THIS PAPER DOCUMENT IS BEING SUBMITTED PURSUANT TO RULE 101(d)
OF REGULATION S-T
Securities and Exchange Commission
Washington, DC 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
AURORA ENERGY, LTD.
(Name of Small Business Issuer in its charter)
Nevada 91-1780941
(State of Organization) (IRS Employer I.D. No.)
3760 North US 31 South, Traverse City, Michigan49684
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number: (616) 941-0073
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange
to be so registered: on which each class is
to be registered:
None None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Aurora Energy, Ltd. ("the Company") is involved in the exploration,
development and production of natural gas and oil reserves in North
America. Management's goal is to produce gas from lower risk black
shales, tight sands and coal beds, targeting projects where large
acreage blocks can be easily evaluated with a series of low cost
test wells prior to development investments.
DEVELOPMENT
The Company was originally incorporated on August 12, 1991 as
a Nevada corporation under the name Mentor Group International
Corporation. It had no material operations from inception until
April, 1997. During its early years, the Company issued common
shares to a number of shareholders in pursuance of several business
interests, which never reached any degree of material impact.
On March 12, 1997, the Company's name was changed to Aurora
Energy, Ltd. On April 22, 1997, the Company acquired a 50%
membership interest in Jet/LaVanway Exploration, L.L.C. in exchange
for a controlling interest in the Company's common stock. John
Miller, Thomas W. Tucker and William W. Deneau were each issued
1,858,400 shares of the Company's common stock (83% of the
Company's outstanding shares). (NOTE: the interest acquired by the
Company equates to 100% of Messrs. Miller, Tucker and Deneau's
collective 50% interest in Jet/LaVanway Exploration, L.L.C.) The
membership interest the Company received in return gives the
Company an interest in the following oil and gas interests:
The Corydon Area of Mutual Interest consisting of
approximately 16,000 net mineral acres in Harrison County, Indiana
- - The Company's share is 5% working interest before payout and
13.015% working interest after payout of investors at an 0.80 net
revenue interest.
The Milltown Area of Mutual Interest consisting of
approximately 5,500 net mineral acres in Crawford County, Indiana
- - The Company's share is 9.555% working interest after payout of
investors at an 0.80 net revenue interest.
The North Harrison Area of Mutual Interest consisting of
approximately 40,000 net mineral acres in Harrison County, Indiana
- - The Company's share is 9.625% working interest after payout of
investors at an 0.80 net revenue interest.
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The Organ Creek Area of Mutual Interest consisting of
approximately 11,000 net mineral acres in Washington County,
Indiana - The Company's share is 9.625% working interest after
payout of investors at an 0.80 net revenue interest.
These interests collectively constitute 50% of the interests
in these properties that are owned by Jet/LaVanway Exploration,
L.L.C., a Michigan limited liability company, formerly known as
Jet/Hunting Exploration, L.L.C., whose principal address is 215
Bridge Street, Charlevoix, Michigan 49720.
At the time of the assignments, Messrs. Tucker, Deneau and
Miller agreed to accept responsibility for managing these
properties on the Company's behalf. On June 25, 1997, they became
directors of the Company and assumed full responsibility for
management.
On July 17, 1997, the Company purchased a 4.8% working
interest at an 80% net revenue interest in the Dumada Project from
Jet Exploration 1995-1, L.L.C. The Company paid $126,451 as a
reimbursement of direct costs and $60,000 as a reimbursement for
indirect costs that Jet Exploration 1995-1, L.L.C. incurred in the
creation and marketing of the entire Dumada Project, including
allocated salaries, travel costs, reproduction costs, telephone
expense, rent and utilities over the 15-month period of time
required to put the Dumada Project together. (See page 7 for a
description of the Dumada Project.)
EMPLOYEES
The Company's strategy is to outsource most of its needed
services and manpower. It will maintain only the essential
personnel to accomplish its mission. The Company currently has six
full time employees. In addition to the officers described under
"Management and Key Consultants" below, the Company employs an
accountant and a secretary. Consultants are hired as needed on an
independent contractor basis.
STRATEGIES
The Company will focus significant resources towards lower
risk long-term gas development of unconventional gas reservoirs.
This strategy generally requires large capital expenditures, which
require either equity or source funding. The Company will use
Company funds to acquire properties when possible, and will attempt
to finance the development of reserves and production using third
party financing or investors. Management believes that the Company
is able to engage in nearly any reasonable size operation or scope
of exploration activity depending on the circumstances and merits
of each proposed operation. Conventional oil and gas exploration
will be given consideration when opportunities are available which
could yield significant upside reserves. Quite often this will be
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prospects generated as a result of data gained from drilling wells
in unconventional reservoirs. Accordingly, the Board of Directors
has not limited the size of operation or scope of project to be
considered in achieving the Company's business plan.
Management has chosen to conduct the Company's first projects
in the black shales of Michigan and Indiana for the following
reasons:
1. There are proven fractured areas based on the production
history from Indiana's oldest New Albany Shale field (Harrison and
Martin Counties) where commercial wells had been established for
over 50 years and Michigan's Antrim Shale play where over 5,000
commercial wells have been drilled in the last 20 years.
2. The market for gas in Indiana and Michigan is excellent,
with a web of major transmission pipelines already in place. Gas
being sold in Indiana and Michigan will sell locally for a premium
price.
3. Throughout the prospective area in Indiana for the New
Albany Shale, there are multiple geological zones of production,
which have been proven to contain large reservoirs of oil and gas.
These reservoirs will be tested each time a New Albany Shale well
is drilled, adding significantly to the potential for reserves.
4. Improved production techniques utilized in unconventional
reservoirs around the world have improved rates of producing gas.
This proven technology will be utilized in the development of the
black shales of Michigan and Indiana.
5. Estimates of gas in place for the Michigan Antrim Shale
have exceeded 500 trillion cubic feet ("tcf"), while the
Indiana/Kentucky New Albany Shale estimates of gas in place is
close to 400 tcf.
COMPETITION AND OTHER OPERATIONAL ISSUES
The oil and gas industry is very competitive. There is a high
degree of competition to obtain favorable oil and gas leases
suitable for drilling, development and production. In the areas of
the Company's strategic focus of gas production from tight sands,
shales and coalbed methane, management expects that there is
sufficient opportunity that the Company will be able to procure
suitable leases in these formations.
There is also competition for desirable contracts to supply
energy companies with gas and oil. While management expects to
line up suitable gas and oil purchasers at profitable prices, the
industry is subject to fluctuations in demand and price that may
limit the Company's profit potential.
4
Other variables that may affect the Company's profitability
include weather conditions that may affect the Company's access to
properties or increase drilling and completion costs, and equipment
availability, that may result in production delays. The industry
has recently experienced shortages of skilled labor that may slow
down production.
Management does not anticipate the need for expenditures on
environmental control facilities. However, state and federal
environmental regulations do increase the costs of doing business.
Permits are always required for the operations of drilling and
producing oil and natural gas. Compliance with environmental
regulations is required by the permits. State inspectors generally
review compliance.
The Company does not own any patents, trademarks, licenses,
franchises or concessions. These are not needed for the Company's
successful operation. On August 6, 1997, the Company filed an
application to register the Company's logo and name as a trademark
with the U.S. Patent and Trademark Office. The application, Serial
No. 75/336640, is pending.
ITEM 2. PLAN OF OPERATION
The Company is in the development stage. Since its inception,
the Company has primarily been involve in planning, obtaining
financing, acquiring oil and gas leases, and exploration of certain
oil and gas properties in Michigan and Indiana.
The Company seeks to maximize stock price and shareholder
value through exploration in low risk shale natural gas plays and
through the acquisition of properties with proven production and
positive cash flow. The Company's short term goal (the next twelve
months) is to acquire or to find through exploration and bring on
line enough production and positive cash flows to cover its general
and administrative expenses. The Company's long term goals include
continued building of reserves and cash flows from production to
allow for further development of existing properties, mortgaging
proved developed reserves to finance continued exploration and
growth in value through development of untapped Antrim Shale, New
Albany Shale or other formations.
During the next 12 months, management expects that the
existing 16 producing wells in the Corydon Project will continue in
production. Steps will be taken to reduce the overhead to the
operation of the project. At this time, the Corydon Project is not
generating positive cash flows and needs cost reductions to allow
it to be successful. No further wells will be drilled until the
Project demonstrates its ability to support further development in
a profitable way.
