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As filed with the Securities and Exchange Commission on October 2, 1996
Registration No. 333-10905
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE AMMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CHENIERE ENERGY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1382 95-4352386
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or organization) Industrial Classification Code Number) Identification No.)
</TABLE>
TWO ALLEN CENTER
1200 SMITH STREET, SUITE 1710
HOUSTON, TEXAS 77002-4312
(713) 659-1361
(Address, including zip code and telephone number, including area code, of
registrant's principal executive offices)
WILLIAM D. FORSTER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CHENIERE ENERGY, INC.
TWO ALLEN CENTER
1200 SMITH STREET, SUITE 1710
HOUSTON TEXAS 77002-4312
(713) 659-1361
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies of all communications, including all communications sent
to the agent for service, should be sent to:
CAMILLE ABOUSLEIMAN, ESQ.
DEWEY BALLANTINE
1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(212) 259-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]_________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ] _________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
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PROSPECTUS
2,844,211 SHARES
CHENIERE ENERGY, INC.
COMMON STOCK
(PAR VALUE $.003 PER SHARE)
This Prospectus relates to 2,844,211 shares of issued and outstanding
common stock of Cheniere Energy, Inc., a Delaware corporation (the "Company" or
"Cheniere"), par value $.003 per share (the "Common Stock"). The Common Stock
was originally issued by Cheniere to certain holders of shares of common stock
of Cheniere Energy Operating Co., Inc., a wholly-owned subsidiary of Cheniere,
and to an "accredited investor" (as defined in Rule 501(a) promulgated under the
Securities Act of 1933, as amended (the "Securities Act")), pursuant to
Regulation D promulgated under the Securities Act. See "Description of Capital
Stock".
The Common Stock (ticker symbol "CHEX") is traded on the over-the-counter
market and quoted on the OTC Bulletin Board (the "Bulletin Board"). On September
27, 1996, the last reported sale price of the Common Stock on the Bulletin Board
was $3.125 per share.
The Common Stock has been registered for sale by Selling Stockholders (as
defined herein) and may be offered by Selling Stockholders from time to time in
transactions in the over-the-counter market, in negotiated transactions or a
combination of such methods of sale, in each such case, at fixed prices which
may be changed, at market prices prevailing at the time of sale, at prices
related to prevailing market prices, or at negotiated prices. The Selling
Stockholders may effect such transactions by selling shares of the Common Stock
to or through broker-dealers, and such broker-dealers may receive compensation
in the form of discounts, concessions or commissions from Selling Stockholders
and/or purchasers of the Common Stock for whom such broker-dealers may act as
agents or to whom they sell as principals, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions). To the
extent required, shares of the Common Stock, the name of the Selling
Stockholder, the public offering price, the names of any such agent, dealer or
underwriter, and any applicable commission or discount with respect to any
particular offer will be set forth in an accompanying Prospectus Supplement. See
"Selling Stockholders" and "Plan of Distribution".
None of the proceeds from the sale of the Common Stock will be received by
the Company. The Company has agreed, among other things, to bear all expenses
(other than underwriting discounts and commissions, fees and expenses of
investment bankers and brokerage commissions) incurred in connection with the
registration and sale of the Common Stock covered by this Prospectus, including,
without limitation, all registration, listing and qualification fees, printers
and accounting fees and fees and disbursements of counsel to the Company.
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT
IN THE SECURITIES OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is October ___,1996
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SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements and the notes thereto appearing elsewhere
in this Prospectus.
THE COMPANY
GENERAL
Cheniere Energy, Inc., a holding company ("Cheniere," together with
Cheniere Operating (as defined below), the "Company"), is the owner of 100% of
the outstanding common stock of Cheniere Energy Operating Co., Inc. ("Cheniere
Operating"). Cheniere Operating is a Houston-based company formed for the
purpose of oil and gas exploration and exploitation. The Company is currently
involved in a joint exploration program which is engaged in the exploration for
oil and natural gas along the Gulf Coast of Louisiana, onshore and in the
shallow waters of the Gulf of Mexico. The Company commenced its oil and gas
activities through such joint program in April 1996.
The Company is involved with one major project in the pre-drilling stage.
The Company has entered into a joint exploration program pursuant to an
Exploration Agreement between the Company and Zydeco Exploration, Inc.
("Zydeco"), an operating subsidiary of Zydeco Energy, Inc. (the "Exploration
Agreement"), with regard to a new proprietary 3-D seismic exploration project in
southern Louisiana (the "3-D Joint Venture"). The Company has the right to earn
up to a 50% participation in the 3-D Joint Venture. The Company believes that
the 3-D seismic survey (the "Survey") is the first of its size within the
Transition Zone of Louisiana, an area extending a few miles on either side of
the Louisiana State coastline. The Survey is to be conducted over certain areas
located within a total area of approximately 255 square miles running 5 miles
south and generally 3 to 5 miles north of the coastline in the most westerly 28
miles of West Cameron Parish, Louisiana (the "Survey AMI"). The 3-D Joint
Venture does not currently have rights to survey the entire Survey AMI and the
extent of the Survey AMI which the 3-D Joint Venture will be entitled to survey
is dependent upon its ability to obtain survey permits and similar rights.
Currently, the 3-D Joint Venture has permits and similar rights to survey
approximately 67% of the Survey AMI and is attempting to acquire rights to
Survey additional portions of the Survey AMI. There is no assurance that the 3-D
Joint Venture will successfully obtain rights to survey additional portions of
the Survey AMI. The 3-D Joint Venture will survey specific sections selected by
it within the areas covered by such permits and rights. A seismic data
acquisition contract has been signed and the 3-D Joint Venture has begun to
conduct the survey.
On July 26, 1996, the Company signed a Letter of Intent with Poseidon
Petroleum, LLC ("Poseidon") to purchase Poseidon's 47% working interest in
undeveloped reserves in the Bonito Unit of the Pacific Outer Continental Shelf,
offshore Santa Barbara County, California (the "Poseidon Interest"). The parties
are conducting due diligence and are negotiating a definitive purchase and sale
agreement and related documentation. The transactions contemplated in the Letter
of Intent may be terminated by either party upon the occurrence of certain
events and there can be no assurance that the Company will successfully
consummate such transactions. Moreover, if such transactions are consummated,
the Company expects that development of the reserves will not occur for at least
five years. There can be no assurance that the Company will successfully develop
the reserves or that the reserves will yield sufficient quantities of oil and
gas to be economically viable.
The Company has not yet established oil and gas production, nor has it
booked proven oil and gas reserves.
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BUSINESS STRATEGY
The Company's objective is to expand the net value of its assets by growing
its oil and gas reserves in a cost efficient manner. The Company intends to
pursue this objective by following an integrated strategy that includes the
following elements:
. FOCUS ON FEW PROJECTS WITH LARGE RESERVE POTENTIAL.
Louisiana Gulf Coast Transition Zone. The Company's current activities are
focused within one area, the Transition Zone of Louisiana. The Company
believes that the Transition Zone, including the westernmost 28 miles of
Louisiana coastline that are within the Survey AMI, has significant remaining
undiscovered reserves. The 3-D Joint Venture therefore plans to focus its
efforts on certain areas, all located within the Survey AMI. In addition, the
substantial infrastructure along the Gulf Coast and in the shallow Gulf of
Mexico permits the Company to lower its operating costs compared to those in
other geographic regions and facilitates the timely development of oil and
gas discoveries. The Company's officers and Zydeco have extensive experience
both onshore and offshore in the Gulf Coast and believe the 3-D Joint Venture
is well positioned to evaluate, explore and develop properties in the area.
Offshore California. The Company has signed a Letter of Intent with Poseidon
to purchase Poseidon's 47% working interest in undeveloped reserves in the
Bonito Unit of the Pacific Outer Continental Shelf, offshore Santa Barbara
County, California. An independent reserve report is being prepared to
determine an estimate of the volume of undeveloped oil and gas reserves
attributable to the Poseidon Interest. The parties are conducting due
diligence and are negotiating a definitive purchase and sale agreement and
related documentation. The transactions contemplated in the Letter of Intent
may be terminated by either party upon the occurrence of certain events and
there can be no assurance that the Company will successfully consummate the
transactions contemplated by the Letter of Intent with Poseidon. Moreover, if
such transactions are consummated, the Company expects that development of
the reserves will not occur for at least five years. There can be no
assurance that the Company will successfully develop the reserves or that the
reserves will yield sufficient quantities of oil and gas to be economically
viable.
. MAINTAIN A SIGNIFICANT WORKING INTEREST IN EACH PROJECT. The Company has the
right to earn up to a 50% participation in the 3-D Joint Venture. Under the
terms of the Exploration Agreement, the Company must timely meet its payment
obligations to the 3-D Joint Venture in order to reach a 50% participation.
The Company does not intend to be an operator in the area, but intends to
maintain a significant working interest to better leverage its administrative
and technical resources and to better influence operator decisions.
. UTILIZE THE LATEST EXPLORATION, DEVELOPMENT AND PRODUCTION TECHNOLOGY. The
Company intends to use the latest technology to enhance the efficiency and
economy of its exploration, development and production efforts. These include
the use of advanced 3-D seismic acquisition and processing techniques in the
Survey AMI.
. CONTROL OVERHEAD COSTS. The Company plans to maintain a small, but
experienced working staff, and to leverage their talents by focusing on a
relatively few projects which have high reserve potential in which it can
obtain a high working interest, and to employ outside consultants and seek
industry partners with the appropriate geographic and technical experience.
Currently, the Company has no employees other than its executive officers and
one administrative assistant.
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RISK FACTORS
An investment in the common stock, par value $.003 per share, of the
Company (the "Common Stock") involves a significant degree of risk. The
following factors, together with the information provided elsewhere in this
Prospectus, should be considered carefully in evaluating an investment in the
Common Stock of the Company.
FACTORS RELATING TO THE COMPANY
Limited Operating History
Cheniere Energy, Inc., a holding company ("Cheniere," together with
Cheniere Operating (as defined below), the "Company"), is the owner of 100% of
the outstanding common stock of Cheniere Energy Operating Co., Inc. ("Cheniere
Operating"). The Company has a limited operating history with respect to its oil
and gas exploration activities which were commenced through a joint exploration
program in April 1996 by Cheniere Operating. Following a reorganization with
Bexy Communications, Inc. ("Bexy"), Cheniere Operating became a wholly-owned
subsidiary of Cheniere. During the fiscal year ended August 31, 1996, the
Company incurred net losses of $286,819. The Company is likely to continue to
incur losses during 1997, and possibly beyond, depending on whether it generates
sufficient revenue from producing reserves acquired either through acquisitions
or drilling activities.
Limited Assets
The Company has not yet established oil and gas production, nor has it
booked proven oil and gas reserves. Currently, the Company's primary asset is
its interest in a joint exploration program pursuant to an Exploration Agreement
(the "Exploration Agreement") between the Company and Zydeco Exploration, Inc.
("Zydeco") with regard to a new proprietary 3-D seismic exploration project in
Southern Louisiana (the "3-D Joint Venture"). Therefore, the Company is highly
dependent on the success of the 3-D Joint Venture and the Company's ability to
acquire operating assets in the future. While the Company has signed a Letter of
Intent to purchase a working interest in undeveloped reserves in the Bonito Unit
of the Pacific Outer Continental Shelf, offshore Santa Barbara County, there is
no assurance that the Company will successfully consummate the transactions
contemplated by such Letter of Intent. Moreover, if such transactions are
consummated, the Company expects that development of the reserves will not occur
for at least five years. There can be no assurance that the Company will
successfully develop the reserves or that the reserves will yield sufficient
quantities of oil and gas to be economically viable. See "Business and
Properties."
Need for Additional Financing
The Company presently has no operating revenues and does not expect to
generate substantial operating revenues in the foreseeable future. It is
expected that the Company will need substantial additional capital in order to
sustain operations and to timely make required payments to the 3-D Joint Venture
and to holders of outstanding promissory notes of the Company. Such additional
capital will also be necessary in order for the Company to acquire additional
oil and gas leases, producing properties or to drill wells on potential
prospects. Additional capital may be secured from a combination of funding
sources that may include borrowings from financial institutions, debt offerings
(which would increase the leverage of the Company and add to its need for cash
to service such debt), additional offerings of the Company's equity securities
(which could cause substantial dilution of the Common Stock), or sales of
portions of the Company's interest in the 3-D Joint Venture (which would reduce
any future revenues from the 3-D Joint Venture). The Company's ability to access
additional capital will depend on its results of operations and the status of
various capital markets at the time such additional capital is sought.
Accordingly, there can be no assurances that capital will be available to the
Company from any source or that, if available, it will be on terms acceptable to
the Company. Should sufficient additional financing not be available, the
Company will be unable to make required payments to the 3-D Joint Venture and/or
to holders of outstanding promissory notes of the Company. See "Management
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
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Timeliness of 3-D Joint Venture Payments
Under the terms of the Exploration Agreement, the Company is required to
make monthly payments to the 3-D Joint Venture aggregating, at least, $13
million, $5 million of which has been paid by the Company to date. The Company's
potential participation in the 3-D Joint Venture could be significantly reduced
in the event of a failure by the Company to make such required monthly payments
when due. The Company has in the past failed to make such payments when due.
While the Company has in such instances succeeded in obtaining waivers under,
and amendments to, the Exploration Agreement extending the due dates for such
payments, there can be no assurance that the Company will successfully obtain
similar amendments should it fail to timely make required payments to the 3-D
Joint Venture in the future. The Company currently does not have sufficient
capital to meet its future payment obligations and there can be no assurance
that the Company will successfully secure the necessary funds. See "Business and
Properties - 3-D Joint Venture Exploration Agreement."
Potential Acquisition of Working Interest in California Offshore Oil Reserves
On July 26, 1996 the Company signed a Letter of Intent to purchase a 47%
working interest in undeveloped reserves in the Bonito Unit of the Pacific Outer
Continental Shelf, offshore Santa Barbara County, California. The parties are
currently conducting due diligence and are in the process of negotiating a
definitive purchase and sale agreement. The transactions contemplated in the
Letter of Intent may be terminated by either party upon the occurrence of
certain events and there can be no assurance that the Company will consummate
such transactions. Moreover, if such transactions are consummated, the Company
expects that development of the reserves will not occur for at least five years.
There can be no assurance that the Company will successfully develop the
reserves or that the reserves will yield sufficient quantities of oil and gas to
be economically viable. See "Business and Properties."
Lack of Liquidity of the Common Stock
There is currently limited liquidity in the trading of the Common Stock.
The completion of the offering of the Common Stock provides no assurance that
the trading market for the Common Stock will become more active. The Company
intends to apply for a Nasdaq SmallCap Market listing as soon as is practicable.
There can be no assurance that the Company will qualify for such listing.
Possible Issuance of Additional Shares
The Company's Certificate of Incorporation authorizes the issuance of
20,000,000 shares of the Common Stock. As of September 27, 1996, approximately
50% of the shares of the Common Stock remained unissued. The Company's Board of
Directors has the power to issue any and all of such shares without shareholder
approval. It is likely that the Company will issue shares of the Common Stock,
among other reasons, in order to raise capital to sustain operations, make
required payments to the 3-D Joint Venture and/or to finance future oil and gas
exploration projects. In addition, the Company has reserved 309,666 and 2/3
shares of the Common Stock for issuance upon the exercise of outstanding
warrants and 319,444 and 2/3
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shares of the Common Stock for issuance upon the exercise of outstanding options
and has agreed to issue additional warrants to purchase 12,500 shares of the
Common Stock. The Company has also agreed to issue 105,000 shares of the Common
Stock in exchange for certain outstanding promissory notes of Cheniere Operating
(See "Management Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources"). Any issuance of the Common Stock
by the Company may result in a reduction in the book value per share or market
price per share of the outstanding shares of the Common Stock and will reduce
the proportionate ownership and voting power of such shares. See "Description of
Capital Stock."
Dependence on Key Personnel
The Company is dependent upon its executive officers for its various
activities. The Company does not maintain "key person" life insurance policies
on any of its personnel nor does it have employment agreements with any of its
personnel. The loss of the services of any of these individuals could materially
and adversely affect the Company. In addition, the Company's future success will
depend in part upon its ability to attract and retain additional qualified
personnel. Other than its officers, the Company has only one full-time employee,
an administrative assistant.
Dependence on Industry Partners
The future success of the 3-D Joint Venture is largely dependent upon the
experience and performance of Zydeco. As the Company has few employees and
limited operating revenues, the Company will be largely dependent upon industry
partners for the success of its oil and gas exploration projects for the
foreseeable future.
Control by Principal Stockholders
William D. Forster, President and Chief Executive Officer of the Company,
and BSR Investments, Ltd. ("BSR"), an entity under the control of a member of
the immediate family of Charif Souki, Secretary and a director of the Company,
own in the aggregate approximately 54.3% of the outstanding Common Stock.
Accordingly, Mr. Forster and BSR will be able to elect all of the directors of
the Company and to control the Company's management, operations and affairs,
including the ability to effectively prevent or cause a change in control of the
Company.
FACTORS RELATING TO THE 3-D JOINT VENTURE
Ability to Obtain Permits
The 3-D Joint Venture will conduct a 3-D seismic survey (the "Survey") over
certain areas located within a total area of approximately 255 square miles
running 5 miles south and generally 3 to 5 miles north of the coastline in the
most westerly 28 miles of West Cameron Parish, Louisiana (the "Survey AMI"). The
3-D Joint Venture does not currently have rights to survey the entire Survey AMI
and the extent of the Survey AMI which the 3-D Joint Venture will be entitled to
survey is dependent upon its ability to obtain survey permits and similar
rights. Currently, the 3-D Joint Venture has rights to survey approximately 67%
of the Survey AMI and is attempting to acquire rights to survey additional
portions of the Survey AMI. There can be no assurance that the 3-D Joint Venture
will successfully obtain permits or rights to survey additional portions of the
Survey AMI.
Louisiana State Waters - Timing Risks
Among certain other rights, the 3-D Joint Venture currently has the
exclusive right to shoot and gather seismic data over 51,360 net acres of
Louisiana State waters, located in the Western half of West Cameron Parish,
Louisiana and constituting a sub-area of the Survey AMI and to nominate for
lease any acreage in such State waters (the "Louisiana Seismic Permit"). The
Louisiana Seismic Permit expires in August 1997, but may be extended at Zydeco's
option for an additional six months to February 1998 by payment of an additional
fee of $391,876.80. By December 1997, the 3-D Joint Venture is scheduled to
complete the Survey, process and interpret the Survey data, nominate and bid for
leases, propose and contract for drilling, and commence drilling its first set
of prospects. Under the terms of the Louisiana Seismic Permit, the 3-D Joint
Venture will be liable to pay penalties of $783,753.60 in the event it fails to
(i) complete the acquisition of
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the seismic data covering the entire area subject to the Louisiana Seismic
Permit or (ii) provide access to such data to the State of Louisiana in a timely
manner. Under the terms of the Exploration Agreement, any such penalties payable
under the Louisiana Seismic Permit shall be borne equally by Zydeco and the
Company. There can be no assurance that the 3-D Joint Venture will complete its
scheduled activities within the time period required under the Louisiana Seismic
Permit. Failure of the 3-D Joint Venture to complete its scheduled activities
within the term of the Louisiana Seismic Permit would materially and adversely
affect the value of the Company's interest in the 3-D Joint Venture. See
"Business and Properties - Permit and Lease Status within the Survey AMI."
FACTORS RELATING TO THE OIL AND GAS INDUSTRY
Operating Risks
The oil and gas operations of the Company are subject to all of the risks
and hazards typically associated with the exploration for, and the development
and production of, oil and gas. Risks in drilling operations include cratering,
explosions, uncontrollable flows of oil, gas or well fluids, fires, pollution
and other environmental risks. The Company's activities are also subject to
perils specific to marine operations, such as capsizing, collision, and damage
or loss from severe weather. These hazards can cause personal injury and loss of
life, severe damage to and destruction of property and equipment, pollution or
environmental damage and suspension of operations. In accordance with customary
industry practices, the Company intends to maintain insurance against some, but
not all, of such risks and some, but not all, of such losses. The occurrence of
a significant event not fully insured or indemnified against could materially
and adversely affect the Company's financial condition and operations. Moreover,
no assurance can be given that the Company will be able to maintain adequate
insurance in the future at rates considered reasonable by the Company. See
"Business and Properties - Operational Risks and Insurance."
