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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER , 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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PENNACO ENERGY, INC.
(Exact Name of Small Business Issuer As Specified In Its Charter)
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NEVADA 1311 88-0384598]
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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1050 17TH STREET, SUITE 700
DENVER, COLORADO 80265
(303) 629-6700
(Address, including zip code, and telephone number, including area code, of
Registration's principal executive offices)
PAUL M. RADY, PRESIDENT AND CHIEF EXECUTIVE OFFICER
PENNACO ENERGY, INC.
1050 17TH STREET, SUITE 700
DENVER, COLORADO 80265
(303) 629-6700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPY TO:
G. MICHAEL O'LEARY
ANDREWS & KURTH L.L.P.
600 TRAVIS, SUITE 4200
HOUSTON, TEXAS 77002
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APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC:
As soon as practicable 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,
other than securities offered only in connection with dividend or interest
reinvestment plans, 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, check the following box and
list the Securities Act registration statement number of 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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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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CALCULATION OF REGISTRATION FEE
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PROPOSED
MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO PRICE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED UNIT(1) PRICE FEE
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Common Stock, $.001 par value............... 1,215,000 $4.27 $5,188,050 $1,442
Common Stock, $.001 par value (2)........... 607,500 $4.27 $2,594,025 $721
Total................................... NA NA $7,782,075 $2,163
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457, based on the average high and low sale prices of
shares of Common Stock as reported on the OTC Bulletin Board on November 30,
1998.
(2) Shares of Common Stock issuable upon exercise of Common Stock Purchase
Warrants.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED DECEMBER 1, 1998.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
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PROSPECTUS
PENNACO ENERGY, INC.
1,822,500 SHARES
COMMON STOCK
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THE COMPANY:
- - Pennaco is an independent natural gas and oil exploration and production
company.
- - Our address is:
Pennaco Energy, Inc.
1050 17th Street
Suite 700
Denver, Colorado 80265
(303) 629-6700
THE SECURITIES AND THE OFFERING:
- - 1,822,500 shares of common stock.
- - Of the 1,822,500 shares, 607,500 shares will be issued upon the exercise of
the common stock purchase warrants.
- - All of the common stock offered for resale through this Prospectus is being
sold by certain securityholders of the Company. The Company will receive no
proceeds from this offering.
- - Pennaco's common stock is traded in the over-the-counter market and quoted on
the OTC Bulletin Board system under the symbol "PNEG." The last reported
sales price of the common stock on November 30, 1998 was $4 1/4.
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................................................... 3
Risk Factors.......................................................... 5
Use of Proceeds....................................................... 9
Price Range of Common Stock........................................... 9
Dividend Policy....................................................... 9
Management's Discussion and Analysis or Plan of Operation............. 10
Business.............................................................. 12
Description of Property............................................... 16
Management............................................................ 17
Certain Relationships and Related Transactions........................ 23
Principal and Selling Stockholders.................................... 24
Description of Securities............................................. 25
Plan of Distribution.................................................. 26
Experts............................................................... 27
Legal Matters......................................................... 27
Changes and Disagreements with Accountants............................ 27
Where to Find More Information........................................ 28
Financial Statements.................................................. F-1
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As used in this Prospectus, (a) any reference to the "Company," "Pennaco,"
"we" or "our" means Pennaco Energy, Inc. and (b) the "Stock" means the common
stock of the Company, par value $.001, being resold through this Prospectus.
------------------------
Some of the statements contained in this Prospectus under "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis or Plan of
Operation" and "Business" that relate to our business and the industry we
operate in, are forward-looking. Statements or assumptions related to or
underlying such forward-looking statements include, without limitation,
statements regarding:
- the quality of our properties with regard to, among other things, the
existence of reserves;
- our ability to increase our reserves through exploration;
- anticipated domestic demand for natural gas and oil;
- the adequacy of our sources of capital resources and liquidity; and
Actual results may differ materially from those suggested by the forward-looking
statements for various reasons, including those discussed under "Risk Factors."
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
IT IS NOT COMPLETE AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD
CONSIDER BEFORE INVESTING IN THE COMMON STOCK OFFERED FOR RESALE THROUGH THIS
PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK
FACTORS" SECTION AND THE FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS.
THE COMPANY
Our company is an independent energy company that acquires, develops and
produces natural gas from coal bed methane properties in the Rocky Mountain
region of the United States. We currently hold oil and gas lease rights to
approximately 465,000 net acres and oil and gas option rights to approximately
27,000 net acres in the Powder River Basin of northeastern Wyoming and
southeastern Montana. We also have a management team that is experienced in the
drilling and development of coal bed methane properties. We plan to drill
approximately 40 coal bed methane wells in the Powder River Basin by year-end
1998 and approximately 500 total coal bed methane wells in 1999. We initiated
our drilling program on November 15, 1998 when we commenced drilling operations
on our first coal bed methane well in the Powder River Basin. We estimate that
our capital expenditures will total approximately $7 million for the fourth
quarter of 1998. Approximately 30% of these expenditures will be drilling
expenditures and 70% lease acquisition expenditures.
Some of the largest coal seams in the United States are found in the Powder
River Basin. A coal seam is a layer of coal of variable thickness which is found
below the surface of the ground but which may also outcrop at the surface. The
coal bed methane wells in the Powder River Basin are 350 to 1,200 feet in depth
and typically take one to two days to drill. Because of the relatively short
drill time, these wells have relatively low drilling and completion costs
(approximately $50,000 to $60,000 per well). The coal bed methane gas recovered
from the wells in this region does not require treatment or processing but does
require dehydration and compression.
Drilling and production growth in the Powder River Basin is currently
impeded by two principal factors:
- a natural gas pipeline bottleneck which restricts the movement of natural
gas out of the Powder River Basin; and
- the completion of an environmental impact statement by the Bureau of Land
Management with respect to a portion of the federal lands in the basin.
We believe that there are currently over 600 wells capable of producing coal
bed methane in the Powder River Basin. However, since production is currently
impeded, it is impossible to estimate proved hydrocarbon reserves. Additionally,
without a means of transportation for production, it is economically unfeasible
to produce natural gas. We believe that this delay has provided the opportunity
for us to establish an acreage position at a reasonable cost. However, these
same factors could adversely impact our ability to produce and market natural
gas. Operators are currently competing for the limited number of drilling
permits allowed on federal lands by the Bureau of Land Management until the
environmental impact statement is complete and sufficient pipeline capacity has
been constructed to transport any additional production. The environmental
impact statement was originally scheduled for completion in May 1999, but has
been delayed until July 1999. Several pipeline construction and expansion
projects have been proposed, two of which are permitted and acquiring rights of
way. It is anticipated that the pipeline take-away capacity will increase
significantly in late 1999, although such an increase cannot be guaranteed.
We currently maintain our principal executive offices at 1050 17th Street,
Suite 700, Denver, CO 80265. Our telephone number is (303) 629-6700 and the
facsimile number is (303) 629-6800. We also
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maintain an office at 3651 Lindell Road, Suite A, Las Vegas, Nevada 89103 and
field office at 400 South Miller Avenue, Gillette, Wyoming 82716.
RECENT DEVELOPMENTS
CMS JOINT VENTURE. On October 23, 1998, our company and CMS Energy
Corporation's exploration and production unit, CMS Oil and Gas Company, signed a
definitive joint venture agreement relating to the development of the Company's
Powder River Basin acreage. The agreement involves virtually all of our
approximately 492,000 net acre leasehold position. Under the terms of the joint
venture, CMS Oil and Gas Company will acquire an undivided 50% working interest
in our leasehold position in the Powder River Basin for $28.0 million. The joint
venture provides for the development of our lease acreage, with Pennaco and CMS
each operating approximately 50% of the wells drilled in the acreage subject to
the joint venture agreement. An affiliate of CMS Oil and Gas, CMS Gas
Transmission and Storage, will provide gathering, compression and transportation
services to the joint venture. All of the leases which are subject to the joint
venture agreement are dedicated to CMS Gas Transmission and Storage for
gathering, compression and transportation.
Pursuant to the terms of the joint venture with CMS Oil & Gas Company, CMS
Oil and Gas Company, agreed to pay Pennaco $5.6 million of earnest money in the
form of a bridge loan secured by substantially all of our oil and gas leases.
$3.2 million of such amount was paid directly to our existing creditors. We
intend to use the balance for general corporate purposes. The joint venture with
CMS Oil and Gas Company is structured such that the conveyance of the working
interests will occur at two separate closings. The first closing occurred on
November 20, 1998 and the second closing is scheduled to occur on January 15,
1999. We received $7.6 million at the first closing and will receive $14.8
million at the second closing. The bridge loan with CMS Oil and Gas Company will
be canceled if both closings occur or if the buyer wrongfully fails to close or
fails to meet the seller's conditions to closing.
COMMENCEMENT OF DRILLING PROGRAM. On November 15, 1998, we initiated our
drilling program with the drilling of our first well in the Powder River Basin.
We plan to drill 40 coal bed methane wells by the end of the fourth quarter of
1998, most of which will be drilled on a 100% working interest basis. In 1999,
we plan to drill as many as 500 gross wells, the majority of which will be part
of the CMS Joint Venture. The 1999 CMS Joint Venture drilling program is subject
to the development of a mutually acceptable drilling plan. In the fourth quarter
of 1998, we expect capital expenditures for drilling to be approximately $2.0
million.
Pursuant to an informal arrangement with CBM Drilling, LLC, we have prepaid
$360,000 of drilling expenses to ensure that drilling rigs appropriate for
Powder River Basin drilling are available for our planned drilling program. CBMD
Drilling, LLC currently has four drilling rigs that will be primarily dedicated
to our drilling program.
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RISK FACTORS
AN INVESTMENT IN OUR COMPANY INVOLVES A SIGNIFICANT DEGREE OF RISK. YOU
SHOULD GIVE CAREFUL CONSIDERATION TO THE SPECIFIC FACTORS SET FORTH BELOW, AS
WELL AS THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, BEFORE YOU PURCHASE
THE COMMON STOCK OFFERED IN THIS PROSPECTUS.
NO OPERATING HISTORY AND REVENUES
We are a development stage company and have no revenues or income and we are
subject to all the risks inherent in the creation of a new business. Since our
principal activities to date have been limited to organizational activities,
prospect development, acquisition of leasehold interests and commencement of a
drilling program, we have no record of any revenue-producing operations.
Consequently, there is no operating history upon which to base an assumption
that we will be able to achieve our business plans.
DEPENDENCE ON GATHERING, COMPRESSION AND TRANSPORTATION FACILITIES
If we begin producing natural gas, the marketability of this production will
depend in part upon the availability, proximity and capacity of gas gathering
and compression systems, pipelines and processing facilities. Based upon future
production estimates for Pennaco and the Powder River Basin, additional pipeline
capacity will be needed as early as the beginning of 1999. Pipeline demand in
the area is increasing as coal and methane development activity continues to
expand. Our core land position is located in an area near the development
activity. The terms of the joint venture provide that Pennaco and CMS Oil and
Gas establish an area of mutual interest around our acreage and that both
Pennaco and CMS Oil and Gas dedicate all of the acreage in the area of mutual
interest to CMS Gas Transmission and Storage Company for gathering, compression
and transportation, which shall be provided at competitive rates and tariffs.
CMS Gas Transmission and Storage Company is currently negotiating to either join
other projects or build its own infrastructure. Meanwhile, outside of the area
of mutual interest, we are engaged in negotiations with several pipeline
companies to lay pipeline to our planned drillsites, and to gather, compress and
transport gas. However, as of yet no agreements have been entered into with any
of these companies. Unless and until we are able to obtain satisfactory
arrangements for the transport and marketing of our gas, both within and outside
of the area of mutual interest, we may experience delays, possibly significant,
in connection with our efforts to generate revenues from the sale of gas.
Further, there is limited pipeline capacity outside of the Powder River Basin
which will require expansion and new construction to accommodate the increasing
production. The expansion of the pipeline capacity is likely to require
significant capital outlays by the pipeline companies and the related plans and
specifications are subject to government regulatory review, permits and
approvals. This approval process may result in delays in the commencement and
completion of any pipeline construction project. We cannot guarantee that
certain of our wells will not be shut in for significant periods of time due to
the lack of capacity in existing pipelines. Further, we cannot guarantee that
any such additional pipeline capacity will be completed on a timely basis or
that we will be permitted to transport any volumes thereon.
In addition, federal and state regulation of gas and oil production and
transportation, general economic conditions, changes in supply and changes in
demand all could adversely affect our ability to produce, gather and transport
our natural gas. If market factors change materially, the financial impact on
Pennaco could be substantial. Most gas transportation contracts will require us
to transport minimum volumes. If we transport smaller volumes, we may be liable
for damages proportional to the shortfall.
RELIANCE ON CMS TRANSACTION
We entered into the joint venture agreement with CMS Oil and Gas Company in
order to obtain the funds necessary to implement our business plan. We cannot
guarantee that we will close the second
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portion of the joint venture agreement or be able to obtain additional funding
in the future if and when it is needed.
BRIDGE LOAN
A foreclosure and forfeiture of the collateral pledged to secure the bridge
loan with CMS Oil and Gas Company would end our development and drilling
activities in the Powder River Basin and threaten Pennaco's viability.
LEASE ACQUISITION RISKS
It is customary in the oil and gas industry to acquire a lease interest in a
property based upon a preliminary title investigation. If the title to the
leases we plan to acquire are defective, we could lose the money already spent
on acquisition and development, or incur substantial costs to repair the title
defect. Our oil and gas leases give us the right to develop and produce oil and
gas from the leased properties. There are many versions of oil and gas leases in
use. Oil and gas leases generally call for annual rental payments and the
payment of a percentage royalty on the oil and gas produced. Courts in many
states have interpreted oil and gas leases to include various implied covenants,
including the lessee's implied obligation to develop the lease diligently, to
prevent drainage of oil and gas by wells on adjacent land, to seek diligently a
market for production, and to operate prudently as defined by industry
standards. It is possible that oil and gas leases with similar language may be
interpreted differently depending on the state in which the property is located.
Issues decided differently in two states may not yet have been decided by the
courts of a third state, which leads to uncertainty; as to the proper
interpretation. For instance, royalty calculations can be substantially
different from state to state, depending on each state's interpretation of lease
language concerning the costs of production. We believe we have followed
industry standards in interpreting our oil and gas leases in the states where we
operate. However, we cannot guarantee that there will be no litigation
concerning the proper interpretation of the lease terms. Adverse decisions in
such litigation could result in material costs or the loss of one or more
leases.
VOLATILITY OF OIL AND GAS MARKETS
If we begin production, our revenues, profitability and future rate of
growth will be substantially dependent upon prevailing market prices for natural
gas and oil, which can be extremely volatile and in recent years have been
depressed at times by excess domestic and imported supplies. In addition to
market factors, actions of state and local agencies, the United States and
foreign governments, and international cartels affect oil and gas prices. All of
these factors will be beyond our control. These external factors and the
volatile nature of the energy markets make it difficult to estimate future
prices of natural gas and oil. We cannot guarantee that we will be able to
produce oil or gas on an economic basis in light of prevailing market prices. If
we are able to produce natural gas, any substantial or extended decline in the
price of natural gas would have a material adverse effect on our financial
condition and results of operations, including reduced cash flow and borrowing
capacity and could reduce both the value and the amount of our oil and gas
reserves.
PROPERTY ACQUISITION AND COMPETITION
Competition to acquire properties is intense. We compete with a number of
potential purchasers that possess greater financial resources than are available
to us. Different companies evaluate potential acquisitions differently. This
results in widely differing bids. If other bidders are willing to pay higher
prices than we believe are supported by our evaluation criteria, then our
ability to acquire prospects could be limited. Low or uncertain prices for
properties could cause potential sellers to withhold or withdraw properties from
the market. In such an environment, we cannot guarantee that there will be a
sufficient number of suitable prospects available for acquisition. Also, we may
be limited in our options for developing prospects.
6
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In addition to competition for leasehold acreage in the Powder River Basin,
the oil and gas exploration and production industry is intensly competitive as a
whole. We will compete against established companies that have significantly
greater financial, marketing, personnel, and other resources than Pennaco. Such
competition could have a material adverse effect on our ability to execute our
business plan and our profitability.
SHUT-IN WELLS, CURTAILED PRODUCTION, AND OTHER PRODUCTION INTERRUPTIONS
In the event that we initiate production and generate income from our coal
bed methane properties, such production may be curtailed or shut-in for
considerable periods of time due to a lack of market demand, government
regulation, pipeline and processing interruptions, allocations, diminished
pipeline capacity, force majeure and such curtailments may continue for a
considerable period of time. There may be an excess supply of gas in areas where
our operations will be conducted. In such an event, it is possible that there
will be no market or a very limited market if we do generate production in the
future. There is also the possibility that drilling rigs may not be available
when needed and there may be shortages of crews, equipment and other manpower
requirements.
UNISURED RISKS
We may not be insured against losses or liabilities which may arise from
operations, either because such insurance is unavailable or because we have
elected not to purchase such insurance due to high premium costs or other
reasons. We currently carry well control insurance as well as property and
general liability insurance.
OPERATING HAZARDS
The oil and natural gas business involves certain operating hazards such as
well blowouts, craterings, explosions, uncontrollable flows of oil, natural gas
or well fluids, fires, formations with abnormal pressures, pipeline ruptures or
spills, pollution, releases of toxic gas and other environmental hazards and
risks. Any of these hazards could cause us to suffer substantial losses if they
occur after we begin commercial production. In addition, we may be liable for
environmental damage caused by previous owners of the property we have purchased
or leased by the Company. As a result, substantial liabilities to third parties
or governmental entities may be incurred, the payment of which could reduce or
eliminate the funds available for exploration, development or acquisitions or
cause us to suffer losses. In accordance with customary industry practices, we
maintain insurance against some, but not all, of such risks and losses. We may
elect to self-insure if our management believes that the cost of insurance,
although available, is excessive relative to the risks presented. The occurrence
of an event that is not covered, or not fully covered, by insurance could have a
material adverse effect on our financial condition and results of operations. In
addition, pollution and environmental risks generally are not fully insurable.
