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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1998
Commission File No. 0-9092
CHENIERE ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4352386
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 SMITH STREET, SUITE 1740
HOUSTON, TEXAS 77002-4312
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (713) 659-1361
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $ 0.003 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's common stock held by non-
affiliates of the registrant was approximately $16,262,562 as of March 26, 1999
(based upon the March 26, 1999 closing sales price of such common stock as
reported by the Nasdaq SmallCap Market). 21,786,277 shares of the registrant's
Common Stock were outstanding as of March 26, 1999.
Documents incorporated by reference: Proxy Statement for the registrant's
Annual Meeting of Stockholders to be held June 4, 1999 (to be filed within 120
days of the close of the registrant's fiscal year) is incorporated by reference
into Part III. Certain disclosures included in Current Report on Form 8-K filed
May 22, 1998 are incorporated by reference into Item 9.
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CHENIERE ENERGY, INC.
Index to Form 10-K
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PART I
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Items 1 and 2. Business and Properties.......................................................... 3
Item 3. Legal Proceedings....................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders..................................... 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................... 13
Item 6. Selected Financial Data................................................................. 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations... 14
Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................. 17
Item 8. Financial Statements and Supplementary Data............................................. 18
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.... 34
PART III
Items 10-13. (Incorporated by reference to Proxy Statement)..................................... 34
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 35
SIGNATURES...................................................................................... 38
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PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
GENERAL
Cheniere Energy, Inc. is a Delaware corporation engaged in exploration for
oil and gas reserves. The terms "Cheniere" and "Company" refer to Cheniere
Energy, Inc. and its subsidiaries. The Company principally operates through its
wholly-owned subsidiary, Cheniere Energy Operating Co., Inc. ("Cheniere
Operating"). Cheniere is a Houston-based company formed for the purpose of oil
and gas exploration, development and exploitation. The Company is currently
involved in a joint exploration program, which is engaged in the exploration for
oil and natural gas along the Gulf Coast of Louisiana, onshore and in the
shallow waters of the Gulf of Mexico. The Company commenced its oil and gas
activities through such joint program in April 1996.
The Company has not yet established oil and gas production nor proven oil and
gas reserves. The Company is currently a development stage enterprise with no
operating revenues to date.
Cheniere is involved with one major project, a joint exploration program
pursuant to an Exploration Agreement between Cheniere and Zydeco Exploration,
Inc. ("Zydeco"), an operating subsidiary of Zydeco Energy, Inc. (the
"Exploration Agreement"), with regard to a 3-D seismic exploration project in
southern Louisiana (the "3-D Exploration Program"). Cheniere has earned a 50%
participation in the 3-D Exploration Program. The 3-D Exploration Program
consists of a proprietary 3-D seismic survey (the "Survey") which covers 228
square miles within a 310 square-mile area running three to five miles north and
generally eight miles south of the coastline in the most westerly 28 miles of
Cameron Parish, Louisiana (the "Survey AMI"). The Survey AMI includes areas
outside and adjacent to the Survey over which the 3-D Exploration Program has
purchased and plans to purchase non-proprietary seismic data. Cheniere and
Zydeco have designated the entire Survey AMI (onshore and offshore) as an area
of mutual interest for five years ending May 15, 2001, during which period the
two companies may continue to drill, test, and develop prospects within the
Survey AMI.
Field acquisition of seismic data in the Survey was completed in July 1997.
Area-wide processing of the data was completed in June 1998. Since beginning
its interpretation work in July 1997, Cheniere and Zydeco have identified
fifteen prospects for inclusion in an initial drilling program within the Survey
AMI. The companies have leased acreage over most of the prospects in this
initial drilling program, and drilling operations commenced in February 1999.
Cheniere has been publicly traded since July 3, 1996 under the name Cheniere
Energy, Inc. The Company's principal executive offices are located at 1200
Smith Street, Suite 1740, Houston, Texas 77002, and its telephone number is
(713) 659-1361.
On April 7, 1998, the Company's Board of Directors approved a change in
fiscal year-end from August 31 to December 31. The change in year-end resulted
in a transition period from September 1, 1997 to December 31, 1997.
BUSINESS STRATEGY
The Company's objective is to expand the net value of its assets by building
an oil and gas reserve base in a cost-efficient manner. The Company intends to
pursue this objective by following an integrated strategy that includes the
following elements:
Focus On Few Projects With Large Reserve Potential
The Company plans to focus its resources on relatively few projects that
possess large reserve potential and favorable risk/reward characteristics. The
Company believes that attractive oil and gas exploration opportunities are
becoming difficult to identify and develop, and that the expertise of management
and staff is best utilized by focusing on like projects that may have a
meaningful impact on the value of its shares. Cheniere's current activities are
focused on its proprietary 3-D Exploration Program in South Louisiana, an area
which the Company believes has significant remaining undiscovered oil and gas
reserve potential. The Company continually evaluates new investment
opportunities, including exploration projects similar to the 3-D Exploration
Program, as well as acquisitions of producing and undeveloped properties.
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Maintain A Significant Working Interest In Each Project
Consistent with its intent to focus on a few meaningful projects, the Company
aims to maintain a significant working interest in each project. As an example,
Cheniere owns a 50% interest in the 3-D Exploration Program. Cheniere intends
to be the operator for certain prospects in this project in order to better
control costs and the timing of activity. For those prospects it does not
operate, Cheniere intends to maintain a significant working interest to better
leverage its administrative and technical resources and to better influence
outside operator decisions.
Utilize the Latest Exploration, Development and Production Technology
The Company uses the latest technology to enhance the efficiency and economy
of its exploration, development and production efforts. These include the use
of advanced 3-D seismic acquisition and processing techniques in the Survey AMI.
Control Overhead Costs
The Company maintains a small, but experienced working staff, which leverages
its talents through its relationships with outside directors who are experienced
in the oil and gas industry, industry partners and outside consultants with
appropriate geographic and technical experience. Beginning in July 1997,
Cheniere engaged a consulting geophysicist through INEXS (Interactive
Exploration Solutions, Inc.), a leading seismic consulting firm in Houston, to
complement Zydeco's in-house interpretation effort. Further, in November 1997,
Cheniere engaged a consulting geologist to assist in the interpretation process.
These consultants became employees of Cheniere on January 1, 1998 and they are
continuing to interpret the seismic data from the Survey and to generate
prospects from such data. In February 1999, the Company retained an additional
geologist as a consultant to assist in its exploration activities.
THE 3-D EXPLORATION PROGRAM IN CAMERON PARISH, LOUISIANA TRANSITION ZONE
The 3-D Exploration Program is located within an area referred to as the
Transition Zone of Louisiana, which defines an area extending roughly three to
five miles on either side of the coastline. The Company believes that the
Transition Zone, including the westernmost 28 miles of Louisiana coastline that
are within the Survey AMI, has significant remaining undiscovered oil and gas
reserve potential. Substantial infrastructure along the Gulf Coast and in the
shallow Gulf of Mexico should permit Cheniere to lower its development costs
compared to those in other geographic regions and facilitate timely development
of oil and gas discoveries. The Company's officers and technical staff have
extensive experience both onshore and offshore in the Gulf Coast and believe the
3-D Exploration Program is well positioned to evaluate, explore and develop
properties in the area.
Exploration Agreement
Under the terms of the Exploration Agreement and its Amendments, Cheniere was
obligated to pay 100% of the Seismic Costs (as defined below) up to $13.5
million, and 50% of the excess of any such costs, to earn a 50% working interest
participation in the leasing and drilling of all Prospects (as defined below)
generated within the Survey AMI. "Seismic Costs" are defined in the Exploration
Agreement to include the following: acquiring and processing seismic data;
legal costs; options to lease land and leases of land; and the cost of seismic
permits including the seismic permit granted by the State of Louisiana discussed
below.
Under the terms of the Exploration Agreement, Zydeco has the responsibility to
perform, or cause to be performed, all of the planning, land, geologic, and
interpretative functions necessary to the project, and to design and oversee the
acquisition and processing of seismic data, interpret results, acquire leases
and generate Prospects. The term "Prospect" is defined in the Exploration
Agreement as a block of acreage suitable for exploration including the
leasehold, operating, nonoperating, mineral and royalty interests, licenses,
permits, and contract rights thereto. Cheniere owns a 50% share of all the
seismic data and has elected to generate its own Prospects, which it has offered
to Zydeco pursuant to the AMI provisions of the Exploration Agreement. Neither
party to the 3-D Exploration Program is permitted to sell or license the data
without the other party's approval.
Cheniere paid 100% of the first $13.5 million of Seismic Costs. Cheniere's
50% share of excess Seismic Costs through December 31, 1997, was estimated in
the Seventh Amendment to the Exploration Agreement to be approximately $2.9
million, which amount was payable to Zydeco on December 31, 1997. Cheniere made
such payment on December 31, 1997, completing its payment obligations to earn a
50% participation in the 3-D Exploration Program.
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The Exploration Agreement includes a joint operating agreement (the "Joint
Operating Agreement") providing for the funding of prospect, exploratory and
development costs subsequent to completion of the data acquisition, processing,
and interpretation phases of the seismic work. Each party will pay its
proportionate share of these costs and either Cheniere or Zydeco, as operator,
will conduct all operations in accordance with the terms of the Joint Operating
Agreement.
Description of the Louisiana Transition Zone Survey AMI
The Survey AMI, which contains the Survey, lies within the Gulf Coast/Gulf of
Mexico basin, a highly prolific hydrocarbon province. Nevertheless, the
Transition Zone represents a relatively less explored area within that region as
compared to exclusively onshore or offshore areas because of the high relative
cost and logistical and technical difficulties associated with conducting modern
seismic surveys over the diverse surface environments encountered along the
coast. Compounding the problem of scarce seismic data is the fact that the
state waters area commonly fell between the jurisdictional responsibilities of
onshore and offshore divisions of the major oil companies. These conditions
have limited the drilling density of deep exploration wells within the Survey
area to roughly one well per five square miles (outside of known fields).
The entire Survey AMI is located within an existing pipeline infrastructure.
As a result, it will generally be more efficient to develop and connect reserves
found onshore and in the shallow offshore areas to markets than would be the
case for reserves found in the federal waters of the Gulf of Mexico. The
Louisiana Gulf Coast/Gulf of Mexico region enjoys easy access to the premium-
priced natural gas consumer markets of the East Coast.
Permit and Lease Status Within the Survey AMI
The Survey AMI covers onshore lands, State Waters, and Federal Outer
Continental Shelf ("OCS") acreage. The permit and lease status of the three
areas is described below.
Onshore Area. Permits, lease options and/or farmouts had been obtained over
the Survey AMI prior to the acquisition of the Survey. Subsequent to shooting,
individual options were either exercised or dropped as they neared expiration,
based on the prospectivity of the area. In addition, onshore acreage has been
leased to supplement the exercised options over identified prospects. As of
December 31, 1998, Cheniere owns an interest in leases covering 2,114 gross
acres (1,330 net) onshore in the State of Louisiana and has the right to
participate in approximately 1,345 additional gross acres (673 net) which have
been leased by Zydeco.
State Waters. On February 14, 1996, the State of Louisiana awarded Zydeco the
exclusive right (the "Louisiana Seismic Permit") to shoot and gather seismic
data over the 51,360 net unleased acres of Louisiana State Waters (extending to
a 3 1/2 mile limit located within the Survey AMI) in the western half of Cameron
Parish. The initial term of the Louisiana Seismic Permit was 18 months; and in
1997 it was extended for an additional six months. As discussed below in
"Seismic Results to Date," the shooting and gathering of seismic data has been
completed. During the term of the Louisiana Seismic Permit, Zydeco and Cheniere
had the exclusive right to nominate blocks of acreage for leasing in the covered
state waters. Although the period of exclusivity expired in February 1998, the
Company and Zydeco may nominate blocks of acreage for leasing at any time.
As of December 31, 1998, Cheniere owns an interest in leases covering 3,191
gross acres (2,103 net) in the state waters of Louisiana and has the right to
participate in 4,522 additional gross acres (2,261 net) which have been leased
by Zydeco.
Federal Waters. The Survey AMI includes an area extending southward
generally up to 5 miles into federal waters. The Minerals Management Service
holds periodic lease sales at which open federal acreage is available for
bidding. Zydeco has acquired leases over 3,095 gross acres (1,547 net) within
the Survey AMI, which Cheniere has the right to participate in should it elect
to do so.
Seismic Results to Date
In the fourth quarter of 1996 approximately 12% of the Survey was shot
prior to a shutdown for the winter. Shooting resumed in April 1997 and was
completed in July 1997. During the winter months, the initial data was
processed and the optimal processing sequence was determined for the remainder
of the data which was acquired in 1997. A second phase of processed data,
created using pre-stack time migration techniques, became available beginning in
November 1997 and was completed in June 1998. (Prestack time migration is a
state of the art processing technique which provides a geologically correct
image of subsurface structures.) Interpretation of the Survey data, including
prospect generation, continues to be conducted by Cheniere and Zydeco personnel.
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Schedule for the 3-D Exploration Program
Interpretation of the Survey data is continuing. Cheniere and Zydeco have
identified fifteen prospects in the West Cameron area of Louisiana for inclusion
in an initial drilling program in the area. The prospects for the initial
program were selected to stay within a reasonable range of drilling depth, cost
and risk, while maximizing hydrocarbon exposure. The initial prospects can be
tested by wells drilled to depths of 10,000 to 16,000 feet. Drilling of the
initial well commenced in February 1999.
Cheniere and Zydeco have designated the entire Survey AMI (onshore and
offshore) as an area of mutual interest for five years ending May 15, 2001,
during which period the two companies may continue to participate in drilling,
testing, and developing prospects within the Survey AMI.
COMPETITION AND MARKETS
Competition in the industry is intense, particularly with respect to the
acquisition of producing properties and proved undeveloped acreage. The Company
competes with the major oil companies and other independent producers of varying
sizes, all of which are engaged in the exploration, development and acquisition
of producing and non-producing properties. Many of the Company's competitors
have financial resources and exploration and development budgets that are
substantially greater than those of the Company, which may adversely affect the
Company's ability to compete.
The Company anticipates selling a portion of its interest in certain of the
prospects within the Survey AMI as a means of funding its participation in the
development of these properties. Cheniere is also investigating with certain
oil and gas service companies the possibility of obtaining vendor financing for
a portion of its drilling activities. The Company anticipates that competition
will arise from other companies also seeking drilling funds from vendors and
potential working interest partners. There can be no assurance that the Company
will be successful in securing funds in this manner.
The availability of a ready market for and the price of any hydrocarbons
produced by the Company will depend on many factors beyond the control of the
Company, including the extent of domestic production and imports of foreign oil,
the marketing of competitive fuels, the proximity and capacity of natural gas
pipelines, the availability of transportation and other market facilities, the
demand for hydrocarbons, the political conditions in international oil-producing
regions, the effect of federal and state regulation of allowable rates of
production, taxation, the conduct of drilling operations, and federal regulation
of natural gas. In the past, as a result of excess deliverability of natural
gas, many pipeline companies have curtailed the amount of natural gas taken from
producing wells, shut-in some producing wells, significantly reduced gas taken
under existing contracts, refused to make payments under applicable "take-or-
pay" provisions, and have not contracted for gas available from some newly
completed wells. The Company can give no assurance that such problems will not
arise again.
In addition, the restructuring of the natural gas pipeline industry has
eliminated the gas purchasing activity of traditional interstate gas
transmission pipeline buyers. Producers of natural gas, therefore, have been
required to develop new markets among gas marketing companies, end-users of
natural gas, and local distribution companies. All of these factors, together
with economic factors in the marketing area, generally may affect the supply
and/or demand for oil and gas and thus the prices available for sales of oil and
gas.
GOVERNMENT REGULATION
The Company's oil and gas exploration, production, and related operations
are subject to federal and state statutes and extensive rules and regulations
promulgated by federal and state agencies. Failure to comply with such laws can
result in substantial penalties. The regulatory burden on the oil and gas
industry increases the Company's cost of doing business and affects its
profitability. Because such laws are frequently amended or reinterpreted, the
Company is unable to predict the future cost or impact of complying with them.
Production
In most, if not all, areas in which the Company conducts activities,
statutes concerning the production of oil and natural gas authorize
administrative agencies to adopt rules which, among others matters, (i) regulate
the operation of, and production from, both oil and gas wells, (ii) determine
the reasonable market demand for oil and gas, and (iii) establish allowable
rates of production. Such regulation may restrict the rate at which the
Company's wells may produce oil or gas, with the result that the amount or
timing of the Company's revenues could be adversely affected.
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MMS Regulation
The Company may conduct certain activities on federal oil and gas leases,
which the Minerals Management Service ("MMS") administers. The MMS grants
leases through competitive bidding. These leases contain relatively
standardized terms and require compliance with detailed MMS regulations and
orders pursuant to The Outer Continental Shelf Lands Act ("OCSLA") (which
regulations and orders are subject to change by the MMS). For offshore
operations, lessees must obtain MMS approval for exploration plans and
development and production plans prior to the commencement of such operations.
In addition to permits required from other agencies (such as the Coast Guard,
the Army Corps of Engineers and the Environmental Protection Agency), lessees
must obtain a permit from the MMS prior to the commencement of drilling. The
MMS has adopted regulations requiring offshore production facilities located on
the Outer Continental Shelf ("OCS") to meet stringent engineering and
construction specifications. The MMS also has regulations restricting the
flaring or venting of natural gas, and has amended such regulations to prohibit
the flaring of liquid hydrocarbons and oil without prior authorization except
under certain limited circumstances. Also, the MMS has promulgated other
regulations governing the plugging and abandonment of wells located offshore and
the removal of all production facilities. To cover the various obligations of
lessees on the OCS, the MMS generally requires that lessees post substantial
bonds or other acceptable assurances that such obligations will be met. The
cost of such bonds or other surety can be substantial and there is no assurance
that the Company will be able to obtain such bonds or other surety in all cases.
The MMS has issued a notice of proposed rulemaking in which it proposes to
amend its regulations governing the calculation of royalties and the valuation
of crude oil produced from federal leases. This proposed rule would modify the
valuation procedures for both arm's length and non-arm's length crude oil
transactions to decrease reliance on oil posted prices and assign a value to
crude oil that better reflects its market value, establish a new MMS form for
collecting differential data, and amend the valuation procedure for the sale of
federal royalty oil. The Company cannot predict what action the MMS will take
on this matter, nor can it predict how the Company will be affected by any
change to this regulation.
In April 1997, after two years of study, the MMS withdrew proposed changes
to the way it values natural gas for royalty payments and requested comment on
two alternative options for natural gas valuation. The changes as originally
proposed would have established an alternative market-based method to calculate
royalties on certain natural gas sold to affiliates or pursuant to non-arm's
length sales contracts. Informal discussions among the MMS and industry
officials are continuing, although it is uncertain whether, and what, changes
may be proposed regarding gas royalty valuation.
Bonding and Financial Responsibility Requirements
The Company is required to obtain bonding, or otherwise demonstrate
financial responsibility, at varying levels by governmental agencies in
connection with obtaining state or federal leases or acting as an owner or
operator on such leases or of exploration and production related facilities.
These bonds may cover such obligations as plugging and abandonment of
unproductive wells, removal and closure of related exploration, production
facilities, and pollution liabilities. The costs of such bonding and financial
responsibility requirements can be substantial, and there can be no assurance
that the Company will be able to obtain such bonds and/or otherwise demonstrate
financial responsibility in all cases.
Natural Gas Marketing and Transportation
The Federal Energy Regulatory Commission ("FERC") regulates the
transportation and sale for resale of natural gas in interstate commerce
pursuant to the Natural Gas Act of 1938 ("NGA") and the Natural Gas Policy Act
of 1978 (the "NGPA"). In the past, the federal government has regulated the
prices at which natural gas could be sold. Deregulation of wellhead sales of
natural gas began with the enactment of the NGPA in 1978. In 1989, Congress
enacted the Natural Gas Wellhead Decontrol Act (the "Decontrol Act") which
removed all NGA and NGPA price and nonprice controls affecting wellhead sales of
natural gas effective January 1, 1993. While sales by producers of natural gas
can currently be made at uncontrolled market prices, Congress could reenact
price controls in the future.
Commencing in April 1992, the FERC issued its Order No. 636 and related
clarifying orders ("Order No. 636"), which, among other things, restructured the
interstate natural gas industry and required interstate pipelines to provide
transportation services separate, or "unbundled," from the pipelines' sales of
natural gas. Order No. 636 and certain related proceedings have been the
subject of a number of judicial appeals and orders on remand by the FERC.
Although Order No. 636 has largely been upheld on appeal, several appeals remain
pending in related restructuring proceedings. The Company cannot predict when
these remaining appeals will be completed or their impact on the Company. FERC
continues to address Order 636-related issues (including capacity brokering,
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alternative and negotiated ratemaking and transportation policy matters) in a
number of pending proceedings. It is unclear what impact, if any, increased
competition within the natural gas industry under Order Nos. 636, et al. will
have on the Company's activities. Although Order No. 636 could provide the
Company with additional market access and more fairly applied transportation
service rates, Order No. 636 could also subject the Company to more restrictive
pipeline imbalance tolerances and greater penalties for violations of these
tolerances.
FERC has announced its intention to re-examine certain of its
transportation-related policies, including the appropriate manner in which
interstate pipelines release transportation capacity under Order No. 636, and
the use of market-based rates for interstate gas transmission. While any
resulting FERC action would affect the Company only indirectly, FERC's current
rules and policy statements may have the effect of enhancing competition in
natural gas markets by, among other things, encouraging non-producer natural gas
marketers to engage in certain purchase and sale transactions. The Company
cannot predict what action FERC will take on these matters, nor can it
accurately predict whether FERC's actions will achieve the goal of increasing
competition in markets in which the Company's natural gas is sold. However, the
Company does not believe that it will be treated materially differently than
other natural gas producers and marketers with which it competes.
OCSLA requires that all pipelines operating on or across the OCS provide
open-access, non-discriminatory service. Although FERC has opted not to impose
the regulations of Order No. 509, in which FERC implemented OCSLA, on gatherers
and other non-jurisdictional entities, FERC has retained the authority to
exercise jurisdiction over those entities if necessary to permit non-
discriminatory access to service on OCS. In this regard, FERC issued a
Statement of Policy ("Policy Statement") regarding the application of its
jurisdiction under the NGA and OCSLA over natural gas facilities and service on
OCS. In the Policy Statement, FERC concluded that facilities located in water
depths of 200 meters or more shall be presumed to have a primary purpose of
gathering up to the point of interconnection with the interstate pipeline grid.
FERC has determined that gathering facilities are outside of its jurisdiction,
and thus, it will no longer regulate the rates and services of such OCS
facilities under the NGA. While it is not possible to determine what the actual
impact of this new policy will be, it is possible that the Company could
experience an increase in transportation costs associated with its OCS natural
gas production and, possibly, reduced access to OCS transmission capacity.
The FERC has also issued numerous orders approving the sale and abandonment
of natural gas gathering facilities previously owned by interstate pipelines and
has acknowledged that if the FERC does not have jurisdiction over services
provided thereon, then such facilities and services may be subject to regulation
by state authorities in accordance with state law. A number of states have
either enacted new laws or are considering the inadequacy of existing laws
affecting gathering rates and/or services. In addition, FERC's approval of
transfers of previously regulated gathering systems to independent or pipeline-
affiliated gathering companies that are not subject to FERC regulation may
affect both the costs and the nature of gathering services that will be
available to interested producers or shippers in the future. The effects, if
any, of state and federal gathering policies on the Company's operations are
uncertain.
Oil Sales and Transportation Rates
Sales of crude oil, condensate, and gas liquids by the Company are not
currently regulated under federal or state law and are made at market prices.
FERC regulates the transportation of oil in interstate commerce pursuant to the
Interstate Commerce Act. However, the price a company receives from the sale of
these products is affected by the cost of transporting the products to market.