5
In the Dumada Project, subject to the supporting engineering
report from S. A. Holditch and Associates, Inc. regarding the
viability of the New Albany Shale in the Dumada area, a pilot
project will be completed with an additional 6 wells being drilled
and the pipeline run to the SIGECO pipeline. Currently testing is
being conducted on 4 wells in the North Loogootee area to evaluate
the natural gas production, water production and pressures. The
testing is being supervised by the consulting engineers. Beyond
the pilot project, all future development of the New Albany Shale
will be dependent upon its demonstrated ability to produce
commercial rates of natural gas.
Also in the Dumada Project, the Company entered into an
agreement with Southeastern Oil & Gas, Inc. of Sarasota, Florida
under which Southeastern Oil & Gas agreed to run at least 30 miles
of seismic tests within the Area of Mutual Interest of Dumada .
The agreement required the seismic tests to be run by September 1,
1998. If the seismic tests provide leads for drilling, the Company
will have its interest proportionate to the other investors in
Dumada for both a 10% carried working interest and an option to
participate in any drilling at cost up to 20% of the drilling
prospect. Because the general area has many other zones of
production of natural gas and oil, management believes the
opportunity for additional discovery within the leased area is
good.
Management is optimistic on the development of the Michigan
Antrim Shale as a stable source of long term future revenue.
Currently the Company is in the middle of a drilling program in
northern Michigan for the Michigan Antrim Shale. Eight wells were
drilled in the Paxton Quarry Project with another eight scheduled
to be drilled after the frost laws are lifted for Alpena County.
Petroleum Development Corporation is 70% owner and the Company is
30% owner of Paxton Quarry.
The Company is also participating in another Antrim project
with Petroleum Development Corporation in Alcona County, Michigan.
The Company's interest is very small because it came into the
projects at a late date. The Company is putting together
additional acreage in Antrim areas for prospective development
within the next two years, subject to available financing.
The Company expects to drill two test wells in a known
structure in Breckinridge County, Kentucky by September, 1998.
Investors are being sought to underwrite the drilling with the
Company receiving a promoted interest. The prospect has potential
for discovering additional zones below the previous producing
formation which was drilled in the Jackson Sandstone at a depth of
approximately 450 feet. It is anticipated that the new wells will
be drilled to 2,000 feet. The prospect is approximately 1,200
acres in size. The New Albany Shale will also be evaluated with
these wells.
6
The Company is also pursuing the purchase of income producing
properties, either royalty or working interest. It has reviewed
five projects for possible acquisition with available financing and
hopes to be able to find some production which will be profitable
for the Company during the next 12 months. The Company has
restricted itself to acquisitions within the United States.
In January, 1998, the Company acquired a 10.65% interest in a
newly discovered Niagaran reef which tested over 200 barrels of oil
per day in Macomb County, Michigan. The operator, West Bay
Exploration, is working to get the well into production. It is
expected to be producing the oil and associated natural gas by
September, 1998.
Management is in the process of arranging a $750,000 line of
credit from First of America bank in Traverse City, Michigan. To
acquire the line of credit, the Company will be required to pledge
its existing assets and the three principal stockholders will be
required to guarantee the Company's debt.
Management expects to pursue testing of other areas within the
Michigan and Illinois basin with other working interest partners
during the next 12 months. How many and where will be determined
by partner interests and the availability of project lands. It is
uncertain at this time just how much testing will occur. Due to
the uncertain results of oil and gas exploration, the Company must
maintain flexibility at all times for changes in direction and
deviations from plans.
This section contains forward looking statements. It is
impossible to accurately predict exactly what will occur in the
next 12 months. Unexpected drilling results, delays in testing and
drilling, difficulties in acquiring leases, difficulties in finding
financial partners, or new opportunities that cause management to
change the focus of its activities could all cause actual results
to differ materially from those results described as anticipated
during the next 12 months.
ITEM 3. DESCRIPTION OF PROPERTY
THE CORYDON PROJECT
The Corydon Project is located northwest of Corydon, Indiana
in Harrison County. This site is northwest of an old producing New
Albany Shale field that produced in the early 1900s. Jet/LaVanway
Exploration, L.L.C. (50% owned by the Company) is party to an Area
of Mutual Interest (AMI) agreement of approximately 42 square miles
(26,880 acres) with MCNIC Oil & Gas Company (f/k/a MCN Energy
Group, Inc.), a Detroit based corporation. Within the AMI, there
are currently 16,244 acres leased for oil and gas development.
Additional leases acquired in this area by the Company or MCNIC
will be added to the joint venture.
7
Currently, there are 22 test and production wells, one State
approved brine water disposal well, and one central production
facility within the project area. All leases are in their first
five-year term and all have an extension provision to extend the
lease for another five years if needed. Once production is
established on a lease, the lease stays in effect as long as the
well is produceable.
Corydon Unit #1 (drilled in 1996 and expanded in 1998) went
into production in July of 1997, back hauling its gas through a
small local utility's pipeline to the Texas Gas Transmission
pipeline in Kentucky. Production from this unit is less than
500,000 cubit feet of gas daily. Current overhead for operations
exceeds income. Steps are being taken to reduce overhead as much
as possible. Further expansion of this unit is dependent upon
commercial viability of the current producing wells. Engineering
studies are being conducted to evaluate the reservoir. The area of
the Corydon Project contains approximately 16,000 leased acres.
THE DUMADA PROJECT
The Dumada Project consists of approximately 104,000 net
mineral acres in western Indiana. In addition to the 4.8% working
interest that the Company first acquired in the Dumada Project in
July 1997, the Company acquired an additional 1% working interest
from Jet Exploration 1995-1, L.L.C. before payout and will own a
10.68% working interest after payout as defined in the agreements
with the existing investors in Dumada.
An evaluation of the viability of the reservoir is currently
underway and being supervised by S.A. Holditch & Associates, Inc.,
an engineering firm familiar with shale production. The study
should be completed by approximately May, 1998 and will give
direction to further development of the shales in this area of
southwestern Indiana. To date, the Company and its industry
partners have drilled 30 wells in the leasehold area.
An agreement with Southeastern Oil & Gas is in place providing
for Southeastern to earn 90% of the working interest in the
leasehold by shooting 30 miles of seismic by September 1, 1998 and
two 3-D seismic reef anomalies. In addition to the 10% carried
working interest, the Company and its industry partners will
receive a 20% option to participate at cost in any prospective
projects. Excluded from the agreement is the New Albany Shale and
the coal bed methane.
THE PAXTON QUARRY PROJECT
The Paxton Quarry project is located in Alpena County,
Michigan, and consists of over 4,000 acres of prime development
land for Antrim Shale gas production. Currently eight prospective
wells have been drilled, logged and are waiting completion. One
dry hole was drilled where Antrim shale was not encountered in the
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well bore and the well was plugged. Weight restrictions were
placed on the roads early in February 1998. This governmental
regulation delayed further development until the roads firm up and
restrictions are removed. Once they are removed, it is anticipated
that an additional 8 wells will be drilled. Once all the wells are
drilled, the wells will be completed, the pipeline and facilities
constructed and hooked up for production.
It is anticipated that after de-watering, the Paxton Quarry
will yield approximately 175 mcf/d. It is expected that one year
of production may be required before the project meets its
anticipated production levels. Production should extend for at
least five years before much decline begins. Ultimately, the
project should have a production life of approximately 30 years.
THE AVERY SMITH PROJECT
The Company leased 560 acres and farmed-in 80 acres in an
existing developed area of Montmorency County, Michigan. This area
was previously passed over by Antrim operators because of wet
lands. Management believes that this area is now able to be
developed because of horizontal drilling and a wetlands specialist
who has demonstrated that the "wetlands" can be accessed in those
areas that are not really wetlands. The developed area currently
has a 185 mcf/d per well average from the projects contiguous to
the project area. Management believes that de-watering in this
area should not take long because the area surrounding these lands
has been in production for over three years.
ALCONA COUNTY ANTRIM WELLS
The Company acquired at no up front cost to the Company from
Jet Exploration, Inc. small interests in Antrim shale wells in
three projects located in Alcona County, Michigan. The Company is
required to pay its proportionate costs of development. Total
development costs for all owners are expected to be approximately
$250,000 per well. The Company has a 2.3% working interest before
pay out and 3.68% after payout in the Devil River Project; a 2.3%
working interest before payout and 3.68% working interest after
payout in the East 23 Project; and a 1.8% working interest before
payout and 3.18% after payout in the Timm Project. The majority
interest owner and ultimate operator of the project is Petroleum
Development Corporation of West Virginia. It is expected that the
Devil River project will have 12 wells, the East 23 project will
have 6 wells, and the Timm project will have 18 wells. Due to the
new development of the area, it is expected that de-watering of the
area may take one year to get production levels up to expected
production rates.
