<PAGE>
As filed with the Securities and Exchange Commission on May 27, 1997
Registration No. 333-23421
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CHENIERE ENERGY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1382 95-4352386
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or organization) Industrial Classification Code Number) Identification No.)
</TABLE>
CHENIERE ENERGY, INC.
TWO ALLEN CENTER
1200 SMITH STREET, SUITE 1710
HOUSTON, TEXAS 77002-4312
(713) 659-1361
(Address, including zip code and telephone number, including area code, of
registrant's principal executive offices)
WILLIAM D. FORSTER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CHENIERE ENERGY, INC.
TWO ALLEN CENTER
1200 SMITH STREET, SUITE 1710
HOUSTON TEXAS 77002-4312
(713) 659-1361
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies of all communications, including all communications sent
to the agent for service, should be sent to:
TIMOTHY J. ALVINO, ESQ.
DEWEY BALLANTINE
1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(212) 259-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]_________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ] _________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
<PAGE>
********************************************************************************
* Information contained herein is subject to completion or amendment. A *
* registration statement relating to these securities has been filed with the *
* Securities and Exchange Commission. These securities may not be sold nor may *
* offers to buy be accepted prior to the time the registration statement *
* becomes effective. This prospectus shall not constitute an offer to sell or *
* the solicitation of an offer to sell or the solicitation of an offer to buy *
* nor shall there be any sale of these securities in any State in which such *
* offer, solicitation or sale would be unlawful prior to registration or *
* qualification under the securities laws of any such State. *
********************************************************************************
PROSPECTUS
3,983,850 SHARES
CHENIERE ENERGY, INC.
COMMON STOCK
(PAR VALUE $.003 PER SHARE)
This Prospectus relates to 3,983,850 shares of issued and outstanding
common stock of Cheniere Energy, Inc., a Delaware corporation ("Cheniere"), par
value $.003 per share (the "Common Stock"). The Common Stock was originally
issued by Cheniere to certain holders of shares of common stock of Cheniere
Energy Operating Co., Inc., a wholly-owned subsidiary of Cheniere, to certain
"accredited investors" (as defined in Rule 501(a) promulgated under the
Securities Act of 1933, as amended (the "Securities Act")), pursuant to
Regulation D promulgated under the Securities Act, and to certain other
investors pursuant to Regulation S promulgated under the Securities Act. See
"Description of Capital Stock".
The Common Stock (ticker symbol "CHEX") is traded on The Nasdaq SmallCap
Market. On May 21, 1997 the last reported sale price of the Common Stock on The
Nasdaq SmallCap Market was $3.53125 per share.
The Common Stock has been registered for sale by Selling Stockholders (as
defined herein) and may be offered by Selling Stockholders from time to time in
transactions on The Nasdaq SmallCap Market, in the over-the-counter market, in
negotiated transactions or a combination of such methods of sale, in each such
case, at fixed prices which may be changed, at market prices prevailing at the
time of sale, at prices related to prevailing market prices, or at negotiated
prices. The Selling Stockholders may effect such transactions by selling shares
of the Common Stock to or through broker-dealers, and such broker-dealers may
receive compensation in the form of discounts, concessions or commissions from
Selling Stockholders and/or purchasers of the Common Stock for whom such broker-
dealers may act as agents or to whom they sell as principals, or both (which
compensation as to a particular broker-dealer might be in excess of customary
commissions). To the extent required, shares of the Common Stock, the name of
the Selling Stockholder, the public offering price, the names of any such agent,
dealer or underwriter, and any applicable commission or discount with respect to
any particular offer will be set forth in an accompanying Prospectus Supplement.
See "Selling Stockholders" and "Plan of Distribution".
None of the proceeds from the sale of the Common Stock will be received by
Cheniere. Cheniere has agreed, among other things, to bear all expenses (other
than underwriting discounts and commissions, fees and expenses of investment
bankers and brokerage commissions) incurred in connection with the registration
and sale of the Common Stock covered by this Prospectus, including, without
limitation, all registration, listing and qualification fees, printers and
accounting fees and fees and disbursements of counsel to Cheniere.
________________
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
SECURITIES OFFERED HEREBY.
________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
The date of this Prospectus is May __, 1997
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements and the notes thereto appearing elsewhere
in this Prospectus.
THE COMPANY
GENERAL
Cheniere Energy, Inc., a holding company ("Cheniere," together with
Cheniere Operating (as defined below) and Cheniere California (as defined
below), the "Company"), is the owner of 100% of the outstanding common stock of
Cheniere Energy Operating Co., Inc. ("Cheniere Operating") and Cheniere Energy
California, Inc. ("Cheniere California"). Cheniere is a Houston-based company
formed for the purpose of oil and gas exploration and if warranted, development
and exploitation. Cheniere Operating is currently involved in a joint
exploration program which is engaged in the exploration for oil and natural gas
along the Gulf Coast of Louisiana, onshore and in the shallow waters of the Gulf
of Mexico. The Company commenced its oil and gas activities through such joint
program in April 1996.
THE COMPANY HAS NOT YET ESTABLISHED OIL AND GAS PRODUCTION, NOR 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.
Cheniere Operating is involved with one major project in the pre-
development stage. Cheniere Operating has entered into a joint exploration
program pursuant to an Exploration Agreement between 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").
Cheniere Operating has the right to earn up to a 50% participation in the 3-D
Exploration Program. Cheniere Operating believes that the 3-D seismic survey
(the "Survey") is the first of its size to cross the shoreline 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 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% (203 square miles) 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. The 3-D Exploration Program will
survey specific sections selected by it within the areas covered by such permits
and rights. A seismic data acquisition contract was signed and acquisition of
data commenced in September, 1996. Prior to discontinuing operations in late
November due to weather conditions, 27 square miles of data had been acquired.
Work on the project was resumed in April 1997 under the terms of an amended
contract with Grant Geophysical, Inc. The 3-D Exploration Program plans to
acquire seismic data over all lands on which rights have been acquired to date,
as well as over additional lands for which permits are being sought. Data
acquisition is anticipated to be completed during the third calendar quarter of
1997.
As previously disclosed, 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 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.
<PAGE>
BUSINESS STRATEGY
The Company's objective is to expand the net value of its assets 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. Cheniere Operating'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 permits Cheniere Operating to lower
its operating costs compared to those in other geographic regions and
facilitates the timely development of oil and gas discoveries. The
Company's officers and Zydeco 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. Zydeco
Energy and its predecessor companies have operated in south Louisiana
onshore and offshore for more than 15 years. Recent activities have been
principally focused in the Bay Marchand offshore area. Zydeco's technical
staff, which presently includes collectively 10 geologists, geophysicists
and landmen, has had many years of experience in south Louisiana
exploration and exploitation. See "Business and Properties".
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. MAINTAIN A SIGNIFICANT WORKING INTEREST IN EACH PROJECT. Cheniere Operating
has the right to earn up to a 50% participation in the 3-D Exploration
Program. Under the terms of the Exploration Agreement, Cheniere Operating
must timely meet its payment obligations to the 3-D Exploration Program in
order to reach a 50% participation. Cheniere Operating 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.
. 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.
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<PAGE>
RISK FACTORS
An investment in the common stock, par value $.003 per share, of
Cheniere (the "Common Stock") involves a significant degree of risk. The
following factors, together with the information provided elsewhere in this
Prospectus, should be considered carefully in evaluating an investment in the
Common Stock of Cheniere.
FACTORS RELATING TO THE COMPANY
Limited Operating History
Cheniere Energy, Inc., a holding company ("Cheniere," together with
Cheniere Operating (as defined below) and Cheniere California (as defined below)
the "Company"), is the owner of 100% of the outstanding common stock of Cheniere
Energy Operating Co., Inc. ("Cheniere Operating") and Cheniere Energy
California, Inc. ("Cheniere California"). The Company has a limited operating
history with respect to its oil and gas exploration activities which were
commenced through a joint exploration program in April 1996 by Cheniere
Operating. Following a reorganization with Bexy Communications, Inc. ("Bexy"),
Cheniere Operating became a wholly-owned subsidiary of Cheniere on July 3, 1996.
During the fiscal year ended August 31, 1996, the Company incurred net losses of
$91,847 and for the six month period ended February 28, 1997, the Company
incurred net losses of $304,699. The Company is likely to continue to incur
losses during the remainder of 1997, and possibly beyond, depending on whether
it generates sufficient revenue from producing reserves acquired either through
acquisitions or drilling activities.
Limited Assets / No Proven Reserves or Current Production
The Company has not yet established oil and gas production, nor has it
booked proven oil and gas reserves. Currently, the Company's primary asset is
its interest in a joint exploration program pursuant to an Exploration Agreement
(the "Exploration Agreement") between Cheniere Operating and Zydeco Exploration,
Inc. ("Zydeco") with regard to a new proprietary 3-D seismic exploration project
in Southern Louisiana (the "3-D Exploration Program"). Since almost all of the
Company's assets are represented by the investment to date in the 3-D
Exploration Program and additional amounts will be invested, the Company is
highly dependent on the success of the 3-D Exploration Program. See "Business
and Properties."
Need for Additional Financing
The Company presently has no operating revenues and does not expect to
generate meaningful operating revenues before calendar year 1998. Additional
capital amounting to $2.5 million will be required to sustain operations
and to timely make required payments to the 3-D Exploration Program. Further
capital is required to pay for the Company's share of Seismic Costs (as defined
herein) in excess of $13.5 million, exercise lease options, acquire additional
oil and gas leases and drill wells on potential prospects, the total amount of
which will be determined by the results of seismic operations. The Company
anticipates that its share of these
5
<PAGE>
expenditures could be at least $6 million during the fourth calendar quarter of
1997 and the first calendar quarter of 1998. Additional capital may be secured
from a combination of funding sources that may include borrowings from financial
institutions, debt offerings (which would increase the leverage of the Company
and add to its need for cash to service such debt), additional offerings of
Cheniere's equity securities (which could cause substantial dilution of the
Common Stock), or sales of portions of Cheniere Operating's interest in the 3-D
Exploration Program (which would reduce any future revenues from the 3-D
Exploration Program). The Company's ability to access additional capital will
depend on its results of operations and the status of various capital markets at
the time such additional capital is sought. Accordingly, there can be no
assurances that capital will be available to the Company from any source or
that, if available, it will be on terms acceptable to the Company. Should
sufficient additional financing not be available, Cheniere will be unable to
fund payments to the 3-D Exploration Program required to be made by Cheniere
Operating. See "Management Discussion and Analysis of Financial Condition and
Results of Operations -Liquidity and Capital Resources."
3-D Exploration Program Payments / Previous Late Payments / Insufficient
Capital
Under the terms of the Exploration Agreement, Cheniere Operating is
required to make monthly payments to the 3-D Exploration Program aggregating, at
least, $13.5 million, $10 million of which has been paid by Cheniere Operating
to date. Cheniere Operating's potential participation in the 3-D Exploration
Program could be significantly reduced in the event of a failure by Cheniere
Operating to make such required monthly payments when due. Cheniere Operating
has in the past failed to make such payments when due. While Cheniere Operating
has in such instances succeeded in obtaining waivers under, and amendments to,
the Exploration Agreement extending the due dates for such payments, there can
be no assurance that Cheniere Operating will successfully obtain similar
amendments should it fail to timely make required payments to the 3-D
Exploration Program in the future. Neither Cheniere Operating nor Cheniere
currently has sufficient capital to meet its future payment obligations and
there can be no assurance that Cheniere Operating or Cheniere will successfully
secure the necessary funds. See "Business and Properties - 3-D Exploration
Program."
Lack of Liquidity of the Common Stock
Through May 21, 1997, the average daily trading volume of the Common
Stock of Cheniere was approximately 50,000 shares. The completion of the
offering of the Common Stock provides no assurance that the trading market for
the Common Stock will become more active. Cheniere is listed on The Nasdaq
SmallCap Market.
6
<PAGE>
No Dividends
Cheniere 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 Cheniere'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.
Possible Issuance of Additional Shares / Shareholder Dilution
Cheniere's Certificate of Incorporation authorizes the issuance of
20,000,000 shares of the Common Stock. As of May 21, 1997, approximately 32.6%
of the shares of the Common Stock remained unissued. Cheniere's Board of
Directors has the power to issue any and all of such shares without shareholder
approval. It is likely that Cheniere will issue shares of the Common Stock,
among other reasons, in order to raise capital to sustain operations, to
capitalize Cheniere Operating in order to make required payments to the 3-D
Exploration Program and/or to finance future oil and gas exploration projects.
In addition, Cheniere has reserved 386,666 and 2/3 shares of the Common Stock
for issuance upon the exercise of outstanding warrants and 331,444 and 2/3
shares of the Common Stock for issuance upon the exercise of outstanding
options. Any issuance of the Common Stock by Cheniere may result in a reduction
in the book value per share or market price per share of the outstanding shares
of the Common Stock and will reduce the proportionate ownership and voting power
of such shares. See "Description of Capital Stock."
Dependence on Key Personnel
The Company is dependent upon its executive officers for its various
activities. The Company does not maintain "key person" life insurance policies
on any of its personnel nor does it have employment agreements with any of its
personnel. The loss of the services of any of these individuals could
materially and adversely affect the Company. In addition, the Company's future
success will depend in part upon its ability to attract and retain additional
qualified personnel. Other than its officers, the Company has only one full-
time employee, an administrative assistant.
Dependence on Industry Partners
The future success of the 3-D Exploration Program is largely dependent
upon the experience and performance of Zydeco. As the Company has few employees
and limited operating revenues, the Company will be largely dependent upon
industry partners for the success of its oil and gas exploration projects for
the foreseeable future.