Effective as of January 1, 1995, FERC implemented regulations establishing an
indexing system for transportation rates for oil pipelines, which would
generally index such rates to inflation, subject to certain conditions and
limitations. Over time, these regulations could increase the cost of
transporting crude oil, liquids, and condensate by pipeline. The Company is not
able to predict with certainty what effect, if any, these regulations will have
on it; but other factors being equal, these regulations may tend to increase
transportation costs or reduce wellhead prices for such commodities.
Operating Hazards and Environmental Matters
The oil and gas business involves a variety of operating risks, including
the risk of fire, explosions, blow-outs, pipe failure, casing collapse,
abnormally pressured formations and environmental hazards such as oil spills,
natural gas leaks, ruptures and discharge of toxic gases, the occurrence of any
of which could result in substantial losses to the Company due to injury or loss
of life, severe damage to or destruction of property, natural resources and
equipment, pollution or other environmental damage, clean-up responsibilities,
regulatory investigation and penalties and suspension of operations. Such
hazards may hinder or delay drilling, development and on-line production
operations.
Extensive federal, state and local laws and regulations applicable to oil
and gas operations regulate the discharge of substances into the environment or
otherwise relate to the protection of the environment. These laws
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and regulations may require the acquisition of a permit before drilling
commences, restrict or prohibit the types, quantities and concentration of
substances that can be released into the environment or wastes that can be
disposed of in connection with drilling and production activities, prohibit
drilling activities on certain lands lying within wetlands or other protected
areas and impose substantial liabilities for pollution or releases of hazardous
substances resulting from drilling and production operations. Failure to comply
with these laws and regulations may also result in civil and criminal fines and
penalties. Moreover, state and federal environmental laws and regulations may
become more stringent.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the original conduct, on certain classes of persons who are
considered to be responsible for the release of a "hazardous substance" into the
environment. These persons include the owner or operator of the disposal site
or sites where the release occurred and companies that disposed or arranged for
the disposal of the hazardous substances. Under CERCLA, such persons may be
subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment, for damages
to natural resources and for the costs of certain health studies, and it is not
uncommon for neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by the release of hazardous
substances.
The Company's operations may be subject to the Clean Air Act ("CAA") and
comparable state and local requirements. Amendments to the CAA were adopted in
1990 and contain provisions that may result in the gradual imposition of certain
pollution control requirements with respect to air emissions from the operations
of the Company. The EPA and states have been developing regulations to
implement these requirements. The Company may be required to incur certain
capital expenditures in the next several years for air pollution control
equipment in connection with maintaining or obtaining permits and approvals
addressing other air emission-related issues. The Company does not believe,
however, that its operations will be materially adversely affected by any such
requirements.
In addition, the U.S. Oil Pollution Act ("OPA") requires owners and
operators of facilities that could be the source of an oil spill into "waters of
the United States" (a term defined to include rivers, creeks, wetlands, and
coastal waters) to adopt and implement plans and procedures to prevent any spill
of oil into any waters of the United States. OPA also requires affected
facility owners and operators to demonstrate that they have at least $35 million
in financial resources to pay for the costs of cleaning up an oil spill and
compensating any parties damaged by an oil spill. Such financial assurances may
be increased to as much as $150 million if a formal assessment indicates such an
increase is warranted.
Operations of the Company are also subject to the federal Clean Water Act
("CWA") and analogous state laws. In accordance with the CWA, the state of
Louisiana has issued regulations prohibiting discharges of produced water in
state coastal waters effective July 1, 1997. Producers may be required to incur
certain capital expenditures in the next several years in order to comply with
the prohibition against the discharge of produced waters into Louisiana coastal
waters or increase operating expenses in connection with offshore operations in
Louisiana coastal waters. Pursuant to other requirements of the CWA, the EPA
has adopted regulations concerning discharges of storm water runoff. This
program requires covered facilities to obtain individual permits, participate in
a group permit or seek coverage under an EPA general permit. The Company
believes that it will be able to obtain, or be included under, such storm water
discharge permits, where necessary.
In addition, the disposal of wastes containing naturally occurring
radioactive material, which are commonly generated during oil and gas
production, is regulated under state law. Typically, wastes containing
naturally occurring radioactive material can be managed on-site or disposed of
at facilities licensed to receive such waste at costs that are not expected to
be material.
OPERATIONAL RISKS AND INSURANCE
The Company anticipates that any wells established by it will be
drilled by proven industry contractors. Based on financial considerations, the
Company may choose to utilize turnkey contracts that limit its financial and
legal exposure. However, circumstances may arise where the Company is unable to
secure a turnkey contract on satisfactory terms. In this case, the Company may
decide to drill, or cause to be drilled, the applicable test well(s) on either a
footage or day-work basis, and the drilling thereof will be subject to the usual
drilling hazards such as cratering, explosions, uncontrollable flows of oil, gas
or well fluids, fires, pollution, and other environmental risks. The Company's
activities are also subject to perils specific to marine operations, such as
capsizing, collision, and damage or loss from severe weather. These hazards can
cause personal injury and loss of life, severe damage to and destruction of
property and equipment, pollution or environmental damage, and suspension of
operations. In accordance with customary industry practices, the Company
intends to maintain insurance against some, but not all,
9
<PAGE>
of such risks, and some, but not all, of such losses. The occurrence of a
significant event not fully insured or indemnified against could materially and
adversely affect the Company's financial condition and operations. Moreover, no
assurance can be given that the Company will be able to maintain adequate
insurance in the future at rates considered reasonable by the Company.
REORGANIZATION
On July 3, 1996, Cheniere Operating underwent a reorganization by
consummating the transactions (the "Reorganization") contemplated in the
Agreement and Plan of Reorganization (the "Reorganization Agreement") dated
April 16, 1996, between Cheniere Operating and Bexy Communications, Inc., a
publicly held Delaware corporation ("Bexy"). Under the terms of the
Reorganization Agreement, Bexy transferred its existing assets and liabilities
to Mar Ventures, Inc., its wholly-owned subsidiary ("Mar Ventures"). As part of
such Reorganization, the stock of Mar Ventures was distributed to the original
Bexy shareholders, and since that time Mar Ventures has not been affiliated with
the Company. Buddy Young, the former President and Chief Executive Officer of
Bexy, has agreed to indemnify the Company, the former shareholders of Cheniere
Operating and their respective officers, directors, attorneys, and other agents
from and against all claims which they may suffer, incur, or pay arising under
or incurred in connection with: (i) the operation of the business of Bexy prior
to the closing of the Reorganization; (ii) any error or omission with respect to
a material fact stated or required to be stated in the proxy materials filed by
Bexy in connection with the Reorganization or the registration statement filed
by Mar Ventures in connection with the distribution of its common stock to the
original Bexy stockholders; and (iii) certain taxes.
YOUNG CONSULTING AGREEMENT
Pursuant to a consulting agreement dated as of July 3, 1996, the Company
engaged Mr. Buddy Young, the former President and Chief Executive Officer of
Bexy, as a consultant to provide Cheniere with advice regarding the management
and business of the Company. Mr. Young provided such consulting services to the
Company for two years at a rate of $75,000 per year. The agreement terminated
on July 3, 1998.
EMPLOYEES
The Company had nine full-time employees as of March 26, 1999.
PROPERTIES
Until March 1998, the Company subleased its Houston, Texas headquarters
from Zydeco under a month-to-month sublease covering approximately 1,498 square
feet at a monthly rental of $1,179. In March 1998, Cheniere terminated its
sublease from Zydeco and leased 2,678 square feet of office space through March
2003 at a monthly rental rate of $4,190. In February 1999, Cheniere amended its
office lease to cover a total of 12,102 square feet at a monthly rental of
$19,612.
FORWARD-LOOKING STATEMENTS
This annual report contains certain statements that may be deemed "forward-
looking statements" within the meaning of Section 27A of the Securities Act, and
Section 21E of the United Stated Securities Exchange Act of 1934, as amended.
Readers of this annual report are cautioned that such forward-looking statements
are not guarantees of future performance and that actual results, developments
and business decisions may differ from those envisaged by such forward-looking
statements.
All statements, other than statements of historical facts so included in
this annual report that address activities, events or developments that the
Company intends, expects, projects, believes, or anticipates will or may occur
in the future, including, without limitation: statements regarding the Company's
business strategy, plans and objectives; statements expressing beliefs and
expectations regarding the ability of the Company to successfully raise the
additional capital necessary to meet its obligations under the Exploration
Agreement, the ability of the Company to secure the leases necessary to
facilitate anticipated drilling activities and the ability of the Company to
attract additional working interest owners to participate in the exploration and
development within the Survey AMI; and statements about non-historical Year 2000
information, are forward-looking statements within the meaning of the Act.
These forward-looking statements are, and will be, based on management's then-
current views and assumptions regarding future events.
10
<PAGE>
The following are some of the important factors that could affect the
Company's financial performance or could cause actual results to differ
materially from estimates contained in the Company's forward-looking statements.
-- The Company's ability to generate sufficient cash flows to support
capital expansion plans, obligations to repay debt and general
operating activities.
-- The Company's ability to obtain additional financing from lenders,
through debt or equity offerings, through sales of a portion of its
interest in the 3-D Exploration Program or through vendor financing
arrangements with oil and gas service companies.
-- The Company's ability to encounter hydrocarbons in sufficient
quantities to be economically viable, and its ability to overcome the
operating hazards that are inherent in the oil and gas industry.
-- Changes in laws and regulations, including changes in accounting
standards, taxation requirements (including tax rate changes, new tax
laws and revised tax law interpretations) and environmental laws in
domestic or foreign jurisdictions.
-- The uncertainties of potential litigation as well as other risks and
uncertainties detailed from time to time in the Company's Securities
and Exchange Commission filings.
-- The Company's or its business partners' ability to replace, modify or
upgrade computer programs in ways that adequately address the Year
2000 issue.
The foregoing list of important factors is not exclusive.
YEAR 2000 ISSUES
The Year 2000 presents significant issues for many computer systems. Much
of the software in use today may not be able to accurately process data beyond
the year 1999. The vast majority of computer systems process transactions using
two digits for the year of the transaction, rather than the full four digits,
making such systems unable to distinguish January 1, 2000 from January 1, 1900.
Such systems may encounter significant processing inaccuracies or become
inoperable when Year 2000 transactions are processed. Such matters could impact
not only the Company in its day-to-day operations but also the Company's
financial institutions, customers and vendors as well as state, provincial and
federal governments with jurisdictions where the Company maintains operations.
The Company is currently addressing Year 2000 issues and is presently
focussing on its internal business systems and processes. To the extent
necessary, the Company will assess the readiness of any key business partners
(financial institutions, customers, vendors, oil and gas operators, etc.).
It has been the Company's strategy to use, wherever possible, industry
prevalent products and processes with minimal customization. As a result, the
Company does not expect any extensive in-house hardware, software or process
conversions in an effort to be Year 2000 compliant nor does the Company expect
its Year 2000 compliance related costs to be material to its operations.
The Company's goal is to be Year 2000 compliant by June 30, 1999 wherever
possible and to have contingency plans in place where compliance is not possible
in a timely manner. While it is the Company's goal to be Year 2000 compliant,
there can be no assurance that there will not be a material adverse effect on
the Company as a result of a Year 2000 related issue. The Company's business
partners may present the area of greatest risk to the Company, in part because
of the Company's limited ability to influence actions of third parties, and in
part because of the Company's inability to estimate the level and impact of
noncompliance of third parties. Additionally, there are many variables and
uncertainties associated with judgments regarding any contingency plans
developed by the Company.
11
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings currently pending against the Company.
In December 1998, the Company received the binding award of an independent
panel of arbitrators reviewing claims against the Company by Zydeco and
counterclaims by the Company related to certain rights and obligations pursuant
to the Exploration Agreement.
The panel confirmed Cheniere's 50% ownership in the proprietary 3-D Seismic
Data, including the right to possess field tapes and all volumes of such data
acquired prior to December 31, 1997. The panel also confirmed Cheniere's right
to review Zydeco's seismic interpretations within the AMI and to purchase an
interest of up to 50% in any prospects generated by Zydeco in the AMI and
Cheniere's right to acquire ownership of all seismic data processing volumes
generated after December 1997 related to such prospects. The arbitration panel
confirmed Zydeco's right to manage the exploration process for a period of 90
days after it declares a prospect's assembly and development to be complete. In
addition, the panel affirmed Cheniere's right to generate prospects and manage
the exploration process for any prospect generated by Cheniere and rejected, or
not accepted within 30 days, by Zydeco (subject to Zydeco's right to acquire a
50% interest in any lease acquired by Cheniere).
Ownership of the existing prospects was also determined by the panel. All
ownership in prospects acquired by either party, where the non-acquiring party
declined to participate, was confirmed to belong to the acquiring party.
Consequently, Cheniere has 100% ownership in six prospects, Cheniere and Zydeco
have 50% ownership each in three prospects and 25% each in another prospect, and
Zydeco has 100% ownership in one Federal lease which covers a portion of one
prospect.
In addition, the panel decreed that all prospects on leases acquired by
Zydeco in the June 1998 Louisiana state lease sale must be offered to Cheniere
and that Cheniere would have 30 days from such offer to review the prospects and
elect or decline to participate.
The panel found that in future state lease sales, Zydeco may require
Cheniere to advance its 50% share of the proposed bid at the time of the sale or
forfeit its right to acquire an interest in such leases, but only if the lease
relates to a prospect which Zydeco has notified Cheniere is completely assembled
and developed, and only if adequate decision-making data is provided 30 days
prior to the sale.
The panel has found that certain activities related to the selling of
prospects are the equivalent of marketing, sale or licensure of the proprietary
seismic data acquired under the Exploration Agreement. In the event such
marketing, sale or licensure of data occurs, the Exploration Agreement provides
that 100% of the proceeds related to seismic data will be directed to Cheniere
until Cheniere recoups $13,500,000 of its investment; thereafter the proceeds
will be shared 50/50 between Cheniere and Zydeco.
The panel found that Zydeco was not authorized to issue cash calls to
Cheniere for seismic costs incurred after December 31, 1997. Accordingly,
$1,115,143 in billings made by Zydeco to Cheniere were not allowed under the
Exploration Agreement and Cheniere has no liability for such costs as billed.
The panel also stated that some portion of such costs may be appropriately
charged to Cheniere as a component of prospects in which Cheniere elects to
acquire an interest.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted for a vote by security holders during the
year ended December 31, 1998.
12
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock of the Company has traded on The Nasdaq SmallCap Market under
the symbol "CHEX" since April 11, 1997. From the time the Company first traded
publicly until April 11, 1997, the Company traded on the OTC Bulletin Board.
The table below presents the high and low daily closing sales prices of the
common stock during each quarter. The Company changed its fiscal year end from
August 31 to December 31, and as a result had a four-month transition period at
the end of 1997. The quotes represent "inter-dealer" prices without retail
markups, markdown, or commissions and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
High ($) Low ($)
------------ ----------
<S> <C> <C>
Three Months Ended
November 30, 1996 5-1/2 2-13/32
February 28, 1997 5-5/8 2-3/4
May 31, 1997 5-1/2 3
August 31, 1997 4-1/4 2-31/32
Four Months Ended December 31, 1997 3-15/16 1-7/8
Three Months Ended
March 31, 1998 3-1/16 2
June 30, 1998 3-5/8 1-3/4
September 30, 1998 2-15/16 13/16
December 31, 1998 1-7/16 7/16
</TABLE>
As of March 26, 1999, there were 21,786,277 shares of the Company's common
stock outstanding held by 773 stockholders of record.
The Company has never paid a cash dividend on its common stock. The Company
currently intends to retain earnings to finance the growth and development of
its business and does not anticipate paying any cash dividends on the common
stock in the foreseeable future. Any future change in the Company's dividend
policy will be made at the discretion of the Company's Board of Directors in
light of the financial condition, capital requirements, earnings and prospects
of the Company, and any restrictions under any credit agreements, as well as
other factors the Board of Directors deems relevant.
With respect to equity securities sold by the Company during the fourth
quarter of 1998 that were not registered under the Securities Act of 1933, as
amended ("Securities Act"), see "Liquidity and Capital Resources Private
Placements of Equity" under Item 6 of this report.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data set forth below are derived from the Consolidated
Financial Statements of the Company for the periods indicated. The financial
data should be read in conjunction with the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
report.
<TABLE>
<CAPTION>
From
For the For the Four Months Ended For the Period Ended Inception to
Year Ended December 31, August 31, December 31,
December 31, --------------------------- --------------------------- ------------
1998 1997 1996 1997 1996 1998
------------ ------------ ----------- ------------ ----------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net operating revenues $ - $ - $ - $ - $ - $ -
Loss from operations (1,658,478) (447,023) (192,330) (1,713,461) (103,814) (3,922,776)
Net loss (1,637,844) (388,361) (193,553) (1,676,468) (121,847) (3,824,520)
Net loss per share (basic and diluted) $ (0.10) $ (0.03) $ (0.02) $ (0.14) $ (0.01) (0.29)
</TABLE>
<TABLE>
<CAPTION>
December 31, August 31,
------------------------------------------ ---------------------------
1998 1997 1996 1997 1996
------------ ------------ ----------- ------------ -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash $ 143,868 $ 787,523 $2,419,264 $ 234,764 $1,093,180
Oil and gas properties, unevaluated 20,000,425 16,534,054 6,000,000 13,500,000 4,000,000
Total assets 20,840,474 17,705,627 8,476,710 13,841,712 5,145,310
Long-term notes payable 2,025,020 2,025,020 - - -
Total liabilities 4,523,144 4,285,599 262,798 888,291 718,855
Total stockholders' equity 16,317,330 13,420,028 8,213,912 12,953,421 4,426,455
Cash dividends per share - - - - -
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Cheniere Operating was incorporated in Delaware in February 1996 for the
purpose of engaging in the oil and gas exploration business, initially on the
Louisiana Gulf Coast. On July 3, 1996, Cheniere Operating underwent a
reorganization whereby Bexy Communications, Inc., a publicly held Delaware
corporation ("Bexy"), received 100% of the outstanding shares of Cheniere
Operating, and the former shareholders of Cheniere Operating received
approximately 93% of the issued and outstanding Bexy shares. As a result of the
share exchange, a change in the control of the Company occurred. The
transaction was accounted for as a recapitalization of Cheniere Operating. Bexy
spun off its existing assets and liabilities to its original shareholders and
changed its name to Cheniere Energy, Inc.
Cheniere is a development stage company with no operating revenues to date.
The Company has not yet established oil and gas production nor proven oil and
gas reserves. The independent accountants' report on Cheniere's financial
statements includes a reference to the Company's ability to continue as a going
concern. See "Management's Plans and Continued Capital Raising Activities"
below.
On April 7, 1998, the Company's Board of Directors approved a change in
fiscal year-end from August 31 to December 31. The change in year-end resulted
in a transition period from September 1, 1997 to December 31, 1997.
RESULTS OF OPERATIONS - COMPARISON OF THE FISCAL YEARS ENDED DECEMBER 31, 1998
AND AUGUST 31, 1997
The Company's financial results for the year ended December 31, 1998,
reflect a loss of $1,637,844 or $0.10 per share (both basic and diluted) as
compared to a loss of $1,676,468, or $0.14 per share (both basic and diluted)
for the fiscal year ended August 31, 1997. The Company did not generate revenues
from operations in either of the periods. The 2% decrease in net loss in 1998 as
compared to that in fiscal 1997 is primarily due to a 3% decrease in general and
administrative ("G&A") expenses to $1,658,478 in 1998 compared to $1,713,461 in
the 1997 fiscal year. Both periods included significant non-recurring expenses.
In 1998, the Company incurred $817,870 in expenses related to arbitration
proceedings between Cheniere and Zydeco. In the fiscal year ended August 31,
1997, the Company incurred a non-cash charge of $624,400 related to financial
advisory services, and it incurred $164,812 in professional fees related to an
acquisition that was not consummated.
14
<PAGE>
Salaries and benefits increased to $698,973 for 1998 compared with $270,209
in fiscal year 1997 as a result of the Company's hiring of additional technical
employees early in 1998 to assist in the interpretation of seismic data and the
generation of prospects. Beginning in the fourth quarter of calendar 1997,
Cheniere began capitalizing as oil and gas property costs that portion of G&A
related to its exploration and development activities. Cheniere capitalized
$444,000 of G&A expenses in 1998 but it did not capitalize any such costs in the
fiscal year ended August 31, 1997. The remaining variance in G&A expenses is the
net effect of several offsetting factors but is principally the result of a
decrease in routine legal fees to $79,647 in 1998 from $144,538 in fiscal 1997,
which is largely accounted for by the Company's change in 1997 from a New York
based law firm to a Houston based law firm.
Other factors affecting the Company's net loss for the year ended
December 31, 1998 were lower interest income (down by $35,527) related
principally to lower average balances in its short-term investment funds and the
absence of net interest expense in 1998 compared with expense of $19,168 in
fiscal 1997. Beginning in the fourth quarter of calendar 1997, Cheniere began
capitalizing interest expense related to its 3-D exploration and development
project.
RESULTS OF OPERATIONS - COMPARISON OF THE FOUR-MONTH PERIODS ENDED DECEMBER 31,
1997 AND 1996
The Company's operating results for the four months ended December 31,
1997, reflect a loss of $388,361 or $0.03 per share (both basic and diluted) as
compared to a loss of $193,553, or $0.02 per share (both basic and diluted) for
the four months ended December 31, 1996. The Company did not generate revenues
from operations in either of the periods. The increased loss in the most recent
four-month period is primarily due to higher G&A expenses of $447,023, as
compared to $192,330 a year earlier. G&A expenses are higher in the most recent
period as the result of: (a) increased professional fees related to financing
activities and to the Company's initial annual stockholders' meeting in November
1997, (b) fees related to recruiting technical professionals who were hired
January 1, 1998 and (c) insurance expenses for coverages not carried in the
earlier period. Interest income of $58,662 in the four months ended December 31,
1997 includes $49,000 related to an agreement that interest earned from
inception to date on funds advanced by Cheniere into the 3-D Exploration Program
accrues to the benefit of the Company.
RESULTS OF OPERATIONS - COMPARISON OF THE PERIODS ENDED AUGUST 31, 1997 AND 1996
The Company's operating results for the fiscal year ended August 31, 1997,
reflect a loss of $1,676,468 or $0.14 per share (both basic and diluted) as
compared to a loss of $121,847, or $0.01 per share (both basic and diluted) for
the six-month period from inception (February 21, 1996) to August 31, 1996. The
Company did not generate revenues from operations in either of the periods. The
increased loss in the most recent fiscal year is primarily due to higher G&A
expenses of $1,713,461, as compared to $103,814 in the period ended August 31,
1996. The higher level of G&A expenses in the more recent period is the result
of: (a) a one-time, non-cash charge of $624,400 for investment banking services,
(b) increased professional fees related to registrations of previously issued
shares of the Company's common stock, (c) insurance expenses for coverages not
carried in the earlier period, and (d) the inclusion of a full year of salary
and compensation, occupancy and office expenses as compared to a partial year
for the period ended August 31, 1996. The increased loss is additionally due to
professional fees of $164,812 related to an acquisition that was not
consummated. Interest income of $56,161 in the latter period exceeded the $1,800
earned in the prior period, based on larger average cash balances and the
comparatively longer period.
