has proposed this rulemaking to facilitate royalty valuation in light of
changes in the gas marketing environment. Recently, the MMS announced its
intention to reconsider the proposal and reopen the comment period. The
Company cannot predict what action the MMS will take on these matters, nor can
it predict at this stage of the rulemaking proceeding how the Company might be
affected by amendments to the regulations.
The MMS recently issued a notice of proposed rulemaking to modify the
valuation procedures for crude oil transactions and to amend the valuation
procedure for the sale of Federal royalty oil. The Company cannot predict what
action the MMS will ultimately take on these matters, nor can it predict at
this stage of the rulemaking proceeding how the Company might be affected by
amendments to the regulations.
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 oil
exploration and
11
<PAGE>
production related facilities. These bonds may cover such obligations as
plugging and abandonment of unproductive wells, removal and closure of related
exploration and 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 FERC regulates the
transportation and sale for resale of natural gas in interstate commerce
pursuant to the NGA and the Natural Gas Policy Act of 1978 ("NGPA"). In the
past, the Federal government has regulated the prices at which oil and gas
could be sold. Deregulation of wellhead sales in the natural gas industry
began with the enactment of the NGPA in 1978. In 1989, Congress enacted the
Natural Gas Wellhead Decontrol Act (the "Decontrol Act"). The Decontrol Act
removed all NGA and NGPA price and nonprice controls affecting wellhead sales
of natural gas effective January 1, 1993. While sales by producers of natural
gas can currently be made at uncontrolled market prices, Congress could
reenact price controls in the future.
On April 8, 1992, the FERC issued Order No. 636, as amended by Order No.
636-A (issued in August 1992) and Order No. 636-B (issued in November 1992) as
a continuation of its efforts to improve the competitive structure of the
interstate natural gas pipeline industry and maximize the consumer benefits of
a competitive wellhead gas market. Interstate pipelines were required by FERC
to "unbundle," or separate, their traditional merchant sales services from
their transportation and storage services and to provide comparable
transportation and storage services with respect to all gas supplies whether
purchased from the pipeline or from other merchants such as marketers or
producers. The pipelines must now separately state the applicable rates for
each unbundled service (e.g., for natural gas transportation and for storage).
This unbundling process has been implemented through negotiated settlement in
individual pipeline services restructuring proceedings. Ultimately, Order Nos.
636, et al., may enhance the competitiveness of the natural gas market. Order
Nos. 636, et al. have recently been substantially affirmed and remanded by the
U.S. Court of Appeals for the D.C. Circuit. FERC's Order No. 636-C was
recently issued as a result of that remand. On February 27, 1997, the
Commission issued Order No. 636-C in response to the Court's remand. On remand
the Commission: (1) reaffirmed its decision to exempt pipelines from sharing
in gas supply realignment ("GSR") costs; (2) reversed its requirement that
pipelines allocate ten percent of GSR costs to interruptible ("IT") customers
and required pipelines to propose the percentage of the GSR costs that their
IT customers must absorb in light of individual circumstances in existence on
each pipeline; (3) modified its non-notice policy, on a prospective basis, to
the extent the prior policy restricts entitlement to non-notice service to any
particular group of customers; (4) reversed its selection of a 20-year
matching term for the right of first refusal and adopted a five-year matching
term; (5) reaffirmed its decision to first require customer-by-customer
mitigation of the effects of SFV rate design; and (6) reaffirmed its decision
to establish the eligibility of customers of downstream pipelines for the
upstream pipeline's one-part small-customer rate on a case-by-case basis. In
the Order the Commission emphasized that circumstances had changed since it
issued Order No. 636 in 1992 and stated that its determination in the Order on
remand would reflect changes that have taken place in the industry. Several
parties have filed requests for rehearsing of the Order.
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.
The 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 the market-based rates for interstate gas transmission. While any
resulting FERC action would affect the Company only indirectly, the 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 the FERC will take
12
<PAGE>
on these matters, nor can it accurately predict whether the 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.
On July 14, 1996, FERC issued Order No. 587 (RM96-1) which promulgated 140
business practice standards developed by the Gas Industry Standards Board for
interstate natural gas pipelines. The standards cover certain business
practices such as nominations, flowing gas, invoicing and capacity release as
well as adoption of protocols and procedures for exchanging these business
practices over the Internet. FERC denied rehearing in Order No. 587-A issued
October 31, 1996. Order No. 587-B promulgated electronic communications
standards on January 20, 1997. On April 18, 1997, in Order No. 587-B, FERC
denied request for rehearing of the dates for complying with the requirements
of Order No. 587-C which requires pipelines to make pro forma tariff filings
to implement the standards by May 1, 1997, implementation of the Internet Web
page standards by August 1, 1997, and implementation of the revised and new
business practices standards by November 1, 1997. On May 6, 1997, in Order No.
587-E, FERC denied a request for rehearing of Order No. 587-B. An appeal of
FERC Order Nos. 587 an 587-A is pending in the United States Court of Appeals
for the District of Columbia Circuit. Oral arguments on this appeal are
scheduled for April 20, 1998.
On February 28, 1997, FERC issued notice of a public conference to be held
on May 29 and 30, 1997 to conduct a broad inquiry into important issues facing
the natural gas industry and FERC's regulation of the industry. The Company
cannot predict at this time what, if any, new standards or regulations may
ultimately result from this conference or what impact any such changes may
have on the industry.
Oil Sales and Transportation Rates. The FERC regulates the transportation of
oil in interstate commerce pursuant to the Interstate Commerce Act. Sales of
crude oil, condensate and gas liquids by the Company are not regulated and are
made at market prices. However, the price a company receives from the sale of
these products is affected by the cost of transporting the products to market.
Effective as of January 1, 1995, the FERC implemented regulations establishing
an indexing system for transportation rates for oil pipelines, which would
generally index such rates to inflation, subject to certain conditions and
limitations. 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, the regulations may tend to increase transportation
costs or reduce wellhead prices for such commodities.
Environmental. The Company's operations are subject to numerous laws and
regulations governing the discharge of oil and hazardous materials into the
environment or otherwise relating to environmental protection. These laws and
regulations may require the acquisition of various permits before drilling
commences, restrict the types, quantities and concentration of various
substances that can be released into the environment in connection with
drilling and production activities, limit or prohibit drilling activities on
certain lands lying within wilderness, wetlands and other protected areas, and
impose substantial liabilities for pollution resulting from the Company's
operations. In particular, under the Federal Oil Pollution Act of 1990 ("OPA
90"), certain persons (including owners, operators, and demise charterers of
vessels, owners and operators of onshore facilities, and lessees, permittees
and holders of rights of use and easements in areas in which offshore
facilities are located ("responsible parties")) may be held liable for various
costs and damages. These include removal costs and damages, damages to natural
resources and damages for lost profits, impairment to earning capacity, and
destruction of or injury to real or personal property. Liability can arise
when oil is discharged or poses a substantial threat of discharge into United
States waters. Liability under OPA 90 is strict, joint and several, unless one
of the specific defenses to liability applies, including an act of God, an act
of war or an act or omission of a third party. OPA 90 also requires certain
responsible parties to establish and maintain evidence of financial
responsibility sufficient to meet the maximum amount of liability to which the
responsible party could be subject under the liability limitation provisions.