9
THE BEECH FORK PROJECT (FORMERLY KNOWN AS THE BALLTOWN PROJECT)
The Beech Fork project, located in Breckinridge County,
Kentucky, consists of approximately 1,500 acres above a known oil
producing Jackson Sand structure. The prospect, no longer
producing oil, contains multiple pay zones below the Jackson Sand
which have never been tested. The Company anticipates that two
test wells will be drilled by approximately September1, 1998 to
evaluate the structure down to a depth of 2,000 feet, penetrating
the Siluran rocks. This is subject to the Company's ability to
obtain appropriate financial backing. Additional pay potential
exists in St. Genevieve, St. Louis, Salem and Ft. Payne limestone
as well as the Devonian lime and New Albany Shale. A major 30 inch
gas transmission line runs through the project area. The offering
to working interest investors is on a cost plus 15% basis.
NEWLY DISCOVERED NIAGARAN WELL INTEREST
The Berragasi 1-5 in Macomb County, Michigan was discovered in
December 1997 by West Bay Exploration of Traverse City, Michigan.
Jet Exploration, Inc. owned a carried working interest of 10.625%
in the well. The Company purchased the interest from Jet
Exploration, Inc., by agreeing to pay the anticipated $60,000
required to complete and equip the well and to provide Jet
Exploration, Inc., a 10% net profit interest once the well is
producing. The well tested 200 barrels of sweet oil per day and is
expected to produce this state mandated maximum allowable.
BLUE LAKE 1-4
The Company is negotiating the acquisition of 50% of the
interest and operations in a shut-in Niagaran well in the northern
Michigan niagaran trend. When the well shut-in, it was producing
steadily 25 barrels of sweet oil per day. The well was shut-in by
the State Department of Environmental Quality due to an oil spill
which occurred while being operated by a previous operator. The
Company will work with the State to get the well back into
production and assist in the clean-up of the well site. Should the
State not allow the Company to re-establish production, the Company
will abandon the project rather than assume any environmental
liability.
INDIANA NEW ALBANY SHALE QUALITIES
The Corydon and Dumada Projects are located in the Indiana New
Albany Shale play. Large-scale exploration is underway in southern
Indiana, where the New Albany Shale play has re-ignited after
nearly 50 years of dormancy. Recent activity in the area (within
the last two years) targeting the New Albany Shale has demonstrated
what was proven in the late 1800s and early 1900s in Indiana: that
the New Albany Shale is an excellent commercial reservoir for
natural gas.
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The New Albany Shale of Indiana appears to be a very similar
reservoir to the Antrim Shale of Michigan, where over 5,000 shale
gas wells have been successfully drilled. Wells typically begin
producing high volumes of water and low volumes of gas when first
beginning to produce in a new area. As more and more wells are
drilled in an area, the formation becomes dewatered and the initial
gas production rate in each well begins to increase. In Indiana,
significant gas from the New Albany Shale was produced in several
areas of Harrison, Martin and Daviess Counties from 1875 through
the 1930s, and some through the 1950s. In Kentucky, numerous
fields exist including the prolific Shrewsbury Field. Harold
Sorgenfrei, Jr. wrote an excellent analysis of the New Albany Shale
in 1952. He detailed the history of this production, demonstrating
that commercial gas reserves were stored in the shale.
Water production by the wells was a significant issue in the
production histories of this period. New Albany Shale wells had
both gas and water production. Excellent gas production was
recorded in these early New Albany shale wells with individual
wells initially producing up to 2,000 mcfg/day while the field
average per well was 187 mcfg/day. The strong water production
caused many production problems throughout the life of the wells.
Until 25 years ago, there were no effective methods for producing
water without impacting the flow of the gas. Prior to the 1970s,
water inhibited production and was a big reason why developers
could not get very excited about drilling for New Albany Shale gas.
Today, the existence of water in a shale gas formation has
been proven helpful in the Michigan Antrim Shale play. Natural
fractures are the conduit for gas and water to move through the
shale and into a well's wellbore. A high level of water is an
indication of excellent natural fracturing which gives management
confidence that as the Company dewaters the shale, the rate of gas
production will increase. In the past, a well bore full of water
would put pressure on the reservoir and prevent the gas from coming
out of the well. Today, technology exists to produce much water
from the shale formation and still keep pressure on the reservoir
low, allowing for the production of natural gas at commercial
rates, even while dewatering the formation.
The Company is prepared to establish gas reserves in the New
Albany Shale play in Indiana, based on experience gained from the
development of the Antrim Shale formation in Michigan, and the
historical evidence of New Albany Shale gas fields, that produced
for over 50 years in the early 1900s.
Major fault systems exist in southern Indiana and western
Kentucky, which have a very positive impact on the natural
fracturing throughout the New Albany Shale area. Most prominent of
these are the following:
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Rough Creek Fault System: A major group of faults trending
East-West in western Kentucky just south of the Indiana-Kentucky
border.
Pennyryle Fault System: A major fault system paralleling the
Rough Creek Fault to the south.
Wabash Valley Fault System: A northeast-southwest trending
high angle normal fault complex, which extends from southern
Indiana to intersect the Rough Creek Fault System.
Moorman Syncline. The area in Kentucky between the Pennyryle
Fault and the Rough Creek Fault, which was a deep Graben occurring
during the New Albany Shale deposition. The New Albany Shale gas
pay zones are three times as thick in this area as elsewhere in the
Illinois Basin.
Mount Carmel Fault System. A North-South trending high angle
normal fault system-penetrating basement rocks in southern Indiana.
Another geological structural feature presented in southern
Indiana and western Kentucky are numerous Silurian reefs. These
reefs are found beneath the New Albany Shale and exist on a
geologic shelf that trends northwest-southeast through our targeted
New Albany Shale development area. Some of these reefs are
pinnacle Silurian reefs up to 800 feet thick. The reefs are
beneath the shale and provide bumps (drape structures) which the
shale drapes over. The presence of these type of reef features
enhance natural fracturing in the New Albany Shale in addition to
structural highs in the geological zones between the top of the
reef and the surface that can trap oil or gas at depths shallower
than the shale.
Numerous shallow productive zones as well as the underlying
Devonian and Silurian formations are present throughout the
targeted New Albany Shale drilling area. These other potential
reservoirs are highly prospective, and additional new discoveries
are expected in the process of drilling New Albany Shale wells.
Additionally the Devonian Limestone and Trenton formations below
the shale are proven reservoirs which have been used in the past
for gas storage.
The New Albany Shale in southern Indiana and western Kentucky
has been classified into several recognized geological units.
These units are described below. From the top of the shale to the
base of the shale, the thickness varies in the targeted area from
100 feet thick to 140 feet thick, except in the Moorman Syncline
which is a targeted area with over 200 feet of shale.
Clegg Creek Member: This is the upper-most member of the New
Albany Shale. It is generally recognized as the most prolific
producing zone in the shale. The total organic carbon content per
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core analyses averages 12.6% across southern Indiana. The Clegg
Creek is believed to be less saturated in water and will often
produce excellent volumes of gas in a well prior to dewatering the
shale.
Camp Run Member: A bioturbated greenish-gray shale
interbedded with organic rich pyritic black shale. It is located
just below the Clegg Creek member.
Morgan Trail Member: A brownish-black shale, which is closely
associated with the overlying Camp Run member.
Selmier Member: A predominately greenish-gray shale with thin
beds of dolomite and sandstone. In the targeted area, the Selmier
is a dark olive gray, and closely associated with the upper Blocher
member. As you move further south, the Selmier becomes thinner and
is eventually absent.
Blocher Member: A very organically rich, black, thinly
laminated shale with laminae of dolomite and limestone. It is the
lowest member of the shale. Below the Blocher member is the
Devonian Limestone.
Based on both the Company's experience and development
strategies in the New Albany Shale along with historical data,
management expects that over 90% of the wells the Company
completes will be commercial wells. A dewatered shale well should
remain at a peak production level for many years and then begin a
very slow decline over several decades. An exhaustive analysis of
the New Albany Shale and its gas producing potential, was prepared
by the Gas Research Institute in 1994 showing the average initial
production rate from all New Albany Shale wells to be 187 mcf/d.
The capacity for gas reserves in the New Albany Shale is
tremendous. Gas is stored in fractures as free gas, but also is
stored by absorption on the clay and kerogen surfaces of the
shale.