RESULTS OF OPERATIONS - PERIOD FROM INCEPTION (FEBRUARY 21, 1996) TO
DECEMBER 31, 1998
The Company's financial results reflect accumulated losses of $3,824,520 or
$0.29 per share, (both basic and diluted) as the Company has yet to generate
revenues from operations. G&A expenses of $3,922,776 included significant non-
recurring items such as $817,870 in legal and other expenses related to
arbitration proceedings between the Company and Zydeco in 1998 as well a
$624,400 non-cash charge related to financial advisory services and $164,812 in
professional fees related to an acquisition that was not consummated in the
fiscal year ended August 31, 1997. The balance of the G&A expense is comprised
primarily of the costs of professional expenses, salary and compensation,
insurance, occupancy and office expense. Interest expense of $39,001 was
incurred with respect to two short-term promissory notes. Interest income of
$137,257 was generated on the Company's cash balances and on funds it has
advanced into the 3-D Exploration Program.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that future liquidity requirements, including
future commitments to the 3-D Exploration Program, will be met by cash balances,
the sale of equity, further borrowings, vendor financing arrangements and/or the
sale of portions of its interest in the 3-D Exploration Program or in the
prospects generated thereunder. At this time, no assurance can be given that
such sales of equity, future borrowings, future vendor agreements or sales of
portions of its interest in the 3-D Exploration Program will be accomplished.
Private Placements of Equity
Since its inception, Cheniere's primary source of financing for operating
expenses and payments to the 3-D Exploration Program has been the sale of its
equity securities. Through December 31, 1998, the Company has issued
approximately 19.0 million shares of its common stock, generating net proceeds
of $20.1 million. Cash proceeds from the sales totaled $18.6 million; non-cash
issuances of stock and warrants were valued at $1.5 million; and the issuance of
bridge notes raised an additional $4.0 million. As of December 31, 1998,
Cheniere has invested $20.0 million in oil and gas properties.
From inception through the Reorganization, Cheniere Operating raised $2.8
million, net of offering costs, from the sale of common stock (which was
exchanged for common stock of Cheniere Energy, Inc. following the
Reorganization) to "accredited investors" (as defined in Rule 501(a) promulgated
under the Securities Act) pursuant to Rule 506 of Regulation D promulgated under
the Securities Act ("Regulation D"). The proceeds, together with proceeds of a
$425,000 short-term note, were used to fund Cheniere's initial $3 million
payment to the 3-D Exploration Program.
Subsequent to the Reorganization and prior to August 31, 1996, the Company
raised $1.7 million, net of offering costs, from the sale of common stock
pursuant to Regulation D and common stock and warrants to purchase common stock
pursuant to Regulation S promulgated under the Securities Act ("Regulation S").
Proceeds were used to fund a $1 million payment to the 3-D Exploration Program
in August 1996.
During the year ended August 31, 1997, the Company raised $9.4 million, net
of offering costs, from the sale of common stock to accredited investors
pursuant to Regulation D and to offshore investors pursuant to Regulation S.
From the $9.4 million net proceeds and other available funds, $9.5 million was
invested in the 3-D Exploration Program.
During the four months ended December 31, 1997, the Company raised $0.5
million, net of offering costs, from the sale of common stock to accredited
investors pursuant to Regulation D and to offshore investors pursuant to
Regulation S. The proceeds, together with cash balances and proceeds from a
$4.0 million December 1997 bridge financing, were used to fund a $2.9 million
payment to the 3-D Exploration Program.
In 1998, the Company raised approximately $4.2 million, net of offering
costs, from the sale of common stock to accredited investors pursuant to
Regulation D. Proceeds of the offerings were used for the acquisition of leases
and other exploration costs, as well as for general corporate purposes. Sales
during the fourth quarter of 1998 consisted of: the November 1998 sale of
1,200,000 shares for a total purchase price of $800,000, and the December 1998
sale of 666,667 shares for a total purchase price of $500,000. All of the
purchasers were accredited investors, and the sales were made pursuant to
Rule 506 of Regulation D without the participation of any underwriters.
Short-Term Promissory Notes
In June 1996, Cheniere borrowed $425,000 through a private placement of
short-term promissory notes (the "Notes"). In connection with the placement of
the Notes, Cheniere issued warrants (the "June Warrants") which, following the
Reorganization, were exchanged for an aggregate of 141,666 and 2/3 warrants to
purchase shares of common stock, to the holders of the Notes (the
"Noteholders"), each of which warrants entitles the holder to purchase one share
of the common stock at an exercise price of $3.00 per share at any time on or
before June 14, 1999. The exercise price was determined at a 100% premium to the
sale price of Cheniere common stock by private placement during May 1996, as the
Company's common stock was not publicly traded at that time. The Company
satisfied all of its obligations under the Notes in the principal amount of
$210,000 by paying the accrued interest on such Notes and by agreeing to issue
105,000 shares of the common stock at a price of $2.00 per share to the holders
of such Notes pursuant to Regulation D. In addition, an individual Noteholder
(the "Remaining Noteholder") purchased several outstanding Notes, following
which such Noteholder held Notes in the aggregate amount of $215,000. In
exchange for such Notes, Cheniere issued a new promissory note in the amount of
$215,000 to the Remaining Noteholder, which Cheniere paid on December 13, 1996.
The Remaining Noteholder also received 64,500 warrants to purchase shares of the
common stock in accordance with the terms of the original Note Agreement. Such
additional warrants have identical terms as the June Warrants, in accordance
with the terms of the original Note Agreement.
16
<PAGE>
On July 31, 1997, Cheniere borrowed $500,000 from a related party,
evidenced by a promissory note bearing interest at 10% per annum and due on
August 29, 1997. On August 28, 1997, the maturity date was extended to
September 29, 1997. The note was repaid by the Company on September 22, 1997,
including all incurred interest. The collateral securing the note has been
released.
In December 1997, Cheniere completed the private placement of a $4,000,000
bridge financing (the "December 1997 Bridge Financing"). The notes payable
issued by Cheniere had an initial maturity date of March 15, 1998, which was
extended to September 15, 1998 and further extended to January 15, 1999. In
December 1998, Cheniere received commitments from certain noteholders to
exchange notes payable for an aggregate of 2,812,528 shares of Cheniere common
stock at a price of $0.72 per share. Accordingly, the $2,025,020 face amount of
the exchanged notes is classified as a long-term obligation as of December 31,
1998. For those notes which were not exchanged for common stock, the maturity
date has been extended to April 15, 1999. The notes bear interest at a rate of
LIBOR plus 4% (ranging from 9.5% to 9.9% through December 31, 1998). The
securities purchase agreements which govern such bridge financing specify that,
during the term of the notes, capital raised by the Company in excess of
$5,000,000 must be directed to repayment of the notes.
In connection with the December 1997 Bridge Financing, Cheniere issued
100,000 shares of common stock and four-year warrants to purchase 1,333,334
shares of common stock at $2-3/8 per share. Additional warrants to purchase
1,600,000 shares of Cheniere common stock were issued on September 15, 1998 in
consideration for the extension to that date. In connection with the extension
to January 15, 1999, the Company offered two alternatives of consideration.
Holders of $3,000,000 of the notes elected to reduce the exercise price of their
warrants to $1.50 per share. The holder of $1,000,000 of the notes elected to
reduce the exercise price of its warrants to $2.00 per share, to extend the term
of such warrants to five years from the latter of September 15, 1998 or the date
of issue, to receive additional warrants to purchase 387,500 shares of common
stock and to receive 50,000 shares of common stock. In January 1999, the
maturity date was extended to March 15, 1999. In March 1999, the maturity date
was extended to April 15, 1999. As consideration for the extension to April 15,
1999, the Company reduced the exercise price by $0.25 per share for all warrants
issued in connection with the issuance or extensions of the notes. The common
stock issued in connection with the December 1997 closing and the September 1998
extension was recorded as a debt issuance cost at the then-market price for the
shares. Proceeds from the December 1997 Bridge Financing were used to fund the
Company's activities related to the 3-D Exploration Program and for general
corporate purposes.
In June 1998, the Company issued $180,000 in short-term notes with
detachable warrants to purchase 83,334 shares of common stock at an exercise
price of $2.00 per share on or before June 4, 2002. Such notes bore interest at
LIBOR plus 4% (9.7%) and matured on August 14, 1998. After extensions to dates
on or about August 31, 1998, the notes were repaid in full.
Management's Plans and Continued Capital Raising Activities
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Cheniere is a
development stage company which has not yet generated any operating revenues.
At various times during the life of the Company to date, it has been necessary
for the Company to raise additional capital through private placements of debt
or equity financing. When such a need has arisen, the Company has met it
successfully. It is management's belief that it will continue to be able to
meet its needs for additional capital as such needs arise in the future.
At December 31, 1998, the Company had $4,000,000 outstanding in senior term
notes payable which matured on January 15, 1999. These notes were issued as
part of a bridge financing in conjunction with an offering of units comprised of
preferred stock and warrants to purchase common stock. The units offering was
subsequently withdrawn. The Company has issued 2,812,528 shares of common stock
in exchange for notes totaling $2,025,020. The remaining notes have been
extended and mature on April 15, 1999. Cheniere intends to raise additional
capital for the repayment of the notes through the sale of common stock.
In the event that the Company should not be successful in future efforts to
raise capital for its operations, management believes that trades or sales of
partial interests to industry partners would be utilized to explore and develop
the Company's oil and gas properties, but the ownership interest which would be
retained by the Company would be reduced accordingly.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
CHENIERE ENERGY, INC. AND SUBSIDIARIES
Report of Independent Accountants........................................ 19
Consolidated Balance Sheet............................................... 20
Consolidated Statement of Operations..................................... 21
Consolidated Statement of Stockholders' Equity........................... 22
Consolidated Statement of Cash Flows..................................... 24
Notes to Consolidated Financial Statements............................... 25
18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Cheniere Energy, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Cheniere
Energy, Inc. and its subsidiaries (a development stage company) at December 31,
1998 and 1997, and the results of their operations and their cash flows for the
year ended December 31, 1998, the four-month period ended December 31, 1997, the
year ended August 31, 1997, the period from inception (February 21, 1996)
through August 31, 1996 and the period from inception (February 21, 1996)
through December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 13 to the
financial statements, the Company is a development stage enterprise which has
not yet generated any operating revenues and which, since its inception in
February 1996, has been dependent on capital contributions to finance its oil
and gas exploration activities. The recoverability of the Company's unevaluated
oil and gas properties is dependent on future events, including obtaining
adequate financing for its exploration and development program, the successful
completion of its planned drilling program, and the achievement of a level of
operating revenues that is sufficient to support the Company's cost structure.
In addition, at December 31, 1998 the Company has $1,974,980 of senior term
notes outstanding which are due on or before April 15, 1999. Management's plans
in regard to these matters are also described in Note 13. The uncertainties
associated with these matters raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 15, 1999, except
as to Note 12 which is
as of March 26, 1999
19
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
----------------- -----------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 143,868 $ 787,523
Accounts Receivable 97,837 102,330
Subscriptions Receivable 500,000 -
Debt Issuance Costs, net - 224,306
Prepaid Expenses and Other Current Assets 8,833 10,543
----------------- -----------------
TOTAL CURRENT ASSETS 750,538 1,124,702
OIL AND GAS PROPERTIES, full cost method
Unevaluated 20,000,425 16,534,054
FIXED ASSETS, net 89,511 46,871
----------------- -----------------
TOTAL ASSETS $ 20,840,474 $ 17,705,627
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Liabilities $ 523,144 $ 369,766
Notes Payable 1,974,980 1,974,980
Less: Cost of Detachable Warrants - (84,167)
----------------- -----------------
Total Current Liabilities 2,498,124 2,260,579
----------------- -----------------
LONG-TERM NOTES PAYABLE
Related Party 2,000,000 2,000,000
Other 25,020 25,020
----------------- -----------------
2,025,020 2,025,020
----------------- -----------------
TOTAL LIABILITIES 4,523,144 4,285,599
----------------- -----------------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY
Common Stock, $.003 par value; 40,000,000 shares authorized
Issued and Outstanding: 18,973,749 and 14,457,866 shares at
December 31, 1998 and 1997, respectively 56,922 43,374
Preferred Stock, $.0001 par value; 5,000,000 shares authorized
Issued and Outstanding: none - -
Additional Paid-in-Capital 20,084,928 15,563,330
Deficit Accumulated During the Development Stage (3,824,520) (2,186,676)
----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 16,317,330 13,420,028
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,840,474 $ 17,705,627
================= =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Four Months Ended
Year Ended December 31, Year Ended
December 31, --------------------------------- August 31,
1998 1997 1996 1997
---------------- --------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenue $ - $ - $ - $ -
---------------- --------------- --------------- ---------------
General and Administrative Expenses 1,658,478 447,023 192,330 1,713,461
---------------- --------------- --------------- ---------------
Loss from Operations Before Other Income
and Income Taxes (1,658,478) (447,023) (192,330) (1,713,461)
Interest Income 20,634 58,662 7,329 56,161
Interest Expense - - (8,552) (19,168)
---------------- --------------- --------------- ---------------
Loss From Operations Before Income Taxes (1,637,844) (388,361) (193,553) (1,676,468)
Provision for Income Taxes - - - -
---------------- --------------- --------------- ---------------
Net Loss $ (1,637,844) $ (388,361) $ (193,553) $ (1,676,468)
================ =============== =============== ===============
Net Loss Per Share (basic and diluted) $ (0.10) $ (0.03) $ (0.02) $ (0.14)
================ =============== =============== ===============
Weighted Average Number of Shares
Outstanding 16,015,455 14,348,128 10,601,368 12,143,919
================ =============== =============== ===============
Period Ended Cumulative
August 31, from the Date
1996 of Inception
Revenue ---------------- ---------------
General and Administrative Expenses $ - $ -
---------------- ---------------
Loss from Operations Before Other Income 103,814 3,922,776
and Income Taxes ---------------- ---------------
Interest Income
Interest Expense (103,814) (3,922,776)
1,800 137,257
Loss From Operations Before Income Taxes (19,833) (39,001)
---------------- ---------------
Provision for Income Taxes
(121,847) (3,824,520)
Net Loss - -
---------------- ---------------
Net Loss Per Share (basic and diluted) $ (121,847) $ (3,824,520)
================ ===============
Weighted Average Number of Shares $ (0.01) $ (0.29)
Outstanding ================ ===============
8,610,941 13,267,925
================ ===============
</TABLE>
21
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Total
--------------------- Paid-In Retained Stockholders'
Per Share Shares Amount Capital Deficit Equity
---------- ---------- ---------- -------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Sale of Shares on April 9, 1996 $0.012 6,242,422 $ 18,727 $ 56,276 $ - $ 75,003
Sale of Shares on May 5, 1996 1.50 2,000,000 6,000 2,994,000 - 3,000,000
Issuance of Shares to an Employee
on July 1, 1996 1.00 30,000 90 29,910 - 30,000
Issuance of Shares in Reorganization to
Former Bexy Shareholders - 600,945 1,803 (1,803) - -
Sale of Shares on July 30, 1996 2.00 50,000 150 99,850 - 100,000
Sale of Shares on August 1, 1996 2.00 508,400 1,525 1,015,275 - 1,016,800
Sale of Shares on August 30, 1996 2.00 500,000 1,500 998,500 - 1,000,000
Expenses Related to Offerings - - - (686,251) - (686,251)
Issuance of Warrants - - - 12,750 - 12,750
Net Loss - - - - (121,847) (121,847)
---------- ------- ---------- --------- ----------
Balance - August 31, 1996 9,931,767 29,795 4,518,507 (121,847) 4,426,455
Sale of Shares on September 12, 1996 2.00 50,000 150 99,850 - 100,000
Sale of Shares on September 16, 1996 2.00 80,250 241 160,259 - 160,500
Conversion of Debt 2.00 105,000 315 209,685 - 210,000
Sale of Shares on October 30, 1996 2.25 457,777 1,373 1,028,627 - 1,030,000
Issuance of Warrants - - - 6,450 - 6,450
Sale of Shares on December 6, 1996 2.25 475,499 1,426 1,068,448 - 1,069,874
Sale of Shares on December 9, 1996 2.50 400,000 1,200 998,800 - 1,000,000
Sale of Shares on December 11, 1996 2.25 22,222 67 49,933 - 50,000
Sale of Shares on December 19, 1996 2.50 200,000 600 499,400 - 500,000
Sale of Shares on December 20, 1996 2.50 220,000 660 549,340 - 550,000
Sale of Shares on February 28, 1997 4.25 352,947 1,059 1,498,967 - 1,500,026
Sale of Shares on March 4, 1997 4.25 352,947 1,059 1,498,966 - 1,500,025
Sale of Shares on May 22, 1997 3.00 535,000 1,605 1,603,395 - 1,605,000
Issuance of Shares to Adjust Prices of
Shares Sold on February 28 and March 4 * - 294,124 883 (883) - -
Sale of Shares on June 26, 1997 3.00 33,333 100 99,900 - 100,000
Sale of Shares on July 24, 1997 3.00 250,000 750 749,250 - 750,000
Issuance of Shares in Connection with
Financial Advisory Services 3.125 200,000 600 624,400 - 625,000
Sale of Shares on July 30, 1997 3.00 100,000 300 299,700 - 300,000
Sale of Shares on August 19, 1997 3.00 100,000 300 299,700 - 300,000
Expenses Related to Offerings - - - (1,153,441) - (1,153,441)
Net Loss - - - - (1,676,468) (1,676,468)
---------- ------- ---------- --------- ----------
Balance - August 31, 1997 14,160,866 42,483 14,709,253 (1,798,315) 12,953,421
</TABLE>
*Additional shares were issued to the purchasers of shares sold on February 28,
1997 and March 4, 1997 pursuant to the terms of those sales.
All of the sales of shares indicated above were made pursuant to private
placement transactions.
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
Common Stock Additional Total
--------------------- Paid-In Retained Stockholders'
Per Share Shares Amount Capital Deficit Equity
---------- ---------- ---------- -------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Balance - August 31, 1997 14,160,866 42,483 14,709,253 (1,798,315) 12,953,421
Sale of Shares on September 15, 1997 3.00 67,000 201 200,799 - 201,000
Sale of Shares on September 16, 1997 3.00 130,000 390 389,610 - 390,000
Expenses Related to Offerings - (74,532) (74,532)
Issuance of Warrants and Shares with
Bridge Notes on December 15, 1997 2.375 100,000 300 338,200 338,500
Net Loss - - - - (388,361) (388,361)
---------- -------- ----------- ---------- ----------
Balance - December 31, 1997 14,457,866 43,374 15,563,330 (2,186,676) 13,420,028
Sale of Shares on April 8, 1998 2.00 530,000 1,590 1,058,410 - 1,060,000
Issuance of Shares in Settlement of
Charges for Previous Legal Services 1.40 70,000 210 97,790 - 98,000
Sale of Shares on May 29, 1998 2.00 22,000 66 43,934 - 44,000
Sale of Shares on June 4, 1998 1.40 890,644 2,672 1,244,230 - 1,246,902
Expenses Related to Offerings - - - (168,000) - (168,000)
Issuance of Shares to Adjust Prices of
Shares Sold on April 8 and May 29** - 236,572 710 (710) - -
Issuance of Warrants with
Bridge Notes on June 4, 1998 - - - 3,661 - 3,661
Issuance of Shares on August 26, 1998
Pursuant to Exercise of Warrants 1.00 100,000 300 99,700 - 100,000
Sale of Shares on August 31, 1998 0.67 750,000 2,250 499,000 - 501,250
Issuance of Warrants and Shares to
Extend Bridge Notes on March 15 and
September 15, 1998 0.67 50,000 150 349,183 - 349,333
Sale of Shares on November 15, 1998 0.67 1,200,000 3,600 796,400 - 800,000
Sale of Shares on December 30, 1998 0.75 666,667 2,000 498,000 - 500,000
Net Loss - - - - (1,637,844) (1,637,844)
---------- -------- ----------- ---------- ----------
Balance - December 31, 1998 18,973,749 56,922 20,084,928 (3,824,520) 16,317,330
========== ======== =========== ========== ==========
</TABLE>
**Additional shares were issued to the purchasers of shares sold on April 8,
1998 and May 29, 1998 at $2.00 per share in order to adjust the purchase
price to the $1.40 per share price offered and received on June 4, 1998.
All of the sales of shares indicated above were made pursuant to private
placement transactions.
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Four Months Ended
Year Ended December 31,
December 31, --------------------------------
1998 1997 1996
---------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (1,637,844) $ (388,361) $ (193,553)
Adjustments to Reconcile Net Loss to
Net Cash Used by Operating Activities:
Depreciation and Amortization 39,171 2,936 2,695
Compensation Paid in Common Stock - - -
(Increase) Decrease in Accounts Receivable 4,493 (102,330) -
(Increase) Decrease in Subscriptions Receivable (500,000) - -
(Increase) Decrease in Prepaid Expenses and Other Current Assets 1,710 46,598 (1,832)
Increase (Decrease) in Accounts Payable and Accrued Liabilities 251,378 (18,525) (31,056)
Increase (Decrease) in Advances from Officers - - -
Non-Cash Interest Expense (Issuance of Warrants) - - -
---------------- --------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ (1,841,092) $ (459,682) (223,746)
---------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Fixed Assets (81,810) - (6,180)
Proceeds from Sales of Oil and Gas Seismic Data - 46,000 -
Oil and Gas Property Additions (2,804,905) (3,050,027) (2,000,000)
---------------- --------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (2,886,715) (3,004,027) (2,006,180)
---------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Notes with Detachable Warrants 180,000 4,000,000 -
Proceeds from Issuance of Notes Payable or Advances 697,000 - -
Repayment of Notes Payable or Advances (877,000) (500,000) (215,000)
Sale of Common Stock 4,252,152 591,000 4,460,375
Offering Costs (168,000) (74,532) (689,365)
---------------- --------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,084,152 4,016,468 3,556,010
---------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH (643,655) 552,759 1,326,084
CASH - BEGINNING OF PERIOD 787,523 234,764 1,093,180
---------------- --------------- ---------------
CASH - END OF PERIOD $ 143,868 $ 787,523 $ 2,419,264
================ --------------- ---------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest (net of amounts capitalized) $ - $ 6,718 $ 8,552
================ =============== ===============
Cash Paid for Income Taxes $ - $ - $ -
================ =============== ===============
Year Ended Period Ended Cumulative
August 31, August 31, from the Date
1997 1996 of Inception
---------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (1,676,468) $ (121,847) $ (3,824,520)
Adjustments to Reconcile Net Loss to
Net Cash Used by Operating Activities:
Depreciation and Amortization 8,268 3,603 53,978
Compensation Paid in Common Stock 624,400 30,000 654,400
(Increase) Decrease in Accounts Receivable - - (97,837)
(Increase) Decrease in Subscriptions Receivable - - (500,000)
(Increase) Decrease in Prepaid Expenses and Other Current Assets (52,341) (4,800) (8,833)
Increase (Decrease) in Accounts Payable and Accrued Liabilities 95,397 292,894 621,144
Increase (Decrease) in Advances from Officers (961) 961 -
Non-Cash Interest Expense (Issuance of Warrants) 6,450 12,750 19,200
---------------- --------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (995,255) 213,561 (3,082,468)
---------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Fixed Assets (10,745) (50,933) (143,488)
Proceeds from Sales of Oil and Gas Seismic Data - - 46,000
Oil and Gas Property Additions (9,500,000) (4,000,000) (19,354,932)
---------------- --------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (9,510,745) (4,050,933) (19,452,420)
---------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Notes with Detachable Warrants - 425,000 4,605,000
Proceeds from Issuance of Notes Payable or Advances 500,000 - 1,197,000
Repayment of Notes Payable or Advances (215,000) - (1,592,000)
Sale of Common Stock 10,516,025 5,191,803 20,550,980
Offering Costs (1,153,441) (686,251) (2,082,224)
---------------- --------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,647,584 4,930,552 22,678,756
---------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH (858,416) 1,093,180 143,868
CASH - BEGINNING OF PERIOD 1,093,180 - -
---------------- --------------- ---------------
CASH - END OF PERIOD $ 234,764 $ 1,093,180 $ 143,868
---------------- --------------- ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest (net of amounts capitalized) $ 15,635 $ - $ 22,353
================ =============== ===============
Cash Paid for Income Taxes $ - $ - $ -
================ =============== ===============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
The Company issued 105,000 shares of common stock upon the conversion of
$210,000 of notes payable in September 1996.