Moreover, the recent trend toward stricter standards in environmental
legislation and regulation is likely to continue. In addition, legislation has
been proposed in Congress from time to time that would reclassify certain oil
and gas exploration and production wastes as "hazardous wastes" which
13
<PAGE>
would make the reclassified wastes subject to much more stringent handling,
disposal and clean-up requirements. If such legislation were to be enacted, it
could have a significant impact on the operating costs of the Company, as well
as the oil and gas industry in general. State initiatives to further regulate
the disposal of oil and gas wastes are also pending in certain states, and
these various initiatives could have a similar impact on the Company. See
"Risk Factors--United States Governmental Regulation, Taxation and Price
Control."
The Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons that are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator
of the disposal site or sites where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances found at the
site. Persons who are or were responsible for releases of hazardous substances
under CERCLA may be subject to joint and several liability for the costs of
cleaning up the hazardous substances that have been released into the
environment and for damages to natural resources, and it is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury and property damage.
OPERATIONAL RISKS AND INSURANCE
The Company anticipates that any wells established by it will be drilled by
proven industry contractors under turnkey contracts that limit the Company's
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 rate 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, of such risks and some, but not all, of such
losses. The occurrence of a significant event not fully insured or indemnified
against could materially and adversely affect the Company's financial
condition and operations. Moreover, no assurance can be given that the Company
will be able to maintain adequate insurance in the future at rates it
considers reasonable.
MAR VENTURES INC.
Prior to the Reorganization, the existing assets and liabilities of Bexy
were transferred to its wholly-owned subsidiary, Mar Ventures, Inc. ("Mar
Ventures"). As part of such Reorganization, the stock of Mar Ventures was
distributed 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 between Cheniere
and Buddy Young, the former President and chief executive officer of Bexy, the
Company engaged Mr. Young as a consultant to provide management of the Company
with advice regarding the management and business of the Company. Mr. Young
agreed to provide such consulting services to the Company for 2 years ending
on July 3, 1998 at a rate of $75,000 per year. Mr. Young is no longer an
employee of the Company and serves only in the capacity of a consultant.
14
<PAGE>
EMPLOYEES
The Company has one full-time employee, an administrative assistant, other
than its executive officers.
PROPERTIES
The Company subleases its Houston, Texas headquarters from Zydeco under a
month-to-month sublease covering approximately 1,395 square feet at a monthly
rental of $1,100. The Company believes that this arrangement gives it the
necessary flexibility to adapt to the changing space requirements of its
business.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
<PAGE>
PART 2
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
From 1989 through December 1993, there was no public trading market for the
Bexy Common Stock. In December 1993, the common stock of Bexy began trading on
the Bulletin Board. In connection with the Reorganization, the Company
divested itself of the assets relating to the business of Bexy prior to the
Reorganization and has shifted its focus to oil and gas exploration.
Simultaneously with the Reorganization, each three outstanding shares of
common stock of Bexy was converted to one share of Common Stock and the
stockholders of Cheniere Operating were issued shares of Common Stock equaling
approximately 93% of the then issued and outstanding shares of Bexy causing
the existing stockholders of Bexy to be diluted to approximately 7%. On July
8, 1996, the Common Stock began trading on the Bulletin Board (ticker symbol
"CHEX"). As the nature of the business and the Common Stock has changed as a
result of the Reorganization, this section describes the market price of the
Common Stock following the Reorganization on July 3, 1996.
The high ask and low bid prices of the Common Stock reported on the Bulletin
Board for the period from July 8, 1996 through August 7, 1996 were $6.00 and
$3.00, respectively. The corresponding high and low prices for the period from
August 8, 1996 through November 22, 1996 were $3.875 and $2.125. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not reflect actual transactions.
As of September 27, 1996 there were 766 record holders of the Common Stock
which does not include holders who hold their shares of the Common Stock in
"street name".
The Company has not paid any dividends since its inception and presently
anticipates that all earnings, if any, will be retained for development of the
Company's business and that no dividends on its Common Stock will be declared
in the foreseeable future. Any future dividends will be subject to the
discretion of the Company's Board of Directors and will depend upon, among
other things, future earnings, the operating and financial condition of the
Company, its capital requirements and general business conditions.
ITEM 6. SELECTED FINANCIAL DATA
The following income statement data and balance sheet data have been derived
from the financial statements prepared in accordance with generally accepted
accounting principles. The financial statements of Cheniere Energy, Inc. and
Subsidiary as of August 31, 1996 and for the period then ended have been
audited by Merdinger, Fruchter, Rosen & Corso, P.C. This information should be
read in conjunction with the financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FROM
INCEPTION
(FEBRUARY 21,
1996) TO
AUGUST 31,
1996
-------------
<S> <C>
Net operating revenues..................................... $ --
(Loss) from continuing operations.......................... 121,847
(Loss) from continuing operations per share of common
stock..................................................... (0.01)
Net (loss) per share of common stock....................... (0.01)
Cash....................................................... 1,093,180
Investment in 3-D Exploration program...................... 4,000,000
Total Assets............................................... 5,145,310
Long-term obligations...................................... --
Total Liabilities.......................................... 718,855
Total Shareholders' Equity................................. 4,426,455
Cash dividends declared per share of common stock.......... --
</TABLE>
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cheniere Operating was incorporated in Delaware in February of 1996 for the
purpose of entering the oil and gas exploration and exploitation business,
initially on the Louisiana Gulf Coast.
In March of 1996, Cheniere Operating entered into discussion with Bexy
Communications, Inc. ("Bexy") for a reorganization in order to give it a
presence in the public market.
On April 16, 1996, the Reorganization Agreement was entered into whereby the
Cheniere Operating stockholders would acquire control of Bexy in consideration
for the outstanding stock of Cheniere Operating.
On July 3, 1996 Cheniere Operating consummated the transactions (the
"Reorganization") contemplated in the Agreement and Plan or 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 (7%)
of the outstanding Bexy stock. This 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.
The reorganization was accounted for as the recapitalization of Cheniere
Operating and the issuance of stock for the net assets of Bexy.