WATER DISPOSAL
We believe that the water produced from the Powder River Basin coal seams,
once we begin development activities, will be low in total dissolved solids,
allowing us to discharge the water with minimal environmental impact. However,
if undrinkable water is discovered, it may be necessary to install and operate
evaporators or to drill disposal wells to re-inject the produced water back into
the underground rock formations adjacent to the coal seams or to lower sandstone
horizons. In the event we are unable to obtain the appropriate permits,
undrinkable water is discovered or if applicable laws or regulations require
water to be disposed of in an alternative manner, the costs to dispose of
produced water will increase and these costs could have a material adverse
effect on our operations in this area and the profitability of such operations
including rendering future production and development uneconomic.
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REGULATION
The oil and gas industry is extensively regulated by federal, state and
local authorities. Legislation and regulations affecting the industry are under
constant review for amendment or expansion, raising the possibility of changes
that may affect, among other things, the pricing or marketing of oil and gas
production. Substantial penalties may be assessed for noncompliance with various
applicable statutes and regulations, and the overall regulatory burden on the
industry increases its cost of doing business and, in turn, decreases its
profitability. State and local authorities regulate various aspects of oil and
gas drilling and production activities, including the drilling of wells (through
permit and bonding requirements), the spacing of wells, the unitization or
pooling of oil and gas properties, environmental matters, safety standards, the
sharing of markets, production limitations, plugging and abandonment, and
restoration.
FEDERAL AND STATE TAXATION
Federal and state income, severance, franchise, excise, and other tax laws
are of particular significance to the oil and gas industry. Recent legislation
has eroded previous benefits to oil and gas producers, and any subsequent
legislation may continue this trend. The states in which we may conduct oil and
gas activities also impose taxes upon the ownership or production of oil and gas
within such states. We cannot guarantee that tax laws will not be changed or
interpreted in the future in a manner that adversely affects our interests.
RELIANCE UPON DIRECTORS AND OFFICERS
We are dependent upon the personal efforts and abilities of our officers,
who exercise control over Pennaco's day to day affairs. We are also dependent
upon our directors, some of whom are engaged in other activities and will devote
limited time to our business. Currently, several of our employees are not
employed by us on a full time basis. They are serving in their respective
capacities as consultants. These arrangements will continue until our business
warrants, and we are able to afford, an expanded staff. We cannot guarantee that
the volume of business necessary to employ all essential personnel on a full
time basis will be obtained or that our proposed operations will prove to be
profitable. We will continue to be highly dependent on the continued services of
our executive officers, and a limited number of other senior managers and
technical personnel. Loss of the services of one or more of these individuals
could have a material adverse effect on our operations. We do have employment
agreements with several of our executive officers. We do not maintain key person
life insurance on any of our executive officers.
NON-ARM'S LENGTH TRANSACTIONS AND RELATED PARTY TRANSACTIONS
The number of shares of our common stock, par value $0.001 per share, or
options to purchase shares of common stock issued to our present stockholders
for cash and/or services was arbitrarily determined and may not be considered
the product of arm's length transactions. It is anticipated that we may deal
with related parties when contracting for acquisition and development projects.
In certain circumstances, the fairness of such transactions will be reviewed and
approved by members of our Board of Directors that do not have interests
therein. It is anticipated that there will not be any other review as to the
fairness of our dealings with related parties. A director of Pennaco, Mark A.
Erickson, is also the President of R.I.S. Resources (USA), Inc., a wholly owned
subsidiary of R.I.S. Resources International Corp., and serves as a director of
RIS International Corp. RIS International Corp. is engaged in the gathering,
processing and marketing of natural gas. RIS International Corp. owns
approximately 25.4% of Pennaco's outstanding shares.
INDEMNIFICATION OF OFFICERS AND DIRECTORS FOR SECURITIES LIABILITIES
Our Bylaws provide that we may indemnify any director, officer, agent and/or
employee as specified in the Nevada Business Corporation Act. Further, we may
purchase and maintain insurance on
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behalf of these persons whether or not we would have the power to indemnify such
person against the liability insured against. This could cause us to make
substantial expenditures and may prevent any recovery from such officers,
directors, agents and employees for losses we incur as a result of their
actions. Further, we have been advised that in the opinion of the SEC,
indemnification for liabilities arising under the Securities Act is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
LIMITED MARKET FOR SECURITIES
At present, a limited market exists for our common stock on the OTC Bulletin
Board system. We cannot guarantee that the OTC Bulletin Board system will
provide adequate liquidity for our common stock or that a trading market will be
sustained for the common stock. If you purchase shares of the common stock
offered hereby you may be unable to resell them should you desire to do so. No
entity has indicated an intent to make a market in our common stock, and we have
not taken any steps to encourage a market maker to begin trading in our common
stock. Furthermore, it is unlikely that a lending institution will accept our
common stock as pledged collateral for loans unless a trading market develops
providing necessary and adequate liquidity for the trading of our common stock.
CUMULATIVE VOTING, PREEMPTIVE RIGHTS AND CONTROL
There are no preemptive rights in connection with the our common stock. The
stockholders may be further diluted in their percentage ownership of Pennaco in
the event that we issue additional shares in the future. Cumulative voting in
the election of Directors is not provided for in the our bylaws or under Nevada
law. Accordingly, the holders of a majority of the shares of our common stock,
present in person or by proxy, will be able to elect all of the Pennaco's Board
of Directors.
NO DIVIDENDS ANTICIPATED
At the present time, we do not anticipate paying dividends, cash or
otherwise, on our common stock in the foreseeable future. Future dividends will
depend on the presence or absence of earnings, our financial requirements and
other factors. If you anticipate the need for immediate income from your
investment, you should refrain from purchasing the securities offered by this
prospectus.
USE OF PROCEEDS
Pennaco will not receive any of the proceeds from sales of the Stock offered
hereby.
PRICE RANGE OF COMMON STOCK
Since July 1, 1998, Pennaco's common stock, par value $.001 (the "Common
Stock") has been traded over the counter and quoted on the OTC Bulletin Board
system. The following table sets forth the high and low closing prices for the
Common Stock as reported on the OTC Bulletin Board system for the period from
July 1, 1998 through November 30, 1998.
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HIGH LOW
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1998
Third quarter.............................................................. $ 6.16 $ 3.03
Fourth quarter (through November 30, 1998)................................. $ 5.38 $ 2.50
</TABLE>
At September 30, 1998, there were approximately 120 stockholders of record
of the Common Stock.
DIVIDEND POLICY
The Company intends to retain all of its earnings, if any, to finance the
expansion of its business and for general corporate purposes, including future
acquisitions of properties. The Company does not anticipate paying cash
dividends on its Common Stock in the foreseeable future.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATION
As a development stage company, the Company has no revenues from operations.
During the period from the Company's inception (January 26, 1998) through
September 30, 1998, the Company reported a net loss of $4,076,338. No revenues
were realized during this period. Expenses incurred from the Company's inception
(January 26, 1998) through September 30, 1998 totaled $5,386,588, including
general and administrative expenses of $2,918,356 and exploration expenses of
$1,784,069, including geologic consulting fees, geologic data and lease rentals.
In the accompanying financial statements, in accordance with APB No. 25
"Accounting for Stock Issued to Employees," the Company has recognized a
non-cash charge to earnings for compensation expense of approximately $1,790,000
for the period from inception (January 26, 1998) through September 30, 1998 for
stock, warrants, and options issued to certain officers and employees.
Compensation expense was calculated based on the difference between the closing
price per share on the last trading day prior to the date of employment with the
Company, and the $1.75 unit price for shares and warrants purchased by an
officer of the Company hired at the beginning of July and the option price for
options awarded to certain officers and key employees hired in July and August
1998. The restricted securities were offered as an incentive to attract a senior
management team to the Company. The Company believes that the offers made by the
Board of Directors were at fair market value due to the restricted nature of the
securities to be issued and the lack of a liquid trading market for the
Company's Common Stock at the time of the offer. However, APB No. 25 requires
the measurement of compensation expense at the date of employment rather than at
the offer date. Further, APB No. 25 requires that compensation be measured based
on the quoted market price of the stock once a company's stock is publicly
traded. While the Company was not yet a registrant, the Company's shares have
been quoted on the OTC Bulletin Board system since July 1, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The capital resources of the Company are limited. At present, the Company is
not producing revenues and its main source of funds has been the sale of the
Company's equity securities. The Company had approximately $1.3 million in cash
as of September 30, 1998. All cash at present is being used to fulfill certain
leasehold purchase commitments that the Company has entered into and to fund
certain ongoing general and administrative expenses. On October 23, 1998, the
Company and CMS Oil and Gas Company announced the CMS Transaction. See "Recent
Developments--CMS Joint Venture." Pursuant to the terms of the CMS Joint
Venture, CMS paid Pennaco $5.6 million in the form of the CMS Bridge Loan
secured by substantially all of the Company's oil and gas leases. Approximately
$3.2 million of such amount was paid directly to existing creditors of the
Company. The Company intends to use the balance for general corporate purposes.
The Company received $7.6 million at the first closing on November 20, 1998 and
the Company will receive $14.8 million at the second closing on January 15,
1999. The CMS Bridge Loan will be canceled if both closings occur or if CMS
wrongfully fails to close or fails to meet the Company's conditions to closing.
Pro forma for the CMS Transaction as of September 30, 1998, the Company had no
debt and approximately $23.0 million of cash. While the proceeds of the CMS
Transaction should allow the Company to pay its current liabilities and fund its
development activities for the first half of 1999, the Company will require
further funding to meet its capital expenditure plans. Should the Company's cash
flow from operations continue to be insufficient to satisfy its capital
expenditure requirements, there can be no assurance that additional debt or
equity financing will be available to meet these requirements. At present, there
are no agreements or understandings between the Company and its officers and
directors or affiliates and any lending institutions with respect to any debt or
equity financings.
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Should the Company be able to obtain debt financing in the future, its level
will have several important effects on the Company's future operations,
including (i) a substantial portion of the Company's cash flow will be dedicated
to the payment of interest on its indebtedness and will not be available for
other purposes and (ii) the Company's ability to obtain additional financing in
the future may be impaired. To address the operational and administrative
requirements of the Company's ongoing development activities, it is anticipated
that during the next twelve months employee requirements will increase to
approximately 18 employees. Currently, the Company has 13 employees.
11
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BUSINESS
GENERAL
The Company was incorporated in January 1998 to engage in the business of
oil and gas exploration and production. To date, the Company's main focus and
primary objective has been the procurement of mineral leasehold interests in the
Powder River Basin of Wyoming and Montana and the commencement of its CBM
drilling program. Since its inception, the Company has issued common stock and
securities to raise capital, recruited and organized management, and has
developed a strategic plan for the development of its Powder River Basin
acreage. Other than the acquisition of leasehold interests, the Company has
conducted limited operations.
CBM production is similar to traditional natural gas production in terms of
the physical producing facilities and the product produced. However, the
subsurface mechanisms that allow the gas to move to the wellbore and the
producing characteristics of CBM wells are significantly different from
traditional natural gas production.
Coal is a black organic mineral formed from buried deposits of plant
material from ancient coastal swamps. Methane, or natural gas, is a common
component of coal, though coals vary in their methane content per ton. Rather
than being limited to open spaces in the coal structure, methane is adsorbed
within the inner coal surfaces. When the coal is fractured and exposed to lower
pressures (near a well or in a coal mine) the gas leaves (desorbs from) the
coal. Whether a coal bed will produce commercial quantities of natural gas
depends on its original content of gas per ton of coal, the thickness of the
coal beds, the reservoir pressure and the existence of fractures through which
the released gas can flow to the wellhead (permeability). Frequently, coal beds
are partly or completely saturated with water. As the water is produced, space
is created for gas to leave the coal and flow to the well. Contrary to
traditional gas wells, new CBM wells often produce water for several months
(dewatering) and then, as the water production decreases because the coal seams
are being drained, and the pressure decreases, natural gas production increases.
The coal beds of the Powder River Basin are among the thickest coals in the
world, potentially containing extensive recoverable coal bed gas reserves, and
are located in the Tongue River Member of the Paleocene Fort Union and lower
Eocene Wasatch formations. This coal seam contains 10 to 12 coal beds ranging in
thickness from approximately five feet to over 200 feet, with cumulative
thicknesses of all coal seams ranging up to 350 feet. In the Fort Union
formation, where the Company intends to drill, gas occurs in sandstones and coal
beds at a number of different stratigraphic levels. Well depths in the Powder
River Basin are relatively shallow, between 350 and 1,200 feet.
Coal beds produce nearly pure methane gas while traditional gas wells
normally produce gas that contains small portions of ethane, propane, and other,
heavier, hydrocarbon gases. Methane normally constitutes more than 90% of the
total gases in the production from traditional gas wells. The Powder River Basin
gas does not contain significant amounts of contaminants, such as hydrogen
sulfide, carbon dioxide or nitrogen, that are sometimes present in traditional
natural gas production. Therefore the properties of the Powder River Basin gas,
such as heat content per unit volume (Btu), are very close to the average
properties of pipeline gas from traditional gas wells.
STRATEGY
Pennaco's business strategy is to build an exploration and production
company that is focused on creating value for its stockholders through
profitable growth in reserves, production and cash flow per share. The key
components of the Company's business strategy include the following: (i)
concentrate activities in the Rocky Mountain and Mid-Continent regions of the
U.S., (ii) lever the expertise of its technical and management team in areas of
prior experience, (iii) acquire producing properties with
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<PAGE>
development and exploitation potential utilizing industry contacts and
opportunities known to the Company's senior management, (iv) assemble acreage
positions through lease acquisition and farm-ins to conduct a balanced
exploration and development effort, (v) seek to acquire operating control and
majority ownership interests in order to optimize the timing and efficiency of
operations, (vi) participate in gas gathering, processing, transportation, and
marketing activities in order to maximize product price realizations and (vii)
maintain a strong balance sheet in order to be in a position to capitalize on
opportunities as they occur.
The Company intends to add production by creating and forming strategic
alliances with mid-stream companies (gathering and marketing) and down-stream
companies (pipeline companies and end users). If the Company establishes
significant production and cash flow in the Powder River Basin, it plans to
pursue other CBM projects as well as more conventional oil and gas projects.
DRILLING AND PRODUCTION STRATEGY
The Company has initiated its development program through the drilling of
its first well on November 15, 1998. Though no assurance of success can be
given, the Company's business plan includes the drilling of 40 net CBM wells by
the end of 1998, and an additional 500 gross CBM wells by the end of 1999,
assuming current economic and regulatory conditions.
The Company's ability to complete its drilling program is entirely dependent
upon the availability of sufficient capital, equipment and personnel. The
estimated cost per well is approximately $50,000 to $60,000 to drill and
complete. The estimated drilling portion of the well cost is approximately
$10,000. The Company has entered into a drilling agreement with CBMD, pursuant
to which it has prepaid drilling costs of $360,000. Additionally, the Company
has agreed to loan CBMD $90,000, which loan will be secured by all the personal
property and equipment of CBMD, and has agreed, if requested on or before June
30, 1999, to loan CBMD an additional $150,000 which would also be secured by all
the personal property and equipment of CBMD. Based on the agreement that every
third well shall be drilled at no cost to Pennaco, the prepaid drilling costs
will be recovered after approximately 75 wells. The prepayments are to ensure
that drilling rigs will be available and dedicated to the Company's planned
drilling program and that the rigs will meet the specific requirements of the
Company. CBMD will dedicate three CBM drilling rigs to the Company's drilling
program.
STRATEGIC ALLIANCE AND PARTNERING
On October 23, 1998, the Company and CMS Energy Corporation's exploration
and production unit, CMS Oil and Gas Company formed the CMS Joint Venture. The
agreement involves virtually all of the Company's approximate 492,000 net acre
leasehold positions. Pursuant to the terms of the CMS Joint Venture, CMS Oil and
Gas Company will acquire an undivided 50% working interest in Pennaco's
leasehold position in the Powder River Basin for $28.0 million. The CMS Joint
Venture provides for the development of the Company's lease acreage, with
Pennaco and CMS each operating approximately 50% of the wells drilled in the
area of mutual interest. An affiliate of CMS Oil and Gas, CMS Gas Transmission
and Storage, will provide gathering, compression and transportation services to
the joint venture. All of the leases in the area of mutual interest are
dedicated to CMS Gas Transmission and Storage for gathering, compression and
transportation.
MARKETING OF PRODUCTION
If the Company successfully produces oil and/or natural gas, it does not
plan to refine or process its production, but plans to sell the production to
unaffiliated oil and natural gas purchasing companies in the area in which it is
produced. If the Company produces natural gas, it expects to sell it under
contracts to both interstate and intrastate natural gas pipeline companies, as
well as companies who transport natural gas overground.
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<PAGE>
TITLE TO PROPERTIES
The Company believes it has satisfactory title to all of its properties in
accordance with standards generally accepted in the oil and gas industry. The
Company's properties are subject to customary royalty interests, liens incident
to operating agreements, liens for current taxes and other burdens which the
Company believes do not materially interfere with the use of or affect the value
of such properties.
COMPETITION
Competition for prospects and producing properties is intense. The Company
has been competing and will continue to compete with a number of other potential
purchasers of prospects and producing properties, many of which will have
greater financial resources than the Company. The bidding for prospects has
become particularly intense in the Powder River Basin with different bidders
evaluating potential acquisitions with different product pricing parameters and
other criteria that result in widely divergent bid prices. The presence of
bidders willing to pay prices higher than are supported by the Company's
evaluation criteria could further limit the ability of the Company to acquire
prospects. In addition, low or uncertain prices for properties can cause
potential sellers to withhold or withdraw properties from the market. In this
environment, there can be no assurance that there will be a sufficient number of
suitable prospects available for acquisition by the Company or that the Company
can sell prospects or obtain financing for or participants to join in the
development of prospects.
In addition to competition for leasehold acreage in the Powder River Basin,
the oil and gas exploration and production industry is intensely competitive as
a whole. The Company will compete against established companies with
significantly greater financial, marketing, personnel, and other resources than
the Company. Such competition could have a material adverse effect on the
Company's ability to execute its business plan as well as profitability.