In conjunction with its December 1997 Bridge Financing, the Company issued
at closing 100,000 shares of common stock (valued at $237,500) and upon
extension of the maturity date 50,000 shares (valued at $33,500), which were
recorded as debt issuance costs. In the same financing, the Company issued
1,333,334 warrants (valued at $101,000) and 1,987,500 warrants (valued at
$315,833) related to extensions of the maturity dates. In conjunction with a
short-term bridge financing in June 1998, the Company issued 83,334 warrants
(valued at $3,661). The amortization of such warrant costs was included in
interest expense which was capitalized as a cost of oil and gas properties.
In 1998, the Company issued 70,000 shares of common stock (valued at
$98,000) in settlement of invoices for previously rendered legal services.
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-ORGANIZATION AND NATURE OF OPERATIONS
Cheniere Energy, Inc., a Delaware corporation, is a development stage
company engaged in exploration for oil and gas reserves. The terms "Cheniere"
and "Company" refer to Cheniere Energy, Inc. and its subsidiaries. The Company
operates principally through its wholly-owned subsidiary, Cheniere Energy
Operating Co., Inc. ("Cheniere Operating"). Cheniere Operating is a Houston-
based company formed for the purpose of oil and gas exploration, development and
exploitation. The Company is currently involved in a joint exploration program,
which is engaged in the exploration for oil and natural gas along the Gulf Coast
of Louisiana, onshore and in the shallow waters of the Gulf of Mexico. The
Company commenced its oil and gas activities through such joint program in April
1996.
On July 3, 1996, Cheniere Operating underwent a reorganization by
consummating the transactions (the "Reorganization") contemplated in the
Agreement and Plan of Reorganization (the "Reorganization Agreement") dated
April 16, 1996, between Cheniere Operating and Bexy Communications, Inc., a
publicly held Delaware corporation ("Bexy"). Under the terms of the
Reorganization Agreement, Bexy transferred its existing assets and liabilities
to Mar Ventures, Inc., its wholly-owned subsidiary ("Mar Ventures"). Bexy
received 100% of the outstanding shares of Cheniere Operating (which aggregated
824.2422 common shares outstanding prior to a 10,000-to-1 stock split which was
effected immediately prior to the Reorganization) and the former shareholders of
Cheniere Operating received 8,242,422 newly issued shares of Bexy common stock,
representing 93% of the then-issued and outstanding Bexy shares. Immediately
following the Reorganization, the original Bexy stockholders held the remaining
600,945 shares (7%) of the outstanding Bexy stock. The stock split has been
given retroactive effect in the financial statements. As a result of the
completion of the share exchange, a change in the control of the Company
occurred. The transaction has been accounted for as a recapitalization of
Cheniere Operating. In accordance with the terms of the Reorganization
Agreement, Bexy changed its name to Cheniere Energy, Inc. Subsequently, the
Company distributed the outstanding capital stock of Mar Ventures to the
original holders of Bexy common stock.
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Cheniere
Energy, Inc. and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain prior
period amounts have been reclassified to conform to the current period
presentation.
The financial statements presented include the accounts of the Company
since the inception of Cheniere Operating (February 21, 1996). While Cheniere
Operating did obtain a presence in the public market through the
recapitalization, it did not succeed to the business or assets of Bexy. For this
reason, the value of the shares issued to the former Bexy shareholders has been
deemed to be de minimis and, accordingly, no value has been assigned to those
shares.
On April 7, 1998, the Company's Board of Directors approved a change in
fiscal year-end from August 31 to December 31. The change in year-end resulted
in a transition period from September 1, 1997 to December 31, 1997.
Oil and Gas Properties
The Company follows the full cost method of accounting for its oil and gas
properties. Under this method, all productive and nonproductive exploration and
development costs incurred for the purpose of finding oil and gas reserves are
capitalized. Such capitalized costs include lease acquisition, geological and
geophysical work, delay rentals, drilling, completing and equipping oil and gas
wells, together with internal costs directly attributable to property
acquisition, exploration and development activities. Interest is capitalized on
oil and gas properties not subject to amortization and in the process of
development. The Company capitalized interest in the amount of $1,058,595 for
the year ended December 31, 1998 and $49,616 during the four-month period ended
December 31, 1997. No interest was capitalized prior to the four-month period
ended December 31, 1997.
25
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The costs of the Company's oil and gas properties, including the estimated
future costs to develop proved reserves, will be depreciated using a composite
units-of-production rate based on estimates of proved reserves. Investments in
unproved properties and major development projects are not amortized until
proved reserves associated with the projects can be determined or until
impairment occurs. If the results of an assessment indicate that the properties
are impaired, the amount of the impairment is added to the capitalized costs to
be amortized. Net capitalized costs are limited to a capitalization ceiling,
calculated on a quarterly basis as the aggregate of the present value,
discounted at 10%, of estimated future net revenues from proved reserves, based
on current economic and operating conditions, plus the lower of cost or fair
market value of unproved properties, less related income tax effects.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved oil
and gas reserves.
Debt Issuance Costs
Costs incurred in connection with the issuance of debt are capitalized and
amortized into interest expense (which is then capitalized as a cost of oil and
gas properties) using the straight-line method over the term of the related
debt. Accumulated amortization was $271,000 as of December 31, 1998 and $13,194
as of December 31, 1997.
Fixed Assets
Fixed assets are recorded at cost. Repairs and maintenance costs are
charged to operations as incurred. Depreciation is computed using the straight
line method calculated to amortize the cost of assets over their estimated
useful lives which range from three to seven years. Upon retirement or other
disposition of property and equipment, the cost and related depreciation is
removed from the accounts and the resulting gains or losses recorded.
Offering Costs
Offering costs consist primarily of placement fees, professional fees and
printing costs. These costs are charged against the related proceeds from the
sale of common stock in the periods in which they occur.
Income Taxes
Provisions for income taxes are based on taxes payable or refundable for
the current year and deferred taxes on temporary differences between the amount
of taxable income and pretax financial income and between the tax bases of
assets and liabilities and their reported amounts in the financial statements.
Deferred tax assets and liabilities are included in the financial statements at
currently enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or settled as
prescribed in Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the current period's
provision for income taxes.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related Interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock. The Company grants options at or above the market
price of its common stock at the date of each grant.
26
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings (Loss) Per Share
Earnings (loss) per share ("EPS") is computed in accordance with the
requirements of SFAS No. 128, "Earnings Per Share," which the Company adopted
effective December 31, 1997. Basic EPS excludes dilution and is computed by
dividing net income (loss) by the weighted average number of shares outstanding
during the period. Diluted EPS reflects potential dilution and is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding during the period increased by the number of additional common
shares that would have been outstanding if the potential common shares had been
issued. Basic and diluted EPS for all periods presented are the same since the
effect of the Company's options and warrants is antidilutive to its net loss per
share under SFAS No. 128.
Cash Equivalents
The Company classifies all investments with original maturities of three
months or less as cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value because of the short maturity of those
instruments. The carrying value of the Company's notes payable is considered to
approximate the fair value of those instruments based on the borrowing rates
currently available to the Company for loans with similar terms and maturities.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires that the Company make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates. Management
believes its estimates are reasonable.
NOTE 3-FIXED ASSETS
Fixed assets consist of the following:
December 31,
--------------------------
1998 1997
---------- ---------
Furniture and Fixtures $ 37,442 $ 29,914
Computers and Office Equipment 84,904 31,764
Other 21,143 -
---------- ---------
143,489 61,678
Less Accumulated Depreciation (53,978) (14,807)
---------- ---------
Fixed Assets, Net 89,511 46,871
========== =========
NOTE 4- OIL AND GAS PROPERTIES
The Company's investment in oil and gas properties has been made pursuant
to an Exploration Agreement between Cheniere Operating and Zydeco Exploration,
Inc. ("Zydeco"), an operating subsidiary of Zydeco Energy, Inc. (the
"Exploration Agreement"). The Exploration Agreement defines a proprietary 3-D
seismic exploration project in southern Louisiana (the "3-D Exploration
Program"). The 3-D seismic survey covers 228 square miles
27
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
within a 310 square-mile area running three to five miles north and generally
eight miles south of the coastline in the most westerly 28 miles of Cameron
Parish, Louisiana.
As of December 31, 1997, August 31, 1997, and August 31, 1996, payments
made by Cheniere to Zydeco relative to the 3-D Exploration Program totaled
$16,427,000, $13,500,000 and $4,000,000, respectively. As the result of its cash
payments through December 31, 1997, the Company earned a 50% interest in the 3-D
Exploration Program. Under the terms of the Exploration Agreement and its
amendments, additional payments will be required as prospects are generated
within the 3-D Exploration Program. The Company's level of participation in such
prospects will depend upon its making such required payments when due.
The Company's financial statements reflect its proportionate interest in
the revenues, costs, expenses, and capital with respect to the 3-D Exploration
Program. Because the exploration project had not reached the drilling phase as
of December 31, 1998, a determination had not yet been made as to the extent of
any oil and gas reserves that should be classified as proved. Consequently, all
of the Company's oil and gas property costs are classified as unevaluated and
are not yet subject to depreciation, depletion and amortization. The Company
estimates that during 1999 a portion of these costs will become evaluated and
subject to depreciation, depletion and amortization as well as subject to the
ceiling test limitations on capitalized costs described in Note 2.
NOTE 5-NOTES PAYABLE
December 1997 - $4,000,000 Bridge Financing
In December 1997, Cheniere completed the private placement of a $4,000,000
bridge financing (the "December 1997 Bridge Financing"). The notes payable
issued by Cheniere had an initial maturity date of March 15, 1998, which was
extended to September 15, 1998 and further extended to January 15, 1999. In
December 1998, Cheniere received commitments from certain noteholders to
exchange notes payable for an aggregate of 2,812,528 shares of Cheniere common
stock at a price of $0.72 per share. Accordingly, the $2,025,020 face amount of
the exchanged notes is classified as a long-term obligation as of December 31,
1998. For those notes which were not exchanged for common stock, the maturity
date has been extended to April 15, 1999. The notes bear interest at a rate of
LIBOR plus 4% (ranging from 9.5% to 9.9% through December 31, 1998). The
securities purchase agreements which govern such bridge financing specify that,
during the term of the notes, capital raised by the Company in excess of
$5,000,000 must be directed to repayment of the notes.
In connection with the December 1997 Bridge Financing, Cheniere issued
100,000 shares of common stock and four-year warrants to purchase 1,333,334
shares of common stock at $2-3/8 per share. Additional warrants to purchase
1,600,000 shares of Cheniere common stock were issued on September 15, 1998 in
consideration for the extension to that date. In connection with the extension
to January 15, 1999, the Company offered two alternatives of consideration.
Holders of $3,000,000 of the notes elected to reduce the exercise price of their
warrants to $1.50. The holder of $1,000,000 of the notes elected to reduce the
exercise price of its warrants to $2.00 per share, to extend the term of such
warrants to five years from the latter of September 15, 1998 or the date of
issue, to receive additional warrants to purchase 387,500 shares of common stock
and to receive 50,000 shares of common stock. In January 1999, the maturity
date was extended to March 15, 1999. In March 1999, the maturity date was
extended to April 15, 1999. As consideration for the extension to April 15,
1999, the Company reduced the exercise price by $0.25 per share for all warrants
issued in connection with the issuance or extensions of the notes. The common
stock issued in connection with the December 1997 closing and the September 1998
extension was recorded as a debt issuance cost at the then-market price for the
shares.
June 1998 - $180,000 Bridge Notes
In June 1998, the Company issued $180,000 in short-term notes with
detachable warrants to purchase 83,334 shares of common stock at an exercise
price of $2.00 per share on or before June 4, 2002. Such notes bore interest at
LIBOR plus 4% (9.7%) and matured on August 14, 1998. After extensions to dates
on or about August 31, 1998, the notes were repaid in full.
July 1997 - $500,000 Notes Payable - Related Party
On July 31, 1997, Cheniere Operating borrowed $500,000 from Sam B. Myers,
Jr., Chairman of Zydeco Energy, Inc., evidenced by a promissory note bearing
interest at 10% per annum and due on August 29, 1997. On August 28, 1997, the
maturity date was extended to September 29, 1997. The Company repaid the
$500,000 promissory note, including all accrued interest, on September 22, 1997.
28
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6-INCOME TAXES
From its inception the Company has recorded losses for both financial
reporting purposes and for federal income tax reporting purposes. Accordingly,
the Company is not presently a taxpayer and has not recorded a provision for
income taxes in any of the periods presented in the accompanying financial
statements.
At December 31, 1998, the Company had net operating loss ("NOL")
carryforwards for tax reporting purposes of approximately $4,571,000. In
accordance with SFAS No. 109, a valuation allowance equal to the tax benefit for
deferred taxes has been established due to the uncertainty of realizing the
benefit of such NOL carryforwards.
Deferred tax assets and liabilities reflect the net tax effect of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities at December 31,
1998 and 1997 are as follows:
December 31,
--------------------------
Deferred Tax Assets 1998 1997
------------ ----------
NOL Carryforwards $ 1,554,000 $ 997,000
Less: Valuation Allowance (1,554,000) (997,000)
------------ ----------
Net Deferred Tax Assets $ - $ -
============ ==========
Net operating loss carryforwards expire starting in 2006 extending through
2013. Per year availability of losses incurred prior to July 3, 1996 of
approximately $747,000 is subject to change of ownership limitations under
Internal Revenue Code Section 382.
NOTE 7-WARRANTS
As of December 31, 1998 the Company has issued and outstanding 4,703,334
and 2/3 warrants. The Company has reserved an equal number of shares of common
stock for issuance upon the exercise of its outstanding warrants. Warrants
issued by the Company do not confer upon the holders thereof any voting or other
rights of a stockholder of the Company. The issuances and terms of the warrants
are described below.
December 1997 Bridge Financing Warrants
In connection with Cheniere's $4,000,000 December 1997 Bridge Financing
(Note 5), the Company issued warrants to purchase 1,333,334 shares of common
stock at $2-3/8 per share. Additional warrants to purchase 1,600,000 shares of
Cheniere common stock were issued on September 15, 1998 in consideration for the
extension to that date. In connection with the extension to January 15, 1999,
the Company offered two alternatives of consideration. Holders of warrants to
purchase 2,200,000 shares of common stock elected to reduce the exercise price
of their warrants to $1.50. The holder of warrants to purchase 733,334 shares
of common stock elected to reduce the exercise price of its warrants to $2.00
per share, to extend the term of such warrants to five years from the latter of
September 15, 1998 or the date of issue, to receive additional warrants to
purchase 387,500 shares of common stock and to receive 50,000 shares of common
stock. In January 1999, the maturity date was extended to March 15, 1999. In
March 1999, the maturity date was extended to April 15, 1999. As consideration
for the extension to April 15, 1999, the Company reduced the exercise price by
$0.25 per share for all warrants issued in connection with the issuance or
extensions of the notes. Pursuant to APB Opinion No. 14, the warrants have been
valued at the differential between the stated interest rate (LIBOR plus 4%) and
the Company's then-estimated market interest rate (20%), applied to the
principal balance outstanding for the initial term of the notes and the term
29
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of the extension for which shares were issued as consideration. These amounts
($420,494 in the aggregate) have been credited to additional paid-in capital and
recorded as interest expense, which has been capitalized to oil and gas
properties ($403,661 in the year ended December 31, 1998 and $16,833 in the
four-month period ended December 31, 1997).
Unit Warrants
In August, September, November, and December 1998, the Company sold
1,950,000 units, each such unit consisting of one share of common stock and one-
half warrant to purchase one share of common stock. Each such warrant is
exercisable within two years from the date of issue at an exercise price of
$2.00 per share.
Adviser Warrants
In consideration of certain investment advisory and other services to the
Company, and pursuant to warrant agreements, each dated as of August 21, 1996,
the Company issued warrants to purchase 13,600 and 54,400 shares of common
stock, (collectively the "Adviser Warrants"). The Adviser Warrants are
exercisable at any time on or before May 15, 1999, at an exercise price of $3.00
per share. The exercise price represents the approximate market price of the
underlying common stock at the time of the transaction.
June Warrants
In conjunction with the issuance of the $425,000 in notes payable, the
Company issued and continues to have outstanding 141,666 and 2/3 warrants
(collectively, the "June Warrants"), each of which entitles the registered
holder thereof to purchase one share of common stock. The June Warrants are
exercisable at any time on or before June 14, 1999, at an exercise price of
$3.00 per share. The exercise price was determined at a 100% premium to the
sales price of Cheniere stock by private placement during May 1996. The June
Warrants were originally issued by Cheniere and were converted to warrants of
Cheniere following the Reorganization. The June Warrants were issued to a group
of eleven investors in connection with a private placement of unsecured
promissory notes. Pursuant to APB Opinion No. 14, the warrants issued have been
valued at the differential rate between the initial interest rate (8%) and the
Company's then-estimated market rate (20%), applied to the outstanding principal
balance. This value, $12,750, has been credited to additional paid-in capital
and charged to interest expense for the period ended August 31, 1996.
Effective September 14, 1996, the Company had not paid all amounts due and
payable under the notes by the Maturity Date. Certain of the noteholders
converted their notes into 105,000 shares of common stock. One of the
noteholders purchased the promissory notes of the remaining noteholders. As per
the terms of the notes, the holder was entitled to receive up to an aggregate of
21,500 additional warrants for each month, or partial month, any amounts
remained due and payable after September 14, 1996, up to a maximum aggregate
number of 86,000 such additional warrants. These notes were repaid on
December 14, 1996, and upon repayment the Company issued 64,500 warrants in
accordance with the loan agreement. The terms of the warrants are similar to the
June Warrants. Pursuant to APB Opinion No. 14, these additional warrants have
been valued at the differential rate between the rate charged (13%) and the
Company's then-estimated market rate (25%), applied to the principal balance for
each month outstanding after September 14, 1996. This value, $6,450, has been
credited to additional paid-in capital and charged to interest expense for the
period ended August 31, 1997.
Commission Warrants
In connection with the July and August 1996 placement of 508,400 shares of
common stock, the Company issued warrants to purchase 12,500 shares of common
stock to one of two distributors who placed the shares. Such warrants are
exercisable on or before the second anniversary of the sale of the shares of
common stock at an exercise price of $3.125 per share. The exercise price
represents the approximate market price of the underlying common stock at the
time of the transaction.
30
<PAGE>
CHENIERE ENERGY, INC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8-STOCK OPTIONS
In 1997 the Company established the Cheniere Energy, Inc. 1997 Stock Option
Plan (the "Option Plan"). The Option Plan allows for the issuance of options to
purchase up to 950,000 shares of Cheniere common stock, and the Company has
reserved 950,000 shares of common stock for issuance upon the exercise of
options which have been granted or which may be granted. The term of options
granted under the Option Plan is generally five years. The vesting schedule
varies, but vesting generally occurs over four years, 25% on each anniversary of
the grant date. Grants made by the Company are summarized in the following
table:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Outstanding at beginning of period 539,444.67 319,444.67
Options granted at an exercise price of $3.00 per share 135,000.00 220,000.00
Options granted at an exercise price of $1.50 per share 12,000.00 -
Options canceled - -
----------- -----------
Outstanding at end of period 686,444.67 539,444.67
=========== ===========
Exercisable at end of period 320,694.67 131,944.67
=========== ===========
Weighted average exercise price of options outstanding $ 1.68 $ 2.96
=========== ===========
Weighted average exercise price of options exercisable $ 1.67 $ 2.82
=========== ===========
Weighted average fair value of options granted during the period $ 0.79 na
=========== ===========
Weighted average remaining contractual life of options outstanding 3.4 years 4.0 years
</TABLE>
The following table summarizes information about fixed options
outstanding at December 31, 1998.
Weighted Average
Exercise Number Remaining
Prices Outstanding Contractual Life
-------- ----------- ----------------
$1.50 587,000.00 4.9
$1.80 19,444.67 3.2
$3.00 80,000.00 4.0
The fair value of options is calculated using the Black-Scholes option
pricing model. Assumptions used for the year ended December 31, 1998 were: no
dividend yield, weighted average volatility of 88%, risk-free interest rate of
4.6% and a 2.5 year expected life of the options. The pro forma effect on the
Company's net loss had it adopted the optional recognition provisions of SFAS
No. 123 for 1998 would be to increase the reported net loss by $155,000 or $0.01
per share (both basic and diluted). The disclosure only provisions of SFAS
No. 123 for periods earlier than 1998 do not have a material effect on the
Company's financial statements.
On December 11, 1998, the Company adjusted the exercise price from $3.00 to
$1.50 per share for the 575,000 options then issued and outstanding to
management and employees.
NOTE 9-SUBSCRIPTIONS RECEIVABLE
At December 31, 1998, the Company had received and accepted a subscription
for the purchase of 666,667 shares of common stock at a price of $0.75 per
share. Funding of the stock sale took place on January 6, 1999.
31
<PAGE>
CHENIERE ENERGY, INC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10-RELATED PARTY TRANSACTIONS
The Company's $4,000,000 December 1997 Bridge Financing included two
tranches: one domestic and one European. In conjunction with the European
tranche, BSR Investments, Ltd., a major stockholder of the Company controlled by
the mother of Charif Souki, Co-Chairman of Cheniere, purchased $2,000,000 of the
notes and pledged a portion of its investment in Cheniere common stock to fund
its participation. In conjunction with the financing, BSR received warrants to
purchase 166,667 shares of the Company's common stock. On September 15, 1998,
BSR received warrants to purchase an additional 400,000 shares of common stock
as consideration for extending the maturity of the notes to that date. Also in
September 1998, the exercise price of the warrants held by BSR was reduced from
$2.375 to $1.50 per share as consideration to extend the maturity date of the
notes to January 15, 1999. In December 1998, BSR agreed to exchange notes
payable of $2,000,000 for 2,777,778 shares of Cheniere common stock ($0.72 per
share).
In conjunction with certain of the Company's private placements of equity,
placement fees have been paid to Investors Administration Services, Limited
("IAS"), a company in which the brother of Charif Souki, Cheniere's Co-Chairman,
is a principal. Placement fees paid to IAS totaled $138,000 for the year ended
December 31, 1998 and $255,000 for the year ended August 31, 1997. Such
payments were recorded as offering costs and reflected as a reduction of
additional paid-in capital.
During June 1998, the Company received and repaid short-term advances from
Co-Chairman of the Board, William D. Forster, and members of his family or
entities under their control, totaling $592,000. Interest was paid at LIBOR
plus 4% and totaled $1,622. In addition, non-interest bearing, short-term
advances totaling $105,000 were made to the Company by Co-Chairman Forster
($75,000) and BSR ($30,000) in October and November 1998. Such advances were
repaid by the Company in October and November 1998.
NOTE 11-COMMITMENTS AND CONTINGENCIES
The Company subleased its Houston, Texas headquarters from Zydeco under a
month-to-month sublease until March 1998. In March 1998, the Company terminated
its sublease from Zydeco for office space and entered into a lease for 2,678
square feet of office space from an unrelated third party at a monthly rental of
$4,190. The term of the lease is six years. In February 1999, Cheniere amended
its office lease agreement to cover a total of 12,102 square feet with a monthly
rental of $19,612.
Rent expense recorded in the financial statements is as follows:
<TABLE>
<CAPTION>
Four-Month Period Ended
Year Ended Period Ended August 31,
December 31, December 31, --------------------------
1998 1997 1997 1996
------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
Office Rental (including parking) $ 52,558 $ 6,887 $ 22,403 $ 3,884
Other Rental Property (terminated June 1997) - - 48,000 13,920
------------ ------------ ---------- ------------
$ 52,558 $ 6,887 $ 70,403 $ 17,804
============ ============ ========== ============
</TABLE>
32
<PAGE>
CHENIERE ENERGY, INC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12-SUBSEQUENT EVENTS
In January 1999, Cheniere sold for $658,000 a 15% working interest in each
of three prospects and an option for the same company to participate in three
additional prospects. Cheniere also sold for $275,000 a seismic option covering
three more prospects within the Survey AMI. In February 1999, the Company
commenced drilling a test well on the first prospect of its exploration program.