RESULTS OF OPERATIONS--AUDITED STATEMENTS FROM INCEPTION (FEBRUARY 21, 1996)
TO AUGUST 31, 1996
The Company's operating results for the period from inception (February 21,
1996) to August 31, 1996 reflect a loss of $121,847, or $0.01 per share, as
there were no operating revenues. General and administrative expenses of
$103,814 and interest expense of $19,833 were offset partially by interest
income of $1,800. General and administrative expenses consisted primarily of
the costs of salary and compensation, occupancy and office expense. Interest
expense was incurred with respect to a short term promissory note and to the
issuance of certain warrants during the period. Interest income was generated
on the Company's cash balances.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet reflected current assets of $1,097,980 with
liabilities of $718,855. Other assets reflected an investment of $4 million in
the proprietary 3-D seismic exploration project in southern Louisiana (the "3-
D Exploration Program"). As of August 31, 1996, the Company's capital
reflected sales of shares net of offering expenses of $686,251.
At August 31, 1996, the Company had working capital of $379,125. Operating
expenses and capitalized costs were financed by the sale of common stock and
Bridge Loan (as defined below) funding as revenues have yet to be generated.
It is anticipated that future liquidity requirements, including the commitment
to the 3-D Exploration Program which will amount to, at least, an additional
$8 million, will be met by sale of equity, further borrowings and/or sales of
portions of the Company's interest in the 3-D Exploration Program. At this
time, no assurance can be given that such sale of equity, further borrowings
or sales of portions of the Company's interest in the 3-D Exploration Program
will prove to be successful. The Company has in the past failed to timely make
certain payments due to the 3-D Exploration Program. While the Company has in
such instances succeeded in obtaining waivers under, and amendments to, the
Exploration Agreement extending the due dates for such
17
<PAGE>
required payments, there can be no assurance that the Company will
successfully obtain similar amendments should it fail to timely make required
payments to the 3-D Exploration Program in the future. The Company currently
does not have sufficient capital to meet its future payment requirements and
there can be no assurance that the Company will successfully secure the
necessary funds. See "Business and Properties--3-D Exploration Program."
At the present time, the Company has no material commitments for capital
expenditures.
Since its inception, Cheniere Operating's primary source of financing for
operating expenses and payments to the 3-D Exploration Program has been,
originally, the sale of its equity securities, and since the reorganization
with Bexy, funding from Cheniere through the sale of Cheniere's equity
securities.
In May and June 1996, Cheniere Operating raised $2,883,000, net of offering
costs, from the sale of shares of its common stock (which were exchanged for
2,000,000 shares of the Common Stock following the Reorganization) to
"accredited investors" (as defined in Rule 501(a) promulgated under the
Securities Act of 1933, as amended (the "Securities Act")) pursuant to Rule
506 of Regulation D promulgated under the Securities Act ("Regulation D"). The
proceeds were used to fund Cheniere Operating's initial $3 million payment to
the 3-D Exploration Program.
In order to finance a $1 million payment made to the 3-D Exploration Program
on August 9, 1996, Cheniere sold Common Stock pursuant to Regulation D and
Regulation S promulgated under the Securities Act ("Regulation S"). In July
1996, Cheniere sold 50,000 shares of the Common Stock to an "accredited
investor" pursuant to Rule 506 of Regulation D and Cheniere received proceeds
of $100,000 from such sale. In July and August 1996, Cheniere conducted an
offering of Common Stock pursuant to Regulation S. Cheniere sold 508,400
shares of the Common Stock and received proceeds of $915,000, net of placement
fees, from such sale.
In late August 1996, Cheniere raised $1,000,000 from the sale of 100,000
units, each consisting of five shares of the Common Stock and a warrant to
purchase one share of the Common Stock, pursuant to Regulation S. The proceeds
were used to fund a $1 million payment to the 3-D Exploration Program made on
September 4, 1996. The warrants are exercisable on or before August 29, 1999
at an exercise price of $3.125 per share (subject to customary anti-dilution
adjustments). The exercise price represents the approximate market price of
the underlying Common Stock at the time of the transaction.
Between fiscal year end at August 31, 1996 and October 31, 1996, the Company
raised $1,237,500 net proceeds from the sale of 588,027 shares of Common Stock
to accredited investors pursuant to Regulation D and certain other investors
pursuant to Regulation S. Proceeds received through October 31, 1996 were used
to fund a $1 million payment to the 3-D Exploration Program on that date.
In June 1996, Cheniere Operating borrowed $425,000 (the "Bridge Loan")
through a private placement of short term promissory notes (the "Notes"). In
connection with the placement of the Notes, Cheniere Operating 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 the 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 Operating
stock by private placement during May 1996, as the Company's stock was not
publicly traded at that time. The Company satisfied all of its obligations
under Notes in the aggregate 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 principal amount of $215,000. In
exchange for such notes, Cheniere Operating issued a new promissory note in
the amount of $215,000 to the Remaining Noteholder. 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. The Remaining Noteholder was not an
affiliate of the Company.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
CONTENTS
CHENIERE ENERGY, INC. AND SUBSIDIARY
<TABLE>
<S> <C>
Independent Auditors' Report.............................................. 19
Consolidated Balance Sheet................................................ 20
Consolidated Statement of Operations...................................... 21
Consolidated Statement of Stockholders' Equity............................ 22
Consolidated Statement of Cash Flows...................................... 23-24
Notes to Consolidated Financial Statements................................ 25-29
</TABLE>
19
<PAGE>
INDEPENDENT AUDITOR'S REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
CHENIERE ENERGY, INC. AND SUBSIDIARY
We have audited the accompanying consolidated balance sheet of CHENIERE
ENERGY, INC. AND SUBSIDIARY, a Development Stage Company, as of August 31,
1996 and the related consolidated statements of operations, stockholders'
equity, and cash flows from inception (February 21, 1996) to August 31, 1996.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CHENIERE
ENERGY, INC. AND SUBSIDIARY as of August 31, 1996 and the results of its
operations and its cash flows for the period then ended in conformity with
generally accepted accounting principles.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C
Certified Public Accountants
New York, New York
September 16, 1996
except for Note 12(3) and
Note 12(4), as to which
the date is June 7, 1997
20
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
AUGUST 31, 1996
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
CURRENT ASSETS
Cash............................................................. $1,093,180
Prepaid Expenses................................................. 4,800
----------
TOTAL CURRENT ASSETS............................................. 1,097,980
----------
PROPERTY AND EQUIPMENT, NET........................................ 46,830
----------
OTHER ASSETS
Investment in 3-D Exploration Program........................... 4,000,000
Security Deposit................................................ 500
----------
TOTAL OTHER ASSETS............................................... 4,000,500
----------
TOTAL ASSETS..................................................... $5,145,310
==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C>
CURRENT LIABILITIES
Accounts Payable................................................. $ 275,975
Accrued Expenses and Taxes Payable............................... 16,929
Loans Payable.................................................... 425,000
Advance from Officers............................................ 961
----------
TOTAL LIABILITIES.............................................. 718,855
----------
STOCKHOLDERS' EQUITY
Common Stock--$.003 Par Value Authorized 20,000,000 shares;
9,931,767 Issued and Outstanding................................ 29,795
Preferred Stock--Authorized 1,000,000 shares; None Issued and
Outstanding..................................................... --
Additional Paid-in-Capital....................................... 4,518,507
Deficit Accumulated During the Development Stage................. (121,847)
----------
TOTAL STOCKHOLDERS' EQUITY..................................... 4,426,455
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................... $5,145,310
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
FROM INCEPTION (FEBRUARY 21, 1996) TO AUGUST 31, 1996
<TABLE>
<S> <C>
Revenue............................................................ $ --
General and Administrative Expenses................................ 103,814
Interest Expense................................................... 19,833
----------
Loss from Operations Before Other Income........................... (123,647)
Interest Income.................................................... 1,800
----------
Loss From Before Income Taxes...................................... (121,847)
Provision for Income Taxes......................................... --
----------
Net Loss........................................................... $ (121,847)
==========
Loss Per Share..................................................... $ (.01)
==========
Weighted Average Shares Outstanding................................ 8,610,941
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FROM INCEPTION (FEBRUARY 21, 1996) TO AUGUST 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ ADDITIONAL TOTAL
PER PAID-IN RETAINED STOCKHOLDERS'
SHARE SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ --------- ------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sale of Founders Shares
on April 9, 1996 ...... $0.012 6,242,422 18,727 56,276 -- 75,003
Sale of Shares on May 3,
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
Offering............... -- -- -- (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
========= ======= ========== ========= ==========
</TABLE>
- --------
All of the Sales of Shares indicated above were made pursuant to private
placement transactions.
