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U. S. Securities and Exchange Commission
Washington, D.C. 20549
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 incorporation (IRS 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
which each class is to be registered
None 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 x 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. $298,570
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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
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Aurora Energy, Ltd. ("the Company") is involved in the exploration,
development and production of natural gas and oil reserves in North America.
Management's goal is to produce gas from lower risk black shales, tight sands
and coal beds, targeting projects where large acreage blocks can be easily
evaluated with a series of low cost test wells prior to development
investments. 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.
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The Organ Creek Area of Mutual Interest consisting of approximately 11,000
net mineral acres in Washington County, Indiana - The Company's share is
9.625% working interest after payout of investors at an 0.80 net revenue
interest.
These interests collectively constitute 50% of the interests in these
properties that are owned by Jet/LaVanway Exploration, L.L.C., a Michigan
limited liability company, formerly known as Jet/Hunting Exploration, L.L.C.,
whose principal address is 215 Bridge Street, Charlevoix, Michigan 49720.
At the time of the assignments 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.
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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
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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.
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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
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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.
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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
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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.
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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.
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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
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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
13
<PAGE>
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.
14
<PAGE>
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%.
15
<PAGE>
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
16
<PAGE>
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
Undeveloped net acreage 29,061
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. LEGAL PROCEEDINGS
There are no pending legal proceedings.
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.
17
<PAGE>
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.
18
<PAGE>
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
19
<PAGE>
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
20
<PAGE>
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.
21
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
AURORA ENERGY, LTD.
(a development stage company)
FOR THE YEAR ENDED DECEMBER 31, 1998
AND
THE PERIODS FROM MARCH 12, 1997
(INCEPTION)
TO
DECEMBER 31, 1998 AND 1997
22
<PAGE>
AURORA ENERGY, LTD.
(a development stage company)
TABLE OF CONTENTS
Independent Auditors' Report 24
Financial Statements for the year ended December 31, 1988 and
the periods from March 12, 1997 (inception) to
Decmeber 31, 1998 and 1997
Balance Sheets 26-27
Statements of Operation 28
Statements of Changes in Shareholders' Equity 29
Statements of Cash Flows 30
Notes to Financial Statements 31-41
23
23
<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.
Rehmann Robson, P.C.
Traverse City, Michigan
24
<PAGE>
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25
<PAGE>
AURORA ENERGY, LTD.
(a development stage company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
---------------------------
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 1,818,043 700,850
Properties being amortized 233,831 -
------------ -----------
Total 2,051,874 700,850
Less accumulated amortization 25,379 -
------------ -----------
Oil and gas properties, net 2,026,495 700,850
Investment in oil and gas partnerships 138,026 99,314
Property and equipment, net 60,592 62,304
------------ -----------
Total assets $ 2,664,614 $ 1,689,996
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<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 (506,263) (250,844)
---------- -----------
Total shareholders' equity 1,371,502 1,348,471
---------- -----------
Total liabilities and shareholders' equity $2,664,614 $1,689,996
========== ===========
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
AURORA ENERGY, LTD.
(a development stage company)
STATEMENTS OF OPERATIONS
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>
Revenues
Oil and gas sales $ 26,151 $ - $ 26,151
Gain on sale of oil and
gas properties 300,000 - 300,000
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 298,570 (1,852) 296,718
----------- ------------ ------------
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 $ (255,419) $ (250,844) $ (506,263)
=========== ============ =============
Net loss per basic and diluted
common share $ (0.03) $ (0.06) $ (0.09)
=========== ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
<TABLE>
<CAPTION>
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
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
nonemployee 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 - - - (255,419) (255,419)
---------- ------- --------- ----------- ----------
Balances at December
31, 1998 8,691,697 $ 8,692 $1,869,073 $ (506,263) $ 1,371,502
========== ======= ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
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 $ (255,419) $(250,844) $ (506,263)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 34,291 732 35,023
Gain on sale of oil and gas properties (300,000) -- (300,000)
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 1,044,084 -- 1,044,084
Capital expenditures for oil and gas properties (2,015,107) (700,850) (2,715,957)
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 are an integral part of these financial statements.
30
<PAGE>
AURORA ENERGY, LTD.
(a development stage company)
NOTES OT 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.
31
<PAGE>
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.
32
<PAGE>
AURORA ENERGY, LTD.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
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
(inception)
Year Ended 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>
33
<PAGE>
AURORA ENERGY, LTD
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
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.
34
<PAGE>
AURORA ENERGY, LTD
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
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>
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 $270,755 in cash which was
credited to the full cost pool.
35
<PAGE>
AURORA ENERGY, LTD.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
In September 1998, the Company sold 100% of their interest in the Avery
Smith project, an unproved property, for $419,329 in cash. Substantial
uncertainty does not exist as to the recovery of the original costs
capitalized by the Company ($119,329) and the Company has no
substantial performance obligations. Therefore, a gain of $300,000 was
recorded, and $119,329 was credited to the full cost pool.
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 $1,818,043 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:
1998 1997
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
======== =========
36
<PAGE>
AURORA ENERGY, LTD.
(a development stage company)
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:
1998 1997
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
============== ==============
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:
37
<PAGE>
1999 $ 14,739
2000 13,796
2001 9,080
2002
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
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.
38
<PAGE>
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.
39
<PAGE>
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>
<S><C>
1998 1997
Weighted Weighted
Average Average
Common Exercise Common Exercise
No. of Options Shares Price Shares Price
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
Information about common stock options outstanding at December 31, 1998 is as follows:
Weighted-
# of Shares Average Weighted-
Range of Outstanding Remaining Average
Exercise and Contractual Exercise
Prices Exercisable Life Price
$ .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>
40
<PAGE>
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.
* * * *
41
<PAGE>
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:
Name Age Position Term of Office
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
Exploration July 17, 1997 to
and Production present
Thomas W. Tucker 56 Director June 25, 1997 to
present
Vice President of
Land and July 17, 1997 to
Development/Treasurer present
Barbara J. Johnson 45 Secretary July 17, 1997 to
present
Gary J. Myles 53 Director June 25, 1997 to
present
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
42
<PAGE>
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,
43
<PAGE>
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:
44
<PAGE>
<TABLE>
<CAPTION>
<S><C>
Capacity in Which Aggregate Aggregate
Name of Individual Remuneration Was Received Remuneration Remuneration
1997(1) 1998
<S> <C> <C> <C>
William W. Deneau President $40,000 $40,000
John V. Miller Vice President of
Explorationand Production $40,000 $40,000
Thomas W. Tucker Vice President of Land and
Development $40,000 $40,000
</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>
<S><C>
Amount and Nature
Title of Name and Address of Beneficial of Beneficial Percent of
Class Owner Owner Class
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
</TABLE>
45
<PAGE>
Common Thomas W. Tucker & Sandra L. 1,682,734 19.36%
Tucker
11607 N. Long Lake Road
Traverse City, MI 49684
*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
46
<PAGE>
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
47
<PAGE>
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 49
(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
48
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
(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 under signed, thereunto
duly authorized.
AURORA ENERGY, LTD.
Date: March 30, 1999
William W. Deneau, President
49
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<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> 2,664,614
<CURRENT-LIABILITIES> 1,274,025
<BONDS> 25,379
0
0
<COMMON> 8,692
<OTHER-SE> 1,869,073
<TOTAL-LIABILITY-AND-EQUITY> 2,664,614
<SALES> 26,151
<TOTAL-REVENUES> 298,570
<CGS> 0
<TOTAL-COSTS> 14,704
<OTHER-EXPENSES> 507,159
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,126
<INCOME-PRETAX> (255,419)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (255,419)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