On March 26, 1999, the Company abandoned its completion attempt on the first
well and began drilling a test well on its second prospect.
On February 2, 1999 and March 15, 1999, the Company issued 2,812,528 shares
of common stock in exchange for certain notes payable with an aggregate face
amount of $2,025,020.
NOTE 13-MANAGEMENT'S PLANS AND CONTINUED CAPITAL RAISING ACTIVITIES
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Cheniere is a
development stage company which has not yet generated any operating revenues.
At various times during the life of the Company to date, it has been necessary
for the Company to raise additional capital through private placements of debt
or equity financing. When such a need has arisen, the Company has met it
successfully. It is management's belief that it will continue to be able to
meet its needs for additional capital as such needs arise in the future.
At December 31, 1998, the Company had $4,000,000 outstanding in senior term
notes payable which matured on January 15, 1999. These notes were issued as
part of a bridge financing in conjunction with an offering of units comprised of
preferred stock and warrants to purchase common stock. The units offering was
subsequently withdrawn. The Company has issued 2,812,528 shares of common stock
in exchange for notes totaling $2,025,020. The remaining notes have been
extended and mature on April 15, 1999. Cheniere intends to raise additional
capital for the repayment of the notes through the sale of common stock.
In the event that the Company should not be successful in future efforts to
raise capital for its operations, management believes that trades or sales of
partial interests to industry partners would be utilized to explore and develop
the Company's oil and gas properties, but the ownership interest which would be
retained by the Company would be reduced accordingly.
33
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required to be presented under this item, concerning the
Company's change in certifying accountants, is incorporated by reference to the
Current Report on Form 8-K filed by the Company on May 22, 1998.
PART III
In accordance with paragraph (3) of General Instruction G to form 10-K,
Part III of this Report is omitted because the Company will file with the
Securities and Exchange Commission not later than 120 days after the end of the
fiscal year ended December 31, 1998 a definitive proxy statement pursuant to
Regulation 14A involving the election of directors, which proxy statement is
incorporated herein by reference (with the exception of certain portions noted
therein that are not so incorporated by reference).
34
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Schedules and Exhibits
(1) Financial Statements
Report of Independent Accounts................... 19
Consolidated Balance Sheet....................... 20
Consolidated Statement of Operations............. 21
Consolidated Statement of Stockholders' Equity... 22
Consolidated Statement of Cash Flows............. 24
Notes to Consolidated Financial Statements....... 25
(2) Financial Statement Schedule
All consolidated financial statement schedules have been omitted
because they are not required, are not applicable, or the information
has been included elsewhere.
(3) Exhibits
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of Cheniere
Energy, Inc. ("Cheniere") (Incorporated by reference to
Exhibit 3.1 of the Company's Registration Statement on Form S-1
filed on August 27, 1996 (File No. 333-10905))
3.2 By-laws of Cheniere as amended through April 7, 1997
4.1 Specimen Common Stock Certificate of Cheniere (Incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement
on Form S-1 filed on August 27, 1996 (File No. 333-10905))
10.1 Exploration Agreement between FX Energy, Inc. (now known as
Cheniere Energy Operating Co., Inc. ("Cheniere Operating")) and
Zydeco Exploration, Inc. ("Zydeco") (Incorporated by reference to
Exhibit 10.1 of the Company's Registration Statement under the
Securities Act of 1933 on Form S-1 filed on August 27, 1996 (File
No. 333-10905))
10.2 First Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco (Incorporated
by reference to Exhibit 10.2 of the Company's Registration
Statement on Form S-1 filed on August 27, 1996 (File
No. 333-10905))
10.3 Second Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco (Incorporated
by reference to Exhibit 10.3 of the Company's Registration
Statement on Form S-1 filed on August 27, 1996 (File
No. 333-10905))
10.4 Third Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco (Incorporated
by reference to Exhibit 10.4 of the Annual Report on Form 10-K
filed on November 27, 1996 (File No. 2-63115))
10.5 Form of Noteholders Agreement between Cheniere and the holders of
promissory notes in the aggregate principal amount of $425,000
(Incorporated by reference to Exhibit 10.4 of the Company's
Registration Statement on Form S-1 filed on August 27, 1996 (File
No. 333-10905))
10.6 Asset Transfer, Assignment and Assumption Agreement between Bexy
Communications, Inc. and Mar Ventures, Inc. (Incorporated by
reference to Exhibit 10.6 of the Company's Registration Statement
on Form S-1 filed on August 27, 1996 (File No. 333-10905))
10.7 Indemnification Agreement between Buddy Young, Cheniere, Cheniere
Operating and the shareholders of Cheniere Operating named
therein (Incorporated by reference to Exhibit 10.7 of the
Company's Registration Statement on Form S-1 filed on August 27,
1996 (File No. 333-10905))
35
<PAGE>
10.8 Form of Warrant Agreement between Cheniere and each of C.M.
Blair, W.M. Foster & Co., Inc. and Redliw Corp. (Incorporated by
reference to Exhibit 10.8 of the Company's Registration Statement
on Form S-1 filed on August 27, 1996 (File No. 333-10905))
10.9 Fourth Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco (Incorporated
by reference to Exhibit 10.12 of the Company's Registration
Statement on Form S-1 filed on March 17, 1997 (File
No. 333-23421))
10.10 Form of Letter Agreement between Cheniere and certain purchasers
of Common Stock pursuant to Regulation S (Incorporated by
reference to Exhibit 10.13 of the Company's Registration
Statement on Form S-1 filed on March 17, 1997 (File
No. 333-23421))
10.11 Form of Warrant Agreement between Cheniere and Reefs & Co., Ltd.
(Incorporated by reference to Exhibit 10.16 of the Annual Report
on Form 10-K filed on October 14, 1997 (File No. 0-9092))
10.12 Form of Warrant Agreement governing warrants issued pursuant to
Noteholders Agreement (Incorporated by reference to Exhibit 10.17
of the Annual Report on Form 10-K filed on October 14, 1997 (File
No. 0-9092))
10.13 Fifth Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco (Incorporated
by reference to Exhibit 10.18 of the Annual Report on Form 10-K
filed on October 14, 1997 (File No. 0-9092))
10.14 Sixth Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco (Incorporated
by reference to Exhibit 10.19 of the Annual Report on Form 10-K
filed on October 14, 1997 (File No. 0-9092))
10.15 10.21 10.22 10.23 Seventh Amendment to the Exploration
Agreement between FX Energy, Inc. (now known as Cheniere
Operating) and Zydeco (Incorporated by reference to Exhibit 10.23
of the Annual Report on Form 10-K filed on October 14, 1997 (File
No. 0-9092))
10.16 Cheniere Energy, Inc. 1997 Stock Option Plan (Incorporated by
reference to Exhibit 10.25 of the Quarterly on Form 10-Q filed on
January 14, 1998 (File No. 0-9092))
10.17 Eighth Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco (Incorporated
by reference to Exhibit 10.26 of the Transition Report in
Form 10-K for the period from September 1, 1997 to December 31,
1997 (File No. 0-9092))
10.18 Form of Securities Purchase Agreement dated December 15, 1997
(Incorporated by reference to Exhibit 10.27 of the Transition
Report in Form 10-K for the period from September 1, 1997 to
December 31, 1997 (File No. 0-9092))
10.19 Form of First Amendment to Securities Purchase Agreement dated
December 15, 1997 (Incorporated by reference to Exhibit 10.28 of
the Transition Report in Form 10-K for the period from
September 1, 1997 to December 31, 1997 (File No. 0-9092))
10.20 Securities Purchase Agreement among Cheniere, Arabella S.A., Alba
Limited and Scorpion Energy Partners dated December 15, 1997
(Incorporated by reference to Exhibit 10.29 of the Transition
Report in Form 10-K for the period from September 1, 1997 to
December 31, 1997 (File No. 0-9092))
10.21 Letter Agreement between Cheniere and Zydeco dated December 31,
1997 (Incorporated by reference to Exhibit 10.30 of the
Transition Report in Form 10-K for the period from September 1,
1997 to December 31, 1997 (File No. 0-9092))
10.22 Services Agreement dated October 1, 1998 between Cheniere and
Charif Souki
10.23 Form of Second Amendment to Securities Purchase Agreement dated
December 15, 1997
10.24 Form of Third Amendment to Securities Purchase Agreement dated
December 15, 1997
10.25 Form of Fourth Amendment to Securities Purchase Agreement dated
December 15, 1997
10.26 Form of Fifth Amendment to Securities Purchase Agreement dated
December 15, 1997
10.27 Exchange Agreement between Cheniere and BSR Investments, Ltd.
21.1 Subsidiaries of Cheniere Energy, Inc. (Incorporated by reference
to Exhibit 21.1 of the Annual Report on Form 10-K filed on
October 14, 1997 (File No. 0-9092))
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
36
<PAGE>
(b) Reports On Form 8-K
The Company filed a Current Report on Form 8-K on December 14,
1998, regarding its binding award from an independent panel of arbitrators.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHENIERE ENERGY, INC.
By: /s/ WALTER L. WILLIAMS
-----------------------
Walter L. Williams
President and Chief Executive Officer
Date: March 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C>
/s/ WILLIAM D. FORSTER Co-Chairman of the Board March 26, 1999
- ----------------------
William D. Forster
/s/ CHARIF SOUKI Co-Chairman of the Board March 26, 1999
- ----------------
Charif Souki
/s/ WALTER L. WILLIAMS President and Chief Executive Officer, March 26, 1999
- ---------------------- Director
Walter L. Williams
/s/ DON A. TURKLESON Chief Financial Officer, Secretary and March 26, 1999
- -------------------- Treasurer
Don A. Turkleson
/s/ MICHAEL L. HARVEY Director March 26, 1999
- ---------------------
Michael L. Harvey
/s/ KENNETH R. PEAK Director March 26, 1999
- -------------------
Kenneth R. Peak
/s/ CHARLES M. REIMER Director March 26, 1999
- ---------------------
Charles M. Reimer
/s/ EFREM ZIMBALIST, III. Director March 26, 1999
- -------------------------
Efrem Zimbalist, III
</TABLE>
38
<PAGE>
EXHIBIT 3.2
_____________________________________
BY-LAWS
OF
CHENIERE ENERGY, INC.
_____________________________________
As amended by the Board of
Directors by resolutions
through April 7, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C> <C>
ARTICLE I. OFFICES......................................................... 1
SECTION 1.1. Registered Office............................................... 1
SECTION 1.2. Other Offices................................................... 1
ARTICLE II. MEETING OF STOCKHOLDERS......................................... 1
SECTION 2.1. Annual Meetings................................................. 1
SECTION 2.2. Special Meetings................................................ 1
SECTION 2.3. Notice of Meetings.............................................. 1
SECTION 2.4. Waiver of Notice................................................ 2
SECTION 2.5. Adjournments.................................................... 2
SECTION 2.6. Quorum.......................................................... 3
SECTION 2.7. Voting.......................................................... 3
SECTION 2.8. Proxies......................................................... 3
SECTION 2.9. Stockholders' Consent in Lieu of Meeting........................ 3
ARTICLE III. BOARD OF DIRECTORS.............................................. 4
SECTION 3.1. General Powers.................................................. 4
SECTION 3.2. Number and Term of Office....................................... 4
SECTION 3.3. Resignation..................................................... 4
SECTION 3.4. Removal......................................................... 4
SECTION 3.5. Vacancies....................................................... 4
SECTION 3.6. Meetings........................................................ 4
SECTION 3.7. Committees of the Board......................................... 5
SECTION 3.8. Directors' Consent in Lieu of Meeting........................... 6
SECTION 3.9. Action by Means of Telephone or Similar Communications Equipment 6
SECTION 3.10. Compensation.................................................... 6
ARTICLE IV. OFFICERS........................................................ 7
SECTION 4.1. Officers........................................................ 7
SECTION 4.2. Authority and Duties............................................ 7
SECTION 4.3. Term of Office, Resignation and Removal......................... 7
SECTION 4.4. Subordinate Officers............................................ 7
SECTION 4.5. Vacancies....................................................... 7
SECTION 4.6. The Chairman.................................................... 7
SECTION 4.7. The Vice-Chairman............................................... 8
SECTION 4.8. The President................................................... 8
SECTION 4.9. Vice Presidents................................................. 8
SECTION 4.10. The Secretary................................................... 8
SECTION 4.11. Assistant Secretaries........................................... 8
SECTION 4.12. The Treasurer................................................... 8
SECTION 4.13. Assistant Treasurers............................................ 9
SECTION 4.14. Compensation.................................................... 9
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
------
<S> <C> <C>
SECTION 4.15. Interested Directors; Quorum.................................... 9
ARTICLE V. SHARES AND TRANSFERS OF SHARES.................................. 10
SECTION 5.1. Certificates Evidencing Shares.................................. 10
SECTION 5.2. Stock Ledger.................................................... 10
SECTION 5.3. Transfers of Shares............................................. 10
SECTION 5.4. Addresses of Stockholders....................................... 10
SECTION 5.5. Lost, Destroyed and Mutilated Certificates...................... 10
SECTION 5.6. Regulations..................................................... 11
SECTION 5.7. Fixing Date for Determination of Stockholders of Record......... 11
ARTICLE VI. SEAL............................................................ 11
SECTION 6.1. Seal............................................................ 11
ARTICLE VII. FISCAL YEAR..................................................... 11
SECTION 7.1. Fiscal Year..................................................... 11
ARTICLE VIII. VOTING OF SHARES IN OTHER CORPORATIONS.......................... 11
SECTION 8.1. Voting of Shares in Other Corporations.......................... 11
ARTICLE IX INDEMNIFICATION AND INSURANCE................................... 11
SECTION 9.1. Indemnification................................................. 11
SECTION 9.2. Insurance for Indemnification................................... 13
ARTICLE X. AMENDMENTS...................................................... 14
SECTION 10.1. Amendments...................................................... 14
</TABLE>
ii
<PAGE>
BY-LAWS
OF
CHENIERE ENERGY, INC.
ARTICLE I.
OFFICES
SECTION 1.1. Registered Office. Unless and until otherwise determined by
the Board of Directors of Cheniere Energy, Inc. (the "Corporation"), the
registered office of the Corporation in the State of Delaware shall be at the
office of Corporation Service Company, 1013 Centre Road, City of Wilmington
19805, County of New Castle and the registered agent in charge thereof shall be
Corporation Service Company.
SECTION 1.2. Other Offices. The Corporation may also have an office or
offices at any other place or places within or without the State of Delaware as
the Board of Directors of the Corporation (the "Board") may from time to time
determine or the business of the Corporation may from time to time require.
ARTICLE II.
MEETING OF STOCKHOLDERS
SECTION 2.1. Annual Meetings. The annual meeting of stockholders of the
Corporation for the election of directors of the Corporation ("Directors") and
for the transaction of such other business as may properly come before such
meeting, shall be held at such place, date and time as shall be fixed by the
Board and designated in the notice or waiver of notice of such annual meeting;
provided, however, that no annual meeting of stockholders need be held if all
actions, including the election of Directors, required by the General
Corporation Law of the State of Delaware (the "General Corporation Law") to be
taken at such annual meeting are taken by written consent in lieu of meeting
pursuant to Section 2.09 hereof.
SECTION 2.2. Special Meetings. Special meetings of stockholders for any
purpose or purposes may be called by the Board or the Chairman of the Board, the
Vice-Chairman, the President or the Secretary of the Corporation or by the
recordholders of at least a majority of the shares of common stock of the
Corporation issued and outstanding ("Shares") and entitled to vote thereat, to
be held at such place, date and time as shall be designated in the notice or
waiver of notice thereof.
SECTION 2.3. Notice of Meetings. (a) Except as otherwise provided by law,
written notice of each annual or special meeting of stockholders stating the
place, date and time of such meeting and, in the case of a special meeting, the
purpose or purposes for which such meeting is to be held, shall be given
personally or by first-
1
<PAGE>
class mail (airmail in the case of international communications) to each
recordholder of Shares (a "Stockholder") entitled to vote thereat, not less than
10 nor more than 60 days before the date of such meeting. If mailed, such notice
shall be deemed to be given when deposited in the United States mail, postage
prepaid, directed to the Stockholder at such Stockholder's address as it appears
on the records of the Corporation. If, prior to the time of transmittal of
notice, the Secretary of the Corporation (the "Secretary") shall have received
from any Stockholder a written request that notices intended for such
Stockholder are to be transmitted to some address other than the address that
appears on the records of the Corporation, notices intended for such Stockholder
shall be transmitted to the address designated in such request.
(b) Notice of a special meeting of Stockholders may be given by the
person or persons calling the meeting, or, upon the written request of such
person or persons, such notice shall be given by the Secretary on behalf of such
person or persons. If the person or persons calling a special meeting of
Stockholders give notice thereof, such person or persons shall deliver a copy of
such notice to the Secretary. Each request to the Secretary for the giving of
notice of a special meeting of Stockholders shall state the purpose or purposes
of such meeting.
(c) Whenever notice is required to be given under any statute or the
Certificate of Incorporation of the Corporation (the "Certificate of
Incorporation") or these Bylaws to any Stockholder to whom (1) notice of two
consecutive annual meetings, and all notice of meetings or of the taking of
action by written consent without a meeting to such person during the period
between such two consecutive annual meetings or (2) all, and at least two,
payments (if sent by first class mail) of dividends or interest on securities
during a twelve month period, have been mailed addressed to such person at his
address as shown on the records of the Corporation and have been returned
because undeliverable, the giving of notice to such person shall not be
required. Any action or meeting which shall be taken or held without notice to
such person shall have the same force and effect as if such notice had been duly
given. If any such person shall deliver to the Corporation a written notice
setting forth his then current address, the requirement that notice to such
person shall have the same force and effect as if such notice be given to such
person shall be reinstated. In the event that the action taken by the
Corporation is such as to require the filing of a certificate under any of the
other sections of the General Corporation Law, the certificate need not state
that notice was not given to persons to whom notice was not required to be given
pursuant to this Section 2.03(c).
SECTION 2.4. Waiver of Notice. Notice of any annual or special meeting of
Stockholders need not be given to any Stockholder who files a written waiver of
notice with the Secretary, signed by the person entitled to notice, whether
before or after such meeting. Neither the business to be transacted at, nor the
purpose of, any meeting of Stockholders need be specified in any written waiver
of notice thereof. Attendance of a Stockholder at a meeting, in person or by
proxy, shall constitute a waiver of notice of such meeting, except when such
Stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business on the grounds that
the notice of such meeting was in adequate or improperly given.
SECTION 2.5. Adjournments. Any Stockholders' meeting, annual or special,
whether or not a quorum (as defined in Section 2.06 hereinafter) is present, may
be adjourned by vote of a majority of the shares present, either in person or by
proxy.
2
<PAGE>
Whenever a meeting of Stockholders, annual or special, is adjourned to another
date, time or place, notice need not be given of the adjourned meeting if the
date, time and place thereof are announced at the meeting at which the
adjournment is taken. If the adjournment is for more than 30 days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each Stockholder entitled to vote
thereat. At the adjourned meeting, any business may be transacted which might
have been transacted at the original meeting.
SECTION 2.6. Quorum. Except as otherwise provided by law or the
Certificate of Incorporation, the recordholders of a majority of the Shares
entitled to vote thereat, present in person or by proxy, shall constitute a
quorum for the transaction of business at all meetings of Stockholders, whether
annual or special. If, however, such quorum shall not be present in person or
by proxy at any meeting of Stockholders, the meeting may be adjourned from time
to time in accordance with Section 2.05 hereof until a quorum shall be present
in person or by proxy. On all questions, the Stockholders present at a duly
called or held meeting at which a quorum is present may continue to do business
until adjournment, notwithstanding the withdrawal of enough Stockholders to
leave less than a quorum, if any action taken (other than adjournment) is
approved by a number of shares which would otherwise constitute a majority of a
quorum.
SECTION 2.7. Voting. Each Stockholder shall be entitled to one vote for
each Share held of record by such Stockholder. Except as otherwise provided by
law or the Certificate of Incorporation, when a quorum is present at any meeting
of Stockholders, the vote of the recordholders of a majority of the Shares
constituting such quorum shall decide any question brought before such meeting.
SECTION 2.8. Proxies. Each Stockholder entitled to vote at a meeting of
Stockholders or to express, in writing, consent to or dissent from any action of
Stockholders without a meeting may authorize another person or persons to act
for such Stockholder by proxy. Such proxy shall be filed with the Secretary
before such meeting of Stockholders or such action of Stockholders without a
meeting, at such time as the Board may require. No proxy shall be voted or
acted upon more than three years from its date, unless the proxy provides for a
longer period.
SECTION 2.9. Stockholders' Consent in Lieu of Meeting. Except as may
otherwise be provided by law or in the Certificate of Incorporation, any action
required by the General Corporation Law to be taken at any annual or special
meeting of Stockholders, and any action which may be taken at any annual or
special meeting of Stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by the recordholders of Shares having not less than the
minimum number of votes necessary to authorize or take such action at a meeting
at which the recordholders of all Shares entitled to vote thereon were present
and voted.
3
<PAGE>
ARTICLE III.
BOARD OF DIRECTORS
SECTION 3.1. General Powers. Except as may otherwise be provided bylaw or
in the Certificate of Incorporation, the business and affairs of the Corporation
shall be managed by the Board, which may exercise all such powers of the
Corporation and do all such lawful acts and things as are not by law, the
Certificate of Incorporation or these By-laws directed or required to be
exercised or done by Stockholders.
SECTION 3.2. Number and Term of Office. The number of Directors shall be
seven or such other number as shall be fixed from time to time by the Board.
Directors need not be Stockholders. Directors shall be elected at the annual
meeting of Stockholders or, if, in accordance with Section 2.01 hereof, no such
annual meeting is held, by written consent in lieu of meeting pursuant to
Section 2.09 hereof, and each Director shall hold office until his successor is
elected and qualified, or until his earlier death or resignation or removal in
the manner hereinafter provided.
SECTION 3.3. Resignation. Any Director may resign at any time by giving
written notice to the Board, the Chairman of the Board of the Corporation(the
"Chairman") or the Secretary. Such resignation shall take effect at the time
specified in such notice or, if the time be not specified, upon receipt thereof
by the Board, the Chairman or the Secretary, as the case may be. Unless
otherwise specified therein, acceptance of such resignation shall not be
necessary to make it effective.
SECTION 3.4. Removal. Any or all of the Directors may be removed, with or
without cause, at any time by vote of the recordholders of a majority of the
Shares then entitled to vote at an election of Directors, or by written consent
of the recordholders of Shares pursuant to Section 2.09 hereof.
SECTION 3.5. Vacancies. Vacancies occurring on the Board as a result of
the removal of Directors without cause may be filled only by vote of the
recordholders of a majority of the Shares then entitled to vote at an election
of Directors, or by written consent of such recordholders pursuant to Section
2.09 hereof. Vacancies occurring on the Board for any other reason, including,
without limitation, vacancies occurring as a result of the creation of new
directorships that increase the number of Directors, may be filled by such vote
or written consent or by vote of the Board or by written consent of the
Directors pursuant to Section 3.08 hereof. If the number of Directors then in
office is less than a quorum, such other vacancies may be filled by vote of a
majority of the Directors then in office or by written consent of all such
Directors pursuant to Section 3.08 hereof. Unless earlier removed pursuant to
Section 3.04 hereof, each Director chosen in accordance with this Section 3.05
shall hold office until the next annual election of Directors by the
Stockholders and until his successor shall be elected and qualified.
