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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON , 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
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:
DAVID P. OELMAN
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. / /
--------------------------
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 , 1999.
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.
<PAGE>
PROSPECTUS
PENNACO ENERGY, INC.
3,296,165 SHARES
COMMON STOCK
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THE COMPANY:
- - We are 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:
- - 3,296,165 shares of common stock.
- - All of the common stock offered for resale through this prospectus is being
sold by certain of our securityholders. We will receive no proceeds from this
offering.
- - Our common stock is listed on the American Stock Exchange under the symbol
"PN." The last reported sales price of the common stock on April 30, 1999 was
$8.6875.
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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.......................................................... 6
Use of Proceeds....................................................... 10
Price Range of Common Stock........................................... 10
Dividend Policy....................................................... 10
Plan of Operation..................................................... 11
Business.............................................................. 13
Description of Property............................................... 20
Management............................................................ 25
Certain Relationships and Related Transactions........................ 31
Principal and Selling Stockholders.................................... 32
Description of Securities............................................. 33
Plan of Distribution.................................................. 34
Experts............................................................... 35
Legal Matters......................................................... 35
Changes In and Disagreements with Accountants......................... 35
Where to Find More Information........................................ 36
Financial Statements.................................................. F-1
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As used in this prospectus, (a) any reference to the "Company," "Pennaco,"
"we," "our" or "ours" means Pennaco Energy, Inc. and (b) the "Stock" means the
common stock of the Company, par value $.001, being resold through this
prospectus.
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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
We are an independent, development stage exploration and production company.
Our current operations are completely focused on the acquisition, development
and production of natural gas from coal bed methane properties in the Rocky
Mountain region of the United States. We are one of the largest holders of oil
and gas leases covering coal bed methane properties in the Powder River Basin of
northeastern Wyoming and southeastern Montana. As of March 1, 1999, we owned oil
and gas lease rights with respect to approximately 311,800 net acres in the
Powder River Basin in northeastern Wyoming and southeastern Montana.
We initiated our drilling program on November 15, 1998 and had drilled
approximately 140 gross (123 net) wells by March 31, 1999. We have operated all
of our wells drilled to date. We plan to drill approximately 330 net coal bed
methane wells in 1999, although there can be no assurance that we will have
sufficient funds to drill all of these wells, that it will be economic to do so
or that these wells will ultimately be productive. The wells we have drilled to
date have each taken an average of three days to drill and are in various stages
of completion awaiting construction of gathering and compression systems and
connection to a pipeline.
We have flow tested most of the 32 wells which were drilled as of December
31, 1998. These tests resulted in the calculation of proved non-producing
reserves as reviewed by our third party reserve engineers. At December 31, 1998,
we had estimated net proved reserves of 18.1 Bcfe with present value of
estimated future net revenues before income taxes (utilizing a 10% discount
rate) of $8.5 million and a standardized measure of discounted future net cash
flows of $6.1 million. Natural gas constituted 100% of our estimated net proved
reserves, all of which were located in the Powder River Basin and 30% of which
were developed but non-producing at year-end. We operate all of the wells on our
proved developed non-producing properties.
We commenced initial gas production in April of 1999 but we cannot guarantee
that our existing wells will produce economic quantities of coal bed methane
gas. While we believe that we have assembled an attractive acreage position, we
cannot guarantee that such acreage contains significant amounts of natural gas
reserves nor that such reserves can or will be economically developed.
CMS TRANSACTION
On October 23, 1998, we signed a definitive purchase and sale agreement with
CMS Energy Corporation's exploration and production unit, CMS Oil and Gas
Company, whereby CMS Oil and Gas Company acquired an undivided 50% working
interest in approximately 492,000 net acres of our leasehold position in the
Powder River Basin for $28 million in cash. The first closing occurred on
November 20, 1998 and the second closing occurred on January 15, 1999. We
acquired the leasehold position which was conveyed to CMS in the CMS transaction
for approximately $7.0 million. Since the announcement of our agreement with CMS
in October 1998, the jointly owned leasehold contained in the area of mutual
interest has increased from 492,000 net acres to approximately 560,000 net acres
through additional acreage purchases.
The CMS agreement provides for the development of our lease acreage within
the area of mutual interest with Pennaco and CMS each operating approximately
50% of the wells to be drilled. As is customary in oil and gas leasehold
transactions, the agreement provides for the adjustment of the
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purchase price for title defects discovered prior to closing and for the
opportunity for one party to participate in acquisitions made by the other party
in the area of mutual interest defined in the agreement. As of April 23, 1999,
$1.2 million of the proceeds remained in escrow in the event certain title
defects could not be cured. The agreement also provides for a preferential
purchase right to the other party in the event either CMS or Pennaco attempts to
sell all or a portion of its interest in the acreage covered by the agreement.
There is no preferential purchase right in the event that either party enters
into a merger, reorganization or consolidation. All of the leases in the area of
mutual interest are dedicated to CMS Gas Transmission and Storage, an affiliate
of CMS Oil and Gas, for gathering, compression and transportation.
GAS GATHERING, COMPRESSION, MARKETING AND TRANSPORTATION
We plan to focus our initial capital spending on drilling, well completion,
production and land acquisition activities rather than gas gathering and
compression operations. Accordingly, we will utilize third party gathering
services to gather, compress and transport our natural gas from the wellhead to
market in return for gathering and compression fees. We recently entered into an
agreement with Bear Paw Energy under which Bear Paw Energy will construct, own
and operate gas gathering systems as well as provide gas gathering and
compression services to Pennaco outside of the CMS area of mutual interest in
our South Gillette Area.
Production growth in the Powder River Basin is currently impeded by a
natural gas pipeline bottleneck which restricts the movement of natural gas out
of the basin. Four pipeline construction and expansion projects which would
serve the Powder River Basin have been announced, and are reportedly in the
process of obtaining permits and acquiring rights of way. On December 23, 1998,
CMS Gas Transmission and Storage, Enron Capital and Trade Resources Corporation,
Western Gas and Colorado Interstate Gas Company, a subsidiary of The Coastal
Corporation, jointly announced the formation of Fort Union Gas Gathering, LLC.
Fort Union has announced plans to build a 106 mile, 24 inch gathering pipeline
to gather coal bed methane gas in the Powder River Basin for delivery to
interstate pipeline interconnects near Glenrock, Wyoming. The new gathering line
is expected to have an initial capacity of approximately 450 MMcf per day of
natural gas and can be expanded with additional compression to 700 MMcf per day.
Construction is scheduled to begin in April 1999 with operations to commence on
or about September 1, 1999.
In September 1998, KN Energy, Inc. and Devon Energy Corporation announced
the formation of Thunder Creek Gas Services LLC. Thunder Creek has announced its
intention to build a 126 mile, 24 inch gathering line capable of delivering up
to 450 MMcf per day of natural gas to multiple interstate pipelines near
Douglas, Wyoming. The operations are scheduled to commence in October 1999.
Additionally, Wyoming Interstate Gas Company, a subsidiary of the Coastal
Corporation, has filed an application with the Federal Energy Regulatory
Commission to construct a new 143 mile, 24 inch natural gas pipeline known as
the Medicine Bow Lateral from Glenrock to Cheyenne, Wyoming where the line will
interconnect with several interstate pipelines which serve the mid-continent and
west coast regions of the U.S. as well as the central Colorado markets. The
Medicine Bow Lateral is scheduled to commence operations in December 1999,
subject to FERC approval, will have initial capacity of 260 MMcf per day and can
be expanded with additional compression to 390 MMcf per day.
On March 30, 1999, Pennaco and CMS announced that Pennaco has entered into a
gas gathering agreement with CMS Continental Natural Gas, Inc., a wholly owned
subsidiary of CMS Energy Corporation. Under this agreement, CMS Continental will
provide gas gathering services to Pennaco and CMS Oil and Gas Company within the
Pennaco/CMS area of mutual interest, which excludes our South Gillette Area. CMS
also announced plans to construct a $190 million, 110 mile high pressure
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gathering pipeline through the Pennaco/CMS jointly owned acreage in the northern
Powder River Basin coal bed methane play, connecting at its southern terminus
with the Fort Union pipeline project.
There can be no assurance that any of these gathering and pipeline systems
will ultimately be constructed or that they will be completed in the time-frame
currently anticipated.
RECENT DEVELOPMENTS
1999 CAPITAL SPENDING PLAN
On February 4, 1999, we announced a capital spending budget of $18.4 million
for 1999, all of which will be directed toward our Powder River Basin coal bed
methane project. We plan to spend approximately $9.4 million to drill
approximately 330 net wells in the project area during 1999. These wells will be
a combination of joint Pennaco/CMS wells drilled in the area of mutual interest
and Pennaco wells drilled outside the area of mutual interest. Approximately
$9.0 million is allocated to additional lease acquisition. We do not anticipate
the need for additional funding in order to execute the announced capital
spending plans for 1999 based upon our current cash position.
We currently maintain our principal executive offices at 1050 17th Street,
Suite 700, Denver, Colorado 80265. Our telephone number is (303) 629-6700 and
the facsimile number is (303) 629-6800. We also maintain an office at 3651
Lindell Road, Suite A, Las Vegas, Nevada 89103 and a field office at 400 South
Miller Avenue, Gillette, Wyoming 82716.
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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.
WE ARE A NEW COMPANY AND HAVE NO OPERATING HISTORY UPON WHICH TO BASE AN
ASSUMPTION THAT WE WILL ACHIEVE OUR BUSINESS GOALS.
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 successfully implement our business plans.
WE DEPEND ON GATHERING, COMPRESSION AND TRANSPORTATION FACILITIES TO MARKET OUR
PRODUCTION AND WE CANNOT GUARANTEE THAT THESE FACILITIES WILL BE AVAILABLE
WHEN NEEDED.
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 eventually, processing facilities.
Pipeline demand in the area is increasing as coal bed methane development
activity continues to expand. Our core land position is located in an area near
the development activity and production. We have entered into an agreement with
CMS Gas Transmission and Storage Company whereby CMS will gather, compress and
transport our gas within the CMS area of mutual interest. We have entered into
an agreement with Bear Paw Energy whereby Bear Paw will lay pipeline to our
planned drill sites, gather, compress and transport our gas outside the CMS area
of mutual interest (see "Prospectus Summary--Gas Gathering, Compression,
Marketing and Transportation"). There is limited pipeline capacity to transport
gas out 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 additional pipeline capacity will be
completed on a timely basis or that we will be permitted to transport any
volumes via the additional capacity.
WE FACE RISKS RELATED TO THE LEASES WE ENTER INTO THAT MAY RESULT IN ADDITIONAL
COSTS.
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. It is possible that the terms of our oil and gas
leases may be interpreted differently depending on the state in which the
property is located. 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 terms of our leases. Adverse
decisions in such litigation could result in material costs or the loss of one
or more leases.
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THE VOLATILITY OF OIL AND GAS MARKETS MAY AFFECT OUR BUSINESS.
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 are 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.