The accompanying notes are an integral part of this report.
23
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
FROM INCEPTION (FEBRUARY 21, 1996) TO AUGUST 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss......................................................... $ (121,847)
Adjustments to Reconcile Net Loss to Net Cash Provided by
Operating Activities:
Depreciation..................................................... 3,603
Compensation Paid in Common Stock................................ 30,000
(Increase) in Prepaid Expenses................................... (4,800)
(Increase) in Security Deposit................................... (500)
Increase in Accounts Payable..................................... 275,975
(Decrease) in Accrued Expenses and Taxes Payable................. 16,929
Increase in Advance from Officers................................ 961
----------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......................... 200,321
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Furniture, Fixtures and Equipment.................... (50,443)
Investment in 3-D Exploration Program............................ (4,000,000)
----------
NET CASH USED BY INVESTING ACTIVITIES.............................. (4,050,443)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of Common Stock............................................. 5,191,803
Issuance of Warrants............................................. 12,750
Offering Costs................................................... (686,251)
Proceeds of Loan................................................. 425,000
----------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......................... 4,943,302
----------
NET INCREASE IN CASH............................................... 1,093,180
CASH--BEGINNING OF PERIOD.......................................... --
----------
CASH--AUGUST 31, 1996.............................................. $1,093,180
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
FROM INCEPTION (FEBRUARY 21, 1996) TO AUGUST 31, 1996
<TABLE>
<S> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................................ $ --
Cash paid for income taxes............................................ $ --
</TABLE>
The accompanying notes are an integral part of the financial statements.
25
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
NOTE 1--NATURE OF OPERATIONS
Cheniere Energy, Inc., a holding company ("Cheniere," together with Cheniere
Operating (as defined below), (the "Company"), is the owner of 100% of the
outstanding common stock of Cheniere Energy Operating Co., Inc. ("Cheniere
Operating"). Cheniere Operating is a Houston-based company formed for the
purpose of oil and gas exploration and if warranted 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 is currently a development stage enterprise under the provisions
of SFAS No. 7. As described above and in Notes 5 and 11, the Company's future
business will be in the field of oil and gas exploration and exploitation.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of Cheniere
Energy, Inc. and its 100% owned subsidiary, Cheniere Energy Operating Co.,
Inc. Accordingly, all references herein to Cheniere Energy, Inc. or the
"Company" include the consolidated results of its subsidiary. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Basis of Presentation
On July 3, 1996, Cheniere Energy, Inc. ("Cheniere"), formerly Bexy
Communications, Inc., acquired all of the outstanding capital stock of
Cheniere Energy Operating Co., Inc. ("Cheniere Operating") as described in
Note 4. For accounting purposes, this acquisition has been treated as a
recapitalization of Cheniere Operating.
The financial statements presented include only the accounts of Cheniere
Operating since Cheniere Operating's inception (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 minimus and, accordingly, no value has been assigned
to those shares.
Property and Equipment
Property and equipment 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, generally seven years. Upon retirement or other
disposition of property and equipment the cost and related depreciation will
be removed from the accounts and the resulting gains or losses recorded.
Concentration of Credit Risk
The Company places its cash in what it believes to be credit-worthy
financial institutions. However, cash balances exceed FDIC insured levels at
various times during the year.
Cash Equivalents
The Company classifies all investments with original maturities of three
months or less as cash equivalents.
26
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
Income Taxes
Income taxes are provided for based on the liability method of accounting
pursuant to Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes". Deferred income taxes are recorded to reflect
the tax consequences on future years of differences between the tax bases of
assets and liabilities and their financial reporting amounts at each year-end.
Investments
The Company continually reviews its investments to determine that the
carrying values have not been impaired.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Per Share of Common Stock
Per share amounts have been computed based on the average number of common
shares outstanding during the period.
Offering Costs
Offering costs consist primarily of placement fees, professional fees and
printing costs. These costs are charged against the proceeds of the sale of
common stock in the periods in which they occur.
Stock-Based Compensation
Statement of Financial Accounting Standards 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
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations. Accordingly, compensation cost for stock options is measured
by 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.
Long-Lived Assets
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of", was issued (SFAS No. 121). SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles to be held and used or
disposed of by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company has adopted this statement and determined that no
impairment loss need be recognized for applicable assets of continuing
operations.
27
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
Impact of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued a new
statement titled "Earnings Per Share" (SFAS No. 128). This statement is
effective for both interim and annual periods ending after December 15, 1997
and specifies the computation, presentation, and disclosure requirements for
earnings per share for entities with publicly held common stock or potential
common stock. After the effective date, all prior-period EPS date presented
shall be restated to conform with the provisions for SFAS No. 128.