Exploration Risks
The Company's exploration activities involve significant risks. There can
be no assurance that the use of technical expertise as applied to geophysical or
geological data will ensure that any well will encounter hydrocarbons. Further,
there is no way to know in advance of drilling and testing whether any prospect
encountering hydrocarbons in the Survey AMI by the 3-D Joint Venture will yield
oil or gas in sufficient quantities to be economically viable. In addition, the
Company is highly dependent upon seismic activity and the related application of
new technology as a primary exploration methodology. There can be no assurance
that the 3-D Joint Venture's efforts will be successful. See "Business and
Properties."
High Dependence upon Lease Acquisition Activities
Both the United States Department of the Interior and the State of
Louisiana award oil and gas leases on a competitive bidding basis and non-
governmental owners of the onshore mineral interests within the Survey AMI are
not obligated to lease their mineral rights to the 3-D Joint Venture except to
the extent they have granted lease options to the 3-D Joint Venture. Other major
and independent oil and gas companies having financial resources significantly
greater than those of the 3-D Joint Venture may bid against the 3-D Joint
Venture for the purchase of oil and gas leases. Accordingly, there can be no
assurance that the 3-D Joint Venture or any other oil and gas venture of the
Company will be successful in acquiring farmouts, seismic permits, lease
options, leases or other rights to explore or recover oil and gas. Consequently,
the proportion of the Survey AMI which could be surveyed or subsequently
explored through drilling would be reduced to the extent that the 3-D Joint
Venture is not successful at such acquisitions. See "Business and Properties -
Permit and Lease Status within the Survey AMI."
Lack of Diversification; Oil and Gas Industry Conditions; Volatility of
Prices for Oil and Gas
As an independent energy company, the Company's revenues and profits will
be substantially dependent on the oil and gas industry in general and the
prevailing prices for oil and gas in particular. Oil and gas prices have been
and are likely to continue to be volatile and subject to wide fluctuations in
response to any of the following factors: relatively minor changes in the supply
of and demand for oil and gas; market uncertainty; political conditions in
international oil producing regions; the extent of domestic production and
importation of oil in certain relevant markets; the level of consumer demand;
weather conditions; the
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competitive position of oil or gas as a source of energy as compared with other
energy sources; the refining capacity of oil purchasers; and the effect of
federal and state regulation on the production, transportation and sale of oil.
It is likely that adverse changes in the oil market or the regulatory
environment would have an adverse effect on the Company's ability to obtain
capital from lending institutions, industry participants, private or public
investors or other sources.
Intense Competition in Oil and Gas Industry
The oil and gas industry is highly competitive. Most of the Company's
current and potential competitors have significantly greater financial resources
and a significantly greater number of experienced and trained managerial and
technical personnel than the Company and the 3-D Joint Venture. There can be no
assurance that the Company or the 3-D Joint Venture will be able to compete
effectively with such firms. See "Business and Properties - Competition and
Markets."
Risks of Turnkey Contracts
The Company anticipates that any wells established by it will be drilled by
proven industry contractors under turnkey contracts that limit the Company's
financial and legal exposure. However, circumstances may arise where a turnkey
contract is not economically beneficial to the Company or is otherwise
unobtainable from proven industry partners. In such instances, the Company may
decide to drill, or cause to be drilled, the applicable well(s) on either a
footage or day rate basis and the drilling thereof will be subject to the usual
drilling hazards such as cratering, explosions, uncontrollable flows of oil, gas
or well fluids, fires, pollution and other environmental risks. The Company
would also be liable for any cost overruns attributable to downhole drilling
problems that otherwise would have been covered by a turnkey contract had one
been negotiated. See "Business and Properties - Operational Risks and
Insurance."
United States Governmental Regulation, Taxation and Price Control
Oil and gas production and exploration are subject to comprehensive
federal, state and local laws and regulations controlling the exploration for
and production and sale of oil and gas and the possible effects of such
activities on the environment. Failure to comply with such rules and regulations
can result in substantial penalties and may adversely affect the Company.
Present, as well as future, legislation and regulations could cause additional
expenditures, restrictions and delays in the Company's business, the extent of
which cannot be predicted and which may require the Company to limit
substantially, delay or cease operations in some circumstances. In most, if not
all, areas where the Company may conduct activities, there may be statutory
provisions regulating the production of oil and natural gas which may restrict
the rate of production and adversely affect revenues. The Company plans to
acquire oil and gas leases in the Gulf of Mexico, which will be granted by the
Federal government and administered by the U.S. Department of Interior Minerals
Management Service (the "MMS"). The MMS strictly regulates the exploration,
development and production of oil and gas reserves in the Gulf of Mexico. Such
regulations could have a material adverse affect on the Company's operations in
the Gulf of Mexico. The Federal government regulates the interstate
transportation of oil and natural gas, through the Federal Energy and Regulatory
Commission ("FERC"). The FERC has in the past regulated the prices at which oil
and gas could be sold. Federal reenactment of price controls or increased
regulation of the transport of oil and natural gas could have a material adverse
affect on the Company. In addition, the Company's operations are subject to
numerous laws and regulations governing the discharge of oil and hazardous
materials into the environment or otherwise relating to environmental
protection, including the Oil Pollution Act of 1990. These laws and regulations
have continually imposed increasingly strict requirements for water and air
pollution control, solid waste management, and strict financial responsibility
and remedial response obligations relating to oil spill protection. The cost of
complying with such environmental legislation will have a general adverse affect
on the Company's operations. See "Business and Properties - Governmental
Regulation."
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THE COMPANY
Cheniere Energy, Inc., a holding company ("Cheniere," together with
Cheniere Operating (as defined below), the "Company"), is the owner of 100% of
the outstanding common stock of Cheniere Energy Operating Co., Inc. ("Cheniere
Operating"). Cheniere Operating is a Houston-based company formed for the
purpose of oil and gas exploration and exploitation. Cheniere Operating was
incorporated in Delaware in February 1996 under the name FX Energy, Inc.
On July 3, 1996 Cheniere Operating consummated the transactions (the
"Reorganization") contemplated in the Agreement and Plan of Reorganization (the
"Reorganization Agreement") dated April 16, 1996 between Cheniere Operating and
Bexy Communications, Inc., a publicly held Delaware corporation ("Bexy"). Under
the terms of the Reorganization Agreement, Bexy transferred its existing assets
and liabilities to Mar Ventures, Inc., its wholly-owned subsidiary ("Mar
Ventures"), Bexy received 100% of the outstanding shares of Cheniere Operating
and the former shareholders of Cheniere Operating received approximately 8.3
million newly issued shares of Bexy common stock, representing 93% of the then
issued and outstanding Bexy shares. Immediately following the Reorganization,
the Original Bexy Stockholders held the remaining 7% of the outstanding Bexy
stock. In accordance with the terms of the Reorganization Agreement, Bexy
changed its name to Cheniere Energy, Inc. Subsequently, the Company distributed
the outstanding capital stock of Mar Ventures to the original holders of Bexy
common stock.
The Common Stock of the Company is traded on the over-the-counter
market and quoted on the OTC Bulletin Board (the "Bulletin Board") of the
National Association of Securities Dealers (the "NASD") (ticker symbol "CHEX")
with 10,039,594 shares outstanding as of September 27, 1996. The Company intends
to apply for a Nasdaq SmallCap Market listing as soon as is practicable.
The Company's principal executive offices are located at Two Allen
Center, 1200 Smith Street, Suite 1710, Houston, Texas 77002. The Company's
telephone number is (713) 659-1361.
USE OF PROCEEDS
All shares of Common Stock covered hereby are being registered for the
account of the Selling Stockholders and, accordingly, the Company will not
receive any proceeds from the sale of the Common Stock by the Selling
Stockholders.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
August 31, 1996. All information set forth below should be read in conjunction
with the financial data of the Company and related notes that appear elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
<S> <C>
Shareholders' Equity
Common Stock - $.003 Par Value
Authorized 20,000,000 shares;
9,931,767 Issued and Outstanding(1) $ 29,795
Preferred Stock -
Authorized 1,000,000 shares; --
None Issued and Outstanding
Additional paid-in capital 5,626,840
Retained Deficit (1,230,180)
----------
Total Shareholders' Equity $4,426,455
==========
</TABLE>
9
<PAGE>
(1) In addition, (i) 209,666 and 2/3 shares of the Common Stock are reserved
for issuance upon exercise of outstanding warrants to purchase Common Stock
at an exercise price of $3.00 per share, (ii) 100,000 shares of the Common
Stock are reserved for issuance upon the exercise of outstanding warrants
to purchase Common Stock at an exercise price of $3.125 per share, (iii)
300,000 shares of the Common Stock are reserved for issuance upon exercise
of outstanding options granted by the Board of Directors to certain of the
Company's executive officers, at an exercise price of $3.00 per share and
(iv) 19,444 and 2/3 shares of the Common Stock are reserved for issuance
upon exercise of outstanding options granted to Buddy Young, at an exercise
price of $1.80 per share.
MARKET PRICE AND DIVIDEND INFORMATION
From 1989 through December 1993, there was no public trading market
for the Bexy Common Stock. In December 1993, the common stock of Bexy began
trading on the Bulletin Board. In connection with the Reorganization, the
Company divested itself of the assets relating to the business of Bexy prior to
the Reorganization and has shifted its focus to oil and gas exploration.
Simultaneously with the Reorganization, each three outstanding shares of common
stock of Bexy was converted to one share of Common Stock and the stockholders of
Cheniere Operating were issued shares of Common Stock equaling approximately 93%
of the then issued and outstanding shares of Bexy causing the existing
stockholders of Bexy to be diluted to approximately 7%. On July 8, 1996, the
Common Stock began trading on the Bulletin Board (ticker symbol "CHEX"). As the
nature of the business and the Common Stock has changed as a result of the
Reorganization, this section describes the market price of the Common Stock
following the Reorganization on July 3, 1996.
The high ask and low bid prices of the Common Stock reported on the
Bulletin Board for the period from July 8, 1996 through September 27, 1996 were
$6.00 and $3.00, respectively. These quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not reflect actual
transactions.
As of September 27, 1996 there were 766 record holders of the Common
Stock which does not include holders who hold their shares of the Common Stock
in "street name".
The Company has not paid any dividends since its inception and
presently anticipates that all earnings, if any, will be retained for
development of the Company's business and that no dividends on its Common Stock
will be declared in the foreseeable future. Any future dividends will be subject
to the discretion of the Company's Board of Directors and will depend upon,
among other things, future earnings, the operating and financial condition of
the Company, its capital requirements and general business conditions.
10
<PAGE>
SELECTED FINANCIAL DATA
The following income statement data and balance sheet data have been
derived from the financial statements prepared in accordance with generally
accepted accounting principles. The financial statements of Cheniere Energy,
Inc. and Subsidiary as of August 31, 1996 and for the year then ended have been
audited by Merdinger, Fruchter, Rosen & Corso, P.C. This information should be
read in conjunction with the financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
September 1, 1995
to
August 31, 1996
-------------------
<S> <C>
Net operating revenues $ --
(Loss) from continuing operations (79,097)
Loss) from continuing operations per share of common
stock (0.008)
(Loss) from discontinued operations (207,722)
Net (loss) per share of common stock (0.03)
Total Assets 5,145,310
Long-term obligations --
Total Liabilities 718,855
Total Shareholders' Equity 4,426,455
Cash dividends declared per share of common stock --
</TABLE>
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cheniere Operating was incorporated in Delaware in February of 1996
for the purpose of entering the oil and gas exploration and exploitation
business, initially on the Louisiana Gulf Coast.
In March of 1996, Cheniere Operating entered into discussion with Bexy
Communications, Inc. ("Bexy") for a reorganization in order to give it a
presence in the public market.
On April 16, 1996, the Reorganization Agreement was entered into
whereby the Cheniere Operating stockholders would acquire control of Bexy in
consideration for the outstanding stock of Cheniere Operating.
Under the terms of the Reorganization Agreement, Bexy transferred its
existing assets of approximately $224,000 and its liabilities of approximately
$111,000 to Mar Ventures, Inc. ("Mar Ventures"), Bexy received 100% of the
outstanding shares of Cheniere Operating and the former shareholders of Cheniere
Operating received approximately 8.3 million newly issued shares of Bexy common
stock, representing 93% of the then issued and outstanding Bexy shares. Cheniere
Operating became a wholly-owned subsidiary of Bexy and the principal business
became oil and gas exploration. Bexy then changed its name to Cheniere Energy,
Inc. The Company distributed the outstanding capital stock of Mar Ventures to
the original holders of Bexy common stock.
The reorganization was accounted for as the recapitalization of
Cheniere Operating and the issuance of stock for the net assets of Bexy.
RESULTS OF OPERATIONS - AUDITED STATEMENTS YEAR ENDED AUGUST 31, 1996
The Company's operating results reflected a loss of $79,097, as there
were no revenues from continuing operations. General and Administrative expenses
of $73,814 comprised most of the loss.
The Company incurred one time losses of $207,722 from the
discontinuance of its former business in the television production and health
information field. Total losses were $286,819.
The Company's balance sheet reflected current assets of $1,097,980
with liabilities of $718,855. Other assets reflect an investment of $4 million
in the 3-D Joint Venture. After fiscal year end, in early September 1996, the
Company made an additional payment of $1 million to the 3-D Joint Venture, such
that an aggregate of $5 million has been paid by the Company to the 3-D Joint
Venture to date.
The Company's capital reflects sales of shares net of offering
expenses of $609,451 and distribution of net assets of $112,902.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 1996, the Company had working capital of $379,125.
Operating expenses and capitalized costs were financed by the sale of common
stock and Bridge Loan (as defined below) funding as revenues have yet to be
generated. It is anticipated that future liquidity requirements, including the
commitment to the 3-D Joint Venture which will amount to, at least, an
additional $8 million, will be met by sale of equity, further borrowings and/or
sales of portions of the Company's interest in the 3-D Joint Venture. At this
time, no assurance can be given that such sale of equity, further borrowings or
sales of portions of the Company's interest in the 3-D Joint Venture will prove
to be successful. The Company has in the past failed to timely
12
<PAGE>
make certain payments due to the 3-D Joint Venture. While the Company has in
such instances succeeded in obtaining waivers under, and amendments to, the
Exploration Agreement extending the due dates for such required payments, there
can be no assurance that the Company will successfully obtain similar amendments
should it fail to timely make required payments to the 3-D Joint Venture in the
future. The Company currently does not have sufficient capital to meet its
future payment requirements and there can be no assurance that the Company will
successfully secure the necessary funds. See "Business and Properties -
3-D Joint Venture Exploration Agreement."
Since its inception, the Company's primary source of financing for
operating expenses and payments to the 3-D Joint Venture has been the sale of
its equity securities.
In May and June 1996, Cheniere Operating raised $2,883,000, net of
offering costs, from the sale of shares of its common stock (which were
exchanged for 2,000,000 shares of the Common Stock following the Reorganization)
to "accredited investors" (as defined in Rule 501(a) promulgated under the
Securities Act of 1933, as amended (the "Securities Act")) pursuant to Rule 506
of Regulation D promulgated under the Securities Act ("Regulation D"). The
proceeds were used to fund Cheniere Operating's initial $3 million payment to
the 3-D Joint Venture.
In order to finance a $1 million payment made to the 3-D Joint Venture
on August 9, 1996, the Company sold Common Stock pursuant to Regulation D and
Regulation S promulgated under the Securities Act ("Regulation S"). In July
1996, the Company sold 50,000 shares of the Common Stock to an "accredited
investor" pursuant to Rule 506 of Regulation D and the Company received proceeds
of $100,000 from such sale. In July and August 1996, the Company conducted an
offering of Common Stock pursuant to Regulation S. The Company sold 508,400
shares of the Common Stock and received proceeds of $915,000, net of placement
fees, from such sale.
In late August 1996, the Company raised $1,000,000 from the sale of
100,000 units, each consisting of five shares of the Common Stock and a warrant
to purchase one share of the Common Stock, pursuant to Regulation S. The
proceeds were used to fund a $1 million payment to the 3-D Joint Venture made on
September 4, 1996.
In September 1996, the Company raised $260,500 from the sale of
130,250 shares of the Common Stock to "accredited investors" (as defined in Rule
501(a) promulgated under the Securities Act) pursuant to Rule 506 of Regulation
D.
In June 1996, Cheniere Operating borrowed $425,000 (the "Bridge Loan")
through a private placement of short term promissory notes with an initial
interest rate of 8% (the "Notes"). The Notes were due on September 14, 1996. In
connection with the placement of the Notes, Cheniere Operating issued warrants,
which following the Reorganization, were exchanged for an aggregate of 141,666
and 2/3 warrants to purchase shares of the Common Stock, to the holders of the
Notes (the "Noteholders"), each of which warrants entitles the holder to
purchase one share of the Common Stock at an exercise price of $3.00 per share
at any time on or before June 14, 1999. The Company has satisfied all of its
obligations under Notes in the aggregate principal amount of $210,000 by paying
the accrued interest on such Notes and by agreeing to issue 105,000 shares of
the Common Stock at a price of $2.00 per share to the holders of such Notes
pursuant to Regulation D. In addition, prior to the maturity of the Notes, an
individual Noteholder (the "Remaining Noteholder") purchased several outstanding
Notes following which such Noteholder held Notes in the aggregate principal
amount of $215,000. In connection with a modification of the Bridge Loan
arrangements as between the Remaining Noteholder and the Company, Cheniere
Operating has issued a new promissory note to the Remaining Noteholder with an
interest rate of 13% per annum in exchange for the Notes held by him. Such new
promissory note is due on January 14, 1997. The Remaining Noteholder is also
entitled to receive up to 21,500 additional warrants to purchase shares of the
Common Stock for each month, or partial month, any amounts remain due and
payable after September 14, 1996, up to a maximum aggregate number of 86,000
such additional warrants. Such additional warrants will have an exercise price
of $3.00 per share and will be exercisable for 3 years from the date of
issuance.
BUSINESS AND PROPERTIES
GENERAL
The Company is currently involved in a joint exploration program which
is engaged in the exploration for oil and natural gas along the Gulf Coast of
Louisiana, onshore and in the shallow waters of the Gulf of Mexico. The Company
commenced its oil and gas activities in April 1996 through such joint
exploration program, and since July 3, 1996 has been publicly traded under the
name Cheniere Energy, Inc.
The Company is involved with one major project in the pre-drilling
stage. The Company entered into a joint exploration program pursuant to an
Exploration Agreement dated April 4, 1996 between FX Energy, Inc., now known as
Cheniere Operating, and Zydeco Exploration, Inc. ("Zydeco"), an operating
subsidiary of Zydeco Energy, Inc. (the "Exploration Agreement"), with regard to
a new proprietary 3-D seismic exploration project in southern Louisiana (the "3-
D Joint Venture"). The Company has the right
13
<PAGE>
to earn up to a 50% participation in the 3-D Joint Venture. The Company believes
that the 3-D seismic survey (the "Survey") is the first of its size within the
Transition Zone of Louisiana, an area extending a few miles on either side of
the Louisiana State coastline. The Survey is to be conducted over certain areas
located within a total area of approximately 255 square miles running 5 miles
south and generally 3 to 5 miles north of the coastline in the most westerly 28
miles of West Cameron Parish, Louisiana (the "Survey AMI"). The 3-D Joint
Venture does not currently have rights to survey the entire Survey AMI and the
extent of the Survey AMI which the 3-D Joint Venture will be entitled to survey
is dependent upon its ability to obtain survey permits and similar rights.
Currently, the 3-D Joint Venture has permits and similar rights to survey
approximately 67% of the Survey AMI and is attempting to acquire rights to
survey additional portions of the Survey AMI. There can be no assurance that the
3-D Joint Venture will successfully obtain rights to survey additional portions
of the Survey AMI. The 3-D Joint Venture will survey specific sections selected
by it within the areas covered by such permits and rights. See "- Permit and
Lease Status Within the Survey AMI." A seismic data acquisition contract has
been signed and the 3-D Joint Venture has begun to conduct the Survey.
On July 26, 1996, the Company signed a Letter of Intent with Poseidon
Petroleum, LLC ("Poseidon") to purchase Poseidon's 47% working interest in
undeveloped reserves in the Bonito Unit of the Pacific Outer Continental Shelf,
offshore Santa Barbara County, California (the "Poseidon Interest"). The parties
are conducting due diligence and are negotiating a definitive purchase and sale
agreement and related documentation. The transactions contemplated in the Letter
of Intent may be terminated by either party upon the occurrence of certain
events and there can be no assurance that the Company will successfully
consummate such transactions. Moreover, if such transactions are consummated,
the Company expects that development of the reserves will not occur for at least
five years. There can be no assurance that the Company will successfully develop
the reserves or that the reserves will yield sufficient quantities of oil and
gas to be economically viable.
The Company has not yet established oil and gas production, nor has it
booked proven oil and gas reserves.