Control by Principal Stockholders
William D. Forster, President and Chief Executive Officer of Cheniere,
and BSR Investments, Ltd. ("BSR"), an entity under the control of a member of
the immediate family of Charif Souki, Chairman of the Board of Directors and
Secretary of Cheniere, own in the aggregate approximately 40.4% of the
outstanding Common Stock. Accordingly, it is likely that Mr. Forster and BSR
will effectively be able to elect all of the directors of Cheniere and to
control Cheniere's management, operations and affairs, including the ability to
effectively prevent or cause a change in control of Cheniere.
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FACTORS RELATING TO THE 3-D EXPLORATION PROGRAM
Ability to Obtain Permits
The 3-D Exploration Program will conduct a 3-D seismic survey (the
"Survey") 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 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 rights to survey approximately 80% (203 square miles) of the Survey AMI and
is attempting to acquire rights to survey additional portions of the Survey AMI.
There can be no assurance that the 3-D Exploration Program will successfully
obtain permits or rights to survey additional portions of the Survey AMI.
Louisiana State Waters - Timing Risks
Among certain other rights, the 3-D Exploration Program currently has
the exclusive right to shoot and gather seismic data over 51,360 net acres of
Louisiana State waters, located in the Western half of Cameron Parish, Louisiana
and constituting a sub-area of the Survey AMI and to nominate for lease any
acreage in such State waters (the "Louisiana Seismic Permit"). The Louisiana
Seismic Permit expires in August 1997, but may be extended at Zydeco's option
for an additional six months to February 1998 by payment of an additional fee of
$391,876.80. It is currently anticipated that Zydeco will exercise its option to
extend the term of the Louisiana Seismic Permit. By December 1997, the 3-D
Exploration Program is scheduled to complete the Survey, process and interpret
the Survey data and begin nomination and bidding for leases. By early 1998, the
3-D Exploration Program is scheduled to propose and contract for drilling, and
commence drilling its first set of prospects. Under the terms of the Louisiana
Seismic Permit, the 3-D Exploration Program 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 the Louisiana Seismic 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 Cheniere
Operating. There can be no assurance that the 3-D Exploration Program will
complete its scheduled activities within the time period required under the
Louisiana Seismic Permit. Failure of the 3-D Exploration Program to complete its
seismic data acquisition program within the term of the Louisiana Seismic Permit
could materially and adversely affect the value of Cheniere Operating's interest
in the 3-D Exploration Program. See "Business and Properties - Permit and Lease
Status within the Survey AMI."
FACTORS RELATING TO THE OIL AND GAS INDUSTRY
Operating Hazards and Uninsured Risks
The oil and gas operations of the Company are subject to all of the
risks and hazards typically associated with the exploration for, and the
development and production of, oil and gas. Risks in drilling operations
include 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
considered reasonable by the Company. See "Business and Properties -
Operational Risks and Insurance."
8
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Exploration Risks
The Company's exploration activities involve significant risks. There
can be no assurance that the use of technical expertise as applied to
geophysical or geological data will ensure that any well will encounter
hydrocarbons. Further, there is no way to know in advance of drilling and
testing whether any prospect encountering hydrocarbons in the Survey AMI by the
3-D Exploration Program will yield oil or gas in sufficient quantities to be
economically viable. In addition, the Company is highly dependent upon seismic
activity and the related application of new technology as a primary exploration
methodology. There can be no assurance that the 3-D Exploration Program's
efforts will be successful. See "Business and Properties."
High Dependence upon Lease Acquisition Activities
Both the United States Department of the Interior and the State of
Louisiana award oil and gas leases on a competitive bidding basis and non-
governmental owners of the onshore mineral interests within the Survey AMI are
not obligated to lease their mineral rights to the 3-D Exploration Program
except to the extent they have granted lease options to the 3-D Exploration
Program. Other major and independent oil and gas companies having financial
resources significantly greater than those of the 3-D Exploration Program may
bid against the 3-D Exploration Program for the purchase of oil and gas leases.
Accordingly, there can be no assurance that the 3-D Exploration Program or any
other oil and gas venture of the Company will be successful in acquiring
farmouts, seismic permits, lease options, leases or other rights to explore or
recover oil and gas. Consequently, the proportion of the Survey AMI which could
be surveyed or subsequently explored through drilling would be reduced to the
extent that the 3-D Exploration Program is not successful at such acquisitions.
See "Business and Properties -Permit and Lease Status within the Survey AMI."
Lack of Diversification / Oil and Gas Industry Conditions / Volatility of
Prices for Oil and Gas
As an independent energy company, the Company's revenues and profits
will be substantially dependent on the oil and gas industry in general and the
prevailing prices for oil and gas in particular. Oil and gas prices have been
and are likely to continue to be volatile and subject to wide fluctuations in
response to any of the following factors: relatively minor changes in the supply
of and demand for oil and gas; market uncertainty; political conditions in
international oil producing regions; the extent of domestic production and
importation of oil in certain relevant markets; the level of consumer demand;
weather conditions; the competitive position of oil or gas as a source of energy
as compared with other energy sources; the refining capacity of oil purchasers;
and the effect of federal and state regulation on the production, transportation
and sale of oil. It is likely that adverse changes in the oil market or the
regulatory environment would have an adverse effect on the Company's ability to
obtain capital from lending institutions, industry participants, private or
public investors or other sources.
Intense Competition in Oil and Gas Industry
The oil and gas industry is highly competitive. Most of the Company's
current and potential competitors have significantly greater financial resources
and a significantly greater number of experienced and trained managerial and
technical personnel than the Company and the 3-D Exploration Program. There can
be no assurance that the Company or the 3-D Exploration Program will be able to
compete effectively with such firms. See "Business and Properties - Competition
and Markets."
Risks of Turnkey Contracts
The Company anticipates that any wells to be drilled in which the
Company will have an interest will be drilled by established industry
contractors under turnkey contracts that limit the Company's financial and legal
exposure. Under a turnkey drilling contract a negotiated price is agreed upon
and the money placed in escrow. The contractor then assumes all of the risk and
expense, including any cost overruns, of drilling a well to contract depth and
completing any agreed upon evaluation of the wellbore.
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Upon performance of all these items, the escrowed money is released to the
contractor. On a footage or day work basis, all risk and expense, including
cost overruns, of drilling a well to total depths lies with the operator.
Circumstances may arise where a turnkey contract is not economically beneficial
to the Company or is otherwise unobtainable from proven industry contractors.
In such instances, the Company may decide to drill, or cause to be drilled, the
applicable well(s) on either a footage or day work basis and the drilling
thereof will be subject to the usual drilling hazards such as cratering,
explosions, uncontrollable flows of oil, gas or well fluids, fires, pollution
and other environmental risks. The Company would also be liable for any cost
overruns attributable to downhole drilling problems that otherwise would have
been covered by a turnkey contract had one been negotiated. See "Business and
Properties - Operational Risks and Insurance."
United States Governmental Regulation, Taxation and Price Control
Oil and gas production and exploration are subject to comprehensive
federal, state and local laws and regulations controlling the exploration for
and production and sale of oil and gas and the possible effects of such
activities on the environment. Failure to comply with such rules and
regulations can result in substantial penalties and may adversely affect the
Company. Present, as well as future, legislation and regulations could cause
additional expenditures, restrictions and delays in the Company's business, the
extent of which cannot be predicted and which may require the Company to limit
substantially, delay or cease operations in some circumstances. 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 which may restrict
the rate of production and adversely affect revenues. The Company plans to
acquire oil and gas leases in the Gulf of Mexico, which will be granted by the
Federal government and administered by the U.S. Department of Interior Minerals
Management Service (the "MMS"). The MMS strictly regulates the exploration,
development and production of oil and gas reserves in the Gulf of Mexico. Such
regulations could have a material adverse effect on the Company's operations in
the Gulf of Mexico. The Federal government regulates the interstate
transportation of oil and natural gas, through the Federal Energy and Regulatory
Commission ("FERC"). The FERC has in the past regulated the prices at which oil
and gas could be sold. Federal reenactment of price controls or increased
regulation of the transport of oil and natural gas could have a material adverse
effect on the Company. In addition, 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, including the Oil Pollution Act of 1990. These laws and regulations
have continually imposed increasingly strict requirements for water and air
pollution control, solid waste management, and strict financial responsibility
and remedial response obligations relating to oil spill protection. The cost of
complying with such environmental legislation will have a general adverse effect
on the Company's operations. See "Business and Properties - Governmental
Regulation."
THE COMPANY
Cheniere Energy, Inc., a holding company ("Cheniere," together with
Cheniere Operating (as defined below) and Cheniere California (as defined
below), the "Company"), is the owner of 100% of the outstanding common stock of
Cheniere Energy Operating Co., Inc. ("Cheniere Operating") and Cheniere Energy
California, Inc. ("Cheniere California"). Cheniere 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.
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"), in
order to give Cheniere Operating a presence in the public market. Bexy was
involved in the production of traditional television programming, and in the
creation, publishing and distribution of health-themed information for the
general public through print and electronic media. Management decided to
terminate Bexy's business because of the small scale of the operations and
because of the relative attractiveness of the Company's oil and gas projects.
Under the terms of the Reorganization Agreement, Bexy transferred
10
<PAGE>
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 and the former shareholders of Cheniere Operating received
approximately 8.3 million 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 7% of the
outstanding Bexy stock. In accordance with the terms of the Reorganization
Agreement, Bexy changed its name to Cheniere Energy, Inc. Subsequently,
Cheniere distributed the outstanding capital stock of Mar Ventures to the
original holders of Bexy common stock.
The Common Stock of Cheniere is traded on The Nasdaq SmallCap Market
(ticker symbol "CHEX") with 13,477,533 shares outstanding as of May 22, 1997.
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.
USE OF PROCEEDS
All shares of Common Stock covered hereby are being registered for the
account of the Selling Stockholders and, accordingly, Cheniere will not receive
any proceeds from the sale of the Common Stock by the Selling Stockholders.
CAPITALIZATION
The following table sets forth the capitalization of Cheniere as of
February 28, 1997. All information set forth below should be read in
conjunction with the financial data of the Company and related notes that appear
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
<S> <C>
Shareholders' Equity
Common Stock - $.003 Par Value
Authorized 20,000,000 shares;
12,295,462 Issued and Outstanding(1) $ 36,886
Preferred Stock -
Authorized 1,000,000 shares;
None Issued and Outstanding --
Additional paid-in capital 9,850,480
Deficit accumulated during (396,546)
the development stage ----------
Total Shareholders' Equity $9,490,820
==========
</TABLE>
(1) In addition, (i) 274,166 and 2/3 shares of the Common Stock are reserved
for issuance upon exercise of outstanding warrants to purchase Common Stock
at an exercise price of $3.00 per share, (ii) 112,500 shares of the Common
Stock are reserved for issuance upon the exercise of outstanding warrants
to purchase Common Stock at an exercise price of $3.125 per share, (iii)
300,000 shares of the Common Stock are reserved for issuance upon exercise
of outstanding options granted by the Board of Directors to certain of
Cheniere's executive officers, at an exercise price of $3.00 per share,
(iv) 19,444 and 2/3 shares of the Common Stock are reserved for issuance
upon exercise of outstanding options granted to Buddy Young, at an exercise
price of $1.80 per share and (v) 12,000 shares of the Common Stock are
reserved for issuance upon exercise of outstanding options granted to
Janet L. Reinarz, at an exercise price of $3.00 per share
11
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
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 April 11, 1997, the
Common Stock began trading on The Nasdaq SmallCap Market (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 for the
following periods are as given: July 8, 1996 through August 31, 1996, $6.00 and
$3.00; September 1, 1996 through November 30, 1996, $3.50 and $2.125; December
1, 1996 through February 28, 1997, $7.3125 and $2.75, and on May 21, 1997,
$3.53125 and $3.4375. High ask and low bid prices before April 11, 1997 reflect
the trading prices of the Common Stock on the OTC Bulletin Board. Beginning on
April 11, 1997, high ask and low bid prices reflect the trading prices of the
Common Stock on the Nasdaq SmallCap Market. These quotations reflect inter-
dealer prices, without retail mark-up, mark-down or commission and may not
reflect actual transactions.
As of May 20, 1997 there were 778 record holders of the Common Stock
which does not include holders who hold their shares of the Common Stock in
"street name".
Cheniere 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 Cheniere'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.
12
<PAGE>
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 year then ended have been
audited by Merdinger, Fruchter, Rosen & Corso, P.C. The financial statements as
of February 28, 1997 and the for the six month period then ended are unaudited.
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>
Pro Forma
From inception ---------------------
(February 21, 1996) September 1, 1996 September 1, 1996
to to to
August 31, 1996 February 28, 1997 February 28, 1997/1/
---------------- ------------------ ---------------------
<S> <C> <C> <C>
Net operating revenues $ -- $ -- $ --
(Loss) from continuing operations (91,847) (304,699) (304,699)
(Loss) from continuing operations (0.01) (0.028) (0.028)
per share of common stock
Net (loss) per share of common (0.008) (0.03) (0.03)
stock
Cash 1,093,180 3,843,088 2,759,882
Investment in 3-D Exploration Program 4,000,000 7,141,745 8,000,000
Total Assets 5,145,310 11,187,621 10,928,920
Long-term obligations -- -- --
Total Liabilities 718,855 1,696,801 84,300
Total Shareholders' Equity 4,426,455 9,490,820 10,844,620
Cash dividends declared per share of -- -- --
common stock
</TABLE>
- --------------
/1/ On March 4, 1997 $1,500,025 of Advances for Issuance of Common Stock were
transferred to capital, as the Company issued shares of common stock for
$1,500,025, and the Company funded an additional $858,255 investment in the
3-D Exploration Program. This column reflects the selected financial data as
if the two events described herein along with applicable costs and expenses
had occurred as of February 28, 1997.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Cheniere Operating was incorporated in Delaware in February of 1996
for the purpose of entering the oil and gas exploration and if warranted,
development 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.