REGULATION
The Company's operations will be subject to extensive and continually
changing regulation, as legislation affecting the oil and natural gas industry
is under constant review for amendment and expansion. Many departments and
agencies, both federal and state, are authorized by statute to issue and have
issued rules and regulations binding on the oil and natural gas industry and its
individual participants. The failure to comply with such rules and regulations
can result in substantial penalties. The regulatory burden on the oil and
natural gas industry will increase the Company's cost of doing business and,
consequently, affect its profitability. However, the Company does not believe
that it will be affected in a significantly different manner by these
regulations than its competitors in the oil and natural gas industry.
TRANSPORTATION AND SALE OF NATURAL GAS. The FERC regulates interstate
natural gas pipeline transportation rates as well as the terms and conditions of
service. FERC's regulations will affect the marketing of any natural gas
produced by the Company, as well as any revenues received by the Company for
sales of such natural gas. In 1985, the FERC adopted policies that make natural
gas transportation accessible to natural gas buyers and sellers on an
open-access, nondiscriminatory basis. The FERC issued Order No. 636 on April 8,
1992, which, among other things, prohibits interstate pipelines from making
sales of gas tied to the provision of other services and requires pipelines to
"unbundle" the services they provide. This has enabled buyers to obtain natural
gas supplies from any source and secure independent delivery service from the
pipelines. All of the interstate pipelines subject to FERC's jurisdiction are
now operating under Order No. 636 open access tariffs. On July 29, 1998, the
FERC issued a Notice of Proposed Rulemaking regarding the regulation of short
term natural gas transportation services. FERC proposes to revise its
regulations to require all available short term capacity (including capacity
released by shippers holding firm entitlements) to be allocated through an
auction process. FERC also proposes to require pipelines to offer additional
services under open access principles, such as "park and loan" services. In a
related initiative, FERC issued a Notice of Inquiry on July 29, 1998 seeking
input from natural gas industry players and affected entities regarding
virtually every aspect of the regulation of interstate natural gas
transportation services. Among other things, FERC is seeking input on whether to
retain cost-based rate regulation
14
<PAGE>
for long term transportation services, potential changes in the manner in which
rates are designed, and the use of index driven or incentive rates for
pipelines. The July 29, 1998 Notice of Inquiry may lead to a subsequent Notice
of Proposed Rulemaking to further revise FERC's regulations.
Additional proposals and proceedings that might affect the natural gas
industry are considered from time to time by Congress, the FERC, state
regulatory bodies and the courts. The Company cannot predict when or if any such
proposals might become effective or their effect, if any, on the Company's
operations. The natural gas industry historically has been closely regulated;
thus there is no assurance that the less stringent regulatory approach recently
pursued by the FERC and Congress will continue indefinitely into the future.
REGULATION OF PRODUCTION. The production of oil and natural gas is subject
to regulation under a wide range of state and federal statutes, rules, orders
and regulations. State and federal statutes and regulations require permits for
drilling operations, drilling bonds and reports concerning operations. Wyoming
and Montana have regulations governing conservation matters, including
provisions for the unitization or pooling of oil and natural gas properties, the
establishment of maximum rates of production from oil and natural gas wells and
the regulation of the spacing, plugging and abandonment of wells. The effect of
these regulations is to limit the amount of oil and natural gas the Company can
produce from its wells and to limit the number of wells or the locations at
which the Company can drill. Moreover, each state generally imposes a production
or severance tax with respect to production and sale of crude oil, natural gas
and gas liquids within its jurisdiction.
FEDERAL OR STATE LEASES. The Company's operations on federal or state oil
and gas leases will be subject to numerous restrictions, including
nondiscrimination statutes. Such operations must be conducted pursuant to
certain on-site security regulations and other permits and authorizations issued
by the Bureau of Land Management, Minerals Management Service and other
agencies. In order to drill wells on Wyoming state land, the Company is required
to file an Application for Permit to Drill with the Wyoming Oil and Gas
Commission. Drilling on acreage controlled by the federal government requires
the filing of a similar application with the Bureau of Land Management. While
the Company has been able to obtain required drilling permits to date, there can
be no assurance that permitting requirements will not adversely effect the
Company's ability to complete its drilling program at the cost and in the time
period currently anticipated.
ENVIRONMENTAL REGULATIONS. Various federal, state and local laws and
regulations governing the discharge of materials into the environment, or
otherwise relating to the protection of the environment, will affect the
Company's operations and costs. In particular, the Company's exploration,
development and production operations, its activities in connection with storage
and transportation of crude oil and other liquid hydrocarbons and its use of
facilities for treating, processing or otherwise handling hydrocarbons and
wastes therefrom will be subject to stringent environmental regulation. Because
CBM wells typically produce significant amounts of water, the Company is
required to file applications with state and federal authorities, as applicable,
to enable it to dispose of water produced from its wells. While the Company has
been able to obtain required water disposal permits to date, there can be no
assurance that such permitting requirements will not adversely effect the
Company's ability to complete its drilling and development program at the cost
and in the time period currently anticipated.
As with the industry generally, compliance with existing regulations will
increase the Company's overall cost of business. Such areas affected include
unit production expenses primarily related to the control and limitation of air
emissions and the disposal of produced water, capital costs to drill exploration
and development wells resulting from expenses primarily related to the
management and disposal of drilling fluids and other oil and gas exploration
wastes and capital costs to construct, maintain and upgrade equipment and
facilities.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as "Superfund," imposes liability, without regard to
fault or the legality of the original act, on certain classes of persons that
contributed to the release of a "hazardous substance" into the environment.
15
<PAGE>
These persons include the "owner" or "operator" of the site and companies that
disposed or arranged for the disposal of the hazardous substances found at the
site. CERCLA also authorizes the Environmental Protection Agency and, in some
instances, third parties to act in response to threats to the public health or
the environment and to seek to recover from the responsible classes of persons
the costs they incur. In the course of its ordinary operations, the Company may
generate waste that may fall within CERCLA's definition of a "hazardous
substance." The Company may be jointly and severally liable under CERCLA for all
or part of the costs required to clean up sites at which such wastes have been
disposed.
The Company may own or lease properties that have been used for the
exploration and production of hydrocarbons in the past. Many of these properties
will have been owned by third parties whose actions with respect to the
treatment and disposal or release of hydrocarbons or other wastes were not under
the Company's control. These properties and wastes disposed thereon may be
subject to CERCLA and analogous state laws. Under such laws, the Company could
be required to remove or remediate previously disposed wastes (including wastes
disposed of or released by prior owners or operators), to clean up contaminated
property (including contaminated groundwater) or to perform remedial plugging
operations to prevent future contamination.
EMPLOYEES
The Company currently has 13 employees and approximately 10 consulting
geologists, engineers, and land acquisition professionals. The Company plans to
hire additional employees as needed. The Company has an outsourcing arrangement
with Trinity Petroleum Management, LLC which provides for administrative
services, specifically land administration, accounting and production reporting.
The Agreement is effective until March 1, 1999 when it converts to a
month-to-month arrangement. The Company believes that this outsourcing
arrangement allows the Company to hire fewer full-time employees and more
efficiently control administrative expenses.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
DESCRIPTION OF PROPERTY
The Company has acquired oil and gas leases and options covering
approximately 492,000 net acres in the Powder River Basin of Wyoming and
Montana. Approximately 60% of the acreage is located on federal and state land
and approximately 40% of the acreage is located on private land. The Company's
leases are generally five to ten year leases. The federal leases are generally
ten year term leases and newly acquired fee and state leases are generally
five-year term leases. Leasehold net revenue interests average greater than 80%.
Historically, oil and gas has been produced from a number of other
reservoirs in the Powder River Basin that are typically greater in depth than
CBM locations. Over 80% of the Company's leasehold acreage allow for development
of all depths. These leases cover both the shallow CBM and exploration potential
for oil and gas from the deeper horizons. Past exploration of the sedimentary
section below the Paleocene coal section has resulted in production from
sandstone reservoirs in twenty-five formations from upper Cretaceous to
Pennsylvanian age. No production has been generated from the Company's leases.
As of the date hereof, the Company has not produced any oil or gas nor does
it currently have the ability to produce any oil or gas. Certain of the
Company's undeveloped oil and gas properties have reserves classified as proved
undeveloped; however, such amounts are not significant.
The Company's office space is currently subleased pursuant to an agreement
in principle with Evansgroup, Inc. The term of the sublease commenced on April
6, 1998 and expires on September 30, 2000. The sublease concerns approximately
11,524 square feet at a yearly rent of approximately $173,000.
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MANAGEMENT
The following individuals are the officers, directors, and key employees and
consultants of the Company:
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS AND DIRECTORS AGE POSITION
- ---------------------------------------------------- --- ------------------------------------------------------
<S> <C> <C>
Jeffrey L. Taylor................................... 30 Chairman of the Board, Director
Paul M. Rady........................................ 45 President, Chief Executive Officer, Director
Glen C. Warren, Jr.................................. 42 Chief Financial Officer, Executive Vice President,
Director
Mark A. Erickson.................................... 40 Hydrocarbon Marketing Consultant, Director
Gregory V. Gibson................................... 48 Vice President, Legal, Secretary, Director
David W. Lanza...................................... 30 Director
<CAPTION>
OTHER SIGNIFICANT EMPLOYEES AND CONSULTANTS AGE POSITION
- ---------------------------------------------------- --- ------------------------------------------------------
<S> <C> <C>
Terrell A. Dobkins.................................. 46 Vice President of Production
Brian A. Kuhn....................................... 40 Vice President of Land
William Travis Brown, Jr............................ 53 Exploration Manager
George L. Hampton, III.............................. 46 Senior Geologist
Dirck Tromp......................................... 32 Staff Geologist
Todd H. Gilmer...................................... 46 Project Hydrology Consultant
John Dolloff........................................ 69 Senior Geology Consultant
Brian Hughes........................................ 43 Production and Engineering Consultant
</TABLE>
PAUL M. RADY, CHIEF EXECUTIVE OFFICER, PRESIDENT, DIRECTOR
Mr. Rady joined the Company in June 1998 as its Chief Executive Officer,
President and Director. Mr. Rady has entered into an employment agreement with
an initial term of four years with automatic renewal provisions. Mr. Rady was
with Barrett Resources Corporation ("Barrett"), an oil and gas exploration and
production company listed on the New York Stock Exchange, for approximately
eight years. During his tenure at Barrett, Mr. Rady held various executive
positions including his most recent position as Chief Executive Officer,
President and Director. As Chief Executive Officer he was responsible for all
aspects of the Company including, operations, financings, representing the
corporation to the investment community, and working with the Board of Directors
to set the direction of the Company. Other positions held by Mr. Rady were Chief
Operating Officer, Executive Vice President--Exploration, and Chief
Geologist--Exploration Manager. Prior to his employment at Barrett, Mr. Rady was
with Amoco Production Company ("Amoco") based in Denver, Colorado for
approximately 10 years. Mr. Rady received a Bachelor of Arts degree in Geology
from Western State College of Colorado in 1978 and a Master of Science Degree in
Geology from Western Washington University in 1980.
JEFFREY L. TAYLOR, CHAIRMAN OF THE BOARD, DIRECTOR
Currently Mr. Taylor is the President and Director of Foreign Investments
for the London Taylor Group. The London Taylor Group is a southern
California-based financial service provider acting as venture capitalist and
investment banker to private and small cap public companies. During the last
five years, Mr. Taylor has been a Member of the Board of Directors of various
public companies including, TransAmerica Industries, Yuma Gold Mines, and
Cornucopia Resources. He has also served during the last five years as Vice
President of Metallica Resources, Vice President of Goldbelt Resources, Vice
President of Arrowhead Minerals Corporation, and Executive Vice President of
Corporate Finance of Ultra Petroleum. Prior to founding the London Taylor Group,
Mr. Taylor was an analyst and financial service provider for Global Resource
Investments, Inc. of Carlsbad, California and the Chief Financial
17
<PAGE>
Officer for International Art Commission of San Francisco, California. Mr.
Taylor holds a Master of Business Administration, Finance degree from the
University of San Diego.
GLEN C. WARREN, JR., CHIEF FINANCIAL OFFICER, EXECUTIVE VICE PRESIDENT,
DIRECTOR
Mr. Warren joined the Company in July 1998 as its Chief Financial Officer,
Executive Vice President and Director. Mr. Warren has entered into an employment
contract with an initial term of four years with automatic renewal provisions.
Prior to assuming his duties as the Company's Chief Financial Officer, Mr.
Warren was an investment banker with Lehman Brothers Inc. in New York and
focused on equity and debt financing, as well as mergers and acquisitions for
energy and natural resource companies. Prior to Lehman Brothers, Mr. Warren was
also an investment banker with Dillon, Read & Co., Inc. and Kidder, Peabody &
Co. Incorporated with a total of nine years of investment banking experience.
Mr. Warren also has six years of exploration and production experience with
Amoco Production Company in New Orleans. Mr. Warren received an MBA degree from
the Anderson Graduate School of Management at U.C.L.A. in 1989 and a Juris
Doctorate degree in 1981 and a Bachelor of Arts degree in Interdisciplinary
Science in 1978, both from the University of Mississippi.
MARK A. ERICKSON, HYDROCARBON MARKETING CONSULTANT, DIRECTOR
Mr. Erickson is a registered petroleum engineer with fifteen years
experience in project financial modeling and management. He is currently
President of R.I.S. Resources (USA), Inc. ("RIS USA"). Prior to that, Mr.
Erickson worked as an asset manager for North American Resources Company, a $200
million subsidiary of Montana Power. He received his BS in Petroleum Engineering
at Montana Tech and Masters in Mineral Economics from the Colorado School of
Mines.
GREGORY V. GIBSON, VICE PRESIDENT, LEGAL, SECRETARY, DIRECTOR
Mr. Gibson has been an attorney specializing in securities and securities
broker dealerships for over 15 years. Mr. Gibson is a southern California-based
practicing attorney with the law firm of Gibson, Haglund & Johnson. Prior to his
present affiliations, Mr. Gibson was corporate counsel for three years to Global
Resource Investment Limited, a southern California-based broker-dealer
specializing in resource and foreign publicly traded securities. Prior to
working at Global, Mr. Gibson was practicing securities and international law
with the law firms of Gibson & Haglund and Gibson, Ogden & Johnson. Mr. Gibson
attended Claremont Men's College and Brigham Young University for undergraduate
studies and received his Juris Doctorate degree from Pepperdine University
School of Law.
DAVID LANZA, DIRECTOR
Mr. Lanza has been a real estate developer, oil and gas real property and
lease developer, and business owner in California, Nevada, Colorado, Texas and
Wyoming for the past ten years. He is currently the President of Hust Brothers,
a commercial real estate and development company, Vice President and principal
of Hust Brothers Inc., a national automotive wholesale company, and President
and principal of Colusa Motor Sales. Mr. Lanza has majority interest in
Marysville Auto Parts which owns and operates 13 automotive chain stores. Mr.
Lanza graduated from the University of Southern California receiving his
Bachelor of Science in Business Administration.
TERRELL A. DOBKINS, VICE PRESIDENT OF PRODUCTION
Mr. Dobkins has over 20 years experience in the petroleum industry. Mr.
Dobkins started his career at Amoco Production Company where he had extensive
experience in Rocky Mountain Low Permeability Gas Reservoirs and worked in
operations, completions and reservoir engineering. Mr. Dobkins worked as a
Manager for three years at American Hunter Exploration where he was involved in
all U.S. operations and engineering. More recently, Mr. Dobkins served eight
years at Barrett Resources, most recently as
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<PAGE>
Manager of Acquisitions, and was involved in the development of several
projects, including completions, operations and reservoir engineering.
BRIAN A. KUHN, VICE PRESIDENT OF LAND
Mr. Kuhn has 18 years experience in the oil and gas industry as a landman.
Mr. Kuhn worked as a landman for thirteen years at Amoco Production Company from
June 1980 to April 1993. While at Amoco, Mr. Kuhn spent three years in the
Powder River Basin and other basins of the Rocky Mountain region. Most recently,
Mr. Kuhn was employed as a Division Landman for five years at Barrett Resources
Corporation where he worked in the Rocky Mountain region and numerous other
basins. Mr. Kuhn has extensive experience in the acquisition of producing
properties, testifying as expert witness before state regulatory agencies,
management of lease acquisition and negotiation of both large and small
exploration transactions. Mr. Kuhn earned a BBA in Petroleum Land Management
from the University of Oklahoma in May 1980. Mr. Kuhn is also a member of the
American Association of Petroleum Landmen, Oklahoma City Association of
Petroleum Landmen and the Tulsa Association of Petroleum Landmen.
WILLIAM TRAVIS BROWN, JR., EXPLORATION MANAGER
Mr. Brown is a Chief Geologist for the Company. He began his career with
Amoco in 1969 as an operations and production geologist in the Rocky Mountain
Region. He has extensive experience in the Green River and Powder River Basins.
From 1969 to present, Mr. Brown has conducted extensive work in 3-D seismic &
stratigraphic analysis, geological mapping, well site analysis, and strategic
land acquisition for several companies including Amoco Production, Lear
Petroleum, Davis Oil, and Coastal Oil and Gas where he initiated the coal
degassification CBM project in the Powder River Basin. Mr. Brown received his
B.S. in Geology at Columbia University and his Master of Science and Ph.D.
candidacy in Geology at the University of New Mexico.
GEORGE L. HAMPTON, III, SENIOR GEOLOGIST
Mr. Hampton has recently been employed by the Company as Senior Geologist.
Prior to his employment by the Company, Mr. Hampton served as Chief Geologist of
Thermal Energy Corporation ("TEC") a joint venture with Torch Operating. While
at TEC Mr. Hampton supervised the geology and drilling and/or completion of 100
shallow CBM wells. Mr. Hampton is a petroleum geologist with 20 years experience
in the oil and gas business. He has spent the last 18 years specializing in CBM
exploration, production and analysis. His career began in 1978 as a geologist
for Amoco. From 1979 to 1982 he participated in the early CBM projects in the
San Juan, Piceance, Uinta and Green River basins. He left Amoco in 1986 to form
Hampton & Associates, Inc., a consulting company specializing in CBM. While
there, he and a team of CBM experts consulted for a number of major and
independent petroleum companies including: Conoco, British Petroleum, Chevron,
Amoco, Helmerich & Payne, Devon Energy (Blackwood & Nichols), Celsius, Torch,
MarkWest, Meridian and Evergreen. Mr. Hampton was responsible for generation and
evaluation of CBM prospects worldwide. He has also supervised over 100 CBM
wells. As a founding partner of Cairn Point Publishing, he worked on and
supervised the creation and publishing of THE INTERNATIONAL COAL SEAM GAS
REPORT, 1997. Mr. Hampton received his BS and MSC in Geology at Brigham Young
University.