If the provisions of SFAS No. 128 had been adopted in these financial
statements, there would not have been any impact on loss per share, since the
effect of the options and warrants would have been antidilutive.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment at August 31, 1996 consist of the following:
<TABLE>
<S> <C>
Furniture and Fixtures........................................... $26,006
Office Equipment................................................. 24,427
-------
50,433
Less Accumulated Depreciation.................................... 3,603
-------
Property and Equipment--Net...................................... $46,830
=======
</TABLE>
NOTE 4--REORGANIZATION
On July 3, 1996 Cheniere Operating consummated the transactions (the
"Reorganization") contemplated in the Agreement and Plan or 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 (7%)
of the outstanding Bexy stock. This 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 5--INVESTMENT IN JOINT EXPLORATION PROGRAM
The Company has entered into a joint exploration program pursuant to an
Exploration Agreement between the Company and Zydeco Exploration, Inc.
("Zydeco"), an operating subsidiary of Zydeco Energy, Inc. (the "Exploration
Agreement"), with regard to a new proprietary 3-D seismic exploration project
in southern Louisiana (the "3-D Exploration Program"). The Company has the
right to earn up to a 50% participation in the 3-D Exploration Program. The
Company believes that the 3-D seismic survey (the "Survey") is the first of
its size within the Transition Zone of Louisiana, an area extending a few
miles on either side of the Louisiana State coastline.
28
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
The Survey is to be conducted over certain areas located within a total area
of approximately 275 square miles running generally 5 miles south and 3 to 5
miles north of the coastline in the most westerly 28 miles of West Cameron
Parish, Louisiana (the "Survey AMI"). The 3-D Exploration Program does not
currently have rights to survey the entire Survey AMI and the extent of the
Survey AMI which the 3-D Exploration Program will be entitled to survey is
dependent upon its ability to obtain survey permits and similar rights.
Currently, the 3-D Exploration Program has permits and similar rights to
survey approximately 80% of the Survey AMI and is attempting to acquire rights
to Survey additional portions of the Survey AMI. There is no assurance that
the 3-D Exploration Program will successfully obtain rights to survey
additional portions of the Survey AMI, nor that it will be successful in
acquiring farmouts, lease options (other than those already obtained), leases,
or other rights to explore or recover oil and gas.
Under the terms of the Exploration Agreement, the Company is required to
make monthly payments to the 3-D Exploration Program aggregating, at least,
$13 million. The Company's potential participation in the 3-D Exploration
Program could be significantly reduced in the event of a failure by the
Company to make such required monthly payments when due. (See Note 12).
As of August 31, 1996, payments made to the 3-D Exploration Program totalled
$4,000,000.
Upon completion of the Company's funding of the 3-D Exploration Program, the
investment (reserves) will be accounted for using the full cost method. The
Company's financial statements will reflect its proportionate interest in the
assets, liabilities, revenues and expenses with respect to the 3-D Exploration
Program.
NOTE 6--NOTES PAYABLE
In June 1996, Cheniere Operating borrowed $425,000 through a private
placement of short term promissory notes with an initial interest rate of 8%
(the "Notes"). The Notes are due on September 14, 1996 (the "Maturity Date").
In connection with the placement of the Notes, Cheniere Operating issued
warrants, which, following the Reorganization, were exchanged for an aggregate
of 141,666 and 2/3 (as adjusted for the 10,000 to 1 stock split referred to in
Note 4) warrants to purchase shares of the 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. This exchange reflects the effective
10,000 for 1 stock split in Cheniere Operating (See Note 4). A failure by the
Company to pay all amounts due and payable under the Notes by the Maturity
date constitutes an event of default thereunder. In such an event of default,
the interest rate applicable to any outstanding Notes would increase to 13%.
Pursuant to APB 14, the warrants issued have been valued at the differential
rate between the initial interest rate (8%) and the estimated market rate
(20%), applied to the principal balance. This value, $12,750, has been
credited to additional paid-in capital.
In addition, the holders of such outstanding Notes would be entitled to
receive up to an aggregate of 42,500 additional warrants (on similar terms)
for each month, or partial month, any amounts remain due and payable following
the Maturity date, up to a maximum aggregate number of 170,000 such additional
warrants. The proceeds from the placement of the Notes were applied toward
professional expenses and used for working capital.
29
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
NOTE 7--INCOME TAXES
The components of the provision for income taxes is as follows:
<TABLE>
<S> <C>
Current Tax Expense
U.S. Federal.................................................... $ --
State and Local.................................................
------
Total Current................................................. --
------
Deferred Tax Expense
U.S. Federal.................................................... --
State and Local................................................. --
------
Total Deferred................................................
------
Total Tax Provision from Continuing Operations................ $ --
======
</TABLE>
The reconciliation of the effective income tax rate to the Federal statutory
rate is as follows:
<TABLE>
<S> <C>
Federal Income Tax Rate........................................... (34.0)%
Deferred Tax Charge (Credit)...................................... --
Effect of Valuation Allowance..................................... 34.0 %
State Income Tax, Net of Federal Benefit.......................... --
-----
Effective Income Tax Rate....................................... 0.0 %
=====
</TABLE>
At August 31, 1996, the Company had net carryforward losses of approximately
$1,020,000. A valuation allowance equal to the tax benefit for deferred taxes
has been established due to the uncertainty of realizing the benefit of the
tax carryforward.
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
August 31, 1996 are as follows:
<TABLE>
<S> <C>
Deferred Tax Assets
Loss Carryforwards............................................ $ 347,000
Less: Valuation Allowance...................................... (347,000)
---------
Net Deferred Tax Assets........................................ $ --
=========
</TABLE>
Net operating loss carryforwards expire starting in 2006 through 2011. Per
year availability is subject to change of ownership limitations under Internal
Revenue Code Section 382.
NOTE 8--WARRANTS
The Company has issued and outstanding certain warrants described herein.
The Company has issued and outstanding 141,666 and 2/3 (as adjusted for the
10,000 to 1 stock split referred to in Note 4) warrants (collectively, the
"June Warrants"), each of which entitles the registered holder
30
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
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 (subject to customary anti-dilution adjustments). The exercise
price was determined at a 100% premium to the sale price of Cheniere Operating
stock by private placement during May, 1996. The June Warrants were originally
issued by Cheniere Operating and were converted to warrants of Cheniere
following the Reorganization. The June Warrants were issued to a group of 11
investors in connection with a private placement of unsecured promissory notes
of Cheniere Operating in the aggregate principal amount of $425,000. The notes
mature on September 14, 1996 (the "Maturity Date"). In the event that the
Company fails to pay all amounts due and payable under the Notes by the
Maturity Date, in addition to an increase in the applicable interest rate, the
holders of any outstanding Notes would be entitled to receive up to an
aggregate of 42,500 additional warrants (on similar terms) for each month, or
partial month, any amounts remain due and payable following the Maturity Date,
up to a maximum aggregate number of 170,000 such additional warrants. Pursuant
to APB 14, the warrants issued have been valued at the differential rate
between the initial interest rate (8%) and the estimated market rate (20%),
applied to the principal balance. This value, $12,750, has been credited to
additional paid-in capital.