Under the terms of the Reorganization Agreement, Bexy transferred its
existing assets of approximately $224,000 and its liabilities of approximately
$111,000 to Mar Ventures, Inc. ("Mar Ventures"), Bexy received 100% of the
outstanding shares of Cheniere Operating and the former shareholders of Cheniere
Operating received approximately 8.3 million newly issued shares of Bexy common
stock, representing 93% of the then issued and outstanding Bexy shares.
Cheniere Operating became a wholly-owned subsidiary of Bexy and the principal
business became oil and gas exploration. Bexy then changed its name to Cheniere
Energy, Inc., and 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 reflected a loss of $91,847, as there
were no revenues from continuing operations. General and Administrative
expenses of $73,814, including primarily the costs of salary, occupancy and
office expense, comprised most of the loss.
RESULTS OF OPERATIONS - UNAUDITED STATEMENTS SIX MONTH PERIOD ENDED
FEBRUARY 28, 1997
The Company's operating results for the six months ended February 28,
1997 reflect a loss of $304,699, or $0.028 per share, as there were no operating
revenues. General and administrative expenses of $311,693 and interest expenses
of $15,002 were offset partially by interest income of $21,996. General and
Administrative expense consisted primarily of the costs of salary, occupancy,
office expense and insurance. Interest expense was incurred with respect to a
short term promissory note that was repaid on December 14, 1996. Interest income
was generated on the Company's cash balances.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 1996, 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
$609,451.
14
<PAGE>
At February 28, 1997, total assets were $11,187,621 compared to
$5,145,310 at August 31, 1996. The increase is primarily from the sale of
Common Stock net of offering costs of $5,145,838 received during the six month
period. Current assets increased to $3,996,409 from $1,097,980 during the same
period. Other assets reflected an increase in investment to approximately $7.1
million from $4 million in the 3-D Exploration Program. This increase was funded
primarily from cash balances and equity proceeds. On March 4, 1997, the Company
funded an additional $858,255 investment in the 3-D Exploration Program, also
from equity proceeds and cash balances, and on May 2, 1997, the Company funded
an additional $2 million investment in the 3-D Exploration Program from cash
balances, bringing its total investment to date in the 3-D Exploration Program
to $10 million. General and administrative and interest expenses were funded
with equity proceeds and cash balances.
At February 28, 1997, the Company had working capital of $2,299,608.
For the period from inception (February 21, 1996) to August 31, 1996, operating
expenses and capitalized costs were financed by the sale of Common Stock and
Bridge Loan (as defined below) funding as the Company had not yet generated
revenues from operations. For the six month period ended February 28, 1997,
operating expenses and capitalized costs were financed by the sale of Common
Stock 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 $3.5 million (which is due in two
payments; $2 million on May 22, 1997 and $1.5 million on June 21, 1997, each of
which has a 30-day grace period), will be met by sale of equity, further
borrowings and/or sales of portions of Cheniere Operating'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 Cheniere Operating's interest
in the 3-D Exploration Program will prove to be successful. Cheniere Operating
has in the past failed to timely make certain payments due to the 3-D
Exploration Program. While Cheniere Operating has in such instances succeeded in
obtaining waivers under, and amendments to, the Exploration Agreement extending
the due dates for such required payments, there can be no assurance that
Cheniere Operating will successfully obtain similar amendments should it fail to
timely make required payments to the 3-D Exploration Program in the future.
Neither Cheniere Operating nor Cheniere currently has sufficient capital to meet
its future payment requirements and there can be no assurance that Cheniere
Operating or Cheniere 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
15
<PAGE>
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 February 28, 1997,
Cheniere raised net proceeds of $5,145,838 from the sale of equity to accredited
investors pursuant to Regulation D and other investors pursuant to Regulation S.
Some of the proceeds were used to fund payments in the aggregate of
approximately $3.1 million to the 3-D Exploration Program.
On March 4, 1997, the Company funded an additional $858,255 investment
in the 3-D Exploration Program, and $1,500,025 of Advances for Issuance of
Common Stock were transferred to capital, as the Company issued 352,947 shares
of Common Stock, at a price of $4.25 per share, for proceeds of $1,500,025. With
respect to these shares of Common Stock, as well as 352,947 shares of Common
Stock issued in February 1997 at a price of $4.25 per share, the Company has
agreed that if, during the 270 day period following the date of purchase of
these shares, the Company offers and sells any shares of Common Stock for a per
share gross sales price lower than the per share price paid for these shares,
the Company will issue additional shares of Common Stock to reflect the lowest
per share gross sales price at which shares were offered and sold during the
period. The pro forma financial information contained in "Selected Financial
Data", above, reflects the stated financial information as if the two events
described above had occurred as of February 28, 1997.
On May 2, 1997, the Company funded an additional $2 million investment
in the 3-D Exploration Program, bringing its total investment to date in the 3-D
Exploration Program to $10 million.
During May 1997, Cheniere issued 535,000 shares of Common Stock, at a
sale price of $3.00 per share, to accredited investors pursuant to Regulation D
and received net proceeds of $1,485,000 from such sale. As noted above, under
the terms of the February 28, 1997 and March 4, 1997 sales of Common Stock,
Cheniere has agreed that if, during the 270 day period following the date of
purchase of these shares, Cheniere offers and sells any shares of Common Stock
for a per share gross sales price lower than the per share price paid for these
shares, Cheniere will issue additional shares of Common Stock to reflect the
lowest per share gross sales price at which shares were offered and sold during
the period. As a consequence of the private placement of Common Stock at a price
of $3.00 per share, Cheniere is obligated to issue 294,000 additional shares of
Common Stock to those investors who purchased Common Stock on February 28, 1997
or March 4, 1997.
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, which Cheniere Operating paid on December 13, 1996. The
Remaining Noteholder also received 64,500 warrants to purchase shares of the
Common Stock in accordance with the terms of the original Note Agreement. Such
additional warrants have identical terms as the June Warrants, in accordance
with the terms of the original Note agreement. The Remaining Noteholder was not
an affiliate of the Company.
16
<PAGE>
On November 27, 1996, Cheniere Operating and Zydeco Exploration
amended the Exploration Agreement between the two entities relating to the 3-D
Exploration Program whereby the schedule for payment of Seismic Funds defined by
the Exploration Agreement and its amendments from Cheniere Operating to Zydeco
is suspended. The new amendment calls for Cheniere Operating to furnish funds to
maintain a $1,000,000 balance in the Seismic Fund account and for Cheniere
Operating to resume the payment schedule within thirty days of Zydeco's
notification. The suspension of payment of Seismic Funds is intended to better
align the payment schedule with Zydeco's need for such funds. Under the revised
agreement, Cheniere Operating expects to fund an additional $3.5 million (plus
50% of certain costs in excess of $13.5 million) of Seismic Fund payments during
the final two quarters of its fiscal year ending August 31, 1997, which is due
in two payments; $2 million on May 22, 1997 and $1.5 million on June 21, 1997,
each of which has a 30-day grace period.
BUSINESS AND PROPERTIES
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. Cheniere California has signed a Purchase and Sale
Agreement with respect to certain undeveloped leases offshore Santa Barbara
County, California.
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.
Cheniere Operating is involved with one major project in the pre-
development stage. Cheniere Operating has entered into a joint exploration
program pursuant to an Exploration Agreement between 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").
Cheniere Operating has the right to earn up to a 50% participation in the 3-D
Exploration Program. Cheniere Operating believes that the 3-D seismic survey
(the "Survey") is the first large survey of its kind to cross the shoreline
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 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% (203 square miles) 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. The 3-D Exploration
Program will survey specific sections selected by it within
17
<PAGE>
the areas covered by such permits and rights. A seismic data acquisition
contract was signed and acquisition of data commenced in September, 1996. Prior
to discontinuing operations in late November due to weather conditions, 27
square miles of data had been acquired. Work on the project was resumed in
April 1997 under the terms of an amended contract with Grant Geophysical, Inc.
The 3-D Exploration Program plans to acquire seismic data over all lands on
which rights have been acquired to date, as well as over additional lands for
which permits are being sought. Data acquisition is anticipated to be completed
during the third calendar quarter of 1997.
As previously disclosed, 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 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.
BUSINESS STRATEGY
The Company's objective is to expand the net value of its assets 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. Cheniere Operating'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 permits Cheniere Operating to lower
its operating costs compared to those in other geographic regions and
facilitates the timely development of oil and gas discoveries. The
Company's officers and Zydeco 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
18
<PAGE>
in the area. Zydeco Energy and its predecessor companies have operated in
south Louisiana onshore and offshore for more than 15 years. Recent
activities have been principally focused in the Bay Marchand offshore
area. Zydeco's technical staff, which presently includes collectively 10
geologists, geophysicists and landmen, has had many years of experience in
south Louisiana exploration and exploitation.
. MAINTAIN A SIGNIFICANT WORKING INTEREST IN EACH PROJECT. Cheniere Operating
has the right to earn up to a 50% participation in the 3-D Exploration
Program. Under the terms of the Exploration Agreement, Cheniere Operating
must timely meet its payment obligations to the 3-D Exploration Program in
order to reach a 50% participation. Cheniere Operating 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.
. 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 CAMERON PARISH, LOUISIANA TRANSITION ZONE
The Company's first exploration project is the 3-D Exploration
Program, in which Cheniere Operating has the right to earn up to a 50%
participation, in a new proprietary 3-D seismic exploration project that
Cheniere Operating believes will be the first large survey of its kind crossing
the shoreline 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 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, certain privately held areas and Federal OCS
acreage which together constitute approximately 80% 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
19
<PAGE>
it within the areas covered by its permits and similar rights. See "- Permit
and Lease Status Within the Survey AMI." A seismic data acquisition
contract was signed and acquisition of data commenced in September, 1996. Prior
to discontinuing operations in late November due to weather conditions, 27
square miles of data had been acquired. Work on the project was resumed in
April 1997 under the terms of an amended contract with Grant Geophysical, Inc.
The 3-D Exploration Program plans to acquire seismic data over all lands on
which rights have been acquired to date, as well as over additional lands for
which permits are currently being sought. Data acquisition is anticipated to be
completed during the third calendar quarter of 1997.
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 $13.5 million, and Seismic Costs greater than $13.5 million
will be borne equally by Cheniere Operating and Zydeco. "Seismic Costs" are
defined in the Exploration Agreement to include the following, inter alia:
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 including 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.
As described above, under the terms of the Exploration Agreement,
Cheniere Operating is obligated to make payments for the Seismic Costs into a
Exploration Program account (the "Exploration Program 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 might have been
reduced to $1.0 million under certain circumstances described above).
On November 27, 1996, Cheniere Operating and Zydeco amended the
Exploration Agreement between the two entities relating to the 3-D Exploration
Program whereby the schedule for payment of Seismic Funds defined by the
Exploration Agreement and its amendments from Cheniere Operating to Zydeco is
suspended. The new amendment calls for Cheniere Operating to furnish funds to
maintain a $1,000,000 balance in the Seismic Fund account and for Cheniere
Operating to resume the payment schedule within thirty days of Zydeco's
Program whereby the schedule for payment of Seismic Funds defined by the
Exploration Agreement and its amendments from Cheniere Operating to Zydeco is
suspended. The new amendment calls for Cheniere Operating to furnish funds to
maintain a $1,000,000 balance in the Seismic Fund account and for Cheniere
Operating to resume the payment schedule within thirty days of Zydeco's
notification, and is intended to better align the payment schedule with Zydeco's
need for such funds. On February 22, 1997, Cheniere Operating received notice
from Zydeco that suspension of
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payments had ceased and that payments under the November 27, 1996 amendment
should be resumed. Under the revised agreement, Cheniere Operating expects to
fund an additional $3.5 million (plus 50% of certain costs in excess of $13.5
million) of Seismic Fund payments during the final two quarters of its fiscal
year ending August 31, 1997, which is due in two payments; $2 million on May 22,
1997, and $1.5 million on June 21, 1997, each of which has a 30-day grace
period. At May 2, 1997, Cheniere Operating had paid $10 million to the
Exploration Program Account. Cheniere Operating made the April 22nd payment to
Zydeco with cash balances. Cheniere intends to make subsequent required payments
with funds raised through sale of equity securities of Cheniere and
capitalization of Cheniere Operating by Cheniere. Cheniere Operating intends to
make its future payments under the amended Exploration Agreement as and when
they are due, however, neither Cheniere Operating nor Cheniere currently has
sufficient capital to cover such payments and there can be no assurance that
Cheniere Operating or Cheniere will successfully secure the necessary funds.
In the event Cheniere Operating fails to make a scheduled payment into
the Exploration Program 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 Exploration Program 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 $10 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 37.0%;
(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, which amount
has been paid to the 3-D Exploration Program or more prior to the
Discontinuance, then the parties will treat Cheniere Operating as having
earned a vested Prospect ownership interest of 25%, regardless of the
existence of certain costs to the 3-D Exploration Program in excess of
$13.5 million, which 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
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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 Cheniere Operating
and Zydeco.
Zydeco and Cheniere Operating have entered into a 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 of exploration
wells testing the primary objective section to one well per five square miles
(outside of the known fields). However, 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 AMI, 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
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 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.
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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 Exploration Program 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") 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
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. It is
currently anticipated that Zydeco will exercise its option to extend the term of
the Louisiana Seismic Permit.
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 23,000 acres of
Federal offshore leases 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 year and may then be available for leasing.
Onshore Area -- Prospective Permits, Lease Options, and Farmouts. To
date, Zydeco has obtained seismic permits covering approximately 22,000 acres,
lease options covering 28,000 acres and farmout agreements covering 5,000 acres
of land lying onshore in the eastern and central portion of the Survey AMI.
Zydeco is continuing to negotiate variously, farmouts, seismic permits or lease
options with owners or lessees of the mineral interests covering approximately
30,000 acres of privately owned lands lying in the western portion of the Survey
AMI.