BUSINESS STRATEGY
The Company's objective is to expand the net value of its assets by
growing its oil and gas reserves in a cost efficient manner. The Company intends
to pursue this objective by following an integrated strategy that includes the
following elements:
. FOCUS ON FEW PROJECTS WITH LARGE RESERVE POTENTIAL.
Louisiana Gulf Coast Transition Zone. The Company's current activities are
focused within one area, the Transition Zone of Louisiana. The Company
believes that the Transition Zone, including the westernmost 28 miles of
Louisiana coastline that are within the Survey AMI, has significant remaining
undiscovered reserves. The 3-D Joint Venture therefore plans to focus its
efforts on certain areas, all located within The Survey AMI. In addition, the
substantial infrastructure along the Gulf Coast and in the shallow Gulf of
Mexico permits the Company to lower its operating costs compared to those in
other geographic regions and facilitates the timely development of oil and
gas discoveries. The Company's officers and Zydeco have extensive experience
both onshore and offshore in the Gulf Coast and believe the 3-D Joint Venture
is well positioned to evaluate, explore and develop properties in the area.
Offshore California. The Company has signed a Letter of Intent with Poseidon
to purchase Poseidon's 47% working interest in undeveloped reserves in the
Bonito Unit of the Pacific Outer Continental Shelf, offshore Santa Barbara
County, California. An independent reserve report is being prepared to
determine an estimate of the volume of undeveloped oil and gas reserves
attributable to the Poseidon Interest. The parties are conducting due
diligence and are negotiating a definitive purchase and sale agreement and
related documentation. The transactions contemplated in the Letter of Intent
may be terminated by either party upon the occurrence of certain events and
there can be no assurance that the Company will successfully consummate such
transactions. Moreover, if such transactions are consummated, the Company
expects that development of the reserves will not occur for at least five
14
<PAGE>
years. There can be no assurance that the Company will successfully develop
the reserves or that the reserves will yield sufficient quantities of oil and
gas to be economically viable.
. MAINTAIN A SIGNIFICANT WORKING INTEREST IN EACH PROJECT. The Company has the
right to earn up to a 50% participation in the 3-D Joint Venture. Under the
terms of the Exploration Agreement, the Company must timely meet its payment
obligations to the 3-D Joint Venture in order to reach a 50% participation.
The Company does not intend to be an operator in the area, but intends to
maintain a significant working interest to better leverage its administrative
and technical resources and to better influence operator decisions.
. UTILIZE THE LATEST EXPLORATION, DEVELOPMENT AND PRODUCTION TECHNOLOGY. The
Company intends to use the latest technology to enhance the efficiency and
economy of its exploration, development and production efforts. These include
the use of advanced 3-D seismic acquisition and processing techniques in the
Survey AMI.
. CONTROL OVERHEAD COSTS. The Company plans to maintain a small, but
experienced working staff, and to leverage their talents by focusing on a
relatively few projects which have high reserve potential in which it can
obtain a high working interest, and to employ outside consultants and seek
industry partners with the appropriate geographic and technical experience.
Currently, the Company has no employees other than its executive officers and
one administrative assistant.
THE 3-D JOINT VENTURE EXPLORATION PROJECT
IN WEST CAMERON PARISH, LOUISIANA TRANSITION ZONE
The Company's first exploration project is the 3-D Joint Venture, in
which the Company has the right to earn up to a 50% participation, in a new
proprietary 3-D seismic exploration project that the Company believes will be
the largest of its kind within the Louisiana Transition Zone. The Survey AMI
covers approximately 255 square miles situated onshore and offshore over the
most westerly 28 miles of the shoreline in West Cameron Parish, Louisiana.
The 3-D Joint Venture must obtain permits or similar rights to survey
the areas located within the Survey AMI. Currently, the 3-D Joint Venture has
rights to Survey 51,360 net acres of Louisiana State Waters, pursuant to an
exclusive permit, and certain privately held areas which together constitute
approximately 67% of the Survey AMI and is attempting to acquire rights from
additional private owners. There can be no assurance that the 3-D Joint Venture
will successfully obtain rights to survey additional portions of the Survey AMI.
The 3-D Joint Venture intends to survey specific sections selected by it within
the areas covered by its permits and similar rights. See "- Permit and Lease
Status Within the Survey AMI." The Company believes that survey sites located
within the Survey AMI have the potential for containing substantial undiscovered
oil and gas reserves, based on the number and size of existing fields in and
around the Survey AMI, the low level of historical exploration in the Survey AMI
and the exploration success resulting from a speculative 3-D seismic survey shot
by an independent geophysical services company in the adjacent Federal offshore
area. An acquisition contract with Grant Geophysical, Inc. has been signed and
the 3-D Joint Venture has begun to conduct the Survey.
3-D Joint Venture Exploration Agreement
Under the terms of the Exploration Agreement, Cheniere Operating is
obligated to pay 100% of the Seismic Costs (as defined below) up to $13.5
million (subject to adjustment as described in the following sentence) in
accordance with a fixed schedule of monthly payments, and 50% of the excess of
any such costs, to acquire a 50% working interest participation in the leasing
and drilling of all Prospects (as defined below) generated by Zydeco within the
Survey AMI. If premiums required for turnkey contracts cause total Seismic Costs
to exceed $13.5 million, Cheniere Operating will bear 100% of Seismic Costs only
up to $13 million, and Seismic Costs greater than $13 million will be borne
equally by Cheniere Operating and Zydeco. "Seismic Costs" are defined in the
Exploration Agreement to include the following, inter alia: acquiring and
processing seismic data; turnkey contracts; legal costs; options to lease land
and leases of land;
15
<PAGE>
and the cost of seismic permits including the seismic permit granted by the
State of Louisiana discussed below. See "-Permit and Lease Status Within the
Survey AMI-Offshore Area."
Under the terms of the Exploration Agreement, Zydeco will perform, or
cause to be performed, all of the planning, land, geologic and interpretative
functions necessary to the project and will design and oversee the acquisition
and processing of seismic data, interpret results, acquire leases and generate
Prospects. The term "Prospect" is defined in the Exploration Agreement as a
block of acreage suitable for exploration and includes the leasehold, operating,
nonoperating, mineral and royalty interests, licenses, permits and contract
rights relating thereto. Cheniere Operating has the right to review all data and
may elect to generate its own Prospects. Neither party to the 3-D Joint Venture
is permitted to sell or license the data without the other party's approval.
As described above, under the terms of the Exploration Agreement,
Cheniere Operating is obligated to make payments for the Seismic Costs into a
joint venture account (the "Joint Venture Account"). The Exploration Agreement
originally provided for an initial installment of $3 million to be paid by May
15, 1996, which was extended to June 14 1996 by agreement of the parties.
Subsequent payments were due on the last day of each of the months of June 1996
through February 1997. Each of the payments was required to be in the amount of
$1 million with the exception of the payments at the end of September 1996 and
February 1997 which were required to be for $2 million and $1.5 million,
respectively (although the February 1997 payment may be reduced to $1.0 million
under certain circumstances described above).
Cheniere Operating failed to timely make the $1 million payments due
on June 30, 1996 and July 30, 1996. Pursuant to the Second Amendment to the
Exploration Agreement dated August 5, 1996, Cheniere Operating (i) was required
to make the payment originally due on June 30, 1996 on or before August 9, 1996
and such payment has been timely made and (ii) is required to make the payment
originally due on July 30, 1996 on or before October 31, 1996. A failure by
Cheniere Operating to make such payment on such date will be treated as a
Discontinuance (as defined below). Other than as described above, all payments
to the Joint Venture Account are due as scheduled, the next such payment being
due on September 30, 1996. Cheniere Operating intends to make its future
payments under the Exploration Agreement as and when they are due, however,
neither Cheniere Operating nor the Company currently has sufficient capital to
cover such payments and there can be no assurance that Cheniere Operating or the
Company will successfully secure the necessary funds.
In the event Cheniere Operating fails to make a scheduled payment into
the Joint Venture Account within 30 days after the date such payment is due (a
"Discontinuance"):
(i) The obligation and right of Cheniere Operating to make such
payments will terminate. Zydeco would have the right to complete the
acquisition and processing of seismic data with the cooperation or
assistance of other companies. In addition, Cheniere Operating's Prospect
ownership interest would be limited to the total amount of its contribution
to the Joint Venture Account, divided by twice the amount of funds expended
for Seismic Costs, expressed as a percentage. For example, if Cheniere
Operating made a total contribution of $3 million to the Joint Venture
Account, prior to a Discontinuance, and total Seismic Costs were $13.5
million, Cheniere Operating's Prospect ownership interest would be limited
to 11.1%;
(ii) If following a Discontinuance, Zydeco contributes funds that
otherwise were required to have been provided by Cheniere Operating under
the terms of the Exploration Agreement, Zydeco shall be entitled to receive
back such funds, together with interest thereon at the prime interest rate,
from revenues attributable to Cheniere Operating's interest in any Prospect
(including, without limitation, any working interest or overriding royalty
interest revenues from production or front end proceeds attributable to such
interest when owned by Cheniere Operating under the applicable operating
agreement or proceeds from the sale or license of seismic data);
(iii) Subject to (iv) immediately below, if a Discontinuance occurs,
and Zydeco does not itself fund the deficient Seismic Costs, Zydeco may
sell, trade, farm-out, lease, sublease or otherwise trade (collectively, a
"Trade") the aggregate (i.e., both that of Zydeco and Cheniere Operating)
Prospect
16
<PAGE>
interests to any party on arms' length terms. For this purpose the aggregate
Prospect interests includes all seismic data acquired, and revenues from a
Trade include seismic data sale or license proceeds. Any revenues accruing
from a Trade shall be applied toward the cost of completing the project
contemplated under the Exploration Agreement; and
(iv) Should Cheniere Operating have funded $8,000,000 or more prior
to the Discontinuance, then the parties will treat Cheniere Operating as
having earned a vested Prospect ownership interest of 25%, which shall not
be subject to any Trade, and any revenues from a Trade, which would in this
instance cover a 75% Prospect ownership interest, shall be shared 33-1/3% by
Cheniere Operating and 66-2/3% by Zydeco.
Prospect Expenses (as defined below) are to be borne equally by Zydeco
and Cheniere Operating; provided, however, that in the event of a
Discontinuance, Cheniere Operating shall bear a percentage of the Prospect
Expenses equal to its Prospect ownership interest. "Prospect Expenses" are
defined in the Exploration Agreement as: lease bonuses and brokerage for leases;
delay or shut in rental payments on leases or interest acquired under the
Exploration Agreement; engineering costs; and certain other costs related to
Prospects. If Cheniere Operating fails to pay its share of Prospect Expenses
within 30 days of receipt of a bill therefor, it will be deemed to have declined
to participate in the Prospect and will have no interest or liability related to
the Prospect in question.
In the event that Zydeco incurs a contractual liability to a third
party in performing its undertakings under the Exploration Agreement, such
contractual liability shall be treated as a Prospect Expense. In the event that
Zydeco incurs a tort liability to a third party in performing its undertakings
under the Exploration Agreement, and such liability is a result of gross
negligence or willful malfeasance, such liability, and all attorneys fees and
expenses relating thereto, shall be solely Zydeco's responsibility. In the event
that Zydeco incurs a tort liability to a third party in performing its
undertakings under the Exploration Agreement, and such liability is not a result
of gross negligence or willful malfeasance, such liability, and all attorneys'
fees and expenses relating thereto, shall be borne equally by the Company and
Zydeco.
Location and Hydrocarbon Potential of the Survey Area
The Survey AMI, which contains the specific areas to be covered by the
Survey, lies within a highly prolific natural gas region. Nevertheless, the
Transition Zone has been relatively less explored to date as compared to
exclusively onshore or offshore regions because of the relatively high cost and
logistical and technical difficulties associated with conducting modern seismic
surveys over the diverse environments encountered along the coast. An additional
impediment has been the difficulty of negotiating with sophisticated landowners
who control most of the area close to the Louisiana coastline. The paucity of
modern seismic data has limited the drilling density: the spacing of exploration
wells testing the primary objective section, outside of the known fields, is
less than one well per five square miles. However, recent declines in the cost
of supercomputing workstations which can be employed in processing and
interpreting seismic data have made projects such as this Transition Zone
venture technically and economically feasible.
The Louisiana Transition Zone contains the Miocene Trend which has
produced many of the largest oil and gas fields in the continental United States
and its territorial waters. Objectives within the Miocene Trend have excellent
reservoir characteristics and have historically exhibited multiple pay zones,
which can allow a single strategically placed well bore to drain multiple
reservoirs. Given the relatively low level of historical exploration and the
high recovery factors characterizing the Louisiana Transition Zone, the Company
believes that this zone has the potential for containing substantial undeveloped
oil and gas reserves. Miocene age reservoirs in fields overlapping the Survey
AMI have produced in excess of 3 trillion cubic feet (tcf) of natural gas. Along
the northeast quadrant of the Survey AMI the Mud Lake and Second Bayou Fields
have cumulatively produced more than 1.3 tcf of natural gas to date, with more
than 250 billion cubic feet (bcf) having been produced from one well. In the
southwestern quadrant of the Survey AMI, the West Cameron Block 17 Field in the
State and Federal waters has cumulatively produced more than 980 bcf to date.
Numerous other smaller, but still significant, oil and gas fields surround and
overlay the area.
17
<PAGE>
Immediately farther offshore of the Survey AMI, a successful industry
drilling program based on a spec 3-D survey provides an analogy that illustrates
the potential for new discoveries in this region resulting from 3-D seismic
data. In 1989, a 3-D seismic survey shot by an independent geophysical services
company along the shallow Federal waters in the western part of the Western
Cameron area led to 4 new field discoveries which have produced approximately
320 bcf of natural gas to date from 15 boreholes. The middle to lower Miocene
reservoir section has excellent flow characteristics, as can be seen by the per
well recoveries, 21 bcf of natural gas, in the area of the adjacent shoot. In
addition to the volumes produced from these discoveries, additional reserves
have been brought on through exploitation wells drilled into existing fields.
The entire Survey AMI is located within an existing pipeline
infrastructure. As a result, it will generally be quicker and less costly to
develop and connect reserves found onshore and in the shallow offshore areas to
markets than would be the case for reserves found in deeper water areas. The
Louisiana Gulf Coast/Gulf of Mexico region enjoys easy access to the premium-
priced markets of the East Coast.
Permit and Lease Status Within the Survey AMI
The 3-D Joint Venture will Survey only certain sections lying within
the Survey AMI. The area to be covered by the Survey is dependent upon the
status of permits granting the 3-D Joint Venture the right to Survey certain
areas and its ability to obtain such permits or similar rights in the future.
Offshore Area -- State Waters Exclusive Permit and Federal Offshore
Permits. On February 14, 1996, the State of Louisiana awarded Zydeco the
exclusive right (the "Louisiana Seismic Permit") to shoot and gather seismic
data over the 51,360 net unleased acres of Louisiana State waters (running out
to a 3 1/2 mile limit located within the Survey AMI) in the western half of West
Cameron Parish. The term of the Louisiana Seismic Permit is for 18 months and
may be extended at Zydeco's option for an additional 6 months by payment of an
additional fee of $391,876.80. During this term Zydeco has the exclusive right
to nominate blocks of acreage for leasing in the covered State waters.
The Survey AMI includes an area running southward over 1 1/2 to 2
miles of Federal waters. Zydeco's seismic contractor, Grant Geophysical, Inc.,
has received approval from the U.S. Government to survey over 21,000 acres of
Federal offshore leases located within the Survey AMI. Although Zydeco has no
exclusive rights regarding leases in the Federal waters, several offshore lease
blocks held by industry and covered by the Survey are scheduled to expire within
the next year and may then be available for leasing.
Onshore Area -- Prospective Permits, Lease Options, and Farmouts.
Zydeco is in negotiations to obtain variously, farmouts, seismic permits or
lease options, with owners of the mineral interests covering approximately
85,000 additional acres of privately owned lands lying under the onshore portion
of the Survey AMI ("Onshore Area"). The outcome of these discussions will effect
the exact delineation of the areas which will be subject to the Survey within
the Survey AMI. As of this date, seismic permits or options covering portions of
the Onshore Area have already been obtained.
Technological Aspects of 3-D Seismic Shoot and Prospect Generation
The Company believes that recently developed seismic processing and
interpretation technology, including some key technology which Zydeco has
licensed for use in Southern Louisiana on an exclusive basis, has now evolved to
a point where quality control for a Transition Zone survey will be improved
significantly. The Survey will incorporate certain of these new techniques for
the first time in a major seismic survey. Moreover, the Company believes that
the areal extent of the Survey, which is unusually large for a shallow
water/onshore seismic survey should permit better imaging of the subsurface,
particularly of the deeper zones.
The design of the Survey has been led by Rudy Prince, Zydeco's Vice-
Chairman, who was formerly CEO and a founder of Digicon Geophysical Corp., a
seismic services company. A primary objective of the Survey is to provide for
accurate and consistent data sufficient for analysis of hydrocarbon indicators
in a depth range of 8,000 - 20,000 feet at an attractive price. The design will
employ technology referred to as "wavefield imaging", for which Zydeco has
obtained an exclusive license for use in the Louisiana Transition
18
<PAGE>
Zone (from Wavefield Imaging, Inc.). The approach combines a relatively lower
density array of shots and receivers with 3-D prestack migration. Moreover, the
Company believes that the use of a single type of shot, dynamite, and a single
type of receiver, hydrophone, across the coastline, will simplify and improve
seismic processing across the different Transition Zone environments.
Data Acquisition. The Company believes that use of similar source
(dynamite) and receiver (hydrophone) components laid out in a symmetrical array
across the shoreline will eliminate the problems of integrating two different
types of data sets (land and marine) and improve data consistency. A limited
amount of airgun source data will be acquired in the Federal waters and around
the few producing fields. A primary consideration in the design, the relatively
deep zones of interest (8,000-20,000 feet), calls for long north-south transects
(up to 10 miles) to improve the quality of deep data.
Data Transmission, Processing and Interpretation. Data will be
transferred daily from the field crew to Zydeco's headquarters in Houston, where
it will undergo nearly real-time processing. This procedure will allow Zydeco to
closely monitor 3-D data quality and make adjustments to the acquisition
parameters if necessary. This new technology also significantly reduces the
delay time between the Survey itself and ultimate drilling decisions. In
combination with a reduced cost design for field data acquisition, Zydeco will
employ a proven technology, 3-D prestack migration, seeking to obtain superior
quality subsurface images. To maximize quality control and minimize delays
Zydeco will process the data in-house. Having completed seismic processing,
Zydeco will also employ state of the art Computer Aided Exploration (CAEX)
interpretation techniques to locate and define drilling prospects.
Schedule for the 3-D Joint Venture
While the Louisiana Seismic Permit, whose primary 18 month term
expires in August 1997, may be extended at Zydeco's option until February 1998
by payment of an additional fee of $391,876.80, Zydeco presently plans to adhere
to the schedule summarized below:
<TABLE>
<CAPTION>
<S> <C> <C>
April - Oct. 1996 Onshore Permitting and Lease Optioning
Sept. - Dec. 1996 Conduct Seismic Survey and Simultaneously Begin Processing &
Interpretation of Data Received
1/st/ Quarter 1997 Continue Processing and Interpretation
2/nd/ Quarter 1997 Complete Interpretation and Identify Prospects
3/rd/ Quarter 1997 Nominate and Bid Offshore Leases, and Lease Onshore
4/th/ Quarter 1997 Propose, Contract for Drilling, and Commence Drilling of First
Group of Prospects
</TABLE>
Under the terms of the Louisiana Seismic Permit, the 3-D Joint Venture
will be liable to pay penalties of $783,753.60 in the event it fails to (i)
complete the acquisition of the seismic data covering the entire area subject to
such Permit or (ii) provide access to such data to the State of Louisiana in a
timely manner. Under the terms of the Exploration Agreement, any such penalties
payable under the Louisiana Seismic Permit shall be borne equally by Zydeco and
the Company. There can be no assurance that the 3-D Joint Venture will complete
its scheduled activities within the time period of the Louisiana Seismic Permit.
Failure of the 3-D Joint Venture to complete its scheduled activities within the
term of the Louisiana Seismic Permit would materially and adversely affect the
value of the Company's interest in the Joint Venture.
Zydeco and the Company have designated the entire Survey AMI (onshore
and offshore) as an area of mutual interest for five years ending May 15, 2001,
during which period the two companies may continue to drill, test, and develop
prospects within the Survey AMI. Any interest taken by either Zydeco or the
Company, during such period, in any agreement or arrangement which creates or
effects an interest in hydrocarbons in lands within the Survey AMI, or an
acquisition of a contractual right to acquire such an interest shall be deemed
taken for development under the Exploration Agreement. The party acquiring such
an interest must offer to the other party the right, which may be waived by such
other party, to participate in the rights and obligations associated with such
interest in proportion to their respective Prospect ownership interests.
