U. S. Securities and Exchange Commission
Washington, D.C. 20549
Amended Form 10-KSB
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(For the year ending: December 31, 1998)
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period from:
Commission file number 000-29722
AURORA ENERGY, LTD.
(Exact name of small business issuer as specified in its
character)
NEVADA 91-1780941
(State or other jurisdiction of (IRS incorporation Employer
organization) Identification No.)
3760 North US-31 South, Traverse City, MI 49684
(Address of principal executive offices)
(616) 941-0073
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange
Act:
Title of each class to be so
Registered Name of each exchange on
None which each class is to
be registered
None
Securities to be registered pursuant to Section 12(g)
of the Act:
Common Stock
Check whether the issuer (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act
during the past 12 months (or for such shorter period
that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for
the past 90 days.
Yes ___Y___ NO______
Delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.( )
State issuer's revenues for its most recent fiscal year.
$1,430
State the aggregate market value of the voting and non-
voting common equity held by nonaffiliates computed by
reference to the price at which the common equity was
sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days.
$3,484,497
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of
the issuer's classes of common equity, as of the latest
practicable date: 8,691,697
Transitional Small Business Disclosure Format
(check one); YES ____ NO X
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. At this point in time,
the Company has no proven reserves. However, production
has begun in the East 23, Timm, Devil River, and Paxton
Quarry Antrim Shale projects in Michigan, and the
Corydon New Albany Shale wells in Indiana. The
Company also owns small purchased interests in two
productive properties: the Lodgepole Stadium Field in
North Dakota and the Merrick Estate #1 in Louisiana.
DEVELOPMENT
The Company was originally incorporated on August 12,
1991 as a Nevada corporation under the name Mentor Group
International Corporation. Mentor was originally a wholly
owned subsidiary of Premier Allied Consultants Corporation.
Mentor was subsequently "spun-off" with the shareholders of
Premier Allied Consultants Corporation receiving shares in
the Company in a transaction exempt from registration. On
November 24, 1995, Superior Lubricants, Inc. was merged
into the Company. At the time of this merger, Mentor changed
its name to Superior Lubricants International, Inc. The
business plan of Superior Lubricants International, Inc.
did not progress as anticipated, and on June 24, 1996, the
name was changed back to Mentor Group International
Corporation. From its inception until April 1997, the Company
was not successful in achieving any material operations.
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.). Through the Jet/LaVanway
membership interest the Company holds interests 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 acquired was 5% working interest before payout
and 13.015% working interest after payout of investors at an
0.80 net revenue interest. The Company has subsequently acquired
an additional 4% working interest before payout and additional
3.20% working interest after payout. The Company's total interest
in the Corydon area is currently 9% before payout and
16.215% after payout.
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.
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 of their interests, 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 May 5, 1997, Jet Exploration 1995-1, L.L.C. (Jet-95)
entered into a Joint Development Agreement for the Dumada
Area of Mutual Interest with Colony Petroleum, L.L.C.,
Cumulus Two Limited Consolidated Exploration, L.L.C., and
Deka Exploration, L.L.C. Jet-95 initially received a 25%
working interest at an 80% net revenue interest in the
Project. A Joint Operating Agreement was signed which
designated Jet-95, L.L.C. as the Operator for drilling
purposes, with Deka Exploration, L.L.C. to assume the duties
of Operator for each well upon commencement of production
operations. Jet-95 subsequently sold off a substantial
amount of its working interest, retaining a 4.8% working
interest before payout and a 10.4675% revenue interest
after payout. As a result of agreements with Colony
Petroleum, L.L.C. and Cumulus Two Limited Consolidated
Exploration, L.L.C., Jet received an overriding royalty
equal to 1% (both before and after payout).
On July 28, 1997, the Company entered into an agreement
with Jet-95 to acquire Jet-95's working interest in the
Dumada Project on an actual cost basis. The Company paid
$126,451 as a reimbursement of direct costs to acquire this
4.8% working interest at an 80% net revenue interest. From
July 28, 1997, the Company was responsible for its allocated
costs associated with the development of the Dumada Project.
The July 28, 1997 agreement also allowed the Company to
acquire the balance of Jet Exploration 1995-1, L.L.C.'s
interest in the Dumada Project, specifically its interest
as an operator, at a price of $60,000. This payment was
intended to reimburse Jet Exploration 1995-1, L.L.C. for
its indirect costs incurred in the creation and marketing
of the 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 Company exercised this
option, and has paid the full $186,451 to Jet Exploration
1995-1, L.L.C. (See page 14 for a description of the Dumada
Project.) On December 18, 1997, the Company sold .25% of its
working interest in the Dumada Project. The Company currently
has financial responsibility for 4.55% of the Dumada Project,
and is entitled to 5.55% of net revenues before payout and
10.4675% of net revenues after payout.
Beginning in January of 1998, the Company put together a
lease block of approximately 2,500 acres over the Illinois
Basin and the Rough Creek Fault System in northern part of
Kentucky. The Company has sold this project for $39,000.
The Company retained rights to 10% of the working interest,
will be carried 10% in the first test well, and holds an
overriding royalty interest in the leases.
In April of 1998, the Company began leasing approximately
13,000 acres in a Trenton gas project in northwest Ohio
known as the Crossroads Project. The Company has secured
financing for all phases of development sufficient to produce
and sell up to 2,000 mcfg/d. Production from 9 wells is
targeted for 1999. The first six months of production will
be a period of evaluation to confirm and refine reserve
estimates.
In September of 1998, the Company acquired interests in
approximately 16,000 acres in Michigan known as the Church
Lake Project and the Chimney Lake Project targeting the
Richfield and Dundee formations.
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", the Company
employs an accountant and a secretary. Consultants are hired
as needed on an independent contractor basis. (See page 32
for a description of the Key Consultants.) No change in the
number of employees is anticipated at this time.
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
its own funds to acquire properties when possible, and will
attempt to finance the development of reserves and production
using third party financing or joint venture partners.
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 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 is continuing to concentrate the Company's
exploratory efforts in the black shales of Michigan and
Indiana for the following reasons:
1. The shales are proven fractured reservoirs in both
states. The gas-in-place has been proven to be
exceptional, being measured in the hundreds of
trillions of cubic feet.
2. In management's opinion, the market for gas in
Indiana and Michigan is excellent, with a web of
major transmission pipelines already in place.
3. The largest, most wide-open opportunities are
throughout the prospective area in Indiana for the
New Albany Shale. There are multiple geological
zones of production above the shale, which have
been proven to contain large reservoirs of oil
and gas. These zones will be tested each time a
New Albany Shale well is drilled, adding significantly
to the potential for discovering new reserves.
4. Unconventional reservoirs are ever increasing in
improved production systems and development.
Understanding these reservoirs and how best to
produce them is making possible large-scale,
low-risk plays in which the Company hopes to be a
major player, especially of the Indiana New Albany
Shale.
COMPETITION AND OTHER OPERATIONAL ISSUES
The oil and gas industry is very competitive. There is a
high degree of competition for 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 are sufficient opportunities 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.
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.
Each state in which the Company conducts oil and gas
operations has a set of regulations and ordinances that
apply. Each state issues booklets of instructions to be
followed. The Company must obtain a permit for each well
to be drilled. As required by the State of Michigan, the
Company has provided a $100,000 letter of credit through
its line of credit with First of America Bank (now known
as National City Bank). Thus far, the Company's industry
partner has obtained the required drilling permits in the
State of Michigan. The Company is in the process of having
two Michigan well permits transferred into its name. As
required by the State of Kentucky, the Company has provided
Kentucky a $2,500 letter of credit from Empire National Bank.
As required by the State of Indiana, the Company has provided
Indiana a Blanket Surety Bond in the amount of $30,000 from
Redland Insurance Company. To date, the Company has three
drilling permits from the State of Indiana. As required by
the State of Ohio, the Company has provided a $50,000 surety
bond from Underwriter's Indemnity Company. The Company has
received a letter from the State of Ohio Department of Natural
Resources assigning the Company an owner number. To date, the
Company has three drilling permits from the State of Ohio. The
Company does not anticipate any difficulties in obtaining
drilling permits as needed.
The Company has been granted a Registered Trademark No.
2,214,144, registered on December 29, 1998, for its logo.
FINANCIAL CONSULTING
On May 1, 1997, the Company entered into a three-year
Business Consultant Agreement with James C. Czirr of
Sandpoint, Idaho. Mr. Czirr has agreed to advise the
Company on financial and financing matters, including
the development and implementation of a plan to make the
Company a public stock company. As amended, the agreement
calls for Mr. Czirr to receive 1,000 shares of the Company's
common stock for 18 months beginning in November of 1998.