Technological Aspects of 3-D Seismic Shoot and Prospect Generation
Cheniere Operating 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 high quality seismic data can be acquired in the Transition Zone
for a reasonable cost. The Survey will incorporate certain of these new
techniques for the first time in a major seismic survey. Moreover, Cheniere
Operating 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 Imaging, Inc.). The approach combines a relatively lower density
array of shots and receivers with 3-D pre-stack migration. Based upon
evaluation by Zydeco's technical staff of the 27 square miles of seismic data
that have been acquired to date, Cheniere Operating believes that the use of a
single type
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of shot, dynamite, and a single type of receiver, hydrophone, across the
coastline, will simplify and improve seismic processing across the different
Transition Zone environments.
Data Acquisition. Cheniere Operating believes that use of similar
source (dynamite) and receiver (hydrophone) components laid out in a symmetrical
array, both onshore and offshore -- including across the shoreline -- eliminates
the problems inherent in hybrid surveys of integrating two different types of
data sets (land and marine). 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
will be 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.
Results to Date. In January 1997, Zydeco completed the assembly of an
exploration team of geophysicists and geologists, and the integration of its 3-D
seismic interpretive hardware and software. During the fall of 1996, 27 square
miles of data (covering approximately 12% of the AMI) was acquired. Shooting
resumed again in April 1997 and will continue until completion of the shoot.
Zydeco is presently analyzing the initial 27 square miles and applying various
seismic processing techniques to improve data resolution and to develop routines
for more complicated processes, including pre-stack migration and velocity
analyses. These techniques will also be used in analyzing future data obtained
in respect of the 3-D Exploration Program. Processing of the first 27 square
miles indicates that various trapping geometries are present within the lower
Miocene objective section, but can offer no assurance of the presence of
hydrocarbons. While Zydeco believes the preliminary data results are promising,
the exploration potential of the data is still not known and identification of
prospects would be premature. The analysis of the exploration potential of the
data will be dependent on further seismic processing and analysis and the
availability of additional data covering the AMI. In any event, the Company
believes that the data is already providing the 3-D Exploration Program with
good resolution beneath each of the onshore, coastal and marine portions of the
survey at depths between 5,000 and 25,000 feet.
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Schedule for the 3-D Exploration Program
The Louisiana Seismic Permit, whose primary 18 month term expires in
August 1997, may be extended at Zydeco's option until February 1998 by payment
of an additional fee of $391,876.80. It is currently anticipated that Zydeco
will exercise its option to extend the term of the Louisiana Seismic Permit. If
this fee is required to be paid, it will be included as a Seismic Cost under the
Exploration Agreement. Zydeco presently plans to adhere to the schedule
summarized below:
2/nd/ Quarter 1996 - 2/nd/ Quarter 1997 Onshore Permitting and Lease
Optioning
3/rd/ Quarter 1996 - 2/nd/ Quarter 1997 Conduct Seismic Survey and
Simultaneously Begin Processing &
Interpretation of Data Received
2/nd/ Quarter 1997 - 4/th/ Quarter 1997 Continue Survey, Processing and
Interpretation and Identify Prospects
4/th/ Quarter 1997 - 1/st/ Quarter 1998 Nominate and Bid State Leases,
Exercise Lease Options Onshore;
Propose and Contract for Drilling
First Group of Prospects
All references to quarters in the above schedule are to calendar quarters.
Under the terms of the Louisiana Seismic Permit, the 3-D Exploration
Program 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 Cheniere Operating. There can be no assurance that the 3-D
Exploration Program will complete its scheduled activities within the time
period of the Louisiana Seismic Permit. Failure of the 3-D Exploration Program
to complete its scheduled activities within the term of the Louisiana Seismic
Permit would materially and adversely affect the value of Cheniere Operating's
interest in the 3-D Exploration Program.
Zydeco and Cheniere Operating 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
Cheniere Operating, 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
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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 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
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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 has conducted 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 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.
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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 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 rehearing 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 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,
28
<PAGE>
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 and 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 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
29
<PAGE>
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 to be drilled in which the
Company will have an interest 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
work basis and the drilling thereof will be subject to the usual drilling
hazards such as cratering, explosions, uncontrollable flows of oil, gas or well
fluids, fires, pollution and other environmental risks. The Company's
activities are also subject to perils specific to marine operations, such as
capsizing, collision, and damage or loss from severe weather. These hazards can
cause personal injury and loss of life, severe damage to and destruction of
property and equipment, pollution or environmental damage and suspension of
operations. In accordance with customary industry practices, the Company
intends to maintain insurance against some, but not all, of such risks and some,
but not all, of such losses. The occurrence of a significant event not fully
insured or indemnified against could materially and adversely affect the
Company's financial condition and operations. Moreover, no assurance can be
given that the Company will be able to maintain adequate insurance in the future
at rates considered reasonable by the Company.
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 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.
EMPLOYEES
The Company has one full-time employee, an administrative assistant,
other than its executive officers.
PROPERTIES
30
<PAGE>
Cheniere 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.
LEGAL PROCEEDINGS
The Company is not involved in any litigation.
MANAGEMENT
OFFICERS AND DIRECTORS
The executive officers and directors of Cheniere are as follows:
<TABLE>
<CAPTION>
Name Age Title
- ---- --- -----
<S> <C> <C>
Charif Souki......... 44 Chairman of the Board of
Directors and Secretary
William D. Forster... 50 President, Chief Executive Officer and
Director
Walter L. Williams... 69 Vice Chairman and Director
Keith F. Carney...... 40 Chief Financial Officer and Treasurer
Efrem Zimbalist III.. 49 Director
</TABLE>
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.
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, 40, 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.
31
<PAGE>
Efrem Zimbalist III, 49, 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.
DIRECTOR COMPENSATION
Directors receive no remuneration for serving on the board of
directors of Cheniere.
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 Cheniere. 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 Cheniere
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 Cheniere,
and Charif Souki, Chairman of the Board of Directors and Secretary of Cheniere,
have not received any compensation in the form of salary or options and Cheniere
does not currently intend to pay any such compensation to such officers until
the Company has raised significant additional capital. Cheniere 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.
Walter L. Williams, Vice Chairman of Cheniere, began receiving a
salary of $120,000 per year on September 1, 1996. By resolution of the Board of
Directors of Cheniere dated July 3, 1996, Cheniere granted to Mr. Williams
certain options to purchase shares of the Common Stock as described below. In
addition, Cheniere granted 30,000 shares of the Common Stock to Mr. Williams on
July 3, 1996. Keith F. Carney, Chief Financial Officer and Treasurer of
Cheniere, began receiving a salary of $90,000 per year on July 16, 1996, the
date of his appointment as an officer of Cheniere. By resolution of the Board
of Directors of Cheniere dated July 23, 1996, Cheniere granted to Mr. Carney
certain options to purchase shares of Common Stock as described below.
32
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information with respect to
individual grants of options to purchase Common Stock made during the period
from inception (February 21, 1996) to August 31, 1996 to each of the named
executive officers.
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants Option Terms($)/(1)/
------------------------------------ ------------------------------
Number of
Securities % of Total Exercise
Underlying Options or Base
Options Granted to Price Expiration 5% 10%
Granted(#) Employees ($/Sh) Date Appreciation($) Appreciation($)
----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Name
- ----
Charif Souki............ - - - - - -
William D. Forster...... - - - - - -
Walter L. Williams...... 75,000/(2)/ 24.0 3.00/(5)/ 6/1/01 76,522 173,601
75,000/(3)/ 24.0 3.00/(5)/ 6/1/01 91,598 213,461
Keith F. Carney......... 37,500/(4)/ 12.0 3.00/(5)/ 7/16/01 38,261 86,801
37,500/(4)/ 12.0 3.00/(5)/ 7/16/01 45,799 106,731
37,500/(4)/ 12.0 3.00/(5)/ 7/16/01 53,714 128,654
37,500/(4)/ 12.0 3.00/(5)/ 7/16/01 62,024 152,769
</TABLE>
- -----------------
/(1)/ The indicated dollar amounts are the result of calculations based on the
exercise price of each option and assume five and ten percent annual
appreciation rates set by the Securities and Exchange Commission over the
term of the option and, therefore, are not intended to forecast possible
future appreciation, if any, of Cheniere's stock price.
/(2)/ Each of these stock options vest and become exercisable on June 1, 1997
and expire five years from the date of grant.
/(3)/ Each of these stock options vest and become exercisable on June 1, 1998
and expire five years from the date of grant.
/(4)/ Cheniere granted Mr. Carney 150,000 stock options on July 23, 1996. The
options vest and become exercisable in equal annual installments of 25%
each on the first through fourth anniversaries of July 16, 1996, and
expire on the fifth anniversary of the date of grant.
/(5)/ The exercise price represents the approximate bid price of the underlying
Common Stock of Cheniere at the time the options were granted.
AGGREGATED OPTION EXERCISED IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUE
The following table sets forth certain information with respect to the
outstanding options to purchase Common Stock as of August 31, 1996 for each of
the named executive officers.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at 8/31/96 (#) at 8/31/96 ($)
-------------------------- ----------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
Name
- ----
Charif Souki.......... - - - -
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.
33
<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH MANAGEMENT
BSR Investments, Ltd. ("BSR"), an entity holding approximately 19.3% of the
outstanding shares of the Common Stock, is under the control of Samyr Souki, the
father of Charif Souki, Chairman of the Board of Directors and Secretary of
Cheniere. Charif Souki has been engaged, from time to time, as a consultant to
BSR. Charif Souki disclaims beneficial ownership of all shares held by
BSR.
DIRECTOR LIABILITY
The Amended and Restated Certificate of Incorporation of Cheniere
eliminates the liability of directors of Cheniere to Cheniere or its
stockholders (in their capacity as directors but not in their capacity as
officers) to the fullest extent permitted by Section 102 of the Delaware General
Corporation Law, as the same may be amended from time to time (the "DGCL").
Specifically, under Section 102 of the DGCL, directors of Cheniere will not be
personally liable for monetary damages for breach of a director's fiduciary duty
as a director, except for liability (i) for any breach of the director's duty of
loyalty to Cheniere or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) for unlawful payments or dividends or unlawful stock repurchases or
redemption as provided in Section 174 of the DGCL or (iv) for any transaction
from which the director derived an improper personal benefit.
DESCRIPTION OF CAPITAL STOCK
Cheniere has 21,000,000 authorized shares of stock, consisting of (a)
20,000,000 shares of the Common Stock, having a par value of $.003 per share,
and (b) 1,000,000 shares of preferred stock, having a par value of $.0001 per
share (the "Preferred Stock").
The shares of the Common Stock being registered pursuant to the
registration statement of which this prospectus is a part include (i) 794,211
shares issued in connection with the Reorganization to the initial subscribers
for common stock of Cheniere Operating and their transferees, other than shares
held by BSR Investments, Ltd. and William D. Forster, (ii) 2,000,000 shares
issued in connection with the Reorganization to holders of common stock of
Cheniere Operating issued in May and June 1996 pursuant to Regulation D, (iii)
689,639 shares issued during the period from July 1996 to December 1996 pursuant
to Regulation D and (iv) 500,000 shares issued in December 1996 pursuant to
Regulation S.
COMMON STOCK
As of May 22, 1997, there were 13,477,533 shares of the Common Stock
outstanding. All of such outstanding shares of Common Stock are fully paid and
nonassessable. Each share of the Common Stock has an equal and ratable right to
receive dividends when, as and if declared by the Board of Directors of Cheniere
out of assets legally available therefor and subject to the dividend obligations
of Cheniere to the holders of any Preferred Stock then outstanding.
In the event of a liquidation, dissolution or winding up of Cheniere, the
holders of Common Stock are entitled to share equally and ratably in the assets
available for distribution after payment of all liabilities, and subject to any
prior rights of any holders of Preferred Stock that at the time may be
outstanding.
The holders of Common Stock have no preemptive, subscription, conversion or
redemption rights, and are not subject to further calls or assessments of
Cheniere. There are no sinking fund provisions applicable to the Common Stock.
Each share of Common Stock is entitled to one vote in the election of directors
and on all other matters, submitted to a vote of stockholders. Holders of
Common Stock have no right to cumulate their votes in the election of directors.
34
<PAGE>
In accordance with the Reorganization Agreement and a letter agreement
dated July 3, 1996 between Buddy Young and Cheniere, Cheniere agreed not to
engage in any reverse split or any transaction that has the effect of a reverse
split, resulting in the combination of shares of the Common Stock without the
prior written consent of Mr. Young for a period of 18 months, ending on January
3, 1998.
PREFERRED STOCK
As of the date of this Prospectus, there were no shares of Preferred Stock
outstanding. Preferred Stock may be issued from time to time in one or more
series, and the Board of Directors, without further approval of the
stockholders, is authorized to fix the dividend rates and terms, conversion
rights, voting rights, redemption rights and terms, liquidation preferences and
any other rights, preferences, privileges and restrictions applicable to each
series of Preferred Stock. The purpose of authorizing the Board of Directors to
determine such rights, preferences, privileges and restrictions is to eliminate
delays associated with a stockholder vote on specific issuances. The issuance
of Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things, adversely
affect the voting power of the holders of Common Stock and, under certain
circumstances, make it more difficult for a third party to gain control of
Cheniere.
WARRANTS
Cheniere has issued and outstanding certain warrants described herein
(collectively, the "Warrants"). Cheniere is not registering such Warrants or
the Common Stock underlying such Warrants pursuant to the registration statement
of which this prospectus is a part.
Cheniere has issued and outstanding 141,666 and 2/3 warrants (collectively,
the "June Warrants"), each of which entitles the registered holder thereof to
purchase one share of Common Stock. The June Warrants are exercisable at any
time on or before June 14, 1999, at an exercise price of $3.00 per share
(subject to customary anti-dilution adjustments). 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. In
connection with the payment of an additional promissory note to one such
investor, Cheniere has issued to such investor an additional warrant to purchase
64,500 shares of the Common Stock (on the same terms as the June Warrants), in
accordance with the terms of the original Note Agreement, which expires on June
14, 1999. (See "Management Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources.")