19
<PAGE>
COMPETITION AND MARKETS
Competition in the industry is intense, particularly with respect to
the acquisition of producing properties and proved undeveloped acreage. The
Company competes with the major oil companies and other independent producers of
varying sizes, all of which are engaged in the exploration, development and
acquisition of producing and non-producing properties. Many of the Company's
competitors have financial resources and exploration and development budgets
that are substantially greater than those of the Company, which may adversely
affect the Company's ability to compete.
The availability of a ready market for and the price of any
hydrocarbons produced by the Company will depend on many factors beyond the
control of the Company, including the extent of domestic production and imports
of foreign oil, the marketing of competitive fuels, the proximity and capacity
of natural gas pipelines, the availability of transportation and other market
facilities, the demand for hydrocarbons, the political conditions in
international oil producing regions, the effect of federal and state regulation
of allowable rates of production, taxation and the conduct of drilling
operations and federal regulation of natural gas. In the past, as a result of
excess deliverability of natural gas, many pipeline companies have curtailed the
amount of natural gas taken from producing wells, shut-in some producing wells,
significantly reduced gas taken under existing contracts, refused to make
payments under applicable "take-or-pay" provisions and have not contracted for
gas available from some newly completed wells. The Company can give no assurance
that such problems will not arise again. In addition, the restructuring of the
natural gas pipeline industry has eliminated the gas purchasing activity of
traditional interstate gas transmission pipeline buyers.
Producers of natural gas, therefore, have been required to develop new
markets among gas marketing companies, end users of natural gas and local
distribution companies. All of these factors, together with economic factors in
the marketing area, generally may affect the supply and/or demand for oil and
gas and thus the prices available for sales of oil and gas.
GOVERNMENTAL REGULATION
The Company's oil and gas exploration, production and related
operations are subject to extensive rules and regulations promulgated by Federal
and state agencies. Failure to comply with such rules and regulations can result
in substantial penalties. The regulatory burden on the oil and gas industry
increases the Company's cost of doing business and affects its profitability.
Because such rules and regulations are frequently amended or reinterpreted, the
Company is unable to predict the future cost or impact of complying with such
laws.
Production. In most, if not all, areas where the Company may conduct
activities, there may be statutory provisions regulating the production of oil
and natural gas under which administrative agencies may promulgate rules in
connection with the operation and production of both oil and gas wells,
determine the reasonable market demand for oil and gas, and establish allowable
rates of production. Such regulation may restrict the rate at which the
Company's wells produce oil or gas below the rate at which such wells would be
produced in the absence of such regulation, with the result that the amount or
timing of the Company's revenues could be adversely affected.
Regulation of Operations on Outer Continental Shelf. The Company plans
to acquire oil and gas leases in the Gulf of Mexico. The Outer Continental Shelf
Lands Act ("OCSLA") requires that all pipelines operating on or across the Outer
Continental Shelf (the "OCS") provide open-access, non-discriminatory service.
Although the Federal Energy Regulatory Commission ("FERC") has opted not to
impose the regulations of Order No. 509, in which the FERC implemented the
OCSLA, on gatherers and other non-jurisdictional entities, the FERC has retained
the authority to exercise jurisdiction over those entities if necessary to
permit non-discriminatory access to service on the OCS. In this regard, the FERC
recently issued a Statement of Policy ("Policy Statement") regarding the
application of its jurisdiction under the Natural Gas Act of 1938 ("NGA") and
the OCSLA over natural gas facilities and service on the OCS. In the Policy
Statement the FERC concluded that facilities located in water depths of 200
meters or more shall be presumed to have a primary purpose of gathering up to
the point of interconnection with the interstate pipeline grid. FERC has
determined that gathering facilities are outside of its jurisdiction. While it
is not possible to determine what the actual impact
20
<PAGE>
of this new policy will be, since FERC has determined that it will no longer
regulate the rates and services of OCS transmission facilities under the NGA, it
is possible that the Company could experience an increase in transportation
costs associated with its OCS natural gas production and, possibly, reduced
access to OCS transmission capacity.
Certain operations the Company conducts are on federal oil and gas
leases, which the Minerals Management Service (the "MMS") administers. The MMS
issues such leases through competitive bidding. These leases contain relatively
standardized terms and require compliance with detailed MMS regulations and
orders pursuant to the OCSLA (which are subject to change by the MMS). For
offshore operations, lessees must obtain MMS approval for exploration plans and
development and production plans prior to the commencement of such operations.
In addition to permits required from other agencies (such as the Coast Guard,
the Army Corps of Engineers and the Environmental Protection Agency), lessees
must obtain a permit from the MMS prior to the commencement of drilling. The MMS
has promulgated regulations requiring offshore production facilities located on
the OCS to meet stringent engineering and construction specifications. The MMS
has proposed additional safety-related regulations concerning the design and
operating procedures for OCS production platforms and pipelines. The MMS has
postponed its decision regarding the adoption of these regulations in order to
gather more information on the subject. The MMS also has regulations restricting
the flaring or venting of natural gas, and has recently amended such regulations
to prohibit the flaring of liquid hydrocarbons and oil without prior
authorization except under certain limited circumstances. Similarly, the MMS has
promulgated other regulations governing the plugging and abandonment of wells
located offshore and the removal of all production facilities. To cover the
various obligations of lessees on the OCS, the MMS generally requires that
lessees post substantial bonds or other acceptable assurances that such
obligations will be met. The cost of such bonds or other surety can be
substantial and there is no assurance that the Company can continue to obtain
bonds or other surety in all cases.
In addition, the MMS is conducting an inquiry into certain contract
agreements for which producers on MMS leases have received settlement proceeds
that are royalty bearing and the extent to which producers have paid the
appropriate royalties on those proceeds. The Company believes that this inquiry
will not have a material impact on its financial condition, liquidity or results
of operations.
The MMS has recently issued a notice of proposed rulemaking in which
it proposes to amend its regulations governing the calculation of royalties and
the valuation of natural gas produced from federal leases. The principal feature
in the amendments, as proposed, would establish an alternative market-index
based method to calculate royalties on certain natural gas production sold to
affiliates or pursuant to non-arm's-length sales contracts. The MMS has proposed
this rulemaking to facilitate royalty valuation in light of changes in the gas
marketing environment. Recently, the MMS announced its intention to reconsider
the proposal and reopen the comment period. The Company cannot predict what
action the MMS will take on these matters, nor can it predict at this stage of
the rulemaking proceeding how the Company might be affected by amendments to the
regulations.
Additional proposals and proceedings that might affect the oil and gas
industry are pending before the FERC and the courts. The Company cannot predict
when or whether any such proposals may become effective. In the past, the
natural gas industry has been heavily regulated. There is no assurance that the
regulatory approach currently pursued by the FERC will continue indefinitely.
Bonding and Financial Responsibility Requirements. The Company is
required to obtain bonding, or otherwise demonstrate financial responsibility,
at varying levels by governmental agencies in connection with obtaining state or
federal leases or acting as an owner or operator on such leases or of oil
exploration and production related facilities. These bonds may cover such
obligations as plugging and abandonment of unproductive wells, removal and
closure of related exploration and production facilities and pollution
liabilities. The costs of such bonding and financial responsibility requirements
can be substantial and there can be no assurance that the Company will be able
to obtain such bonds and/or otherwise demonstrate financial responsibility in
all cases.
21
<PAGE>
Natural Gas Marketing and Transportation. The FERC regulates the
transportation and sale for resale of natural gas in interstate commerce
pursuant to the NGA and the Natural Gas Policy Act of 1978 ("NGPA"). In the
past, the Federal government has regulated the prices at which oil and gas could
be sold. Deregulation of wellhead sales in the natural gas industry began with
the enactment of the NGPA in 1978. In 1989, Congress enacted the Natural Gas
Wellhead Decontrol Act (the "Decontrol Act"). The Decontrol Act removed all NGA
and NGPA price and nonprice controls affecting wellhead sales of natural gas
effective January 1, 1993. While sales by producers of natural gas can currently
be made at uncontrolled market prices, Congress could reenact price controls in
the future.
On April 8, 1992, the FERC issued Order No. 636, as amended by Order
No. 636-A (issued in August 1992) and Order No. 636-B (issued in November 1992)
as a continuation of its efforts to improve the competitive structure of the
interstate natural gas pipeline industry and maximize the consumer benefits of a
competitive wellhead gas market. Interstate pipelines were required by FERC to
"unbundle," or separate, their traditional merchant sales services from their
transportation and storage services and to provide comparable transportation and
storage services with respect to all gas supplies whether purchased from the
pipeline or from other merchants such as marketers or producers. The pipelines
must now separately state the applicable rates for each unbundled service (e.g.,
for natural gas transportation and for storage). This unbundling process has
been implemented through negotiated settlement in individual pipeline services
restructuring proceedings. Ultimately, Order Nos. 636, et al., may enhance the
competitiveness of the natural gas market. Order Nos. 636, et al. have recently
been substantially affirmed by the U.S. Court of Appeals for the D.C. Circuit.
It is unclear what impact, if any, increased competition within the
natural gas industry under Order No. 636 will have on the Company's activities.
Although Order No. 636 could provide the Company with additional market access
and more fairly applied transportation service rates, Order No. 636 could also
subject the Company to more restrictive pipeline imbalance tolerances and
greater penalties for violations of these tolerances.
The FERC has announced its intention to re-examine certain of its
transportation-related policies, including the appropriate manner in which
interstate pipelines release transportation capacity under Order No. 636, and
the use of the market-based rates for interstate gas transmission. While any
resulting FERC action would affect the Company only indirectly, the FERC's
current rules and policy statements may have the effect of enhancing competition
in natural gas markets by, among other things, encouraging non-producer natural
gas marketers to engage in certain purchase and sale transactions. The Company
cannot predict what action the FERC will take on these matters, nor can it
accurately predict whether the FERC's actions will achieve the goal of
increasing competition in markets in which the Company's natural gas is sold.
However, the Company does not believe that it will be treated materially
differently than other natural gas producers and marketers with which it
competes.
Recently, the FERC issued a policy statement on how interstate natural
gas pipelines can recover the costs of new pipeline facilities. While this
policy statement affects the Company only indirectly, in its present form, the
new policy should enhance competition in natural gas markets and facilitate
construction of gas supply laterals.
Oil Sales and Transportation Rates. The FERC regulates the
transportation of oil in interstate commerce pursuant to the Interstate Commerce
Act. Sales of crude oil, condensate and gas liquids by the Company are not
regulated and are made at market prices. However, the price a company receives
from the sale of these products is affected by the cost of transporting the
products to market. Effective as of January 1, 1995, the FERC implemented
regulations establishing an indexing system for transportation rates for oil
pipelines, which would generally index such rates to inflation, subject to
certain conditions and limitations. These regulations could increase the cost of
transporting crude oil, liquids and condensate by pipeline. The Company is not
able to predict with certainty what effect, if any, these regulations will have
on it, but other factors being equal, the regulations may tend to increase
transportation costs or reduce wellhead prices for such commodities.
22
<PAGE>
Environmental. The Company's operations are subject to numerous laws
and regulations governing the discharge of oil and hazardous materials into the
environment or otherwise relating to environmental protection. These laws and
regulations may require the acquisition of various permits before drilling
commences, restrict the types, quantities and concentration of various
substances that can be released into the environment in connection with drilling
and production activities, limit or prohibit drilling activities on certain
lands lying within wilderness, wetlands and other protected areas, and impose
substantial liabilities for pollution resulting from the Company's operations.
In particular, under the Federal Oil Pollution Act of 1990 ("OPA 90"), certain
persons (including owners, operators, and demise charters of vessels, owners and
operators of onshore facilities, and lessees, permittees and holders of rights
of use and easements in areas in which offshore facilities are located
("responsible parties")) may be held liable for various costs and damages. These
include removal costs and damages, damages to natural resources and damages for
lost profits, impairment to earning capacity, and destruction of or injury to
real or personal property. Liability can arise when oil is discharged or poses a
substantial threat of discharge into United States waters. Liability under OPA
90 is strict, joint and several, unless one of the specific defenses to
liability applies, including an act of God, an act of war or an act or omission
of a third party. OPA 90 also requires certain responsible parties to establish
and maintain evidence of financial responsibility sufficient to meet the maximum
amount of liability to which the responsible party could be subject under the
liability limitation provisions. Moreover, the recent trend toward stricter
standards in environmental legislation and regulation is likely to continue. In
addition, legislation has been proposed in Congress from time to time that would
reclassify certain oil and gas exploration and production wastes as "hazardous
wastes" which would make the reclassified wastes subject to much more stringent
handling, disposal and clean-up requirements. If such legislation were to be
enacted, it could have a significant impact on the operating costs of the
Company, as well as the oil and gas industry in general. State initiatives to
further regulate the disposal of oil and gas wastes are also pending in certain
states, and these various initiatives could have a similar impact on the
Company. See "Risk Factors -- United States Governmental Regulation, Taxation
and Price Control."
The Comprehensive Environmental Response, Compensation, and Liability
Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons that are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
the disposal site or sites where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances found at the
site. Persons who are or were responsible for releases of hazardous substances
under CERCLA may be subject to joint and several liability for the costs of
cleaning up the hazardous substances that have been released into the
environment and for damages to natural resources, and it is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury and property damage.
OPERATIONAL RISKS AND INSURANCE
The Company anticipates that any wells established by it will be
drilled by proven industry contractors under turnkey contracts that limit the
Company's financial and legal exposure. However, circumstances may arise where
the Company is unable to secure a turnkey contract on satisfactory terms. In
this case, the Company may decide to drill, or cause to be drilled, the
applicable test well(s) on either a footage or day rate basis and the drilling
thereof will be subject to the usual drilling hazards such as cratering,
explosions, uncontrollable flows of oil, gas or well fluids, fires, pollution
and other environmental risks. The Company's activities are also subject to
perils specific to marine operations, such as capsizing, collision, and damage
or loss from severe weather. These hazards can cause personal injury and loss of
life, severe damage to and destruction of property and equipment, pollution or
environmental damage and suspension of operations. In accordance with customary
industry practices, the Company intends to maintain insurance against some, but
not all, of such risks and some, but not all, of such losses. The occurrence of
a significant event not fully insured or indemnified against could materially
and adversely affect the Company's financial condition and operations. Moreover,
no assurance can be given that the Company will be able to maintain adequate
insurance in the future at rates it considers reasonable.
23
<PAGE>
MAR VENTURES INC.
Prior to the Reorganization, the existing assets and liabilities of
Bexy were transferred to its wholly-owned subsidiary, Mar Ventures, Inc. ("Mar
Ventures"). As part of such Reorganization, the stock of Mar Ventures has been
distributed to the Original Bexy Stockholders. Buddy Young, the former President
and chief executive officer of Bexy, has agreed to indemnify the Company, the
former shareholders of Cheniere Operating and their respective officers,
directors, attorneys and other agents from and against all claims which they may
suffer, incur, or pay arising under or incurred in connection with: (i) the
operation of the business of Bexy prior to the closing of the Reorganization;
(ii) any error or omission with respect to a material fact stated or required to
be stated in the proxy materials filed by Bexy in connection with the
Reorganization or the registration statement filed by Mar Ventures in connection
with the distribution of its common stock to the Original Bexy Stockholders; and
(iii) certain taxes.
YOUNG CONSULTING AGREEMENT
Pursuant to a Consulting Agreement dated as of July 3, 1996 between
Cheniere and Buddy Young, the former President and chief executive officer of
Bexy, the Company engaged Mr. Young as a consultant to provide management of the
Company with advice regarding the management and business of the Company. Mr.
Young agreed to provide such consulting services to the Company for 2 years
ending on July 3, 1998 at a rate of $75,000 per year. Mr. Young is no longer an
employee of the Company and serves only in the capacity of a consultant.
EMPLOYEES
The Company has one full-time employee, an administrative assistant,
other than its executive officers.
PROPERTIES
The Company subleases its Houston, Texas headquarters from Zydeco
under a month-to-month sublease covering approximately 1,395 square feet at a
monthly rental of $1,100. The Company believes that this arrangement gives it
the necessary flexibility to adapt to the changing space requirements of its
business.
LEGAL PROCEEDINGS
The Company is not involved in any litigation.
24
<PAGE>
MANAGEMENT
THE COMPANY
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Title
- ---- --- -----
<S> <C> <C>
William D. Forster... 49 President, Chief Executive Officer
and Director
Walter L. Williams... 68 Vice Chairman and Director
Keith F. Carney...... 40 Chief Financial Officer and Treasurer
Charif Souki......... 43 Secretary and Director
Efrem Zimbalist III.. 49 Director
</TABLE>
William D. Forster, 49, is currently President and Chief Executive
Officer of Cheniere. Mr. Forster was an investment banker with Lehman Brothers
from 1975 to 1990 (11 years as a Managing Director), initially in the oil and
gas department for seven years, and then in various other areas. In 1990, he
founded his own private investment bank, W. Forster & Co. Inc. In 1994, he
became active again in the oil and gas business when he began to work together
with BSR Investments, Ltd., a Paris-based private investment company, to provide
financing for small energy companies. Mr. Forster is a director of Equity Oil
Company, a Nasdaq National Market company, and he serves on the Board of
Trustees of Mystic Seaport Museum. He holds a Bachelor of Arts degree in
economics from Harvard College and a Master of Business Administration degree
from Harvard Business School.
Walter L. Williams, 68, is currently Vice-Chairman of Cheniere. Prior
to joining Cheniere, Mr. Williams spent 32 years as a founder and later Chairman
and Chief Executive Officer of Texoil, Inc., a publicly held Gulf Coast
exploration and production company. Prior to that time he was an independent
petroleum consultant. He received a Bachelor of Science degree in petroleum
engineering from Texas A&M University in 1949 and is a Registered Engineer in
both the states of Louisiana and Texas. He serves on the board of directors of
Texoil, Inc. and has served as a Director and Member of the Executive Committee
of the Board of the Houston Museum of Natural Science.
Keith F. Carney, 40, is currently Chief Financial Officer and
Treasurer of Cheniere. Prior to joining Cheniere, Mr. Carney was a securities
analyst in the oil & gas exploration/production sector with Smith Barney, Inc.
from 1992-1996. From 1982-1990 he was employed by Shell Oil as an exploration
geologist, with assignments in the Gulf of Mexico, the Middle East and other
areas. He received a Master of Science degree in geology from Lehigh University
in 1982 and a Master of Business Administration/Finance degree from the
University of Denver in 1992.
Charif Souki, 43, is currently the Secretary and a Director of
Cheniere. Mr. Souki is an independent investment banker with twenty years of
experience in the industry. In the past few years he has specialized in
providing financing for promising microcap and small capitalization companies
with an emphasis on the oil and gas industry. He holds a Bachelor of Arts degree
from Colgate University and a Master of Business Administration from Columbia
University.
Efrem Zimbalist III, 49, a director of Cheniere, is President and
Chief Executive Officer of Times Mirror Magazines, a division of Times Mirror
Co., and a Vice President of Times Mirror Co. He formerly served as vice
president, strategic development for Times Mirror Co. from 1993 to 1995.
Previously he served as Chairman and Chief Executive Officer of Correia Art
Glass, Inc., a family owned business. He also served five years as a senior
engagement manager at the management consulting firm of McKinsey and Co., Inc.
in Los Angeles. Mr. Zimbalist received a Bachelor of Arts degree in economics
from Harvard College and a Master's degree in business administration from
Harvard Business School.
25
<PAGE>
DIRECTOR COMPENSATION
Directors receive no remuneration for serving on the board of
directors of the Company.
EXECUTIVE COMPENSATION
Simultaneously with the reorganization of Bexy with Cheniere Operating
(the "Reorganization"), all of the officers of Bexy resigned from their
respective offices and were replaced by the current officers of the Company. As
the Company has divested itself of the assets relating to the business of Bexy
prior to the Reorganization and has shifted to a new business, this section
describes the compensation to be received by the executive officers of the
Company following the Reorganization on July 3, 1996. The Company presently has
no employment agreement with any of the Executive Officers.
William D. Forster, President and Chief Executive Officer of the
Company, and Charif Souki, Secretary of the Company, have not received any
compensation in the form of salary or options and the Company does not currently
intend to pay any such compensation to such officers until the Company has
raised significant additional capital. The Company provides an apartment for the
use of Mr. Forster and Mr. Souki during times they are in Houston at a total
cost of $4,800 per month.