SECTION 3.6. Meetings. (a) Annual Meetings. As soon as practicable after
each annual election of Directors by the Stockholders, the Board shall meet for
the purpose of organization and the transaction of other business, unless it
shall have transacted all such business by written consent pursuant to Section
3.08 hereof.
4
<PAGE>
(b) Other Meetings. Other meetings of the Board shall be held at
such times as the Chairman, the Vice-Chairman, the President of the
Corporation(the "President"), the Secretary or a majority of the Board shall
from time to time determine.
(c) Notice of Meetings. The Secretary shall give written notice to
each Director of each meeting of the Board, which notice shall state the place,
date, time and purpose of such meeting. Notice of each such meeting shall be
given to each Director, if by mail, addressed to him at his residence or usual
place of business, at least five days before the day on which such meeting is to
be held, or shall be sent to him at such place by telecopy, telegraph, cable, or
other form of recorded communication, or be delivered personally or by telephone
not later than the day before the day on which such meeting is to be held. A
written waiver of notice, signed by the Director entitled to notice, whether
before or after the time of the meeting referred to in such waiver, shall be
deemed equivalent to notice. Neither the business to be transacted at, nor the
purpose of any meeting of the Board need be specified in any written waiver of
notice thereof. Attendance of a Director at a meeting of the Board shall
constitute a waiver of notice of such meeting, except as provided by law.
(d) Place of Meetings. The Board may hold its meetings at such place
or places within or without the State of Delaware as the Board or the Chairman
may from time to time determine, or as shall be designated in the respective
notices or waivers of notice of such meetings.
(e) Quorum and Manner of Acting. A majority of the total number of
Directors then in office shall be present in person at any meeting of the Board
in order to constitute a quorum for the transaction of business at such meeting,
and the vote of a majority of those Directors present at any such meeting at
which a quorum is present shall be necessary for the passage of any resolution
or act of the Board, except as otherwise expressly required by law, the
Certificate of Incorporation or these By-laws. In the absence of a quorum for
any such meeting, a majority of the Directors present thereat may adjourn such
meeting from time to time until a quorum shall be present.
(f) Organization. At each meeting of the Board, one of the following
shall act as chairman of the meeting and preside, in the following order of
precedence:
(i) the Chairman, if any;
(ii) the Vice Chairman, if any,
(iii) the President;
(iv) any Director chosen by a majority of the Directors present.
The Secretary or, in the case of his absence, any person (who shall be an
Assistant Secretary, if an Assistant Secretary is present) whom the chairman of
the meeting shall appoint shall act as secretary of such meeting and keep the
minutes thereof.
SECTION 3.7. Committees of the Board. The Board may, by resolution passed
by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more Directors. The Board may designate one or
more Directors as alternate members of any committee, who may replace any absent
or
5
<PAGE>
disqualified member at any meeting of such committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another Director to act at the
meeting in the place of any such absent or disqualified member. Any committee of
the Board, to the extent provided in the resolution of the Board designating
such committee, shall have and may exercise all the powers and authority of the
Board in the management of the business and affairs of the Corporation, and may
authorize the seal of the Corporation to be affixed to all papers which may
require it; provided, however, that no such committee shall have such power of
authority in reference to amending the Certificate of Incorporation (except that
such a committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the Board as provided
in Section 151(a) of the General Corporation Law, fix the designations and any
of the preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the Corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
of stock of the Corporation or fix the number of shares of any series of stock
or authorize the increase or decrease of the shares of any series), adopting an
agreement of merger or consolidation under Section 251 or 252 of the General
Corporation Law, recommending to the Stockholders the sale, lease or exchange of
all or substantially all the Corporation's property and assets, recommending to
the Stockholders a dissolution of the Corporation or the revocation of a
dissolution, or amending these By-laws; provided further, however, that, unless
expressly so provided in the resolution of the Board designating such committee,
no such committee shall have the power or authority to declare a dividend, to
authorize the issuance of stock, or to adopt a certificate of ownership and
merger pursuant to Section 253 of the General Corporation Law. Each committee of
the Board shall keep regular minutes of its proceedings and report the same to
the Board when so requested by the Board.
SECTION 3.8. Directors' Consent in Lieu of Meeting. Any action required or
permitted to be taken at any meeting of the Board or of any committee thereof
may be taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, shall be signed by all
the members of the Board or such committee and such consent is filed with the
minutes of the proceedings of the Board or such committee.
SECTION 3.9. Action by Means of Telephone or Similar Communications
Equipment. Any one or more members of the Board, or of any committee thereof,
may participate in a meeting of the Board or such committee by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation in a
meeting by such means shall constitute presence in person at such meeting.
SECTION 3.10. Compensation. Directors shall not receive any stated salary
for their services as directors or as members of committees, except as fixed or
determined by resolution of the Board of Directors. No such compensation or
reimbursement shall preclude any Director from serving the Corporation in any
other capacity and receiving compensation therefor.
6
<PAGE>
ARTICLE IV.
OFFICERS
SECTION 4.1. Officers. The officers of the Corporation shall be the
President, the Secretary and a Treasurer and may include a Chairman or two Co-
Chairmen, a Vice-Chairman, one or more Vice Presidents (including, one or more
Executive and/or Senior Vice Presidents), a Chief Financial Officer, one or more
Assistant Secretaries, one or more Assistant Treasurers and such other officers
as the Board may determine. Any two or more offices may be held by the same
person.
SECTION 4.2. Authority and Duties. All officers shall have such authority
and perform such duties in the management of the Corporation as may be provided
in these By-laws or, to the extent not so provided, by resolution of the Board.
SECTION 4.3. Term of Office, Resignation and Removal. (a) Each officer,
except such officers as may be appointed in accordance with the provision of
Section 4.04 or Section 4.05, shall be appointed by the Board and shall hold
office for such term as may be determined by the Board. Each officer shall hold
office until his successor has been appointed and qualified or his earlier death
or resignation or removal in the manner hereinafter provided. The Board may
require any officer to give security for the faithful performance of his duties.
(b) Any officer may resign at any time by giving written notice to
the Board, the Chairman, the President or the Secretary. Such resignation shall
take effect at the time specified in such notice or, if the time be not
specified, upon receipt thereof by the Board, the Chairman, the President or the
Secretary, as the case may be. Unless otherwise specified therein, acceptance
of such resignation shall not be necessary to make it effective.
(c) All officers and agents appointed by the Board shall be subject
to removal, with or without cause, at any time by the Board or by any officer
upon whom such power of removal may be conferred by the Board.
SECTION 4.4. Subordinate Officers. The Board may empower the President to
appoint such other officers as the business of the Corporation may require, each
of whom shall hold the office for such period, have such authority and perform
such duties as are provided in these Bylaws or as the Board or President may
from time to time determine.
SECTION 4.5. Vacancies. Any vacancy occurring in any office of the
Corporation, for any reason, shall be filled by action of the Board. Unless
earlier removed pursuant to Section 4.03 hereof, any officer appointed by the
Board to fill any such vacancy shall serve only until such time as the unexpired
term of his predecessor expires unless reappointed by the Board.
SECTION 4.6. The Chairman or Co-Chairmen. The Chairman, if one shall be
appointed, or Co-Chairmen, if they shall be appointed, shall have the power to
call special meetings of Stockholders, to call special meetings of the Board
and, if present, to preside at all meetings of Stockholders and all meetings of
the Board. The Chairman or Co-Chairmen shall perform all duties incident to the
office of Chairman of the
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Board and all such other duties as may from time to time be assigned to him or
them by the Board or these By-laws.
SECTION 4.7. The Vice-Chairman. The Vice-Chairman, if one shall be
appointed, shall perform such duties as may from time to time be assigned to him
by the Board or the Chairman, and in the absence or disability of the Chairman,
shall perform the duties and exercise the powers of the Chairman.
SECTION 4.8. The President. The President shall have general and active
management and control of the business and affairs of the Corporation, subject
to the control of the Board, and shall see that all orders and resolutions of
the Board are carried into effect. The President shall perform all duties
incident to the office of President and all such other duties as may from time
to time be assigned to him by the Board or these By-laws.
SECTION 4.9. Vice Presidents. Vice Presidents, if any, in order of their
seniority or in any other order determined by the Board, shall generally assist
the President and perform such other duties as the Board or the President shall
prescribe, and in the absence or disability of the President, shall perform the
duties and exercise the powers of the President.
SECTION 4.10. Chief Financial Officer. The Chief Financial Officer shall
perform such duties as are customary for a chief financial officer to perform
and such other duties as the Board or the President shall prescribe.
SECTION 4.11. The Secretary. The Secretary shall, to the extent
practicable, attend all meetings of the Board and all meetings of Stockholders
and shall record all votes and the minutes of all proceedings in a book to be
kept for that purpose, and shall perform the same duties for any committee of
the Board when so requested by such committee. He shall give or cause to be
given notice of all meetings of Stockholders and of the Board, shall perform
such other duties as may be prescribed by the Board, the Chairman or the
President and shall act under the supervision of the President. He shall keep
in safe custody the seal of the Corporation and affix the same to any instrument
that requires that the seal be affixed to it and which shall have been duly
authorized for signature in the name of the Corporation and, when so affixed,
the seal shall be attested by his signature or by the signature of the Treasurer
of the Corporation (the "Treasurer") or an Assistant Secretary or Assistant
Treasurer of the Corporation. He shall keep in safe custody the certificate
books and stockholder records and such other books and records of the
Corporation as the Board, the Chairman or the President may direct and shall
perform all other duties incident to the office of Secretary and such other
duties as from time to time may be assigned to him by the Board, the Chairman or
the President.
SECTION 4.12. Assistant Secretaries. Assistant Secretaries of the
Corporation ("Assistant Secretaries"), if any, in order of their seniority or in
any other order determined by the Board, shall generally assist the Secretary
and perform such other duties as the Board or the Secretary shall prescribe,
and, in the absence or disability of the Secretary, shall perform the duties and
exercise the powers of the Secretary.
SECTION 4.13. The Treasurer. The Treasurer shall have the care and
custody of all the funds of the Corporation and shall deposit such funds in such
banks or other depositories as the Board, or any officer or officers, or any
officer and agent jointly, duly authorized by the Board, shall, from time to
time, direct or approve. He shall
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disburse the funds of the Corporation under the direction of the Board and the
President. He shall keep a full and accurate account of all moneys received and
paid on account of the Corporation and shall render a statement of his accounts
whenever the Board, the Chairman or the President shall so request. He shall
perform all other necessary actions and duties in connection with the
administration of the financial affairs of the Corporation and shall generally
perform all the duties usually appertaining to the office of treasurer of a
corporation. When required by the Board, he shall give bonds for the faithful
discharge of his duties in such sums and with such sureties as the Board shall
approve.
SECTION 4.14. Assistant Treasurers. Assistant Treasurers of the
Corporation ("Assistant Treasurers"), if any, in order of their seniority or in
any other order determined by the Board, shall generally assist the Treasurer
and perform such other duties as the Board or the Treasurer shall prescribe,
and, in the absence or disability of the Treasurer, shall perform the duties and
exercise the powers of the Treasurer.
SECTION 4.15. Compensation. The compensation of the officers of the
Corporation shall be fixed by the Board.
SECTION 4.16. Interested Directors; Quorum. (a) No contract or
transaction between the Corporation and one or more of its directors or
officers, or between the Corporation and any other corporation, partnership,
association, or other organization in which one or more of its directors or
officers are directors or officers, or have a financial interest, shall be void
or voidable solely for this reason, or solely because the director or officer is
present at or participates in the meeting of the Board or Committee thereof
which authorizes the contract or transaction, or solely because the votes of one
or more of such directors or officers are counted for such purpose, if:
(1) The material facts as to that person's relationship or
interest and as to the contract or transaction are disclosed or
are known to the Board or the Committee, and the Board or
Committee in good faith authorizes the contract or transaction by
the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a
quorum; or
(2) The material facts as to that person's relationship or
interest and as to the contract or transaction are disclosed or
are known to the Stockholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by
vote of the shareholders; or
(3) The contract or transaction is fair as to the
Corporation as of the time it is authorized, approved or
ratified, by the Board of Directors, a Committee thereof, or the
shareholders.
(b) Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a Committee
which authorizes the contract or transaction.
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ARTICLE V.
SHARES AND TRANSFERS OF SHARES
SECTION 5.1. Certificates Evidencing Shares. Shares shall be evidenced by
certificates in such form or forms as shall be approved by the Board.
Certificates shall be issued in consecutive order and shall be numbered in the
order of their issue, and shall be signed by the Chairman, the President or any
Vice President and by the Secretary, any Assistant Secretary, the Treasurer or
any Assistant Treasurer. Any or all of the signatures on a Certificate may be a
facsimile. In the event any such officer who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to hold such
office or to be employed by the Corporation before such certificate is issued,
such certificate may be issued by the Corporation with the same effect as if
such officer had held such office on the date of issue.
SECTION 5.2. Stock Ledger. A stock ledger in one or more counterparts
shall be kept by the Secretary, in which shall be recorded the name and address
of each person, firm or corporation owning the Shares evidenced by each
certificate evidencing Shares issued by the Corporation, the number of Shares
evidenced by each such certificate, the date of issuance thereof and, in the
case of cancellation, the date of cancellation. Except as otherwise expressly
required by law, the person in whose name Shares stand on the stock ledger of
the Corporation shall be deemed the owner and recordholder thereof for all
purposes.
SECTION 5.3. Transfers of Shares. Registration of transfers of Shares
shall be made only in the stock ledger of the Corporation upon request of the
registered holder of such shares, or of his attorney thereunto authorized by
power of attorney duly executed and filed with the Secretary, and upon the
surrender of the certificate or certificates evidencing such Shares properly
endorsed or accompanied by a stock power duly executed, together with such proof
of the authenticity of signatures as the Corporation may reasonably require.
SECTION 5.4. Addresses of Stockholders. Each Stockholder shall designate
to the Secretary an address at which notices of meetings and all other corporate
notices may be served or mailed to such Stockholder, and, if any Stockholder
shall fail to so designate such an address, corporate notices may be served upon
such Stockholder by mail directed to the mailing address, if any, as the same
appears in the stock ledger of the Corporation or at the last known mailing
address of such Stockholder.
SECTION 5.5. Lost, Destroyed and Mutilated Certificates. Each recordholder
of Shares shall promptly notify the Corporation of any loss, destruction or
mutilation of any certificate or certificates evidencing any Share or Shares of
which he is the recordholder. The Board may, in its discretion, cause the
Corporation to issue a new certificate in place of any certificate theretofore
issued by it and alleged to have been mutilated, lost, stolen or destroyed, upon
the surrender of the mutilated certificate or, in the case of loss, theft or
destruction of the certificate, upon satisfactory proof of such loss, theft or
destruction, and the Board may, in its discretion, require the recordholder of
the Shares evidenced by the lost, stolen or destroyed certificate or his legal
representative to give the Corporation a bond sufficient to indemnify the
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Corporation against any claim made against it on account of the alleged loss,
theft or destruction of any such certificate or the issuance of such new
certificate.
SECTION 5.6. Regulations. The Board may make such other rules and
regulations as it may deem expedient, not inconsistent with these By-laws,
concerning the issue, transfer and registration of certificates evidencing
Shares.
SECTION 5.7. Fixing Date for Determination of Stockholders of Record. In
order that the Corporation may determine the Stockholders entitled to notice of
or to vote at any meeting of Stockholders or any adjustment thereof, or to
express consent to, or to dissent from, corporate action in writing without a
meeting, or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action, the Board may fix, in advance, a record date, which shall not be more
than 60 nor less than 10 days before the date of such meeting, nor more than 60
days prior to any other such action. A determination of the Stockholders
entitled to notice of or to vote ata meeting of Stockholders shall apply to any
judgment of such meeting; provided, however, that the Board may fix a new record
date for the adjourned meeting.
ARTICLE VI.
SEAL
SECTION 6.1. Seal. The Board may approve and adopt a corporate seal, which
shall be in the form of a circle and shall bear the full name of the
Corporation, the year of its incorporation and the words "Corporate Seal
Delaware".
ARTICLE VII.
FISCAL YEAR
SECTION 7.1. Fiscal Year. The fiscal year of the Corporation shall end on
the thirty-first day of December of each year unless changed by resolution of
the Board.
ARTICLE VIII.
VOTING OF SHARES IN OTHER CORPORATIONS
SECTION 8.1. Voting of Shares in Other Corporations. Shares in other
corporations which are held by the Corporation may be represented and voted by
the Chairman, President or a Vice President of the Corporation or by proxy or
proxies appointed by one of them. The Board may however, appoint some other
person to vote the shares.
ARTICLE IX.
INDEMNIFICATION AND INSURANCE
SECTION 9.1. Indemnification. (a) The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened,
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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. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which 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 reasonable cause to believe that his conduct
was unlawful.
(b) The Corporation shall 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 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) 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 of the State of Delaware or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Section 9.01(a) and (b) of these By-
laws, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under Section 9.01(a) and (b) of these By-
laws (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in Section 9.01(a) and
(b)of these By-laws. Such determination shall be made (i) by the Board by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (ii) if such a quorum is not obtainable, or, even
if obtainable, a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (iii) by the stockholders of the
Corporation.
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(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the Corporation pursuant to this Article IX. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the Board deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, other Sections of this Article IX shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any law, by-law, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action in an
official capacity and as to action in another capacity while holding such
office.
(g) For purposes of this Article IX, references to "the Corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees or
agents so that any person who is or was a director, officer, employee or agent
of such constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall stand
in the same position under the provisions of this Article IX with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued.
(h) For purposes of this Article IX, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service as a director, officer, employee or agent of the
Corporation which imposes duties on, or involves service by, such director,
officer, employee or agent with respect to any employee benefit plan, its
participants, or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" as referred to in
this Article IX.
(i) The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article IX shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrator of such a person.
SECTION 9.2. Insurance for Indemnification. The Corporation may purchase
and maintain insurance on behalf of any person who 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 any
liability asserted against
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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 the provisions of Section 145 of the General
Corporation Law.
ARTICLE X.
AMENDMENTS
SECTION 10.1. Amendments. Unless otherwise provided in the Certificate of
Incorporation, any By-law (including these By-laws) may be adopted, amended or
repealed by the vote of the recordholders of a majority of the Shares then
entitled to vote at an election of Directors or by written consent of
Stockholders pursuant to Section 2.09 hereof, or by vote of the Board or by a
written consent of Directors pursuant to Section 3.08 hereof.
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EXHIBIT 10.22
SERVICES AGREEMENT
This Services Agreement (the "Agreement") is made and entered into effective
October 1, 1998 by and between Charif Souki ("Souki"), an individual and Co-
Chair of the Board of Directors of Cheniere Energy, Inc., and Cheniere Energy,
Inc. ("Cheniere"), a Delaware corporation with offices at 1200 Smith Street,
Suite 1740, Houston, Texas 77002.
WHEREAS, Souki is experienced in business matters generally and particularly in
the financial development and management of development stage enterprises,
WHEREAS, the involvement of Souki in the day-to-day management and operations of
Cheniere has become increasingly substantial in recent months,
WHEREAS, to date, Souki has provided such services without compensation by
Cheniere, and
WHEREAS, Cheniere desires to be assured of its ability to retain the services of
Souki on an ongoing basis for several months, which represent a particularly
critical time in the development of Cheniere,
NOW, THEREFORE, in consideration of the mutual agreements and covenants herein
contained and other good and valuable consideration, the sufficiency of which is
hereby acknowledged, Souki and Cheniere hereby agree as follows:
1. Scope of Services
Cheniere hereby retains Souki to provide consulting services related to the
financing and management of Cheniere. In rendering the services described
herein, Souki shall comply with all the terms of this Agreement.
2. Compensation, Consideration and Payment
In full and complete compensation for all services provided hereunder Cheniere
agrees to pay or cause to be paid a consulting fee accruing at a rate of $10,000
per month (prorated for any partial months of service) plus reimbursement of
necessary and reasonable expenses. Payment shall be made at such time as
Cheniere shall determine in its sole discretion that it has adequate financial
resources to make the payments without creating an unreasonable financial burden
on Cheniere.
3. Term of Agreement
The term of this Agreement shall commence on October 1, 1998 and shall continue
for a period of six months or until terminated by either party as prescribed in
paragraph 7 below.
4. Independent Contractor
It is mutually agreed by Souki and Cheniere that for the purposes of this
Agreement and all services to be provided hereunder, Souki shall be, and shall
be deemed to be, an independent contractor, and not an employee of Cheniere.
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5. Liability
Cheniere acknowledges that Souki has not made any expressed or implied warranty
regarding the services provided under this Agreement and Souki disclaims any
liability for Cheniere's actions. Cheniere agrees to and hereby holds Souki
harmless from all costs, expenses and claims arising out of or in connection
with this Agreement or any of the services provided hereunder, except in
connection with any gross negligence or willful misconduct on the part of
Souki..
6. Confidential Information
"Confidential Information" shall mean all confidential and/or proprietary
information, that or documents of Cheniere disclosed to Souki by Cheniere which
includes without limitation trade secrets, seismic data, technical data,
intellectual property, methods, practices and other information that relates to
past, present and future exploration, development and business activities,
except such information as has been made available to the general public through
reports, filings, press releases or other announcements by Cheniere. Souki
shall not disclose, or permit any other person or entity to use or disclose any
such Confidential Information. Upon termination or expiration of this
Agreement, Souki shall return to Cheniere all written or descriptive matter,
including but not limited to drawings, maps, plots, or other papers or documents
which contain any such Confidential Information, as promptly as possible, but in
no event later than five (5) days after such termination, expiration or request.
7. Termination
(a) This Agreement may be terminated without cause by either party upon thirty
(30) days written notice to the other party.
(b) In the event Souki willfully breaches this Agreement to provide services
pursuant to the terms hereof, Cheniere may terminate this Agreement by
giving Souki one (1) day written notice.
8. Entire Agreement
This Agreement contains the entire agreement between the parties and it
supersedes all prior agreements and understandings between the parties
respecting the subject matter hereof. This Agreement may not be amended,
changed or terminated orally by or on behalf of either party.
9. Governing Law and Compliance and Dispute Resolution
This Agreement shall be governed by and construed in accordance with the laws of
the State of Texas. Souki shall comply with all applicable laws and
regulations. In the event of a dispute hereunder, the parties agree to submit
to binding arbitration under the auspices of the American Arbitration
Association, all costs and expenses of which shall be shared equally by the
parties. In addition, either party may apply for injunctive relief in any court
of competent jurisdiction to restrain the breach, or threatened breach of this
Agreement. No party shall be liable to the other party for consequential,
punitive, or incidental damages.
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10. Notices
Any notice or request herein required or committed to be given hereunder shall
be given in writing.
11. Survivorship
The terms and provisions hereof shall survive the termination of this Agreement,
and shall remain in full force and effect thereafter, and shall be binding upon
the parties hereto, and their respective representatives, successors, and
authorized assigns.
12. Assignment
This Agreement may not be assigned or delegated, in whole or in part, without
prior written consent of the other party, which consent may be withheld in such
other party's sole discretion.
EXECUTED EFFECTIVE THE 1/ST/ OF OCTOBER, 1998
Charif Souki Cheniere Energy, Inc.
/s/ CHARIF SOUKI By: /s/ WILLIAM D. FORSTER
- ---------------- ----------------------
Name: William D. Forster
Title: Co-Chairman of the Board
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EXHIBIT 10.23
CHENIERE ENERGY, INC.
TWO ALLEN CENTER
1200 SMITH STREET, SUITE 1740
HOUSTON, TEXAS 77002-4312
April 3, 1998
Lender Name
Address
Re: (Form of) Second Amendment to Securities Purchase Agreement
Dear Lender:
Reference is made to the Securities Purchase Agreement dated as of December 15,
1997 (the "Agreement"), between Cheniere Energy, Inc., a Delaware corporation
("Borrower"), and ____________ ("Lender"). Unless otherwise indicated, all
capitalized terms herein are used as defined in the Agreement.