In consideration of certain investment advisory and other services to the
Company, pursuant to warrant agreements each dated as of August 21, 1996,
Cheniere issued to C.M. Blair, W.M. Foster & Co., Inc. and Redliw Corp. warrants
to purchase 13,600 and 54,400 shares of Common Stock, respectively
(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).
In connection with the July and August 1996 placement of 508,400 shares of
the Common Stock pursuant to Regulation S promulgated under the Securities Act
of 1933, as amended (the "Securities Act"), Cheniere issued warrants to purchase
12,500 shares of Common Stock to one of two distributors who placed the shares.
Such warrants are exercisable on or before the second anniversary of the sale of
the shares of Common Stock at an exercise price of $3.125 per share (subject to
customary anti-dilution adjustments).
In late August 1996, Cheniere sold 100,000 units pursuant to Regulation S,
each such unit consisting of 5 shares of the Common Stock and a warrant to
purchase one share of the 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).
35
<PAGE>
The Warrants do not confer upon the holders thereof any voting or other
rights of a stockholder of Cheniere.
POSSIBLE ANTI-TAKEOVER PROVISIONS
The Amended and Restated Certificate of Incorporation of Cheniere (the
"Charter") contains certain provisions that might be characterized as anti-
takeover provisions. Such provisions may render more difficult certain possible
takeover proposals to acquire control of Cheniere and make removal of management
of Cheniere more difficult.
As described above, the Charter authorizes a class of undesignated
Preferred Stock consisting of 1,000,000 shares. Preferred Stock may be issued
from time to time in one or more series, and the Board of Directors, without
further approval of the stockholders, is authorized to fix the rights,
preferences, privileges and restrictions applicable to each series of Preferred
Stock. The purpose of authorizing the Board of Directors to determine such
rights, preferences, privileges and restrictions is to eliminate delays
associated with a stockholder vote on specific issuances. The issuance of
Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things, adversely
affect the voting power of the holders of Common Stock and, under certain
circumstances, make it more difficult for a third party to gain control of
Cheniere.
Cheniere is incorporated under the laws of the State of Delaware. Section
203 of the Delaware General Corporation Law prevents an "interested stockholder"
(defined as a stockholder owning 15 percent or more of a corporation's voting
stock) from engaging in a business combination with such corporation for a
period of three years from the time such stockholder became an interested
stockholder unless (a) the corporation's board of directors had earlier approved
either the business combination or the transaction by which the stockholder
became an interested stockholder, or (b) upon attaining that status, the
interested stockholder had acquired at least 85 percent of the corporation's
voting stock (not counting shares owned by persons who are directors and also
officers), or (c) the business combination is later approved by the board of
directors and authorized by a vote of two-thirds of the stockholders (not
including the shares held by the interested stockholder). Cheniere is currently
subject to Section 203.
In addition, William D. Forster, President and Chief Executive Officer of
Cheniere, and BSR Investments, Ltd. ("BSR"), an entity under the control of a
member of the immediate family of Charif Souki, Chairman of the Board of
Directors and Secretary of Cheniere, own in the aggregate approximately 40.4% of
the outstanding shares of the Common Stock. Accordingly, it is likely that Mr.
Forster and BSR will have the ability to effectively prevent or cause a change
in control of Cheniere.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and registrar for the Common Stock is U.S. Stock
Transfer Corporation.
36
<PAGE>
SELLING STOCKHOLDERS
The Registration Statement has been filed under the Securities Act of 1933,
as amended (the "Securities Act") to afford the holders of the Common Stock
listed in the table below (in such capacity, the "Selling Stockholders") the
opportunity to sell such Common Stock in a public transaction. Cheniere will
from time to time supplement or amend this Prospectus to (i) add any holder of
the Common Stock or (ii) reflect any additional required information concerning
any Selling Stockholders or concerning any transfers other than an open market
transfer effected through a broker.
Except where otherwise noted, no Selling Stockholder has had any position,
office or other material relationship with the Company or any of its
predecessors or affiliates within the last three years.
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
on the Date Hereof After Sale*
---------------------------- -------------------------
Number Number of Percent
of Percent of Shares Number of of
Name Shares Class to be Offered Shares Class
- ---- --------- ------------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C>
Dennis L. Adams 50,000 ** 50,000 0 0
Bemel & Ross Profit Sharing 10,000 ** 10,000 0 0
Robert Bowden 10,000 ** 10,000 0 0
Martin Brander 15,000 ** 15,000 0 0
Jacqueline B. Brandwynne 100,000 ** 100,000 0 0
Cinco de Mayo, Ltd. 30,000 ** 30,000 0 0
Ronald W. Cochran 20,000 ** 20,000 0 0
Joseph F. Cullman III 200,000 1.7 200,000 0 0
Murray A. Decoteau, DDS 100,000 ** 100,000 0 0
Peter T. Dixon, Trustee for U/Art 16 35,000 ** 35,000 0 0
u/w for W. Palmer Dixon FBO
Peter Dixon
Peter T. Dixon, Trustee for U/Art 16 35,000 ** 35,000 0 0
u/w for W. Palmer Dixon FBO
Palmer Dixon
East End Associates, Inc. 66,666 ** 66,666 0 0
Bryan Ezralow TTEE of the Bryan 30,000 ** 30,000 0 0
Ezralow 1994 Trust
Marc Ezralow 30,000 ** 30,000 0 0
Marshall Ezralow TTEE of the 40,000 ** 40,000 0 0
Ezralow Family Trust
Allen Finkelstein 30,000 ** 30,000 0 0
Gail Daly Forster/(1)/ 120,000 1.0 120,000 0 0
Gail Daly Forster and John Marshall 100,000 ** 100,000 0 0
Forster TTEEs u/a 8/22/78 by William
H. Forster/(2)/
William Forster Family Trust/(3)/ 120,000 1.0 120,000 0 0
Giorgio Tiberio Gallizio Revocable 13,500 ** 13,500 0 0
Trust dated June 12, 1991
Giovanni Enos Gallizio 12,000 ** 12,000 0 0
Giovanni R. Gallizio Revocable Trust 20,000 ** 20,000 0 0
dated June 14, 1991
Stephen B. Goot 13,000 ** 13,000 0 0
Ralph O. Hellmold 20,000 ** 20,000 0 0
Beth Hoemke 20,000 ** 20,000 0 0
Brendan Hughes 25,000 ** 25,000 0 0
Kim W. Johnston, M.D. 22,222.22 ** 22,222.22 0 0
</TABLE>
37
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Sandra J. Kessler 66,000 ** 66,000 0 0
Sole and Separate Property
Ted Koutsoubos 50,000 ** 50,000 0 0
Carolyn Leemon 12,750 ** 12,750 0 0
Howard Leemon, DDS, PC 32,500 ** 32,500 0 0
Defined Benefits Pension Plan
Andrew Lessman 50,000 ** 50,000 0 0
Richard B. Liipfert 11,111.11 ** 11,111.11 0 0
Michael Marcus 40,000 ** 40,000 0 0
Alan, Mark & Charlen J. Mark 3,000 ** 3,000 0 0
Arden Merback 9,000 ** 9,000 0 0
Eli Moshen 11,000 ** 11,000 0 0
John S. Neel, Jr. 11,111.11 ** 11,111.11 0 0
Ostis Ventures, Ltd. 144,211 1.2 144,211 0 0
Brooke A. Peterson 20,000 ** 20,000 0 0
Pierre Phillippine 21,000 ** 21,000 0 0
Joe Rivera 12,500 ** 12,500 0 0
Joe Sam Robinson, Jr., M.D. 111,111 ** 111,111 0 0
Bert Rogel, Esq. in trust for Estate of 90,000 ** 90,000 0 0
Sharon Heinz Tingle
Ofer Shabtai 24,000 ** 24,000 0 0
Hugh F. Smisson, III, M.D. 55,555.56 ** 55,555.56 0 0
LaWahna R. Smisson 11,111.11 ** 11,111.11 0 0
Alan Sturm 180,000 1.5 180,000 0 0
Fred Sturm 10,500 ** 10,500 0 0
Gisela Sturm 25,000 ** 25,000 0 0
Three D Holdings, Ltd. 300,000 2.4 300,000 0 0
Diana Venegas 20,000 ** 20,000 0 0
Vivaldi, Ltd. 120,000 1.0 120,000 0 0
Michael J. Wagstaff 2,500 ** 2,500 0 0
Wallington Investments, Ltd. 200,000 1.7 200,000 0 0
Whittier Energy Company 20,000 ** 20,000 0 0
Stephen S. Wien 50,000 ** 50,000 0 0
</TABLE>
* Assumes the sale of all shares of the Common Stock being offered by the
registration statement of which this Prospectus is a part.
** Less than 1%
(1) Gail Daly Forster is the mother of William D. Forster, President, Chief
Executive Officer and a director of Cheniere.
(2) Gail Daly Forster and John Marshall Forster TTEEs u/a 8/22/78 by William H.
Forster is a trust for the benefit of Mr. Forster's mother of which trust
Mr. Forster is a 20% remainderman. Mr. Forster disclaims beneficial
ownership of the shares of the Common Stock held by such trust.
(3) The William Forster Family Trust is a trust for the benefit of the
descendants of Mr. Forster's father. Mr. Forster disclaims beneficial
ownership of the shares of Common Stock held by such trust.
Cheniere has agreed, among other things, to bear all expenses (other
than underwriting discounts and commissions, fees and expenses of investment
bankers and brokerage commissions) incurred in connection with the registration
and sale of the Common Stock covered by this Prospectus, including, without
limitation, all registration, listing and qualification fees, printers and
accounting fees and fees and disbursements of counsel to Cheniere.
38
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
ownership of the Common Stock of: (i) each person known by Cheniere to own
beneficially five percent or more of the outstanding Common Stock immediately
prior to the offering; (ii) each of Cheniere's directors; (iii) each of the
executive officers of Cheniere; and (iv) all directors and executive officers of
Cheniere 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)/ 20.9%
BSR Investments, Ltd. 2,602,000 19.1%
Charif Souki 0/(2)/
Walter L. Williams 105,000/(3)/ .8%
Keith F. Carney 37,500/(4)/ -
Efrem Zimbalist III 22,000 .3%
All directors and executive officers as a group (5
persons)........................................................... 3,010,711/(1)(2)/ 22.1%
</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) Includes 75,000 shares which will be issuable upon the exercise of options
held by Mr. Williams which vest on June 1, 1997. Does not include 75,000
shares of the Common Stock issuable upon the exercise of options, not
exercisable within 60 days of the date of this Prospectus, held by Mr.
Williams.
(4) Includes 37,500 shares which will be issuable upon the exercise of options
held by Mr. Carney which vest on July 16, 1997. Does not include 112,500
shares of the Common Stock issuable upon the exercise of options, not
exercisable within 60 days of the date of this Prospectus, held by Mr.
Carney.
PLAN OF DISTRIBUTION
The shares of the Common Stock offered hereby are being offered
directly by the Selling Stockholders. The sale of the Common Stock may be
effected by the Selling Stockholders from time to time in transactions on The
Nasdaq SmallCap Market, in the over-the-counter market, in negotiated
transactions or a combination of such methods of sale, in each such case, at
fixed prices which may be changed, at market prices prevailing at the time of
sale, at prices related to prevailing market prices, or at negotiated prices.
The Selling Stockholders may effect such transactions by selling Common Stock to
or through broker-dealers, and such broker-dealers may receive compensation in
the form of underwriting discounts, concessions or commissions from Selling
Stockholders and/or purchasers of Common Stock for whom such broker-dealers may
act as agents or to whom they sell as principals, or both (which compensation as
to a particular broker-dealer may be in excess of customary commissions).
Cheniere will keep this Registration Statement or a similar registration
statement effective until the earliest to occur of (i) the date that all
securities registered pursuant to the Registration Statement of which this
Prospectus is a part have been disposed of in accordance with the plan of
disposition indicated herein, (ii) the date that all securities registered
pursuant to the Registration Statement of which this Prospectus is a part have
become eligible for sale pursuant to Rule 144(k) under the Securities Act, or
(iii) with respect to 2,844,211 of the shares of the Common Stock being offered
pursuant to this Prospectus, September 17, 1998, and with respect to an
additional 1,139,639 shares of the Common Stock being offered pursuant to this
Prospectus, March 17, 1999.
At the time a particular offer of the Common Stock is made, to the
extent required, a supplemental Prospectus will be distributed which will set
forth the number of shares of the Common Stock being offered and the terms of
the offering including the name or names of any underwriters, dealers or agents,
the purchase price paid by any underwriter for the Common Stock purchased from
the Selling Stockholders,
39
<PAGE>
any discounts, commissions and other items constituting compensation from the
Selling Stockholders and any discounts, commissions or concessions allowed or
reallowed or paid to dealers.
In order to comply with certain state securities laws, if applicable,
the Common Stock will be sold in such jurisdictions only through registered or
licensed brokers or dealers. In addition, in certain states the Common Stock
may not be sold unless the Common Stock has been registered or qualified for
sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with by Cheniere and the
Selling Stockholder.
The Selling Stockholders and any brokers-dealers, agents or
underwriters that participate with Selling Stockholders in the distribution of
Common Stock may be deemed to be "underwriters" as defined in the Securities Act
in which event all brokerage commissions or discounts and other compensation
received by such Selling Stockholders, broker-dealers, agents or underwriters
may be deemed underwriting compensation under the Securities Act. In addition,
any of the shares of Common Stock that qualify for sale pursuant to Rule 144 may
be sold under Rule 144 rather than pursuant to this Prospectus.
Under applicable rules and regulations under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), any person engaged in the
distribution of the Common Stock may not simultaneously engage in market making
activities with respect to Cheniere for a period of five business days prior to
the commencement of such distribution. In addition and without limiting the
foregoing, the Selling Stockholders will be subject to applicable provisions of
the Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M, which may limit the timing of purchases and sales of
shares of Common Stock by the Selling Stockholders.