WE FACE COMPETITION FROM OTHER COMPANIES IN THE NATURAL GAS BUSINESS AND FOR THE
ACQUISITION OF SUITABLE PROPERTIES.
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.
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. We will compete against established companies that have significantly
greater financial, marketing, personnel, and other resources than us. 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 MAY
AFFECT OUR ABILITY TO DO BUSINESS.
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 any one or a combination of the following
factors:
- a lack of market demand;
- government regulation;
- pipeline and processing interruptions;
- production allocations;
- diminished pipeline capacity; and
- force majeure.
These 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.
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WE ARE SUBJECT TO OPERATING RISKS WHICH MAY NOT BE COVERED BY OUR INSURANCE.
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. 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 currently
carry well control insurance as well as property and general liability
insurance. 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.
OUR DRILLING ACTIVITIES MAY PRODUCE UNDRINKABLE WATER THAT MUST BE TREATED OR
REINJECTED WHICH WILL INCREASE OUR COSTS.
If during the course of drilling activity undrinkable water is discovered,
it may be necessary to install and operate evaporators or to drill disposal
wells to reinject 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.
OUR INDUSTRY IS SUBJECT TO EXTENSIVE REGULATION WHICH MAY INCREASE OUR COSTS.
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 our cost of doing business and, in turn, decreases our
profitability.
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WE DO NOT ANTICIPATE PAYING DIVIDENDS IN THE FORESEEABLE FUTURE.
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.
ACTUAL RESULTS MAY DIFFER FROM FORWARD-LOOKING STATEMENTS.
Some of the statements contained in this prospectus under "Prospectus
Summary," "Risk Factors," "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; and
- the adequacy of our sources of capital resources and liquidity.
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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USE OF PROCEEDS
We will not receive any of the proceeds from sales of the stock offered
hereby.
PRICE RANGE OF COMMON STOCK
Since April 19, 1999, our common stock has been traded on the American Stock
Exchange. From July 1, 1998 to April 16, 1999, our common stock was 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 April 16,
1999 and on the American Stock Exchange for the period from April 19, 1999
through April 30, 1999.
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HIGH LOW
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1998
Third quarter.............................................................. $ 6.16 $ 3.03
Fourth quarter............................................................. $ 5.38 $ 2.50
1999
First quarter.............................................................. $ 5.25 $ 2.97
Second quarter (through April 30, 1999).................................... $ 8.69 $ 5.19
</TABLE>
At December 31, 1998, there were approximately 3,225 stockholders of record
of the Common Stock.
DIVIDEND POLICY
We intend to retain all of our earnings, if any, to finance the expansion of
our business and for general corporate purposes, including future acquisitions
of properties. We do not anticipate paying cash dividends on the common stock in
the foreseeable future.
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PLAN OF OPERATION
The following information should be read in conjunction with the Financial
Statements and Notes thereto presented elsewhere in this prospectus. The Company
follows the successful efforts method of accounting for oil and gas properties.
See "Organization and Summary of Accounting Policies," included in Note 1 of the
Consolidated Financial Statements.
GENERAL
As a development stage company, the Company had no revenues from operations
in 1998. During the period from the Company's inception (January 26, 1998)
through December 31, 1998, the Company reported a net loss of $3,812,873. The
Company realized a gain on sale of property of $1,413,207 based on the
$7,600,000 of proceeds received in the first closing of the CMS Transaction
which occurred on November 20, 1998. Expenses incurred from the Company's
inception (January 26, 1998) through December 31, 1998 totaled $6,547,366,
including general and administrative expenses of $3,977,592 and exploration
expenses of $1,825,767, 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 December 31, 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 an SEC registrant until September 8, 1998,
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. Until recently, the
Company had not produced any revenues and its main source of funds has been the
sale of the Company's equity securities and the proceeds from CMS Transaction.
The Company had approximately $5.6 million in cash as of December 31, 1998.
On December 23, 1998, the Company and CMS Oil and Gas Company announced the
CMS Transaction. Pursuant to the terms of the CMS Agreement, 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 used the balance
for general corporate purposes. The Company received $7.6 million at the first
closing on November 20, 1998 and $14.8 million at the second closing on January
15, 1999 less approximately $1.8 million which was deposited into an escrow
account subject to customary closing adjustments. The CMS Bridge Loan was
canceled at the second closing. Pro forma for the CMS Transaction as of December
31, 1998, the Company has no debt and approximately $19.8 million of cash. As of
April 23, 1999, approximately $1.2 million is held in escrow pending closing
adjustments for the CMS Transaction. While the proceeds of the CMS transaction
allowed the Company to repay its current liabilities and should
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allow the Company to fund its planned $18.4 million capital expenditure program
for 1999, the Company will require further funding to meet its future
expenditure plans.
Should the Company's cash flow from operations continue to be insufficient
to satisfy its planned 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. The Company plans to
pursue a bank credit facility committment in the second quarter of 1999. There
can be no assurances as to the availability or borrowing capacity of such a bank
facility.
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 (1) a substantial portion of the Company's cash flow could be
dedicated to the payment of interest on its indebtedness and would not be
available for other purposes and (2) 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 12 months employee requirements will
increase to approximately 18 employees. Currently, the Company has 14 full-time
employees.
CAPITAL EXPENDITURES
The Company had capital expenditures of approximately $19.2 million in 1998,
including approximately $18.1 million for lease acquisitions and $0.8 million
for drilling activities. On February 4, 1999, the Company announced a capital
spending budget of $18.4 million for 1999, all of which will be directed towards
the Company's Powder River Basin CBM project. The Company plans to spend
approximately $9.4 million to drill approximately 330 net wells in the Powder
River Basin during 1999, although there can be no assurance that it will have
sufficient funds to drill all of these wells, that it would be economic to do so
or that these wells will ultimately be productive. The wells will be a
combination of joint Pennaco/CMS wells drilled in the area of mutual interest
and Pennaco wells drilled primarily on a 100% working interest basis located
outside of the CMS area of mutual interest. The balance of the 1999 capital
budget, approximately $9.0 million, is allocated to lease acquisition. The
Company does not anticipate the need for additional funding in order to execute
the announced capital spending plan for 1999 based upon the Company's current
cash position.
12
<PAGE>
BUSINESS
GENERAL
Pennaco Energy, Inc. is an independent, development stage exploration and
production company. The Company's current operations are completely focused on
the acquisition, development and production of natural gas from coal bed methane
("CBM") properties in the Rocky Mountain region of the United States. Pennaco is
one of the largest holders of oil and gas leases covering CBM properties in the
Powder River Basin in northeastern Wyoming and southeastern Montana. As of March
1, 1999, the Company owned oil and gas lease rights with respect to
approximately 311,800 net acres in the Powder River Basin.
The CBM wells in the Powder River Basin are generally 350 to 1,200 feet in
depth and typically take only two or three days to drill and complete. Because
of the relatively shallow depth and short amount of time to drill a well, CBM
wells have relatively low drilling, completion and well connection costs
(approximately $60,000 total well cost per well). Approximately 50% of the total
well costs are well connection costs, comprised of costs of gathering lines,
power lines and surface equipment. The Company plans to contract much of the
well connection cost to third party gatherers in return for payment of a per Mcf
gathering fee. The CBM gas recovered from the wells in the Powder River Basin
does not require processing but does require dehydration and compression and
could eventually require carbon dioxide treatment over the next several years.
The Company initiated its drilling program on November 15, 1998 and had
drilled approximately 32 gross (30 net) wells as of December 31, 1998. We have
operated all of our wells drilled to date. As of March 31, 1999, the Company had
drilled approximately 140 gross (123 net) CBM wells and plans to drill
approximately 330 net CBM wells in 1999, although there can be no assurances
that it will have sufficient funds to drill all of these wells, that it would be
economic to do so or that these wells will ultimately be productive. The wells
the Company has drilled to date have each taken an average of three days to
drill and are in various stages of completion and testing while awaiting
construction of gathering and compression systems and connection to a pipeline.
The Company has flow tested most of the 32 wells which were drilled as of
December 31, 1998. These tests resulted in the calculation of proved
non-producing reserves as reviewed by the Company's third party engineers. At
December 31, 1998, the Company had estimated net proved reserves of 18.1 Bcfe
with present value of estimated future net revenues before income taxes
(utilizing a 10% discount rate) of $8.5 million and a standardized measure of
discounted future net cash flows of $6.1 million. Natural gas constituted 100%
of the Company's estimated net proved reserves, all of which were located in the
Powder River Basin and 30% of which were developed but non-producing at
year-end. The Company operates all of the wells on its proved developed
non-producing properties.
The success of the Company's drilling program (including the magnitude of
any potential reserves) cannot be fully evaluated until the wells are completed,
connected to a gathering system and produced for a period of time. The Company
commenced initial gas production in April 1999 but there can be no assurance
that the Company's existing wells will produce economic quantities of CBM gas.
The Company recently entered into an agreement with Bear Paw Energy, Inc.
("Bear Paw Energy'), a subsidiary of TransMontaigne, Inc., under which Bear Paw
Energy will construct, own and operate gas gathering systems as well as provide
gas gathering and compression services to Pennaco in the Company's South
Gillette Area. On March 17, 1999, the Company entered into an agreement with
Western Gas Resources, Inc. ("Western Gas") to compress and transport 11 MMcf
per day of gas from the Dopplebock compressor station located southwest of the
Company's South Gillette Area to the interconnect with Williston Basin
Interstate Pipeline ("WBI") at Recluse, Wyoming. Pennaco has entered into two
gas sale contracts to sell a total of 10,000 MMBtu per day of natural gas for 12
months beginning April 1, 1999 to two gas purchasers deliverable at Recluse,
Wyoming into the WBI. The Company has entered into agreements to purchase gas
for the month of April 1999 in order to meet its gas sales contract obligations
13
<PAGE>
prior to commencement of Pennaco gas production. The Company believes that once
gathering and compressions systems are completed, its initial production from
its South Gillette Area will be sufficient to satisfy its obligations under
these two gas sales contracts.
The Company currently maintains its principal executive offices at 1050 17th
Street, Suite 700, Denver, Colorado 80265. The Company's telephone number is
(303) 629-6700 and the facsimile number is (303) 629-6800. The Company also
maintains an office at 3651 Lindell Road, Suite A, Las Vegas, Nevada 89103 and a
field office at 400 South Miller Avenue, Gillette, Wyoming 82716.
CMS TRANSACTION
On October 23, 1998, the Company and CMS Energy Corporation's exploration
and production unit, CMS Oil and Gas Company ("CMS") signed a definitive
purchase and sale agreement (the "CMS Agreement") relating to the development of
the Company's Powder River Basin acreage (the "CMS Transaction") within a
designated area of mutual interest. Pursuant to the terms of the CMS Agreement,
CMS acquired an undivided 50% working interest in approximately 492,000 net
acres of Pennaco's leasehold position in the Powder River Basin for $28.0
million. The Company acquired that portion of the leasehold position which was
conveyed to CMS in the CMS Transaction for approximately $7.0 million. The
purchase price provided for in the CMS Agreement was the result of arm's length
negotiations between the Company and CMS and was also a function of the
consideration originally paid by the Company for such acreage. The Company's
Board of Directors received a fairness opinion from Hanifen Imhoff, Inc. that
the CMS Transaction was fair to the Company's stockholders from a financial
point of view. The Company compensated Hanifen Imhoff, Inc. $125,000 for
rendering this fairness opinion.