These shares are required to be registered with the SEC on
Form S-8 as shares issued pursuant to employee benefit plans.
Until the Company is able to issue these shares, the shares
are being accrued but not issued. As amended, the agreement
also grants Mr. Czirr a five-year option to purchase 16,000
shares of the Company's common stock at a price of $.05 per
share. Mr. Czirr has been active in the oil and gas industry
for 16 years. He founded Extol Energy Corporation in 1982.
As president of Extol Energy Corporation, he has experience in
managing several oil and gas projects. He is currently a
director of two public companies, Metalline Mines and Maco
Industries, both of which trade on the OTC Bulletin Board.
BANK FINANCING
Effective April 10, 1998, the Company entered into a Business
Loan Agreement with First of America Bank, N.A., Northern
Region (now known as National City Bank) of Traverse City,
Michigan. The Company received a $750,000 line of credit
reflected in a note dated April 14, 1998 bearing interest at
one percentage point over the New York consensus index rate
with an initial rate of 9.5% per year. The note matures on
April 10, 1999. Interest is payable monthly. The Company
granted an all assets security interest as collateral on the
loan. Messrs. Deneau, Miller and Tucker each provided personal
guarantees for repayment of the loan. As of December 31, 1998,
$610,000 had been drawn on the line, and another $100,000 was
allocated to an open letter of credit issued to the State of
Michigan Department of Environmental Quality to obtain drilling
permits for wells to be drilled in Michigan.
OIL AND GAS TERMINOLOGY
AMI: Area of mutual interest in which all parties who have
joined together in an area agree to share opportunities and
obligations with the area.
Bioturbated: The churning and stirring of a sediment by
organisms.
Brine Water Disposal Well: A well into which salt water
and other liquid substances are pumped for disposal purposes.
De-watering: The system whereby brine water is removed
from the well in order to allow the gas/oil to be released.
Pumping mechanisms are usually used for this process. New
wells may have great amounts of water, which must first be
removed. As water is removed, gas/oil production usually
increases.
Exploratory Well: A well drilled in an unproved area, either
to find a new oil or gas reservoir or to extend a known
reservoir. Sometimes referred to as a wildcat.
Farmed-in: One of the most common forms of cooperation between
producers in developing oil and gas properties. The owner of
the working interest in a lease assigns the working interest
to another operator for development of the property, retaining
an economic interest, usually in the form of an overriding royalty.
Fault System: The earth's crust is subject to stresses from
movement, heat and other environmental factors. When the crust
breaks under the strain, a fracture is created. When several
fractures occur and they are significant in size, they are
referred to as faults. A series of faults is called a "fault
system."
Field: A geographical area under which one or more oil or gas
reservoirs lie.
Formation: An identifiable layer of rocks named after its
geographical location and dominant rock type.
Fracturing: A perforating gun is lowered into the well bore
and at the proper depth, the gun is fired and perforations are
made through the casing and into the formation, making for
additional fractures in the formation allowing hydrocarbons to
flow into the well bore so that they can be transported to the
surface. To assist in the process of releasing the hydrocarbons
trapped in the rock itself, sand, water, and/or acid are pumped
into the well bore under great pressure to fracture the rock near
the well bore.
Gross Acres: The total number of acres in which one owns a working
interest.
Lease: A legal contract that specifies the terms of the business
relationship between an energy company and a landowner or mineral
rights holder on a particular tract of land.
Leasehold: Mineral rights leased in a certain area to form a
project area.
Net Acres: Gross acres multiplied by one's fractional working
interest in the property.
Niagaran Trend: The Niagaran rock formation in Northern and
Southern Michigan has demonstrated great oil and gas reserves.
The buried reefs seem to line up and form a trend, hence "Niagaran
trend."
NRI: Net Revenue Interest.
Overriding Royalty Interest: Is similar to basic royalty interest
except that it is created out of the working interest. For
example, an operator possesses a standard lease providing for a
basic royalty to the lessor or mineral rights owner of 1/8 of
8/8. This then entitles the operator to retain 7/8 of the total
oil and gas produced. The 7/8 in this case is the 100% working
interest the operator owns. This operator may assign his working
interest to another operator subject to a retained 1/8 overriding
royalty. This would then result in a basic royalty of 1/8, an
overriding royalty of 1/8 and a working interest of 3/4. Overriding
royalty interest owners have no obligation or responsibility for
developing and operating the property. The only expenses borne by
the overriding royalty owner is a share of the production or
severance taxes and sometimes costs incurred to make the oil or
gas salable.
Pay Zone: The geologic formation where the gas/oil is located.
Plugged: Equipment in the well bore is salvaged and a cement
plug is placed into the well, thereby plugging off the rock
exposed in the well.
Production: Natural resources, such as oil or gas, taken out
of the ground.
Prospect: An idea that oil and/or gas may be found in a certain
location is known as a prospect.
Proved Reserves: Estimates of oil, gas, and gas liquids
quantities thought to be recoverable from known reservoirs
under existing economic and operating conditions.
Reservoir: A rock formation or trap containing oil and/or
natural gas.
Shale: A clastic (gr. klastos, "broken") rock composed of
predominantly clay-size particles consisting of clay minerals,
quartz and other minerals. Often found as thin layered organic
rock rich in hydrocarbon deposits.
Shut-in: A well that has been capped (having the valves locked
shut) for an undetermined amount of time. This could be for
additional testing, could be to wait for pipeline or processing
facility, or a number of other reasons.
Silurian Reef: A reef similar to a reef in the ocean which was
developed in Silurian geological time and is now buried beneath
the surface and may contain hydrocarbons if trapped within the
reef rock.
3-D Seismic: Technology to create three-dimensional images by
bouncing sound waves off of underground rock formations. Used
to look for underground accumulations of oil and gas.
Sweet Oil: Natural occurring oil that does not contain hydrogen
sulfide.
Test Well: A well drilled in an unproven geographical area,
charting new ground.
Undeveloped Acreage: Leased acreage on which wells have not
been drilled or completed to a point that would permit the
production of commercial quantities of oil or gas.
Unit: A contiguous parcel of land deemed to cover one or more
common reservoirs for oil or natural gas, as determined by
state or federal regulations. Unit interest owners generally
share in costs and revenues according to their proportion of
ownership in the unit.
Well Bore: The hole of the well starting at the surface of
the earth and descending downward to the bottom of the hole.
Working Interest: The cost-bearing ownership share of an oil
or gas lease.
Volume Acronyms:
Bbl:
A standard oil measurement that equals one
barrel (42 US gallons)
Bcfg:
Billion cubic feet of gas
cfg:
Cubic feet of gas
mcf:
Thousand cubic feet of gas, a standard
measurement unit for volumes of natural
gas that equals one thousand cubic feet
tcfg:
Trillion cubic feet of gas
/d:
Per day
ITEM 2. DESCRIPTION OF PROPERTY
THE CORYDON PROJECT
The Corydon Project is located northwest of Corydon, Indiana,
in Harrison County. This 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.
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. The first leases will begin to expire in December
of 1999. Once production is established on a lease, the lease
stays in effect as long as the well is producible.
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 cubic feet of gas daily. Steps are being taken to
reduce overhead in order to make the project profitable. Further
expansion of this unit is dependent upon commercial viability of
the current producing wells in outlying areas. Engineering
studies have been completed to evaluate the reservoir. The
reservoir is partially depleted and development in the future
will be targeting outlying areas with more virgin pressures.
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, the Company acquired an additional 1% before payout
working interest from Jet Exploration 1995-1, L.L.C. The
Company will own a 10.68% working interest after payout as
defined in the agreements with the existing investors in Dumada.
To date, the Company and its industry partners have drilled
30 test wells in the leasehold area, which are currently
temporarily abandoned. Thirteen of those wells have been
tested extensively. S. A. Holditch & Associates, Inc., an
engineering firm familiar with shale production; has completed
an evaluation of the viability of the reservoir. The engineering
reports show proved but undeveloped reserves of 5 Bcf/gas from
the first 10 wells on over 100,000 acres of leasehold.
An agreement with Southeastern Oil & Gas (SEOG) expired at the
end of 1998. SEOG earned drilling rights by shooting 30 miles
of seismic and by completing a 3-D seismic shoot in the Dumada
AMI during 1998. SEOG has given notice that they have a
prospect to drill, but due to other more favorable prospects,
they are not going to proceed. No additional seismic will be
run to keep the agreement effective.
A 10-Well Pilot Unit is slated for 1999 in this prospect.