The purpose of this amendment to the Agreement is to increase from $1,000,000 to
$5,000,000 the amount of net funds which Borrower may raise through private
placement of its equity securities or from the sale of seismic data and retain
for use in its business before being required to direct the proceeds from such
sources to prepayment of the Term Loan.
For good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, Borrower and Lender agree as follows:
1. Amendment of Terms of Payment. Section 2 of the Agreement is hereby amended
by replacing paragraph (c) of such Section in its entirety with the
following paragraph:
(c) In addition to prepayments under clause (b) above, Borrower shall
make prepayments of principal of the Term Loan equal to the net cash
proceeds received by Borrower from any private placement of Borrower's
equity securities or from any sale by Borrower of seismic data, less
up to $5,000,000 which may be retained by Borrower.
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2. Representations and Warranties. Borrower represents and warrants that it
possesses all requisite power and authority to execute, deliver and comply with
the terms of this instrument, which has been duly authorized and approved by all
necessary corporate action and for which no consent of any person is required.
3. Fees and Expenses. Borrower agrees to pay the reasonable fees and expenses
of counsel to Lender for services rendered in connection with the negotiation
and execution of this instrument.
4. Loan Paper; Effect. This instrument is a Loan Paper and, therefore, is
subject to the applicable provisions of Section 13 of the Agreement, all of
which are incorporated herein by reference the same as if set forth herein
verbatim. Except as amended in this instrument, the Loan Papers are and shall
be unchanged and shall remain in full force and effect. In the event of any
inconsistency between the terms of the Agreement as hereby modified (the
"Amended Agreement") and any other Loan Papers, the terms the Amended Agreement
shall control and such other document shall be deemed to be amended hereby to
conform to the terms of the Amended Agreement.
5. No Waiver of Defaults. This instrument does not constitute a waiver of, or
a consent to any present or future violation of or default under, any provision
of the Loan Papers, or a waiver of Lender's right to insist upon future
compliance with each term, covenant, condition and provision of the Loan Papers,
and the Loan papers shall continue to be binding upon, and inure to the benefit
of, Borrower, Lender and their respective successors and assigns.
6. Final Agreement. THE LOAN PAPERS, AS AMENDED HEREBY, REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO ORAL
AGREEMENTS BETWEEN THE PARTIES.
If the foregoing terms and conditions are acceptable to Lender, Lender should
indicate its acceptance by signing in the space provided below and returning an
executed copy hereof to Borrower, whereupon this letter shall become an
agreement binding upon and inuring to the benefit of Borrower and Lender and
their respective successors and assigns.
Sincerely,
CHENIERE ENERGY, INC.
By:
-----------------------------
Don A. Turkleson
Chief Financial Officer
Accepted and agreed to as of the day and year first set forth in the foregoing
letter.
______________________________
Lender
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EXHIBIT 10.24
CHENIERE ENERGY, INC.
TWO ALLEN CENTER
1200 SMITH STREET, SUITE 1740
HOUSTON, TEXAS 77002-4312
September ___, 1998
Lender Name
Address
Re: (Form of) Third Amendment to Securities Purchase Agreement ("Third
Amendment")
Dear Lender:
Reference is made to the Securities Purchase Agreement dated as of December
15, 1997 (the "Agreement"), between Cheniere Energy, Inc., a Delaware
corporation ("Borrower"), and Lender. Unless otherwise indicated, all
capitalized terms herein are used as defined in the Agreement.
The purpose of this amendment to the Agreement is to extend the maturity
date from September ___, 1998 to December 15, 1998, subject to the right of the
Borrower to extend such maturity date to January 15, 1999 in its sole
discretion. In consideration therefor, the exercise price per share of the
Warrants previously issued to Lender shall be reduced, and certain provisions of
the Agreement shall be amended, all as described below.
For good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, Borrower and Lender agree as follows:
1. Restate Prior Amendments. This Third Amendment restates the First Amendment
dated as of December 18, 1997 and the Second Amendment dated April 3, 1998, and
as such supercedes such amendments, which are hereby agreed to be null and void.
2. Amendment of Terms of Payment. Section 2 of the Agreement is hereby amended
by replacing paragraph (c) in its entirety and adding a new paragraph (d), which
together read as follows:
"(c) In addition to prepayments under clause (b) above, Borrower
shall make prepayments of principal of the Term Loan equal to net cash
proceeds received by Borrower from any private placement of Borrower's
equity securities or from any sale by Borrower of seismic data or
other assets as permitted by Section 6(d), less up to $5,000,000 which
may be retained by Borrower; provided, however, that no more than an
aggregate of $2,000,000 of proceeds received by Borrower from the sale
by Borrower of seismic data or other assets as permitted by Section
6(d), in one or more transactions, shall be retained by Borrower;
(d) All payments on the Senior Notes shall be applied pro rata to the
then due and outstanding principal amounts or interest obligations, as
the case may be, under each of the Senior Notes."
1
<PAGE>
3. Amendment Regarding Extension and Additional Lender Warrants. Section 3
of the Agreement is hereby amended by replacing such Section in its
entirety with the following:
"As a result of having extended the maturity of the Term Loan through
180 days after the original maturity date, Borrower shall issue to
Lender additional warrants ("Additional Lender Warrants") with an
exercise price equal to the Exercise Price which expire on the
Expiration Date in the form of EXHIBIT A to purchase _________ shares of
Common Stock. The Additional Lender Warrants shall be issued within 10
days after September ___, 1998 and shall have an expiration date of
September 15, 2002."
4. Amendment to Certain Negative Covenants. Section 6(d) of the Agreement
is hereby amended by replacing such Section in its entirety with the
following:
"(d) sell, lease or otherwise dispose of all or any substantial portion
of its assets; provided that Borrower will be permitted to sell
seismic data, interests in the seismic project and/or all prospects
defined to date, working interests in individual prospects,
overriding royalty interests, and other partnering arrangements
involving total consideration paid to Borrower not to exceed
$2,000,000;"
Section 6 of the Agreement is hereby amended by deleting the word "or" at
the end of clause (e), replacing the period at the end of clause (f) with
"; or" and adding to such Section a new clause (g), which reads as
follows:
"(g) incur any indebtedness subsequent to September __, 1998 unless such
indebtedness by its terms is expressly made subordinate to the Term
Loan."
5. Amendment to Rights and Remedies. Section 11 of the Agreement is hereby
amended by replacing the word "two-thirds of the aggregate principal
amount then outstanding under" in the first sentence with the words
"$750,000 in aggregate original principal amount of ".
6. Amendment of Maturity Date. The definition of Maturity Date in Section
12 shall be hereby amended by replacing the paragraph captioned MATURITY
DATE in its entirety with the following paragraph:
"MATURITY DATE means the earlier of (a) subject to the extension
provided for below, December 15, 1998 and (b) the date that the Senior
Notes are declared immediately due and payable pursuant to SECTION 11
in the event of a Default; provided that Lender's rights continue
until the Obligation has been paid and performed in full. If no
Default or Potential Default exists, Borrower may extend the Maturity
Date until January 15, 1999 by notifying Lender of such extension
prior to the original Maturity Date."
7. Registration Procedures. By December 15, 1998, Borrower shall prepare
and file or cause to be filed with the SEC a Registration Statement with
respect to the Common Stock underlying the Additional Lender Warrants.
All provisions of Section 9 of the Agreement with respect to
registration shall apply to such additional registration statements.
8. Reduction of Exercise Price on Existing Warrants. As of the date hereof,
the exercise price per share of the aggregate of _________ Lender
Warrants and Additional Lender Warrants previously issued to Lender
shall be reduced from $2.375 to $1.50, and the "Exercise Price" of such
warrants is hereby agreed to be amended to reflect such reduction.
9. Interest Payment Provisions. Commencing with October 15, 1998, interest
on the Senior Notes shall be due and payable monthly on the 15th of each
month, and the third paragraph of
2
<PAGE>
the Senior Notes is hereby agreed to be amended to reflect that such
payments shall be monthly rather than quarterly.
10. Representations and Warranties. Borrower represents and warrants that
it possesses all requisite power and authority to execute, deliver and
comply with the terms of this instrument, which has been duly
authorized and approved by all necessary corporate action and for which
no consent of any person is required.
11. Fees and Expenses. Borrower agrees to pay the reasonable fees and
expenses of counsel to Lender for services rendered in connection with
the negotiation and execution of this instrument.
12. Loan Paper; Effect. This instrument is a Loan Paper and, therefore, is
subject to the applicable provisions of Section 13 of the Agreement,
all of which are incorporated herein by reference the same as if set
forth herein verbatim. Except as amended in this instrument, the Loan
Papers are and shall be unchanged and shall remain in full force and
effect. In the event of any inconsistency between the terms of the
Agreement as hereby modified (the "Amended Agreement") and any other
Loan Papers, the terms of the Amended Agreement shall control and such
other document shall be deemed to be amended hereby to conform to the
terms of the Amended Agreement.
13. No Waiver of Defaults. This instrument does not constitute a waiver
of, or a consent to any present or future violation of or default
under, any provision of the Loan Papers, or a waiver of Lender's right
to insist upon future compliance with each term, covenant, condition
and provision of the Loan Papers, and the Loan Papers shall continue to
be binding upon, and inure to the benefit of, Borrower, Lender and
their respective successors and assigns.
14. Final Agreement. THE LOAN PAPERS, AS AMENDED HEREBY, REPRESENT THE
FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES. THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES.
If the foregoing terms and conditions are acceptable to Lender, Lender
should indicate its acceptance by signing in the space provided below and
returning an executed copy hereof to Borrower, whereupon this letter shall
become an agreement binding upon and inuring to the benefit of Borrower and
Lender and their respective successors and assigns.
Sincerely,
CHENIERE ENERGY, INC.
By:
-----------------------------------
Don A. Turkleson
Chief Financial Officer
Accepted and agreed to as of the day
and year first set forth in this Third
Amendment.
- ------------------------------
Lender
3
<PAGE>
EXHIBIT 10.25
CHENIERE ENERGY, INC.
TWO ALLEN CENTER
1200 SMITH STREET, SUITE 1740
HOUSTON, TEXAS 77002-4312
January 12, 1999
via Federal Express
Lender Name
Address
Re: (Form of) Fourth Amendment to Securities Purchase Agreement ("Fourth
Amendment")
Dear Lender:
Reference is made to the Securities Purchase Agreement dated as of December
15, 1997 as amended by the Third Amendment dated on or about September 13, 1998
(as amended, the "Agreement"), between Cheniere Energy, Inc., a Delaware
corporation ("Borrower"), and Lender. Unless otherwise indicated, all
capitalized terms herein are used as defined in the Agreement.
The purpose of this amendment to the Agreement is to extend the maturity
date from January 15, 1999 to March 15, 1999 as described below.
For good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, Borrower and Lender agree as follows:
1. Amendment of Maturity Date. The definition of Maturity Date in Section
12 shall be hereby amended by replacing the paragraph captioned MATURITY
DATE in its entirety with the following paragraph:
"MATURITY DATE means the earlier of (a) March 15, 1999 and (b)
the date that the Senior Notes are declared immediately due and
payable pursuant to SECTION 11 in the event of a Default; provided
that Lender's rights continue until the Obligation has been paid and
performed in full."
2. Representations and Warranties. Borrower represents and warrants that
it possesses all requisite power and authority to execute, deliver and
comply with the terms of this instrument, which has been duly authorized
and approved by all necessary corporate action and for which no consent
of any person is required.
3. Fees and Expenses. Borrower agrees to pay the reasonable fees and
expenses of counsel to Lender for services rendered in connection with
the negotiation and execution of this instrument.
4. Loan Paper; Effect. This instrument is a Loan Paper and, therefore, is
subject to the applicable provisions of Section 13 of the Agreement, all
of which are incorporated herein by reference the same as if set forth
herein verbatim. In the event of any inconsistency between the terms of
the Agreement as hereby modified (the "Amended Agreement") and any other
Loan Papers, the terms of the Amended Agreement shall control and such
other document shall be deemed to be amended hereby to conform to the
terms of the Amended Agreement.
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<PAGE>
5. No Waiver of Defaults. This instrument does not constitute a waiver of,
or a consent to any present or future violation of or default under, any
provision of the Loan Papers, or a waiver of Lender's right to insist
upon future compliance with each term, covenant, condition and provision
of the Loan Papers, and the Loan Papers shall continue to be binding
upon, and inure to the benefit of, Borrower, Lender and their respective
successors and assigns.
6. Final Agreement. THE LOAN PAPERS, AS AMENDED HEREBY, REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES.
If the foregoing terms and conditions are acceptable to Lender, Lender
should indicate its acceptance by signing in the space provided below and
returning an executed copy hereof to Borrower, whereupon this letter shall
become an agreement binding upon and inuring to the benefit of Borrower and
Lender and their respective successors and assigns.
Sincerely,
CHENIERE ENERGY, INC.
By:
---------------------------------
Don A. Turkleson
Chief Financial Officer
Accepted and agreed to as of the day
and year first set forth in this Fourth
Amendment.
- -----------------------
Lender
2
<PAGE>
EXHIBIT 10.26
CHENIERE ENERGY, INC.
TWO ALLEN CENTER
1200 SMITH STREET, SUITE 1740
HOUSTON, TEXAS 77002-4312
March 15, 1999
via facsimile
Lender Name
Address
Re: (Form of) Fifth Amendment to Securities Purchase Agreement ("Fifth
Amendment")
Dear Lender:
Reference is made to the Securities Purchase Agreement dated as of December
15, 1997 as amended by the Third Amendment dated on or about September 13, 1998
and the Fourth Amendment dated January 12, 1999 (as amended, the "Agreement"),
between Cheniere Energy, Inc., a Delaware corporation ("Borrower"), and Lender.
Unless otherwise indicated, all capitalized terms herein are used as defined in
the Agreement.
The purpose of this amendment to the Agreement is to extend the maturity
date from March 15, 1999 to April 15, 1999. In consideration therefor, the
exercise price per share of the Warrants previously issued to Lender shall be
reduced as described below.
For good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, Borrower and Lender agree as follows:
1. Amendment of Maturity Date. The definition of Maturity Date in Section
12 shall be hereby amended by replacing the paragraph captioned MATURITY
DATE in its entirety with the following paragraph:
"MATURITY DATE means the earlier of (a) April 15, 1999 and (b)
the date that the Senior Notes are declared immediately due and
payable pursuant to SECTION 11 in the event of a Default; provided
that Lender's rights continue until the Obligation has been paid and
performed in full. If no Default or Potential Default exists."
2. Reduction of Exercise Price on Existing Warrants. As of the date hereof,
the exercise price per share of the Warrants previously issued to Lender shall
be reduced from $1.50 to $1.25, and the "Exercise Price" of such warrants is
hereby agreed to be amended to reflect such reduction.
3. Amendment to Call of Warrants. As of the date hereof, each of the
agreements evidencing Warrants held by Lender shall be amended so that the first
sentence of Section 7 shall read:
"This warrant may be called and canceled by the Company at its
election at any time following the date upon which the closing price
of the Common Stock on its principal trading market has been $3.00 for
a period of 20 consecutive trading days (all as determined in good
faith by the Company's Board of Directors) at the price equal to $.01
per share of Common Stock for which this Warrant shall be exercisable
on the call Date (as defined below)."
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<PAGE>
4. Representations and Warranties. Borrower represents and warrants that it
possesses all requisite power and authority to execute, deliver and comply with
the terms of this instrument, which has been duly authorized and approved by all
necessary corporate action and for which no consent of any person is required.
5. Fees and Expenses. Borrower agrees to pay the reasonable fees and expenses
of counsel to Lender for services rendered in connection with the negotiation
and execution of this instrument.
6. Loan Paper; Effect. This instrument is a Loan Paper and, therefore, is
subject to the applicable provisions of Section 13 of the Agreement, all of
which are incorporated herein by reference the same as if set forth herein
verbatim. Except as amended in this instrument, the Loan Papers are and shall
be unchanged and shall remain in full force and effect. In the event of any
inconsistency between the terms of the Agreement as hereby modified (the
"Amended Agreement") and any other Loan Papers, the terms of the Amended
Agreement shall control and such other document shall be deemed to be amended
hereby to conform to the terms of the Amended Agreement.
7. No Waiver of Defaults. This instrument does not constitute a waiver of, or
a consent to any present or future violation of or default under, any provision
of the Loan Papers, or a waiver of Lender's right to insist upon future
compliance with each term, covenant, condition and provision of the Loan Papers,
and the Loan Papers shall continue to be binding upon, and inure to the benefit
of, Borrower, Lender and their respective successors and assigns.
8. Final Agreement. THE LOAN PAPERS, AS AMENDED HEREBY, REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO ORAL
AGREEMENTS BETWEEN THE PARTIES.
If the foregoing terms and conditions are acceptable to Lender, Lender
should indicate its acceptance by signing in the space provided below and
returning an executed copy hereof to Borrower, whereupon this letter shall
become an agreement binding upon and inuring to the benefit of Borrower and
Lender and their respective successors and assigns.
Sincerely,
CHENIERE ENERGY, INC.
By:
----------------------------------
Don A. Turkleson
Chief Financial Officer
Accepted and agreed to as of the day
and year first set forth in this Fifth
Amendment.
- ----------------------------
Lender
2
<PAGE>
EXHIBIT 10.27
THE SHARES WHICH ARE THE SUBJECT OF THIS EXCHANGE AGREEMENT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD OR
OTHERWISE DISPOSED OF FOR VALUE UNLESS A REGISTRATION STATEMENT HAS BECOME
EFFECTIVE WITH RESPECT TO SUCH SECURITIES UNDER THE SECURITIES ACT AND SUCH
STATE SECURITIES LAWS OR PURSUANT TO AN OPINION OF COUNSEL REASONABLY ACCEPTABLE
TO THE COMPANY THAT THERE IS AN APPLICABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS.
EXCHANGE AGREEMENT
(Regulation "D" Offering)
THIS EXCHANGE AGREEMENT (this "Agreement"), dated as of the date of
acceptance set forth on the signature page hereto, is by and between CHENIERE
ENERGY, INC., a Delaware corporation, with offices located at 1200 Smith Street,
Suite 1740, Houston, Texas 77002 (the "Company"), and the undersigned (the
"Buyer").
WITNESSETH:
WHEREAS, the Buyer wishes to exchange its promissory note ("Note") issued
pursuant to the Securities Purchase Agreement dated December 15, 1997 as amended
by the Third Amendment to Securities Purchase Agreement dated September 14, 1998
for shares of Common Stock of the Company, par value $.003 per share (the
"Common Stock"), upon the terms and subject to the conditions of this Agreement,
subject to acceptance of this Agreement by the Company;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. AGREEMENT TO EXCHANGE.
a). EXCHANGE. The undersigned, intending to be legally bound, hereby
irrevocably agrees to exchange its Note in the face amount set forth on the
signature page of this Agreement for the number of shares of Common Stock
("Shares") set forth on the signature page of this Agreement, the number of
Shares being determined by dividing the face amount of the Note by $0.72.
Interest will continue to accrue until January 15, 1999; any interest due
and payable at the Closing Date will be paid to the Buyer in cash. This
Agreement is submitted to you in accordance with and subject to the terms
and conditions described in this Agreement.
<PAGE>
b) ACCEPTANCE OF EXCHANGE; CLOSING DATE. The Company has the right to accept
or reject this Agreement, in whole or in part, in the Company's sole
discretion. The Company shall have thirty days from the date of this
Agreement to accept the Agreement. The Closing Date shall be March 15,
1999 but may be accelerated by the Company if the remaining $2,000,000 in
Notes (held by persons other than Buyer) shall be exchanged pursuant to
similar exchange agreements or refinanced by the Company. The Shares shall
be delivered to a place of your designation upon acceptance of this
Agreement.
c) OTHER DOCUMENTS. The Buyer agrees that it will, upon request, execute and
deliver any additional documents deemed by the Company to be necessary or
desirable to complete the exchange of the Note.
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO INFORMATION;
INDEPENDENT INVESTIGATION.
The Buyer represents and warrants to, and covenants and agrees with, the
Company as follows:
a) The Buyer is purchasing the Shares for its own account for investment only
and not with a view towards the public sale or distribution thereof in
violation of the Securities Act of 1933, as amended (the "Securities Act"),
and with no present intention of dividing or allowing others to participate
in this investment.
b) If the Buyer is an individual, the Buyer is an "accredited investor" as
that term is defined in Rule 501(a)(5) or (6) of Regulation D promulgated
under the Securities Act by reason that the Buyer is an individual (i)
having an individual net worth, or a joint net worth with the Buyer's
spouse, at the time of the purchase that exceeds $1,000,000, or (ii) who
had an individual income in excess of $200,000 in each of the two most
recent years or joint income with the Buyer's spouse in excess of $300,000
in each of those years and has a reasonable expectation of reaching the
same income level in the current year; or if the Buyer is a corporation or
other entity, the Buyer is an "accredited investor" as that term is defined
in Rule 501(a)(1), (2), (3), (7) or (8) of Regulation D promulgated under
the Securities Act.
c) If the Buyer is a corporation or other entity, it was not organized for the
specific purpose of acquiring the Shares.
d) The Buyer has such knowledge, sophistication and experience in business,
tax and financial matters that the Buyer is capable of evaluating, and is
familiar with, the merits and risks of an investment in the Shares, can
bear the substantial economic risk of an investment in the Shares for an
indefinite period of time and can afford a complete loss of such
investment.
2
<PAGE>
e) The Buyer represents that its overall commitment to investments which are
not readily marketable is not disproportionate to the Buyer's net worth,
and the Buyer's investment in the Shares will not cause such overall
commitment to become excessive.
f) If the Buyer is an individual, the Buyer has adequate means of providing
for his current needs and personal and family contingencies and has no need
for liquidity in his investment in the Shares.
g) All subsequent offers and sales of the Shares by the Buyer shall be made
pursuant to registration of such securities under the Securities Act and
applicable state securities laws or pursuant to a valid exemption from such
registration requirements.
h) The Buyer understands that the Shares are being offered and sold to it in
reliance on specific exemptions from the registration requirements of
United States federal and state securities laws and that the Company is
relying upon the truth and accuracy of, and the Buyer's compliance with,
the representations, warranties, agreements, acknowledgments and
understandings of the Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of the Buyer to acquire
the Shares. The Buyer agrees that, if any of the representations,
warranties, agreements, acknowledgments or understandings deemed to have
been made by it in connection with its investment in the Shares is no
longer accurate, it shall promptly notify the Company and consult with the
Company in order to determine an appropriate course of action.
i) The Buyer has carefully read this Agreement and, to the extent that the
Buyer believed necessary, has discussed the representations, warranties and
agreements which the Buyer makes by signing this Agreement and the
applicable limitations upon the Buyer's resale of the Shares with the
Buyer's counsel.
j) The Buyer and its advisors have been afforded the opportunity to ask
questions of the Company, and have received complete and satisfactory
answers to any and all such inquiries and has had access to such financial
and other information concerning the Company and the Shares as it has
deemed necessary in connection with its decision as to whether to make its
investment. Without limiting the generality of the foregoing, the Buyer
has been furnished with and has read the Company's Private Placement
Memorandum dated November 14, 1998 (the "Private Placement Memorandum")
which contains, in addition to other information, a section captioned "Risk
Factors" and "Description of Securities" and the following documents as
filed by the Company with the United States Securities and Exchange
Commission: (a) Transition Report on Form 10-K for the four months ended
December 31, 1997; (b) Quarterly Reports on Form 10-Q for the periods ended
June 30, 1998 and September 30, 1998; (c) Proxy Statement of the Company
dated October 10, 1997. The Buyer specifically acknowledges that it does
not require and has not requested to see any information with respect to
the Company or this investment other than the information described in the
Private Placement Memorandum.
k) The Buyer acknowledges that (i) none of the Company, any affiliate thereof
or any person representing the Company or any affiliate thereof has made
any representation to
3
<PAGE>
it with respect to the Company or the offering or sale of the Shares, other
than the information concerning the Company and the offering contained in
the Private Placement Memorandum, (ii) in making its investment decision
the Buyer is not relying upon any information given by the Company or any
affiliate thereof or any person representing the Company or any affiliate
thereof other than the information concerning the Company and the Offering
contained in the Private Placement Memorandum and (iii) no representation
has been made, and no information has been furnished, to the Buyer in
connection with the offering or sale of the Shares that was in any way
inconsistent with any other information with which the Buyer has been
provided.
l) The Buyer understands that no United States federal or state agency or any
other government or governmental agency has passed on or made any
recommendation or endorsement of the Shares.
m) The address shown under the Buyer's signature at the end of this Agreement
is the principal residence of the Buyer, if the Buyer is an individual, or
the principal business address of the Buyer, if the Buyer is a corporation
or other entity.
n) The Buyer has full power and authority to enter into this Agreement and
consummate the transactions contemplated by this Agreement, and the Buyer,
if an individual, is at least 21 years of age. This Agreement has been
duly and validly authorized, executed and delivered by or on behalf of the
Buyer and is a valid and binding agreement of the Buyer enforceable in
accordance with its terms, subject as to enforceability to general
principles of equity and to bankruptcy or other laws affecting the
enforcement of creditors' rights generally.
o) The Buyer understands that its investment in the Shares involves a high
degree of risk including those risks described in the section of the
Private Placement Memorandum captioned "Risk Factors," a copy of which has
been provided to Buyer. The Buyer is relying solely upon its own knowledge
and experience in business, tax and financial matters in making its
decision to purchase the Shares.