Since the announcement of the CMS Transaction, the jointly owned leasehold
contained in the area of mutual interest has grown from 492,000 net acres to
approximately 560,000 net acres through additional acreage purchases. The CMS
Agreement provides for the development of the Company's leasehold acreage within
the area of mutual interest, with Pennaco and CMS each operating approximately
50% of the wells to be drilled. As is customary in oil and gas leasehold
transactions, the agreement provides for the adjustment of the purchase price
for title defects discovered prior to closing and for the opportunity for one
party to participate in acquisitions made by the other party in the area of
mutual interest defined in the agreement. As of March 12, 1999, approximately
$1.2 million of the proceeds of the CMS Transaction were held in escrow pending
resolution of possible title defects. The agreement also provides for a
preferential purchase right to the other party in the event either CMS or the
Company attempts to sell a portion of its interest in the acreage covered by the
agreement. There is no preferential purchase right in the event that either
party enters into a merger, reorganization or consolidation. All of the leases
in the area of mutual interest are dedicated to CMS Gas Transmission and
Storage, an affiliate of CMS, for gathering, compression and transportation,
provided that such services are offered at competitive market rates.
BUSINESS 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.
- Concentrate activities in the Rocky Mountains and Mid-Continent regions of
the U.S.
- Leverage the expertise of its technical and management team in areas of
prior experience.
- Acquire additional undeveloped properties in the Powder River Basin that
add to near-term drilling inventory.
- Acquire producing properties with development and exploitation potential.
14
<PAGE>
- Seek to acquire operating control and majority ownership interests in
properties to optimize the timing and efficiency of operations.
- Actively manage gas gathering, processing, transportation, and marketing
activities to maximize product price realizations.
- Maintain a strong balance sheet in order to be in a position to capitalize
on opportunities as they occur.
GAS GATHERING, COMPRESSION, MARKETING AND TRANSPORTATION
The Company plans to focus its initial capital spending on drilling, well
completion, production and land acquisition activities rather than gas gathering
and compression operations. Accordingly, the Company plans to utilize third
party gathering services to gather, compress and transport its natural gas from
the wellhead to market in return for gathering and compression fees. The Company
recently entered into an agreement with Bear Paw Energy under which Bear Paw
Energy will construct, own and operate gas gathering systems as well as provide
gas gathering and compression services to Pennaco outside of the CMS area of
mutual interest in the Company's South Gillette Area. On March 17, 1999 the
Company entered into an agreement with Western Gas to compress and transport 11
MMcf per day of gas from the Doppelbock compressor station located southwest of
the Company's South Gillette Area to the interconnect with WBI at Recluse,
Wyoming. Western Gas will take delivery of the gas gathered by Bear Paw Energy
in the South Gillette area and transport the gas to Doppelbock.
Production growth in the Powder River Basin is currently impeded by a
natural gas pipeline bottleneck which restricts the movement of natural gas out
of the basin. Currently only two pipelines are available to transport CBM gas
out of the Powder River Basin. The MIGC pipeline, which is operated by Western
Gas, has recently undergone a 40 MMcf per day expansion to 130 MMcf per day. The
MIGC line runs south through the eastern side of the Powder River Basin to
interconnect with two interstate pipelines near Glenrock, Wyoming, but has
little available capacity due to increasing CBM gas production from the Powder
River Basin. A subsidiary of MDU Resources operates the 42 MMcf per day WBI
pipeline which runs northeast from Recluse, Wyoming to local markets throughout
eastern Montana and North Dakota and interconnects with the Northern Border
Pipeline, an interstate pipeline which travels southeast to the Chicago markets.
WBI has limited additional capacity.
Three pipeline construction and expansion projects which would serve the
Powder River Basin have recently been announced, all of which are reportedly in
the process of obtaining permits and acquiring rights of way. On December 23,
1998, CMS Gas Transmission and Storage, Enron Capital and Trade Resources
Corporation, Western Gas and Colorado Interstate Gas Company ("CIG"), a
subsidiary of The Coastal Corporation, jointly announced the formation of Fort
Union Gas Gathering, LLC ("Fort Union"). Fort Union has announced plans to build
a 106 mile, 24 inch gathering pipeline to gather CBM gas in the Powder River
Basin. The new gathering line is expected to have an initial capacity of
approximately 450 MMcf per day of natural gas and can be expanded with
additional compression to 700 MMcf per day. The Fort Union line is expected to
deliver CBM gas to a carbon dioxide treating facility to be constructed near
Glenrock, Wyoming and to interstate pipeline interconnects near Glenrock.
Construction is scheduled to begin in April 1999 with operations to commence on
or about September 1, 1999, although there can be no assurance that such system
will ultimately be constructed or that it will be completed in the time-frame
currently anticipated.
In September 1998, KN Energy, Inc. and Devon Energy Corporation announced
the formation of Thunder Creek Gas Services LLC ("Thunder Creek"). Thunder Creek
has announced its intention to build a 126 mile, 24 inch gathering line capable
of delivering up to 450 MMcf per day of natural gas to multiple interstate
pipelines near Douglas, Wyoming. The operations are scheduled to commence in
October 1999, although there can be no assurance that such system will
ultimately be construed.
15
<PAGE>
Additionally, Wyoming Interstate Gas Company, a subsidiary of the Coastal
Corporation, has filed an application with the Federal Energy Regulatory
Commission ("FERC") to construct a new 143 mile, 24 inch natural gas pipeline
known as the Medicine Bow Lateral from Glenrock to Cheyenne, Wyoming where the
line will interconnect with several interstate pipelines which serve the
mid-continent and west coast regions of the U.S. as well as the central Colorado
markets. The Medicine Bow Lateral is scheduled to commence operations in
December 1999, subject to FERC approval, will have initial capacity of 260 MMcf
per day of natural gas and can be expanded with additional compression to 390
MMcf per day. There can be no assurance that such system will ultimately be
constructed or that it will be completed in the time-frame currently
anticipated.
On November 11, 1998, the Company entered into a gas brokerage and
administration agreement with Mercator Energy, Inc. ("Mercator") whereby
Mercator agreed to provide gas marketing and administration services to Pennaco.
This agreement was renewed on March 1, 1999 and extends until September 1, 1999
and converts to a month-to-month basis thereafter. Mercator has extensive
experience in gas marketing services in the Rocky Mountain region and
specifically in the Powder River and surrounding gas producing basins.
COMPETITION
The Company competes with a number of other potential purchasers of oil and
gas leases and producing properties, many of which have greater financial
resources than the Company. The bidding for oil and gas leases has become
particularly intense in the Powder River Basin with bidders evaluating potential
acquisitions with varying 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 oil and gas leases. 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 oil and gas leases available for
acquisition by the Company or that the Company can sell oil and gas leases or
obtain financing for or participants to join in the development of prospects.
REGULATION
GENERAL
The Company's operations are affected by numerous governmental laws and
regulations including energy, environmental, conservation, tax and other laws
and regulations relating to the energy industry. 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. Changes in any of these laws and regulations could have a material
adverse effect on the Company's business. In view of the many uncertainties with
respect to current and future laws and regulations, including their
applicability to the Company, the Company cannot predict the overall effect of
such laws and regulations on its future operations.
The Company believes that its operations comply in all material respects
with all applicable laws and regulations and that the existence and enforcement
of such laws and regulations have no more restrictive effect on the Company's
method of operations than on other similar companies in the energy industry.
The following discussion contains summaries of certain laws and regulations
and is qualified in its entirety by the foregoing.
OPERATIONS OF 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
16
<PAGE>
on-site security regulations and other permits and authorizations issued by the
Bureau of Land Management ("BLM"), Minerals Management Service and other
agencies. In order to drill wells in Wyoming on federal, state or
privately-owned 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
BLM. 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.
Drilling on federal lands in a large portion of the Powder River Basin is
currently limited until the completion of an environmental impact statement
("EIS") by the BLM. The number of drilling permits allowed on federal lands
subject to the EIS are limited until the EIS is complete. This limitation could
adversely affect the Company's ability to drill on federal lands. Approximately
53% of the Company's leasehold is comprised of federal acreage although only a
portion of the Company's acreage is currently included in the EIS. Operators are
currently drilling wells on an interim basis on federal lands with the limited
number of drilling permits allowed by the BLM until the EIS is complete. Pennaco
has approximately 38 interim drilling permits on federal lands within the EIS.
The EIS was originally scheduled for completion in May 1999, but has been
delayed until September 1999. There can be no assurance as to its ultimate
completion date.
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 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.
Accordingly, there can be no assurance that the less stringent regulatory
approach recently pursued by the FERC and Congress will continue indefinitely
into the future.
17
<PAGE>
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.
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 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 CMB 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 energy industry generally, compliance with existing regulations
will increase the Company's overall cost of doing business. These costs include
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 production 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.
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.
18
<PAGE>
EMPLOYEES
The Company currently has 14 full-time employees and utilizes the services
of 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
("Trinity") which provides for administrative services, specifically land
administration and accounting. The Trinity agreement is effective until August
31, 1999 when it converts to a month-to-month arrangement. The Company believes
that by outsourcing various administrative functions to Trinity the Company is
able to hire fewer full-time employees and more efficiently control
administrative expenses.
CUSTOMERS
During 1998, the Company made no sales of natural gas. The Company has
entered into two natural gas sales contracts with a term of one year each
beginning April 1, 1999. One contract for 5,000 MMBtu per day is with
Interenergy Resources Corporation, an affiliate of KN Energy, Inc. and the other
also for 5,000 MMBtu per day is with Montana-Dakota Utilities Co., a division of
MDU Resources Group, Inc. The Company is dependent on these two customers to
purchase its initial production, particularly until the completion of the Fort
Union pipeline project which is scheduled to commence operations in September
1999.
PREDECESSOR ENTITIES
The Company was formed under the laws of the State of Nevada on January 26,
1998, to engage in the business of oil and gas exploration, production and
marketing. The original predecessor of Pennaco was incorporated on March 12,
1985 as VCI Video Communications, Inc. in the Province of British Columbia and
subsequently changed its name to AKA Video Communications, Inc. ("AVCI"). On
March 25, 1996 the shareholders of AVCI agreed to exchange all AVCI shares for
shares of International Metal Protection, Inc. ("International Metal"),
Pennaco's immediate predecessor. After said exchange AVCI became inactive and
the Directors and shareholders approved the windup of AVCI. International Metal
outstanding shares in a share for share exchange with Pennaco, International
Metal was dissolved in February of 1998. The Company is the sole surviving
entity of the reorganization.
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<PAGE>
LEGAL PROCEEDINGS
The Company may be subject from time to time to routine litigation in
connection with its oil and gas operations. Currently the Company is not
involved in litigation which could have a material impact on the Company.