The Company is seeking funding for this unit. If funding is
not secured, this project will be deferred.
CROSSROADS PROJECT
Aurora began leasing approximately 13,000 acres in a Trenton
gas project in northwest Ohio known as the Crossroads Project.
Aurora has secured financing for all phases of development
sufficient to produce and sell up to 2,000 mcfg/d. Production
from 9 wells is targeted for 1999. The first six months of
production will be a period of evaluation to confirm and refine
reserve estimates. The Company sold 33% of this project during
1998, and has sold an additional 17% since December 31, 1998.
The Company has no plans to sell more of this project and
currently retains a 50% working interest in the Crossroads as
well as rights to be project operator.
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 thirteen wells have been drilled. Ten wells
have been completed and are producing, two of the sixteen
wells have been plugged and one is a Salt Water Disposal
Well. The Company now owns 29% interest in this project
after an oil and gas industry investor bought 1% working
interest for $34,000.00 in December of 1998. The initial
ten well phase of this project was completed, with facility
and a salesline late in October of 1998. Production revenue
is expected to begin in 1999, after division orders and
unitization agreements have been executed.
ALCONA COUNTY ANTRIM WELLS
The Company acquired from Jet Exploration, Inc. (Jet)
(at Jet's costs), in December of 1997, small interests
in Antrim shale wells in three projects located in Alcona
County, Michigan. The Company has a 2.3% working interest
before pay out and 3.68% after payout in the Devil River
Project where ten wells began producing in November of 1998.
A 2.3% working interest before payout and 3.68% working
interest after payout was acquired in the East 23 Project
that began producing through six wells in September of 1998.
The Company owns a 1.8% working interest before payout and
3.18% after payout in the Timm Project that started producing
in August of 1998. This unit has twenty-one wells producing.
Although these projects are in production at December 31, 1998,
the Company does not expect any distributable revenue until
sometime in 1999. The majority interest owner and ultimate
operator of these projects is Petroleum Development Corporation
of West Virginia.
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 Company has sold
this project for $39,000. Aurora retained rights to 10% of
the working interest, will be carried 10% in the first test
well, and holds an overriding royalty interest in the leases.
NEWLY DISCOVERED BEREGSASI 1-5 NIAGARAN WELL INTEREST
The Beragsasi 1-5 in Macomb County, Michigan was discovered
in December 1997 by West Bay Exploration of Traverse City,
Michigan. Jet owned a carried working interest of 10.625%
in the well. The Company purchased the interest from Jet,
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 the
Company expects the Beregsasi 1-5 to begin producing the state
mandated maximum allowable of 200 Bbls/day. Production is
anticipated for 1999.
BLUE LAKE 1-4 NIAGARAN WELL
The Company acquired 50% of the interest and operations in a
shut-in Niagaran well in the northern Michigan Niagaran trend
from Trinity Exploration Corporation on March 27, 1998. The
Company paid $5,000 plus an agreement to pay Trinity Exploration
Corporation 20% of the Company's net profits on the well after
the Company achieves payout. For purposes of this agreement,
direct expenses are deducted from revenues, but indirect
expenses are not. Before the well was 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 did not assume liability for past acts
or omissions. Trinity Exploration and its principal gave the
Company an indemnification agreement for all acts or omissions
for which they may be held liable. The Company is discussing
environmental remediation with the state of Michigan. The
Company subsequently acquired an additional 48.5% working
interest in this well in November of 1998.
CHURCH LAKE & CHIMNEY LAKE PROJECTS
The Company acquired interests in approximately 16,000 acres
in Michigan known as the Church Lake Project and the Chimney
Lake Project. The projects were acquired in 1998 from a Michigan
geologist, with whom the Company's management has a long standing
relationship established. The costs to acquire the interest were
minimal, and involved a due diligence effort to continue the
acquisition of leasehold, as well as efforts to secure permits
for drilling test wells. The Company has no debt outstanding
in this project and anticipates bringing in a new industry
partner in 1999 to accomplish testing prospective reservoirs.
This partner will be expected to reimburse the Company for
its costs to date and to bear some kind of promotional burden
in the project in the favor of the Company.
Due to the confidentiality required to keep this attractive
prospect out of the hands of competitors, no discussion will
be made of the location of this project or the targeted
formations to be tested, etc. Upon the securing of a partner
and the acquisition of critical leasehold, the Company will
release critical information publicly.
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. According to
the Final Report: Gas Potential of the New Albany Shale
(Devonian and Mississippian) in the Illinois Basin, published
by the Gas Research Institute in 1994 ("GRI Publication"),
activity in the area 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.
Management believes that the New Albany Shale of Indiana
is 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, as described in a 1994
Reserve Study Report prepared by Paul Dubois, professional
geologist, for the Equitable Life Assurance Society. 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.
According to the GRI Publication, 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.
Management believes that 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.
In management's opinion, the existence of water in a shale gas
formation has been proven helpful in Michigan Antrim Shale plays.
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.
According to the GRI Publication, 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:
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.
In an article published by John B. Droste and Robert H. Shaver in the
University of Chicago Journal of Geology, Vol. 88, 1980, entitled
"Recognition of Buried Silurian Reefs in Southwestern Indiana:
Application to the Terre Haute Bank," the authors indicate that in
the 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.
According to the GRI Publication, 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 structures, which have been used in the
past for gas storage.
Also according to the GRI Publication, 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 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 their prior experience, management believes that the
potential for gas reserves in the New Albany Shale is substantial.
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. A de-watered
shale well should remain at a peak production level for many years
and then begin a very slow decline over several decades.
JET/LAVANWAY EXPLORATION, L.L.C.
The Company owns a 50% membership interest in Jet/LaVanway
Exploration, L.L.C. (J/L). The other 50% interest is owned by
LaVanway Capital & Trade Corporation. J/L was formed in June 1995,
to develop the Corydon Project in Harrison County, Indiana. This
was a joint venture between Jet Exploration, Inc. (Jet) which agreed
to provide field operations, and LaVanway Capital & Trade Corporation,
which agreed to provide the accounting for the project. The history
of Jet is detailed below. J/L 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 over the entire leased area.
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, which continued
the same activities. On January 1, 1995, William W. Deneau acquired
49% of Jet. On October 21, 1995, John V. Miller, Jr., exercised his
option to acquire 9.26% of Jet, thereby reducing Thomas W. Tucker's
interest to 46.3% and William W. Deneau's interest to 44.44%.
On February, 8, 1995, Jet Exploration 1995-1, L.L.C. (Jet 95-1) was
created to begin more extensive development of Shale gas around the
country. William W. Deneau (35%), Thomas W. Tucker (35%), and John V.
Miller, Jr. (30%) owned Jet 95-1. On June 1, 1995, Jet and Hunting
Exploration Company formed Jet Hunting Exploration, L.L.C., whose name
was subsequently changed to Jet/LaVanway Exploration, L.L.C.
Aurora & LaVanway, L.L.C.
In April 1998, the Company formed a new entity, Aurora & LaVanway,
L.L.C. ("A&L") with LaVanway Capital & Trade Corporation. The Company
is the managing member and owns a 50% membership interest in A&L.
LaVanway Capital and Trade Corporation owns the remaining 50%
membership interest in A&L. A&L was formed to pursue business
opportunities that might arise in conjunction with other projects
and pursuits of the founding entities. The initial membership
contribution of each member was $2,000. A&L is in the process of
seeking financing for 100 wells to be drilled in Floyd and Clark
Counties, Indiana.
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 $1,900. The
sublease is for a one-year renewable term. The Company also rents
400 square feet of storage space from South 31, L.L.C. for $150 per
month. . The storage space houses well logs, cuttings, and other
documents that the Company needs to retain. The Company was renting
two offices from White Pine Land Company but has since discontinued
this lease. 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 December 31, 1998, the Company has no proven 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. The Lodgepole in North
Dakota, the Merrick Estate #1 in Louisiana, and the wells in the Blue
Spruce, Angel, East 23, Timm, Devil River, Paxton Quarry Projects in
Michigan and the Corydon wells in Indiana are the only interests owned
by the Company that are currently in production. As of December 31,
1998, the Company owns the following gross and net productive wells
and gross and net developed acreage as follows:
Oil
Gross productive wells 3.00
Net productive wells .11
Gross developed acreage 1,040.00
Net developed acreage 6.45
Gas
Gross productive wells 128.00
Net productive wells 11.72
Gross developed acreage 14,025.00
Net developed acreage 1,971.00
As of December 31, 1998, the Company has leased mineral
rights on gross and net undeveloped acreage as follows:
Undeveloped gross acreage 196,090
Lease terms are generally five years. The Company in its present
form has been involved in oil and gas exploration and leasing
less than two years. Consequently, in general, lease terms have
the majority of their terms yet to run. Lease agreements
provide for extensions as necessary.