In consideration of certain investment advisory and other services to the
Company, 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
(subject to customary anti-dilution adjustments). The exercise price
represents the approximate market price of the underlying Common Stock at the
time of the transaction.
In connection with the July and August 1996 placement of 508,400 shares of
Common Stock, the Company agreed to issue 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 (subject
to customary anti-dilution adjustments). The exercise price represents the
approximate market price of the underlying Common Stock at the time of the
transaction.
In late August 1996, the Company sold 100,000 units, each such unit
consisting of 5 shares of Common Stock and a warrant to purchase one share of
Common Stock. Each such warrant is exercisable on or before September 1, 1999
at an exercise price of $3.125 per share (subject to customary anti-dilution
adjustments). The exercise price represents the approximate market price of
the underlying Common Stock at the time of the transaction.
The Warrants do not confer upon the holders thereof any voting or other
rights of a stockholder of the Company.
NOTE 9--STOCK OPTIONS
The Company has granted certain options to purchase shares of Common Stock to
2 executives. Such options aggregate 300,000 shares at an exercise price of
$3.00 per share. The options vest and are exercisable as follows:
1) 75,000 options vest and become exercisable on June 1, 1997 and expire
June 1, 2001.
2) 75,000 options vest and become exercisable on June 1, 1998 and expire
June 1, 2001.
3) 150,000 options vest and become exercisable in equal annual
installments of 25% each on the first through fourth anniversary of July
16, 1996 and expire July 16, 2001.
31
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
In addition, the Company has granted options to the former President of the
Company. The holder has the option to acquire 19,444 and 2/3 shares of Common
Stock at an exercise price of $1.80 per share. The options expire November 11,
2003. The disclosure provisions of SFAS No. 123 do not have a material effect
on the financial statements.
NOTE 10--COMMON STOCK RESERVED
The Company has reserved 322,166 and 2/3 share of Common Stock for insurance
upon the exercise of outstanding warrants (See Note 8).
The Company has reserved 319,444 and 2/3 shares of Common Shares for
insurance upon the exercise of outstanding options (See Note 9).
NOTE 11--COMMITMENTS AND CONTINGENCIES
1) The Company subleases its Houston, Texas headquarters from Zydeco under a
month-to-month sublease.
2) On December 20, 1996, Cheniere Energy California, Inc. ("Cheniere
California") was incorporated. Cheniere California is a 100% owned subsidiary
of the Company.
On December 20, 1996, Cheniere California signed a Purchase and Sale
Agreement with Poseidon Petroleum, LLC ("Poseidon") to acquire Poseidon's 60%
working interest in six undeveloped leases in the Bonito Unit of the Pacific
Outer Continental Shelf (OCS) off Santa Barbara County, California. The
combined working interest of the six leases are equal to a 47% working
interest in the Bonito Unit, which includes a seventh lease in which Poseidon
has no interest.
Poseidon estimates that the net proved undeveloped reserves attributable to
its interest are approximately 47 million barrels of oil equivalent. As
payment for this interest, Poseidon will receive production payments
aggregating $18,000,000 to be paid as three percent of the production revenue
from the leases being assigned. Minimum prepayments from the annual production
payment shall be made at the rate of $540,000 per year, payable in advance.
Poseidon will receive the first minimum prepayment of $540,000 at closing.
Poseidon has prepared a reserve report with respect to the leases which is
currently being evaluated by Cheniere California. The principal amount of the
production payment and the required minimum yearly payments are subject to
adjustment based on the results of the reserve report.
The transaction is subject to the receipt of a reserve report acceptable to
Cheniere California and to the satisfaction of certain conditions by Poseidon
and/or Cheniere California, and, accordingly, there can be no assurance that
Cheniere California will successfully consummate the transaction. Moreover, if
the transaction is consummated, Cheniere California expects that development
of the reserves will not occur for at least four years. While Cheniere
California would be obligated to make cash payments to Poseidon, regardless of
whether production is established, the only result of failure to make payments
would be forfeiture of operating rights in the leases and their reassignment
to Poseidon. Prior to the establishment of production, Cheniere California
expects to fund the minimum prepayments with cash balances or with proceeds
from the sale of Cheniere's equity securities and capitalization by Cheniere
of Cheniere California. There can be no assurance that economically feasible
oil and gas reserves exist in Poseidon's leases in the Bonito Unit until
further exploration is done, and economic feasibility studies based upon such
work are concluded.
32
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
The working interest in the Bonito Unit, if acquired, will be accounted for
under the full cost method of accounting.
3) Pursuant to a Consulting Agreement dated as of July 3, 1996 between the
Company and Buddy Young, the former president and chief executive officer of
Bexy, the Company engaged Mr. Young as a consultant to provide management of
the Company with advice regarding the management and business of the Company.
Mr. Young agreed to provide such consulting services to the Company for two
years ending on July 3, 1998 at a rate of $75,000 per year. Mr. Young is no
longer an employee of the Company and serves only in the capacity of a
consultant.
NOTE 12--SUBSEQUENT EVENTS
1) Effective as of September 14, 1996, certain of the note holders described
in Note 6 converted their notes into common stock at a price of $2 per share.
As a result, 105,000 shares were issued to retire $210,000 of notes. The
exchange of debt for common stock was not pursuant to the terms of the
promissory notes and it was an offer of stock for debt.
2) In addition, an individual note holder has purchased the promissory notes
of the remaining note holders. The holder thus holds notes totaling $215,000.
As per the terms of the notes, the interest rate on these outstanding notes
has increased to 13% per annum, effective September 14, 1996. The holder of
the notes is also entitled to receive up to an aggregate of 21,500 additional
warrants (as described in Note 6) for each month, or partial month, any
amounts remain due and payable after September 14, 1996, up to a maximum
aggregate number of 86,000 such additional warrants. Pursuant to APB 14, these
additional warrants will be valued at the differential rate between the
interest rate charged (13%) and the then estimated market rate (25%), applied
to the principal balance for each month outstanding after September 14, 1996.
This value will be credited to additional paid-in capital.
3) Subsequent to the balance sheet date, the Company has made the following
payments to the Exploration Program:
<TABLE>
<S> <C>
September 4, 1996.................................................... $1,000,000
October 31, 1996..................................................... 1,000,000
January 28, 1997..................................................... 520,000
February 7, 1997..................................................... 621,745
March 4, 1997........................................................ 858,255
May 2, 1997.......................................................... 2,000,000
June 2, 1997......................................................... 2,000,000
----------
$8,000,000
==========
</TABLE>
The Company has a remaining commitment (after the above payments) of at
least $1.5 million, which is due in one payment on June 21, 1997. A thirty day
grace period applies to the payment.