DESCRIPTION OF PROPERTY
OPERATIONS
The Company initiated its drilling program on November 15, 1998 and had
drilled approximately 32 gross (30 net) wells as of December 31, 1998. As of
March 31, 1999, the Company had drilled approximately 140 gross (123 net) CBM
wells and plans to drill approximately 330 net CBM wells in 1999, although there
can be no assurances that it will have sufficient funds to drill all of these
wells, that it would be commercially reasonable to drill all of these wells or
that these wells will ultimately be productive. All of the wells drilled to date
have been operated by Pennaco. The wells the Company has drilled to date have
each taken an average of three days to drill and are in various stages of
completion and testing while awaiting construction of gathering and compression
systems and connection to a pipeline. The success of the Company's drilling
program (including the magnitude of any potential reserves) cannot be determined
until the wells are completed, connected to a gathering system and produced for
a period of time.
The Company's ability to complete its drilling program is entirely dependent
upon the availability of sufficient capital, equipment and personnel. The
estimated total cost per well is approximately $60,000 to drill, complete and
install well connection facilities. The estimated drilling portion of the total
per well cost is approximately $10,000 per well.
The Company has entered into a drilling agreement with CBM Drilling, LLC
("CBMD"), pursuant to which Pennaco had prepaid drilling costs of $333,473 as of
December 31, 1998. 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 100 additional net wells are drilled for Pennaco by CBMD. The
prepayments to CBMD were made to ensure that drilling rigs appropriate for CBM
drilling operations will be available and dedicated to the Company's planned
drilling program. CBMD currently has four CBM drilling rigs, three of which are
primarily dedicated to the Company's drilling program.
Approximately 50% of the average $60,000 total well cost is well connection
cost comprised of gathering lines, power lines and surface equipment. In the
South Gillette Area where the Company has drilled most of the 135 wells drilled
as of March 22, 1999, Pennaco has entered into a gas gathering and compression
agreement with Bear Paw Energy that also provides for well connection services
in return for a per mcf gathering fee. Accordingly, the Company has reduced its
average well costs in the South Gillette Area to approximately $30,000 per well
in return for a comprehensive well connection, gathering and compression fee. In
the South Gillette Area, Bear Paw Energy will construct, own and operate all
gathering and compression facilities from the wellhead to the interconnect with
MIGC, Fort Union or Thunder Creek pipelines. The Company intends to continue to
allocate its capital expenditures to drilling, completion and lease acquisition
activities rather than well connection, gathering and compression activities.
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<PAGE>
DRILLING ACTIVITY
The following table summarizes the Company's drilling activities, all of
which were located in the Powder River Basin, during the past year:
<TABLE>
<CAPTION>
WELLS DRILLED
----------------------
PERIOD FROM INCEPTION
(JANUARY 26, 1998) TO
DECEMBER 31, 1998
----------------------
GROSS NET
----------- ---
<S> <C> <C>
Development
Natural Gas........................................... 30 28
Non-productive........................................ -- --
--- ---
Total............................................... 30 28
--- ---
--- ---
Exploratory
Natural Gas........................................... 2 2
Non-productive........................................ -- --
--- ---
Total............................................... 2 2
--- ---
--- ---
</TABLE>
NATURAL GAS RESERVES
The table below sets forth the Company's quantities of proved reserves as of
December 31, 1998, all of which were located in the United States, and the
present value of future net revenue attributed to those reserves. The estimates
were prepared by the independent petroleum engineering firm of Ryder Scott
Company ("Ryder Scott").
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
<S> <C>
Proved Reserves
Natural Gas (Bcf)........................................................ 18.1
Oil and condensate (MMbls)............................................... --
-----------------
Total (Bcfe)........................................................... 18.1
-----------------
-----------------
Proved developed reserves (Bcfe)........................................... 5.5
Present value of estimated future net revenues before income taxes
discounted at 10%(1)..................................................... $ 8,528,000
Standardized measure of discounted future net cash flows(2)................ $ 6,142,000
-----------------
-----------------
</TABLE>
- ------------------------
(1) The present value of estimated future net revenues on a non-escalated basis
is based on the weighted average price of $1.16 per Mcf of natural gas at
December 31, 1998, the price that the Company believes it would have
realized at the field meter.
(2) The standardized measure of discounted net cash flows represents the present
value of estimated future net revenues after income taxes, discounted at
10%.
In accordance with SEC requirements, estimates of the Company's proved
reserves and future net revenues are made using sales prices estimated to be in
effect as of the date of such reserve estimates and are held constant throughout
the life of the properties (except to the extent a contract specifically
provides for escalation). Estimated quantities of proved reserves and future net
revenues therefrom are affected by natural gas and oil prices, which have
fluctuated widely in recent years. There are numerous uncertainties inherent in
estimating natural gas and oil reserves and their estimated values, including
many factors beyond the control of the producer. The reserve data set forth in
this document represents only estimates.
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<PAGE>
Reservoir engineering is a subjective process of estimating underground
accumulation of natural gas and oil that cannot be measured in an exact manner.
The accuracy of any reserve estimate is a function of the quality of available
data and of engineering and geological interpretation and judgment. As a result,
estimates of different engineers, including those used by the Company, may vary.
In addition, estimates of reserves are subject to revision based upon actual
production, results of future development and exploration activities, prevailing
natural gas and oil prices, operating costs and other factors, which revisions
may be material. Accordingly, reserve estimates are often different from the
quantities of natural gas and oil that are ultimately recovered and are highly
dependent upon the accuracy of the assumptions upon which they are based.
In general, the volume of production from natural gas and oil properties
owned by the Company declines as reserves are depleted. Except to the extent the
Company acquires additional properties containing proved reserves or conducts
successful exploration and development activities, or both, the proved reserves
of the Company will decline as reserves are produced. Volumes generated from
future activities of the Company are therefore highly dependent upon the level
of success in acquiring or finding additional reserves and the costs incurred in
doing so.
Reference should be made to Note 9--"Information Regarding Proved Oil and
Gas Reserves-- Unaudited" to the Financial Statements included in this document
for additional information pertaining to the Company's proved natural gas
reserves as of December 31, 1998.
PRODUCTION
The Company had no oil and gas production in 1998. The Company commenced
natural gas production in April 1999 (See "Item 1--Description of
Business--General").
PRODUCTIVE WELLS
The following table sets forth, as of December 31, 1998, the number of gross
and net productive oil and gas wells in which the Company owned an interest.
Productive wells are producing wells and wells capable of production, including
shut-in wells.
<TABLE>
<CAPTION>
PRODUCTIVE WELLS
- ----------------------------------------------
NATURAL GAS OIL
- ---------------------- ----------------------
GROSS NET GROSS NET
- ----------- --- ----------- ---
<S> <C> <C> <C>
32 30 -- --
</TABLE>
DEVELOPED AND UNDEVELOPED ACREAGE
The gross and net acres of developed and undeveloped oil and gas leases held
by the Company as of December 31, 1998 are summarized in the following table.
"Undeveloped Acreage" includes leasehold interests that contain proved
undeveloped reserves.
<TABLE>
<CAPTION>
PRO FORMA(2)
------------------------------------------
DEVELOPED ACREAGE UNDEVELOPED DEVELOPED ACREAGE UNDEVELOPED
ACREAGE(1) ACREAGE(1)
-------------------- -------------------- -------------------- --------------------
GROSS NET GROSS NET GROSS NET GROSS NET
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wyoming............................ 1,760 1,604 461,025 312,725 1,760 1,604 461,025 212,890
Montana............................ 1,760 -- 208,227 167,388 -- -- 208,227 92,044
--------- --------- --------- --------- --------- --------- --------- ---------
Total............................ 1,760 1,604 669,252 480,113 1,760 1,604 669,252 304,934
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Undeveloped acreage is leased acreage on which wells have not been drilled
or completed to a point that would permit the production of commercial
quantities of natural gas and oil regardless of
22
<PAGE>
whether such acreage contains proved reserves. Of the aggregate 669,252
gross and 480,113 net undeveloped acres, 23,470 gross and 20,166 net acres
are held by production from other leasehold acreage generally owned and
operated by third parties.
(2) Pro forma to give effect to the closing of the CMS Transaction which
occurred on January 15, 1999. See "Item 1--Description of Business--CMS
Transaction." Approximately 20,000 net undeveloped acres are subject to an
election to purchase on behalf of CMS pursuant to the terms of the CMS
Transaction.
Substantially all the leases summarized in the preceding table will expire
at the end of their respective primary terms unless the existing leases are
renewed or production has been obtained from the acreage subject to the lease
prior to that date, in which event the lease will remain in effect until the
cessation of production. The following table sets forth the gross and net acres
to leases summarized in the preceding table that will expire during the period
indicated:
<TABLE>
<CAPTION>
PRO FORMA(2)
--------------------
UNDEVELOPED ACREAGE UNDEVELOPED ACREAGE
ACRES EXPIRING -------------------- --------------------
TWELVE MONTHS ENDING GROSS NET GROSS NET
- -------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
December 31, 1999................................. 4,616 4,077 4,616 3,917
December 31, 2000................................. 3,241 2,892 3,241 2,331
December 31, 2001................................. 6,765 4,929 6,765 4,403
December 31, 2002................................. 56,269 20,789 56,269 14,444
December 31, 2003 and thereafter.................. 574,891 427,260 574,891 264,365
--------- --------- --------- ---------
Primary Term Acreage.............................. 645,782 459,947 645,782 289,460
Held by Production Acreage(1)..................... 23,470 20,166 23,470 15,474
--------- --------- --------- ---------
Total Undeveloped Acreage......................... 669,252 480,113 669,252 304,934
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Held by production acreage is leasehold interest in oil and gas properties,
which is beyond its primary term and is being kept in force by virtue of
production of oil and gas in commercial quantities.
(2) Pro forma to give effect to the closing of the CMS Transaction which
occurred on January 15, 1999. See "Item 1--Description of Business--CMS
Transaction." Approximately 20,000 net undeveloped acres are subject to an
election to purchase on behalf of CMS pursuant to the terms of the CMS
Transaction.
PROPERTIES
Following the second closing of the CMS Transaction on January 15, 1999, the
Company owned oil and gas leases covering approximately 304,934 net acres in the
Powder River Basin of Wyoming and Montana. Since the second closing, Pennaco has
acquired an additional 6,800 net acres outside of the CMS area of mutual
interest, increasing the Company's leasehold total to approximately 311,800 net
acres as of March 1, 1999. Approximately 56% of the acreage is located on
federal and state land and approximately 44% of the acreage is located on
private land. The Company's leases generally have five to ten year primary
terms. The federal leases are generally ten year term leases and newly acquired
fee and state leases are generally five-year term leases.