From March 15, 1997, through December 31, 1998, the Company
has participated in the drilling of productive and dry wells as
follows:
Net productive exploratory wells drilled 15.03
Net dry exploratory wells drilled .63
The Company has not drilled any development wells as of December 31,
1998.
As of December 31, 1998, the Company is not drilling any wells. All
current projects are either in the completion phase with production
facilities and flow lines under development, or in the drilling-
planning stages. See "Description of Property" describing the
individual projects.
As of December 31, 1998, the Company had no contractual
commitments to deliver or provide any fixed and determinable
quantities of gas or oil. The Company had an agreement with
Southern Indiana Gas and Electric (SIGECO) which provides for
the 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. This
contract has been allowed to expire.
ITEM 3. ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings.
ITEMITEM 4. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the
fourth quarter of 1998.
PART II
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is not currently traded on a
public trading market. The Company has engaged the services
of Public Securities, Inc. to assist the Company in becoming
eligible for trading on the NASD OTC Bulletin Board. There
is no written agreement concerning this engagement. The
Company reserves the right to discontinue the process at any
time, or to work with an alternative underwriter. There is
no assurance when or if the Company's common stock will
become eligible for trading. Management is committed to continue
to pursue this goal.
There are currently 8,691,697 shares of common stock
outstanding. Another 36,000 shares are being reserved to
satisfy outstanding option agreements as of December 31,
1998. 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 new exploration and expansion of
current projects, at least for the foreseeable future.
The Company's currently outstanding stock meets the
definition of penny stock set forth at Section 3(a)(51)(A)
of the Act. As a result, subject to limited exemptions, any
broker/dealer trading in the Company's stock is required to
provide its customers, prior to effecting a transaction in
the Company's stock, a risk disclosure document prepared by
the Securities and Exchange Commission, describing: the nature
and level of risk in the market for penny stocks; the
broker/dealer's duties to the customer; the rights and
remedies available to the customer for violations of
broker/dealer duties or the Federal securities laws; a
narrative description of the dealer market, including "bid"
and "ask" prices for penny stocks, and the significance of the
spread between bid and ask prices; a toll free number for
inquiries in disciplinary actions against broker/dealers and
their sales representatives; and other descriptive
information regarding penny stock trading. The broker/dealer
is also required to provide to any customer effecting
transactions in penny stocks, specific information about the
bid and ask prices, the number of shares trading, and the
broker/dealer's compensation. Broker/dealers are required
to preapprove customer accounts for penny stock trading,
based upon suitability requirements.
RECENT SALES OF UNREGISTERED SECURITIES
On December 21, 1998, the Company sold 1% of the working
interest in the Paxton Quarry project to a Michigan
industry investor for the sum of $34,000 in cash. The
Company relied on Section 4(2) of the Securities Act of
1933 for an exemption from registration.
In April, May and June 1998, the Company sold 33% of
the working interest in the Crossroads Project to Michigan
industry investors for the sum of $320,000 in cash. The
Company relied on Section 4(2) of the Securities Act
of 1933 for an exemption from registration.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
PLAN OF OPERATION
Since its inception, the Company has primarily been
involved in planning, obtaining financing, acquiring oil and
gas leases, and exploration of certain oil and gas properties
in Michigan, Indiana, and Ohio. The Company will continue
its focus in the Midwest; however, it will not restrict the
activity to this area. There should be no significant change
in the number of employees over the next 12 months.
The Company seeks to maximize stock price and shareholder
value through exploration in low-risk natural gas plays and
through the acquisition of properties with proven production
and positive cash flow. The Company's short-term goal (the
next 12 months) is to acquire or to find through exploration
and bring on-line enough production and positive cash flows
to produce a profit while covering 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. Those goals also include mortgaging proved and
developed reserves to finance continued exploration and
growth in value through development of untapped Antrim Shale,
New Albany Shale or other formations.
The Company expects it will be necessary to raise additional
funds for operations during 1999. These funds can be
raised in part by selling additional shares of the Company's
common stock through a private placement. The Company also
plans to acquire productive properties with recourse financing.
The Company may raise capital by reducing to a 50% ownership
interest in projects with proven reserves where a majority
interest is held.
During the next 12 months, management expects the existing
wells in the various drilling units in Michigan to continue
in production and begin to produce positive cash flows.
The Paxton Quarry Unit, in Michigan began commercial production
in 1998 and is expected to generate revenue from production in
1999.
The Company expects the Crossroads Project's initial 9-well
pilot unit, in Ohio, to begin production in 1999. There are
80 existing wellbores that can be re-entered for further
production. The Company currently owns, by lease, 39
existing wellbores that are candidates for production.
The Crossroads Project could potentially reach 200 wells.
The Company will continue to take steps to reduce the overhead
of the Corydon Project operations in Indiana. Aurora began operating
the Corydon Project for Jet/LaVanway Exploration in November 1998.
Three re-entry wells were drilled and completed during 1998. The
gathering system is now under construction as is the processing
facility.
In the Dumada Project, management has a 10-well production
unit slated for 1999. Management will require additional funding
for the initial 10-well unit. If funding is not obtained, this
project will have to be deferred.
The Beregsasi 1-5 well in Michigan, operated by West Bay
Exploration, is expected to begin production in 1999.
The Company is evaluating the economics of a proven Queen Sands
gas reservoir in the established Permian Basin. This prospect is
in New Mexico and has a twenty-well potential with multiple pay
zones. Preliminary engineering evaluations indicate commercial
production could be achieved. The Company would share the project
with a New Mexico operator.
During the next twelve months, in addition to completing and
bringing into production current projects under development, the
Company will pursue income producing properties, either royalty
or working interest, which would enhance the Company's cash flows
and profitability. In addition, Management expects to continue
aggressive pursuit of new oil and gas exploration and development
opportunities, while retaining enough flexibility to accommodate
the changes of focus necessitated by industry developments.
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.
YEAR 2000 ISSUE DISCLOSURES:
BACKGROUND
The Year 2000 Issue is a result of computer programs being
written to recognize two digits instead of four to identify the
applicable year. Date sensitive computer programs may then interpret
dates using "00" as the year 1900 rather than the year 2000. This
could cause system failures, miscalculations or other system
disruptions, which might temporarily interrupt the Company's ability
to engage in normal business activities.
PLAN AND STATE OF READINESS
The Company has addressed the most direct problems associated with
the Year 2000 Issue. The Company has obtained written assurances
from the appropriate vendors and manufacturers that 100% of the
Company's computer hardware, and that 100% of all date sensitive
software currently in use by the Company, are Year 2000 compliant.
Consequently, the Company anticipates no expenditures will be required to
bring administrative software and hardware in compliance with Year 2000
requirements.
The Company has only just begun communicating with third parties
and examining non-information-technology systems to determine their
state of readiness. The Company anticipates that by mid-1999 our
survey of material vendors and partners and the inspection of
non-information-technology systems will be complete. The Company
has only a few non-information-technology systems and does not
expect the costs of remediation to be material. The Company
estimates that the survey of non-information-technology systems
and third parties whose lack of readiness for the Year 2000 could
materially affect the Company's ability to conduct normal
day-to-day operations is 5% complete.
The costs to the Company for a lack of readiness on the part
of vendors, customers and partners are limited to whatever the
temporary interruption of business functions would total. The
major risks would be interruptions in communications, banking,
and cash flows if the pipelines and final purchasers of the
Company's gas and oil production were not in compliance. Cash flow
could also be impacted if industry partners whom operate oil and
gas properties in which the Company is invested suffer business
interruptions due to their own lack of readiness, or due to third
party vendors' and/or customers' lack of readiness for the Year 2000
problem.
CONTINGENCY PLANS
Temporary interruptions in the Company's cash flows due to Year
2000 Issue problems affecting purchasers of the Company's oil and
gas production are not expected to present material difficulties. If, for the
same reasons, more protracted cash flow interruptions are encountered,
the Company plans to access unused lines of credit and/or
borrowing from affiliated entities to cover the most necessary
disbursements until such time as the normal order of business is
restored.
ITEM 7. FINANCIAL STATEMENTS
AURORA ENERGY, LTD.
(a development stage company)
FINANCIAL STATEMENTS
AND
SUPPLEMENTAL INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1998
AND
THE PERIODS FROM MARCH 12, 1997
TO
DECEMBER 31, 1998 AND 1997
AURORA ENERGY, LTD.