As the free gas and water is produced, the absorbed gas begins to
release into the shale fracture network through a process called
desorption, providing a steady, long term flow of gas to the
wellbore. Almost every well drilled at favorable depths (300 feet
to 2,500 feet deep) will produce natural gas. The amount of daily
gas produced depends on how much natural fracturing exists in the
shale.
JET/LAVANWAY EXPLORATION, L.L.C.
The Company owns a 50% membership interest in Jet/LaVanway
Exploration, L.L.C. The other 50% interest is owned by LaVanway
Capital & Trade Corporation. Jet/LaVanway Exploration, L.L.C. was
formed in June 1995, to develop the Corydon Project in Harrison
County, Indiana. This was a joint venture between Jet Exploration,
13
Inc. which agreed to provide field operations, and LaVanway Capital
& Trade Corporation, which agreed to provide the accounting for the
project. MCNIC Oil & Gas Company (the parent corporation of
Michigan Consolidated Gas, a Michigan utility) was involved as an
investor. Jet/LaVanway Exploration, L.L.C. has now acquired
mineral leases on over 83,500 acres in Harrison, Crawford,
Washington and Floyd Counties in Indiana. Development to date has
included over 40 test wells into the New Albany Shale formation.
Jet Oil Corporation was started by Thomas W. Tucker and his
father, Wilbert, in 1983, to access the activity of oil and gas
exploration in the northern Niagran Reef trend in Michigan. After
Wilbert Tucker's death in 1987, Thomas Tucker founded Jet
Exploration, Inc., which continued the same activities. In 1994,
William W. Deneau acquired a 35% interest in Jet Exploration, Inc.,
and John V. Miller, Jr. acquired a 30% interest in Jet Exploration,
Inc. At this time, Jet Exploration, Inc. began evaluating various
states for exploration potential. In 1995, it settled its focus on
the New Albany Shale formation in the Illinois basin and initiated
the formation of Jet/LaVanway Exploration, L.L.C.
OFFICES
The Company's main office is a 1,600 square foot facility
located at 3760 North US 31 South, Traverse City, Michigan. This
office is being sublet from Prudential Insurance. The Company has
executed a sublease agreement providing a monthly rental rate of
$1,899.50. The sublease is for a one-year renewable term. The
Company also rents approximately 700 square feet from the building
next door at 3766 North US 31 South, on a month-to-month
arrangement. The rental rate is $550 per month. The Company also
rents 400 square feet of storage space from South31, L.L.C. for
$150 per month. The storage space houses well logs, cuttings, and
other documents that the Company needs to retain. Management does
not anticipate needing additional space at any time in the
foreseeable future.
SUMMARY OIL AND GAS OPERATIONS DISCLOSURE
All of the Company's oil and gas operations are in the United
States. As of March15, 1998, the Company has no proved, developed
reserves and has reported no reserves to any government agencies.
The Corydon Unit began production late in 1997, but revenues
have been withheld by the operator as costs are currently exceeding
the revenue generated. Steps are being taken to reduce overhead in
the Corydon project and as useful data becomes available will be
included in subsequent filings under this heading. No other
Company owned project is in commercial production as of March15,
1998.
14
As of March15, 1998, the Company owns the following gross and
net productive wells and gross and net developed acreage as
follows:
OIL
Gross productive wells 1.0
Net productive wells .10625
Gross developed acreage 40.0
Net developed acreage 4.25
GAS
Gross productive wells 97.0
Net productive wells 7.9
Gross developed acreage 12,590.0
Net developed acreage 1,719.0
As of March15, 1998, the Company has leased mineral rights on
gross and net undeveloped acreage as follows:
Undeveloped gross acreage 162,036
Undeveloped net acreage 38,870
Lease terms are generally five years. The Company in its
present form has been involved in oil and gas exploration and
leasing less than one year. Consequently, in general, lease terms
have the majority of their terms yet to run. Lease agreements
provide for extensions as necessary.
From March15, 1997, through March15, 1998, the Company has
participated in the drilling of productive and dry wells as
follows:
Net productive exploratory wells drilled 7.65
Net dry exploratory wells drilled .34
The Company has not drilled any development wells as of
March15, 1998.
As detailed in the Management Discussion and Analysis of
individual projects, the Company is in the process of drilling
wells in several projects as of March15, 1998. The gross and net
wells being drilled are as follows:
GAS
Gross wells being drilled 11.0
Net wells being drilled 1.6
As of March15, 1998, the Company had no contractual
commitments to deliver or provide any fixed and determinable
quantities of gas or oil. The Company does have an agreement with
Southern Indiana Gas and Electric (SIGECO) which provides for the
15
sale to SIGECO of all the natural gas generated by the Dumada
project at the New York Mercantile Exchange monthly contract
settlement price plus $0.05 per MMBtu. The contract is good for
three years from March1, 1998, with an automatic series of three
month extensions which can be terminated by either party. As of
March1, 1998, the Dumada project was in a test phase to determine
per well flow rates and provable reserves.
ITEM 4: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND
MANAGEMENT
Beneficial owners of more than 5% of the Company's common
stock are set forth below.
<TABLE>
<CAPTION>
Amount and
Title Name and Address Nature of Percent
of Class of Beneficial Owner Beneficial Owner of Class
<S> <C> <C> <C>
Common Britannia Holdings Limited
P. O. Box 615 Kings House
The Grange St. Peter Port
Guernsey, GY1 2QJ,
Channel Islands 700,000 8.05%
Common The William & Patricia Deneau
Revocable Living Trust,
DTD 10/12/95
3832 Perimeter Drive
Traverse City, MI 49684 1,828,400 21.04%
Common Roger J. Dubuc, Trustee
Roger J. Dubuc Trust DTD 1/21/87
18677 Foxhollow Court
Northville, MI 48167 500,000 5.75%
Common John V. and Michelle R. Miller, Trustees
Miller Family Living Trust
DTD 6/25/97
5922 Deertrail Drive
Traverse City, MI 49684 1,787,400 20.56%
Common Thomas W. Tucker and
Sandra L. Tucker
11607 N. Long Lake Road
Traverse City, MI 49684 1,798,400 20.69%
</TABLE>
16
The security ownership of management is outlined in the
following chart:
<TABLE>
<CAPTION>
Title of Name and Address Amount Owed BeforePercent
of Class of Owner the Offering of Class
<S> <C> <C> <C>
Common William W. Deneau in the name of:
The William & Patricia Deneau
Revocable Living Trust,
DTD 10/12/95
3832 Perimeter Drive
Traverse City, MI 49684 1,828,400 21.04%
Common John V. Miller in the name of:
John V. & Michelle R. Miller
TTEE Miller Family Living Trust,
DTD 6/25/97
5922 Deertrail Drive
Traverse City, MI 49684 1,787,400 20.56%
Common Thomas W. Tucker in the name of:
Thomas W. & Sandra L. Tucker
11607 N. Long Lake Road
Traverse City, MI 49684 1,798,400 20.69%
Common Officers and Directors
as a Group 5,444,200 62.63%
</TABLE>
Options held by officers and directors are reflected in the chart
below.
<TABLE>
<CAPTION>
Title and Amount of
Name of Securities Called Exercise Date of
Holder for by Options Price Exercise
<S> <C> <C> <C>
Gary Myles Option to purchase $.50 per share Expires:
July31, 2002
</TABLE>
17
ITEM 5.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth information about each of the
officers and directors of the Company:
<TABLE>
<CAPTION>
Name Age Position Term of Office
<C> <C> <C> <C>
William W. Deneau 53 Director June 25, 1997 to present
President July 17, 1997 to present
John V. Miller Jr 39 Director June 26, 1997 to present
Vice President
of Exploration and
Production July 17, 1997 to present
Thomas W. Tucker 55 Director June 25, 1997 to present
Vice President of
Land and Development/
Treasurer July 17, 1997 to present
Barbara J. Johnson
44 Secretary July 17, 1997 to present
Gary Myles 52 Director June 25, 1997 to present
</TABLE>
There are no family relationships between any of the foregoing
individuals.
William W. Deneau became employed by the Company at the time
he sold his interest in Jet/LaVanway Exploration, L.L.C. to the
Company in exchange for the Company's stock on April 22, 1997.
Since that time, Mr. Deneau has been responsible for managing the
Company's affairs. He officially became president on July 17,
1997. Since 1987, Mr. Deneau has been the president, a director,
and the sole stockholder of White Pine Land Services, Inc. of
Traverse City, Michigan. Prior to March 1, 1997, White Pine Land
Services, Inc. was a 35-member company engaged in the business of
providing real estate services to oil and gas companies. On March
1, 1997, White Pine Land Services, Inc. sold its business to a
newly formed corporation, White Pine Land Company. White Pine Land
Services, Inc. continues to exist for the purpose of managing its
investments.