The Company's Powder River Basin leasehold can generally be divided into
four separate project areas as follows:
SOUTH GILLETTE AREA--Pennaco now holds approximately 16,000 net acres in
this project area located near the town of Gillette, Wyoming and outside the CMS
area of mutual interest. The Company began its initial drilling program in this
area and the majority of its wells drilled to date are located here. The
Company's South Gillette Area wells have an average 94% working interest and all
are operated by the
23
<PAGE>
Company. The wells are in the process of being tested, dewatered and connected
to gathering and compression systems. The Company's first gas production began
flowing from this area in April 1999.
NORTHERN FAIRWAY AREA--Pennaco holds approximately 142,000 net acres in this
project area located north of the town of Gillette, Wyoming, up to the Wyoming
border on the east side of the basin. Virtually all of the Company's leasehold
acreage in this area is included in the area of mutual interest with CMS. The
Company drilled and is the operator of 11 exploratory CBM wells in the Spotted
Horse Prospect in this area in January 1999. The Company also drilled and is the
operator of four exploratory CMB wells in the Collums Prospect the first quarter
of 1999. The wells in these two prospects are in the process of completion and
testing.
BORDER AREA--Pennaco holds approximately 92,000 net acres in this project
area located in Montana adjoining the Wyoming border adjacent to the Northern
Fairway Area and the Sherian Area. All of the Company's leasehold in this area
is included in the area of mutual interest with CMS. While the Company has not
drilled any wells in this area, some industry CBM drilling activity has occurred
adjacent to the Border Area with encouraging results.
SHERIDAN AREA--Pennaco holds approximately 62,000 net acres in this project
area located in Wyoming primarily east of the town of Sheridan on the west side
of the basin. Virtually all of the Company's leasehold in this area is included
in the area of mutual interest with CMS. The Company has not drilled any wells
in this area.
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 75% 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 25 formations from upper Cretaceous to Pennsylvanian
age. No such production has been generated from the Company's leases.
TITLE TO PROPERTIES
As is customary in the oil and gas industry, only a preliminary title
examination is conducted at the time oil and gas leases covering properties
believed to be suitable for drilling operations are acquired by the Company.
Prior to the commencement of drilling operations, a thorough title examination
of the drill site tract is conducted by independent attorneys. Once production
from a given well is established, the Company prepares a division order title
report indicating the proper parties and percentages for payment of production
proceeds, including royalties. The company believes that title to its leasehold
properties is good and defensible in accordance with standards generally
acceptable 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.
OFFICE FACILITIES
The Company's office space is currently subleased pursuant to an agreement
with Evansgroup, Inc. The term of the sublease commenced on April 6, 1998 and
expires on September 30, 2000. The sublease covers approximately 11,524 square
feet at a yearly rent of approximately $173,000.
The Company also leases office and lodging space in Gillette, Wyoming. The
term of the office lease commenced on October 5, 1998 and expires on April 4,
1999. The lease covers approximately 9,000 square feet at a yearly rent of
approximately $17,400. In February 1999 a new lease/purchase agreement was
entered into whereby the term of the lease/purchase agreement commences on April
4, 1999 and expires December 31, 2000. The yearly rent is approximately $17,400.
Under terms of the purchase option, $1,000 per month of the rent is deemed to
apply to a purchase option on the property. The purchase option expires January
7, 2001.
24
<PAGE>
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................................... 31 Chairman of the Board, Director
Paul M. Rady........................................ 45 President, Chief Executive Officer, Director
Glen C. Warren, Jr.................................. 43 Chief Financial Officer, Executive Vice President,
Director
Gregory V. Gibson................................... 49 Vice President, Legal, Secretary, Director
Terrell A. Dobkins.................................. 46 Vice President of Production
Brian A. Kuhn....................................... 40 Vice President of Land
Mark A. Erickson.................................... 40 Director
David W. Lanza...................................... 30 Director
<CAPTION>
OTHER SIGNIFICANT EMPLOYEES AND CONSULTANTS AGE POSITION
- ---------------------------------------------------- --- ------------------------------------------------------
<S> <C> <C>
William Travis Brown, Jr............................ 53 Exploration Manager
Dirck Tromp......................................... 32 Staff Geologist
John Dolloff........................................ 69 Senior Geology Consultant
</TABLE>
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 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.
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 and a Master of Science Degree in Geology
from Western Washington University.
25
<PAGE>
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. and a Juris Doctorate
degree and a Bachelor of Arts degree in Interdisciplinary Science, both from the
University of Mississippi.
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.
TERRELL A. DOBKINS, VICE PRESIDENT--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 Manager of Acquisitions, and was
involved in the development of several projects, including completions,
operations and reservoir engineering. Mr. Dobkins received a Bachelor of Science
degree in Chemical Engineering from the University of New Mexico.
BRIAN A. KUHN, VICE PRESIDENT--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.
MARK A. ERICKSON, 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
26
<PAGE>
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.
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.
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.
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. 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.
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.
Directors' terms are one year.
EXECUTIVE COMPENSATION
The Company has 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.
27
<PAGE>
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.
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 of $150,000 for 1999 and equal to 1% of the
Company's net cash flow thereafter, 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 its three most
highly compensated officers with annual compensation in excess of $100,000
during the period ended December 31, 1998.
28
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL AWARDS
COMPENSATION OTHER ANNUAL SECURITIES
------------------ COMPENSATION UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS (1) OPTIONS (#) COMPENSATION
- ------------------------------------------------------------ ---------- ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Paul W. Rady ...............................................
President and Chief Executive Officer $65,077(2) -- -- 800,000 --
Glen C. Warren, Jr. ........................................
Chief Financial Officer and Executive Vice President 49,680(3) -- -- 513,228 --
Terrell A. Dobkins .........................................
Vice President--Production 46,465(4) -- -- 250,000 --
Brian A. Kuhn ..............................................
Vice President--Land 41,548(5) -- -- 150,000 --
</TABLE>
- ------------------------
(1) The Company recognized non-cash compensation expense relating to restricted
Common Stock and warrants purchased by Mr. Warren of $675,000, and stock
options issued to Mr. Dobkins of $556,250 and Mr. Kuhn of $412,500,
respectively, in the third quarter of 1998. This non-cash expense was
recognized in accordance with APB No. 25, "Accounting for Stock Issued to
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 purchase and the $1.75 unit price for restricted shares and warrants
purchased by Mr. Warren. Compensation expense for Mr. Dobkins and Mr. Kuhn
was calculated based on the difference between the closing price per share
on the last trading day prior to the date of employment and the exercise
price for options awarded. The restricted securities were offered as
incentive to attract a senior management team to the Company. The Company
believes that the offers made by the Board of Directors in June 1999 were at
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 the offers were made which was prior to the date that the Company's
stock was first quoted on the OTC Bulletin Board system. 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 Company's
stock once the stock is publicly traded. While the Company was not an SEC
registrant until September 8, 1998, the Company's shares were quoted on the
OTC Bulletin Board system beginning July 1, 1998 (the Company's shares were
listed on the American Stock Exchange on April 19, 1999).
(2) Mr. Rady became an executive officer on June 16, 1998, compensated at an
annual salary of $120,000.
(3) Mr. Warren became an executive officer on July 2, 1998, compensated at an
annual salary of $100,000.
(4) Mr. Dobkins became an officer on July 6, 1998, compensated at an annual
salary of $95,000.
(5) Mr. Kuhn became an officer on July 9, 1998, compensated at an annual salary
of $87,000.
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
29
<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 December 31, 1998, Non-statutory Stock Options to purchase
2,969,365 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 616,500 are vested as of
December 31, 1998 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 December 31,
1998.
30
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------
PERCENTAGE OF
TOTAL OPTIONS
NUMBER OF GRANTED TO
SECURITIES EMPLOYEES AS OF EXERCISE
UNDERLYING THE PERIOD ENDED PRICE PER
OPTIONS GRANTED DECEMBER 31, 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
13,228 0.4% $ 3.25 September 3, 2008
Terrell A. Dobkins...................... 175,000 5.9% $ 3.25 July 6, 2004 through July
6, 2007(1)
75,000 2.5% $ 2.50 July 6, 2004 through July
6, 2007(1)
Brian A. Kuhn........................... 100,000 3.4% $ 3.25 July 9, 2004 through July
9, 2007(1)
50,000 1.7% $ 2.50 July 9, 2004 through July
9, 2007(1)
</TABLE>
- ------------------------
(1) Option expiration date is five years subsequent to vesting which occurs
ratably over a four year period from the date of grant.
The following table reflects certain information concerning the number of
unexercised options held by the Named Officers and the value of such officers'
unexercised options as of December 31, 1998. No options were exercised by the
Named Officers during the period ended December 31, 1998.
OPTION VALUES AS OF THE PERIOD ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN THE
OPTIONS HELD AT MONEY OPTIONS HELD AT
DECEMBER 31, 1998 DECEMBER 31, 1998 (1)
--------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Paul W. Rady..................................................... -- 800,000 -- $450,000
Glen C. Warren, Jr............................................... -- 513,228 -- 267,460
Terrell A. Dobkins............................................... -- 250,000 -- 150,000
Brian A. Kuhn.................................................... -- 150,000 -- 93,750
</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 Officers is $2.50 per share and $3.25
per share. The value of unexercised options for each of the Named Officers
represents the difference between the exercise price of such options and the
closing price of the Company's Common Stock on December 31, 1998 ($3.625 per
share).
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.
31
<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 April
15, 1999 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" assumes that all of the shares 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(3) 5.7% 285,715 571,429 3.8%
Jeffrey L. Taylor................................. 543,375(4) 3.6% -- 543,375 3.6%
Glen C. Warren, Jr................................ 262,500(5) 1.7% 87,500 175,000 1.2%
Gregory V. Gibson................................. 100,000(6) * -- 100,000 *
Mark A. Erickson.................................. 75,000(7) * -- 75,000 *
David W. Lanza.................................... 66,000(8) * -- 66,000 *
William Travis Brown.............................. 87,500(9) * 25,000 62,500 *
R.I.S. International.............................. 2,500,000 10) 16.5% -- 2,500,000 16.5%
State Street Research & Management................ 1,500,000 11) 9.9% 1,500,000 -- --
Centennial Energy Partners, L.P................... 300,000 12) 2.0% 300,000 -- --
Tercentennial Energy Partners, L.P................ 268,500 12) 1.8% 268,500 -- --
Quadrennial Partners, L.P......................... 250,000 12) 1.7% 250,000 -- --
Investment 11, L.L.C.............................. 25,000 12) * 25,000 -- --
Centennial Overseas Fund, Ltd..................... 20,000 12) * 20,000 -- --
Arpels Financial Services Corporation............. 165,000 1.1% 165,000 -- --
Excalibur Funds Group............................. 110,000 * 110,000 -- --
Jayvee & Co....................................... 82,500 * 82,500 -- --
Yorkton Securities, Inc. ......................... 75,200 13) * 75,200 -- --
Aton Venture Fund Ltd............................. 41,250 * 41,250 -- --
Yorkton Securities in Trust for
Michael McMurrich............................... 33,000 * 33,000 -- --
Dynachem, Inc..................................... 27,500 * 27,500 -- --
All officers and directors as a group
(six persons)................................... 1,904,019 12.6% -- 1,530,804 10.1%
</TABLE>
- ------------------------
* Represents less than 1% of the Common Stock outstanding.