4) As previously disclosed, Cheniere California signed a Purchase and Sale
Agreement with Poseidon Petroleum, LLC ("Poseidon") to acquire Poseidon's 60%
working interest in the Bonito Unit of the Pacific Outer Continental Shelf
offshore Santa Barbara County, California. Cheniere California and Poseidon
have mutually agreed to terminate the Purchase and Sale Agreement pursuant to
the terms thereof, and that upon termination, neither party thereto shall have
any liability thereunder. The Company has decided that it is in its best
interests at this time to concentrate its resources on the 3-D Exploration
Program.
33
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
William D. Forster.......... 50 President, Chief Executive Officer and Director
Walter L. Williams.......... 68 Vice Chairman and Director
Keith F. Carney............. 41 Chief Financial Officer and Treasurer
Charif Souki................ 43 Secretary and Director
Efrem Zimbalist III......... 50 Director
</TABLE>
William D. Forster, 50, currently President and Chief Executive Officer of
Cheniere, co-founded the Company in February 1996. Mr. Forster was an
investment banker with Lehman Brothers from 1975 to 1990 (11 years as a
Managing Director), initially in the oil and gas department for seven years,
and then in various other areas. In 1990, he founded his own private
investment bank, W. Forster & Co. Inc. In 1994, he became active again in the
oil and gas business when he began to work together with BSR Investments,
Ltd., a Paris-based private investment company, to provide financing for small
energy companies. Mr. Forster is a director of Equity Oil Company, a Nasdaq
National Market company, and he serves on the Board of Trustees of Mystic
Seaport Museum. He holds a Bachelor of Arts degree in economics from Harvard
College and a Master of Business Administration degree from Harvard Business
School.
Walter L. Williams, 69, currently Vice-Chairman of Cheniere, joined the
Company in June 1996. Prior to joining Cheniere, Mr. Williams spent 32 years
as a founder and later Chairman and Chief Executive Officer of Texoil, Inc., a
publicly held Gulf Coast exploration and production company. Prior to that
time he was an independent petroleum consultant. He received a Bachelor of
Science degree in petroleum engineering from Texas A&M University in 1949 and
is a Registered Engineer in both the states of Louisiana and Texas. He serves
on the board of directors of Texoil, Inc. and has served as a Director and
Member of the Executive Committee of the Board of the Houston Museum of
Natural Science.
Keith F. Carney, 41, currently Chief Financial Officer and Treasurer of
Cheniere, joined the Company in July 1996. Prior to joining Cheniere, Mr.
Carney was a securities analyst in the oil & gas exploration/production sector
with Smith Barney, Inc. from 1992-1996. From 1982-1990 he was employed by
Shell Oil as an exploration geologist, with assignments in the Gulf of Mexico,
the Middle East and other areas. He received a Master of Science degree in
geology from Lehigh University in 1982 and a Master of Business
Administration/Finance degree from the University of Denver in 1992.
Charif Souki, 44, currently the Chairman of the Board of Directors and
Secretary of Cheniere, co-founded the Company in February 1996. Mr. Souki is
an independent investment banker with twenty years of experience in the
industry. In the past few years he has specialized in providing financing for
promising microcap and small capitalization companies with an emphasis on the
oil and gas industry. He holds a Bachelor of Arts degree from Colgate
University and a Master of Business Administration from Columbia University.
Efrem Zimbalist III, 50, a director of Cheniere since July 1996, is
President and Chief Executive Officer of Times Mirror Magazines a division of
Times Mirror Co., and a Vice President of Times Mirror Co. He formerly served
as vice president, strategic development for Times Mirror Co. from 1993 to
1995. Previously he served as Chairman and Chief Executive Officer of Correia
Art Glass, Inc., a family owned business. He also served five years as a
senior engagement manager at the management consulting firm of McKinsey and
Co., Inc. in Los Angeles. Mr. Zimbalist received a Bachelor of Arts degree in
economics from Harvard College and a Master's degree in business
administration from Harvard Business School.
34
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Simultaneously with the reorganization of Bexy with Cheniere Operating (the
"Reorganization"), all of the officers of Bexy resigned from their respective
offices and were replaced by the current officers of the Company. As the
Company has divested itself of the assets relating to the business of Bexy
prior to the Reorganization and has shifted to a new business, this section
describes the compensation to be received by the executive officers of the
Company following the Reorganization on July 3, 1996. The Company presently
has no employment agreement with any of the Executive Officers.
William D. Forster, President and Chief Executive Officer of the Company,
and Charif Souki, Secretary of the Company, have not received any compensation
in the form of salary or options and the Company does not currently intend to
pay any such compensation to such officers until the Company has raised
significant additional capital. In addition, Mr. Forster and Mr. Souki have
not been reimbursed for any travel or entertainment expense incurred on behalf
of Cheniere, nor has any such expense been accrued. The Company provides an
apartment for the use of Mr. Forster and Mr. Souki during times they are in
Houston at a total cost of $4,800 per month. Directors receive no remuneration
for serving on the board of directors of the Company.
Walter L. Williams, Vice Chairman of the Company, began receiving a salary
of $120,000 per year on September 1, 1996. By resolution of the Board of
Directors of the Company dated July 3, 1996, the Company granted to Mr.
Williams certain options to purchase shares of the Common Stock as described
below. In addition, the Company granted 30,000 shares of the Common Stock to
Mr. Williams on July 3, 1996, which shares have not yet been issued. Keith F.
Carney, Chief Financial Officer and Treasurer of the Company, began receiving
a salary of $90,000 per year on July 16, 1996, the date of his appointment as
an officer of the Company. By resolution of the Board of Directors of the
Company dated July 23, 1996, the Company granted to Mr. Carney certain options
to purchase shares of Common Stock as described below.
OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth certain
information with respect to individual grants of stock options made during the
fiscal year ended August 31, 1996 to each of the named executive officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE AT
------------------------------- ASSUMED ANNUAL RATES OF
NUMBER OF STOCK PRICE APPRECIATION FOR
SECURITIES % OF TOTAL EXERCISE OPTION TERMS($)(1)
UNDERLYING OPTIONS OR BASE -------------------------------
OPTIONS GRANTED TO PRICE EXPIRATION 5% 10%
NAME GRANTED(#) EMPLOYEES ($/SH) DATE APPRECIATION($) APPRECIATION($)
- ---- ---------- ---------- -------- ---------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
William D. Forster...... -- -- -- -- -- --
Walter L. Williams...... 75,000(2) 25.0 3.00 6/1/01 76,522 173,601
75,000(3) 25.0 3.00 6/1/01 91,598 213,461
Keith F. Carney......... 37,500(4) 12.5 3.00 7/16/01 38,261 86,801
37,500(4) 12.5 3.00 7/16/01 45,799 106,731
37,500(4) 12.5 3.00 7/16/01 53,714 128,654
37,500(4) 12.5 3.00 7/16/01 62,024 152,769
</TABLE>
- --------
(1) The indicated dollar amounts are the result of calculations based on the
exercise price of each option and assume five and ten percent annual
appreciation rates set by the Securities and Exchange Commission over the
term of the option and, therefore, are not intended to forecast possible
future appreciation, if any, of the Company's stock price.