DIRCK TROMP, STAFF GEOLOGIST
Mr. Tromp is a certified professional geologist with nine years of varied
geologic and hydrogeologic experience in the petroleum, mining, and
environmental fields. He began his career as a research geologist with the U.S.
Geological Survey. The majority of his experience has been as a hydrogeologist
and geochemist with Roy F. Weston, Inc., an international environmental
consulting firm. Mr. Tromp has extensive experience with digital mapping, 3-D
computer hydrologic conceptual modeling and groundwater flow modeling. He has
designed and installed groundwater systems and hydrocarbon recovery wells.
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<PAGE>
He has a strong working knowledge of environmental compliance requirements. Mr.
Tromp holds a BS in Geological Engineering and MSc in Geology/Geochemistry both
from the Colorado School of Mines.
TODD H. GILMER, PROJECT HYDROLOGY CONSULTANT
Mr. Gilmer is a consulting Project Hydrologist for the Company. Recently Mr.
Gilmer was one of the principal hydrologists for Amoco's Pine River (Los Pinos)
CBM water project in the San Juan Basin and has conducted a CBM hydrologic study
for Western Gas Resources in the Powder River Basin. He is a hydrogeologist with
25 years of experience in hydro-geological investigation and water production
problems in the petroleum and mineral industries. He is skilled in water
resource exploration, development and evaluation and has vast experience working
with government and environmental regulatory agencies. Mr. Gilmer began his
career as a hydrogeologist with Wright Water Engineers of Denver in 1973. From
1974-1986 he worked for several water resource companies where he managed
several coal mine baseline studies and ground water flow modeling projects. From
1986 to present he has been owner/senior hydrogeologist for Gilmer Geophysics,
Inc. where he has continued his work on hydrology projects for major coal mining
and petroleum companies. He is the author of many publications on hydrology. Mr.
Gilmer earned his BS degree in Geophysics from the University of Minnesota and
attended graduate school for two years at the same institution where he studied
geophysics and hydrogeology.
JOHN DOLLOFF, SENIOR GEOLOGY CONSULTANT
Mr. Dollof is a consulting senior geologist to the Company. Mr. Dolloff has
over 40 years of exploration and production geology and management experience in
the Rocky Mountain, Mid-Continent and west Texas areas. Beginning his career
with Standard Oil of Texas, he was staff geologist with the predecessor of
Champlin Petroleum (Union Pacific Resources) where he advanced to become
District Manager. He became Regional Manager for Helmerich & Payne and for nine
years he managed an 11-state oil and gas exploration program. He has also served
as exploration manager and Senior Vice-President for several petroleum companies
in the Rocky Mountain Region. Mr. Dolloff earned his BS in Geology from Yale
University and MSc Geology from University of Minnesota.
BRIAN HUGHES, PRODUCTION AND ENGINEERING CONSULTANT
Mr. Hughes is a petroleum engineer with more than twenty years of
supervisory and management experience in nearly all aspects of the natural gas
business. He has been a consulting, drilling, and production engineer for
completion operations in several CBM and tight gas sandstone projects in the
western Rocky Mountains. Prior to 1988, Mr. Hughes was a petroleum engineer with
Shell Oil where he was responsible for all Shell-operated units in west Texas.
Mr. Hughes received his B.S. in Mechanical Engineering from the U.S. Military
Academy and a Masters degree in Petroleum Engineering from the University of
Texas.
Directors' terms are one year.
EXECUTIVE COMPENSATION
The Company has recently entered into four-year employment agreements with
Paul M. Rady, who was hired by the Company in June 1998, and Glen C. Warren,
Jr., who was hired in July 1998.
The employment agreement with Mr. Rady provides for a salary of $120,000 per
year, bonus compensation equal to 2% of the Company's net cash flow,
participation in the Company's standard insurance plans for its executives, and
participation in the Company's other incentive compensation programs at the
discretion of the Board of Directors. Mr. Rady was granted 400,000 stock options
exercisable at $2.50 per share and 400,000 stock options exercisable at $5.00
per share which vest ratably over a four-year period commencing in June 1999.
Mr. Rady's stock options are subject to accelerated vesting in the event of his
termination without cause or in the event of a change of control of the Company.
20
<PAGE>
The stock options expire in 2008, subject to earlier termination if the
employment is terminated. If Mr. Rady's employment with the Company is
terminated without cause prior to June 1, 1999, Mr. Rady is entitled to
termination compensation of $2,000,000. If Mr. Rady's employment with the
Company is terminated without cause after June 1, 1999, Mr. Rady is entitled to
termination compensation of $3,000,000. Mr. Rady's employment agreement
automatically renews on each anniversary of the effective date after June 1,
2001 for an additional two years unless the Company notifies Mr. Rady in writing
90 days prior to such anniversary that it will not be renewing his employment
agreement.
The employment agreement with Mr. Warren provides for a salary of $100,000
per year, bonus compensation equal to 1% of the Company's net cash flow,
participation in the Company's standard insurance plans for its executives, and
participation in the Company's other incentive compensation programs at the
discretion of the Board of Directors. Mr. Warren was granted 200,000 stock
options exercisable at $2.50 per share, 100,000 stock options exercisable at
$3.25 per share, and 200,000 stock options exercisable at $5.00 per share which
vest ratably over a four-year period commencing in July 1999. The stock options
expire in 2008. Mr. Warren's stock options are subject to accelerated vesting in
the event of his termination without cause or in the event of a change of
control of the Company. If Mr. Warren's employment with the Company is
terminated without cause prior to July 1, 1999, Mr. Warren is entitled to
termination compensation of $400,000. If Mr. Warren's employment with the
Company is terminated without cause after July 1, 1999 but before July 1, 2000,
Mr. Warren is entitled to termination compensation of $750,000. If Mr. Warren's
employment with the Company is terminated without cause after July 1, 2000, Mr.
Warren is entitled to termination compensation of $1,250,000. Mr. Warren's
employment agreement automatically renews on each anniversary of the effective
date after June 1, 2002 for an additional year, unless the Company notifies Mr.
Warren in writing 90 days prior to such anniversary that it will not be renewing
his employment agreement.
The following table provides certain summary information concerning
compensation earned by the Company's Chief Executive Officer and Chief Financial
Officer (the "named Executive Officers") during the period ended Septemer 30,
1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL AWARDS
COMPENSATION SECURITIES
------------------ OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY (1) BONUS COMPENSATION OPTIONS (#) COMPENSATION
- ------------------------------------------------------------ ---------- ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Paul W. Rady ...............................................
President and Chief Executive Officer $35,000 -- -- 800,000 --
Glen C. Warren, Jr. ........................................
Chief Financial Officer and Executive Vice President 25,000 -- -- 512,150 --
</TABLE>
- ------------------------
(1) Reflects compensation paid from date of employment through September 30,
1998. Mr. Rady began employment with the Company on June 16, 1998. Mr.
Warren began employment with the Company on July 2, 1998.
1998 STOCK OPTION AND INCENTIVE PLAN
On March 24, 1998, the Board of Directors adopted the 1998 Stock Option and
Incentive Plan (the "Plan") which was subsequently approved by the stockholders
of the Company. The stockholders of the Company approved an amendment to the
Plan on June 29, 1998. The Plan is intended to provide incentive to key
employees and directors of, and key consultants, vendors, customers, and others
expected to provide
21
<PAGE>
significant services to, the Company, to encourage proprietary interest in the
Company, to encourage such key employees to remain in the employ of the Company
and its Subsidiaries, to attract new employees with outstanding qualifications,
and to afford additional incentive to consultants, vendors, customers, and
others to increase their efforts in providing significant services to the
Company. The Plan is administered by the Board of Directors or can be
administered by a Committee appointed by the Board of Directors, which Committee
shall be constituted to permit the Plan to comply with Rule 16b-3 of the Act,
and which shall consist of not less than two members. The Board of Directors, or
the Committee if there be one, at its discretion, can select the eligible
employees and consultants to be granted awards, determine the number of shares
to be applicable to such award, and designate any Options as Incentive Stock
Options or Nonstatutory Stock Options (except that no Incentive Stock Option may
be granted to a non-employee director or a non-employee consultant). The stock
subject to awards granted under the Plan are shares of the Company's authorized
but unissued or reacquired Common Stock. The aggregate number of shares which
may be issued as awards or upon exercise of awards under the Plan is 4,500,000
shares. As of September 30, 1998, Non-statutory Stock Options to purchase
2,960,150 have been granted to key employees and directors for exercise prices
ranging from $1.25 to $5.00 per share pursuant to the vesting schedules of the
respective agreements. Options in the amount of 612,500 are currently vested
while the balance of the options vest over the passage of time or are tied to
certain benchmarks being achieved with regards to the drilling of wells or
obtaining certain annual gross production revenues. No Incentive Stock Option
Agreements have been entered into by the Company as of July 31, 1998. The shares
that may presently be issued pursuant to the exercise of an option awarded by
the Plan have not been registered under the Securities Act of 1933 (the
"Securities Act"), any state securities authority, nor any foreign securities
authority, and will be subject to the limitations of Rule 144.
The following table reflects certain information regarding stock options
granted to the Named Executive Officers during the period ended September 30,
1998.
OPTION GRANTS AS OF THE PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------
PERCENTAGE OF
TOTAL OPTIONS
GRANTED TO
NUMBER OF EMPLOYEES AS OF
SECURITIES THE PERIOD ENDED EXERCISE
UNDERLYING SEPTEMBER 30, PRICE PER
OPTIONS GRANTED 1998 SHARE EXPIRATION DATE
--------------- ----------------- ----------- ----------------------
<S> <C> <C> <C> <C>
Paul M. Rady................................ 400,000 13.5% $ 2.50 June 15, 2008
400,000 13.5% $ 5.00 June 15, 2008
Glen C. Warren, Jr.......................... 200,000 6.8% $ 2.50 July 1, 2008
100,000 3.4% $ 3.25 July 1, 2008
200,000 6.8% $ 5.00 July 1, 2008
12,150 0.4% $ 5.00 September 4, 2008
</TABLE>
The following table reflects certain information concerning the number of
unexercised options held by the Named Executive Officers and the value of such
officers' unexercised options as of September 30, 1998. No options were
exercised by the Named Executive Officers during the period ended September 30,
1998.
22
<PAGE>
OPTION VALUES AS OF THE PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN THE
OPTIONS HELD AT MONEY OPTIONS HELD AT
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998 (1)
--------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Paul W. Rady..................................................... -- 800,000 -- $250,000
Glen C. Warren, Jr............................................... -- 512,150 -- 125,000
</TABLE>
- ------------------------
(1) Options are "in-the-money" if the closing market price of the Company's
Common Stock exceeds the exercise price of the options. The exercise price
of the options granted to the Named Executive Officers is $2.50 per share.
The value of unexercised options for each of the Named Executive Officers
represents the difference between the exercise price of such options and the
closing price of the Company's Common Stock on September 30, 1998 ($3.125
per share).
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A Director of the Company, Mark A. Erickson is also the President of RIS
USA, a wholly owned subsidiary of R.I.S. Resources International Corp. ("RIS"),
and serves as a director of RIS USA. RIS USA is engaged in the downstream
gathering, processing and marketing gas business, and may purchase and provide
infrastructure gathering and transportation of CBM produced by the Company. RIS
owns approximately 25.4% of the issued and outstanding shares of the Company.
If the Company deals with related parties, the fairness of the transactions
will be reviewed only by members of the Board of Directors that do not have
interests in the transactions.
23
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information concerning the beneficial
ownership of the Company's common stock and stock purchase warrants as of
November 30, 1998 for (i) each current director who owns shares, (ii) each
officer of the Company who owns shares, (iii) all persons known by the Company
to beneficially own more than 5% of the outstanding shares of the Company's
common stock, (iv) all officers and directors of the Company as a group, and (v)
each of the security holders offering Stock for sale pursuant to this Prospectus
(the "Selling Stockholders"). All persons listed, unless otherwise noted, have
an address in care of the Company's principal executive offices and have sole
voting and investment power with respect to their shares unless otherwise
indicated. The information presented under "Shares Beneficially Owned After
Offering" and "Warrants Beneficially Owned After Offering" assumes that all of
the units offered by the Selling Stockholders will be sold. Unless otherwise
noted, each of the stockholders listed below has an address c/o Pennaco Energy,
Inc., 1050 17th Street, Suite 700, Denver, Colorado 80265.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING SHARES BENEFICIALLY
(1) OWNED AFTER OFFERING
------------------------- SHARES BEING -----------------------
NAME NUMBER PERCENT (2) OFFERED NUMBER PERCENT
- -------------------------------------------------- ---------- ------------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Paul M. Rady...................................... 857,144(4) 5.8% -- 857,144 5.8%
Jeffrey L. Taylor................................. 543,375(3) 3.7% -- 543,375 3.7%
Gregory V. Gibson................................. 100,000(5) * -- 100,000 *
David W. Lanza.................................... 50,000(6) * -- 50,000 *
Mark A. Erickson.................................. 41,250(7) * -- 41,250 *
Glen C. Warren, Jr................................ 262,500 10) 1.8% -- 262,500 1.8%
R.I.S. International.............................. 4,000,000(8) 27.0% -- 4,000,000 27.0%
Brant Investments Ltd............................. 562,500 11) 3.8% 562,500 -- --
Yorktown Securities, Inc.......................... 52,500 12) * 52,500 -- --
Jayvee & Co....................................... 112,500 13) * 112,500 -- --
Royal Trust Corp. of Canada....................... 562,500 14) 3.8% 562,500 -- --
Aton Venture Fund Ltd............................. 75,000 15) * 75,000 -- --
Michael McMurrich................................. 45,000 16) * 45,000 -- --
Excalibur Funds Group............................. 150,000 17) 1.0% 150,000 -- --
Dynachem, Inc..................................... 37,500 18) * 37,500 -- --
Arpels Financial Services Corporation............. 225,000 19) 1.5% 225,000 -- --
All officers and directors as a group
(six persons)................................... 1,854,269(9) 12.5% -- 1,854,269 12.5%
</TABLE>
- ------------------------
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date hereof upon the
exercise of warrants or options. Each beneficial owner's percentage
ownership is determined by assuming that options or warrants that are held
by such person (but not those held by any other person) and which are
exercisable within 60 days from the date hereof have been exercised.
(2) Assumes 14,795,179 shares outstanding plus, for each individual, any
securities that specific person has the right to acquire upon exercise of
presently exercisable stock options. Options and warrants held by persons
other than the specific individual for whom an ownership interest
percentage is being calculated are not considered in calculating that
specific individual's ownership interest percentage.
(3) Includes 400,000 shares issuable to Mr. Taylor upon the exercise of
currently vested stock options, exercisable at a price of $1.25 per share.
Mr. Taylor's address is 7220 Avenida Encinas, Suite 204, Carlsbad,
California 92009.
(4) Includes 285,715 shares issuable upon the exercise of presently exercisable
stock purchase warrants, exercisable at a price of $1.75 per share.
(5) Represents 100,000 shares issuable upon the exercise of currently vested
stock options, exercisable at a price of $1.25 per share. Mr. Gibson's
address is 2010 Main Street, Suite 400, Irvine, California 92614.
(6) Represents 50,00 shares issuable upon the exercise of currently vested
stock options, exercisable at a price of $1.25 per share. Mr. Lanza's
address is 710 3rd Street, Marysville, California 95901.
24
<PAGE>
(7) Includes 31,250 shares issuable upon the exercise of currently vested stock
options, exercisable at a price of $1.25 per share. Mr. Erikson's address
is .
(8) The address of R.I.S. Resources International Corp. is 609 West Hastings
Street, 11th Floor, Vancouver, British Columbia V6B 4W4, Canada. According
to the directors and officers of R.I.S., the only person who owns more than
10% of the outstanding voting rights of RIS is John Hislop, who owns 10.22%
of the outstanding RIS common stock.
(9) Includes 581,250 shares issuable upon the exercise of currently vested
stock options, exercisable at a price of $1.25 per share, and 373,215
shares issuable upon the exercise of presently exercisable stock purchase
warrants, exercisable at a price of $1.75 per share.
(10) Includes 87,500 shares issuable upon the exercise of presently exerciseable
stock purchase warrants exerciseable at a price of $1.75 per share.
(11) Includes 187,500 shares issuable upon the exercise of presently exercisable
stock purchase warrants exercisable at a price of $5.00 per share.
(12) Includes 17,500 shares issuable upon the exercise of presently exercisable
stock purchase warrants exercisable at a price of $5.00 per share.
(13) Includes 37,500 shares issuable upon the exercise of presently exercisable
stock purchase warrants exercisable at a price of $5.00 per share.
(14) Includes 187,500 shares issuable upon the exercise of presently exercisable
stock purchase warrants exercisable at a price of $5.00 per share.
(15) Includes 25,000 shares issuable upon the exercise of presently exercisable
stock purchase warrants exercisable at a price of $5.00 per share.
(16) Includes 15,000 shares issuable upon the exercise of presently exercisable
stock purchase warrants exercisable at a price of $5.00 per share.
(17) Includes 50,000 shares issuable upon the exercise of presently exercisable
stock purchase warrants exercisable at a price of $5.00 per share.
(18) Includes 12,500 shares issuable upon the exercise of presently exercisable
stock purchase warrants exercisable at a price of $5.00 per share.
(19) Includes 75,000 shares issuable upon the exercise of presently exercisable
stock purchase warrants exercisable at a price of $5.00 per share.
DESCRIPTION OF SECURITIES
GENERAL
The authorized Common Stock of the Company consists of 50,000,000 shares of
$0.001 par value common stock. The following summary of the terms and provisions
of the Company's capital stock does not purport to be complete and is qualified
in its entirety by reference to the Company's Articles of Incorporation and
Bylaws, which have been filed as exhibits to the Company's registration
statement, of which this prospectus is a part, and applicable law.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors. Such
holders are not entitled to vote cumulatively for the election of directors.
Holders of a majority of the shares of Common Stock entitled to vote in any
election of directors may elect all of directors standing for election.