(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 15,144,179 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
32
<PAGE>
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 285,715 shares issuable upon the exercise of presently exercisable
stock purchase warrants, exercisable at a price of $1.75 per share.
(4) 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.
(5) Includes 87,500 shares issuable upon the exercise of presently exerciseable
stock purchase warrants exerciseable at a price of $1.75 per share.
(6) 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 2 Park Plaza, Suite 450, Irvine, California 92614.
(7) Includes 50,000 shares issuable upon the exercise of presently exercisable
stock options, exercisable at a price of $1.25 per share, 15,000 shares
issuable upon the exercise of options which will vest upon the termination
of Mr. Erickson's term as a Director on June 15, 1999 at a price of $3.19
per share and 10,000 shares currently owned.
(8) Includes 50,000 shares issuable upon the exercise of currently vested stock
options, exercisable at a price of $1.25 per share. Mr. Lanza's address is
2 Park Plaza, Suite 450, Irvine, California 92614.
(9) Includes 25,000 shares issuable upon the exercise of presently exercisable
stock purchase warrants, exercisable at a price of $1.75 per share and
12,500 shares issuable upon the exercise of currently vested stock options,
exercisable at a price of $2.50 per share.
(10) 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.
(11) The address of State Street Research and Management is One Financial
Center, 30th Floor, Boston, Massachusetts 02111-2640.
(12) These shares are under common control. Each entity's address is 900 Third
Ave., Suite 1801, New York, New York 10022.
(13) Represents 75,200 shares issuable upon the exercise of stock purchase
warrants with an exercise price of $3.58 per share which expire on September
3, 2000. The address of Yorkton Securities is 181 Bay Street, Suite 3100,
Box 830, Toronto, Ontario, M5J 2T3, Canada.
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
33
<PAGE>
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 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 listed on the American Stock Exchange system under the
symbol "PN."
As of April 15, 1999, there were 15,144,179 shares issued and outstanding.
STOCK PURCHASE WARRANTS
The Company issued 607,500 warrants with an exercise price of $5.00 per
share on September 4, 1998, via a private placement exempt from the registration
requirements of the Securities Act. These warrants expired unexercised on March
4, 1999.
As of April 15, 1999 the Company had 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.
As of April 15, 1999 the Company had 128,000 warrants outstanding with an
exercise price of $1.25 per share issued April 15, 1998, via a private placement
exemption from the registration requirements of the Securities Act. These
warrants are exercisable anytime after April 15, 1999 and expire on April 15,
2000.
As of April 15, 1999 the Company had 75,200 warrants outstanding with an
exercise price of $3.58 per share issued September 4, 1998, via a private
placement exemption from the registration requirements of the Securities Act.
These warrants may be exercised any time within two years from the date of
issuance.
No shares underlying the above-referenced warrants have been registered
under the Securities Act.
TRANSFER AGENT
The Company's transfer agent is: Harris Trust and Savings Bank, P.O. Box
A3504, Chicago, Illinois 60690-3504.
PLAN OF DISTRIBUTION
We are registering the common stock on behalf of selling stockholders. As
used in this prospectus, "selling stockholders" includes donees and pledgees
selling shares received from a named selling stockholder after the date of this
prospectus. All costs, expenses and fees in connection with the registration of
the common stock offered hereby will be paid by us. Brokerage commissions and
similar selling expenses, if any, attributable to the sale of common stock will
be borne by the selling stockholders. Sales of Common 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 American Stock Exchange, in
negotiated transactions, through put or call option transactions relating to the
Common Stock, through short sales of Common Stock, or a combination of such
methods of sale, at market prices prevailing at the time of sale, or at
negotiated prices. These transactions may or may not involve brokers or dealers.
The selling stockholders have advised us that they have not entered into any
agreements, understandings or arrangements with any
34
<PAGE>
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 common stock by the selling stockholders.
The selling stockholders may sell Common Stock directly to purchasers or to
or through broker-dealers, which may act as agents or principals. These
broker-dealers may receive compensation in the form of discounts, concessions,
or commissions from the selling stockholders and/or purchasers of Common 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 Common Stock might be deemed to be "underwriters" within the meaning
of Section 2(a)(11) of the Securities Act of 1933, and any commissions received
by such broker-dealers and any profit on the resale of the Common Stock sold by
them while acting as principals might be deemed to be underwriting discounts or
commissions under the Securities Act. We have agreed to indemnify each selling
stockholder against liabilities, including liabilities arising 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
Common 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(a)(11) of the Securities Act, the selling stockholders will
be subject to the prospectus delivery requirements of the Securities Act. We
have 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 Common 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 the Rule.
When we are notified by a selling stockholder that any material arrangement
has been entered into with a broker-dealer for the sale of Common Stock, we will
file a supplement to this prospectus, if required, pursuant to Rule 424(b) under
the Act, disclosing
- the name of each such selling stockholder and of the participating
broker-dealer(s),
- the number of shares of Common Stock involved,
- the price at which such shares of Common Stock were sold,
- the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable,
- that the broker-dealer(s) did not conduct any investigation to verify the
information set out or incorporated by reference in this prospectus and
- other facts, material to the transaction.
In addition, when we are notified by a selling stockholder that a donee or
pledgee intends to sell more than 500 shares, a supplement to this prospectus
will be filed. See "Principal and Selling Stockholders."
EXPERTS
The financial statements of Pennaco Energy, Inc. as of December 31, 1998,
and for the period from January 26, 1998 (inception) to December 31, 1998, have
been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
35
<PAGE>
LEGAL MATTERS
The legality of the common stock offered by this prospectus 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 IN 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 LLP as auditors
for the Company's financial statements for the period ending December 31, 1998,
and KPMG LLP was engaged for such purpose in September 1998.
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 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.
36
<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 December 31, 1998, and the related statements
of operations, stockholders' equity and cash flows for the period from January
26, 1998 (inception) to December 31, 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
December 31, 1998, and the results of its operations and its cash flows for the
period from January 26, 1998 (inception) to December 31, 1998, in conformity
with generally accepted accounting principles.
KPMG LLP
Denver, Colorado
March 12, 1999
F-1
<PAGE>
ITEM 7.
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
HISTORICAL
-------------- PRO FORMA
(NOTE 2)
------------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash.............................................................................. $ 5,622,776 19,804,190
Accounts receivable............................................................... 374,728 374,728
Unit subscriptions receivable..................................................... 763,750 763,750
Assets held for sale.............................................................. 6,931,995 --
Drilling deposit.................................................................. 333,473 333,473
Inventory......................................................................... 231,116 231,116
Prepaid expenses and other current assets......................................... 151,858 151,858
-------------- ------------
Total current assets............................................................ 14,409,696 21,659,115
-------------- ------------
Property and equipment, at cost:
Oil and gas properties, using the successful efforts method of accounting (note
8):
Unproved........................................................................ 4,656,965 4,656,965
Proved.......................................................................... 1,358,769 1,358,769
Other property and equipment...................................................... 296,119 296,119
-------------- ------------
6,311,853 6,311,853
Less accumulated depreciation..................................................... (61,607) (61,607)
-------------- ------------
Net property and equipment...................................................... 6,250,246 6,250,246
-------------- ------------
Deferred income tax asset........................................................... 1,266,000 1,806,000
Other assets........................................................................ 99,795 99,795
-------------- ------------
$ 22,025,737 29,815,156
-------------- ------------
-------------- ------------
Current liabilities:
Bridge loan payable (notes 2 and 3)............................................... $ 5,600,000 --
Lease acquisitions payable........................................................ 618,586 --
Accounts payable and accrued liabilities.......................................... 1,964,228 1,964,228
Income taxes payable.............................................................. -- 5,389,000
-------------- ------------
Total current liabilities....................................................... 8,182,814 7,353,228
-------------- ------------
Stockholders' equity (note 5):
Common stock, $.001 par value. Authorized 50,000,000 shares; 14,795,179 shares
issued and outstanding.......................................................... 15,152 15,152
Additional paid-in capital........................................................ 17,640,644 17,640,644
Retained earnings (deficit) accumulated during the development stage.............. (3,812,873) 4,806,132
-------------- ------------
Total stockholders' equity...................................................... 13,842,923 22,461,928
-------------- ------------
Commitments (note 7)
$ 22,025,737 29,815,156
-------------- ------------
-------------- ------------
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
PERIOD FROM JANUARY 26, 1998 (INCEPTION) TO DECEMBER 31, 1998
<TABLE>
<S> <C>
Revenue:
Gain on sale of property..................................................... $ 1,413,207
Interest income.............................................................. 55,286
-----------
Total revenue.............................................................. 1,468,493
-----------
Expenses:
Exploration.................................................................. 1,825,767
Depreciation and amortization................................................ 61,607
General and administrative................................................... 3,977,592
Interest expense............................................................. 682,400
-----------
Total expenses............................................................. 6,547,366
-----------
Loss before income taxes................................................... (5,078,873)
Income tax benefit............................................................. 1,266,000
-----------
Net loss and deficit accumulated during the development stage.............. $(3,812,873)
-----------
-----------
Loss per share................................................................. (0.34)
-----------
-----------
Weighted average common shares outstanding..................................... 11,245,298
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD FROM JANUARY 26, 1998 (INCEPTION) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK UNITS ADDITIONAL
----------------------- TO BE PAID-IN ACCUMULATED
SHARES AMOUNT ISSUED CAPITAL DEFICIT TOTAL
------------ --------- ----------- ------------ ------------ ------------
<S> <C> <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 for cash, net of
offering costs of $178,014 (note
5)................................... 12,030,000 12,030 -- 10,607,551 -- 10,619,581
Compensation relating to common stock
and warrants (note 5)................ -- -- -- 1,340,000 -- 1,340,000
Stock option compensation (note 5)..... -- -- -- 450,000 -- 450,000
Units issued for cash, net of offering
costs of $324,675 (note 5)........... 1,770,179 1,770 -- 4,231,993 -- 4,233,763
Warrants issued for properties and
services (note 5).................... -- -- -- 248,702 -- 248,702
Units to be issued from escrow (note
5)................................... 356,500 -- 357 763,393 -- 763,750
Net loss for the period................ -- -- -- -- (3,812,873) (3,812,873)
------------ --------- --- ------------ ------------ ------------
Balances at December 31, 1998.......... 15,151,679 $ 14,795 357 17,640,644 (3,812,873) 13,842,923
------------ --------- --- ------------ ------------ ------------
------------ --------- --- ------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 26, 1998 (INCEPTION) TO DECEMBER 31, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss..................................................................... $(3,812,873)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on the sale of property............................................... (1,413,207)
Depreciation and amortization.............................................. 61,607
Compensation relating to common stock and warrants issued.................. 1,340,000
Stock option compensation.................................................. 450,000
Warrants issued for services............................................... 16,500
Deferred income tax benefit................................................ (1,266,000)
Increases in operating assets and liabilities:
Accounts receivable...................................................... (374,728)
Prepaid expenses and other current assets................................ (151,858)
Inventory................................................................ (231,116)
Other assets............................................................. (99,795)
Accounts payable and accrued liabilities................................. 1,964,228
-----------
Net cash used by operating activities.................................. (3,517,242)
-----------
Cash flows from investing activities:
Capital expenditures......................................................... (19,198,439)
Proceeds from sale of properties............................................. 7,600,000
Drilling deposit............................................................. (333,473)
Increase in lease acquisitions payable....................................... 618,586
-----------
Net cash used by investing activities.................................. (11,313,326)
-----------
Cash flows from financing activities:
Proceeds from issuance of bridge loans....................................... 8,800,000
Repayment of bridge loan..................................................... (3,200,000)
Proceeds from issuance of note payable....................................... 500,000
Repayment of note payable.................................................... (500,000)
Proceeds from issuance of common stock, net of offering costs................ 14,853,344
-----------
Net cash provided by financing activities.............................. 20,453,344
Net increase in cash................................................... 5,622,776
Cash at beginning of period.................................................... --
-----------
Cash at end of period.......................................................... $ 5,622,776
-----------
-----------
Supplemental disclosures of cash flow information:
Cash paid for interest....................................................... $ 682,400
-----------
-----------
Cash paid for income taxes................................................... $ --
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 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, acquisition of leases and
option rights, and commencement of its drilling program. 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-owned 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.