(a development stage company)
TABLE OF CONTENTS
PAGE
Independent Auditors' Report 22
Financial Statements for the year ended December 31,
1998 and the periods from March 12, 1997 (inception)
to December 31, 1998 and 1997
Balance Sheets 23-24
Statements of Operations 25
Statements of Changes in Shareholders' Equity 26
Statements of Cash Flows 27-28
Notes to Financial Statements 29-39
<PAGE>
INDEPENDENT AUDITORS' REPORT
March 1, 1999
Stockholders and Board of Directors
Aurora Energy, Ltd. (a development stage company)
We have audited the accompanying balance sheets of Aurora
Energy, Ltd. (a development stage company) as of December 31,
1998, and 1997, and the related statements of operations, changes
in stockholders' equity and cash flows for the year ended
December 31, 1998 and for the periods from March 12, 1997
(inception) to December 31, 1998 and 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 audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe our audits provide 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 Aurora Energy, Ltd. as of December 31, 1998, and 1997, and
the results of its operations and its cash flows for the year
ended December 31, 1998 and the periods from March 12, 1997
(inception) to December 31, 1998 and 1997 in conformity with
generally accepted accounting principles.
As described in Note 5, the accompanying 1998 financial statements
have been restated. The effect of the restatement is to increase
the 1998 and cumulative-from-inception net loss and loss per share
by $300,000 and $0.03 respectively, from the amounts previously
reported.
Rehmann Robson, P.C.
Traverse City, Michigan
<PAGE>
AURORA ENERGY, LTD.
(a development stage company)
<TABLE>
<CAPTION>
BALANCE SHEETS
December 31
--------------------------
Restated
(Note 5)
ASSETS 1998 1997
<S> <C> <C>
Current assets
Cash and cash equivalents $ 13,967 $ 518,408
Accounts receivable:
Billed 415,732 182,970
Unbilled - 121,200
Prepaid expenses 9,802 4,950
---------- ---------
Total current assets 439,501 827,528
---------- ---------
Oil and gas properties, using full cost
accounting
Properties not subject to
amortization 1,518,043 700,850
Properties being amortized 233,831 -
---------- ---------
Total 1,751,874 700,850
Less accumulated amortization 25,379 -
---------- ---------
Oil and gas properties, net 1,726,495 700,850
Investment in oil and gas partnerships 138,026 99,314
Property and equipment, net 60,592 62,304
---------- ----------
Total assets $2,364,614 $1,689,996
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
December 31
-------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
---- ----
<S> <C> <C>
Current liabilities
Accounts payable $ 626,074 $ 186,151
Short-term bank borrowings 610,000 -
Current portion of obligations under
capital leases 14,739 14,739
Accrued expenses 23,212 23,303
Advances from investors - 89,000
---------- ----------
Total current liabilities 1,274,025 313,193
Obligations under capital leases, net of
current portion 19,087 28,332
---------- ----------
Total liabilities 1,293,112 341,525
Commitments (Note 9)
Shareholders' equity
Common stock, $.001 par value; 500,000,000
shares
authorized; 8,691,697 shares issued
and outstanding,
(1997 - 8,391,197 shares outstanding) 8,692 8,391
Additional paid-in capital 1,869,073 1,590,924
Deficit accumulated during the development
stage (806,263) (250,844)
---------- ----------
Total shareholders' equity 1,071,502 1,348,471
---------- ---------
Total liabilities and shareholders' equity $2,364,614 $1,689,996
========== ==========
</TABLE>
AURORA ENERGY, LTD.
(a development stage company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative from
March 12, 1997
Period from (Inception)
Year Ended March 12, 1997 to
December 31, (Inception) December 31,
1998 to 1998
Restated December 31, Restated
(Note 5) 1997 (Note 5)
----------- -------------- --------------
<S> <C> <C> <C>
Revenues
Oil and gas sales $ 26,151 $ - $ 26,151
Equity in loss of
investee partnership (44,060) (43,686) (87,746)
Interest income 12,269 1,459 13,728
Other 4,210 40,375 44,585
----------- ------------- ------------
Total revenues (1,430) (1,852) (3,282)
----------- ------------- ------------
Expenses
General and administrative 472,868 228,218 701,086
Production and lease
operating expenses 14,704 312 15,016
Depreciation and amortization 34,291 732 35,023
Interest 32,126 19,730 51,856
----------- ------------- ------------
Total expenses 553,989 248,992 802,981
----------- ------------- ------------
Net loss $ (555,419) $ (250,844) $ (806,263)
============ ============= ============
Net loss per basic and
diluted common share $ (0.06) $ (0.06) $ (0.12)
============ ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
AURORA ENERGY, LTD.
(a development stage company)
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIODS FROM MARCH 12, 1997 (INCEPTION) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the Total
Common Stock Paid-in Developmental Shareholders'
Shares Amount Capital Stage Equity
------ ------ ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Common stock issued for cash
at
$.001 per share 514,997 $ 515 $ - $ - $ 515
Common stock issued for
Cash at
$0.25 per share 580,000 580 13,920 - 14,500
Common stock issued in
exchange for interest in
oil and gas partnership 5,575,200 5,575 137,425 - 143,000
Common stock issued for
cash at
$1.00 per share 50,000 50 49,950 - 50,000
Common stock issued for
cash at
$0.7142857 per share 700,000 700 499,300 - 500,000
Common stock issued for
cash at
$0.90 per share 971,000 971 872,929 - 873,900
Common stock options issued
to consultant and non-
employee director in lieu
of cash - - 17,400 - 17,400
Net loss - - - (250,844) (250,844)
------- ------ ------- --------- ---------
Balances at December 31,
1997 8,391,197 8,391 1,590,924 (250,844) 1,348,471
Common stock issued for
cash at
$0.90 per share 220,500 221 198,229 - 198,450
Common stock issued in
exchange for oil and
gas working interest 80,000 80 79,920 - 80,000
Net loss, as restated
(Note 5) - - - (555,419) (555,419)
------ ------- -------- --------- ----------
Balances at December 31,
1998 8,691,697 $8,692 $1,869,073 $(806,263) $1,071,502
========== ======== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
AURORA ENERGY, LTD.
(a development stage company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period From Cumulative from
March 12, 1997 March 12, 1997
(Inception) (Inception)
Year Ended to to
December 31, December 31, December 31,
1998 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(555,419) $(250,844) $(806,263)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 34,291 732 35,023
Equity in loss of investee
partnership 44,060 43,686 87,746
Services received in exchange for
stock options - 17,400 17,400
Changes in operating assets and
liabilities which provided
(used) cash:
Accounts receivable (111,562) (304,170) (415,732)
Prepaid expenses (4,852) (4,950) (9,802)
Accounts payable 439,923 186,151 626,074
Accrued expense (91) 23,303 23,212
---------- ---------- ---------
Net cash used in operating activities (153,650) (288,692) (442,342)
---------- ---------- ---------
Cash flows from investing activities
Proceeds from sale of oil and gas
properties 971,070 - 971,070
Capital expenditures for oil and
gas properties (1,942,093) (700,850) (2,642,943)
Acquisition of interests in oil
and gas partnerships (82,773) - (82,773)
Capital expenditures for property
and equipment (7,200) (15,667) (22,867)
---------- --------- ----------
Net cash used in investing
activities (1,060,996) (716,517) (1,777,513)
---------- --------- ----------
Cash flows from financing activities
Proceeds from sales of common stock 198,450 938,915 1,137,365
Proceeds of loans from financial
institutions 610,000 500,000 1,110,000
Advances from affiliate - 175,000 175,000
Repayment of advances from affiliate - (175,000) (175,000)
(Repayment of) advances from
investors (89,000) 89,000 -
Payments on obligations under capital
leases (9,245) (4,298) (13,543)
---------- --------- -----------
Net cash provided by financing
activities 710,205 1,523,617 2,233,822
---------- ---------- -----------
Net (decrease) increase in cash and cash
equivalents (504,441) 518,408 13,967
Cash and cash equivalents, beginning of
period 518,408 - -
---------- --------- -----------
Cash and cash equivalents, end of
period $13,967 $518,408 $13,967
========== ========== ===========
</TABLE>
The accompanying notes area an integral part of these financial statements.
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
and 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 Statements 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 to change the corporate name to Aurora
Energy, Ltd.