Walter L. Williams, Vice Chairman of the Company, began receiving a
salary of $120,000 per year on September 1, 1996. By resolution of the Board of
Directors of the Company dated July 3, 1996, the Company granted to Mr. Williams
certain options to purchase shares of the Common Stock as described below. In
addition, the Company granted 30,000 shares of the Common Stock to Mr. Williams
on July 3, 1996, which shares have not yet been issued. Keith F. Carney, Chief
Financial Officer and Treasurer of the Company, began receiving a salary of
$90,000 per year on July 16, 1996, the date of his appointment as an officer of
the Company. By resolution of the Board of Directors of the Company dated July
23, 1996, the Company granted to Mr. Carney certain options to purchase shares
of Common Stock as described below.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information with respect to
individual grants of stock options made during the fiscal year ended
August 31, 1996 to each of the named executive officers.
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants Option Terms($)/(1)/
----------------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Number of
Securities % of Total Exercise
Underlying Options or Base
Options Granted to Price Expiration 5% 10%
Granted(#) Employees ($/sh) Date Appreciation($) Appreciation($)
----------- ---------- -------- ----------
Name
- --------------------
William D. Forster.. - - - - - -
Walter L. Williams.. 75,000/(2)/ 25.0 3.00 6/1/01 76,522 173,601
75,000/(3)/ 25.0 3.00 6/1/01 91,598 213,461
Keith F. Carney..... 37,500/(4)/ 12.5 3.00 7/16/01 38,261 86,801
37,500/(4)/ 12.5 3.00 7/16/01 45,799 106,731
37,500/(4)/ 12.5 3.00 7/16/01 53,714 128,654
37,500/(4)/ 12.5 3.00 7/16/01 62,024 152,769
</TABLE>
26
<PAGE>
____________________
/(1)/ The indicated dollar amounts are the result of calculations based on the
exercise price of each option and assume five and ten percent annual
appreciation rates set by the Securities and Exchange Commission over
the term of the option and, therefore, are not intended to forecast
possible future appreciation, if any, of the Company's stock price.
/(2)/ Each of these stock options vest and become exercisable on June 1, 1997
and expire five years from the date of grant.
/(3)/ Each of these stock options vest and become exercisable on June 1, 1998
and expire five years from the date of grant.
/(4)/ The Company granted Mr. Carney 150,000 stock options on July 23, 1996.
The options vest and become exercisable in equal annual installments of
25% each on the first through fourth anniversaries of July 16, 1996, and
expire on the fifth anniversary of the date of grant.
AGGREGATED OPTION EXERCISED IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUE
The following table sets forth certain information with respect to the
outstanding stock options as of August 31, 1996 for each of the named
executive officers.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at 8/31/96 (#) at 8/31/96 ($)
-------------------------- --------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Name
- ----
William D. Forster.. - - - -
Walter L. Williams.. - 150,000 - 37,500/(1)/
Keith F. Carney..... - 150,000 - 37,500/(1)/
----------- ------- ----------- -----------
</TABLE>
/(1)/ Market value of underlying securities at fiscal year-end 8/31/96
($3.25), minus the exercise price.
CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH MANAGEMENT
BSR Investments, Ltd. ("BSR"), an entity holding approximately 25.9%
of the outstanding shares of the Common Stock, is under the control of a member
of the immediate family of Charif Souki, Secretary and a director of the
Company. Mr. Souki has been engaged, from time to time, as a consultant to BSR.
In addition, BSR has in the past provided certain financial advisory and other
services to the Company on an arm's length basis. Mr. Souki disclaims beneficial
ownership of all shares held by BSR.
DIRECTOR LIABILITY
The Amended and Restated Certificate of Incorporation of the Company
eliminates the liability of directors of the Company to the Company or its
stockholders (in their capacity as directors but not in their capacity as
officers) to the fullest extent permitted by Section 102 of the Delaware General
Corporation Law, as the same may be amended from time to time (the "DGCL").
Specifically, under Section 102 of the DGCL, directors of the Company will not
be personally liable for monetary damages for breach of a director's fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) for unlawful payments or dividends or unlawful stock repurchases
or redemption as provided in Section 174 of the DGCL or (iv) for any transaction
from which the director derived an improper personal benefit.
DESCRIPTION OF CAPITAL STOCK
The Company has 21,000,000 authorized shares of stock, consisting of
(a) 20,000,000 shares of the Common Stock, having a par value of $.003 per
share, and (b) 1,000,000 shares of preferred stock, having a par value of $.0001
per share (the "Preferred Stock").
The shares of the Common Stock being registered pursuant to the
registration statement of which this prospectus is a part include (i) 794,211
shares issued in connection with the Reorganization to the initial subscribers
for common stock of Cheniere Operating and their transferees, other than shares
held by BSR Investments, Ltd. and William D. Forster, (ii) 2,000,000 shares
issued in connection with the Reorganization to holders of common stock of
Cheniere Operating issued in May and June 1996 pursuant to Regulation D and
(iii) 50,000 shares issued in July 1996 pursuant to Regulation D.
COMMON STOCK
As of September 27, 1996, there were 10,039,594 shares of the
Common Stock outstanding. All of such outstanding shares of Common Stock are
fully paid and nonassessable. Each share of the Common Stock has an equal and
27
<PAGE>
ratable right to receive dividends when, as and if declared by the Board of
Directors of the Company out of assets legally available therefor and subject to
the dividend obligations of the Company to the holders of any Preferred Stock
then outstanding.
In the event of a liquidation, dissolution or winding up of the Company,
the holders of Common Stock are entitled to share equally and ratably in the
assets available for distribution after payment of all liabilities, and subject
to any prior rights of any holders of Preferred Stock that at the time may be
outstanding.
The holders of Common Stock have no preemptive, subscription, conversion
or redemption rights, and are not subject to further calls or assessments of the
Company. There are no sinking fund provisions applicable to the Common Stock.
Each share of Common Stock is entitled to one vote in the election of directors
and on all other matters, submitted to a vote of stockholders. Holders of Common
Stock have no right to cumulate their votes in the election of directors.
In accordance with the Reorganization Agreement and a letter agreement
dated July 3, 1996 between Buddy Young and Cheniere, the Company agreed not to
engage in any reverse split or any transaction that has the effect of a reverse
split, resulting in the combination of shares of the Common Stock without the
prior written consent of Mr. Young for a period of 18 months, ending on January
3, 1998.
PREFERRED STOCK
As of the date of this Prospectus, there were no shares of Preferred
Stock outstanding. Preferred Stock may be issued from time to time in one or
more series, and the Board of Directors, without further approval of the
stockholders, is authorized to fix the dividend rates and terms, conversion
rights, voting rights, redemption rights and terms, liquidation preferences and
any other rights, preferences, privileges and restrictions applicable to each
series of Preferred Stock. The purpose of authorizing the Board of Directors to
determine such rights, preferences, privileges and restrictions is to eliminate
delays associated with a stockholder vote on specific issuances. The issuance of
Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things, adversely
affect the voting power of the holders of Common Stock and, under certain
circumstances, make it more difficult for a third party to gain control of the
Company.
WARRANTS
The Company has issued and outstanding certain warrants described herein
(collectively, the "Warrants"). The Company is not registering such Warrants or
the Common Stock underlying such Warrants pursuant to the registration statement
of which this prospectus is a part.
The Company has issued and outstanding 141,666 and 2/3 warrants
(collectively, the "June Warrants"), each of which entitles the registered
holder thereof to purchase one share of Common Stock. The June Warrants are
exercisable at any time on or before June 14, 1999, at an exercise price of
$3.00 per share (subject to customary anti-dilution adjustments). The June
Warrants were originally issued by Cheniere Operating and were converted to
warrants of Cheniere following the Reorganization. The June Warrants were issued
to a group of 11 investors in connection with a private placement of unsecured
promissory notes of Cheniere Operating in the aggregate principal amount of
$425,000. In connection with the issuance of a new promissory note to one such
investor, the Company has agreed to issue to such investor up to 21,500
additional warrants to purchase shares of the Common Stock (on terms similar to
the June Warrants) for each month, or partial month after September 14, 1996 any
amounts remain due and payable on such new promissory note, up to a maximum
aggregate number of 86,000 such additional warrants. (See "Management Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources.")
In consideration of certain investment advisory and other services to
the Company, pursuant to warrant agreements each dated as of August 21, 1996,
the Company issued to C.M. Blair, W.M. Foster & Co., Inc. and Redliw Corp.
warrants to purchase 13,600 and 54,400 shares of Common Stock, respectively
(collectively the "Adviser Warrants"). The Adviser Warrants are exercisable at
any time on or before May 15, 1999 at an exercise price of $3.00 per share
(subject to customary anti-dilution adjustments).
In connection with the July and August 1996 placement of 508,400 shares
of the Common Stock pursuant to Regulation S promulgated under the Securities
Act of 1933, as amended (the "Securities Act"), the Company agreed to issue
warrants to purchase 12,500 shares of Common Stock to one of two distributors
who placed the shares. Such warrants are exercisable on
28
<PAGE>
or before the second anniversary of the sale of the shares of Common Stock at an
exercise price of $3.125 per share (subject to customary anti-dilution
adjustments).
In late August 1996, the Company sold 100,000 units pursuant to
Regulation S, each such unit consisting of 5 shares of the Common Stock and a
warrant to purchase one share of the Common Stock. Each such warrant is
exercisable on or before September 1, 1999 at an exercise price of $3.125 per
share (subject to customary anti-dilution adjustments).
The Warrants do not confer upon the holders thereof any voting or other
rights of a stockholder of the Company.
POSSIBLE ANTI-TAKEOVER PROVISIONS
The Amended and Restated Certificate of Incorporation of the Company
(the "Company's Charter") contains certain provisions that might be
characterized as anti-takeover provisions. Such provisions may render more
difficult certain possible takeover proposals to acquire control of the Company
and make removal of management of the Company more difficult.
As described above, the Company's Charter authorizes a class of
undesignated Preferred Stock consisting of 1,000,000 shares. Preferred Stock may
be issued from time to time in one or more series, and the Board of Directors,
without further approval of the stockholders, is authorized to fix the rights,
preferences, privileges and restrictions applicable to each series of Preferred
Stock. The purpose of authorizing the Board of Directors to determine such
rights, preferences, privileges and restrictions is to eliminate delays
associated with a stockholder vote on specific issuances. The issuance of
Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things, adversely
affect the voting power of the holders of Common Stock and, under certain
circumstances, make it more difficult for a third party to gain control of the
Company.
The Company is incorporated under the laws of the State of Delaware.
Section 203 of the Delaware General Corporation Law prevents an "interested
stockholder" (defined as a stockholder owning 15 percent or more of a
corporation's voting stock) from engaging in a business combination with such
corporation for a period of three years from the time such stockholder became an
interested stockholder unless (a) the corporation's board of directors had
earlier approved either the business combination or the transaction by which the
stockholder became an interested stockholder, or (b) upon attaining that status,
the interested stockholder had acquired at least 85 percent of the corporation's
voting stock (not counting shares owned by persons who are directors and also
officers), or (c) the business combination is later approved by the board of
directors and authorized by a vote of two-thirds of the stockholders (not
including the shares held by the interested stockholder). Although the Company
is not currently subject to Section 203, the Company intends to apply for
listing on the Nasdaq SmallCap Market as soon as practicable. See "The Company".
If and when the Company becomes so listed, and if the Company does not amend its
Certificate of Incorporation or By-laws to exclude the application of Section
203, such section will apply to the Company and thus may inhibit an interested
stockholder's ability to acquire additional shares of Common Stock or otherwise
engage in a business combination with the Company.
In addition, William D. Forster, President and Chief Executive Officer
of the Company, and BSR Investments, Ltd. ("BSR"), an entity under the control
of a member of the immediate family of Charif Souki, Secretary and a director of
the Company, own in the aggregate approximately 54.3% of the outstanding shares
of the Common Stock. Accordingly, Mr. Forster and BSR have the ability to
effectively prevent or cause a change in control of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and registrar for the Common Stock is U.S. Stock
Transfer Corporation.
29
<PAGE>
SELLING STOCKHOLDERS
The Registration Statement has been filed under the Securities Act of
1933, as amended (the "Securities Act") to afford the holders of the Common
Stock listed in the table below (in such capacity, the "Selling Stockholders")
the opportunity to sell such Common Stock in a public transaction. The Company
will from time to time supplement or amend this Prospectus to (i) add any holder
of the Common Stock or (ii) reflect any additional required information
concerning any Selling Stockholders or concerning any transfers other than an
open market transfer effected through a broker.
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
on the Date Hereof After Sale*
-------------------- --------------------
<S> <C> <C> <C> <C> <C>
Number of Percent of Number of Shares Number of Percent of
Name Shares Class to be Offered Shares Class
- ---- --------- ---------- ---------------- --------- ----------
Apex Investment Fund Ltd. 403,400 4.0 70,000 333,400 3.3
Bemel & Ross Profit Sharing 10,000 ** 10,000 0 0
Charles M. Blair, IRA 50,000 ** 50,000 0 0
Robert Bowden 10,000 ** 10,000 0 0
Martin Brander 30,000 ** 30,000 0 0
Jacqueline B. Brandwynne 100,000 ** 100,000 0 0
Cinco de Mayo, Ltd. 50,000 ** 50,000 0 0
Ronald W. Cochran 20,000 ** 20,000 0 0
Codell Holdings, Ltd. 250,000 2.5 250,000 0 0
Joseph F. Cullman III 200,000 2.0 200,000 0 0
Murray A. Decoteau, DDS 100,000 ** 100,000 0 0
Delaware Charter Guarantee 20,000 ** 20,000 0 0
Peter T. Dixon, Trustee for U/Art 35,000 ** 35,000 0 0
16 u/w for W. Palmer Dixon FBO
Peter Dixon
Peter T. Dixon, Trustee for U/Art 35,000 ** 35,000 0 0
16 u/w for W. Palmer Dixon FBO
Palmer Dixon
Bryan Ezralow TTEE of the Bryan 30,000 ** 30,000 0 0
Ezralow 1994 Trust
Marc Ezralow 30,000 ** 30,000 0 0
Marshall Ezralow TTEE of the 40,000 ** 40,000 0 0
Ezralow Family Trust
Allen Finkelstein 30,000 ** 30,000 0 0
Gail Daly Forster/1/ 120,000 1.2 120,000 0 0
Gail Daly Forster and John 100,000 ** 100,000 0 0
Marshall Forster TTEEs u/a 8/22/78
by William H. Forster/2/
William Franzblau 10,000 ** 10,000 0 0
Ralph O. Hellmold 20,000 ** 20,000 0 0
Beth Hoemke 20,000 ** 20,000 0 0
Sandra J. Kessler 150,000 1.5 150,000 0 0
Sole and Separate Property
Ted Koutsoubos 100,000 ** 100,000 0 0
Andrew Lessman 100,000 ** 100,000 0 0
Michael Marcus 40,000 ** 40,000 0 0
Arden Merback 20,000 ** 20,000 0 0
Eli Moshen 20,000 ** 20,000 0 0
Ostis Ventures, Ltd. 148,000 1.5 144,211 3,789 **
Alan, Mark & Charlen J. Mark 10,000 ** 10,000 0 0
Brooke A. Peterson 20,000 ** 20,000 0 0
Pierre Phillippine 30,000 ** 30,000 0 0
Bert Rogel, Esq. in trust for 90,000 ** 90,000 0 0
Estate of Sharon Heinz Tingle
Wayne A. Root 10,000 ** 10,000 0 0
Alan Sturm 150,000 1.5 150,000 0 0
Diana Venegas 50,000 ** 50,000 0 0
Vincente Holdings, Ltd. 250,000 2.5 250,000 0 0
Vivaldi, Ltd. 130,000 1.3 130,000 0 0
Michael J. Wagstaff 10,000 ** 10,000 0 0
William Forster Family Trust/3/ 120,000 1.2 120,000 0 0
</TABLE>
___________________________
* Assumes the sale of all shares of the Common Stock being offered by
the registration statement of which this Prospectus is a part.
** Less than 1%
(1) Gail Daly Forster is the mother of William D. Forster, President, Chief
Executive Officer and a director of the Company.
(2) Gail Daly Forster and John Marshall Forster TTEEs u/a 8/22/78 by William
H. Forster is a trust for the benefit of Mr. Forster's mother of which
trust Mr. Foster ia a 20% remainderman. Mr. Foster disclaims beneficial
ownership of the shares of the Common Stock held by such trust.
(3) The William Forster Family Trust is a trust for the benefit of the
descendants of Mr. Forster's father. Mr. Forster disclaims beneficial
ownership of the shares of Common Stock held by such trust.
The Company has agreed, among other things, to bear all expenses (other
than underwriting discounts and commissions, fees and expenses of investment
bankers and brokerage commissions) incurred in connection with the registration
and sale of the Common Stock covered by this Prospectus, including, without
limitation, all registration, listing and qualification fees, printers and
accounting fees and fees and disbursements of counsel to the Company.
30
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
ownership of the Common Stock, of: (i) each person known by the Company to own
beneficially five percent or more of the outstanding Common Stock immediately
prior to the offering; (ii) each of the Company's directors; (iii) each of the
executive officers of the Company; and (iv) all directors and executive officers
of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO
THE OFFERING
----------------------------------
NAME OF BENEFICIAL OWNER PERCENTAGE
------------------------ OF SHARES
NUMBER OUTSTANDING
------ -----------
<S> <C> <C>
William D. Forster 2,846,211/(1)/ 28.3%
BSR Investments, Ltd. 2,602,000 25.9
Charif Souki 0/(2)/
Walter L. Williams 30,000/(3)/(4) .3
Keith F. Carney 0/(3)/ -
Efrem Zimbalist III 20,000 .2
All directors and executive officers as a group (5 persons).. 2,896,211/(1)/(2)/ 28.9
</TABLE>
(1) Does not include 100,000 shares held by a trust for the benefit of
Mr. Forster's mother of which trust Mr. Forster is a 20%
remainderman and of which shares he disclaims beneficial ownership.
(2) Does not include 2,602,000 shares held by BSR Investments, Ltd., an
entity under the control of a member of Mr. Souki's immediate
family, of which shares Mr. Souki disclaims beneficial ownership.
(3) Does not include 150,000 shares of the Common Stock issuable upon
the exercise of options, not exercisable within 60 days of the date
of this Prospectus, held by each of Mr. Williams and Mr. Carney.
(4) The 30,000 shares of the Common Stock held by Mr. Williams have been
granted by the Company, but have not yet been issued.
PLAN OF DISTRIBUTION
The shares of the Common Stock offered hereby are being offered directly
by the Selling Stockholders. The sale of the Common Stock may be effected by the
Selling Stockholders from time to time in transactions in the over-the-counter
market, in negotiated transactions or a combination of such methods of sale, in
each such case, at fixed prices which may be changed, at market prices
prevailing at the time of sale, at prices related to prevailing market prices,
or at negotiated prices. The Selling Stockholders may effect such transactions
by selling Common Stock to or through broker-dealers, and such broker-dealers
may receive compensation in the form of underwriting discounts, concessions or
commissions from Selling Stockholders and/or purchasers of Common Stock for whom
such broker-dealers may act as agents or to whom they sell as principals, or
both (which compensation as to a particular broker-dealer may be in excess of
customary commissions). The Company will keep this Registration Statement or a
similar registration statement effective until the earliest to occur of (i) the
date that all securities registered pursuant to the Registration Statement of
which this Prospectus is a part have been disposed of in accordance with the
plan of disposition indicated herein, (ii) the date that all securities
registered pursuant to the Registration Statement of which this Prospectus is a
part have become eligible for sale pursuant to Rule 144(k) under the Securities
Act, or (iii) September 17, 1998.
At the time a particular offer of the Common Stock is made, to the
extent required, a supplemental Prospectus will be distributed which will set
forth the number of shares of the Common Stock being offered and the terms of
the offering including the name or names of any underwriters, dealers or agents,
the purchase price paid by any underwriter for the Common Stock purchased from
the Selling Stockholders,
31
<PAGE>
any discounts, commissions and other items constituting compensation from the
Selling Stockholders and any discounts, commissions or concessions allowed or
reallowed or paid to dealers.
In order to comply with certain state securities laws, if applicable,
the Common Stock will be sold in such jurisdictions only through registered or
licensed brokers or dealers. In addition, in certain states the Common Stock may
not be sold unless the Common Stock has been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with by the Company and the Selling
Stockholder.
The Selling Stockholders and any brokers-dealers, agents or underwriters
that participate with Selling Stockholders in the distribution of Common Stock
may be deemed to be "underwriters" as defined in the Securities Act in which
event all brokerage commissions or discounts and other compensation received by
such Selling Stockholders, brokers-dealers, agents or underwriters may be deemed
underwriting compensation under the Securities Act. In addition, any of the
shares of Common Stock that qualify for sale pursuant to Rule 144 may be sold
under Rule 144 rather than pursuant to this Prospectus.