(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 in 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.
(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.
F-6
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1998
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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. Upon the sale of a partial interest in an
unproved property, the proceeds are treated as a recovery of cost. If the
proceeds exceed the carrying amount of the property, a gain is recognized
in 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 using 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 the asset and
liability method, 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), defines a fair value method of
accounting for stock compensation 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
F-7
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1998
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOR STOCK ISSUED TO EMPLOYEES (APB 25), which the Company has elected to
follow. 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) CMS TRANSACTION
On October 23, 1998, the Company and CMS Oil and Gas Company signed a
definitive agreement (the "CMS Agreement") relating to the development of
the Company's Powder River Basin acreage (the "CMS Transaction"). Pursuant
to the terms of the CMS Agreement, CMS Oil and Gas Company will acquire an
undivided 50% working interest in approximately 492,000 net acres of
Pennaco's leasehold position in the Powder River Basin for $28,000,000. The
Company acquired the leasehold position which is being conveyed to CMS in
the CMS Transaction for approximately $7,000,000. The purchase price
provided for in the CMS Agreement was the result of arm's length
negotiations between the Company and CMS. The joint operating agreement
between the parties will be modeled after the 1989 AAPL Model Form of Joint
Operating Agreement. The CMS Agreement provides that the parties will in
good faith negotiate a development agreement for the exploration,
development and production of coal bed methane from the leases. The
development agreement will provide that each party will operate
approximately 50% of the wells drilled in the area of mutual interest.
Pennaco and CMS have divided the acreage in the area of mutual interest into
project areas which will be operated by one party or the other. As is
customary in oil and gas leasehold transactions, the agreement provides for
the adjustment of the purchase price for title defects discovered prior to
closing and for the opportunity for one party to participate in acquisitions
made by the other party in the area of mutual interest defined in the
agreement. The agreement also provides for a preferential purchase right to
the other party in the event either CMS or the Company attempts to sell a
portion of its interest in the acreage covered by the agreement. There is no
preferential purchase right in the event that either party enters into a
merger, reorganization or consolidation. All of the leases in the area of
mutual interest are dedicated to CMS Gas Transmission and Storage, an
affiliate of CMS Oil and Gas Company, for gathering, compression and
transportation.
Pursuant to the terms of the CMS Agreement, CMS agreed to pay Pennaco
$5,600,000 of earnest money in the form of a non-interest bearing bridge
loan (the "CMS Bridge Loan") which was secured by substantially all of the
Company's oil and as leases. Approximately $3,200,000 of such amount was
paid directly to existing creditors of the Company. The CMS Transaction is
structured such that the conveyance of the working interests was to occur at
two separate closings. The first closing occurred on November 20, 1998, and
the second occurred on January 15, 1999. The Company received $7,600,000 at
the first closing and received $14,800,000 at the second closing, less
approximately $1,800,000 which is held in escrow subject to customary
closing adjustments. As of March 12, 1999, approximately $1,200,000 was held
in escrow pending CMS closing adjustments. The CMS Bridge Loan was canceled
at the second closing.
F-8
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1998
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) CMS TRANSACTION (CONTINUED)
The unaudited pro forma balance sheet of the Company as of December 31, 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 and the lease acquisitions
payable, all as if the transactions had occurred on that date.
(3) BRIDGE LOAN
The Company borrowed $3,200,000 on September 4, 1998 under a bridge loan
with interest payable at 18% per year. The bridge loan was paid in full on
October 23, 1998 with proceeds from the CMS Transaction.
(4) INCOME TAXES
The income tax benefit of $1,266,000 includes a deferred federal income tax
benefit of $1,196,000 and a deferred state income tax benefit of $70,000.
The income tax benefit recorded for the period from inception to December
31, 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 December 31, 1998, the Company has a net operating loss carryforward for
federal income tax purposes of approximately $431,000 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
December 31, 1998, relate to the net operating loss carryforward.
(5) 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 $178,014 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
F-9
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1998
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) STOCKHOLDERS' EQUITY (CONTINUED)
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 December 31, 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 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 980,000 units at $3.25 per unit.
Each unit consists of one share of common stock and one warrant for each
two shares issued. The warrants with an exercise price of $5.00 per share
expire on March 4, 1999. Proceeds to the Company were approximately
$3,165,000. Offering costs of $324,675 were charged to additional paid in
capital.
Under the terms of the stock subscription agreement, one of the
subscribers to the offering subscribed for an additional 235,000 units.
An additional $763,750 was deposited into an escrow account representing
the aggregate purchase price of the additional 235,000 units. Under the
terms of the escrow agreement the shares and the shares of common stock
underlying the warrants were to be registered for resale under the
Securities Act of 1993 (the "Act") with the U.S. Securities and Exchange
Commission 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.
The escrow proceeds of $763,750 were deposited into an interest bearing
escrow account together with certificates representing the units to be
purchased. Under the terms of the subscription agreement, the
registration statement was required to be declared effective and the
Canadian exemption order was to be obtained on or before December 31,
1998. The registration statement has not been declared effective.
Accordingly as of December 31, 1998, the subscriber may elect to either
purchase the escrow units or receive a refund from the escrow account
paid with their subscription, plus interest thereon, and an additional
unit for each 10 units purchased in the offering. On February 28, 1999
all the subscribers elected to receive an additional unit for each 10
units purchased in the offering and, as a result, an additional 121,500
units are to be issued. The additional units to be issued have been
reflected in the accompanying financial statements as units to be issued
from escrow and the $763,750 to be received from escrow has been
reflected as unit subscriptions receivable. The subscriber is 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 until such time as the registered
securities may be resold pursuant to Rule 144 promulgated under the Act.
F-10
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1998
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) STOCKHOLDERS' EQUITY (CONTINUED)
(b) WARRANTS
At December 31, 1998 the Company has outstanding 607,500 warrants with an
exercise price of $5.00 per share. These warrants were exercisable any
time within six months of the date of issuance. The warrants expired
unexercised on March 4, 1999.
At December 31, 1998 the Company also has outstanding 398,215 warrants
with an exercise price of $1.75 per share for the first year and $1.96
per share for the second year. 310,715 of these warrants were issued July
1, 1998 and 87,500 were issued September 4, 1998. The warrants expire two
years from the date of issuance.
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 anytime 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 (inception) to December
31, 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.
The Company issued warrants to purchase 90,000 shares of common stock to
SMS Operating, LLC as partial consideration for a lease acquisition. The
warrants are exercisable at $4.72 per share anytime after November 24,
1998 and expire November 24, 2002. The estimated fair value of the
warrants issued of $232,202 was capitalized as lease acquisition cost.
(c) STOCK OPTION 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 December 31,
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
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
NUMBER OF PRICE
OPTIONS PER SHARE
---------- -----------
<S> <C> <C>
BALANCE, JANUARY 26, 1998 (INCEPTION) -- $ --
Granted...................................................................... 2,969,365 2.71
Canceled..................................................................... (204,000) 1.27
----------
BALANCE, DECEMBER 31, 1998..................................................... 2,765,365 2.82
----------
----------
</TABLE>
F-11
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1998
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the range of exercise prices and the weighted-average
contractual life of outstanding stock options at December 31, 1998, is as
follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AVERAGE AVERAGE EXCERCISABLE AVERAGE
DECEMBER 31, EXERCISE REMAINING DECEMBER 31, EXERCISE
1998 PRICE LIFE (YEARS) 1998 PRICE
------------ ----------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
$ 1.25 800,000 1.25 9.3 612,500 1.25
2.50 914,000 2.50 8.4 4,000 2.50
3.25 430,000 3.25 4.6 -- --
3.63 1,215 3.63 4.0 -- --
4.56 12,150 4.56 3.8 -- --
5.00 608,000 5.00 4.2 -- --
------------ ------------
$1.25 - 5.00 2,765,365 2.81 7.1 616,500 1.24
------------ ------------
------------ ------------
</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 December 31, 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 (inception)
to December 31, 1998 would have been $6,447,183 and $.57, respectively.
The weighted average fair value of options granted during 1998 was $1.34
per share. The weighted average remaining contractual life of all options
outstanding at December 31, 1998 was approximately 7.1 years. The fair
value of each option grant was estimated at the date of grant 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%.
(6) RELATED PARTY TRANSACTIONS
RIS Resources International Corporation (RIS International) owned 4,000,000
shares of the Company's common stock at December 31, 1998. A member of the
Board of Directors of the Company also serves as a consultant to 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 the Company
and has received approximately $5,700 as compensation for his services.
During the period from inception to December 31, 1998, a company for which
the Company's Chairman serves as a director provided administrative services
for the Company for which it received
F-12
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1998
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) RELATED PARTY TRANSACTIONS (CONTINUED)
compensation of approximately $16,000. In addition the Chairman was paid
approximately $150,000 for the period from January 26, 1998 (inception) to
December 31, 1998.
One of the Company's Directors provided legal services to the Company during
the period from inception to December 31, 1998. The Director's firm was paid
approximately $192,000 and the Director was paid approximately $22,500 for
the period from inception to December 31, 1998.
(7) 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, $750,000 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 seven months of the lease from June 1, 1998 through December
31, 1998, the Company paid $100,835 in rent.
The company also leases office and lodging space in Gillette, Wyoming.
The term of the lease commenced on October 5, 1998 and expires on April
4, 1999. The lease concerns approximately 9,000 square feet at a yearly
rent of approximately $17,400. In February 1999 a new lease/ purchase
agreement was entered into. The term of the lease/purchase agreement
commences on April 4, 1999 and expires December 31, 2000. The yearly rent
during that term is approximately $17,400. Under the terms of the
purchase option, $1,000 per month of the rent is deemed to apply to a
purchase option on the property. The purchase option expires January 7,
2001.