Cheniere agreed to register the Common Stock under the Securities Act
and to indemnify and hold the Selling Stockholders harmless against certain
liabilities under the Securities Act that could arise in connection with the
sale by the Selling Stockholders of the Common Stock.
See "Selling Stockholders".
LEGAL MATTERS
Certain legal matters in connection with the Common Stock being
offered hereby will be passed upon for Cheniere by Dewey Ballantine, New York,
New York.
EXPERTS
The audited financial statements of Cheniere included in this
prospectus and elsewhere in the registration statement, to the extent and for
the periods indicated in their reports, have been audited by Merdinger,
Fruchter, Rosen & Corso, P.C., independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
The audited financial statements of Bexy Communications, Inc. included
in this Prospectus and elsewhere in the registration statement, to the extent
and for the periods indicated in their reports, have been audited by Farber &
Hass, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
40
<PAGE>
AVAILABLE INFORMATION
Cheniere is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. The reports, proxy statements and other
information filed by Cheniere with the Commission can be inspected and copied at
the public reference facilities maintained by the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices at 7 World Trade Center, New York, New York 10048 and the Northwestern
Atrium Center, 500 West Madison Street, Room 1400, Chicago, Illinois 60661.
Copies of such material also can be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Company files reports with the Commission electronically. The
Commission maintains a Web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission.
41
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CHENIERE ENERGY, INC. AND SUBSIDIARY
For the Fiscal Year Ended August 31, 1996
Independent Auditors' Report F-1
Consolidated Balance Sheet F-2
Consolidated Statement of Operations F-3
Consolidated Statement of Stockholders' Equity F-4
Consolidated Statement of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
For the Three Months Ended November 30, 1996
Consolidated Balance Sheet (Unaudited) F-16
Consolidated Statement of Operations (Unaudited) F-17
Consolidated Statement of Stockholders' Equity (Unaudited) F-18
Consolidated Statement of Cash Flows (Unaudited) F-19
Notes to Consolidated Financial Statements (Unaudited) F-20
For the Six Months Ended February 28, 1997
Consolidated Balance Sheet (Unaudited) F-24
Consolidated Statement of Operations (Unaudited) F-25
Consolidated Statement of Stockholders' Equity (Unaudited) F-26
Consolidated Statement of Cash Flows (Unaudited) F-27
Notes to Consolidated Financial Statements F-28
<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 11(2) and
Note 12(3), as to which the
date is April 21, 1997
F-1
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
AUGUST 31, 1996
ASSETS
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
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
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 4,488,507
Deficit Accumulated During the
Development Stage (91,847)
----------
TOTAL STOCKHOLDERS' EQUITY 4,426,455
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,145,310
==========
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
FROM INCEPTION (FEBRUARY 21, 1996) AUGUST 31, 1996
Revenue $ -
General and Administrative Expenses 73,814
Interest Expense 19,833
------------
Loss from Operations Before Other Income (93,647)
Interest Income 1,800
------------
Loss From Operations Before Income Taxes (91,847)
Provision for Income Taxes -
------------
Net Loss $ (91,847)
============
Loss Per Share $ (.01)
============
Weighted Average Shares Outstanding 8,610,941
============
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FROM INCEPTION (FEBRUARY 21, 1996) AUGUST 31, 1996
<TABLE>
<CAPTION>
Common Stock Additional Total
----------------------- Paid-In Retained Stockholders'
Shares Amount Capital Deficit Equity
----------- ---------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
Sale of Shares - At Time of
and Subsequent to
Inception 9,330,822 27,992 5,087,011 - 5,115,003
Issuance of Shares in Reorganization
to Former Bexy Shareholders 600,945 1,803 (1,803) _ _
Expenses Related
to Offering - - (609,451) - (609,451)
Issuance of Warrants - - 12,750 12,750
Net Loss - - - (91,847) (91,847)
---------- --------- ----------- ---------- ----------
Balance - August 31, 1996 9,931,767 $ 29,795 $ 4,488,507 $ (91,847) $4,426,455
========== ========= =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this report.
F-4
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED AUGUST 31, 1996
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (91,847)
Adjustments to Reconcile Net Loss to
Net Cash Provided by Operating Activities:
Depreciation 3,603
(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 5,115,003
Issuance of Warrants 12,750
Offering Costs (609,451)
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
===========
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.
F-5
<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 with Cheniere Operating
as the acquirer in a reverse acquisition.
The financial statements presented include only the accounts of
Cheniere Operating since Cheniere Operating's inception (February 21,
1996), due to the fact that Cheniere did not succeed to the business
or assets of Bexy.
F-6
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
F-7
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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:
Furniture and Fixtures $26,006
Office Equipment 24,427
-------
50,433
Less Accumulated Depreciation 3,603
-------
Property and Equipment - Net $46,830
=======
F-8
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
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 and the former shareholders of Cheniere Operating received
approximately 8.3 million 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 7% of the outstanding Bexy stock. 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. 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 "Exploration Program").
The Company has the right to earn up to a 50% participation in the
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.
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"). The
Exploration Program does not currently have rights to survey the
entire Survey AMI and the extent of the Survey AMI which the
Exploration Program will be entitled to survey is dependent upon its
ability to obtain survey permits and similar rights. Currently, the
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 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.
F-9
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
NOTE 5 - INVESTMENT IN 3-D EXPLORATION PROGRAM (Continued)
Under the terms of the Exploration Agreement, the Company is required
to make monthly payments to the Exploration Program aggregating, at
least, $13 million. The Company's potential participation in the
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 Exploration Program
totalled $4,000,000.
Upon completion of the Company's funding of the 3-D Exploration
Program, the investment will be accounted for under the equity method.
The Company's financial statements will reflect its proportionate
interest in the revenues, costs, expenses and capital with respect to
the 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
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. 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 then 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.
F-10
<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:
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 $ -
===========
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
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%
===========
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:
Deferred Tax Assets
Loss Carryforwards $ 347,000
Less: Valuation Allowance (347,000)
-----------
Net Deferred Tax Assets $ -
===========
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.
F-11
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
NOTE 8 - WARRANTS
The Company has issued and outstanding certain warrants described
herein.
The Company has issued and outstanding 141,666 and 2/3 warrants
(collectively, the "June Warrants"), each of which entitles the
registered holder thereof to purchase one share of Common Stock. The
June Warrants are exercisable at any time on or before June 14, 1999,
at an exercise price of $3.00 per share (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 then 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.
F-12
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
NOTE 8 - WARRANTS (Cont'd)
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.
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 19, 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.
F-13
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont'd)
The transaction is subject to the receipt 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 economic feasibility
studies have been concluded.
The working interest in the Bonito Unit, if acquired, will be
accounted for under the full cost method.
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%) at 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:
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
----------
$6,000,000
==========
F-14
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
The Company has a remaining commitment (after the above payments) of
at least $3.5 million, which is due in two payments, $2 million on
May 22, 1997 and $1.5 million due on June 21, 1997. A thirty day
grace period applies to each of the payments.
F-15
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
November 30, August 31,
1996 1996
---------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 324,550 $1,093,180
Prepaid Expenses And Other Current Assets 6,622 4,800
---------- ----------
TOTAL CURRENT ASSETS 331,172 1,097,980
---------- ----------
PROPERTY AND EQUIPMENT, NET 50,988 46,830
---------- ----------
OTHER ASSETS
Investment 6,000,000 4,000,000
Security Deposit 500 500
---------- ----------
TOTAL OTHER ASSETS 6,000,500 4,000,500
---------- ----------
TOTAL ASSETS $6,382,660 $5,145,310
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 374,184 $ 292,894
Loans Payable 215,000 425,000
Advances for Issuance of Common Stock 384,985 -
Advance from Officers 961 961
---------- ----------
TOTAL LIABILITIES 975,130 718,855
---------- ----------
STOCKHOLDERS' EQUITY
Common Stock - $.003 Par Value
Authorized 20,000,000 shares;
10,624,794 and 9,931,767 Issued and
Outstanding at November 30, 1996 and
August 31, 1996, respectively 31,875 29,795
Preferred Stock - Authorized
1,000,000 shares; None Issued
and Outstanding - -
Additional Paid-in-Capital 5,625,618 4,488,507
Deficit Accumulated During the Development Stage (249,963) (91,847)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 5,407,530 4,426,455
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,382,660 $5,145,310
========== ==========
</TABLE>
See Accompanying Notes to Financial Statements.
F-16
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
For the Three Cumulative
Months Ended from Date
November 30, 1996 of Inception
----------------- ------------
<S> <C> <C>
Revenue $ - $ -
------------ -----------
General and Administrative Expenses 145,928 219,742
Interest Expense 13,689 33,522
----------- ----------
159,617 253,264
----------- ----------
Loss from Operations Before Other Income (159,617) (253,264)
Interest Income 1,501 3,301
----------- ----------
Loss From Operations Before Income Taxes (158,116) (249,963)
Provision for Income Taxes - -
----------- ----------
Net Loss $ (158,116) $ (249,963)
=========== ==========
Loss Per Share $ (.015) $ (.027)
=========== ==========
Weighted Average Number of Shares Outstanding 10,310,670 9,256,075
=========== ==========
</TABLE>
See Accompanying Notes to Financial Statements.
F-17
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Total
----------------------- Paid-In Retained Stockholders'
Shares Amount Capital Deficit Equity
----------- ---------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Sale of Shares - At Time of
and Subsequent to the
Reorganization 9,330,822 27,992 5,087,011 - 5,115,003
Issuance of Shares in
Reorganization to Former
Bexy Shareholders 600,945 1,803 (1,803) - -
Expenses Related
to Offering - - (609,451) - (609,451)
Issuance of Warrants - - 12,750 - 12,750
Net Loss - - - (91,847) (91,847)
---------- --------- ----------- ----------- ----------
Balance - August 31, 1996 9,931,767 29,795 4,488,507 (91,847) 4,426,455
Sale of Shares 588,027 1,765 1,288,736 - 1,290,501
Conversion of Debt 105,000 315 209,685 - 210,000
Issuance of Warrants - - 6,450 - 6,450
Expense Related to Offering - - (367,760) - (367,760)
Net Loss - - - (158,116) (158,116)
---------- --------- ----------- ----------- ----------
Balance - November 30, 1996 10,624,794 $ 31,875 $ 5,625,618 $ (249,963) $5,407,530
========== ========= =========== =========== ==========
</TABLE>
See Accompanying Notes to Financial Statements.
F-18
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
Three Months Ended From Date of
November 30, 1996 of Inception
------------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $( 158,116) $( 249,963)
Adjustments to Reconcile Net Loss to
Net Cash Used by Operating Activities:
Depreciation 2,023 5,626
(Increase) in Prepaid Expenses and Other Current Assets (1,822) (6,622)
(Increase) in Security Deposit - (500)
Increase in Accounts Payable and Accrued Expenses 81,290 374,194
Increase in Advance from Officers - 961
----------- -----------
NET CASH USED BY OPERATING ACTIVITIES (76,625) 123,696
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Furniture, Fixtures and Equipment (6,180) (56,623)
Investment (2,000,000) (6,000,000)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (2,006,180) (6,056,623)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of Common Stock 1,290,500 6,405,503
Issuance of Warrants 6,450 19,200
Offering Costs (367,760) (977,211)
Proceeds of Loan - 425,000
Advances for Issuance of Common Stock 384,985 384,985
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,314,175 6,257,477
----------- -----------
NET (DECREASE) INCREASE IN CASH (768,630) 324,550
CASH - BEGINNING 1,093,180 -
----------- -----------
CASH - NOVEMBER 30, 1996 $ 324,550 $ 324,550
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest $ 8,570 $ 8,750
=========== ===========
Cash Paid for Income Taxes $ - $ -
=========== ===========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL ACTIVITIES:
Common stock totalling 105,000 shares was issued upon the conversion of
$210,000 of debt.
See Accompanying Notes to Financial Statements.
F-19
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING
a) Basis of Presentation
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. Certain reclassifications have been
made to the prior period to conform to the current periods
presentation.
For further information refer to the financial statements and
footnotes included in the Registrant's Annual Report on form 10-K for
the year ended August 31, 1996.
The results of operations for any interim period are not necessarily
indicative of the results to be expected for the full fiscal year
ended August 31, 1997.
The accompanying consolidated financial statements include the
accounts of Cheniere Energy, Inc. ("The Company") and its 100% owned
subsidiary, Cheniere Energy Operating Co., Inc. ("Cheniere
Operating"). 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.
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"). For
accounting purposes, this acquisition has been treated as a
recapitalization of Cheniere with Cheniere Operating as the acquirer
in a reverse acquisition.
The equity section of the balance sheet has been restated, as required
by purchase accounting in a reverse acquisition, to reflect the par
value of Cheniere's (the legal acquirer) outstanding common stock and
the accumulated deficit of Cheniere Operating (the accounting
acquirer). The difference between the accumulated deficits of Cheniere
and Cheniere Operating, totaling $1,151,083, was offset to additional
paid-in capital.
The financial statements presented include only the accounts of
Cheniere Operating since Cheniere Operating's inception (February 21,
1996), due to the fact that Cheniere did not succeed to the business
or assets of Bexy.
The Company is currently a development stage enterprise under the
provisions of SFAS No.7. The Company's future business will be in the
field of oil and gas exploration and exploitation.
F-20
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING (Cont'd)
b) Loss Per Share
Loss per share is based on the weighted average number of shares of
common stock outstanding during the period.
NOTE 2 - WARRANTS
The Company has issued and outstanding certain warrants described
herein.
The Company has issued and outstanding 141,666 and 2/3 warrants
(collectively, the "June Warrants"), each of which entitles the
registered holder thereof to purchase one share of Common Stock. The
June Warrants are exercisable at any time on or before June 14, 1999,
at an exercise price of $3.00 per share (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. Pursuant to APB 14, the warrants issued have been
valued at the differential rate between the initial interest rate (8%)
and the then estimated market rate (20%), applied to the principal
balance. This value, $12,750, has been credited to additional paid-in
capital.