The Company has yet to generate significant revenue from
planned principal operations. The Company's business 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 the states of Michigan, Indiana,
Ohio, North Dakota, Kentucky and Louisiana. As of December
31, 1998 the Company did not have any proved properties
which were deemed significant. However, management expects
the Company will have a significant increase in proved
properties during 1999 through further exploration,
purchases of proved properties and performance of existing
properties.
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.
Loss Per Share
Loss per share is computed using the weighted average
number of common shares outstanding during the period
and considers a dual presentation and reconciliation
of "basic" and "diluted" per share amounts. Diluted
amounts reflect 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.
The weighted average number of common shares outstanding was
8,571,568 and 4,305,843 during the year ended December 31,
1998 and the period from March 12, 1997 (inception) to December
31, 1997, respectively.
Restatement
As described in Note 5, these financial statements have been
restated.
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 are assessed
periodically and a loss is recognized if those properties are
impaired.
In addition, the capitalized costs are subject to a
"ceiling test" which essentially 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
are charged against the related allowance for impairment to the
extent an allowance has been provided; if the allowance
previously provided is inadequate, a loss is recognized.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits in banks.
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.
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.
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.
Investment in Oil and Gas Partnerships
The Company owns a 50% interest in Jet/LaVanway Exploration,
L.L.C. and Aurora/LaVanway, L.L.C., both Michigan limited
liability companies. 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.
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 and depreciation. 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.
Reclassification
Certain amounts as reported in the 1997 financial statements
have been reclassified to conform with the 1998 presentation.
2. SUPPLEMENTAL CASH FLOWS INFORMATION
Non-Cash Financing and Investing Activities:
<TABLE>
<CAPTION>
For the
Period from
March 12, 1997
Year Ended (inception) to
December 31, December 31,
1998 1997
<S> <C> <C>
Common stock issued in exchange for an oil and
gas working interest $80,000 $ --
======= ===========
Common stock issued in exchange for interest in
oil and gas partnership $ -- $ 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 and equipment $ -- $ 47,369
======= ===========
</TABLE>
Other Cash Flows Information
Cash paid for interest and income taxes amounted to the following:
<TABLE>
<CAPTION>
Period from
March 12, 1997
(inception)
Year Ended to
December 31, December 31,
1998 1997
<S> <C> <C>
Interest $ 29,896 $ 19,730
Income taxes none none
</TABLE>
3. ACCOUNTS RECEIVABLE
Billed accounts receivable, amounting to $415,732 and
$182,970 at December 31, 1998 and 1997, respectively,
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 PARTNERSHIPS
Jet/LaVanway, LLC
On April 21, 1997, three individuals, who are shareholder/
directors of the Company, transferred their 50% ownership
interest in Jet/LaVanway, a Michigan L.L.C. ("Jet") 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 value of the 50% interest in
Jet on the date of transfer. Jet 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.
The following table presents condensed balance sheet data
and results of operations of Jet as of September 30, 1998
(the most recent data available) and December 31, 1997:
<TABLE>
<CAPTION>
September 30, December 31,
Balance Sheet 1998 1997
<S> <C> <C>
Current assets $ 462,184 $ 618,757
Other assets 258,793 247,348
-------- --------
Total assets $ 720,977 $ 866,105
======== ========
Current liabilities $ 448,336 $ 511,094
Other liabilities -- 156,383
Equity 272,641 198,628
-------- ---------
Total liabilities and equity $ 720,977 $ 866,105
======== =========
Period Ended Year Ended
September 30, December 31,
Income Statement 1998 1997
Net sales $ 26,030 $ 26,657
Operating expenses 109,588 114,029
-------- -------
Net loss $ (83,558) $ (87,372)
======== =======
</TABLE>
The Company was contingently liable as guarantor for the
repayment of certain loans made to Jet. At December 31,
1997, the outstanding balance of these loans, which were
secured by Jet's oil and gas properties was $96,000. These
notes were paid off in 1998.
Aurora/LaVanway, LLC
On March 11, 1998, the Company formed a partnership with an
unrelated party, creating Aurora/LaVanway, a Michigan L.L.C.
("Aurora"). The Company holds a 50% share in Aurora; such
interest was acquired in exchange for a $2,000 cash investment.
Aurora's purpose is to acquire and manage oil and gas projects.
Equity of Aurora was $3,610 as of December 31, 1998. Results
of operations to date are not significant.
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 (see Note 14), for
$22,500 in cash which was credited to the full cost pool.
In January 1998, the Company sold a partial interest in the
Paxton Quarry project, an unproved property, for $197,741 in
cash which was credited to the full cost pool.
In September 1998, the Company sold 100% of their interest
in the Avery Smith project, an unproved property, for $419,329
in cash which was credited to the full cost pool. The costs
capitalized by the Company at the time of the sale amounted to
$119,329. The Company originally issued the 1998 financial
statements with the $300,000 excess of proceeds over the
carrying value reported as a gain. The Company was subsequently
directed by the staff of the Securities and Exchange Commission
to credit the $300,000 amount to the full cost pool (properties
not subject to amortization on the accompanying balance sheet).
These financial statements reflect that revision and, accordingly,
the 1998 and cumulative net loss has been increased by $300,000
and the 1998 and cumulative loss per share have been increased
by $0.03 from the amounts originally reported.
In December 1998, the Company sold a partial interest in the
Paxton Quarry project, an unproved property, for $34,000 in
cash which was credited to the full cost pool.
During 1998, the Company sold a partial interest in the
Crossroads project, an unproved property, for $320,000 in cash
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, Michigan, North Dakota, Kentucky and Louisiana. At
December 31, 1998, a determination cannot be made about the
extent, if any, of additional oil reserves that should be
classified as proved reserves in connection with 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
occur in 1999.
Costs excluded from amortization consist of exploration costs
in the amount of $1,518,043 and $700,850 at December 31, 1998
and 1997, respectively.
7. OIL AND GAS PROPERTIES BEING AMORTIZED
The Company has two projects purchased in 1998, that are
considered proved properties; Merrick and Lodgepole. The
Company retains a royalty interest in each of these two
properties. During 1998 reserve studies were not performed;
therefore, amortization has been calculated on the
estimated producing life (9 years at December 31, 1998) based
on expected cash flows. Amortization on these projects amounted
to $25,379 for the year ended December 31, 1998.
8. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of the following
amounts:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Furniture and fixtures $ 37,107 $ 35,515
Leasehold improvements 13,820 11,490
Computer equipment 17,410 15,655
Software 1,899 376
-------- --------
Total costs 70,236 63,036
Accumulated depreciation 9,644 732
-------- --------
Property and equipment, net $ 60,592 $ 62,304
======== ========
</TABLE>
9. 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 accompanying balance sheets at December 31
are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Furniture and fixtures $ 33,335 $ 33,335
Computer equipment 14,034 14,034
------- -------
Total 47,369 47,369
Less accumulated amortization 6,837 582
------- -------
Net book value $ 40,532 $ 46,787
======= ========
</TABLE>
The Company leases office space under an operating lease. This
lease, which expires on October 15, 1999, 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.
The Company leased two offices in an adjacent building on a
month to month basis. This lease was not renewed at December
1, 1998.
Beginning in 1998, the Company leased a storage facility from
a related party on a quarterly basis.
Net rental expense on operating leases was $29,551 and
$12,449, for the year ended December 31, 1998 and for the
period from March 12, 1997 (inception) to December 31, 1997,
respectively. Rental expense on an operating lease paid to
related parties for the year ended December 31, 1998 amounted
to $1,800. There was no rental expense paid to related parties
for the period from March 12, 1997 (inception) to December 31,
1997.
The following is a schedule of annual future minimum lease
payments required under capitalized leases as of December 31,
1998:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 14,739
2000 13,796
2001 9,080
2002 7,567
2003 --------
Total minimum payments due 45,182
Less amounts representing interest,
imputed at rates ranging from
13.34% to 13.51% 11,356
--------
Present value of net minimum lease
payments 33,826
Current portion 14,739
--------
Obligations under capital leases, net
of current portion $ 19,087
</TABLE>
10. DEBT
The Company's short-term borrowings consist of draws on a
$750,000 revolving line of credit with National City Bank.
The outstanding balance on this line of credit at December 31,
1998 was $610,000. Principal plus all unpaid interest, which
is charged at a rate of 9.5% per annum, are payable on April
10, 1999. The borrowings are collateralized by all Company
assets and the personal guarantees of Company management.
In connection with the line of credit, $100,000 has been
allocated in the form of an unused letter of credit to support
certain drilling permits.
As of December 31, 1998, the Company also has an unused letter
of credit of $2,500 with another bank.