F-13
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1998
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) SUPPLEMENTAL FINANCIAL DATA--OIL AND GAS ACTIVITIES
Capitalized costs related to oil and gas activities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998
------------
<S> <C>
Unproved oil and gas properties, at cost.................................................. $4,656,965
Proved oil and gas properties............................................................. 1,358,769
------------
Capitalized costs..................................................................... $6,015,734
------------
------------
</TABLE>
Costs incurred in oil and gas activities for the period from January 26,
1998 (inception) to December 31, 1998 are as follows:
<TABLE>
<S> <C>
Unproved property acquisition costs.................................... $18,132,430
Development costs...................................................... 734,852
Exploration costs...................................................... 1,860,804
----------
Total costs incurred............................................... $20,728,086
----------
----------
</TABLE>
Unproved property acquisition costs include costs incurred to purchase,
lease or otherwise acquire a property. Exploration costs include the costs
of geological and geophysical activity, dry holes, delay rentals, and
drilling and equipping exploratory wells. Development costs include costs
incurred to gain access to and prepare development well locations for
drilling, and to drill and equip development wells.
(9) INFORMATION REGARDING PROVED OIL AND GAS RESERVES (UNAUDITED)
PROVED OIL AND GAS RESERVES. Proved oil and gas reserves are the
estimated quantities of crude oil, natural gas, and natural gas liquids
which geological and engineering data demonstrate with reasonable certainty
to be recoverable in future years from known reservoirs under existing
economic and operating conditions, i.e., prices and costs as of the date the
estimate is made. Prices include consideration of changes in existing prices
provided only by contractual arrangements, but not on escalations based upon
future conditions.
The table below sets forth the Company's quantities of historical proved
reserves as estimated by independent petroleum engineers, all of which were
located in the United States, and the present values attributed to those
reserves. The estimates were prepared by the independent petroleum
engineering firm of Ryder Scott Company. Reserve estimates are inherently
imprecise and are
F-14
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1998
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) INFORMATION REGARDING PROVED OIL AND GAS RESERVES (UNAUDITED) (CONTINUED)
continually subject to revisions based on production history, results of
additional exploration and development, prices of oil and gas and other
factors.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
GAS
(BCF)
---------------------
<S> <C>
Proved developed and undeveloped reserves:
Balance at January 26, 1998 (inception).............................................. --
Extensions and discoveries........................................................... 18.1
---
Balance at December 31, 1998......................................................... 18.1
---
---
Proved developed reserves:
Balance at January 26, 1998 (inception).............................................. --
---
---
Balance at December 31, 1998......................................................... 5.5
---
---
</TABLE>
Standardize Measure of Discounted Future Net Cash Flows
Future net cash flows presented below are computed using year-end prices and
costs. Future corporate overhead expenses and interest expense have not been
included.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
(IN THOUSANDS)
<S> <C>
Future cash inflows, net of production taxes......................................... $ 20,250
Future production costs.............................................................. (6,831)
Future development costs............................................................. (1,422)
Future income tax expenses........................................................... (3,468)
-------
Future net cash flows................................................................ 8,529
-------
10% annual discount for estimated timing of cash flows............................... (2,387)
-------
Standardized measure of discounted future net cash flows............................. $ 6,142
-------
-------
</TABLE>
F-15
<PAGE>
PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 1998
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) INFORMATION REGARDING PROVED OIL AND GAS RESERVES (UNAUDITED) (CONTINUED)
The principal sources of changes in the standardized measure of discounted
future net cash flows, are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 26, 1998
(INCEPTION)
TO DECEMBER 31,
1998
-------------------
(IN THOUSANDS)
<S> <C>
Net change due to extensions and discoveries....................................... $ 8,528
Net change in income taxes......................................................... (2,386)
--------
Net changes........................................................................ 6,142
Balance at January 26, 1998 (inception)............................................ --
--------
Balance at December 31, 1998....................................................... $ 6,142
--------
--------
</TABLE>
The standardized measure of discounted future net cash flows relating to
proved oil and gas reserves and the changes in standardized measure of
discounted future net cash flows relating to proved oil and gas reserves
were prepared in accordance with the provisions of Statement of Financial
Accounting Standards No. 69. Future cash inflows were computed by applying
current prices at year-end to estimated future production. Future production
and development costs are computed by estimating the expenditures to be
incurred in developing and producing the proved oil and gas reserves at
year-end, based on year-end costs and assuming continuation of existing
economic conditions. Future income tax expenses are calculated by applying
appropriate year-end tax rates to future pretax net cash flows relating to
proved oil and gas reserves, less the tax basis of properties involved and
tax credits and loss carryforwards relating to oil and gas producing
activities. Future net cash flows are discounted at a rate of 10% annually
to derive the standardized measure of discounted future net cash flows. This
calculation procedure does not necessarily result in an estimate of the fair
market value or the present value of the Company's oil and gas properties.
F-16
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
David E. Coffey C.P.A. was previously the principal accountant for Pennaco
Energy, Inc. On October 30, 1998, his appointment as principal accountant was
terminated and KPMG Peat Marwick LLP was engaged as principal accountants. The
decision to change accountants was approved by the Board of Directors.
In connection with the audit of the period from January 26, 1998 (date of
inception) to April 15, 1998, and the subsequent interim period through October
30, 1998, there were no disagreements with David E. Coffey, C.P.A. on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements if not resolved to his
satisfaction would have caused him to make reference in connection with his
opinion to the subject matter of the disagreement.
The audit report of David E. Coffey, C.P.A. on the financial statements of
Pennaco Energy, Inc. as of April 15, 1998 and for the period from January 26,
1998 (inception) to April 15, 1998, did not contain any adverse opinion or
disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit
scope, or accounting principles.
F-17
<PAGE>
PENNACO ENERGY, INC.
3,296,165 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 September 15, 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 September 15, 1998 and included herein by reference).
+4.1 Form of Warrant
+5.1 Opinion of Gibson, Haglund & Johnson
10.1 Mineral Lease Purchase Agreement dated February 23, 1998 between High
Plains Associates, Inc. and Pennaco Energy, Inc. (filed as Exhibit 10.1
to the Company's Form 10-SB/A File No. 00-24881, filed September 15,
1998 and included herein by reference).
10.2 Letter Agreement dated January 23, 1998 between High Plains Associates,
Inc. and Taylor Oil Properties (filed as Exhibit 10.2 to the Company's
Form 10-SB/A File No. 00-24881, filed September 15, 1998 and included
herein by reference).
10.3 Assignment of Option and Exercise of Option dated March 6, 1998 between
High Plains Associates, Inc. and Pennaco Energy, Inc. (filed as Exhibit
10.3 to the Company's Form 10-SB/A File No. 00-24881, filed September
15, 1998 and included herein by reference).
10.4 Agreement dated March 6, 1998 between High Plains Associates, Inc. and
Pennaco Energy, Inc. (filed as Exhinbit 10.4 to the Company's Form
10-SB/A File No. 00-24881, filed September 15, 1998 and included herein
by reference).
10.5 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
September 15, 1998 and included herein by reference).
10.6 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
September 15, 1998 and included herein by reference).
10.7 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
September 15, 1998 and included herein by reference).
10.8 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 September 15, 1998 and included herein by
reference).
10.9 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 September 15, 1998 and included herein by
reference).
10.10 Secured Promissory Note dated August 13, 1998 from Pennaco Energy, Inc. to
Venture Capital Sourcing, SA (filed as Exhibit 10.10 to the Company's
Form 10-SB/A File No. 00-24881, filed September 15, 1998 and included
herein by reference).
10.11 Second Amendment to Security Agreement dated August 13, 1998 between
Pennaco Energy, Inc. and Venture Capital Sourcing, SA (filed as Exhibit
10.11 to the Company's Form 10-SB/A File No. 00-24881, filed September
15, 1998 and included herein by reference).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE
- ------ --------------------------------------------------------------------------
<C> <S>
10.12 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
September 15, 1998 and included herein by reference).
10.13 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).
10.14 Sublease Agreement dated October 23, 1998 between Pennaco Energy, Inc. and
Evansgroup, Inc. (filed as Exhibit 10.14 to the Company's Form 10-SB/A
File No. 00-24881 filed December 22, 1998 and included here by
reference).
10.15 Agreement Regarding the Drilling of Coal Bed Methane Wells (filed as
Exhibit 10.15 to the Company's Form 10-SB/A File No. 00-24881, filed
December 22, 1998 and included herein by reference).
10.16 First Amendment to Purchase and Sale Agreement dated November 20, 1998
(filed as Exhibit 10.16 to the Company's Form 10-SB/A File No. 00-24881,
filed January 28, 1999 and included herein by reference).
10.17 Second Amendment to Purchase and Sale Agreement dated January 15, 1999
(filed as Exhibit 10.17 to the Company's Form 10-SB/A File No. 00-24881,
filed January 28, 1999 and included herein by reference).
*23.1 Consent of KPMG LLP
+23.2 Consent of Gibson, Haglund & Johnson (included in Exhibit 5.1)
*23.3 Consent of Hanifen Imhoff, Inc.
+24.1 Power of Attorney
</TABLE>
- ------------------------
+ Previously Filed
* Filed Herewith
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 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.
II-5
<PAGE>
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-6
<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 AMENDMENT TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, TO THE
CITY OF DENVER, STATE OF COLORADO, ON THE 5TH DAY OF MAY, 1999.
<TABLE>
<S> <C> <C>
PENNACO ENERGY, INC.
By: *
-----------------------------------------
Paul M. Rady
CHIEF EXECUTIVE OFFICER,
PRESIDENT, AND DIRECTOR
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON MAY 4, 1999
IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
NAME TITLE
- ------------------------------ --------------------------
<C> <S>
- ------------------------------ Chairman of the Board of
Jeffrey L. Taylor Directors
*
- ------------------------------ President, Chief Executive
Paul M. Rady Officer, and Director
Chief Financial Officer,
/s/ GLEN C. WARREN, JR. Executive Vice
- ------------------------------ President, and Director
Glen C. Warren, Jr. (Principal Financial and
Accounting Officer)
*
- ------------------------------ Director
Mark A. Erickson
- ------------------------------ Vice President, Legal,
Gregory V. Gibson Secretary, and Director
*
- ------------------------------ Director
David W. Lanza
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ GLEN C. WARREN, JR.
-------------------------
Glen C. Warren, Jr.,
Pursuant to a
power-of-attorney filed
with the Registration
Statement on Form SB-2
(333-68317) on
December 3, 1998.
</TABLE>
II-7
<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 LLP
Denver, Colorado
April 30, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF HANIFEN IMHOFF, INC.
We consent to the use of our name in the Pennaco Energy, Inc.
Registration Statement on Form SB-2 under the heading "BUSINESS." In giving
such consent, we do not thereby admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of
1933, as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder.
/s/ Hanifen Imhoff, Inc.
----------------------------------------
Hanifen Imhoff, Inc.
Denver, Colorado
May 4, 1999