Holders of Common Stock are entitled to participate pro rata in such
dividends as may be declared in the discretion of the Board of Directors out of
funds legally available therefor. Holders of Common Stock
25
<PAGE>
are entitled to share ratably in the net assets of the Company upon liquidation
after payment or provision for all liabilities. Holders of Common Stock have no
preemptive rights to purchase shares of stock of the Company. Shares of Common
Stock are not subject to any redemption provisions and are not convertible into
any other securities of the Company. All outstanding shares of Common Stock are
fully paid and non-assessable.
The Common Stock is quoted on the OTC Bulletin Board system under the symbol
"PNEG."
As of November 30, 1998, 14,795,179 shares are issued and outstanding.
STOCK PURCHASE WARRANTS
The Company has 607,500 warrants outstanding with an exercise price of $5.00
per share issued September 4, 1998, via a private placement exempt from the
registration requirements of the Securities Act. These warrants may be exercised
any time within six months of the date of issuance.
The Company has 398,215 warrants outstanding with an exercise price of $1.75
per share for the first year of exercisability and $1.96 per share for the
second year of exercisability. 310,715 of these warrants were issued July 1,
1998 and 87,500 were issued September 4, 1998, via private placements exempt
from the registration requirements of the Securities Act and may be exercised
within two years from the date of issuance.
The Company has 75,200 warrants outstanding with an exercise price of $3.58
per share issued September 4, 1998, via a private placement exempt from the
registration requirements of the Securities Act. These warrants may be exercised
any time within two years from the date of issuance.
Other than the shares underlying the 607,500 warrants issued September 4,
1998, which are being registered hereby, no other shares underlying the
above-referenced warrant have been registered under the Securities Act.
TRANSFER AGENT
The Company's transfer agent is: Pacific Stock Transfer Company, 3690 South
Eastern, Las Vegas, Nevada 89109.
PLAN OF DISTRIBUTION
The Company is registering the Stock on behalf of the Selling Stockholders.
As used herein, "Selling Stockholders" includes donees and pledgees selling
Stock received from a named Selling Stockholder after the date of this
prospectus. All costs, expenses and fees in connection with the registration of
the Stock offered hereby will be borne by the Company. Brokerage commissions and
similar selling expenses, if any, attributable to the sale of Stock will be
borne by the Selling Stockholders. Sales of Stock may be effected by Selling
Stockholders from time to time in one or more types of transactions (which may
include block transactions) through the OTC Bulletin Board system, in negotiated
transactions, through put or call options transactions relating to the Stock,
through short sales of Stock, or a combination of such methods of sale, at
market prices prevailing at the time of sale, or at negotiated prices. Such
transactions may or may not involve brokers or dealers. The Selling Stockholders
have advised the Company that they have not entered into any agreements,
understandings or arrangements with any underwriters or broker-dealers regarding
the sale of their securities, nor is there an underwriter or coordinating broker
acting in connection with the proposed sale of Stock by the Selling
Stockholders.
The Selling Stockholders may effect such transactions by selling Stock
directly to purchasers or to or through broker-dealers, which may act as agents
or principals. Such broker-dealers may receive compensation in the form of
discounts, concessions, or commissions from the Selling Stockholders and/or
purchasers
26
<PAGE>
of Stock for whom such broker-dealers may act as agents or to whom they sell as
principal, or both (which compensation as to a particular broker-dealer might be
in excess of customary commissions).
The Selling Stockholders and any broker-dealers that act in connection with
the sale of Stock might be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act, and any commissions received by such
broker-dealers and any profit on the resale of the Stock sold by them while
acting as principals might be deemed to be underwriting discounts or commissions
under the Securities Act. The Selling Stockholders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving sales
of the Stock against certain liabilities, including liabilities arising under
the Securities Act.
Because Selling Stockholders may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, the Selling Stockholders will be
subject to the prospectus delivery requirements of the Securities Act. The
Company has informed the Selling Stockholders that the anti-manipulative
provisions of Regulation M promulgated under the Exchange Act may apply to their
sales in the market.
Selling Stockholders also may resell all or a portion of the Stock in open
market transactions in reliance upon Rule 144 under the Securities Act, provided
they meet the criteria and conform to the requirements of such Rule.
Upon the Company being notified by a Selling Stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of Stock
through a block trade, special offering, exchange distribution or secondary
distribution or a purchase by a broker or dealer, a supplement to this
prospectus will be filed, if required, pursuant to Rule 424(b) under the Act,
disclosing (i) the name of each such selling stockholder and of the
participating broker-dealer(s), (ii) the number of shares of Stock involved,
(iii) the price at which such shares of Stock were sold, (iv) the commissions
paid or discounts or concessions allowed to such broker-dealer(s), where
applicable, (v) that such broker-dealer(s) did not conduct any investigation to
verify the information set out or incorporated by reference in this prospectus
and (vi) other facts ,material to the transaction. In addition, upon the Company
being notified by a Selling Stockholder that a donee or pledgee intends to sell
more than 500 shares of Stock, a supplement to this prospectus will be filed.
See "Principal and Selling Stockholders."
EXPERTS
KPMG Peat Marwick LLP, independent certified accountants, have audited our
financial statements included in this prospectus. These financial statements are
included herein in reliance upon their report and upon their authority as
experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters in connection with the Stock offered hereby will be
passed upon by Gibson, Haglund & Johnson. Mr. Gibson, a Director of the Company,
is a partner with Gibson, Haglund & Johnson and is the beneficial owner of
100,000 shares of the Company's Common Stock.
CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
David E. Coffey, C.P.A., the accounting firm that had previously been
engaged as the principal accountant to audit the Company's financial statements,
was dismissed in July 1998. The Company's Board of Directors approved the
dismissal of David E. Coffey, C.P.A. The audit report previously issued by David
E. Coffey, C.P.A. with respect to the Company's financial statements did not
contain an adverse opinion or a disclaimer of opinion, nor was such report
qualified or modified as to uncertainty, audit scope or accounting principles.
The Company's Board of Directors approved the selection of KPMG Peat Marwick LLP
as auditors for the Company's financial statements for the period ending
September 30, 1998, and KPMG Peat Marwick LLP was engaged for such purpose in
September 1998.
27
<PAGE>
WHERE TO FIND MORE INFORMATION
We have filed a registration statement on Form SB-2 to register with the SEC
the Stock that may be offered by the Selling Stockholders using this Prospectus.
This Prospectus is a part of that registration statement. As allowed by SEC
rules, this Prospectus does not contain all of the information contained in the
registration statement or the exhibits to the registration statement.
We are subject to the informational requirements of the Securities Exchange
Act of 1934. Accordingly, we file annual, quarterly and current reports, proxy
statements, and other information with the SEC. The public may read and copy any
reports, statements, or other information that we file at the SEC's public
reference room at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C.
20549. The public may obtain information on the operation of the public
reference room by calling the SEC at 1-800-SEC-0330. Our SEC filings are also
available to the public from commercial document retrieval services and at the
web site maintained by the SEC at "http://www.sec.gov." You may also access
additional information about us at our web site, "http://www.pennaco.com."
You may request a copy of these filings at no cost, by writing or
telephoning us at the following address:
Pennaco Energy, Inc.
Attention: Glen C. Warren, Jr.
1050 17th Street, Suite 700
Denver, Colorado 80265
(303) 629-6700
You should rely on the information contained in this Prospectus and any
prospectus supplement. We have not authorized anyone to provide you with
information that is different from what is contained in this Prospectus.
You should not assume that the information contained in this Prospectus or
any prospectus supplement is accurate as of any date other than the date on the
front of those documents, and neither the delivery of this Prospectus or any
prospectus supplement to you nor the issuance of Stock under them will create
any implication to the contrary.
28
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-1
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors
Pennaco Energy, Inc.:
We have audited the accompanying balance sheet of Pennaco Energy, Inc. (a
development stage company) as of September 30, 1998, and the related statements
of operations, stockholders' deficit and cash flows for the period from January
26, 1998 (inception) to September 30, 1998. 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 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 financial statements referred to above present fairly,
in all material respects, the financial position of Pennaco Energy, Inc. as of
September 30, 1998, and the results of its operations and its cash flows for the
period from January 26, 1998 (inception) to September 30, 1998, in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Denver, Colorado
November 20, 1998
F-2
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL (NOTE 2)
----------- -----------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current Assets:
Cash.......................................................................... $ 1,358,125 $22,966,124
Drilling deposit.............................................................. 250,000 250,000
Prepaid expenses and other current assets..................................... 78,753 78,753
----------- -----------
Total current assets........................................................ 1,686,878 23,294,877
----------- -----------
Property and Equipment:
Undeveloped oil and gas properties, at cost (using the successful efforts
method of accounting) (note 9).............................................. 16,054,802 9,054,802
Computer software and equipment............................................... 176,993 176,993
Furniture and fixtures........................................................ 69,092 69,092
----------- -----------
16,300,887 9,300,887
Less accumulated depreciation................................................. (34,217) (34,217)
----------- -----------
Net property and equipment.................................................. 16,266,670 9,266,670
----------- -----------
Deferred income tax asset....................................................... 1,280,000 1,280,000
Other assets.................................................................... 64,415 64,415
----------- -----------
$19,297,963 $33,905,962
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bridge loan payable, including accrued interest (note 3)...................... $ 3,241,867 --
Note payable to shareholder, including accrued interest (note 3).............. 504,583 --
Lease acquisitions payable.................................................... 2,645,551 --
Accounts payable and accrued liabilities...................................... 286,006 286,006
Income tax payable............................................................ -- 7,560,000
----------- -----------
Total current liabilities................................................... 6,678,007 7,846,006
Stockholders' equity (note 6):
Common stock, $.001 par value. Authorized 50,000,000 shares; 14,795,179 shares
issued and outstanding...................................................... 14,795 14,795
Additional paid-in capital.................................................... 16,681,499 16,681,499
Retained earnings (deficit) accumulated during the development stage.......... (4,076,338) 9,363,662
----------- -----------
Total stockholders' equity.................................................. 12,619,956 26,059,956
Commitments (note 8)............................................................
----------- -----------
$19,297,963 $33,905,962
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
PERIOD FROM JANUARY 26, 1998 (INCEPTION) TO SEPTEMBER 30, 1998
<TABLE>
<S> <C>
Interest Income............................................................... $ 30,250
------------
Expenses:
Exploration................................................................. 1,784,069
Depreciation and amortization............................................... 34,217
General and administrative (note 6)......................................... 2,918,356
Interest expense, including $4,583 payable to shareholder................... 649,946
------------
Total expenses............................................................ 5,386,588
------------
Loss before income taxes.................................................. (5,356,338)
Income tax benefit............................................................ 1,280,000
------------
Net loss and deficit accumulated during the development stage............. $(4,076,338)
------------
------------
Loss per share................................................................ $ (.38)
------------
------------
Weighted average common shares outstanding.................................... 10,615,560
------------
------------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD FROM JANUARY 26, 1998 (INCEPTION) TO SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------ PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------- --------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balances at January 26, 1998
(inception)............................ -- $ -- $ -- $ -- $ --
Common Stock issued in connection with
share exchange (note 1)................ 995,000 995 (995) -- --
Common Stock issued, net of offering
costs of $178,014 (note 6)............. 12,030,000 12,030 10,607,551 -- 10,619,581
Compensation relating to common stock and
warrants issued (note 6)............... -- -- 1,340,000 -- 1,340,000
Stock option compensation (note 6)....... -- -- 450,000 -- 450,000
Units issued, net of offering costs of
$288,225 (note 6)...................... 1,770,179 1,770 4,268,443 -- 4,270,213
Warrants issued for services (note 6).... -- -- 16,500 -- 16,500
Net loss for the period.................. -- -- -- (4,076,338) (4,076,338)
------------- --------- ------------- -------------- -------------
Balances at September 30, 1998........... 14,795,179 $ 14,795 $ 16,681,499 $ (4,076,338) $ 12,619,956
------------- --------- ------------- -------------- -------------
------------- --------- ------------- -------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 26, 1998 (INCEPTION) TO SEPTEMBER 30, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss..................................................................... $(4,076,338)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.............................................. 34,217
Compensation relating to common stock and warrants issued.................. 1,340,000
Stock option compensation.................................................. 450,000
Warrants issued for services............................................... 16,500
Increase in accrued interest on bridge loan and note payable............... 46,450
Deferred income tax benefit................................................ (1,280,000)
Increases in operating assets and liabilities:
Prepaid expenses and other current assets................................ (78,753)
Other assets............................................................. (64,415)
Accounts payable and accrued liabilities................................. 286,006
----------
Net cash used in operating activities.................................. (3,326,333)
----------
Cash flows from investing activities:
Capital expenditures......................................................... (16,300,887)
Drilling deposit............................................................. (250,000)
Increase in lease acquisitions payable....................................... 2,645,551
----------
Net cash used by investing activities.................................. (13,905,336)
----------
Cash flows from financing activities:
Proceeds from issuance of bridge loan........................................ 3,200,000
Proceeds from issuance of note payable....................................... 500,000
Proceeds from issuance of common stock, net of offering costs................ 14,889,794
----------
Net cash provided by financing activities.............................. 18,589,794
----------
Net increase in cash................................................... 1,358,125
Cash at beginning of period.................................................... --
----------
Cash at end of period.......................................................... $1,358,125
----------
----------
Supplemental disclosures of cash flow information:
Cash paid for interest....................................................... $ 603,496
----------
----------
Cash paid for income taxes................................................... $ --
----------
----------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
SEPTEMBER 30, 1998
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION AND BASIS OF PRESENTATION
Pennaco Energy, Inc. (the "Company") is an independent, energy company
primarily engaged in the acquisition and development of natural gas
production from coal bed methane properties in the Rocky Mountain region
of the United States. The Company was incorporated on January 26, 1998
under the laws of the state of Nevada and its headquarters are in Denver,
Colorado.
The Company's activities to date have been limited to organizational
activities, prospect development activities, and acquisition of leases
and option rights. The Company currently has oil and gas lease rights in
the Powder River Basin in northeastern Wyoming and southeastern Montana.
Currently, the Company has no revenue producing operations. Accordingly,
the Company is considered to be in the development stage.
The Company was incorporated as a wholly-owed subsidiary of International
Metal Protection Inc. (International Metal). Subsequently, all of the
outstanding shares of International Metal were exchanged for shares of
the Company and International Metal was merged into the Company. The
995,000 shares issued in the exchange were recorded at their par value of
$.001 per share as International Metal had no assets or liabilities at
the date of the merger. International Metal and its predecessor, AKA
Video Communications Inc., had been inactive for the two years ended
December 31, 1997 and prior thereto.
The Company's year end is December 31.
(B) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(C) SIGNIFICANT RISKS
The Company is subject to a number of risks and uncertainties inherent in
the oil and gas industry. Among these are risks related to fluctuating
oil and gas prices, uncertainties related to the estimation of oil and
gas reserves and the value of such reserves, effects of competition and
extensive environmental regulation, risks associated with the search for
and the development of oil and gas reserves, and many other factors, many
of which are necessarily beyond the Company's control. The Company's
financial condition and results of operations will depend significantly
upon the Company's ability to find and develop natural gas and oil
reserves and upon the prices received for natural gas and oil produced,
if any. These prices are subject to fluctuations in response to changes
in supply, market uncertainty and a variety of additional factors that
are beyond the control of the Company.
F-7
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
SEPTEMBER 30, 1998
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.
(E) OIL AND GAS ACTIVITIES
The Company follows the successful efforts method of accounting for its
oil and gas activities. Accordingly, costs associated with the
acquisition, drilling and equipping of successful exploratory wells are
capitalized. Geological and geophysical costs, delay and surface rentals
and drilling costs of unsuccessful exploratory wells are charged to
expense as incurred. Costs of drilling development wells, both successful
and unsuccessful, are capitalized. Upon the sale or retirement of oil and
gas properties, the cost thereof and the accumulated depreciation and
depletion are removed from the accounts and any gain or loss is credited
or charged to operations. Depletion of capitalized acquisition,
exploration and development costs is computed on the units-of-production
method by individual fields as the related proved reserves are produced.
Capitalized costs of unproved properties are assessed periodically and a
provision for impairment is recorded, if necessary, through a charge to
operations.
Proved oil and gas properties are assessed for impairment on a
field-by-field basis. If the net capitalized costs of proved oil and gas
properties exceeds the estimated undiscounted future net cash flows from
the property a provision for impairment is recorded to reduce the
carrying value of the property to its estimated fair value.
(F) OTHER PROPERTY AND EQUIPMENT
Other property and equipment is recorded at cost. Depreciation and
amortization is provided using the straight-line method over the
estimated useful lives of the assets, which range from 3 to 15 years.
(G) INCOME TAXES
The Company provides for income taxes under Statement of Financial
Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES (SFAS 109).
SFAS NO. 109 requires the use of the asset and liability method of
accounting for income taxes. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and net operating loss carryforwards. Deferred tax assets and
liabilities are measured using enacted income tax rates expected to apply
to taxable income in the years in which those differences are expected to
be recovered or settled. Under SFAS 109, the effect on deferred tax
assets and liabilities of a change in income tax rates is recognized in
the results of operations in the period that includes the enactment date.
(H) STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION (SFAS 123). This statement defines a fair value
method of accounting for its stock compensation
F-8
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
SEPTEMBER 30, 1998
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
plans. SFAS 123 allows an entity to measure compensation costs for these
plans using the intrinsic value based method of accounting as prescribed
in Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES (APB 25). The pro forma disclosures of net loss and
loss per share required by SFAS 123 are included in Note 5.
(I) LOSS PER SHARE
Loss per share is based on the weighted average number of common shares
outstanding during the period. Outstanding stock options and warrants
were excluded from the computation as their effect was antidilutive.
(2) JOINT VENTURE AGREEMENT
On October 23, 1998, the Company and CMS Oil and Gas Company, a subsidiary
of CMS Energy Corporation (CMS), signed a definitive agreement involving the
development of certain of its properties in the Powder River Basin. Under
the terms of the agreement, CMS will acquire an undivided 50% working
interest in the Company's undeveloped oil and gas properties for
$28,000,000, payable at two closings, $7,600,000 was paid on November 20,
1998 and $20,400,000 will be paid on January 15, 1999, in the form of
$14,800,000 in cash and the settlement of a $5,600,000 bridge loan from CMS.