Under applicable rules and regulations under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), any person engaged in the distribution
of the Common Stock may not simultaneously engage in market making activities
with respect to the Company for a period of nine business days prior to the
commencement of such distribution. In addition and without limiting the
foregoing, the Selling Stockholders will be subject to applicable provisions of
the Exchange Act and the rules and regulations thereunder, including, without
limitation, Rules 10b-6 and 10b-7, which provisions may limit the timing of
purchases and sales of shares of Common Stock by the Selling Stockholders.
The Company agreed to register the Common Stock under the Securities Act
and to indemnify and hold the Selling Stockholders harmless against certain
liabilities under the Securities Act that could arise in connection with the
sale by the Selling Stockholders of the Common Stock.
See "Selling Stockholders".
LEGAL MATTERS
Certain legal matters in connection with the Common Stock being offered
hereby will be passed upon for the Company by Dewey Ballantine, New York, New
York.
EXPERTS
The audited financial statements of Cheniere Operating included in this
prospectus and elsewhere in the registration statement, to the extent and for
the periods indicated in their reports, have been audited by Merdinger,
Fruchter, Rosen & Corso, P.C., independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
The audited financial statements of Bexy Communications, Inc. included
in this Prospectus and elsewhere in the registration statement, to the extent
and for the periods indicated in their reports, have been audited by Farber &
Hass, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
32
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. The reports, proxy statements and other
information filed by the Company with the Commission can be inspected and copied
at the public reference facilities maintained by the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
Regional Offices at 7 World Trade Center, New York, New York 10048 and the
Northwestern Atrium Center, 500 West Madison Street, Room 1400, Chicago,
Illinois 60661. Copies of such material also can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates.
33
<PAGE>
INDEX TO FINANCIAL STATEMENTS
-----------------------------
CONTENTS
- --------
CHENIERE ENERGY, INC. AND SUBSIDIARY
- ------------------------------------
Independent Auditors' Report F-1
Consolidated Balance Sheet F-2
Consolidated Statement of Operations F-3
Consolidated Statement of Stockholders' Equity F-4
Consolidated Statement of Cash Flows F-5 - F-6
Notes to Consolidated Financial Statements F-7 - F-13
BEXY COMMUNICATIONS, INC.
- -------------------------
Unaudited Balance Sheet May 31, 1996 F-14
Statement of Operations F-15
Statement of Cash Flows F-16
Notes to Financial Statements F-17 - F-18
Independent Auditors' Report - August 3, 1995 F-19
Balance Sheet F-20
Statement of Operations F-21
Statement of Shareholders' Equity F-22 - F-23
Statement of Cash Flows F-24 - F-25
Notes to Financial Statements F-26 - F-28
Independent Auditors' Report - August 31, 1994 F-29
Balance Sheet F-30
Statements of Operations F-31
Statements of Shareholders' Equity F-32
Statements of Cash Flows F-33 - F-34
Notes to Financial Statements F-35 - F-37
<PAGE>
INDEPENDENT AUDITOR'S REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
CHENIERE ENERGY, INC. AND SUBSIDIARY
We have audited the accompanying consolidated balance sheet of CHENIERE ENERGY,
INC. AND SUBSIDIARY as of August 31, 1996 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CHENIERE ENERGY,
INC. AND SUBSIDIARY as of August 31, 1996 and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C
Certified Public Accountants
New York, New York
September 16, 1996
F-1
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AUGUST 31, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,093,180
Prepaid Expenses 4,800
-----------
TOTAL CURRENT ASSETS 1,097,980
-----------
PROPERTY AND EQUIPMENT, NET 46,830
-----------
OTHER ASSETS
Investment 4,000,000
Security Deposit 500
-----------
TOTAL OTHER ASSETS 4,000,500
-----------
TOTAL ASSETS $ 5,145,310
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 275,975
Accrued Expenses and Taxes Payable 16,929
Loans Payable 425,000
Advance from Officers 961
-----------
TOTAL LIABILITIES 718,855
-----------
STOCKHOLDERS' EQUITY
Common Stock--$.003 Par Value
Authorized 20,000,000 shares;
9,931,767 Issued and Outstanding 29,795
Preferred Stock - Authorized
1,000,000 shares; None Issued
and Outstanding. --
Additional Paid-in-Capital 5,626,840
Retained Deficit (1,230,180)
-----------
TOTAL STOCKHOLDERS' EQUITY 4,426,455
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,145,310
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Revenue $ --
General and Administrative Expenses 73,814
Interest Expense 7,083
----------
Loss from Operations Before Other Income (80,897)
Interest Income 1,800
----------
Loss From Continuing Operations Before Income Taxes (79,097)
Provision for Income Taxes --
----------
Loss From Continuing Operations (79,097)
----------
Discontinued Operations
Loss From operations of discontinued
business (less applicable income taxes
of $0) (149,080)
Loss on disposal of business (less
applicable income taxes of $0) (58,642)
----------
Loss From Discontinued Operations (207,722)
---------
Net Loss $ (286,819)
==========
Loss Per Share $ (.03)
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED AUGUST 31, 1996
<TABLE>
<CAPTION>
Common Stock Additional Notes Total
------------------------- Paid-In Retained Receivable Stockholders'
Shares Amount Capital Deficit Stockholders Equity
------------- ---------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance - September 1, 1995 1,558,947 $ 133,654 $ 992,831 $( 943,361) $(46,674) $ 136,450
Sales of Shares - Prior to
Reorganization 244,512 13,750 123,750 - - 137,500
Exchange of Shares - Due to
Reverse Split (1,202,514) (145,601) 145,601 - - -
Sale of Shares - At Time of
and Subsequent to the
Reorganization 9,330,822 27,992 5,087,011 - - 5,115,003
Expenses Related
to Offering - - ( 609,451) - - ( 609,451)
Repayment of Receivable - - - - 16,439 16,439
Distribution of Net Assets - - ( 112,902) - 30,235 ( 82,667)
Net Loss - - - ( 286,819) - ( 286,819)
------------ --------- ---------- ----------- ------------- ----------
Balance - August 31, 1996 9,931,767 $ 29,795 $5,626,840 $(1,230,180) $ - $4,426,455
============ ========= ========== =========== ============= ==========
</TABLE>
The accompanying notes are an integral part of this report.
F-4
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED AUGUST 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (286,819)
Adjustments to Reconcile Net Loss to
Net Cash Provided by Operating Activities:
Depreciation 4,503
(Increase) in Accounts Receivable (5,600)
(Increase) in Prepaid Expenses (4,800)
Decrease in Inventory 2,700
(Increase) in Security Deposit (500)
Decrease in Other Assets 2,122
Increase in Accounts Payable 279,514
(Decrease) in Accrued Expenses and Taxes Payable 11,949
Increase in Advance from Officers 961
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,030
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Furniture, Fixtures and Equipment (50,999)
Investment (4,000,000)
-----------
NET CASH USED BY INVESTING ACTIVITIES (4,050,999)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of Common Stock 5,252,503
Offering Costs (609,451)
Proceeds of Loan 425,000
Notes Receivable 16,439
Notes Payable (7,519)
Distribution (50,957)
-----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,026,015
-----------
NET INCREASE IN CASH 979,046
CASH - BEGINNING OF PERIOD 114,134
-----------
CASH - AUGUST 31, 1996 $ 1,093,180
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED AUGUST 31, 1996
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ -
Cash paid for income taxes $ -
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
During the year, the Company distributed the assets and liabilities of its
discontinued operations. The net noncash distribution was $61,945.
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
NOTE 1 - NATURE OF OPERATIONS
Cheniere Energy, Inc., a holding company ("Cheniere," together with Cheniere
Operating (as defined below), the "Company"), is the owner of 100% of the
outstanding common stock of Cheniere Energy Operating Co., Inc. ("Cheniere
Operating"). Cheniere Operating is a Houston-based company formed for the
purpose of oil and gas exploration and 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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
----------------------
The consolidated financial statements include the accounts of Cheniere Energy,
Inc. and its 100% owned subsidiary, Cheniere Energy Operating Co., Inc.
Accordingly, all references herein to Cheniere Energy, Inc. or the "Company"
include the consolidated results of its subsidiary. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Property and Equipment
----------------------
Property and equipment are recorded at cost. Repairs and maintenance costs are
charged to operations as incurred. Depreciation is computed using the straight
line method calculated to amortize the cost of assets over their estimated
useful lives, generally seven years. Upon retirement or other disposition of
property and equipment the cost and related depreciation will be removed from
the accounts and the resulting gains or losses recorded.
Concentration of Credit Risk
----------------------------
The Company places its cash in what it believes to be credit-worthy financial
institutions. However, cash balances exceed FDIC insured levels at various
times during the year.
Cash Equivalents
----------------
The Company classifies all investments with original maturities of three months
or less as cash equivalents.
Income Taxes
------------
Income taxes are provided for based on the liability method of accounting
pursuant to Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes". Deferred income taxes are recorded to reflect
the tax consequences on future years of differences between the tax bases of
assets and liabilities and their financial reporting amounts at each year-end.
F-7
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 3- PROPERTY AND EQUIPMENT
Property and equipment at August 31, 1996 consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Furniture and Fixtures $26,006
Office Equipment 24,427
-------
50,433
Less Accumulated Depreciation 3,603
-------
Property and Equipment - Net $46,830
=======
</TABLE>
NOTE 4 - REORGANIZATION
--------------
On July 3, 1996 Cheniere Operating consummated the transactions (the
"Reorganization") contemplated in the Agreement and Plan or Reorganization (the
"Reorganization Agreement") dated April 16, 1996 between Cheniere Operating and
Bexy Communications, Inc., a publicly held Delaware corporation ("Bexy").
Under the terms of the Reorganization Agreement, Bexy transferred its existing
assets and liabilities to Mar Ventures, Inc., its wholly-owned subsidiary ("Mar
Ventures"), Bexy received 100% of the outstanding shares of Cheniere Operating
and the former shareholders of Cheniere Operating received approximately 8.3
million newly issued shares of Bexy common stock, representing 93% of the then
issued and outstanding Bexy shares. Immediately following the Reorganization,
the Original Bexy Stockholders held the remaining 7% of the outstanding Bexy
stock. In accordance with the terms of the Reorganization Agreement, Bexy
changed its name to Cheniere Energy, Inc. Subsequently, the Company
distributed the outstanding capital stock of Mar Ventures to the original
holders of Bexy common stock.
NOTE 5 - INVESTMENT IN JOINT VENTURE
---------------------------
The Company has entered into a joint exploration program pursuant to an
Exploration Agreement between the Company and Zydeco Exploration, Inc.
("Zydeco"), an operating subsidiary of Zydeco Energy, Inc. (the "Exploration
Agreement"), with regard to a new proprietary 3-D seismic exploration project
in southern Louisiana (the "3-D Joint Venture"). The Company has the right to
earn up to a 50% participation in the 3-D Joint Venture. The Company believes
that the 3-D seismic survey (the "Survey") is the first of its size within the
Transition Zone of Louisiana, an area extending a few miles on either side of
the Louisiana State coastline.
F-8
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
NOTE 5 - INVESTMENT IN JOINT VENTURE (CONTINUED)
---------------------------------------
The Survey is to be conducted over certain areas located within a total area of
approximately 255 square miles running 5 miles south and generally 3 to 5 miles
north of the coastline in the most westerly 28 miles of West Cameron Parish,
Louisiana (the "Survey AMI"). The 3-D Joint Venture does not currently have
rights to survey the entire Survey AMI and the extent of the Survey AMI which
the 3-D Joint Venture will be entitled to survey is dependent upon its ability
to obtain survey permits and similar rights. Currently, the 3-D Joint Venture
has permits and similar rights to survey approximately 67% of the Survey AMI
and is attempting to acquire rights to Survey additional portions of the Survey
AMI. There is no assurance that the 3-D Joint Venture will successfully obtain
rights to survey additional portions of the Survey AMI, nor that it will be
successful in acquiring farmouts, lease options (other than those already
obtained), leases, or other rights to explore or recover oil and gas.
Under the terms of the Exploration Agreement, the Company is required to make
monthly payments to the 3-D Joint Venture aggregating, at least, $13 million.
The Company's potential participation in the 3-D Joint Venture could be
significantly reduced in the event of a failure by the Company to make such
required monthly payments when due.
NOTE 6 - NOTES PAYABLE
-------------
In June 1996, Cheniere Operating borrowed $425,000 through a private placement
of short term promissory notes with an initial interest rate of 8% (the
"Notes"). The Notes are due on September 14, 1996 (the "Maturity Date"). In
connection with the placement of the Notes, Cheniere Operating issued warrants,
which, following the Reorganization, were exchanged for an aggregate of 141,666
and 2/3 warrants to purchase shares of the Common Stock, to the holders of the
Notes (the "Noteholders"), each of which warrants entitles the holder to
purchase one share of the Common Stock at an exercise price of $3.00 per share
at any time on or before June 14, 1999. A failure by the Company to pay all
amounts due and payable under the Notes by the Maturity date constitutes an
event of default thereunder. In such an event of default, the interest rate
applicable to any outstanding Notes would increase to 13%. In addition, the
holders of such outstanding Notes would be entitled to receive up to an
aggregate of 42,500 additional warrants (on similar terms) for each month, or
partial month, any amounts remain due and payable following the Maturity date,
up to a maximum aggregate number of 170,000 such additional warrants. The
proceeds from the placement of the Notes were applied toward professional
expenses and used for working capital.
NOTE 7- INCOME TAXES
------------
At August 31, 1996, the Company had net carryforward losses of approximately
$1,020,000. A valuation allowance equal to the tax benefit for deferred taxes
has been established due to the uncertainty of realizing the benefit of the tax
carryforward.
F-9
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
NOTE 7- INCOME TAXES (CONTINUED)
-----------------------
Deferred tax assets and liabilities reflect the net tax effect of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities at August 31,
1996 are as follows:
Deferred Tax Assets
Loss Carryforwards $ 347,000
Less: Valuation Allowance (347,000)
----------
Net Deferred Tax Assets $ -
==========
Net operating loss carryforwards expire starting in 2006 through 2011. Per
year availability is subject to change of ownership limitations under Internal
Revenue Code Section 382.
NOTE 8 - WARRANTS
--------
The Company has issued and outstanding certain warrants described herein.
The Company has issued and outstanding 141,666 and 2/3 warrants (collectively,
the "June Warrants"), each of which entitles the registered holder thereof to
purchase one share of Common Stock. The June Warrants are exercisable at any
time on or before June 14, 1999, at an exercise price of $3.00 per share
(subject to customary anti-dilution adjustments). The June Warrants were
originally issued by Cheniere Operating and were converted to warrants of
Cheniere following the Reorganization. The June Warrants were issued to a
group of 11 investors in connection with a private placement of unsecured
promissory notes of Cheniere Operating in the aggregate principal amount of
$425,000. The notes mature on September 14, 1996 (the "Maturity Date"). In
the event that the Company fails to pay all amounts due and payable under the
Notes by the Maturity Date, in addition to an increase in the applicable
interest rate, the holders of any outstanding Notes would be entitled to
receive up to an aggregate of 42,500 additional warrants (on similar terms) for
each month, or partial month, any amounts remain due and payable following the
Maturity Date, up to a maximum aggregate number of 170,000 such additional
warrants.
In consideration of certain investment advisory and other services to the
Company, pursuant to warrant agreements each dated as of August 21, 1996, the
Company issued warrants to purchase 13,600 and 54,400 shares of Common Stock,
(collectively the "Adviser Warrants"). The Adviser Warrants are exercisable at
any time on or before May 15, 1999 at an exercise price of $3.00 per share
(subject to customary anti-dilution adjustments).
F-10
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
NOTE 8- WARRANTS (CONTINUED)
--------------------
In connection with the July and August 1996 placement of 508,400 shares of
Common Stock, the Company agreed to issue warrants to purchase 12,500 shares of
Common Stock to one of two distributors who placed the shares. Such warrants
are exercisable on or before the second anniversary of the sale of the shares
of Common Stock at an exercise price of $3.125 per share (subject to customary
anti-dilution adjustments).
In late August 1996, the Company sold 100,000 units, each such unit consisting
of 5 shares of Common Stock and a warrant to purchase one share of Common
Stock. Each such warrant is exercisable on or before September 1, 1999 at an
exercise price of $3.125 per share (subject to customary anti-dilution
adjustments).
The Warrants do not confer upon the holders thereof any voting or other rights
of a stockholder of the Company.
NOTE 9- STOCK OPTIONS
-------------
The Company has granted certain options to purchase shares of Common Stock to 2
executives. Such options aggregate 300,000 shares at an exercise price of
$3.00 per share. The options vest and are exercisable as follows:
1) 75,000 options vest and become exercisable on June 1, 1997 and expire
June 1, 2001.
2) 75,000 options vest and become exercisable on June 1, 1998 and expire June
1, 2001.
3) 150,000 options vest and become exercisable in equal annual installments of
25% each on the first through fourth anniversary of July 16, 1996 and
expire July 16, 2001.
In addition, the Company has granted options to the former President of the
Company. The holder has the option to acquire 19,444 and 2/3 shares of
Common Stock at an exercise price of $1.80 per share. The options expire
November 11, 2003.
NOTE 10- COMMON STOCK RESERVED
---------------------
The Company has reserved 322,166 and 2/3 share of Common Stock for insurance
upon the exercise of outstanding warrants (See Note 8).
The Company has reserved 319,444 and 2/3 shares of Common Shares for insurance
upon the exercise of outstanding options (See Note 9).
F-11
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
NOTE 11- DISCONTINUED OPERATIONS
-----------------------
As of March 1, 1996, the Company decided to discontinue its then present
operations in the television productions and health information business. The
assets and liabilities relating to the discontinued operations were distributed
on July 3, 1996. No assets or liabilities from the discontinued operations are
included in the consolidated balance sheet as of August 31, 1996.
Revenues, related losses and income tax benefit associated with the
discontinued business are as follows:
For the period September 1, 1995 to February 29, 1996:
Revenue $ 42,258
=========
Loss From Operations (Net of Income
Tax Benefit of $0) $(149,080)
=========
For the period March 1, 1996 to July 3, 1996:
Revenue $ 7,500
=========
Loss on Disposal (Net of Income tax
Benefit of $0) $ (58,642)
=========
The Loss on Disposal consists of the loss from operations during the period of
disposal.
NOTE 12- COMMITMENTS AND CONTINGENCIES
-----------------------------
1) The Company subleases its Houston, Texas headquarters from Zydeco under a
month-to-month sublease.
2) On July 26, 1996, the Company signed a Letter of Intent with Poseidon
Petroleum, LLC ("Poseidon") to purchase Poseidon's 47% working interest in
undeveloped reserves in the Bonito unit of the Pacific Outer Continental
Shelf, offshore Santa Barbara County, California. The parties are
conducting due diligence and are negotiating a definitive purchase and sale
agreement and related documentation. The transactions contemplated in the
Letter of Intent may be terminated by either party upon the occurrence of
certain events and there can be no assurance that the Company will
successfully consummate such transactions. Moreover, if such transactions
are consummated, the Company expects that development of the reserves will
not occur for at least five years. There can be no assurance that the
Company will successfully develop the reserves or that the reserves will
yield sufficient quantities of oil and gas to be economically viable.
F-12
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
NOTE 13 - SUBSEQUENT EVENTS
-----------------
Effective as of September 14, 1996, certain of the note holders described in
Note 6 converted their notes into common stock at a price of $2 per share. As
a result, 105,000 shares were issued to retire $210,000 of notes.
In addition, an individual note holder has purchased the promissory notes of
the remaining note holders. The holder thus holds notes totaling $215,000. As
per the terms of the notes, the interest rate on these outstanding notes has
increased to 13% per annum, effective September 14, 1996. The holder of the
notes is also entitled to receive up to an aggregate of 21,500 additional
warrants (as described in Note 6) for each month, or partial month, any amounts
remain due and payable after September 14, 1996, up to a maximum aggregate
number of 86,000 such additional warrants.