Effective September 14, 1996, the Company failed to pay all amounts
due and payable under the Notes by the Maturity Date. Certain of the
noteholders converted their notes into 105,000 shares of common stock.
An individual note holder has purchased the promissory notes of the
remaining note holders. As per the terms of the notes, the holder is
also entitled to receive up to an aggregate of 21,500 additional
warrants 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. (See Note 6). 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, $6,450, 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.
F-21
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
NOTE 2 - WARRANTS (Cont'd)
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.
Due to significant fluctuations in the market price of Common Stock,
no value has been allocated to any of the warrants and no amount of
the debt proceeds has been allocated to paid-in capital.
NOTE 3 - 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.
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 4 - COMMON STOCK RESERVED
The Company has reserved 322,166 and 2/3 share of Common Stock for
insurance upon the exercise of outstanding warrants.
The Company has reserved 319,444 and 2/3 shares of Common Shares for
insurance upon the exercise of outstanding options.
F-22
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
NOTE 5 - COMMITMENTS AND CONTINGENCIES
1) The Company subleases its Houston, Texas headquarters from Zydeco
under a month-to-month sublease.
2) On December 19, 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 that Poseidon has no interest in. 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 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 economic feasibility
studies have been concluded.
The working interest in the Bonito Unit, if acquired, will be
accounted for under the full cost method.
3) As of November 30, 1996, the Company has an investment of $6,000,000
in a joint venture. Under the terms of the joint venture agreement,
the Company is required to make additional monthly payments
aggregating, at least, $7.5 million. The Company's potential
participation in the joint venture could be significantly reduced in
the event of a failure by the Company to make such required monthly
payments when due.
NOTE 6 - SUBSEQUENT EVENTS
During the month of December 1996, the Company issued 1,317,721 shares
of common stock for gross proceeds of $3,169,872. Proceeds received
are intended to fund future commitments to the 3-D Exploration
Program.
Also, on December 14, 1996, the Company repaid the $215,000 loan
payable and related accrued interest. Upon repaying the loan, the
Company issued 64,500 warrants in accordance with the loan agreement.
On December 19, 1996, Cheniere Energy California, Inc. ("Cheniere
California") was incorporated. Cheniere California is a 100% owned
subsidiary of the Company.
F-23
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
February 28, August 31,
1997 1996
---------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 3,843,088 $1,093,180
Prepaid Expenses And Other Current Assets 153,321 4,800
----------- ----------
TOTAL CURRENT ASSETS 3,996,409 1,097,980
----------- ----------
PROPERTY AND EQUIPMENT, NET 48,967 46,830
----------- ----------
OTHER ASSETS
Investment 7,141,745 4,000,000
Security Deposit 500 500
----------- ----------
TOTAL OTHER ASSETS 7,142,245 4,000,500
----------- ----------
TOTAL ASSETS $11,187,621 $5,145,310
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 196,776 $ 292,894
Loans Payable - 425,000
Advance from Officers - 961
Advances for Issuance of Common Stock 1,500,025 -
----------- ----------
TOTAL LIABILITIES 1,696,801 718,855
----------- ----------
STOCKHOLDERS' EQUITY
Common Stock - $.003 Par Value
Authorized 20,000,000 shares;
12,295,462 and 9,931,767 Issued and
Outstanding at February 28, 1997 and
August 31, 1996, respectively 36,886 29,795
Preferred Stock - Authorized
1,000,000 shares; None Issued
and Outstanding
Additional Paid-in-Capital 9,850,480 4,488,507
Deficit Accumulated During the Development Stage (396,846) (91,847)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 9,490,820 4,426,455
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,187,621 $5,145,310
=========== ==========
</TABLE>
See Accompanying Notes to Financial Statements.
F-24
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Cummulative
February 28, February 28, from the Date
1997 1997 of Inception
------------------- ----------------- --------------
<S> <C> <C> <C>
Revenue $ - $ - $ -
----------- ----------- ----------
General and Administrative Expenses 165,765 311,693 385,507
Interest Expense 1,313 15,002 34,835
----------- ----------- ----------
167,078 326,695 420,342
----------- ----------- ----------
Loss from Operations Before Other Income (167,078) (326,695) (420,342)
Interest Income 20,495 21,996 23,796
----------- ----------- ----------
Loss From Operations Before Income Taxes (146,583) (304,699) (396,546)
Provision for Income Taxes - - -
----------- ----------- ----------
Net Loss $ (146,583) $ (304,699) $ (396,546)
=========== =========== ==========
Loss Per Share (.012) (.028) (.040)
=========== =========== ==========
Weighted Average Number of Shares
Outstanding 11,757,696 11,036,471 9,950,972
=========== =========== ==========
</TABLE>
See Accompanying Notes to Financial Statements.
F-25
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Total
----------------------- Paid-In Retained Stockholders'
Shares Amount Capital Deficit Equity
----------- ---------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Sale of Shares - At Time of
and Subsequent to
Inception 9,330,822 27,992 5,087,011 - 5,115,003
Issuance of Shares in
Reorganization to Former
Bexy Shareholders 600,945 1,803 (1,803) - -
Expenses Related
to Offering - - (609,451) - (609,451)
Issuance of Warrants - - 12,750 - 12,750
Net Loss - - - (91,847) 91,847
---------- --------- ----------- ---------- ----------
Balance - August 31, 1996 9,931,767 29,795 4,488,507 (91,847) 91,847
Sale of Shares 2,258,695 6,776 5,953,624 - 5,960,400
Conversion of Debt 105,000 315 209,685 - 210,000
Issuance of Warrants - - 6,450 - 6,450
Expenses Related to Offering - - (807,786) - (807,786)
Net Loss - - - (304,699) 304,699
---------- --------- ----------- ---------- ----------
Balance - February 28, 1997 12,295,462 $ 36,886 $ 9,850,480 $ (396,546) $9,490,820
========== ========= =========== ========== ==========
</TABLE>
See Accompanying Notes to Financial Statements.
F-26
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the Six Cummulative
Months Ended from Date
February 28, 1997 of Inception
------------------ --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (304,699) $ (396,546)
Adjustments to Reconcile Net Loss to
Net Cash Used by Operating Activities:
Depreciation 4,043 7,646
(Increase) in Prepaid Expenses and Other Current Assets (148,521) (153,321)
Increase in Security Deposit - (500)
(Decrease) Increase in Accounts Payable and
Accrued Expenses (96,118) 196,786
(Decrease) in Advance from Officers (961) -
----------- ------------
NET CASH USED BY OPERATING ACTIVITIES (546,256) (345,935)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Furniture, Fixtures and Equipment (6,180) (56,623)
Investment (3,141,745) (7,141,745)
----------- ------------
NET CASH USED BY INVESTING ACTIVITIES (3,147,925) (7,198,368)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of Loan - 425,000
Repayment of Loan (215,000) (215,000)
Sale of Common Stock 5,960,400 11,075,403
Offering Costs (807,786) (1,417,237)
Advances for Issuance of Common Stock 1,500,025 1,500,025
----------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,444,089 11,387,391
----------- ------------
NET INCREASE IN CASH 2,749,908 3,843,088
CASH - BEGINNING OF YEAR 1,093,180 -
----------- ------------
CASH - FEBRUARY 28, 1997 $ 3,843,088 $ 3,843,088
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest $ 15,635 $ 15,635
=========== ============
Cash Paid for Income Taxes $ - $ -
=========== ============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL ACTIVITIES:
Common stock totalling 105,000 shares was issued upon the conversion of
$210,000 of debt.
See Accompanying Notes to Financial Statements.
F-27
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING
a) Basis of Presentation
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. Certain reclassifications have been
made to the prior period to conform to the current period's
presentation.
For further information refer to the financial statements and
footnotes included in the Registrant's Annual Report on form 10-K for
the year ended August 31, 1996.
The results of operations for any interim period are not necessarily
indicative of the results to be expected for the full fiscal year
ending August 31, 1997.
The accompanying consolidated financial statements include the
accounts of Cheniere Energy, Inc. ("The Company") and its 100% owned
subsidiaries, Cheniere Energy Operating Co., Inc. ("Cheniere
Operating") and Cheniere Energy California, Inc. ("Cheniere
California"). Accordingly, all references herein to Cheniere Energy,
Inc. or the "Company" include the consolidated results of its
subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
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 with Cheniere Operating
as the acquirer in a reverse acquisition.
The financial statements presented include only the accounts of
Cheniere Operating since Cheniere Operating's inception (February 21,
1996), due to the fact that Cheniere did not succeed to the business
or assets of Bexy.
The Company is currently a development stage enterprise under the
provisions of SFAS No. 7. The Company's future business will be in the
field of oil and gas exploration and exploitation.
b) Loss Per Share
Loss per share is based on the weighted average number of shares of
common stock outstanding during the period.
F-28
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 2 - ACQUISITIONS
On December 19, 1996, Cheniere California was incorporated. Cheniere
California is a 100% owned subsidiary of the Company.
NOTE 3 - WARRANTS
The Company has issued and outstanding certain warrants described
herein.
The Company has issued and outstanding 141,666 and 2/3 warrants
(collectively, the "June Warrants"), each of which entitles the
registered holder thereof to purchase one share of Common Stock. The
June Warrants are exercisable at any time on or before June 14, 1999,
at an exercise price of $3.00 per share (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. Pursuant to APB 14, the warrants issued
have been valued at the differential rate between the initial interest
rate (8%) and the then estimated market rate (20%), applied to the
principal balance. This value, $12,750, has been credited to
additional paid in capital.
Effective September 14, 1996, the Company had not paid all amounts due
and payable under the Notes by the Maturity Date. Certain of the
noteholders converted their notes into 105,000 shares of common stock.
An individual note holder purchased the promissory notes of the
remaining note holders. As per the terms of the notes, the holder was
entitled to receive up to an aggregate of 21,500 additional warrants
for each month, or partial month, any amounts remained due and payable
after September 14, 1996, up to a maximum aggregate number of 86,000
such additional warrants. These notes were repaid on December 14,
1996 and, upon repayment, the Company issued 64,500 warrants in
accordance with the loan agreement. The terms of the warrants are
similar to the June Warrants. Pursuant to APB 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, $6,450, 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 issued warrants to purchase 12,500
shares of Common Stock to one of two distributors who placed the
shares. Such warrants are exercisable on or before the second
anniversary of the sale of the shares of Common Stock at an exercise
price of $3.125 per share (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.
F-29
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 3 - WARRANTS (Cont'd)
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 4 - 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 qualified options vest and become exercisable on June 1, 1997
and expire June 1, 2001.
2) 75,000 qualified options vest and become exercisable on June 1, 1998
and expire June 1, 2001.
3) 150,000 qualified 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.
In addition, the Company has granted qualified 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.
Also, the Company has granted 12,000 non-qualified options to an
employee at an exercise price of $3.00 per share. These options vest
and become exercisable in equal annual installments of 25% each on the
first through fourth anniversary of January 23, 1997 and expire
January 23, 2002.
The disclosure provisions of SFAS No. 123 do not have a material
effect on the financial statements.
F-30
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 5 - COMMON STOCK RESERVED
The Company has reserved 386,666 and 2/3 share of Common Stock for
insurance upon the exercise of outstanding warrants.
The Company has reserved 331,444 and 2/3 shares of Common Shares for
insurance upon the exercise of outstanding options.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
1) The Company subleases its Houston, Texas headquarters from Zydeco
under a month-to-month sublease.
2) On December 19, 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 that Poseidon has no interest in. 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 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 economic feasibility
studies have been concluded (see note 7, numeral 1).
The working interest in the Bonito Unit, if acquired, will be
accounted for under the full cost method.
3) As of February 28, 1997, the Company has an investment of $7,141,745
in the 3-D Exploration Program. Under the terms of the Exploration
Agreement, the Company is required to make additional monthly payments
aggregating, at least, approximately $6.358 million (See Note 7). 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.
F-31
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 6 - COMMITMENTS AND CONTINGENCIES (Cont'd)
4) One February 28, 1997, the Company issued 352,947 shares of common
stock at a price of $4.25 per share. If during the 270 day period
following the date of purchase of these shares the Company offers and
sells any shares of its common stock for a gross sales price lower
than the price paid for these shares, the Company will issue
additional shares to reflect the lowest gross sales price at which
shares were offered and sold during the period (see Note 7, numeral
3).
NOTE 7 - SUBSEQUENT EVENTS
1) As previously disclosed, 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 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.
2) On March 4, 1997, $1,500,025 of Advances for Issuance of Common Stock
were transferred to capital, as the Company issued 352,947 shares of
common stock. Proceeds received are intended to fund future
commitments to the 3-D Exploration Program. If during the 270 day
period following the date of purchase of these shares the Company
offers and sells any shares of its common stock for a gross sales
price lower than the price paid for these shares, the Company will
issue additional shares to reflect the lowest gross sales price at
which shares were offered and sold during the period.
On March 4, 1997, the Company funded an additional $858,255 investment
in the 3-D Exploration Program, bringing its total investment to date
to $8,000,000. The Company has a remaining commitment of at least $5.5
million, which is due in three payments: $2 million each on April 22,
1997 and May 22, 1997 and $1.5 million on June 21, 1997. A thirty day
grace period applies to each of the payments.
If the two events described above had occurred as of February 28,
1997, along with applicable costs and expenses, the balance sheet as
of February 28, 1997 would reflect the following:
Cash $ 2,759,882
Prepaid Expenses and Other Current Assets 119,571
Property and Equipment, Net 48,967
Investment 8,000,000
Security Deposit 500
-----------
Total Assets $10,928,920
===========
Accounts Payable and Accrued Expenses $ 84,300
-----------
Common Stock 37,946
Additional Paid-in Capital 11,184,020
Deficit Accumulated During
the Development Stage (377,346)
-----------
10,844,620
-----------
Total Liabilities and Stockholders' Equity $10,928,920
===========
3) During May 1997, Cheniere issued 535,000 shares of Common Stock, at a
sale price of $3.00 per share, to accredited investors pursuant to
Regulation D and received net proceeds of $1,485,000 from such sale.