The unaudited pro forma balance sheet of the Company as of September 30,
1998 gives effect to the sale of the interest in the properties and the use
of a portion of the proceeds to repay the bridge loan, the note payable to
shareholders and lease acquisitions payable, all as if the transactions had
occurred on that date.
The agreement also contemplates the formation of a joint venture to develop
the properties. The agreement provides that Pennaco and CMS will each
operate approximately 50% of the wells drilled in the area of mutual
interest provided for in the joint venture agreement. An affiliate of CMS,
CMS Gas Transmission and Storage, will provide gathering, compression and
transportation services to the joint venture. All of the leases in the area
of mutual interest are dedicated to CMS Gas Transmission and Storage for
gathering, compression and transportation.
Under the terms of the agreement, CMS agreed to pay Pennaco $5,600,000 of
earnest money in the form of a bridge loan secured by substantially all of
the Company's oil and gas leases. The loan is due and payable at the second
closing in January 1999. The loan will be settled in connection with the
second closing or will be forgiven if CMS wrongfully fails to close or fails
to meet the Company's conditions to closing. A portion of the proceeds were
used to repay the bridge loan.
(3) BRIDGE LOAN
The Company borrowed $3,200,000 under a bridge loan. The bridge loan is
payable on October 23, 1998 with interest at 18%. The bridge loan is secured
by undeveloped oil and gas properties with a carrying value of approximately
$2,668,000. The bridge loan was repaid in full and the note was canceled on
October 23, 1998.
F-9
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
SEPTEMBER 30, 1998
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(4) NOTE PAYABLE TO SHAREHOLDER
The unsecured note payable to shareholder bears interest at the prime rate
(8.25% at September 30, 1998) and matures on December 31, 1998. Under the
terms of the note, all interest will be forgiven if the loan is repaid in
full prior to November 30, 1998. Interest payable on the note for the period
from inception to September 30, 1998 was $4,583.
(5) INCOME TAXES
The income tax benefit of $1,280,000 includes a deferred federal income tax
benefit of $1,210,000 and a deferred state income tax benefit of $70,000.
The income tax benefit recorded for the period from inception to September
30, 1998 differs from the expected income tax benefit (based on the
statutory rate of 34%) primarily as a result of state income taxes and stock
and stock option compensation which is not deductible for tax purposes.
At September 30, 1998, the Company has a net operating loss carryforward for
federal income tax purposes of approximately $(3,560,000) which is available
to offset future federal taxable income, if any, through 2018. The tax
effects of temporary differences that give rise to the deferred tax assets
at September 30, 1998 are a result of the net operating loss carryforward.
(6) STOCKHOLDERS' EQUITY
(A) COMMON STOCK
Since its formation in January 1998, the Company completed four private
placement offerings of common stock. In February 1998, 500,000 shares
were issued at $.10 per share. Proceeds to the Company were approximately
$50,000. Also in February 1998, 4,530,000 shares were issued at $.22 per
share. Proceeds to the Company were approximately $997,000. In April
1998, 5,000,000 shares were issued at $1.25 per share. The proceeds to
the Company were $6,250,000. In June 1998, 2,000,000 shares were issued
at $1.75 per share. Proceeds to the Company were approximately
$3,500,000. The Company incurred approximately $723,000 in offering costs
relating to these offerings, which have been charged to additional
paid-in capital.
In June 1998, the Company offered certain individuals the right to
acquire common stock at $1.75 per share along with a share purchase
warrant for every two shares purchased, conditioned upon their acceptance
of employment as officers of the Company.
No compensation cost was recorded for the individuals who commenced
employment with the Company prior to July 1, 1998 (the date the Company's
common stock commenced trading) as the estimated fair value of common
stock approximated the common stock issuance price and the warrant
exercise price. Compensation expense of $450,000 was recorded for the
shares and warrants issued subsequent to July 1, 1998 based on the
difference between the closing price per share on the last trading day
prior to the date of employment with the Company and the common stock
issuance price and the warrant exercise price.
During the period from inception to September 30, 1998, a total of
796,429 units were issued at $1.75 per unit to officers and key employees
of the Company. The units consist of one share of
F-10
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
SEPTEMBER 30, 1998
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) STOCKHOLDERS' EQUITY (CONTINUED)
common stock and one warrant for each two shares issued. The warrants
have an exercise price of $1.75 per share in the first year and $1.96 per
share in the second year and are exercisable at any time. Proceeds to the
Company were approximately $1,394,000.
In September 1998, the Company issued 1,215,000 Units at $3.25 per unit,
consisting of one share of common stock and one warrant for each two
shares issued. The warrants have an exercise price of $5.00 per share and
may be exercised any time prior to March 4, 1999. Under the terms of the
stock subscription agreement 25% of the proceeds from a certain party, or
$763,750, are subject to an Escrow Arrangement, which provides that the
shares and the shares of common stock underlying the warrants are to be
registered for resale under the Securities Act of 1993 (the "Act") with
the U. S. Securities and Exchange Commission, which the Company has
undertaken to have accomplished by December 31, 1998. The Company has
also undertaken to have the shares qualified by way of an exemption order
provided by the respective Securities Commissions in Canada. Proceeds to
the Company were approximately $3,165,000 exclusive of the proceeds
placed in escrow. Offering costs of $288,225 were charged to additional
paid-in capital.
The escrow proceeds of $763,750 were deposited into an interest bearing
escrow account together with certificates representing the Units to be
purchased. In the event the registration statement is not declared
effective or the Canadian exemption orders are not obtained on or before
the December 31, 1998, the subscribers to the Offering are entitled to
receive either (a) an additional Unit for each 10 Units purchased in the
Offering, or (b) a refund from the escrow of 25% of the amount paid with
their subscription, plus interest thereon. The subscribers are also
entitled to receive an additional Unit for each 10 Units previously
acquired in the Offering in the event that the Company does not maintain
an effective registration statement effective until such time as the
registered securities may be resold pursuant to Rule 144 promulgated
under the Act. The cash in escrow and the related units are not reflected
in the accompanying financial statements.
(B) WARRANTS
The Company issued warrants to purchase 128,000 shares of common stock to
a company for corporate finance services for a period of one year
commencing April 15, 1998. The warrants are exercisable at $1.25 per
share any time after April 15, 1999 and expire April 15, 2000. The
estimated fair value of the warrants issued of $16,500 was charged to
expense during the period from January 26, 1998 to September 30, 1998. In
September 1998, the Company agreed to issue warrants to purchase 75,200
shares of common stock to the same company in connection with the
placement of units in the September 1998 unit offering. The warrants are
exercisable at a price of $3.58 per share and expire September 4, 2000.
F-11
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
SEPTEMBER 30, 1998
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) STOCKHOLDERS' EQUITY (CONTINUED)
(C) STOCK OPTION, WARRANT AND INCENTIVE PLAN
On March 24, 1998, the Company adopted the 1998 Stock Option and
Incentive Plan (the Plan). The aggregate number of shares which may be
issued as awards under the Plan is 4,500,000 shares. As of September
1998, options to purchase common stock have been granted to key employees
and directors at exercise prices ranging from $1.25 to $5.00 per share.
Stock option activity for the Plan for the period from inception to
September 30 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
NUMBER OF PRICE PER
OPTIONS SHARE
---------- -----------
<S> <C> <C>
BALANCE, JANUARY 26, 1998 (INCEPTION) -- $ --
Granted...................................................................... 2,960,150 2.70
Canceled..................................................................... (200,000) 1.25
----------
BALANCE, SEPTEMBER 30, 1998.................................................... 2,760,150 2.81
----------
----------
</TABLE>
A summary of the range of exercise prices and the weighted-average
contractual life of outstanding stock options at September 30, 1998, is
as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OUTSTANDING EXERCISE REMAINING LIFE NUMBER EXERCISABLE EXERCISE
SEPTEMBER 30, 1998 PRICE (YEARS) SEPTEMBER 30, 1998 PRICE
------------------ ----------- --------------- ------------------ -----------
<S> <C> <C> <C> <C> <C>
$ 1.25 800,000 $ 1.25 9.6 612,500 $ 1.25
2.50 918,000 2.50 8.7 -- --
3.25 430,000 3.25 4.8 -- --
5.00 612,150 5.00 4.4 --
---------- -------
$1.25 - 5.00 2,760,150 $ 2.81 7.4 612,500 $ 1.25
---------- -------
---------- -------
</TABLE>
The Company applies APB Opinion 25 and related interpretations in
accounting for its stock option plans. No compensation expense has been
recognized for options granted at or above market value at date of grant.
Compensation expense of $1,340,000 has been recorded for the period from
inception to September 30, 1998 for options granted below the market
value, based upon the difference between the option price and the quoted
market price at the date of grant.
Had compensation cost for the Company's stock-based compensation plans
been determined based upon the fair value of options on the grant dates,
consistent with the provisions of SFAS 123, the Company's pro forma net
loss and loss per share for the period from January 26, 1998 to September
30, 1998 would have been $(6,682,454) and $(.63), respectively.
The weighted average fair value of options granted during 1998 was $1.33
per share. The weighted average remaining contractual life of all options
outstanding at September 30, 1998 was approximately 6.2 years. The fair
value of each option grant was estimated at the date of grant
F-12
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
SEPTEMBER 30, 1998
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) STOCKHOLDERS' EQUITY (CONTINUED)
using the Black-Scholes option-pricing model with the following
assumptions: no expected dividends, expected life of the options of 1 to
10 years, volatility of 72%, and a risk-free interest rate of 5.5%.
(7) RELATED PARTY TRANSACTIONS
RIS Resources International Corporation (RIS International) owns 4,000,000
shares of the Company's common stock. A member of the Board of Directors of
the Company also serves as the President and as a member of the Board of
Directors of RIS International. From April 1, 1998 through June 22, 1998 he
served as an officer of the Company. Since that time he has consulted with
Company and has received approximately $5,700 as compensation for his
services.
During the period from inception to September 30, 1998, a company for which
the Company's Chairman serves as a director provided administrative services
for the Company for which it received compensation of approximately $16,000.
One of the Company's Directors provided legal services to the Company during
the period from inception to September 30, 1998. The Director's firm was
paid approximately $148,000 and the Director was paid approximately $15,000
for the period from inception to September 30, 1998.
(8) COMMITMENTS
(A) EMPLOYMENT AGREEMENTS
The Company has entered into four-year employment agreements with two
officers, its President and its Chief Financial Officer and Executive
Vice President. Under the terms of the agreement with the President, if
employment is terminated without cause prior to June 1, 1999, the
President is entitled to termination compensation of $2,000,000, or
$3,000,000 if he is terminated without cause after June 1, 1999 but
before the expiration of his employment agreement in June 2002. Under
terms of the agreement with the Executive Vice President and Chief
Financial Officer, if employment is terminated without cause prior to
July 1, 1999, the Chief Financial Officer and Executive Vice President is
entitled to termination compensation of $400,000, $750,00 if he is
terminated without cause after July 1, 1999 but before July 1, 2000 and
$1,250,000 if he is terminated without cause thereafter but prior to the
expiration of his employment agreement.
(B) LEASE COMMITMENTS
The Company entered into an amendment to its office lease agreement in
Denver, Colorado effective June 1, 1998. The amended lease covers 11,524
square feet for a term of two years and four months. During the term of
the lease, rent is payable in the amount of $172,860 base rent per year.
During the four months of the lease from June 1, 1998 through September
30, 1998, the Company paid $57,620 in rent.
F-13
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
SEPTEMBER 30, 1998
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) DISCLOSURES ABOUT CAPITALIZED COSTS, COST INCURRED AND RESERVES
Costs incurred in oil and gas producing activities for the period from
January 26, 1998 to September 30, 1998 are as follows:
<TABLE>
<S> <C>
Unproven property acquisition costs.................................... $16,054,802
----------
----------
</TABLE>
Certain of the Company's undeveloped oil and gas properties have reserves
classified as proved undeveloped; however, such amounts are not significant.
F-14
<PAGE>
PENNACO ENERGY, INC.
1,822,500 SHARES
COMMON STOCK
--------------------------------
P R O S P E C T U S
--------------------------------
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus supplement and the prospectus or
to make representations as to matters not stated in this prospectus supplement
and the prospectus. You must not rely on unauthorized information. This
prospectus supplement and the prospectus are not an offer to sell these
securities or our solicitation of your offer to buy these securities in any
jurisdiction where that would not be permitted or legal. Neither the delivery of
this prospectus supplement or the prospectus nor any sales made hereunder after
the date of this prospectus supplement and the prospectus shall create an
implication that the information contained herein or the affairs of the company
have not changed since the date thereof.
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Nevada Revised Statutes and certain provisions of the Company's Bylaws
under certain circumstances provide for indemnification of the Company's
Officers, Directors and controlling persons against liabilities that they may
incur in such capacities. A summary of the circumstances in which such
indemnification is provided for is contained herein, but this description is
qualified in its entirety by reference to the Company's Bylaws and to the
statutory provisions.
In general, any Officer, Director, employee or agent may be indemnified
against expenses, fines, settlements or judgments arising in connection with a
legal proceeding to which such person is a party, if that person's actions were
in good faith, were believed to be in the Company's best interest, and were not
unlawful. Unless such person is successful upon the merits in such an action,
indemnification may be awarded only after a determination by independent
decision of the Board of Directors, by legal counsel, or by a vote of the
stockholders, that the applicable standard of conduct was met by the person to
be indemnified.
The circumstances under which indemnification is granted in connection with
an action brought on behalf of the Company is generally the same as those set
forth above; however, with respect to such actions, indemnification is granted
only with respect to expenses actually incurred in connection with the defense
or settlement of the action. In such actions, the person to be indemnified must
have acted in good faith and in a manner believed to have been in the Company's
best interest, and must not have been adjudged liable for negligence or
misconduct.
Indemnification may also be granted pursuant to the terms of agreements that
may be entered in the future or pursuant to a vote of stockholders or Directors.
The statutory provision cited above also grants the power to the Company to
purchase and maintain insurance which protects its Officers and Directors
against any liabilities incurred in connection with their service in such a
position, and such a policy may be obtained by the Company.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses of the offering are estimated to be as follows:
<TABLE>
<S> <C>
SEC Registration Fee............................................... $ 2,163
Printing Expenses.................................................. 9,500
Legal Fees and Expenses............................................ 25,000
Accounting Fees and Expenses....................................... 2,500
Transfer Agent Fees................................................ 500
Miscellaneous...................................................... 1,337
---------
TOTAL............................................................ $ 41,000
---------
---------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Set forth below is certain information concerning all sales of securities by
the Company during the past three years that were not registered under the
Securities Act.
(a) The Company issued 995,000 shares in January 1998 pursuant to a
share-for-share exchange with the stockholders of International Metal
Protection, Inc. in a transaction conducted solely to reincorporate the Company
in a new jurisdiction. This transaction was exempt from the registration
requirements of the
II-1
<PAGE>
Securities Act pursuant to Section 4(2) of the Securities Act. There was no
change in ownership and the stockholders made no significant investment
decision.
(b) The Company issued 500,000 shares in February 1998 for the purchase
price of $.10 per share pursuant to a private placement exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) of the
Securities Act. At that time, the Company had only a business plan and no
assets. There were eleven offerees in this offering, all of whom made purchases
and all of whom the Company believes were sophisticated investors. The Company
fully apprised each of the offerees of the Company's start-up nature and gave
them full details regarding the Company's business plan. There was no general
solicitation or advertising used in connection with the offer to sell or sale of
these securities. The purchasers were advised that the securities, once
purchased, could not be resold or otherwise transferred without subsequent
registration under the Securities Act. Each purchaser represented to the Company
that they were purchasing the securities for their own account for investment
purposes only.
(c) The Company issued 4,530,000 shares in February 1998 for a purchase
price of $.22 per share pursuant to a Regulation D, Rule 504 offering. Offerees
were provided with a private placement memorandum containing detailed
information about the Company and its plan. The Company required each
prospective investor to represent in writing that (i) they had adequate means of
providing for their current needs and personal contingencies and had no need to
sell the securities in the foreseeable future and (ii) they, either alone or
with their duly designated purchaser representative, had such knowledge and
experience in business and financial matters that they were capable of
evaluating the risks and merits of an investment in the securities.
(d) The Company issued 5,000,000 shares in April 1998 for a purchase price
of $1.25 per share pursuant to a Regulation D, Rule 506 offering. The Company
accepted subscriptions only from accredited investors. Offerees were provided
with a private placement memorandum containing detailed information about the
Company and its plan. The Company required each prospective investor to
represent in writing that (i) they had received and reviewed the private
placement memorandum and understood the risks of an investment in the Company;
(ii) they had the experience and knowledge with respect to similar investments
which enabled them to evaluate the merits and risks of such investment, or they
had obtained and relied upon an experienced independent adviser with respect to
such evaluation; (iii) they had adequate means to bear the economic risk of such
investment, including the loss of the entire investment; (iv) they had adequate
means to provide for their current needs and possible personal contingencies;
(v) they had no need for liquidity of their investment in the Company; (vi) they
understood that the securities had not been registered under the Securities Act
and may have not been registered or qualified under applicable state securities
laws and, therefore, that they could not sell or transfer the securities unless
the securities were subsequently registered or an exemption therefrom was
available to them; (vii) they were acquiring the securities for investment
solely for their own account and without any intention of reselling or
distributing them; and (viii) they understood that the securities would bear a
restrictive legend prohibiting transfers except in compliance with the
provisions of the securities, the subscription agreement executed by the
purchaser and the applicable federal and state securities laws.
(e) The Company issued 128,000 share purchase warrants with an exercise
price of $1.25 per share, exercisable after April 15, 1999, to Yorkton in April
1998 pursuant to a private placement exemption from the registration
requirements of the Securities Act under Section 4(2) of the Securities Act.
These warrants were issued pursuant to a negotiated transaction between the
Company and Yorkton, whereby Yorkton agreed to provide corporate finance
services to the Company for one year in return for these warrants.