11. INCOME TAXES
At December 31, 1998, the Company has net operating loss
carryforwards totaling approximately $617,000 that may be
offset against future taxable income through 2013. No tax
benefit has been reported in the 1998 financial statements,
because the ultimate utilization of these accumulated losses
is uncertain. Accordingly, the approximately $210,000 tax
benefit of the loss carryforwards have been offset by a
valuation allowance of the same amount.
12. ADVANCES FROM INVESTORS
Advances from investors at December 31, 1997 consisted of
investments made by investors who, under terms of their
leasing program agreement, were to receive their investment
plus an override when the Company's oil and gas holdings
began producing revenues. This plan was terminated in 1998
and the initial investment was returned to the investors.
13. RELATED PARTY TRANSACTIONS
The Company incurred expenses of $421,647 and $158,188 for the
year ended December 31, 1998 and the period from March 12, 1997
(inception) to December 31, 1997, respectively, to a local real
estate concern which is owned one-fifth by one of the Company's
principal shareholders. These fees relate to lease management,
lease acquisition, title searches and abstracts.
In 1997, 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.
During 1997, 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.
Oil and gas properties reported on the accompanying balance
sheets contains a working interest in a natural gas lease.
This lease is related to the development of a mineral acre
property in western Indiana known as the "Dumada Project".
The Company acquired (for $186,451 in cash) its initial interest
in this project in July, 1997 from Jet Exploration 1995-1, a
Michigan L.L.C., ("Jet LLC") which is owned one-third each by
the Company's three principal executive officers and shareholders.
During 1998, the Company also acquired from Jet LLC (for $10
plus Jet LLC's cost of $56,767 in the related projects) an
interest in certain other oil and gas properties. These
projects, located in Michigan, are known as the Antrim Projects.
14. 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 maximum term of options granted is 10
years. 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
16,000 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 estimated fair value of the
options. On August 1, 1997, the Company issued an option to
purchase 10,000 shares of common stock at an option price of
$.50 per share to a director. 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. No options
have been exercised.
On February 5, 1998, the Company issued an option to purchase
10,000 shares of common stock at an option price of $1 per share
to its controller. The option expires on July 31, 2002. No
options have been exercised.
On February 17, 1999, the Company issued an option to purchase
10,000 shares of common stock at an option price of $1 per
share to its controller. The option expires on July 31, 2003.
No options have been exercised.
On February 17, 1999, the Company issued an option to purchase
10,000 shares of common stock at an option price of $1 per
share to a director. The option expires on July 23, 2003.
No options have been exercised.
A summary of the status of the Company's common stock option
plan as of December 31, 1998 and 1997 and changes during the
periods then ended is presented below:
<TABLE>
<CAPTION>
1998 1997
Weighted Weighted
Average Average
Common Exercise Common Exercise
No. of Options Shares Price Shares Price
- -------------- ------ --------- ------ --------
<S> <C> <C> <C> <C>
Outstanding, beginning of
year 26,000 $ 0.22 -- --
Granted 10,000 $ 1.00 26,000 $ 0.22
Exercised -- -- -- --
Forfeited -- -- -- --
------ ------- ------- --------
Outstanding, end of year 36,000 $ 0.44 26,000 $ 0.22
====== ======= ====== ========
Available for exercise
currently 36,000 26,000
====== ======
</TABLE
Information about common stock options outstanding at
December 31, 1998 is as follows:
</TABLE>
<TABLE>
<CAPTION>
Weighted-
# of Shares Average Weighted-
Range of Outstanding Remaining Average
Exercise and Contractual Exercise
No. of Options Prices Exercisable Life Price
- -------------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
$ .05 16,000 3.3 yrs. $ .05
$ .50 10,000 3.6 yrs. $ .50
$ 1.00 10,000 3.6 yrs. $ 1.00
-------
36,000
=======
</TABLE>
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 costs are
recognized in the financial statements for outstanding stock
options issued to employees. The proforma effects on net loss
and loss per share if the options granted in 1998 to the
Company's controller were accounted for at fair value are not
considered significant.
15. SUBSEQUENT EVENT
Effective January 1, 1999, the Company purchased a 100%
interest in Indigas Energy, a Michigan L.L.C. ("Indigas")
and Consolidated Exploration, a Michigan L.L.C. ("Conexco").
Indigas and Conexco, which were owned 100% by two of the
Company's principal shareholders, were sold to the Company in
exchange for the rights to a royalty interest in several oil
and gas leases.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
N/A
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following table sets forth information about each of the
officers and directors of the Company:
<TABLE>
<CAPTION>
Name Age Position Term of Office
<S> <C> <C> <C>
William W. Deneau 54 Director June 25, 1997 to Present
President July 17, 1997 to Present
John V. Miller, Jr. 40 Director June 25, 1997 to Present
Vice President of July 17, 1997 to Present
Exploration
And Production
Thomas W. Tucker 56 Director June 25, 1997 to Present
Vice President of July 17, 1997 to Present
Land and Development
Barbara J. Johnson 45 Secretary July 17, 1997 to Present
Gary J. Myles 53 Directory 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
contributed his interest in Jet/LaVanway Exploration, L.L.C. to
the Company in exchange for the Company's stock on April 22, 1997.
He is a full time employee. 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 contributed his interest in Jet/LaVanway Exploration L.L.C. to
the Company in exchange for the Company's stock on April 22, 1997.
He is a full time employee. 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 has been employed by the Company since he
contributed 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 on a full time basis. 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.
John M. Lohman, C.P.A., Controller, became employed by the Company
on September 15, 1997. Mr. Lohman has a Bachelor of Arts degree
in accounting from Michigan State University, and is currently
working on a Master of Science of Taxation program through Grand
Valley State University. Before joining Aurora, he was employed
as Tax Supervisor for Dennis, Gartland & Neirgarth, P.C. from
1996 to 1997. Prior to that position, he was employed as a
staff accountant with Brown, Bradford, Seman & Shaw from September
1995 to September 1996 and staff accountant for Lane and Calcutt,
P.C. for seven years prior to that.
Katherine L. Dungey, Well Records Manager and Secretary to John
Miller, became employed by the Company on June 1, 1997. Ms. Dungey
was employed at White Pine Land Services, Inc. from April 15, 1996
to June 1, 1997 as a secretary.
None of the Company's officers or directors has been involved in
legal proceedings of the type that are required to be
disclosed. The officers, directors, their affiliates and associates,
are not eligible to receive finders' fees or other
compensation related to the acquisition of new oil and gas prospects.
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.
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. Mr. Schroeder is paid $200 per day plus
expenses. For any prospect Mr. Schroeder brings to the Company
which the Company invests in, Mr. Schroeder will receive a 2%
overriding royalty interest for all leases taken in the AMI, plus
a fee of $5,000 for one well, a fee of $2,500 per well for two
to five wells, a fee of $1,000 per well for six to 25 wells, and
a fee of $500 per well for 26 or more wells.
S. A. Holditch and Associates, Inc. is a petroleum engineering
and geoscience service corporation based in College Station, Texas.
Holditch was founded in 1977. They work routinely for major oil
corporation as well as smaller independents, both domestically
and abroad. They have conducted research projects for the Gas
Research Institute and the U.S. Department of Energy. Holditch
performs comprehensive reservoir studies using proprietary reservoir
stimulators and is considered an innovator in the analysis of oil
and gas reservoirs. Holditch has special expertise in pressure
transient test analysis, well stimulation, and reservoir fluids.
Holditch engineers use a unique combination of practical field
experience and theoretical knowledge to help their clients
become more profitable. Holditch has completed extensive engineering
studies on several of Aurora's projects.
ITEM 10. EXECUTIVE COMPENSATION
MANAGEMENT REMUNERATION
The remuneration of the Company's three most highly compensated
employees is set forth in the chart below:
<TABLE>
<CAPTION>
Capacity in which Aggregate Aggregate
Name of Individual Remuneration Was Remuneration Remuneration
Received 1997(1) 1998
<S> <C> <C> <C>
William W. Deneau President $40,000 $40,000
John V. Miller, Jr. Vice President of Exploration $40,000 $40,000
And Production
Thomas W. Tucker Vice President of Land and $40,000 $40,000
Development
</TABLE>
(1) This information is reported on an annualized basis.
Fiscal 1997 was not a full year. The actual amount to each
individual was $20,000.
These three officers also receive family health coverage. The Company
adopted a 1997 Stock Option Plan effective October 1, 1997. The Stock
Option Plan has 1,000,000 shares of common stock available. To date,
the officers listed above have not yet been granted options under this
plan.