F-13
<PAGE>
BEXY COMMUNICATIONS INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
MAY 31,
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------ ----------
<S> <C> <C>
Cash $ 63,541 $ 78,397
Accounts Receivable 68,800 63,620
Program Inventory, Net 52,756 511,244
Furniture and Fixtures, (Net of Accumulated Depreciation of $3,464 and 622 1,258
$2,262)
Other Assets 4,600 12,121
----------- ---------
Total Assets $ 190,319 $ 666,640
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES
Accounts Payable and Accrued Expenses 39,849 $ 64,502
Accrued Interest Expense to Related Party 37,209 38,924
Note Payable - 180,000
Note Payable to Related Party - 76,219
Deposits 2,000 2,000
Deferred Income 16,000 -
----------- ---------
Total Liabilities 95,058 361,648
----------- ---------
STOCKHOLDERS' EQUITY
Common Stock, Par Value $.01, 25,000,000
Shares Authorized, 1,803,459 and 1,490,951 Shares
Issued and Outstanding 147,404 130,289
Contributed Capital 1,116,581 915,828
Accumulated Deficit (1,138,489) (659,910)
----------- ---------
Notes Receivable from Stockholders ( 30,235) ( 81,212)
----------- ---------
Total Stockholders' Equity 95,261 304,995
----------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 190,319 $ 666,640
=========== =========
</TABLE>
F-14
<PAGE>
BEXY COMMUNICATIONS INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
For the For the
Three Months Ended Nine Months Ended
May 31, 1996 May 31, 1995 May 31, 1996 May 31, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUE $ 7,500 $ 45,689 $ 49,758 $ 101,867
Cost of Programs and
Distribution Fees 3,826 40,852 29,071 125,514
---------- ---------- ---------- ----------
3,674 4,837 20,687 ( 23,647)
---------- ---------- ---------- ----------
EXPENSES:
Advertising 2,042 - 10,101 225
Salaries - 2,739 - 8,216
Consulting Fees to Majority Shareholder 21,000 - 59,500 -
General and Administrative 10,116 11,510 100,545 43,574
Depreciation 300 302 900 906
Interest - 1,718 - 6,328
Professional Fees 13,158 1,811 35,144 6,066
Rent 3,645 10,406 11,443 26,381
---------- ---------- ---------- ----------
Total Expenses 50,261 28,486 217,633 91,696
---------- ---------- ---------- ----------
Other Income 540 - 1,819 4,162
---------- ---------- ---------- ----------
Net Loss ( 46,047) (23,649) ( 195,127) ( 111,181)
---------- ---------- ---------- ----------
Net Loss per Share ( .02) ( .02) ( .10) ( .08)
========== ========== ========== ==========
Weighted Average Number of Shares 1,803,459 1,455,950 1,681,203 1,450,450
Outstanding
</TABLE>
F-15
<PAGE>
BEXY COMMUNICATIONS INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTH PERIODS ENDED MAY 31,
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $( 195,127) $( 111,181)
Adjustments to Reconcile Net Loss to
Net Cash (Used By) Operating Activities:
Amortization of Film Costs 2,700 58,255
Depreciation 900 906
Changes in Operating Assets and Liabilities:
Accounts Receivable ( 5,600) ( 28,420)
Other Assets 2,122 -
Accounts Payable and Accrued Expenses 3,539 19,962
Accrued Interest Expense ( 4,981) 6,328
---------- -----------
Net Cash (Used By) Operating Activities ( 196,447) ( 54,150)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Furniture and Fixtures ( 566) -
Net Change in Notes Receivable 16,439 51,788
---------- -----------
Net Cash Provided By Investing Activities 15,738 51,788
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of Common Stock 137,500 130,976
Repayment of Note Payable - ( 5,000)
Net Repayment to Related Party ( 7,519) ( 51,781)
---------- -----------
Net Cash Provided by Financing Activities 129,981 74,186
---------- -----------
Net (Decrease) Increase in Cash ( 50,593) 71,824
CASH - BEGINNING OF YEAR 114,134 6,573
---------- -----------
CASH - END OF YEAR $ 63,541 $ 78,397
========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest $ 4,983 $
========== ===========
Cash Paid for Income Taxes $ $ 1,221
========== ===========
</TABLE>
F-16
<PAGE>
BEXY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996
NOTE 1 - The accompanying financial statements have been prepared in
accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form
10-QSB and Regulation S-B. Accordingly, they do not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair
presentation have been included. Certain reclassifications have
been made to the prior period to conform to the current periods
presentation.
The financial statements include the Company's wholly owned subsidiary,
MAR Ventures Inc., a Delaware Corporation, which acquired substantially
all of the assets and liabilities of the Company on April 16, 1996.
For further information refer to the financial statements and footnotes
included in the Registrant's Annual Report on Form 10-KSB for the year
ended August 31, 1995, which indicated a going concern report as to the
Company's ability to continue in existence.
The Results of Operations for any interim period are not necessarily
indicative of the results to be expected for the full fiscal year ended
August 31, 1996.
Unclassified Balance Sheet - In accordance with the provisions of SFAS
No. 53, the Company has elected to present an unclassified balance
sheet.
Per Share Information - Net loss per share for the periods presented is
computed on the basis of the weighted average common shares
outstanding.
NOTE 2 - GENERAL AND ADMINISTRATIVE EXPENSES
The Company has expended approximately $46,000 through May 31, 1996 to
fund certain start-up costs of a company owned by the Company's
majority shareholder. In exchange for funding the start-up costs, the
majority shareholder granted the Company an option to purchase the
Company for $50,000, which was terminated on April 16, 1996.
NOTE 3 - SUBSEQUENT EVENTS
On July 3, 1996, a date subsequent to the balance sheet date, the
shareholders approved a plan which transferred the assets and
liabilities to a new subsidiary, MAR Ventures Inc. and which changed
the Company's business from the television production and health
information business to the business of oil and gas exploration.
As part of the reorganization, the Company issued new shares of its
stock in exchange for all of the stock of Cheniere Energy Operating
Co., Inc. resulting in a change in control of the Company and
distribution of the shares of MAR Ventures Inc. to its existing
shareholders. MAR Ventures Inc. assumes the Company's liabilities,
including its obligations under the reorganization agreement.
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Bexy Communications, Inc.:
We have audited the accompanying balance sheet of Bexy Communications, Inc. (the
"Company") as of August 31, 1995. We have also audited the statements of
operations, shareholders' equity and of cash flows for the two years ended
August 31, 1995. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at August 31, 1995, and the
results of its operations and its cash flows for each of the two years ended
August 31, 1995 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
that raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 6. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
FARBER & HASS
November 9, 1995
F-18
<PAGE>
BEXY COMMUNICATIONS, INC.
BALANCE SHEET
AUGUST 31, 1995
- ---------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CASH $114,134
ACCOUNTS RECEIVABLE 63,200
PROGRAM INVENTORY, Net 55,456
FURNITURE AND FIXTURES - Net of accumulated
depreciation of $2,564 956
OTHER ASSETS 6,722
--------
TOTAL ASSETS $240,468
========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses $ 36,310
Accrued interest to related party 42,189
Note payable to related party 7,519
Deposits 2,000
Deferred income 16,000
---------
Total liabilities 104,018
---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, par value - $.01, 25,000,000 shares
authorized, 1,558,947 issued and outstanding 133,654
Contributed capital 992,831
Accumulated deficit (943,361)
Notes receivable from shareholders (46,674)
---------
Total shareholders' equity 136,450
---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 240,468
=========
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE>
BEXY COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
FOR THE TWO YEARS ENDED AUGUST 31, 1995
- ---------------------------------------
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
REVENUES $ 125,654 $ 130,228
--------- ---------
COST OF PROGRAMS AND DISTRIBUTION FEES:
Amortization of film costs 254,044 122,630
Distribution fees 63,087 52,036
--------- ---------
Total cost of programs
and distribution fees 317,131 174,666
--------- ---------
EXPENSES:
Advertising 2,300 22,552
General and administrative 65,227 54,227
Depreciation 1,208 850
Interest 9,593 10,167
Professional fees 108,315 60,105
Rent 16,513 21,281
--------- ---------
Total expenses 203,156 169,182
--------- ---------
NET LOSS $(394,633) $(213,620)
========= =========
</TABLE>
NET LOSS PER SHARE $ (.27) $ (.17)
========= =========
See accompanying notes to financial statements.
F-20
<PAGE>
BEXY COMMUNICATIONS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE TWO YEARS ENDED AUGUST 31, 1995
--------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK NOTES TOTAL
------------------------------ RECEIVABLE SHARE-
SHARES CONTRIBUTED ACCUMULATED FROM HOLDER'S
OUTSTANDING AMOUNT CAPITAL DEFICIT SHAREHOLDERS EQUITY
------------- ----------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
SEPTEMBER 1, 1993 7,164,333 $126,970 $502,575 $(335,108) $ 294,437
ONE-FOR-SIX REVERSE
STOCK SPLIT (5,970,277)
SALE OF SHARES 120,833 1,208 181,767 $(153,000) 29,975
ISSUANCE OF SHARES
FOR SERVICES 45,062 451 12,179 12,630
CONSTRUCTIVE ISSUANCE
OF SHARES RELATING
TO THE PURCHASE OF
PROGRAM INVENTORY 50,000 500 89,500 90,000
REPAYMENT ON NOTES
RECEIVABLE 20,000 20,000
NET LOSS (213,620) (213,620)
---------- -------- -------- --------- --------- ---------
BALANCE,
AUGUST 31, 1994 1,409,951 129,129 786,021 (548,728) (133,000) 233,422
</TABLE>
(Continued)
F-21
<PAGE>
BEXY COMMUNICATIONS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
FOR THE TWO YEARS ENDED AUGUST 31, 1995
----------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK NOTES TOTAL
------------------------------ RECEIVABLE SHARE-
SHARES CONTRIBUTED ACCUMULATED FROM HOLDER'S
OUTSTANDING AMOUNT CAPITAL DEFICIT SHAREHOLDERS EQUITY
------------- ----------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
AUGUST 31, 1994 1,409,951 129,129 786,021 (548,728) (133,000) 233,422
CANCELLATION OF
CONSTRUCTIVE
ISSUANCE (50,000) (500) (89,500) (90,000)
SALE OF SHARES 151,000 4,573 231,393 235,966
ISSUANCE OF SHARES
FOR SERVICES 45,168 452 64,917 65,369
REPAYMENT ON NOTES
RECEIVABLE 86,326 86,326
ISSUANCE OF SHARES
FOR ROUNDING 2,828
NET LOSS (394,633) (394,633)
--------- -------- -------- --------- ----------- ---------
BALANCE,
AUGUST 31, 1995 1,558,947 $133,654 $992,831 $(943,361) $ (46,674) $ 136,450
========= ======== ======== ========= ============ =========
</TABLE>
See notes to financial statements.
F-22
<PAGE>
BEXY COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE TWO YEARS ENDED AUGUST 31, 1995
-------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(394,633) $(213,620)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 1,208 850
Amortization of film costs 239,044 122,630
Issuance of stock for services 65,369 12,630
Write-off of investment 10,000
Changes in operating assets and
liabilities:
Increase in accounts receivable (28,000) (22,151)
Decrease in program inventory 3,083
Increase in other assets (4,601) (2,121)
Decrease in accounts payable
and accrued expenses (8,230) (24,149)
Increase in deferred income 16,000
Increase in accrued interest expense 9,593 10,030
Increase in deposits 2,000
--------- ---------
Net cash used by operating activities (94,250) (110,818)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES -
Capital expenditures (2,577)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment on note payable (2,038)
Borrowings from related party 34,519 38,000
Repayments to related party (155,000)
Sale of common stock 189,292 49,975
Collections on note receivable 133,000
--------- ---------
Net cash provided by financing activities 201,811 85,937
--------- ---------
NET INCREASE (DECREASE) IN CASH 107,561 (27,458)
CASH, BEGINNING OF PERIOD 6,573 34,031
--------- ---------
CASH, END OF PERIOD $ 114,134 $ 6,573
========= =========
</TABLE>
(Continued)
F-23
<PAGE>
BEXY COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE TWO YEARS ENDED AUGUST 31, 1995
--------------------------------------------------
1995 1994
---- ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ -0- $ -0-
Cash paid for income taxes $1,566 $ 800
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
During 1995, the Company reduced the carrying value of its program
inventory by $235,500 in order to reflect a lower of cost or market
valuation on certain program inventory. In addition, the Company wrote-off
its investment ($10,000) in the "Victims" television series.
During 1994, the Company issued a note payable amounting to $185,000 and
common stock amounting to $90,000 for the acquisition of a program series
entitled "Feelin' Great". During 1995, the Company negotiated with the
seller to cancel the acquisition and the related debt and common stock.
The program was returned to the seller.
During 1995, the Company issued shares of common stock in exchange for
notes receivable totalling $46,674. In addition, the Company issued 45,168
shares of common stock in exchange for services.
See accompanying notes to financial statements.
F-24
<PAGE>
BEXY COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
---------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL INFORMATION - Bexy Communications, Inc. (the "Company") was
incorporated under the laws of the State of Delaware. The Company is
engaged in the production and distribution of television programming,
focusing on health information for the general public through print
and electronic media that entertains as well as informs.
Effective July 18, 1994, the Company approved a one-for-six reverse
split of its outstanding common stock.
GOING CONCERN - The Company experienced significant operating losses
for the fiscal years ended August 31, 1995 and 1994. The financial
statements have been prepared assuming the Company will continue to
operate as a going concern which contemplates the realization of
assets and the settlement of liabilities in the normal course of
business. No adjustment has been made to the recorded amount of
assets or the recorded amount or classification of liabilities which
would be required if the Company were unable to continue its
operations. As discussed in Note 6, management has developed an
operating plan which they believe will generate sufficient cash to
meet its obligations in the normal course of business.
UNCLASSIFIED BALANCE SHEET - In accordance with the provisions of SFAS
No. 53, the Company has elected to present an unclassified balance
sheet.
CONCENTRATION OF CREDIT RISK - Financial instruments which potentially
subject the Company to concentrations of credit risk consist
principally of cash and trade receivables. The Company has
substantially all of its cash on deposit in one financial institution.
The Company routinely assesses the financial strength of its customers
and normally does not require collateral to support customer
receivables. At August 31, 1995, the Company had four customers which
accounted for approximately 81% of trade accounts receivable.
FURNITURE AND FIXTURES - Furniture and fixtures are recorded at cost
and depreciated over an estimated useful life of 3 years using the
straight-line method.
LICENSE AGREEMENTS - Revenue from television licensing agreements and
the related film costs are recognized upon the execution of a
licensing agreement, provided certain conditions have been met,
including availability of the film for broadcast.
PROGRAM INVENTORY - Program inventory is stated at the lower of cost
or estimated net realizable value, determined on a film-by-film basis.
Film costs include production, print and pre-release costs. These
costs are amortized in the ratio of the current year's gross revenue
to management's estimate of remaining gross revenues from all sources
on an individual film basis.
The Company continually evaluates the carrying value of its program
inventory. Based on the lower than forecasted revenues of its film
library experienced in 1995 and current projections indicating a
continued decline in film revenues, the Company re-evaluated the
future market value of its program inventory in the fourth quarter and
recorded a write-down to reflect its value at the lower of cost or
market. The adjustment totalled $235,500 and was recorded in
amortization of film costs.
GENERAL AND ADMINISTRATIVE EXPENSES - The Company has expended
approximately $12,000 through August 31, 1995 and an additional
$24,000 through November 9, 1995 to fund certain start-up costs of a
company owned by the
F-25
<PAGE>
Company's majority shareholder. In exchange for funding the start-up
costs, the majority shareholder has granted the Company an option to
purchase the company for $50,000.
INCOME TAXES - The Company accounts for its income taxes in accordance
with the provisions of Statement of Financial Accounting Standards 109
("SFAS 109"). The asset and liability method requires the recognition
of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between tax bases and financial
reporting bases of other assets and liabilities.
The Company has net operating loss carryforwards of approximately
$740,000 and $269,000 available to offset future Federal and
California taxable income, respectively. Such loss carryforwards
expire starting in 2006 through 2008.
PER SHARE INFORMATION - Net loss per share for the years presented is
computed on the basis of the weighted average common shares
outstanding. The number of shares used in the computation was
1,459,365 for the year ended August 31, 1995 and 1,256,444 for the
year ended August 31, 1994.
<TABLE>
<CAPTION>
<S> <C>
2. PROGRAM INVENTORY
At August 31, 1995, the program inventory consisted of the following:
"Heartstoppers...Horror At The Movies"
A two-hour television program hosted by
George Hamilton $ 416,636
"Christmas at the Movies" - A one-hour
television program hosted by Gene Kelly 106,000
"It's A Wonderful Life - A Personal
Remembrance" hosted by Frank Capra, Jr. 41,786
---------
Total 564,422
Less: accumulated amortization (508,966)
---------
Program Inventory, Net $ 55,456
=========
</TABLE>
3. NOTE PAYABLE TO RELATED PARTY
Through August 31, 1995, a Trust controlled by Buddy Young, an
officer, director and majority shareholder of the Company, advanced
funds to the Company for operating expenses and film productions. The
advanced funds accrue interest at a rate of 8% per annum. The balance
of the note totalling $7,519 and accrued interest of $42,189 are
currently due and are collateralized by the program inventory.
4. STOCK OPTION PLANS
In November 1993, the Company adopted a nonqualified stock option plan
that covers certain key employees, consultants and directors as
determined by the Board. The aggregate number of shares of common
stock that may be issued pursuant to options under the plan will not
exceed 416,666. Price and terms are determined at the discretion of
the Board.
F-26
<PAGE>
On November 11, 1993, the Board of Directors granted options to the
President and principal shareholder. Options to acquire 58,333 shares
of the Company's common stock were granted at an exercise price of
$.60 per share. All of the shares are currently exercisable and
expire on November 11, 2003.
5. COMMITMENTS AND CONTINGENCIES
The Company leases its primary office space under a one-year lease
agreement expiring July 1996. Monthly rent on such lease is $1,150.
The Company has an option to extend the lease for one year. Total
rent expense for all operating leases for the years ended August 31,
1995 and 1994 was $16,513 and $22,945, respectively.
6. MANAGEMENT PLANS
In fiscal 1995 and 1994, the Company generated net negative cash flows
from operating activities of $94,250 and $110,818, respectively.
Management expects that the forecasted sales and additional equity and
debt financing will be adequate to finance the 1996 cash flow
requirements. If the Company does not achieve the forecasted sales,
the Company may have difficulty in continuing as a going concern.
Management has developed alternative plans which include but are not
limited to, merging with another company and obtaining additional
financing sources.
7. SUBSEQUENT EVENT (UNAUDITED)
In September 1995, the Company sold 85,000 shares of its common stock
for a total of $93,500.
F-27
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Bexy Communications, Inc.:
We have audited the accompanying balance sheet of Bexy Communications, Inc.
(the "Company") as of August 31, 1994. We have also audited the statements
of operations, shareholders' equity and of cash flows for the two years
ended August 31, 1994. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at August 31, 1994, and the
results of its operations and its cash flows for each of the two years
ended August 31, 1994 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, effective September 1,
1993, the Company adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes".
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from
operations that raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters
are also described in Note 7. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
FARBER & HASS
October 24, 1994
F-28
<PAGE>
BEXY COMMUNICATIONS, INC.
BALANCE SHEET
AUGUST 31, 1994
----------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CASH $ 6,573
ACCOUNTS RECEIVABLE 35,200
PROGRAM INVENTORY, Net 569,500
FURNITURE AND FIXTURES - Net of accumulated
depreciation of $1,356 2,164
OTHER ASSETS 12,121
--------
TOTAL ASSETS $625,558
========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses $ 44,540
Accrued interest expense 32,596
Note payable 185,000
Note payable to related party 128,000
Deposits 2,000
--------
Total liabilities 392,136
--------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock (par value - $.01, 25,000,000 shares
authorized, 1,409,951 issued and outstanding) 129,129
Contributed capital 786,021
Accumulated deficit (548,728)
Notes receivable from shareholders (133,000)
---------
Total shareholders' equity 233,422
---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 625,558
=========
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE>
BEXY COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
FOR THE TWO YEARS ENDED AUGUST 31, 1994
-------------------------------------------------
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
REVENUES $ 130,228 $ 317,946
--------- ---------
COST OF PROGRAMS AND DISTRIBUTION FEES:
Amortization of film costs 122,630 147,292
Distribution fees 52,036 133,757
--------- ---------
Total cost of programs
and distribution fees 174,666 281,049
--------- ---------
EXPENSES:
Advertising 22,552 27,083
General and administrative 54,227 44,457
Depreciation 850 348
Interest 10,167 18,992
Professional fees 60,105 62,209
Rent 21,281 14,769
Reserve on former employee advances 98,015
--------- ---------
Total expenses 169,182 265,873
--------- ---------
NET LOSS $(213,620) $(228,976)
========= =========
Net loss per share $ (.17) $ (.19)
========= =========
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE>
BEXY COMMUNICATIONS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE TWO YEARS ENDED AUGUST 31, 1994
--------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
SHARES CONTRIBUTED ACCUMULATED
OUTSTANDING AMOUNT CAPITAL DEFICIT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, SEPTEMBER 1, 1992 7,164,333 $126,970 (106,132)
CAPITAL CONTRIBUTIONS $ 160,573
CONVERSION OF RELATED PARTY DEBT
AND ACCRUED INTEREST 342,002
NET LOSS (228,976)
----------- ------------ ----------- -----------
BALANCE, AUGUST 31, 1993 7,164,333 126,970 502,575 (335,108)
ONE-FOR-SIX REVERSE STOCK SPLIT (5,970,277)
SALE OF SHARES 120,833 1,208 181,767
ISSUANCE OF SHARES FOR SERVICES 45,062 451 12,179
CONSTRUCTIVE ISSUANCE OF SHARES
RELATING TO THE PURCHASE OF
PROGRAM INVENTORY 50,000 500 89,500
NET LOSS (213,620)
----------- ------------ ----------- -----------
BALANCE, AUGUST 31, 1994 1,409,951 $129,129 $ 786,021 $(548,728)
=========== ============ =========== ===========
</TABLE>
See notes to financial statements.