(f) The Company issued 2,000,000 shares in June 1998 to RIS pursuant to a
Regulation D, Rule 506 offering for a purchase price of $1.75 per share. The
Company accepted subscriptions only from accredited investors. Offerees were
provided with a private placement memorandum containing detailed information
about the Company and its plan. The Company required each prospective investor
to represent in writing that (i) they had received and reviewed the private
placement memorandum and understood the risks of an
II-2
<PAGE>
investment in the Company; (ii) they had the experience and knowledge with
respect to similar investments which enabled them to evaluate the merits and
risks of such investment, or they had obtained and relied upon an experienced
independent adviser with respect to such evaluation; (iii) they had adequate
means to bear the economic risk of such investment, including the loss of the
entire investment; (iv) they had adequate means to provide for their current
needs and possible personal contingencies; (v) they had no need for liquidity of
their investment in the Company; (vi) they understood that the securities had
not been registered under the Securities Act and may have not been registered or
qualified under applicable state securities laws and, therefore, that they could
not sell or transfer the securities unless the securities were subsequently
registered or an exemption therefrom was available to them; (vii) they were
acquiring the securities for investment solely for their own account and without
any intention of reselling or distributing them; and (viii) they understood that
the securities would bear a restrictive legend prohibiting transfers except in
compliance with the provisions of the securities, the subscription agreement
executed by the purchaser and the applicable federal and state securities laws.
(g) The Company issued 796,429 units in June, July and September 1998
pursuant to a Regulation D, Rule 506 offering by three members of the management
team of the Company, for a purchase price of $1.75 per unit, each unit
consisting of one share and a one share purchase warrant for every two shares
purchased. All units were purchased by three members of the management team of
the Company. Offerees were provided with a private placement memorandum
containing detailed information about the Company and its plan. The Company
required each prospective investor to represent in writing that (i) they had
received and reviewed the private placement memorandum and understood the risks
of an investment in the Company; (ii) they had the experience and knowledge with
respect to similar investments which enabled them to evaluate the merits and
risks of such investment, or they had obtained and relied upon an experienced
independent adviser with respect to such evaluation; (iii) they had adequate
means to bear the economic risk of such investment, including the loss of the
entire investment; (iv) they had adequate means to provide for their current
needs and possible personal contingencies; (v) they had no need for liquidity of
their investment in the Company; (vi) they understood that the securities had
not been registered under the Securities Act and may have not been registered or
qualified under applicable state securities laws and, therefore, that they could
not sell or transfer the securities unless the securities were subsequently
registered or an exemption therefrom was available to them; (vii) they were
acquiring the securities for investment solely for their own account and without
any intention of reselling or distributing them; and (viii) they understood that
the securities would bear a restrictive legend prohibiting transfers except in
compliance with the provisions of the securities, the subscription agreement
executed by the purchaser and the applicable federal and state securities laws.
(h) The Company issued 1,215,000 units on September 4, 1998 pursuant to a
Regulation D, Rule 506 offering for a purchase price of $3.25 per unit, each
unit consisting of one share and a one share purchase warrant for every two
shares purchased. The Company accepted subscriptions only from accredited
investors. Offerees were provided with a private placement memorandum containing
detailed information about the Company and its plan. The Company required each
prospective investor to represent in writing that (i) they had received and
reviewed the private placement memorandum and understood the risks of an
investment in the Company; (ii) they had the experience and knowledge with
respect to similar investments which enabled them to evaluate the merits and
risks of such investment, or they had obtained and relied upon an experienced
independent adviser with respect to such evaluation; (iii) they had adequate
means to bear the economic risk of such investment, including the loss of the
entire investment; (iv) they had adequate means to provide for their current
needs and possible personal contingencies; (v) they had no need for liquidity of
their investment in the Company; (vi) they understood that the securities had
not been registered under the Securities Act and may have not been registered or
qualified under applicable state securities laws and, therefore, that they could
not sell or transfer the securities unless the securities were subsequently
registered or an exemption therefrom was available to them; (vii) they were
acquiring the securities for investment solely for their own account and without
any intention of reselling or distributing them; and (viii) they understood that
the securities would bear a restrictive legend prohibiting transfers
II-3
<PAGE>
except in compliance with the provisions of the securities, the subscription
agreement executed by the purchaser and the applicable federal and state
securities laws. Yorkton served as placement agent for this private placement.
As compensation, Yorkton received share purchase warrants to purchase 75,200
shares at an exercise price of $3.58.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE
- ------ --------------------------------------------------------------------------
<C> <S>
3.1 Articles of Incorporation (filed as Exhibit 3.1 to the Company's Form
10-SB, File No. 00-24881, filed November 24, 1998 and included herein by
reference)
3.2 Bylaws (filed as Exhibit 3.2 to the Company's Form 10-SB, File No.
00-24881, filed November 24, 1998 and included herein by reference)
4.1 Form of Warrant
5.1 Opinion of Gibson, Haglund & Johnson
10.1 Pennaco Energy, Inc. 1998 Stock Option and Incentive Plan (filed as
Exhibit 10.5 to the Company's Form 10-SB, File No. 00-24881, filed
November 24, 1998 and included herein by reference)
10.2 Form of Pennaco Energy, Inc. Incentive Stock Option Agreement (filed as
Exhibit 10.6 to the Company's Form 10-SB, File No. 00-24881, filed
November 24, 1998 and included herein by reference)
10.3 Form of Pennaco Energy, Inc. Non-Statutory Stock Option Agreement (filed
as Exhibit 10.7 to the Company's Form 10-SB, File No. 00-24881, filed
November 24, 1998 and included herein by reference)
10.4 Employment Agreement dated June 10, 1998 between Pennaco Energy, Inc. and
Paul M. Rady (filed as Exhibit 10.8 to the Company's Form 10-SB, File
No. 00-24881, filed November 24, 1998 and included herein by reference)
10.5 Employment Agreement dated July 2, 1998 between Pennaco Energy, Inc. and
Glen C. Warren, Jr. (filed as Exhibit 10.9 to the Company's Form 10-SB,
File No. 00-24881, filed November 24, 1998 and included herein by
reference)
10.6 Purchase and Sale Agreement between Pennaco Energy, Inc., as Seller and
CMS Oil and Gas Company, as Buyer, dated October 23, 1998 (filed as
Exhibit 10.12 to the Company's Form 10-SB, File No. 00-24881, filed
November 24, 1998 and included herein by reference)
10.7 Secured Promissory Note dated October 23, 1998 from Pennaco Energy, Inc.
to CMS Oil and Gas Company (filed as Exhibit 10.13 to the Company's Form
10-SB, File No. 00-24881, filed November 24, 1998 and included herein by
reference)
10.8 Agreement Regarding the Drilling of Coal Bed Methane Wells
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Gibson, Haglund & Johnson (included in Exhibit 5.1)
24.1 Power of Attorney (included in signature page on page II-6)
27 Financial Data Schedule
</TABLE>
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant, 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 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
II-4
<PAGE>
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 Act and will be governed by the final
adjudication of such issue.
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; (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 additional or changed material
information on the plan of distribution.
(2) that, for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(3) that, for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
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 thereto.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL
THE REQUIREMENTS FOR FILING ON FORM SB-2 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, TO THE CITY OF DENVER, STATE OF COLORADO, ON THE 2ND DAY OF
DECEMBER, 1998.
<TABLE>
<S> <C> <C>
PENNACO ENERGY, INC.
By: /s/ PAUL M. RADY
-----------------------------------------
Paul M. Rady
CHIEF EXECUTIVE OFFICER,
PRESIDENT, AND DIRECTOR
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below appoints Paul M. Rady and Glen C.
Warren or either of them, either of whom may act without the joinder of the
other, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, state and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement and any Registration Statement
(including any amendment thereto) for this offering that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and
to file the same, with all exhibits thereto, and all other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as he might or would do in person, hereby ratifying and
confirming al that said attorney-in-fact and agents or any of them or their or
his substitute and substitutes, may lawfully do or cause to be done by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND THE DATES INDICATED.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
- ------------------------------ Chairman of the Board of , 1998
Jeffrey L. Taylor Directors
/s/ PAUL M. RADY
- ------------------------------ President, Chief Executive December 2, 1998
Paul M. Rady Officer, and Director
Chief Financial Officer,
/s/ GLEN C. WARREN, JR. Executive Vice
- ------------------------------ President, and Director December 2, 1998
Glen C. Warren, Jr. (Principal Financial and
Accounting Officer)
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ MARK A. ERICKSON
- ------------------------------ Hydrocarbon Marketing December 2, 1998
Mark A. Erickson Consultant and Director
- ------------------------------ Vice President, Legal, , 1998
Gregory V. Gibson Secretary, and Director
/s/ DAVID W. LANZA
- ------------------------------ Director December 2, 1998
David W. Lanza
</TABLE>
II-7
<PAGE>
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR ANY OTHER SECURITIES LAWS, AND
MAY NOT BE OFFERED, SOLD OR TRANSFERRED IN THE UNITED STATES UNLESS REGISTERED
UNDER THE ACT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT IS
AVAILABLE. - THE WARRANTS REPRESENTED BY THIS CERTIFICATE MAY NOT BE EXERCISED
BY OR ON BEHALF OF ANY U.S. PERSON UNLESS SUCH SECURITIES, AND THE SECURITIES
ISSUABLE UPON EXERCISE OF THE COMMON STOCK PURCHASE WARRANTS ARE REGISTERED
UNDER THE ACT OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
WARRANTS TO PURCHASE SHARES OF No. _______
PENNACO ENERGY, INC.
Initial Issuance on _______ _______, 1998
Void after 5:00 p.m. Nevada Time, (six months from issuance)
THIS CERTIFIES THAT, for value received, ___________, or registered assigns
(the "Holder") is the registered holder of Warrants (the "Warrants") to
purchase from Pennaco Energy, Inc., a Nevada corporation (the "Company"),
at any time after the date of initial issuance and from time to time until
5:00 p.m., Nevada time, ________ (the "Expiration Date"), subject to the
conditions as set forth herein, at the initial exercise price of five
dollars ($5.00) (the "Exercise Price"), one (1) share offully paid and
non-assessable $.001 par value common stock of the Company (the "Shares"),
up to an aggregate of (a number equal to 50% of the number of Shares
purchased in the Offering) upon the terms and subject to the conditions set
forth herein upon surrender of this Certificate and payment of the Exercise
Price at the principal office of the Company. The number of Shares
purchasable upon exercise of the Warrants and the Exercise Price per share
shall be subject to adjustment from time to time as set forth herein. The
exercise of the Warrants is subject to compliance with the conditions set
forth herein under the heading "Compliance with U.S. Securities Laws."
1. EXERCISE OF WARRANTS.
(a) The exercise of any Warrants represented by this Certificate
is subject to the conditions set forth below in "Compliance with U.S. Securities
Laws."
(b) Subject to compliance with the conditions set forth below in
"Compliance with U.S. Securities Laws,"the Holder shall have the right to
purchase from the. Company the number of Shares which the Holder may at the
time be entitled to purchase pursuant hereto, upon surrender to the Company at
its principal office, of this Certificate together with the form of election to
purchase attached hereto duly completed and signed, and upon payment to the
Company of the aggregate Exercise Pricefor the number of Shares in respect of
which Warrants are then exercised
(c) No Warrant may be exercised after 5:00 p.m., Nevada time, on
the Expiration Date, at which time all Warrants evidenced hereby, unless
exercised prior thereto, shall thereafter be void.
(d) Payment of the aggregate Exercise Price for the number of
Shares in respect of which Warrants are exercised shall be made in cash, or by
certified check or bank draft payable to the order of the Company, or any
combination of theforegoing,
(e) The Warrants represented by this Certificate are exercisable
at the option of the Holder, in whole or in part (but not as to fractional
Shares). Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the Holder a new Certificate
of like tenor representing such number of unexercised Warrants.
<PAGE>
(f) Upon surrender of this Certificate and payment of the
Exercise Price as aforesaid, the Company shall cause to be delivered with all
reasonable dispatch to or upon the written order of the Holder and in such name
or names as the Holder may designate, a certificate or certificates for the
number of whole Shares of Common Stock purchased upon the exercise of the
Warrants.
2. ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
and shall not be required to issue scrip or pay cash in lieu of fractional
interests, it being the intent of the parties that all fractional interests
shall be eliminated by rounding any fraction down to the nearest whole number of
shares of Common Stock.
3. PAYMENT OF TAXES. The Company will pay all documentary stamp
taxes, if any, attributable to the issuance and delivery of the Shares upon the
exercise of the Warrants; PROVIDED, HOWEVER, that the Company shall not be
required to pay any tax or taxes which may be payable in respect of any transfer
involved in the issuance or delivery of any Warrant or the delivery of any
Shares in any name other than that of the Holder, which transfer taxes shall be
paid by the Holder.
4. COMPLIANCE WITH U.S. SECURITIES LAWS. The Warrants and the
Shares issuable upon the exercise of the Warrants have not been registered under
the United States Securities Act of 1933, as amended (the "Act"), and may not be
offered, sold, or transferred unless registered under the Act or an exemption
from such registration is available. All Shares issued by the Company will bear
the following legend:
"The shares represented by this certificate have been acquiredfor investment and
have not been registered under the Securities Act of 1933. The shares may not
be sold or transferred in the absence of such registration or an exemption
therefrom under said Act."
5. TRANSFER OF WARRANTS. The Warrants shall be transferable only on
the books of the Company maintained at the Company's principal office upon
delivery of this Certificate with the form of assignment attached hereto duly
completed and signed by the Holder or by its duly authorized attorney or
representative, or accompanied by proper evidence of succession, assignment or
authority to transfer. The Company may, in its discretion, require, as a
condition to any transfer of Warrants, a signature guarantee by a commercial
bank or trust company, by a broker or dealer which is a member of the National
Association of Securities Dealers, Inc., or by a member of a national securities
exchange, The Toronto Stock Exchange, The Securities and Futures Authority
Limited in the United Kingdom, or The International Stock Exchange in London,
England. Upon any registration of transfer, the Company shall deliver a new
certificate or certificates of like tenor and evidencing in the aggregate a like
number of Warrants to the person entitled thereto in exchange for this
Certificate, subject to the limitations provided herein, without any charge
except for any tax, or other governmental charge imposed in connection
therewith.
6. EXCHANGE AND RGPLACEMENT OF WARRANT CERTIFICATES, LOSS OF OR
MUTILATED WARRANT CERTIFICATES.
(a) This Certificate is exchangeable without expense, upon the
surrender hereof by the Holder at the principal office of the Company, for a new
Certificate of like tenor and date representing in the aggregate the right to
purchase the same number of Shares in such denominations as shall be designated
by the Holder at the time of such surrender.
(b) Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any
Certificate and, in case of such loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Certificate, if mutilated, the Company will make and deliver a new
Certificate of like tenor, in lieu thereof.
Page 2
<PAGE>
7. EXERCISE PRICE, ADIUSTMENT OF EXERCISE PRICE AND NUMBER OF
SHARES.
(a) EXERCISE PRICE. The Warrants initially are exercisable at
the Exercise Price per Share, subject to adjustment from time to time as
provided herein.
(b) SUBDIVISION, COMBINATION, OR STOCK DIVIDEND. In the event
that the Company shall at any time subdivide or combine the outstanding shares
of Common Stock or increase the Shares of Common Stock outstanding by way of
dividend, the Exercise Price shall forthwith be proportionately decreased in the
case of subdivision or stock dividend, or increased in the case of combination.
(c) ADIUSTMENT IN NUMBER OF SHARES. Upon each adjustment of the
Exercise Price pursuant to the provisions of this paragraph 7, the number of
Shares issuable upon the exercise of each Warrant shall be adjusted to the
nearest full Share by multiplying a number equal to the Exercise Price in effect
immediately prior to such adjustment by the number of Shares issuable upon
exercise of the Warrants immediately prior to such adjustment and dividing the
product so obtained by the adjusted Exercise Price.
(d) RECLASSIFICATION, CONSOLIDATION, MERGER, ETC. In the event
of any reclassification or change of the outstanding shares of Common Stock
(other than a change in par value to no par value, or from no par value to par
value, or as a result of a subdivision or combination), or in the event of any
consolidation of the Company with, or merger of the Company into, another
corporation (other than a consolidation or merger in which the Company is the
surviving corporation and which does not result in any reclassification or
change of the outstanding shares of Common Stock, except a change as a result of
a subdivision or combination of such shares or a change in par value, as
aforesaid), or in the case of a sale or conveyance to another corporation of the
property of the Company as an entirety or substantially as an entirety, the
Holder shall thereafter have the right to convert into and to purchase the kind
and respective number of shares of stock and other securities and property
receivable upon such reclassification, change, consolidation, merger, sale or
conveyance as if the Holder were the owner of the shares of Common Stock
underlying the Warrants immediately prior to any such events at a price equal to
the product of (x) the number of shares issuable upon exercise of the Warrants
and (y) the Equivalent per Share Exercise Price in effect immediately prior to
the record date for such reclassification, change, consolidation, merger, sale
or conveyance as if such Holder had exercised the Warrants.
8. RESERVATION OF SECURITIES.
(a) The Company covenants and agrees that at all times during
the period the Warrants are exercisable, the Company shall reserve and keep
available, free from preemptive rights, out of its authorized and unissued
shares of Common Stock or out of its authorized and issued shares of Common
Stock held in its treasury, solely for the purpose of issuance upon exercise of
the Warrants, such number of shares of Common Stock as shall be issuable upon
the exercise of the Warrants.
(b) The Company covenants and agrees that, upon exercise of the
Warrants and payment of the Exercise Price therefor, all shares of Common Stock
issuable upon such exercise shall be duly and validly issued, fully paid and
non-assessable, and the Holder shall receive good and valid record title to such
shares of Common Stock, free and clear from all taxes with respect to the issue
or sale thereof and any claim, lien, security interest, mortgage, pledge, charge
or other encumbrance of any nature whatsoever, except as such as may have been
created by the Holder, and such shares of Common Stock shall not be subject to
the preemptive rights of any stockholder.
9. SURVIVAL. All agreements, covenants, representations and
warranties herein shall survive the execution and delivery of this Certificate
and any investigation at any time made by or on behalf of any party hereto and
the exercise, sale and purchase of the Warrants and the Common Stock (and any
other securities or properties) issuable on exercise hereof.
Page 3
<PAGE>
10. REGISTERED HOLDER. The Company may deem and treat the registered
Holder(s) hereof as the absolute owner(s) of this Certificate and the Warrants
represented hereby (notwithstanding any notation of ownership or other writing
hereon made by anyone), for the purpose of any exercise of the Warrants, and of
any distribution to the Holder(s) hereof, and for all other purposes, and the
Company shall not be affected by any notice to the contrary.