John V. Miller, Jr. became employed by the Company at the time
he sold his interest in Jet/LaVanway Exploration L.L.C. to the
Company in exchange for the Company's stock on April 22, 1997.
18
Since that time, he has been responsible for overseeing exploration
and development activities. He officially became Vice President of
Exploration and Production on July 17, 1997. In 1994, Mr. Miller
joined Jet Exploration, Inc. of Traverse City, Michigan as a vice
president with responsibility for getting Jet Exploration, Inc.
into the shale gas play in Michigan and Indiana. He was the
driving force behind the establishment of Jet/LaVanway Exploration,
L.L.C. and its effort in southern Indiana. Mr. Miller left the
position with Jet Exploration, Inc. to join the Company. From 1988
to 1994, Mr. Miller worked for White Pine Land Services, Inc. of
Traverse City, Michigan, as a land manager.
Thomas W. Tucker is employed by both the Company and Jet
Exploration, Inc. of Traverse City, Michigan. He has been employed
by the Company since he sold his interest in Jet/LaVanway
Exploration, L.L.C. to the Company in exchange for the Company's
stock on April 22, 1997. Since that time, he has been responsible
for overseeing land development activities. He officially became
Vice President of Land and Development on July 17, 1997. Mr.
Tucker founded Jet Oil Corporation with his father in 1982. After
his father's death, Mr. Tucker founded Jet Exploration, Inc. in
1987. Mr. Tucker has been the president of Jet Exploration, Inc.
since its inception. Prospectively, Jet Exploration, Inc. will not
take on any new projects, and its existing projects will be allowed
to run out their course. Jet Exploration, Inc. currently has other
projects with which the Company is not involved.
Gary J. Myles was elected to serve as an outside director of
the Company on July 17, 1997. Mr. Myles is currently Vice
President of the northern Michigan region of Old Kent Mortgage
Company, a wholly owned subsidiary of Old Kent Financial
Corporation (a $12 billion bank holding company). He is the
Regional Manager for the northern region of Michigan, and is based
in Traverse City, Michigan. Mr. Myles has been with Old Kent
Mortgage Company since July 1988.
Barbara J. Johnson became employed by the Company on June 1,
1997. She is the Administrative Assistant to the President. She
became the corporate secretary on July 17, 1997. From August 30,
1993 to June 1, 1997, Ms. Johnson worked for White Pine Land
Services, Inc. of Traverse City, Michigan, as a Lease Records
Manager. Prior to that, Ms. Johnson was employed in Frankfort,
Michigan, for A&W Restaurant, as a server.
None of the Company's officers or directors have been involved
in legal proceedings of the type that are required to be disclosed.
Key Consultants
The Company hires consultants on an as-needed basis to obtain
technical expertise. The consultants described below currently
provide the Company its primary technical assistance.
19
Karl M. Schroeder, has a B.S. degree in geology from Central
Michigan University and began working in the Michigan oil industry
in 1976. He first served Shell Oil in their Niagaran Reef
exploration program and then accepted a position with Amoco. With
Amoco, Mr. Schroeder was an operations geologist and provided
formation evaluation and wellsite operations coordination. Since
1980, Mr. Schroeder has served as an independent consulting
geologist providing prospect generation, wellsite evaluation,
hydrocarbon logging, and operations oversite. He has worked with
Amoco, MCN, PPG, Sun, Dart, Jet Exploration and others. He has
worked extensively in the Michigan, Illinois and Appalachian
Basins.
Brian D. Deans, has a B.S. and M.S. degree in Geological
Engineering from Michigan Technological University and began
working in the Michigan Basin in 1986. He has worked as an engineer
for ANR Pipeline, Peninsular Oil & Gas, and Williams and Works (a
large civil engineering firm in Grand Rapids, Michigan). In 1991,
Mr. Deans accepted a position with Aangstrom Precision Corporation
and has continued to work with them as a project director. He has
used Terrasciences Terrastation, Lotus and Vortext software to
load, manipulate and display data on UNIX workstations and
microcomputers. He has achieved expertise in computer surface
modeling. Brian's work has taken him to Columbia, Venezuela,
Portugal, Alaska, Canada, North Sea-UK, Mid Continent (Texas and
Louisiana) and, of course, Michigan. Mr. Dean will be a part-time
employee of Aurora Energy, Ltd. while on assignment with Aangstrom.
Steven P. Kohler, received a B.S. in Petroleum & Natural Gas
Engineering from Pennsylvania State University in 1977. He worked
with Amoco as a production engineer in the Michigan, Illinois and
Appalachian Basins. He also has worked in West Texas on secondary
reservoir issues. Lately, Mr. Kohler has been an independent
consultant specializing in Shale production. He has provided
assistance to independents, including Jet Exploration, Inc. and
Jet/LaVanway Exploration, L.L.C. in Traverse City, Michigan.
20
ITEM 6. EXECUTIVE COMPENSATION
MANAGEMENT REMUNERATION
The remuneration of the Company's three most highly
compensated employees is set forth in the chart below:
<TABLE>
<CAPTION>
Name of Capacity in Which Aggregate
Individual Remuneration Was Received Remuneration(1)
<C> <C> <C>
William W. Deneau President $40,000
John V. Miller Vice President of Exploration
and Production $40,000
Thomas W. Tucker Vice President of Land and
Development $40,000
(1) This information is reported on an annualized
basis. Fiscal 1997 was not a full year. The actual
amount paid to each individual was $20,000.
</TABLE>
These three officers also receive family health coverage. It
is anticipated that during the next 12 months, a stock option plan
will be adopted and implemented that may involve the issuance of
stock options to the Company's employees, officers, directors and
consultants.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The 50% membership interest in Jet/LaVanway Exploration,
L.L.C. was originally owned by Jet Exploration, Inc., which is
owned by WilliamW. Deneau, ThomasW. Tucker, and JohnV.
Miller,Jr., who are directors and executive officers of the
Company. Jet Exploration, Inc. sold the membership interest in
Jet/LaVanway Exploration, L.L.C., to its three owners at fair
market value. The membership interests subsequently were conveyed
by Messrs. Deneau, Tucker and Miller to Mentor Group International,
Inc. (the Company's prior name) for common stock (see Item1,
Description of Business - Development).
The Office facilities leased by the Company are owned by
South31, L.L.C., which is owned one-third by William W. Deneau,
and one-third by the wife of Thomas W. Tucker. However, the
21
potential for an unfavorable rental arrangement is ameliorated to
some extent by the fact that the properties are leased to unrelated
third parties who have in turn subleased a portion of the space to
the Company. The storage facilities that the Company leases from
South31, L.L.C. are in a storage building that contains four other
storage units that are leased to unrelated third parties at the
same rates that the Company pays.
Messrs. Deneau, Tucker and Miller are all involved as equity
owners in numerous corporations and limited liability companies
that are active in the oil and gas business. It is probable that
on occasion, the Company will find it necessary or appropriate to
deal with these Companies. A specific instance that has already
occurred is the purchase by the Company of the Dumada Project
interest from Jet Exploration 1995-1, L.L.C., and grant of an
option to the Company by Jet Exploration 1995-1 to purchase the
remainder of its Dumada Project interest as described at "Business
- - The Dumada Project." Messrs. Deneau, Miller and Tucker each own
one-third of Jet Exploration 1995-1, L.L.C. Actual direct costs to
Jet Exploration 1995-1, L.L.C. were $126,451. Indirect costs were
estimated at $60,000. Indirect costs refer to costs incurred in
the creation and marketing of the entire Dumada Project, including
allocated salaries, travel costs, reproduction costs, telephone
expense, rent and utilities over the 15-month period of time
required to put the Dumada Project together. The amount paid by
the Company to Jet Exploration 1995-1, L.L.C. for the Dumada
Project interest was $186,451.
From time to time, the Company will hire White Pine Land
Company to perform real estate services for the Company. Patricia
Deneau, wife of William W. Deneau, is employed part-time by White
Pine Land Company, and owns 35% of the outstanding stock of White
Pine Land Company. She does not participate in management of the
White Pine Land Company.