As noted above, under the terms of the February 28, 1997 and March 4,
1997 sales of Common Stock, Cheniere has agreed that if, during the
270 day period following the date of purchase of these shares,
Cheniere offers and sells any shares of Common Stock for a per share
gross sales price lower than the per share price paid for these
shares, Cheniere will issue additional shares of Common Stock to
reflect the lowest per share gross sales price at which shares were
offered and sold during the period. As a consequence of the private
placement of Common Stock at a price of $3.00 per share, Chenier has
issued 294,124 additional shares of Common Stock to those investors
who purchased Common Stock on February 28, 1997 or March 4, 1997.
F-32
<PAGE>
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
IN CONNECTION WITH THE OFFERING AND SALE OF THE COMMON STOCK OFFERED HEREBY,
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND ANY SUCH INFORMATION OR
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES
IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE.
__________
TABLE OF CONTENTS
PAGE
Summary.................................. 2
Risk Factors............................. 4
The Company.............................. 9
Use of Proceeds.......................... 9
Capitalization........................... 10
Market Price and Dividend Information.... 10
Selected Financial Data.................. 12
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 13
Business and Properties.................. 16
Management............................... 29
Description of Capital Stock............. 32
Selling Stockholders..................... 35
Principal Stockholders................... 37
Plan of Distribution..................... 37
Legal Matters............................ 38
Experts.................................. 38
Available Information.................... 39
3,983,850 SHARES
CHENIERE ENERGY, INC.
COMMON STOCK
(PAR VALUE $.003 PER SHARE)
<PAGE>
PART II
Information Not Required in Prospectus
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Common Stock to be registered is to be offered for the account of
the Common Stockholders. The estimated expenses of this offering, to be fully
paid by Cheniere unless otherwise noted, in connection with the issuance and
distribution of the securities being registered are as follows:
Accounting Fees and Expenses............................... $ 10,000.00
Legal Fees and Expenses.................................... $ 50,000.00
Securities and Exchange Commission Filing Fee.............. $ 1,561.13
---------
Miscellaneous Expenses..................................... $ 5,000.00
Total.................................................... $ 66,561.13
---------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Amended and Restated Certificate of Incorporation of Cheniere (the
"Charter") eliminates the liability of directors of Cheniere to Cheniere or its
stockholders (in their capacity as directors but not in their capacity as
officers) to the fullest extent permitted by Section 102 of the Delaware General
Corporation Law, as the same may be amended from time to time (the "DGCL").
Specifically, under Section 102(b)(7) of the DGCL, directors of Cheniere will
not be personally liable to Cheniere or its stockholders for monetary damages
for breach of fiduciary duty as a director, provided that such provision shall
not eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to Cheniere or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL or (iv) for any
transaction from which the director derived an improper personal benefit.
The Charter also provides that Cheniere shall indemnify all persons whom it
may indemnify under Section 145 of the DGCL to the fullest extent permitted by
such Section. Section 145(a) of the DGCL provides that a Delaware corporation
may indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Section 145(b) of the DGCL provides that a Delaware corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation and except that no indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the extent
that the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the
<PAGE>
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to be indemnified for such expenses
which the court shall deem proper.
Section 145 of the DGCL further provides that to the extent a director or
officer of a corporation has been successful on the merits or otherwise in the
defense of any action, suit or proceeding referred to in subsections (a) and
(b) of Section 145, or in the defense of any claim, issue, or matter therein, he
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith; that indemnification and
advancement of expenses provided by, or granted pursuant to Section 145 shall
not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to his official capacity and as to action in another capacity while holding such
office; that indemnification and advancement of expenses provided by, or granted
pursuant to, Section 145 shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director or officer and
shall inure to the benefit of the heirs, executors and administrators of such a
person; and that the corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director or officer of the
corporation against any liability asserted against him and incurred by him in
any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
such Section 145.
Article IX of Cheniere's By-laws contains detailed indemnification rights
for Cheniere's directors, other employees and other agents. The By-laws provide
for indemnification in accordance with the provisions of Section 145 of the
DGCL.
The inclusion of the indemnification provisions in the Charter and
Cheniere's By-laws may have the effect of reducing the likelihood of derivative
litigation against directors, and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefitted
Cheniere and its stockholders.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In May and June 1996, Cheniere Operating issued 200 shares of its common
stock (which were exchanged for 2,000,000 shares of the Common Stock following
the Reorganization) to a group of "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"). Cheniere Operating received net proceeds of $2,883,000, net
of offering costs, on cash sales of $3,000,000.
In July 1996, Cheniere issued 50,000 shares of Common Stock to an
"accredited investor" (as defined in Rule 501(a) promulgated under the
Securities Act) for $100,000 in cash pursuant to Rule 506 of Regulation D.
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 Joint Venture made on
September 4, 1996.
Between fiscal year end at August 31, 1996 and February 28, 1997, Cheniere
raised net proceeds of $5,145,838 from the sale of equity to accredited
investors pursuant to Regulation D and other investors pursuant to Regulation S.
Some of the proceeds were used to fund payments in the aggregate of
approximately $2.1 million to the 3-D Joint Venture.
On March 4, 1997, the Company sold 352,947 shares of Common Stock, at a
price of $4.25 per share, for net proceeds of $1,500,025 pursuant to
Regulation S. With respect to these shares of Common Stock, as well as 352,947
shares of Common Stock issued in February 1997 at a price of $4.25 per share,
the Company has agreed that if, during the 270 day period following the date of
purchase of these shares, the Company offers and sells any shares of Common
Stock for a per share gross sales price lower than the per share price paid for
these shares, the Company will issue additional shares of Common Stock to
reflect the lowest gross per share sales price at which shares were offered and
sold during the period.
During May 1997, Cheniere issued 535,000 shares of Common Stock, at a sale
price of $3.00 per share, to accredited investors pursuant to Regulation D and
received net proceeds of $1,485,000 from such sale. As noted above, under the
terms of the February 28, 1997 and March 4, 1997 sales of Common Stock,
Cheniere has agreed that if, during the 270 day period following the date of
purchase of these shares, Cheniere offers and sells any shares of Common Stock
for a per share gross sales price lower than the per share prices paid for these
shares, Cheniere will issue additional shares of Common Stock to reflect the
lowest per share gross sales price at which shares were offered and sold during
the period. As a consequence of the private placement of Common Stock at a
price of $3.00 per share, Cheniere has issued 294,124 additional shares of
Common Stock to those investors who purchased Common Stock on February 28, 1997
or March 4, 1997.
In June 1996, Cheniere Operating borrowed $425,000 (the "Bridge Loan")
through a private placement of short term promissory notes. 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 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 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, which Cheniere Operating paid on December 13, 1996. The
Remaining Noteholder also received 64,500 additional warrants to purchase shares
of the Common Stock. Such additional warrants have an exercise price of $3.00
per share and will be exercisable until June 14, 1999.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A. Exhibits
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 Form of Noteholders' Agreement ("Noteholders Agreement") between
Cheniere Operating and the holders of promissory notes in the
aggregate principal amount of $425,000.00*
10.5 Form of Warrant Agreement governing warrants of Cheniere issued in
exchange for warrants of Cheniere Operating (which were issued
pursuant to the Noteholders Agreement)*
10.6 Asset Transfer, Assignment and Assumption Agreement between Bexy
Communications, Inc. and Mar Ventures Inc.*
10.7 Indemnification Agreement among Buddy Young, Cheniere, Cheniere
Energy Operating Co., Inc. and the Stockholders of Cheniere Energy
Operating Co., Inc. named therein*
10.8 Form of Warrant Agreement between Cheniere and each of C.M. Blair,
W.M. Foster & Co., Inc. and Redliw Corp.*
10.9 Consulting Agreement between Cheniere and Buddy Young *
10.10 Letter Agreement between Cheniere and Buddy Young regarding
reverse splits of common stock of Cheniere, par value $.003 per
share (the "Common Stock")*
10.11 Form of Subscription Agreement for purchasers of Common Stock
pursuant to pursuant to Rule 506 of Regulation D promulgated under
the Securities Act of 1933*
10.12 Fourth Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco Exploration, Inc.*
10.13 Form of Letter Agreement between Cheniere and certain purchasers of
Common Stock pursuant to Regulation S.*
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.
23.3 Consent of Merdinger, Fruchter, Rosen & Corso, P.C. to inclusion of
financial statements for the fiscal year ended as of August 31,
1996.
24.1 Powers of Attorney included on signature page.
-------------
* Filed previously.
B. Financial Statement Schedules
None
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
II-3
<PAGE>
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of the issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Houston,
State of Texas, on the 27th day of May, 1997.
CHENIERE ENERGY, INC.
By: /s/ William D. Forster
----------------------------------------
William D. Forster, President, Chief
Executive Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this
registration statement of which this prospectus is a part has been signed below
by the following persons in the capacities indicated and on the 27th day of
May, 1997.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ William D. Forster President, Chief Executive Officer and Director
- --------------------------------------------------------------- (Principal Executive Officer)
William D. Forster
/s/ * Vice-Chairman and Director
- ---------------------------------------------------------------
Walter L. Williams
/s/ * Chief Financial Officer and Treasurer
- ---------------------------------------------------------------
Keith F. Carney
/s/ * Secretary and Director
- ---------------------------------------------------------------
Charif Souki
/s/ * Director
- ---------------------------------------------------------------
Efrem Zimbalist III
*By: /s/ William D. Forster
-----------------------------------------------------------
Willam D. Forster
Attorney-in-Fact
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
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 Form of Noteholders' Agreement ("Noteholders Agreement") between
Cheniere Operating and the holders of promissory notes in the
aggregate principal amount of $425,000.00*
10.5 Form of Warrant Agreement governing warrants of Cheniere issued in
exchange for warrants of Cheniere Operating (which were issued
pursuant to the Noteholders Agreement)*
10.6 Asset Transfer, Assignment and Assumption Agreement between Bexy
Communications, Inc. and Mar Ventures Inc.*
10.7 Indemnification Agreement among Buddy Young, Cheniere, Cheniere
Energy Operating Co., Inc. and the Stockholders of Cheniere Energy
Operating Co., Inc. named therein*
10.8 Form of Warrant Agreement between Cheniere and each of C.M. Blair,
W.M. Foster & Co., Inc. and Redliw Corp.*
10.9 Consulting Agreement between Cheniere and Buddy Young*
10.10 Letter Agreement between Cheniere and Buddy Young regarding
reverse splits of common stock of Cheniere, par value $.003 per
share (the "Common Stock")*
10.11 Form of Subscription Agreement for purchasers of Common Stock
pursuant to pursuant to Rule 506 of Regulation D promulgated under
the Securities Act of 1933*
10.12 Fourth Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco Exploration,
Inc.*
10.13 Form of Letter Agreement between Cheniere and certain purchasers of
Common Stock pursuant to Regulation S.*
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.
23.3 Consent of Merdinger, Fruchter, Rosen & Corso, P.C. to inclusion of
financial statements for the fiscal year ended as of August 31,
1996.
24.1 Powers of Attorney included on signature page.
--------------
* Filed previously.
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF DEWEY BALLANTINE]
May 5, 1997
Cheniere Energy, Inc.
Two Allen Center
1200 Street, Suite 1710
Houston, Texas 77002-4312
Ladies and Gentlemen:
We have acted as counsel to Cheniere Energy, Inc., a Delaware corporation
(the "Company"), in connection with the Company's preparation and filing of a
Registration Statement on Form S-1 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Act"), for the registration of the
resale of 1,139,639 shares of issued and outstanding common stock of the
Company, par value $0.003 per share (the "Common Stock").
In connection with this opinion, we have examined originals or copies
(including facsimile copies) of such agreements, documents, records and
instruments as we have deemed appropriate for the purposes of rendering this
opinion. As to factual matters, we have relied solely upon, and assumed the
accuracy, completeness and genuineness of, certificates of officers of the
Company, certificates of public officials, and oral and written representations
made to us by officers and other representatives of the Company. We have made
no independent investigation of any of the facts stated in any such certificate
or representation. In our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified,
photostatic or facsimile copies and the authenticity of the originals of such
latter documents.
Based upon the foregoing, and subject to the assumptions, qualifications
and limitations set forth herein, we are of the opinion as of the date hereof
that:
1. The Company is a corporation duly organized and validly existing
under the laws of the State of Delaware.
<PAGE>
Cheniere Energy, Inc.
March 14, 1997
Page 2
2. The shares of the Common Stock to be registered pursuant to the
Registration Statement have been duly authorized by the Company, and are validly
issued, fully paid and nonassessable.
We are members of the bar of the State of New York and we express no
opinion as to matters governed by the laws of any other jurisdiction other than
the federal laws of the United States of America and the Delaware General
Corporation Law.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to our name in the prospectus
constituting a part of such Registration Statement under the heading "Legal
Matters." In giving such consent, we do not thereby admit that we come within
the category of persons whose consent is required under Section 7 of the Act or
the rules and regulations of the Securities and Exchange Commission promulgated
thereunder.
Very truly yours,
DEWEY BALLANTINE
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS
CHENIERE ENERGY, INC.
As independent public accountants, we hereby consent to the use of our report
(and to all references to our firm) included in this Registration Statement on
Form S-1.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
May 27, 1997
New York, New York
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board Of Directors
Cheniere Energy, Inc.
We hereby consent to the use of our financial statements of August 31,
1996 included in this Registration Statement on Form S-1 and to the reference to
our firm under the caption "Experts" in the prospectus.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
May 27, 1997
New York, New York