11. NOTICES. All notices and other communications from the Company
to the Holder of the Warrants represented by this Certificate shall be mailed by
first class registered or certified airmail, postage prepaid, to the last
address of such Holder as it shall appear on the books of the Company maintained
at the Company's principal office upon or to such other address as the Holder
may have specified to the Company in writing.
12. HEADINGS. The headings contained herein are for convenience of
reference only and are not part of this Warrant.
13. GOVERNING LAW. This Warrant shall be deemed to be a contract made
under the laws of the State of Nevada and for all purposes shall be construed in
accordance with the laws of said state.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its duly authorized officers.
Dated: ______________
PENNACO ENERGY, INC.
By:
-----------------------------
Paul M. Rady, President
Attest:
- ---------------------------------
Gregory V. Gibson, Secretary
Page 4
<PAGE>
PENNACO ENERGY, INC
FORM OF ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by this Warrant Certificatefor, and to purchase ___________Shares
hereunder, and herewith tenders in payment for such Shares cash or a certified
check or bank draft payable to the order of PENNACO ENERGY, INC in the amount of
$___________ , all in accordance with the terms hereof. The undersigned
requests that a certificatefor such Shares be registered in the name of and
delivered to:
- --------------------------------------------------------------------------------
(Please Print Name, Address and Social Security Number
or other Identifying Number)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
and, if said number of Shares shall not be all the Shares purchasable hereunder,
that a new Warrant Certificate for the balance remaining of the Shares
purchasable hereunder be registered in the name of the undersigned Warrant
holder or his Assignee as below indicated and delivered to the address stated
below.
DATED:
Name of Warrant holder:
-------------------------------------
(Please Print)
Address:
----------------------------------------------------
- ------------------------------------------------------------
Signature:
--------------------------------------------------
Note. The above signature must correspond in all respects with the name of the
holder as specified on the face of this Warrant Certificate, without alteration
or enlargement or change whatever, unless the Warrants represented by this
Warrant Certificate have been assigned
IN CONNECTIO WITH THIS ELECTION TO PURCHASE, THE WARRANT HOLDER MUST DELIVER TO
THE COMPANY A WRITTEN OPINION OF UNITED STATES COUNSEL, IN FORM AND SUBSTANCE
SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT THE WARRANTS AND THE SHARES OF
COMMON STOCK ISSUABLE UPON EXERCISE THEREOF HAVE BEEN REGISTERED UNDER THE ACT
OR ARE EXEMPT FROM REGISTRATION UNDER THE ACT.
Page 5
<PAGE>
PENNACO ENERGY, INC
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto:
- --------------------------------------------------------------------------------
(Please Print Name, Address and Social Security Number
or Other Identifying Number of Transferee)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ___________, Attorney, to
transfer the within Warrant Certificate on the books of the Company, with full
power of substitution in the premises.
DATED:
Signature of registered holder:
-------------------------------------------------
Note: The above signature must correspond in all respects with the name of
the holder as specified on the face of this Warrant Certificate,
without alteration or enlargement or change whatever. The above
signature of the registered holder must be guaranteed by a commercial
bank or trust company, by a broker or dealer which is a member of the
National Association of Securities Dealers, Inc. or by a member of a
national securities exchange, The Toronto Stock Exchange, The
Securities and Futures Authority Limited in the United Kingdom or The
International Stock Exchange in London, England. Notarized or
witnessed signatures are not acceptable as guaranteed signatures,
Signature Guaranteed:
- ------------------------------
Authorized Officer
- ------------------------------
Name of Institution
Page 6
<PAGE>
GIBSON, HAGLUND & JOHNSON
LAW OFFICES
JAMBOREE CENTER
2 PARK PLAZA, SUITE 450
IRVINE, CALIFORNIA 92814
TELEPHONE (949) 752-1100
FACSIMILE (949) 752-1144
December 2, 1998
Pennaco Energy, Inc.
1050 17th Street, Suite 700
Denver, Colorado 80265
Gentlemen:
We have acted as counsel to Pennaco Energy, Inc., a Nevada corporation
(the "Company"), in connection with the preparation and filing with the
Securities and Exchange Commission under the Securities Act of 1933, as
amended, of a Registration Statement on Form SB-2 (the "Registration
Statement") relating to the offering by certain holders thereof of 607,500
shares of Common Stock, $.001 par value issuable on exercise of Common Stock
Purchase Warrants (the "Warrant Stock") and 1,215,000 shares of Common Stock,
$.001 par value (the "Stock").
In arriving at the opinions expressed below, we have examined originals,
or copies certified or otherwise identified to our satisfaction, of the
Articles of Incorporation of the Company, the Bylaws of the Company and any
such other documents, records, certificates, and other instruments as in our
judgment are necessary or appropriate for purposes of this opinion.
Based on the foregoing, we are of the opinion that: (i) the shares of
Warrant Stock, when sold, issued and paid for in accordance with the terms
of the Warrants, will be legally issued, fully paid and non-assessable; and
(ii) the shares of Stock are validly issued, fully paid, and non-assessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference of our firm in the prospectus
forming a part of such Registration Statement.
Very truly yours,
GIBSON, HAGLUND & JOHNSON
GIBSON, HAGLUND & JOHNSON
<PAGE>
AGREEMENT REGARDING THE
DRILLING OF COALBED METHANE WELLS
This Agreement Regarding the Drilling of Coalbed Methane Wells
("Agreement") is effective the 1st day of October, 1998 ("Effective Date") and
is by and between CBM Drilling LLC, a Wyoming limited liability company ("CBM")
whose address is P.O. Box 353, Evansville, WY 82636 and Pennaco Energy, Inc
("Pennaco") whose address is 1050 17th Street, Suite 700, Denver, Colorado
80265.
RECITALS
A. Pennaco owns and operates certain undeveloped oil and gas interests
located in the Powder River Basin in Montana and Wyoming and is interested in
developing those interests by drilling coalbed methane wells into the Fort Union
Formation.
B. CBM has the equipment and expertise to drill coalbed methane wells to
Pennaco's. specifications (with such CBM drilled wells being the "Wells").
C. To facilitate CBM's drilling of such Wells for Pennaco, Pennaco has
heretofore paid CBM $250,000 as a prepayment for such drilling and agrees to pay
CBM an additional prepayment of $110,000 upon the execution of this Agreement
(collectively, the "Prepayment" as more fully described in Section 1 below).
D. To further facilitate the drilling of such Wells for Pennaco, Pennaco
has agreed to loan CBM $90,000 (the "Loan"), to be secured with a first and
prior security interest in all of CBM's personal property and equipment pursuant
to a "Security Agreement."
E. To memorialize their agreement with respect to the drilling of the
Wells, the Prepayment, the Loan and Security Agreement, the parties wish to
enter into this Agreement.
<PAGE>
AGREEMENT
NOW THERETOFORE, for and in consideration of the foregoing, $100 and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parties agree as follows:
1. PREPAYMENT FOR DRILLING. Prior to the execution of this Agreement,
Pennaco has paid CBM the sum of $250,000 as a prepayment for the drilling of
certain of the Wells. Contemporaneously with the execution of this Agreement,
Pennaco shall pay CBM the additional sum of $110,000 as a prepayment for the
drilling of Wells as hereinafter provided. The $250,000 prepayment and the
$110,000 prepayment are herein collectively referred to as the "Prepayment." The
Prepayment will be credited to every third Well drilled by CBM, i.e. for every
three Wells CBM drills, CBM agrees to invoice Pennaco for two of such Wells upon
the completion of each Well and apply a portion of the Prepayment to pay the
invoice for the third Well. Pennaco agrees to pay the CBM invoices within then
(10) days of receipt. Upon expiration or termination of this Agreement, any
unused portion of the Prepayment shall be refunded, without interest, to Pennaco
within five (5) days after such termination. Such refund obligation shall be
secured by the Security Agreement hereinafter described.
2. DRILLING OF THE WELLS.
a. CBM will not be obligated to use more than three (3) rigs to
drill the Wells unless Pennaco, with CBM's consent, elects to make an additional
$90,000 prepayment for each additional rig which Pennaco requests CBM to provide
for the drilling of the Wells. Such $90,000
-2-
<PAGE>
prepayment will enable CBM to purchase a rig and such rig shall automatically
become subject to the Security Agreement hereinafter described.
b. It is the intent of the parties that as of the termination of
this Agreement (except for breach), CBM shall have been offered the right to
drill 75% of the coalbed methane wells drilled on leases operated by Pennaco in
Campbell, Sheridan and Johnson Counties, Wyoming, and in Big Horn, Rosebud and
Powder River Counties, Montana. This right shall terminate upon the earlier of
(i) when CBM has been offered 1,000 wells under the terms of this Agreement to
drill on acreage operated by Pennaco or (ii) upon termination of this Agreement
as hereinafter provided. However, it is recognized that at any particular time
during the term of this Agreement, CBM may be drilling more or less than 75% of
the wells then being drilled. In the event Pennaco offers a well to CBM for
drilling while CBM is using fewer than 3 rigs on Pennaco wells (or the maximum
number of rigs that CBM is required to provide pursuant to subparagraph 2.a.
above if Pennaco has made additional prepayments) and CBM is unable to drill
such well within the drilling schedule for such well or elects not to drill such
well, such well shall count toward the 1,000 well maximum. Only those wells
offered to and undrilled by CBM while CBM has fewer than 3 rigs (or the maximum
number of rigs that CBM is required to provide pursuant to subparagraph 2. a.
above) will be included in the 1,000 well maximum. CBM also will have the right
to sub-contract with one or more third-party drillers (the "Driller(s)") to meet
its drilling obligations under this Agreement. Pennaco will have the right to
accept or reject any Driller proposed for use by CBM under this Agreement. Such
Drillers must agree in writing with Pennaco to look solely to CBM for payment
and to waive any rights to file liens against the Wells drilled under this
Agreement. Notwithstanding
-3-
<PAGE>
the foregoing, nothing in this Agreement is intended to obligate Pennaco to
drill any minimum number of wells during the term hereof.
b. In the event of a slow-down in or cessation of drilling
activities on Pennaco-operated wells, Pennaco shall release third-party drilling
rigs first so that CBM is the last to be released.
c. Wells shall be drilled by CBM or third-party Drillers pursuant to
the Drilling Contract (including Exhibit A thereto) attached hereto as EXHIBIT
1. Upon Pennaco's payment to CBM for work performed by third-party Drillers
under the Drilling Contract, CBM shall indemnify and hold Pennaco harmless from
any claims for payments by such Drillers. In the event of any claims for
payment by such Drillers, Pennaco shall have the right, but not the obligation,
in addition to all of its other remedies at law or in equity, to suspend
payments hereunder to CBM until such claims have been resolved.
e. All wells shall be drilled in a good and workmanlike manner to
industry standards and to the specifications provided by Pennaco at any time and
from time to time. The Parties shall work diligently together in order to
attempt to resolve operational problems and performance problems as they arise.
f. Pennaco shall enter into a separate agreement with Powder River
Cementers giving Powder River the same rights as to the cementing of wells as
CBM has for drilling hereunder', provided, however, that the rates for such
cementing work must be competitive; provided, however, that such agreement shall
not require any prepayments or obligation to loan.
g. To facilitate the timely drilling of the Wells, Pennaco agrees to
forward to CBM reasonable advance notice of Pennaco's proposed drilling
schedule. The parties agree to work
-4-
<PAGE>
together in good faith to schedule and meet such schedule for the drilling of
the Wells, as the same may be amended at any time and from time to time by
Pennaco.
h. Pennaco, at its cost and expense, agrees to obtain and comply
with all permits necessary to drill the Wells. Pennaco will be responsible for
the negotiating of and payment of surface owner agreements and will provide
copies of same to CBM.
3 . LOAN/PROMISSORY NOTE. As soon as a Note and Security Agreement have
been mutually agreed to by Pennaco and CBM, Pennaco agrees to lend CBM $90,000
to be evidenced by a Term Promissory Note (the "Note") which shall heave a term
of 3 years and shall provide that the principal and interest, accrued on a
semi-annual basis at the rate of ten percent (10%) per annum for the first two
years and thirteen percent (13%) per annum for the third year, shall be paid at
maturity. There shall be no prepayment penalty.
4. ADDITIONAL LOANS. Similarly, Pennaco agrees, if requested by CBM on
or before June 30, 1999, to loan CBM, promptly after such request, an additional
$150,000.00, in $75,000.00 increments, for a three year term from the date of
each loan, with principal and accrued interest, accrued on a semi-annual basis
at the rate of 2.25% over the Prime Rate of Chase Manhattan Bank on the date of
each loan for the first two years and 5.25% over such Prime Rate on the date of
each loan for the third year, to be paid on the maturity date or earlier with no
prepayment penalty. Such additional loans shall be evidenced by Secured
Promissory Notes in the same form as the Note negotiated in connection with
paragraph 4 above and shall be secured by the Security Agreement.
5. SECURITY AGREEMENT. To secure any refund obligation under this
Agreement and CBM's obligations under the Note and any additional loans pursuant
to paragraph 4 above, CBM agrees to grant Pennaco a first and prior security
interest in all of CBM's personal property and
-5-
<PAGE>
equipment including, but not limited to, the personal property and equipment
described on EXHIBIT 2 (the "Collateral"). To grant the security interest to
Pennaco, CBM, as debtor, agrees to execute a Security Agreement and such other
documentation as reasonably deemed necessary in Pennaco's discretion to perfect
Pennaco's security interest in the Collateral, including without limitation,
local UCC filings in the appropriate counties and state central recording
offices.
6. INDEPENDENT CONTRACTOR STATUS. The parties intend that CBM provide
the services under this Agreement as an independent contractor. This Agreement
is not intended to create, and shall not create a joint venture, partnership or
any other type of business association.
7. TERM. This Agreement shall terminate upon the earlier of (i)
completion of the drilling of the last well by CBM which constitutes the 1,000th
well offered by Pennaco to CBM for drilling, or (ii) five years after the
Effective Date hereof. If the 1,000 well number has not been reached by
December 31, 2000, either Party may request renegotiation of the terms of the
Drilling Contract based on prevailing market conditions at the time. If the
parties are unable to agree on renegotiation of such terms within sixty (60)
days after a request for renegotiation is made, either Party may terminate this
Agreement on thirty (30) days notice to the other Party. Notwithstanding the
foregoing, this Agreement may be terminated earlier by Pennaco in the event of a
breach of this Agreement by CBM which is not cured within ten (10) days after
notice by Pennaco of such breach. Upon expiration of the term of this Agreement
(except for termination due to the breach of this Agreement by CBM), the Parties
shall meet to attempt to negotiate a new Agreement for services on other wells
to be drilled by Pennaco.
-6-
<PAGE>
8. MISCELLANEOUS.
a. GOVERNING LAW. The parties agree that this Agreement is governed
by and shall be construed pursuant to the laws of the State of Colorado.
b. NOTICES. All notices and communications required or permitted
under this Agreement shall be in writing and addressed to the parties at the
addresses set forth above. Any communication or delivery hereunder shall be
deemed to have been duly made when received by the receiving party and may be
personally delivered, sent by certified mail, return receipt requested,
overnight courier or facsimile transmission. Any party may, by written notice
so delivered to the other parties, change the address or individual to which
delivery shall thereafter be made.
c. AMENDMENTS. This Agreement may not be amended except by an
instrument in writing signed by the party to be charged with such amendment and
delivered by such party to the party claiming the benefit of such amendment.
d. NO WAIVER. A waiver by either Party of any breach of this
Agreement shall not be deemed to be a waiver of any subsequent breach, whether
of the same type or otherwise.
e. ASSIGNMENT. This Agreement may not be assigned without the
express written consent of the other Party, which consent shall not be
unreasonably withheld. CBM hereby consents to the assignment of this Agreement
to CMS Oil and Gas Company ("CMS"), at the election of CMS, as to wells to be
drilled by CMS on acreage operated by CMS in Campbell, Sheridan and Johnson
Counties, Wyoming, and in Big Horn, Rosebud and Powder River Counties, Montana.
If CMS elects to accept such assignment it shall execute a ratification of this
Agreement and, thereafter, this Agreement shall apply in the same manner as if
CMS had been an original signatory hereto so that the wells drilled by CBM for
CMS shall count toward the 1,000 well maximum and
-7-
<PAGE>
CBM shall drill for CMS on the same terms as for Pennaco; provided, however,
that the Prepayment shall be credited only against wells drilled for Pennaco,
CMS shall not be obligated to make any prepayments, and CMS shall not be
obligated to make any of the loans.
f. HEADINGS. Headings used in this Agreement are for guidance and
convenience of reference only and shall not limit or otherwise affect any of the
terms or provisions of this Agreement.
g. ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding among the parties, superseding all negotiations, prior discussion
and prior agreements.
h. BINDING EFFECT. This Agreement shall be binding upon, and shall
inure to the benefit of, the parties hereto, and their respective successors and
assigns.
Executed on the dates set forth below but effective as of the Effective
Date.
-8-
<PAGE>
Pennaco Energy, Inc.
By:
---------------------------
Name:
-------------------------
Title:
------------------------
Date:
-------------------------
CBM Drilling, LLC
BY:
---------------------------
its Manager
By:
---------------------------
Name:
-------------------------
Title:
------------------------
Date:
-------------------------
-9-
<PAGE>
EXHIBIT 23.1
The Board of Directors and Stockholders
Pennaco Energy, Inc:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Denver, Colorado
December 1, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PENNACO
ENERGY, INC.'S SEPTEMBER 30, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-26-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,358,125
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,686,878
<PP&E> 16,300,887
<DEPRECIATION> (34,217)
<TOTAL-ASSETS> 19,297,963
<CURRENT-LIABILITIES> 6,678,007
<BONDS> 0
0
0
<COMMON> 14,795
<OTHER-SE> 12,605,161
<TOTAL-LIABILITY-AND-EQUITY> 19,297,963
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 4,736,642
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 649,946
<INCOME-PRETAX> (5,356,338)
<INCOME-TAX> (1,280,000)
<INCOME-CONTINUING> (4,076,338)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,076,338)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.38)
</TABLE>