On July 14, 1997, the Company borrowed $500,000 from Britannia
Holdings Limited ("Britannia") a commercial lending institution
located in Guernsey, Channel Islands. As partial consideration for
the loan, Britannia received 200,000 shares of the Company's common
stock. Britannia also had an option to accept the Company's common
stock at a price of $1 per share in lieu of receiving repayment of
the $500,000 loan. On December24, 1997, Britannia accepted
500,000 shares of the Company's common stock, bringing its total
ownership position to 700,000 shares. Interest expense accrued for
the period July14, 1997 to December 24, 1997 on the loan amounted
to $15,462 and was paid by the Company in cash.
William W. Deneau is the sole shareholder of White Pine Land
Services, Inc. On August26, 1997, White Pine Land Services, Inc.
22
loaned the Company $125,000. On October14, 1997, White Pine Land
Services, Inc. loaned the Company $50,000. Both loans carried
interest at the annual rate of 6%, compounded monthly. The $50,000
loan was repaid in full on December15, 1997, together with $509.59
in interest. The $125,000 loan was repaid in full on December31,
1997, together with $2,609.59 in interest. Management does not
currently expect to borrow any further funds from White Pine Land
Services, Inc.
ITEM 8. DESCRIPTION OF SECURITIES
The securities being registered under Section12(g) of the Act
are common stock, par value $.001 per share. All shares are
entitled to one vote, and have equal dividend and liquidation
rights. There are no preemptive rights or redemption rights. The
common stock is nonassessable. Shareholders are not personally
responsible for the debts or obligations of the Company.
The Company has 50,000,000 shares of common stock authorized.
The shareholders have authorized an increase to 500,000,000 shares
which has not yet been filed with the state of Nevada. As of
February 17, 1998 there were 8,691,697 shares outstanding. The
Company has never paid a cash dividend on its common stock and does
not expect to pay a cash dividend in the foreseeable future. The
Company intends to devote all of its funds to the operation of its
business.
23
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE
REGISTRANT'S COMMON
EQUITY AND OTHER SHAREHOLDER MATTERS
The Company's common stock is not currently traded on a public
trading market. There are currently 8,691,697 shares of common
stock outstanding. Another 320,000 shares are currently being
reserved to satisfy outstanding option agreements. Of the
currently outstanding shares, 7,986,700 shares are subject to
trading restrictions under Rule 144; and 704,997 shares could be
freely traded pursuant to Rule 144. There are no registration
agreements outstanding, nor has the Company proposed to register
its shares at any time in the foreseeable future.
The Company has not paid dividends on its common stock and
does not expect to do so in the foreseeable future. There are no
contractual or other formal limitations on the payments of
dividends. However, the Company expects to use all funds for
investment in wells and expansion, at least for the foreseeable
future.
ITEM 2. LEGAL PROCEEDINGS
There are no pending legal proceedings.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
The Company has not experienced a change in who serves as its
principal accountants.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
On April 22, 1997, Messrs. Miller, Tucker and Deneau each
received 1,848,400 shares of the Company's common stock in return
for the contribution of a 50% membership interest in Jet/LaVanway
Exploration, L.L.C., 16.667% each. This membership interest had a
fair market value of $143,000, based on an estimation of the values
of the projects owned by Jet/LaVanway Exploration, L.L.C. at the
time of the transfer. The Company relied upon the exemption from
registration found at Rule 506 of Regulation D. No commission was
paid on this transaction.
In May, 1997, the Company engaged in a private placement
pursuant to which it sold 50,000 shares of common stock at a price
of $1 per share. The Company relied on Section 4(2) of the
Securities Act of 1933 for an exemption from registration. No
underwriter was used and no commission was paid. Sales were
limited to investors with whom the officers of the Company were
personally acquainted.
24
On July 14, 1997, the Company borrowed $500,000 from Britannia
Holdings Limited, and as partial consideration issued 200,000
shares of the Company's common stock to Britannia. The Company
also issued a $500,000 note to Britannia Holdings. The Company
relied upon Section 4(2) of the Securities Act of 1933 for an
exemption from registration.
From October 13, 1997 through February 17, 1998, the Company
engaged in a private offering of securities pursuant to which it
sold 1,671,000 shares of common stock at a price of $1 per share.
The Company also received a 4% working interest in the Corydon
Project in exchange for 80,000 shares of its common stock under
this offering. The Company relied upon Rule 506 of RegulationD
for an exemption from registration. Five hundred thousand of these
shares were issued to Britannia Holdings in payment of its $500,000
note as described above. The Company retained VESTAX Securities
Corporation on a best-efforts basis to assist in the sale of the
balance of this offering. VESTAX participated in the sale of
1,191,500 shares of common stock and received a commission equal to
$119,150. Except for the exchange for the Corydon Project working
interest, this offering was limited to accredited investors.
Prior to current management taking over the management of the
Company certain securities were issued, including 580,000 shares of
common stock that were issued between January and June of 1996 at
a price of $.025 per share (total cash proceeds of $14,500).
Management believes that Rule 504 of Regulation D was relied on to
establish an exemption from registration. The Company's current
management does not have information about underwriters,
commissions or the class of persons to whom the 1996 offering was
made.
On August 1, 1997, the Company issued to Gary Myles an option
to purchase 10,000 shares of the Company's common stock at a price
of $0.50 per share expiring July 31, 2002. This option was issued
in consideration of Mr. Myles' agreement to serve as a director of
the Company.
On February5, 1998, the Company issued to John M. Lohman (the
Company's Controller) an option to purchase 10,000 shares of the
Company's common stock at a price of $1 per share expiring July 31,
2002. This option was issued in consideration of employment
services pursuant to an employee stock option plan.
On May 1, 1997, the Company issued to Jim Czirr an option to
purchase 300,000 shares of common stock at a price of $0.05 per
share, expiring May 1, 2002. This option was issued as partial
consideration under a consulting agreement under which Mr. Czirr
agreed to assist the Company in the development and implementation
of a plan to make the Company a public stock company.
25
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article XVI of the Company's Articles of Incorporation states
as follows:
A director or officer is not liable for
damages for breach of fiduciary duty as a
director or officer except for: (a) acts or
omissions which involve intentional
misconduct, fraud or a knowing violation of
the law; or (b) the payment of a distribution
in violation of NRC 78.300.
This provision is authorized by Nevada's corporations laws. In
addition, NRC (Nevada Revised Code) 78.751 allows the Company to
indemnify a director, officer, employee or agent who is party to a
threatened, pending or completed action, suit or proceeding because
of this person's position with the Company, if the person acted in
good faith and in a manner which the person reasonably believed to
be in or not opposed to the best interests of the Company and with
respect to any criminal action had no reasonable cause to believe
the conduct was unlawful. If the director, officer, employee or
agent prevails in the litigation, indemnification of the defense
costs is mandatory.
26
PART F/S
AURORA ENERGY, LTD.
(a development stage company)
FINANCIAL STATEMENTS
FOR THE PERIOD FROM MARCH 12, 1997 (INCEPTION)
TO
DECEMBER 31, 1997
27
AURORA ENERGY, LTD.
(a development stage company)
TABLE OF CONTENTS
PAGE
Independent Auditors' Report 1
Financial Statements for the period from March 12, 1997 (inception)
to December 31, 1997
Statement of Financial Position 2
Statement of Operations 3
Statement of Changes in Stockholders' Equity 4
Statement of Cash Flows 5
Notes to Financial Statements 6-13
28
INDEPENDENT AUDITORS' REPORT
February 4, 1998
Stockholders and Board of Directors
Aurora Energy, Ltd. (a development stage company)
We have audited the accompanying statement of financial position of
Aurora Energy, Ltd. (a development stage company) as of December
31, 1997, and the related statements of operations, changes in
stockholders' equity and cash flows for the period from March 12,
1997 (inception) to December 31, 1997. 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 our audit provides a
reasonable basis for our opinion.
Rehmann Robson, P.C.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Aurora
Energy, Ltd. (a development stage company) as of December 31, 1997,
and the results of its operations and cash flows for the period
from March 12, 1997 (inception) to December 31, 1997 in conformity
with generally accepted accounting principles.
29
AURORA ENERGY, LTD.
(a development stage company)
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1997
<TABLE>
ASSETS
<S> <C>
Current assets
Cash and cash equivalents $ 518,408
Accounts receivable: (Note 3)
Billed 182,970
Unbilled 121,200
Total accounts receivable 304,170
Prepaid expenses 4,950
Total current assets 827,528
Oil and gas properties, not subject to amortization,
using full cost accounting (Notes 2, 4, 5 and 6) 700,850
Investment in oil and gas partnership (Note 4) 99,314
Property and equipment, net (Note 7) 62,304
Total assets $1,689,996
See accompanying notes.