3. COMPANY REPRESENTATIONS, ETC.
The Company represents and warrants to the Buyer that:
a) ORGANIZATION AND GOOD STANDING. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Delaware and is qualified to do business in the states in which
such qualification is required based on the nature and scope of the
Company's operations.
b) CONCERNING THE SHARES. The Shares of Common Stock, when issued, delivered
and paid for in accordance with this Agreement, will be duly and validly
authorized and issued, fully paid and nonassessable.
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<PAGE>
c) EXCHANGE AGREEMENT. The Company has full power and authority to enter into
this Agreement and consummate the transactions contemplated by this
Agreement. This Agreement, when accepted by the Company, shall have been
duly and validly authorized, executed and delivered on behalf of the
Company and shall be a valid and binding agreement of the Company
enforceable in accordance with its terms, subject as to enforceability to
general principles of equity and to bankruptcy or other laws affecting the
enforcement of creditors' rights generally.
d) NON-CONTRAVENTION. The execution and delivery of this Agreement by the
Company and the consummation by the Company of the issuance of the Shares
and the other transactions contemplated by this Agreement do not and will
not conflict with or result in a breach by the Company of any of the terms
or provisions of, or constitute a default under, the certificate of
incorporation or bylaws of the Company, or any indenture, mortgage, deed of
trust or other material agreement or instrument to which the Company is a
party or by which it or any of its properties or assets are bound, or any
existing applicable law, rule or regulation or any applicable decree,
judgment or order of any court, United States federal or state regulatory
body, administrative agency or other governmental body having jurisdiction
over the Company or any of its properties or assets.
e) APPROVALS. The Company is not aware of any authorization, approval or
consent of any governmental body which is required to be obtained by the
Company for the issuance and sale of the Shares to the Buyer as
contemplated by this Agreement that has not been obtained.
f) ADVERTISING. The Shares are not being offered or sold by any form of
general solicitation or general advertising.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
a) TRANSFER RESTRICTIONS. The Buyer acknowledges that (i) the Shares to be
issued to it hereunder have not been and are not being registered under the
provisions of the Securities Act or any applicable state securities laws
(except as provided in the Registration Procedures set forth in Section 5
of this Agreement), and may not be offered, sold, pledged or otherwise
transferred unless (A) the Shares are subsequently registered under the
Securities Act and all applicable state securities laws or (B) the Buyer
shall have delivered to the Company an opinion of counsel, reasonably
satisfactory in form, scope and substance to the Company, to the effect
that the Shares, may be sold or transferred pursuant to a valid exemption
from such registration requirements; (ii) the Shares are and will be
"restricted securities" (as defined in Rule 144 promulgated under the
Securities Act); (iii) any sale of the Shares, made in reliance on Rule 144
promulgated under the Securities Act may be made only in accordance with
the terms of said Rule and
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<PAGE>
further, if said Rule is not applicable, any resale of the Shares, under
circumstances in which the seller, or the person through whom the sale is
made, may be deemed to be an underwriter, as that term is used in the
Securities Act, may require compliance with some other exemption under the
Securities Act or the rules and regulations of the Securities and Exchange
Commission (the "SEC") thereunder; and (iv) neither the Company nor any
other person is under any obligation to register the Shares (other than
pursuant to the Registration Procedures set forth in Section 5 of this
Agreement) under the Securities Act or any state securities laws or to
comply with the terms and conditions of any exemption thereunder.
b) Restrictive Legend. The Buyer acknowledges and agrees that "stop transfer"
instructions shall be placed against the Shares on the transfer books of
the Company, and that the certificate(s) evidencing the Shares shall bear
the following legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("THE SECURITIES ACT"),
OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE OFFERED FOR
SALE, SOLD OR OTHERWISE DISPOSED OF FOR VALUE UNLESS A REGISTRATION
STATEMENT HAS BECOME EFFECTIVE WITH RESPECT TO SUCH SECURITIES UNDER
THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR
PURSUANT TO AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE
CORPORATION THAT THERE IS AN APPLICABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS."
c) FORM D. The Company agrees to file a Form D with respect to the Shares if
and as required under Regulation D of the Securities Act.
5. REGISTRATION PROCEDURES.
a) Within 90 days after the issuance of the Shares, the Company shall prepare
and file or cause to be filed with the SEC a registration statement (the
"Registration Statement") with respect to the Shares. The Company shall
thereafter use diligence in attempting to cause the Registration Statement
to be declared effective by the SEC and shall thereafter use diligence to
maintain the effectiveness of the Registration Statement until the earlier
to occur of (i) the date which is one year from the effective date of the
Registration Statement, (ii) the date on which all of the Shares have been
sold by the Buyer or (iii) the date on which the Shares can be resold
pursuant to SEC Rule 144.
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<PAGE>
b) Following effectiveness of the Registration Statement, the Company shall
furnish to the Buyer a prospectus as well as such other documents as the
Buyer may reasonably request.
c) The Company shall use diligent efforts to (i) register or otherwise qualify
the Common Stock covered by the Registration Statement for sale under the
securities laws of such jurisdictions as the Buyer may reasonably request,
(ii) prepare and file in those jurisdictions such amendments (including
post-effective amendments) and supplements as may be required, (iii) take
such other actions as may be necessary to maintain such registrations
and/or qualifications in effect at all times while the Registration
Statement is likewise maintained effective and (iv) take all other actions
reasonably necessary or advisable to qualify the Shares for sale in such
jurisdictions; provided, however, that the Company shall not be required in
connection therewith or as a condition thereto to (I) qualify to do
business in any jurisdiction where it would not otherwise be required to
qualify but for this Section 5(c), (II) subject itself to general taxation
in any such jurisdiction, (III) file a general consent to service of
process in any such jurisdiction, (IV) provide any undertakings that cause
more than nominal expense or burden to the Company or (V) make any change
in its certificate of incorporation or bylaws, which in each case the Board
of Directors of the Company determines to be contrary to the best interests
of the Company and its stockholders.
d) The Company shall, following effectiveness of the Registration Statement,
as promptly as practicable after becoming aware of any such event, notify
the Buyer of the happening of any event of which the Company has knowledge,
as a result of which the prospectus included in the Registration Statement,
as then in effect, includes an untrue statement of a material fact or omits
to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, and use its best efforts promptly to prepare a
supplement or amendment to the Registration Statement to correct such
untrue statement or omission, and deliver a number of copies of such
supplement or amendment to the Buyer or as the Buyer may reasonably
request. The Company may voluntarily suspend the effectiveness of such
Registration Statement for a limited time, which in no event shall be
longer than 90 days, if the Company has been advised by legal counsel that
the offering of Common Stock pursuant to the Registration Statement would
adversely affect, or would be improper in view of (or improper without
disclosure in a prospectus), a proposed financing, a reorganization,
recapitalization, merger, consolidation, or similar transaction involving
the Company or its subsidiaries, in which event the one year period
referred to in clause (i) of Section 5(a) shall be extended for an
additional period of time beyond such one year period equal to the number
of days the effectiveness thereof has been suspended pursuant to this
sentence.
e) Following effectiveness of the Registration Statement, the Company, as
promptly as practicable after becoming aware of any such event, will notify
the Buyer of the issuance by the SEC of any stop order or other suspension
of effectiveness of the Registration Statement at the earliest possible
time.
7
<PAGE>
f) Following effectiveness of the Registration Statement, the Company will use
diligence either to (i) cause all the Common Stock covered by the
Registration Statement to be listed on each national securities exchange on
which similar securities issued by the Company are then listed, if any, if
the listing of such Common Stock is then permitted under the rules of such
exchange, or (ii) secure the quotation of all the Common Stock covered by
the Registration Statement on The Nasdaq SmallCap Market, if the listing of
such Common Stock is then permitted under the rules of such The Nasdaq
SmallCap Market, or (iii) if, despite the Company's best efforts to satisfy
the preceding clause (i) or (ii), the Company is unsuccessful in satisfying
the preceding clause (i) or (ii) and without limiting the generality of the
foregoing, to use its best efforts to arrange for at least two market
makers to register with the National Association of Securities Dealers,
Inc. as such with respect to such Common Stock.
g) Provide a transfer agent and registrar, which may be a single entity, for
the Common Stock not later than the effective date of the Registration
Statement.
h) It shall be a condition precedent to the obligations of the Company to take
any action pursuant to this Section 5 that the Buyer shall furnish to the
Company such information regarding itself as the Company may reasonably
request to effect the registration of the Common Stock and shall execute
such documents in connection with such registration as the Company may
reasonably request.
i) The Buyer agrees to cooperate with the Company in any manner reasonably
requested by the Company in connection with the preparation and filing of
the Registration Statement hereunder.
j) The Buyer agrees that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 5(d) or 5(e), the
Buyer will immediately discontinue disposition of Shares pursuant to the
Registration Statement until the Buyer's receipt of notice from the Company
that sales may resume and copies of the supplemented or amended prospectus
and, if so directed by the Company, shall deliver to the Company (at the
expense of the Company) or destroy (and deliver to the Company a
certificate of destruction) all copies in the Buyer's possession of the
prospectus covering such Common Stock current at the time of receipt of
such notice.
k) All expenses, other than (i) underwriting discounts and commissions, (ii)
other fees and expenses of investment bankers and (iii) brokerage
commissions, incurred in connection with registrations, filings or
qualifications pursuant to this Section 5, including, without limitation,
all registration, listing and qualification fees, printers and accounting
fees and the fees and disbursements of counsel to the Company, shall be
borne by the Company.
8
<PAGE>
l) To the extent permitted by law, the Company will indemnify and hold
harmless the Buyer, the directors, if any, of the Buyer, the officers, if
any, of the Buyer, each person, if any, who controls the Buyer within the
meaning of the Securities Act or the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), any underwriter (as defined in the Securities
Act) for the Buyer, the directors, if any, of such underwriter and the
officers, if any, of such underwriter, and each person, if any, who
controls any such underwriter within the meaning of the Securities Act or
the Exchange Act (each, an "Indemnified Person"), against any losses,
claims, damages, expenses or liabilities (joint or several) (collectively,
"Claims") to which any of them may become subject under the Securities Act,
the Exchange Act or otherwise, insofar as such Claims (or actions or
proceedings, whether commenced or threatened, in respect thereof) arise out
of or are based upon any of the following statements, omissions or
violations in the Registration Statement, or any post effective amendment
thereof, or any prospectus included therein: (i) any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any post effective amendment thereof or the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, (ii)
any untrue statement or alleged untrue statement of a material fact
contained in any preliminary prospectus if used prior to the effective date
of such Registration Statement, or contained in the final prospectus (as
amended or supplemented, if the Company files any amendment thereof or
supplement thereto with the SEC) or the omission or alleged omission to
state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements therein
were made, not misleading or (iii) any violation or alleged violation by
the Company of the Securities Act, any state securities law or any rule or
regulation under the Securities Act, the Exchange Act or any state
securities law (the matters in the foregoing clauses (i) through (iii) are
hereinafter collectively referred to as the "Violations"). Subject to the
restrictions set forth in Section 5(n) with respect to the number of legal
counsel, the Company shall reimburse the Buyer and each such underwriter or
controlling person, promptly as such expenses are incurred and are due and
payable, for any reasonable legal fees or other reasonable expenses
incurred by them in connection with investigating or defending any such
Claim. Notwithstanding anything to the contrary contained herein, the
indemnity contained in this Section 5(l) (I) shall not apply to a Claim
arising out of or based upon a Violation which occurs in reliance upon and
in conformity with information furnished in writing to the Company by any
Indemnified Person or underwriter for such Indemnified Person expressly for
use in connection with the preparation of the Registration Statement or any
such amendment thereof or supplement thereto; (II) with respect to any
preliminary prospectus shall not inure to the benefit of any person from
whom the person asserting any Claim purchased the Shares that are the
subject thereof (or to the benefit of any person controlling such person)
if the untrue statement or omission of material fact contained in the
preliminary prospectus was corrected in the prospectus, as then amended or
supplemented, if such final prospectus was timely made available by the
Company; and (III) shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of
the Company, which consent shall not be unreasonably withheld. Such
indemnity shall remain in full force and effect regardless of any
investigation made
9
<PAGE>
by or on behalf of the Indemnified Person and shall survive the transfer of
the Shares by the Buyer.
m) The Buyer agrees to indemnify and hold harmless, to the same extent and in
the same manner set forth in Section 5(l), the Company, each of its
directors, each of its officers who signs the Registration Statement, each
person, if any, who controls the Company within the meaning of the
Securities Act or the Exchange Act, any underwriter and any other
stockholder selling securities pursuant to the Registration Statement or
any of its directors or officers or any person who controls such
stockholder or underwriter within the meaning of the Securities Act or the
Exchange Act (each such person and each Indemnified Person, an "Indemnified
Party"), against any Claim to which any of them may become subject, under
the Securities Act, the Exchange Act or otherwise, insofar as such Claim
arises out of or is based upon any Violation by the Buyer, in each case to
the extent (and only to the extent) that (I) such Violation occurs in
reliance upon and in conformity with written information furnished to the
Company by the Buyer expressly for use in connection with such Registration
Statement or such prospectus or (II) is a result of the breach of federal
or state securities laws pertaining to the transfer by the Buyer of the
Shares or the securities underlying the Shares; and the Buyer will
reimburse any reasonable legal or other expenses reasonably incurred by any
Indemnified Party in connection with investigating or defending any such
Claim; provided, however, that the indemnity contained in this Section 5(m)
shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of the Buyer,
which consent shall not be unreasonably withheld; provided, further, that
the Buyer shall be liable under this Section 5(m) for only that amount of a
Claim as does not exceed the net proceeds to the Buyer as a result of the
sale of Shares pursuant to such Registration Statement or such prospectus.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of such Indemnified Party and shall
survive the transfer of the Shares (or underlying securities) by the Buyer.
Notwithstanding anything to the contrary contained herein the indemnity
contained in this Section 5(m) with respect to any preliminary prospectus
shall not inure to the benefit of any Indemnified Party if the untrue
statement or omission of material fact contained in the preliminary
prospectus was corrected on a timely basis in the prospectus, as then
amended or supplemented.
n) Promptly after receipt by an Indemnified Person or Indemnified Party under
Section 5(l) or 5(m) of notice of the commencement of any action (including
any governmental action), such Indemnified Person or Indemnified Party
shall, if a Claim in respect thereof is made against any indemnifying party
under this Section 5, deliver to the indemnifying party a written notice of
the commencement thereof, and the indemnifying party shall have the right
to participate in, and, to the extent the indemnifying party so desires,
jointly with any other indemnifying party similarly noticed, assume control
of the defense thereof with counsel mutually satisfactory to the
indemnifying parties; provided, however, that an Indemnified Person or
Indemnified Party shall have the right to retain its own counsel, with the
fees and expenses to be paid by the indemnifying party, if, in the
reasonable opinion of counsel retained by the indemnifying party, the
representation by
10
<PAGE>
such counsel of the Indemnified Person or Indemnified Party and the
indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party
and any other party represented by such counsel in such proceeding. Except
as provided in the preceding sentence, the Company shall pay for only one
separate legal counsel for the Indemnified Persons. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party
of any liability to the Indemnified Person or Indemnified Party under this
Section 5, except to the extent that the indemnifying party is prejudiced
in its ability to defend such action. The indemnity required by this
Section 5 shall be made by periodic payments of the amount thereof during
the course of the investigation or defense, as such expense, loss, damage
or liability is incurred and is due and payable.
o) PIGGYBACK REGISTRATION. After the registration under Section 5(a) hereof,
and for a period ending three years from the date hereof, if the Company at
any time proposes to register any of its securities under the Securities
Act (other than a registration effected solely to implement an employee
benefit plan, a transaction to which Rule 145 of the SEC is applicable or
any other form or type of registration in which the Buyer's Shares cannot
be included pursuant to SEC rule or practice), it will give written notice
to the Buyer of its intention to do so. If such registration is proposed
to be of Common Stock on a form which permits inclusion of the Shares, upon
the written request (stating the intended method of disposition of such
securities) of the Buyer given within thirty (30) days after transmittal by
the Company to the Buyer of such notice, the Company will, subject to the
limits contained in this Agreement, use its best efforts to cause all such
Shares of the Buyer to be registered under the Securities Act and qualified
for sale under any state securities law, all to the extent requisite to
permit such sale or other disposition by the Buyer, except that if the
Company receives a written opinion of a managing underwriter that the
inclusion of any or all of such Shares would adversely affect the marketing
of the securities to be sold pursuant to such registration statement the
Company shall not be required to register any or all of such Shares.
Sections 5(b) through 5(n) hereof shall apply to any registration in which
the Buyer participates, and in such event, the term "Registration
Statement" shall mean the registration statement filed in connection with
such registration.
6. TRANSFER AGENT INSTRUCTIONS.
Promptly following the delivery by the Buyer of the Note and the Company's
acceptance of this Agreement, the Company's transfer agent will be instructed by
the Company to issue one or more certificates representing the Shares purchased,
bearing the restrictive legend specified in Section 4(b) of this Agreement,
registered in the name of the Buyer or its nominee and in such denominations as
shall be specified by the Buyer prior to the Closing Date. The Company warrants
that no instruction other than such instructions referred to in this Section 6
and stop transfer instructions to give effect to Section 4(a) and (b) hereof
will be given by the Company to the transfer agent and that the Shares shall
otherwise be freely transferable on the books and
11
<PAGE>
records of the Company as and to the extent provided in this Agreement. Nothing
in this Section shall affect in any way the Buyer's obligations and agreement to
comply with all applicable federal and state securities laws upon resale of the
Shares. If the Buyer provides the Company with an opinion of counsel reasonably
satisfactory in form, scope and substance to the Company that registration of a
resale by the Buyer of any of the Shares in accordance with Section 4(a) is not
required under the Securities Act or applicable state securities laws, the
Company shall permit the transfer agent to issue one or more share certificates
in such name and in such denominations as specified by the Buyer.
7. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The Buyer understands that the Company's obligation to sell the Shares to
the Buyer pursuant to this Agreement is conditioned upon:
a) The receipt and acceptance by the Company in its sole and absolute
discretion of this Agreement, as evidenced solely by delivery by the
Company to the Buyer of this Agreement duly executed by the Company;
b) The receipt by the Company of a completed Form W-8 or W-9, if necessary,
attached to this Agreement, for the Buyer;
c) Delivery by the Buyer to the Company of the Note; and
d) The accuracy on the Closing Date of the representations and warranties of
the Buyer contained in this Agreement and the performance by the Buyer on
or before the Closing Date of all covenants and agreements of the Buyer
required to be performed on or before such Closing Date.
8. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to exchange the Note
for the Shares is conditioned upon:
a) Delivery by the Company to the Buyer of this Agreement duly executed by the
Company in acceptance thereof and delivery of the Shares to the Buyer and
the cash for any interest due and payable on the Note; and
b) The accuracy on the Closing Date of the representations and warranties of
the Company contained in this Agreement and the performance by the Company
on or before the Closing Date of all covenants and agreements of the
Company required to be performed on or before such Closing Date.
9. NO OFFER TO SELL.
12
<PAGE>
This Agreement shall not be construed or interpreted as any offer by the
Company to sell the Shares. The Company shall have no obligation to accept this
Agreement if offered by the Buyer and may in the Company's sole discretion elect
to reject this Agreement. The Company shall have no obligation or liability to
the Buyer or to any other party if the Company in its sole and absolute
discretion determines not to accept this Agreement.
10. GOVERNING LAW; JURISDICTION.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware (without giving effect to principles of conflicts
of law). The Buyer hereby consents to and agrees to submit to the jurisdiction
in the United States of America of the District Court of the State of Texas
located in Harris County or of the United States District Court for the Southern
District of Texas for any action or proceeding brought by the Company arising
under or by reason of this Agreement or relating to the sale of the Shares and
to the venue of such action or proceeding in such courts.
11. TRIAL BY JURY.
The Buyer hereby waives trial by jury in any action or proceeding
involving, directly or indirectly, any matter (whether sounding in tort,
contract, fraud or otherwise) in any way arising out of or in connection with
this Agreement, or the Shares issued hereunder.
12. MISCELLANEOUS.
A facsimile transmission of this signed agreement shall be legal and
binding on all parties hereto. This Agreement and the rights and obligations
hereunder are not transferable or assignable by the Buyer. The headings of this
Agreement are for convenience of reference and shall not form part of, or affect
the interpretation of, this Agreement. If any provision of this Agreement shall
be invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement or the validity or enforceability of this Agreement
in any other jurisdiction. Any notices required or permitted to be given under
the terms of this Agreement shall be sent by mail or delivered personally or by
courier and shall be effective five (5) days after being placed in the mail, if
mailed, or upon receipt, if delivered personally or by courier, in each case
addressed to a party at such party's address shown in the introductory paragraph
or on the signature page of this Agreement or such other address as may be
provided by a party in accordance with this Section 12.
13. ENTIRE UNDERSTANDING.
This Agreement (including any attachments hereto) constitutes the entire
understanding of the parties hereto with respect to the subject matter hereof
and supersedes any and all prior agreements, whether written or oral. This
Agreement may be amended only in a written document duly executed by both
parties hereto.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
13
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer or
one of its officers thereunto duly authorized as of December 16, 1998.
Name of Buyer: BSR Investments, Ltd.
Signature: By: /s/ NICOLE SOUKI
------------------------------
Name: Nicole Souki
Title: President
Address: 97 Avenue Henri Martin
75016 Paris, France
Address for Delivery
Of Shares ______________________________
(if different): ______________________________
______________________________
IRS Taxpayer No:__________________________________
Number of Shares: 2,777,778
---------
Face Value of Note
Being Delivered: US $2,000,000.00
----------------
This Agreement has been accepted by the Company as of January 15, 1999.
CHENIERE ENERGY, INC.
By:/s/ DON A. TURKLESON
--------------------------------
Name: Don A. Turkleson
Title: Chief Financial Officer
14
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (Nos. 333-57533 and
333-49847) and in the Registration Statement on Form S-8 (No. 333-52479) of
Cheniere Energy, Inc. of our report dated March 15, 1999 appearing on page 19 of
Cheniere Energy, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1998.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 26, 1999
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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