ITEM 11. 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 Nature
Title of Name and Address of Beneficial of Beneficial Pecent of
Class Owner Owner Class
<S> <C> <C> <C>
Common Britannia Holdings Limited* 700,000 8.05%
P. O. Box 615 Kings House
The Grange St. Peter Port
Guernsey, GY1 2QJ, Channel
Islands
Common The William & Patricia Deneau 1,712,733 19.71%
Revocable Living Trust, DTD
10/12/95
3832 Perimeter Drive
Traverse City, MI 49684
Common Roger J. Dubuc, Trustee 500,000 5.75%
Roger J. Dubuc Trust DTD
1/21/87
18677 Foxhollow Court
Northville, MI 48167
Common John V. & Michelle R. Miller, 1,656,733 19.06%
Trustees
Miller Family Living Trust DTD
6/25/97
3167 E. Kasson Rd.
Cedar, MI 49684
Common Thomas W. Tucker & Sandra L. 1,682,734 19.36%
Tucker
11607 N. Long Lake Road
Traverse City, MI 49684
</TABLE>
*Britannia Holdings Limited is an investment and financing company.
ITEM 12. 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 William W. Deneau, Thomas W. Tucker, and John V. 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 estimated 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 Item 1,
Description of Business Development).
The Office facilities leased by the Company are owned by South 31,
L.L.C., which is owned one-third by William W. Deneau, and one-third
by Thomas W. Tucker. However, the 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. There is also a
storage unit that the Company leases from South 31, L.L.C. The
storage building 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 owns 20% 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 a loan repayment on the $500,000. On December
24, 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 July 14, 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 August 26, 1997, White Pine Land
Services, Inc. loaned the Company $125,000. On October 14,
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 December 15, 1997,
together with $509 in interest. The $125,000 loan was repaid in
full on December 31, 1997, together with $2,610 in interest.
Management does not currently expect to borrow any further funds
from White Pine Land Services, Inc.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K PAGE
(13a) The following documents are filed as part of
this report:
(3)(i) Articles of Incorporation
Incorporated By Reference from Form 10-QSB for
Period ended September 30, 1997
(3)(ii) Bylaws
Incorporated By Reference from Form 10-QSB for
period ended September 30, 1997
(4) Instruments defining rights of security holders
Incorporated by reference from Form 10-SB
(9) Voting Trust Agreement None
(10) Material Contracts
P 1997 Stock Option Plan
Incorporated By Reference from Form 10-SB
P Stock Option Plan with Gary Myles (1997)
Incorporated By Reference from Form 10-SB
P Stock Option Plan with John M. Lohman
Incorporated By Reference from Form 10-SB
P Business Consultant Agreement with James C. Czirr
Incorporated By Reference from Form 10-SB
P Stock Option Agreement with James C. Czirr
Incorporated By Reference from Form 10-SB
P Amendment to Stock Option Agreement with James C.
Czirr
P Rental Agreement
Incorporated By Reference from Form 10-SB
P First of America Loan Documents
Incorporated By Reference from Form 10-QSB for period
ending September 30, 1998
P Dumada Project Development Agreement
Incorporated By Reference from Form 10-SB
P Amendment to Dumada Project Development Agreement
Incorporated By Reference from Form 10-SB
P Letter Agreement for acquisition of Dumada Project
Incorporated By Reference from Form 10-SB
P St. Blue Lake 1-4 Letter Agreement
Incorporated By Reference from Form 10-SB
P Beregsasi 1-5 Letter Agreement
Incorporated By Reference from Form 10-SB
P Sublease Agreement for Office
Incorporated By Reference from Form 10-SB
P Letter Agreement with Karl Schroeder
(27) Financial Data Schedule 50
(99) Additional Exhibits
P Reserve and Economic Evaluation of Dumada Project,
Prepared by S. A. Holditch & Associates, Inc.
Incorporated By Reference from Form 10-SB
P Analysis of Avery, Paxton Quarry, Black River, Maxwell,
Fairview and Alpena Projects, prepared by S. A. Holditch &
Associates, Inc.
Incorporated By Reference from Form 10-SB
P Reserve and Economic Evaluation of Paxton Quarry, Antrim
Shale Project prepared by S. A. Holditch & Associates, Inc.
Incorporated By Reference from Form 10-SB
P State Blue Lake 1-4 reserve estimate prepared by Theresa
Sloan, Consultant
Incorporated By Reference from Form 10-SB
P First of America Irrevocable Letter of Credit to State
of Michigan
Incorporated By Reference from Form 10-SB
P Empire National Bank Letter of Credit to State of Kentucky
Incorporated By Reference from Form 10-SB
P Blanket Surety Bond to State of Indiana
Incorporated By Reference from Form 10-SB
P State of Ohio Owner Number notification
Incorporated By Reference from Form 10-SB
P Blanket Surety Bond to State of Ohio
Incorporated By Reference from Form 10-SB
P Three Ohio Oil and Gas Well Drilling Permits
Incorporated By Reference from Form 10-SB
P Eight State of Indiana Drilling and Operating Permits
Incorporated By Reference from Form 10-SB
(13b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth
quarter of 1998.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AURORA ENERGY, LTD.
Date: October 5, 1999
BY:________________________________
William W. Deneau, President
<PAGE>
EXHIBIT 10
[AURORA ENERGY, LTD. LETTERHEAD]
James C. Czirr
6070 Baldy Mountain Road
Sandpoint, ID 83864
RE: Amendment to Busienss Consulting Agreement
Dear Mr. Czirr:
It is the intent of this letter that it be attached to, and
become an addendum to and revision of the Business Consulting
Agreement dated May 1, 1997 between Aurora Energy, Ltd. ("Aurora") and James
C.Czirr ("Czirr").
Aurora and Czirr hereby agree that clause 3.3 (a) of the
aforementioned agreement be revised as follows:
The Company agrees to grant to CONSULTANT, upon execution
of this Agreement, an option to purchase Sixteen Thousand
(16,000) shares of the Company's common stock, $.001 par value
("Common Stock") at an initial exercise price of Five Cents
($.05) per share, with a term of five (5) years, pursuant to the
terms of an Option Agreement in the form attached hereto as
Exhibit "A".
Please sign below and return to Aurora if you agree to the above
and it fairly represents your understanding of the amendment to
the Business Consulting Agreement discussed and agreed on by the
parties to the above-referenced agreement.
Sincerely,
/s/ William W. Deneau
William W. Deneau
President
The above letter is accepted and it is agreed to make it a part
of the Business Consulting Agreement dated May 1, 1997 between
Aurora Energy, Ltd. and James C. Czirr.
/s/ James C. Czirr 3/19/99
- ------------------ -------
James C. Czirr Date
<PAGE>
James C. Czirr
6070 Baldy Mountain Rd.
Sandpoint, ID 83864
Phone 208-263-6695
Fax 208-265-5585
Bill Deneau
Aurora Energy, Ltd.
3766 N. US-31 South
P.O. Box 961
Traverse City, MI 49685-0961
RE: Agreement Adjustment October 28, 1998
Bill;
Recently I spoke with you regarding adjusting the agreement
that I have with Aurora. Since that conversation I have
reconsidered the proposal of decreasing the monthly shares for
months passed to 1000 per month. I am authorizing you to waive
any S-8 monthly share provisions for the first eighteen months
of the agreement.
Even though I can account for some time and expenses
traveling to Traverse City on several occasions and representing
Aurora at several investor meetings I am making this concession.
You have my permission to add this letter as an addendum to our
original agreement.
Make it a good day,
/s/ James C. Czirr
James C. Czirr
The above letter is accepted and it is agreed to make it part
of the original consuling agreement Dated May 1, 1997 between
Aurora Energy, Ltd. and James C. Czirr
Aurora Energy, Ltd.
/s/ William W. Deneau 11-11-98
- --------------------- --------
William W. Deneau Date
<PAGE>
Article 5 of Regulation S-X
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 13,967
<SECURITIES> 0
<RECEIVABLES> 415,732
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 439,501
<PP&E> 60,592
<DEPRECIATION> 9,644
<TOTAL-ASSETS> 2,364,614
<CURRENT-LIABILITIES> 1,274,025
<BONDS> 19,087
0
0
<COMMON> 8,692
<OTHER-SE> 1,869,073
<TOTAL-LIABILITY-AND-EQUITY> 2,364,614
<SALES> 26,151
<TOTAL-REVENUES> (1,430)
<CGS> 0
<TOTAL-COSTS> 14,704
<OTHER-EXPENSES> 507,159
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,126
<INCOME-PRETAX> (555,419)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1
<NET-INCOME> (555,419)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