F-31
<PAGE>
BEXY COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE TWO YEARS ENDED AUGUST 31, 1994
--------------------------------------------
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(213,620) $(228,976)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 850 348
Amortization of film costs 122,630 147,292
Issuance of stock for services 12,630
Reserve for former employee receivables 98,015
Expenses paid by officer 420
Changes in operating assets and
liabilities:
Increase in accounts receivable (22,151) (13,049)
(Increase) decrease in program
inventory 3,083 (488,857)
Increase in other assets (2,121) (6,451)
Increase (decrease) in accounts
payable and accrued expenses (24,149) 91,255
Decrease in cash overdraft (4,565)
Increase (decrease) in accrued
interest expense 10,030 (3,994)
Increase in deposits 2,000
---------
Net cash used by operating activities (110,818) (408,562)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES -
Capital expenditures (2,577)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment on note payable (2,038) (200)
Borrowings from related party 38,000 344,000
Repayments to related party (61,780)
Sale of common stock 49,975
Contributions to capital 160,573
--------- ---------
Net cash provided by financing activities 85,937 442,593
--------- ---------
NET INCREASE (DECREASE) IN CASH (27,458) 34,031
CASH, BEGINNING OF PERIOD 34,031 -0-
--------- ---------
CASH, END OF PERIOD $ 6,573 $ 34,031
========= =========
</TABLE>
(Continued)
F-32
<PAGE>
BEXY COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE TWO YEARS ENDED AUGUST 31, 1994 (CONTINUED)
------------------------------------------------------------------------
1994 1993
---- ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ -0- $ -0-
Cash paid for income taxes $ 800 $ -0-
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
During the year ended August 31, 1994, the Company issued a note payable
amounting to $185,000 and common stock amounting to $90,000 for the
acquisition of a program series entitled "Feelin' Great" (see Notes 2 and
3).
During the year ended August 31, 1994, the Company issued shares of common
stock in exchange for notes receivable totalling $133,000.
During the year ended August 31, 1993, $342,002 of related party debt and
accrued interest were converted to contributed capital.
During the three years ended August 31, 1993, a former officer/director of
the Company made repayments of principal and interest on the note payable
to the bank and paid certain state income taxes due in the prior years.
The amounts paid (approximately $19,000) have been offset against the
amounts due from former officers.
See accompanying notes to financial statements.
F-33
<PAGE>
BEXY COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL INFORMATION - Bexy Communications, Inc. (the "Company") was
incorporated under the laws of the State of Delaware. The Company is
engaged in the production and distribution of television programming,
focusing on health information for the general public through print
and electronic media that entertains as well as informs.
Effective July 18, 1994, the Company approved a one-for-six reverse
split of its outstanding common stock.
GOING CONCERN - The Company experienced significant operating losses
for the fiscal year ended August 31, 1994. The financial statements
have been prepared assuming the Company will continue to operate as a
going concern which contemplates the realization of assets and the
settlement of liabilities in the normal course of business. No
adjustment has been made to the recorded amount of assets or the
recorded amount or classification of liabilities which would be
required if the Company were unable to continue its operations. As
discussed in Note 7, management has developed an operating plan which
they believe will generate sufficient cash to meet its obligations in
the normal course of business.
UNCLASSIFIED BALANCE SHEET - In accordance with the provisions of SFAS
No. 53, the Company has elected to present an unclassified balance
sheet.
CONCENTRATION OF CREDIT RISK - Financial instruments which potentially
subject the Company to concentrations of credit risk consist
principally of trade receivables. The Company routinely assesses the
financial strength of its customers. The Company normally does not
require collateral to support customer receivables. At August 31,
1994, the Company had one customer which accounted for approximately
86% of trade accounts receivable.
FURNITURE AND FIXTURES - Furniture and fixtures are recorded at cost
and depreciated over an estimated useful life of 3 years using the
straight-line method.
OTHER ASSETS - Other assets consist primarily of a 50% interest in the
pilot program for the "Victims" television series.
LICENSE AGREEMENTS - Revenue from television licensing agreements and
the related film costs are recognized upon the execution of a
licensing agreement, provided certain conditions have been met,
including availability of the film for broadcast.
INCOME TAXES - Effective September 1, 1993, the Company adopted the
provisions of Statement of Financial Accounting Standards 109 ("SFAS
109"). The adoption of SFAS 109 changes the Company's method of
accounting for income taxes from the deferred method (APB 11) to an
asset and liability method. The asset and liability method requires
the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between tax
bases and financial reporting bases of other assets and liabilities.
The cumulative effect of the initial adoption on prior years' retained
earnings was not significant. Additionally, the effect of the
adoption of SFAS 109 for fiscal 1994 was not significant.
The Company has net operating loss carryforwards of approximately
$339,000 and $177,000 available to offset future Federal and
California taxable income, respectively. Such loss carryforwards
expire starting in 2006 through 2008.
PER SHARE INFORMATION - Net loss per share for the years presented is
computed on the basis of the weighted average common shares
outstanding. The number of shares used in the computation was
1,256,444 for the year ended August 31, 1994 and 1,194,055 for the
year ended August 31, 1993.
F-34
<PAGE>
2. PROGRAM INVENTORY
Program inventory is stated at the lower of cost or estimated net
realizable value, determined on a film-by-film basis. Film costs
include production, print and pre-release costs. These costs are
amortized in the ratio of the current year's gross revenue to
management's estimate of remaining gross revenues from all sources on
an individual film basis.
At August 31, 1994, the program inventory consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
"Heartstoppers...Horror At The Movies"
A two-hour television program hosted by
George Hamilton $ 416,636
"Christmas at the Movies" - A one-hour
television program hosted by Gene Kelly 106,000
"It's A Wonderful Life - A Personal
Remembrance" hosted by Frank Capra, Jr. 41,786
"Feelin' Great" - 26 one-half hour
episodes promoting a healthy lifestyle 275,000
---------
Total 839,422
Less: accumulated amortization (269,922)
---------
Program Inventory, Net $ 569,500
=========
</TABLE>
3. NOTE PAYABLE
In connection with the acquisition of a program series entitled
"Feelin' Great", the Company issued a note payable to Hammond
Productions in the amount of $185,000. The note bears no interest, is
secured by the existing 26 episodes of the series and scheduled
maturities of the note are as follows for the years ending August 31:
<TABLE>
<CAPTION>
<S> <C>
1995 $ 85,000
1996 50,000
1997 50,000
-------
$185,000
========
</TABLE>
4. NOTE PAYABLE TO RELATED PARTY
Through August 31, 1994, a Trust controlled by Buddy Young, an
officer, director and majority shareholder of the Company, advanced
funds to the Company for operating expenses and film productions. The
advanced funds accrue interest at a rate of 8% per annum. The balance
of the note, $128,000, is due June 30, 1995 and is collateralized by
the program inventory.
5. STOCK OPTION PLANS
In November 1993, the Company adopted a nonqualified stock option plan
that covers certain key employees, consultants and directors as
determined by the Board. The aggregate number of shares of common
stock that may be issued pursuant to options under the plan will not
exceed 416,666. Price and terms are determined at the discretion of
the Board.
F-35
<PAGE>
On November 11, 1993, the Board of Directors granted options to the
President and principal shareholder. Options to acquire 58,333 shares
of the Company's common stock were granted at an exercise price of
$.60 per share. All of the shares are currently exercisable and
expire on November 11, 2003.
6. COMMITMENTS AND CONTINGENCIES
The Company leases its primary office space on a month-to-month basis
at a rate of $500 per month. The Company has also entered into a two
year lease agreement for other office space expiring February 1996.
Monthly rent on such lease is $2,080. As this space is currently not
being utilized, the Company has sublet the space commencing on
September 1, 1994 and terminating August 31, 1995 for a monthly rental
amount of $2,080. Total rent expense for all operating leases for the
years ended August 31, 1994 and 1993 was $22,945 and $14,769,
respectively.
In connection with the acquisition of a television series entitled
"Feelin' Great", the Company will pay to Hammond Productions three
percent of the gross revenues derived from the distribution of the
existing twenty-six episodes.
7. MANAGEMENT PLANS
In fiscal 1994, the Company generated net negative cash flows from
operating and investing activities of $100,765. Management expects
that the forecasted higher sales and cash flow from operations will be
adequate to finance the 1995 cash flow requirements. If the Company
does not achieve the forecasted higher sales, the Company may have
difficulty in continuing as a going concern. Management has developed
alternative plans which include but are not limited to, merging with
another company and obtaining additional financing sources.
F-36
<PAGE>
===============================================================================
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE OFFERING AND SALE OF THE COMMON STOCK
OFFERED HEREBY, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND ANY SUCH
INFORMATION OR REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES OTHER THAN
THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES
IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
__________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................. 2
Risk Factors............................. 4
The Company.............................. 8
Use of Proceeds.......................... 9
Capitalization........................... 9
Market Price and Dividend Information.... 9
Selected Financial Data.................. 11
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 11
Business and Properties.................. 13
Management............................... 24
Description of Capital Stock............. 27
Selling Stockholders..................... 30
Principal Stockholders................... 32
Plan of Distribution..................... 32
Legal Matters............................ 33
Experts.................................. 33
Available Information.................... 34
</TABLE>
2,844,211 SHARES
CHENIERE ENERGY, INC.
COMMON STOCK
(PAR VALUE $.003 PER SHARE)
<PAGE>
PART II
Information Not Required in Prospectus
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Common Stock to be registered is to be offered for the account of
the Common Stockholders. The estimated expenses of this offering, to be fully
paid by the Company unless otherwise noted, in connection with the issuance and
distribution of the securities being registered are as follows:
Accounting Fees and Expenses............................... $ 10,000.00
Legal Fees and Expenses.................................... $150,000.00
Securities and Exchange Commission Filing Fee.............. $ 3,127.00
Miscellaneous Expenses..................................... $ 10,000.00
Total.................................................... $173,127.00
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Amended and Restated Certificate of Incorporation of the Company (the
"Company's Charter") eliminates the liability of directors of the Company to the
Company or its stockholders (in their capacity as directors but not in their
capacity as officers) to the fullest extent permitted by Section 102 of the
Delaware General Corporation Law, as the same may be amended from time to time
(the "DGCL"). Specifically, under Section 102(b)(7) of the DGCL, directors of
the Company will not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL or
(iv) for any transaction from which the director derived an improper personal
benefit.
The Company's Charter also provides that the Company shall indemnify all
persons whom it may indemnify under Section 145 of the DGCL to the fullest
extent permitted by such Section. Section 145(a) of the DGCL provides that a
Delaware corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Section 145(b) of the DGCL provides that a Delaware corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation and except that no indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the extent
that the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the
<PAGE>
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to be indemnified for such expenses
which the court shall deem proper.
Section 145 of the DGCL further provides that to the extent a director or
officer of a corporation has been successful on the merits or otherwise in the
defense of any action, suit or proceeding referred to in subsections (a) and
(b) of Section 145, or in the defense of any claim, issue, or matter therein, he
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith; that indemnification and
advancement of expenses provided by, or granted pursuant to Section 145 shall
not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to his official capacity and as to action in another capacity while holding such
office; that indemnification and advancement of expenses provided by, or granted
pursuant to, Section 145 shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director or officer and
shall inure to the benefit of the heirs, executors and administrators of such a
person; and that the corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director or officer of the
corporation against any liability asserted against him and incurred by him in
any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
such Section 145.
Article IX of the Company's Bylaws contains detailed indemnification rights
for the Company's directors, other employees and other agents. The Bylaws
provide for indemnification in accordance with the provisions of Section 145 of
the DGCL.
The inclusion of the indemnification provisions in the Company's Charter
and Bylaws may have the effect of reducing the likelihood of derivative
litigation against directors, and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefitted
the Company and its stockholders.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In May and June 1996, Cheniere Operating issued 200 shares of its common
stock (which were exchanged for 2,000,000 shares of the Common Stock following
the Reorganization) to a group of "accredited investors" (as defined in Rule
501(a) promulgated under the Securities Act of 1933, as amended (the "Securities
Act")) pursuant to Rule 506 of Regulation D promulgated under the Securities Act
("Regulation D"). Cheniere Operating received net proceeds of $2,883,000, net
of offering costs, on cash sales of $3,000,000.
In June 1996, Cheniere Operating issued 11 short term unsecured promissory
notes with an initial interest rate of 8% and an aggregate face value of
$425,000 to a group of "accredited investors" (as defined in Rule 501(a)
promulgated under the Securities Act) for $425,000 in cash pursuant to Section
4(2) of the Securities Act. Subsequently, the Company agreed to issue 105,000
shares of the Common Stock to the holders of Notes in the aggregate principal
amount of $210,000 in exchange for such Notes. In addition, prior to the
maturity of the Notes, an individual Noteholder (the "Remaining Noteholder")
purchased several outstanding Notes following which such Noteholder held Notes
in the aggregate principal amount of $215,000. Cheniere Operating has issued a
new promissory note to the Remaining Noteholder with an interest rate of 13% per
annum in exchange for the Notes held by him.
In July 1996, Cheniere issued 50,000 shares of Common Stock to an
"accredited investor" (as defined in Rule 501(a) promulgated under the
Securities Act) for $100,000 in cash pursuant to Rule 506 of Regulation D.
In July and August 1996, Cheniere issued 508,400 shares of Common Stock to
a group of investors pursuant to Regulation S promulgated under the Securities
Act. Cheniere received net proceeds of $915,000 on cash sales of $1,016,800
less placement fees of $101,800 paid to Pinnacle Group, Ltd. and Ostis Ventures,
Ltd. as placement agents.
In late August 1996, the Company raised $1,000,000 from the sale of 100,000
units, each consisting of five shares of the Common Stock and a warrant to
purchase one share of the Common Stock, pursuant to Regulation S.
In September 1996, Cheniere issued 130,250 shares of stock to "accredited
investors" (as defined in Rule 501(a) promulgated under the Securities Act) for
an aggregate price of $260,500 in cash pursuant to Rule 506 of Regulation
D.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A. Exhibits
3.1 Amended and Restated Certificate of Incorporation of Cheniere
Energy, Inc. ("Cheniere")/*/
3.2 By-laws of Cheniere/*/
4.1 Specimen Common Stock Certificate of Cheniere/*/
5.1 Opinion of Dewey Ballantine/*/
10.1 Exploration Agreement between FX Energy, Inc. (now known as
Cheniere Energy Operating Co., Inc. ("Cheniere Operating")) and
Zydeco Exploration, Inc./*/
10.2 First Amendment to the Exploration Agreement between FX Energy, Inc.
(now known as Cheniere Operating) and Zydeco Exploration, Inc./*/
10.3 Second Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco Exploration,
Inc./*/
10.4 Form of Noteholders' Agreement ("Noteholders Agreement") between
Cheniere Operating and the holders of promissory notes in the
aggregate principal amount of $425,000.00/*/
10.5 Form of Warrant Agreement governing warrants of Cheniere issued in
exchange for warrants of Cheniere Operating (which were issued
pursuant to the Noteholders Agreement)/*/
10.6 Asset Transfer, Assignment and Assumption Agreement between Bexy
Communications, Inc. and Mar Ventures Inc./*/
10.7 Indemnification Agreement among Buddy Young, Cheniere, Cheniere
Energy Operating Co., Inc. and the Stockholders of Cheniere Energy
Operating Co., Inc. named therein/*/
10.8 Form of Warrant Agreement between Cheniere and each of C.M. Blair,
W.M. Foster & Co., Inc. and Redliw Corp./*/
10.9 Consulting Agreement between Cheniere and Buddy Young/*/
10.10 Letter Agreement between Cheniere and Buddy Young regarding
reverse splits of the Common Stock/*/
21.1 Subsidiaries of Cheniere/*/
23.1 Consent of Dewey Ballantine (included in Exhibit 5.1)/*/
23.2 Consent of Merdinger, Fruchter, Rosen & Corso, P.C./*/
23.3 Consent of Farber & Hass/*/
23.4 Consent of Merdinger, Fruchter, Rosen & Corso, P.C. to inclusion of
financial statements for the fiscal year ended as of
August 31, 1996.
24.1 Powers of Attorney included on signature page./*/
- ----------------
* Filed previously.
B. Financial Statement Schedules
None
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
II-3
<PAGE>
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of the issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Houston,
State of Texas, on the 1st day of October, 1996.
CHENIERE ENERGY, INC.
By: /s/ William D. Forster
----------------------------------------
William D. Forster, President, Chief
Executive Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this
registration statement of which this prospectus is a part has been signed below
by the following persons in the capacities indicated and on the 1st day of
October, 1996.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ William D. Forster President, Chief Executive Officer and Director
- --------------------------------------------------------------- (Principal Executive Officer)
William D. Forster
/s/ * Vice-Chairman and Director
- ---------------------------------------------------------------
Walter L. Williams
/s/ * Chief Financial Officer and Treasurer
- ---------------------------------------------------------------
Keith F. Carney
/s/ * Secretary and Director
- ---------------------------------------------------------------
Charif Souki
/s/ * Director
- ---------------------------------------------------------------
Efrem Zimbalist III
*By: /s/ William D. Forster
-----------------------------------------------------------
Willam D. Forster
Attorney-in-Fact
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
3.1 Amended and Restated Certificate of Incorporation of Cheniere
Energy, Inc. ("Cheniere")/*/
3.2 By-laws of Cheniere/*/
4.1 Specimen Common Stock Certificate of Cheniere/*/
5.1 Opinion of Dewey Ballantine/*/
10.1 Exploration Agreement between FX Energy, Inc. (now known as
Cheniere Energy Operating Co., Inc. ("Cheniere Operating")) and
Zydeco Exploration, Inc./*/
10.2 First Amendment to the Exploration Agreement between FX Energy, Inc.
(now known as Cheniere Operating) and Zydeco Exploration, Inc./*/
10.3 Second Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco Exploration,
Inc./*/
10.4 Form of Noteholders' Agreement ("Noteholders Agreement") between
Cheniere Operating and the holders of promissory notes in the
aggregate principal amount of $425,000.00/*/
10.5 Form of Warrant Agreement governing warrants of Cheniere issued in
exchange for warrants of Cheniere Operating (which were issued
pursuant to the Noteholders Agreement)/*/
10.6 Asset Transfer, Assignment and Assumption Agreement between Bexy
Communications, Inc. and Mar Ventures Inc./*/
10.7 Indemnification Agreement among Buddy Young, Cheniere, Cheniere
Energy Operating Co., Inc. and the Stockholders of Cheniere Energy
Operating Co., Inc. named therein/*/
10.8 Form of Warrant Agreement between Cheniere and each of C.M. Blair,
W.M. Foster & Co., Inc. and Redliw Corp./*/
10.9 Consulting Agreement between Cheniere and Buddy Young/*/
10.10 Letter Agreement between Cheniere and Buddy Young regarding
reverse splits of the Common Stock/*/
21.1 Subsidiaries of Cheniere/*/
23.1 Consent of Dewey Ballantine (included in Exhibit 5.1)/*/
23.2 Consent of Merdinger, Fruchter, Rosen & Corso, P.C./*/
23.3 Consent of Farber & Hass/*/
23.4 Consent of Merdinger, Fruchter, Rosen & Corso, P.C. to inclusion of
financial statements for the fiscal year ended as of
August 31, 1996.
24.1 Powers of Attorney included on signature page./*/
- ----------------
* Filed previously.
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board Of Directors
Cheniere Energy, Inc.
We hereby consent to the use of our financial statements of August 31,
1996 included in this Registration Statement on form S-1 and to the reference to
our firm under the caption "Experts" in the prospectus.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
September 27, 1996