</TABLE>
30
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
Current liabilities
Accounts payable $ 186,151
Current portion of capital lease obligations 14,739
Advances from investors (Note 10) 89,000
Accrued expenses 23,303
Total current liabilities 313,193
Capital lease obligations, net of
current portion (Note 8) 28,332
Total liabilities 341,525
Stockholders' equity (Note 12)
Common stock, $.001 par value; 500,000,000
shares authorized; 8,391,197 shares
issued and outstanding 8,391
Additional paid-in capital 1,590,924
Deficit accumulated during the development stage (250,844)
Total stockholders' equity 1,348,471
Total liabilities and stockholders' equity $1,689,996
</TABLE>
31
AURORA ENERGY, LTD.
(a development stage company)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MARCH 12, 1997 (INCEPTION)
THROUGH DECEMBER 31, 1997
<TABLE>
<S> <C>
Operating revenues $ 40,375
General and administrative expenses 229,262
Operating loss (188,887)
Other income (expense)
Equity in loss of investee partnership (43,686)
Interest income 1,459
Interest expense (19,730)
Other expense, net (61,957)
Net loss ($250,844)
________
Net loss per basic and diluted common share $ (.06)
See accompanying notes.
</TABLE>
32
AURORA ENERGY, LTD.
(a development stage company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM MARCH 12, 1997 (INCEPTION)
THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Stock Paid in Developmental
Shares Amount Capital Stage Totals
<S> <C> <C> <C> <C> <C>
Common stock issued
for cash at $.001
per share (Note 1) 514,997 $ 515 $ -- $ -- $ 515
Common stock issued
for cash at $.025
per share 580,000 580 13,920 -- 14,500
Common stock issued
in exchange for
interest in oil and
gas partnership5,575,200 5,575 137,425 --143,000
(Note 4)
Common stock issued
for cash at $1.00
per share 50,000 50 49,950 -- 50,000
Common stock issued
in exchange for
cancellation of loan
at $.7142857 per 700,000 700 499,300 -- 500,000
share (Note 11)
Common stock issued
for cash at $.90
per share 971,000 971 872,929 -- 873,900
Common stock options
issued to consultant
and nonemployee
director (Note 12) -- -- 17,400 -- 17,400
Net loss -- -- -- (250,844) (250,844)
Balance at
December 31, 1997 8,391,197 $8,391 $1,590,924 $(250,844) $1,348,471
See accompanying notes.
</TABLE>33
AURORA ENERGY, LTD.
(a development stage company)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MARCH 12, 1997 (INCEPTION)
THROUGH DECEMBER 31, 1997
<TABLE>
Cash flows from operating activities:
<S> <C>
Net loss $ (250,844)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 733
Equity in loss of investee partnership 43,686
Services received in exchange for stock options17,400
Changes in operating assets and liabilities which
provided (used) cash:
Accounts receivable (304,170)
Prepaid expenses (4,950)
Accounts payable 186,152
Accrued expense 23,302
Net cash used in operating activities (288,691)
Cash flows from investing activities
Capital expenditures for oil and gas properties (700,850)
Capital expenditures for property and equipment (15,668)
Net cash used in investing activities (716,518)
Cash flows from financing activities
Proceeds from the sale of common stock 938,915
Proceeds of loan from financial institution 500,000
Advances from affiliate 175,000
Repayment of advancement from affiliate (175,000)
Advances from investors 89,000
Payments made to reduce capital lease obligations (4,298)
Net cash provided by financing activities 1,523,617
Net increase in cash and cash equivalents 518,408
Cash and cash equivalents, beginning of period --
Cash and cash equivalents, end of period $518,408
</TABLE>
34
AURORA ENERGY, LTD.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Aurora Energy, Ltd. (the "Company") is engaged primarily in
the acquisition, development, production, exploration for, and
the sale of, oil, gas and natural gas liquids. The Company
intends to sell its oil and gas products primarily to domestic
pipelines and refineries. Since revenues, as reported in the
Statement of Operations, are not considered by management to
represent the Company's planned principal operations, the
financial statements are prepared under the accounting
assumption that the Company is operating as a development
stage enterprise.
The Company was originally incorporated in the State of
Nevada
as Mentor Group International Corporation on August 12, 1991.
The Company had no material operations from inception to
February, 1997, when the Board of Directors and shareholders
reverse split the outstanding common stock on a one for twenty
basis. On March 12, 1997, a certificate of name change was
filed with the Secretary of State in Nevada in order to change
the corporate name to Aurora Energy, Ltd.
The Company has not generated revenue from planned principal
operations. The Company is in the development stage and,
since inception, has primarily been involved in planning,
obtaining financing, acquiring oil and gas leases, and
exploration of certain oil and gas properties in Michigan and
Indiana. As of December 31, 1997 the Company did not have any
proved properties. However, the Company is expected to
explore or purchase proved properties during 1998.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
35
AURORA ENERGY, LTD.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
Loss Per Share
Loss per share is computed using the weighted average number
of common shares outstanding during the period (4,305,843)
determined pursuant to Statement of Financial Accounting
Standards (SFAS) No. 128., "Earnings Per Share." This
Statement requires a dual presentation and reconciliation of
"basic" and "diluted" per share amounts. Diluted reflects the
potential dilution of all common stock equivalents. Since the
assumed exercise of common stock options would be
antidilutive, such exercise is not assumed for purposes of
determining diluted loss per share. Accordingly, diluted and
basic per share amounts are equal.
36
AURORA ENERGY, LTD.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Oil and Gas Properties
The Company follows the full cost method of accounting for
oil
and gas properties. Accordingly, all costs associated with
acquisition, exploration, and development of oil and gas
reserves, including directly related overhead costs, are
capitalized.
All
capitalized costs of oil and gas properties, including the
estimated future costs to develop proved reserves, are
amortized on the unit-of-production method using estimates
of
proved reserves. Investments in unproved properties and
major
development projects are not amortized until proved reserves
associated with the projects can be determined or until
impairment occurs. Unproved properties shall be assessed
periodically and a loss shall be recognized if those
properties are impaired.
In addition, the capitalized costs are subject to a "ceiling
test," which basically limits such costs to the aggregate of
the "estimated present value," discounted at a 10 percent
interest rate of future net revenues from proved reserves,
based on current economic and operating conditions, plus the
lower of cost or fair market value of unproved properties.
Sales of proved and unproved properties are accounted for as
adjustments of capitalized costs with no gain or loss
recognized, unless such adjustments would significantly alter
the relationship between capitalized costs and proved reserves
of oil and gas, in which case the gain or loss is recognized
in income.
When unproved property is surrendered, abandoned, or
otherwise
deemed worthless, capitalized acquisition costs relating
thereto shall be charged against the related allowance for
impairment to the extent an allowance has been provided; if
the allowance previously provided is inadequate, a loss shall
be recognized.
37
AURORA ENERGY, LTD.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits in
banks
and deposits in an escrow trust account. The company has
deposits in financial institutions in excess of federally
insured limits; management believes interest rates or other
financial risks associated with these deposits are not
significant.
Revenue Recognition
Oil and gas revenues are generally recognized at the time of
extraction of product or performance of services. Revenues
from service contracts are recognized ratably over the term of
the contract.
38
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Property and Equipment
Property and equipment are stated at cost. Major
improvements
and renewals are capitalized while ordinary maintenance and
repairs are expensed. Management annually reviews these
assets to determine whether carrying values have been
impaired.
Investment in Affiliates
The Company owns a 50% interest in Jet/LaVanway Exploration,
L.L.C., a Michigan limited liability company. Ownership is
accounted for at the end of the Company's calendar year using
the equity method, whereby the investment is stated at cost,
adjusted for the Company's equity in undistributed earnings or
loss since acquisition.
Depreciation
Depreciation, which includes amortization of assets recorded
as capital leases, is computed using the straight-line method
over the estimated useful lives of the related assets, which
range from 5 to 40 years.
Income Taxes
Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and
federal income tax bases of assets and liabilities that will
result in taxable or deductible amounts in the future, based
on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income.
Deferred income taxes arise from temporary basis differences
principally related to oil and gas properties, depreciation,
and non-deductible expenses. Valuation allowances are
established when necessary to reduce deferred tax assets to
the amount expected to be realized. Income tax expense is the
tax payable or refundable for the year plus or minus the
change during the year in deferred tax assets and liabilities.
2.