(2) Each of these stock options vest and become exercisable on June 1, 1997
and expire five years from the date of grant.
(3) Each of these stock options vest and become exercisable on June 1, 1998
and expire five years from the date of grant.
(4) The Company granted Mr. Carney 150,000 stock options on July 23, 1996. The
options vest and become exercisable in equal annual installments of 25%
each on the first through fourth anniversaries of July 16, 1996, and
expire on the fifth anniversary of the date of grant.
35
<PAGE>
(5) The exercise price represents the approximate bid price of the underlying
Common Stock of Cheniere at the time the options were granted.
AGGREGATED OPTION EXERCISED IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUE
The following table sets forth certain information with respect to the
outstanding stock options as of August 31, 1996 for each of the named
executive officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 8/31/96 (#) AT 8/31/96 ($)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
William D. Forster.......... -- -- -- --
Walter L. Williams.......... -- 150,000 -- 37,500(1)
Keith F. Carney............. -- 150,000 -- 37,500(1)
</TABLE>
- --------
(1) Market value of underlying securities at fiscal year-end 8/31/96 ($3.25),
minus the exercise price.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Common Stock, of: (i) each person known by the Company to own
beneficially five percent or more of the outstanding Common Stock at November
22, 1996; (ii) each of the Company's directors; (iii) each of the executive
officers of the Company; and (iv) all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO THE
OFFERING
---------------------------
PERCENTAGE
OF SHARES
NAME OF BENEFICIAL OWNER NUMBER OUTSTANDING
------------------------ --------- -----------
<S> <C> <C>
William D. Forster................................. 2,846,211(1) 26.8%
BSR Investments, Ltd............................... 2,602,000 24.5%
Charif Souki....................................... 0(2) --
Walter L. Williams................................. 30,000(3)(4) .3%
Keith F. Carney.................................... 0(3) --
Efrem Zimbalist III................................ 20,000 .2%
All directors and executive officers as a group (5
persons).......................................... 2,896,211(1)(2) 27.3%
</TABLE>
- --------
(1) Does not include 100,000 shares held by a trust for the benefit of Mr.
Forster's mother of which trust Mr. Forster is a 20% remainderman and of
which shares he disclaims beneficial ownership.
(2) Does not include 2,602,000 shares held by BSR Investments, Ltd., of which
Charif Souki disclaims beneficial ownership. BSR Investments, Ltd. is
controlled by Samyr Souki, President of BSR Investments, Ltd. and the
father of Charif Souki.
(3) Does not include 150,000 shares of the Common Stock issuable upon the
exercise of options, not exercisable within 60 days of the date of this
Prospectus, held by each of Mr. Williams and Mr. Carney.
(4) The 30,000 shares of the Common Stock held by Mr. Williams have been
granted by the Company, but have not yet been issued.
36
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BSR Investments, Ltd. ("BSR"), an entity holding approximately 24.5% of the
outstanding shares of the Common Stock, is under the control of a member of
the immediate family of Charif Souki, Secretary and a director of the Company.
Mr. Souki has been engaged, from time to time, as a consultant to BSR.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. Financial Statements and Supplementary Data, Financial Statement
Schedules and Exhibits
PAGE
----
1. Consolidated Financial Statements
Independent Auditors' Report........................................ 19
Consolidated Balance Sheet.......................................... 20
Consolidated Statement of Operations................................ 21
Consolidated Statement of Stockholders' Equity...................... 22
Consolidated Statement of Cash Flows................................ 23-24
Notes to Consolidated Financial Statements.......................... 25-29
2. Consolidated Financial Statement Schedules
All consolidated financial statement schedules have been omitted because
they are not required, are not applicable or the information required has been
included elsewhere herein.
37
<PAGE>
3. Exhibits and Financial Statement Schedules
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
3.1 --Amended and Restated Certificate of Incorporation of Cheniere
Energy, Inc. ("Cheniere")*
3.2 --By-laws of Cheniere*
4.1 --Specimen Common Stock Certificate of Cheniere*
5.1 --Opinion of Dewey Ballantine*
10.1 --Exploration Agreement between FX Energy, Inc. (now known as
Cheniere Energy Operating Co., Inc. ("Cheniere Operating")) and
Zydeco Exploration, Inc.*
10.2 --First Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco Exploration, Inc.*
10.3 --Second Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco Exploration, Inc.*
10.4 --Third Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco Exploration, Inc.*
10.5 --Form of Regulation D Subscription Agreement between Cheniere
Operating and certain "accredited investors"*
10.6 --Form of Noteholders' Agreement ("Noteholders Agreement") between
Cheniere Operating and the holders of promissory notes in the
aggregate principal amount of $425,000.00*
10.7 --Form of Warrant Agreement governing warrants of Cheniere issued in
exchange for warrants of Cheniere Operating (which were issued
pursuant to the Noteholders Agreement)*
10.8 --Asset Transfer, Assignment and Assumption Agreement between Bexy
Communications, Inc. and Mars Ventures Inc.*
10.9 --Indemnification Agreement among Buddy Young, Cheniere, Cheniere
Energy Operating Co., Inc. and the Stockholders of Cheniere Energy
Operating Co., Inc. named therein*
10.10 --Form of Warrant Agreement between Cheniere and each of C.M. Blair,
W.M. Forster & Co., Inc. and Redliw Corp.*
10.11 --Consulting Agreement between Cheniere and Buddy Young regarding
reverse splits of the Common Stock*
21.1 --Subsidiaries of Cheniere*
23.1 --Consent of Dewey Ballantine (included in Exhibit 5.1)*
23.2 --Consent of Merdinger, Fruchter, Rosen & Corso, P.C.*
</TABLE>
- --------
* Filed previously.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
CHENIERE ENERGY, INC.
/s/ William D. Forster
By:__________________________________
President and Chief Executive
Officer
Date: June 25, 1997
39
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> FEB-21-1996
<PERIOD-END> AUG-31-1996
<CASH> 1,093,180
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,097,980
<PP&E> 50,433
<DEPRECIATION> 3,603
<TOTAL-ASSETS> 5,145,310
<CURRENT-LIABILITIES> 718,855
<BONDS> 0
0
0
<COMMON> 29,795
<OTHER-SE> 4,426,455
<TOTAL-LIABILITY-AND-EQUITY> 5,145,310
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,833
<INCOME-PRETAX> (121,847)
<INCOME-TAX> 0
<INCOME-CONTINUING> (121,847)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (121,847)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