SUPPLEMENTAL CASH FLOW INFORMATION
Non-Cash Financing and Investing Activities:
Common stock issued for oil and gas investment $143,000
Common stock issued in satisfaction of loan
from
financial institution $500,000
Capital
lease obligations assumed for the purchase
of non
oil and gas property plant and equipment $47,369
39
2. SUPPLEMENTAL CASH FLOW INFORMATION
Other Cash Flow Information
Cash paid for interest and income taxes during the period
from inception (March 12, 1997)to December 31, 1997, amounted
to the following:
[S] [C]
Interest $19,730
Income taxes none
3. ACCOUNTS RECEIVABLE
Billed accounts receivable, amounting to $182,970 at
December
31, 1997 consist of joint interest billings to investors who
have invested with the Company on specific oil and gas
projects.
Unbilled accounts receivable consist of joint interest
billings which have been received by the Company but have not
yet been billed to the investor. These receivables amounted
to $121,200 at December 31, 1997.
4. INVESTMENT IN OIL AND GAS PARTNERSHIP
On April 21, 1997, three individuals, who are
shareholder/directors of Aurora Energy, Ltd., transferred
their 50% ownership interest in Jet/LaVanway Exploration,
L.L.C., a Michigan LLC (the "Partnership") to the Company in
exchange for 5,575,200 shares of common stock. The Company
recorded the transaction at $143,000 which represented the
estimated fair market value of the 50% interest in the
Partnership at the date of transfer; such value was considered
to be more clearly determinable than the value of the
Company's common stock. The Partnership holds an approximate
9% interest in the Jet/LaVanway New Albany Shale area located
in Harrison, Crawford, Washington, Floyd and Clark Counties,
State of Indiana, which covers approximately 80,656 acres.
40
The following table presents condensed balance sheet data of
Jet/LaVanway as of December 31, 1997 and results of its
operations for the year then ended:
[CAPTION]
Balance Sheet December 31,1997
[S] [C]
Current assets $ 618,757
Other assets 247,348
Total assets $ 866,105
Current liabilities $ 511,094
Other liabilities 156,383
Equity 198,628
Total liabilities and equity $ 866,105
41
4. INVESTMENT IN OIL AND GAS PARTNERSHIP
[CAPTION]
Year Ended
Income Statement December 31, 1997
[S] [C]
Net sales $ 26,657
Operating expenses 114,029
Net loss $ (87,372)
The Company is contingently liable as guarantor for the
repayment of certain loans made to Jet/LaVanway. At December
31, 1997, the outstanding balance of these loans, which are
secured by the Partnership's oil and gas properties, is
$96,000.
5. SALE OF INTERESTS IN OIL AND GAS PROPERTIES
In December 1997, the Company sold a partial interest in the
Dumada project, an unproved property, for $22,500 which was
credited to the full cost pool.
6. OIL AND GAS PROPERTIES NOT SUBJECT TO AMORTIZATION
The Company is currently participating in oil and gas
exploration and development activities on blocks of acreage in
the States of Indiana and Michigan. At December 31, 1997, a
determination cannot be made about the extent of additional
oil reserves that should be classified as proved reserves as
a result of these projects. Consequently, the associated
property costs and exploration costs have been excluded in
computing amortization of the full cost pool. The Company
will begin to amortize these costs when the projects are
evaluated, which is currently estimated to be in 1998.
Costs excluded from amortization consist of exploration
costs
in the amount of $700,850 at December 31, 1997. All of these
expenditures were incurred during 1997.
42
7. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 consist of the
following amounts:
[S] [C]
Furniture and fixtures $ 35,515
Computer equipment 15,655
Software 376
Leasehold improvements 11,490
Sub-total 63,036
Accumulated depreciation 732
Property and equipment, net $ 62,304
8. LEASES
The Company conducts a portion of its operations with leased
equipment, which meet the capitalization criteria specified by
generally accepted accounting principles.
Equipment held under capitalized leases and included in
property and equipment, in the Statement of Financial Position
at December 31, 1997 are as follows:
[S] [C]
Furniture and fixtures $ 33,335
Computer equipment 14,034
Total 47,369
Less accumulated amortization 582
Net book value $ 46,787
43
The following is a schedule of annual future minimum lease
payments required under capitalized leases as of December31,
1997:
[S] [C]
1998 $ 14,739
1999 14,739
2000 13,796
2001 9,080
2002 7,567
Total minimum payments due 59,921
Less amounts representing interest at rates
ranging from 13.34% to 13.51% 16,850
Present value of net minimum lease payments $ 43,071
Net rental expense on operating leases was $12,449 for the
period ended December 31, 1997.
The Company leases office space under an operating lease.
This lease, which expires on October 15, 1998, contains a
renewal clause which may be exercised at the option of both
parties. The leased office space is owned by an entity which
is owned one-third by one of the Company's principal
shareholders and one-third by the spouse of another of the
Company's principal shareholders. Such facilities are
subleased by the Company from an unrelated third party. In
addition, the Company also leases two offices in an adjacent
building on a month to month basis.
9. INCOME TAXES
At December 31, 1997, net operating loss carryforwards of
approximately $391,100 are available to offset future federal
taxable income, if any, through 2012.
At December 31, 1997 the Company has a deferred tax asset
attributed primarily to a net operating loss carryforward
(calculated using a 34% tax rate) of approximately $133,000.
This asset has been offset in full by a valuation allowance in
the same amount.
44
10. ADVANCES FROM INVESTORS
Advances from investors at December 31, 1997 consist of
investments made by investors who, under terms of their
leasing program agreement, will receive their investment plus
an override when the Company's oil and gas holdings begin
producing revenues. Since none of these holdings are
currently producing, no royalty or working interest accruals
have been made.
11. RELATED PARTY TRANSACTIONS
The Company issued a total of 700,000 shares of common stock
to a foreign commercial lending institution in exchange for
cancellation of a $500,000 loan advanced by the institution.
Interest expense of $15,462 incurred on the loan was paid in
cash.
A corporation owned and controlled by one of the Company's
principal shareholders advanced a total of $175,000 in
short-term loans to the Company. Interest incurred on these loans,
which were repaid in full during the period, amounted to
$3,119.
The Company incurred expenses of $158,188 to a local real
estate concern which is 35% owned by the spouse of one of the
Company's principal shareholders.
12. COMMON STOCK OPTION PLAN
On October 1, 1997, the Company adopted an incentive
qualified
stock option plan which authorized the issuance of up to
1,000,000 shares of the Company's common stock at an option
price which may not be less than 100% of fair market value on
the date of grant. The plan was created in an effort to
retain key employees, attract new employees, obtain the
services of consultants, encourage the sense of proprietorship
of such persons in the Company, and to stimulate the active
interest of such persons in the development and financial
success of the Company. On May 1, 1997, the Company issued to
a consultant who renders certain advisory services to the
Company an option to purchase 300,000 shares of common stock
at an option price of $.05 per share. The option expires May
1, 2002. The Company recorded $15,000 in consulting expense
in connection with the issuance of the options based upon the
fair value of the services rendered. Such value is considered
more clearly determinable than the fair value of the options.
On August1, 1997, the Company issued to a director an option
to purchase 10,000 shares of common stock at an option price
of $.50 per share. The option expires July 31, 2002. The
Company recorded $2,400 in expense in connection with the
issuance of the options based upon the fair value of the
services rendered. Such value is considered more clearly
determinable than the fair value of the options. On February
5, 1998, the Company issued to its controller an option to
purchase 10,000 shares of common stock at an option price of
$1 per share. The option expires on July31, 2002. No options
have been exercised.
45
In 1997, the Company adopted the disclosure aspects of
Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation". The Company
applies Accounting Principles Board (APB) Opinion No. 25 in
accounting for its stock option plan and, accordingly, no
compensation cost will be recognized in the financial
statements for outstanding stock options to be issued to
employees. Companies that do not adopt a fair value method
contemplated in SFAS No. 123 are required to make pro-forma
disclosures of net loss and loss per share as if they had
adopted the fair value accounting method.
* * * * *
46
PART III
ITEM 1. INDEX TO EXHIBITS
Page
(2) P Charter and Bylaws 47
(3) Instruments defining the rights of See
security holders Exhibit (2)
Charter
(5) Voting Trust Agreement None
(6) Material Contracts
P Stock Option Agreement with Gary Myles 72
P Stock Option Agreement with John M. Lohman 75
P
Business Consultant Agreement
with JamesC. Czirr 78
P Stock Option Agreement with JamesC. Czirr 82
P Rental Agreement 85
(7) Material Foreign Patents
47
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act
of 1934, the registrant caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
AURORA ENERGY, LTD.
Date: April 24, 1998 By: s/William W. Deneau
William W. Deneau, President
