UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
UNDER SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
COLONY ENERGY, INC.
(Name of registrant as specified in its charter)
Delaware 76-0662309
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(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
2100 West Loop South, Suite 900, Houston, Texas 77027
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(Address of principal executive offices) (Zip Code)
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange
to be so registered on which each class is to be
registered
None Not Applicable
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Securities to be registered under Section 12(g) of the Act:
Common Stock, Par Value $.001 Per Share
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(Title of Class)
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
TABLE OF CONTENTS
ITEM 1. BUSINESS. 4
ITEM 1A. RISK FACTORS. 11
ITEM 2. FINANCIAL INFORMATION. 20
ITEM 3. PROPERTIES. 23
ITEM 4. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT. 23
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS. 24
ITEM 6. EXECUTIVE COMPENSATION. 25
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. 25
ITEM 8. LEGAL PROCEEDINGS 26
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. 26
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES. 27
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED. 27
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS. 29
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 30
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE. 30
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS. 30
EXPLANATORY NOTE
The Company is filing this General Form for Registration of Securities on
Form 10 on a voluntary basis, pursuant to section 12(g) of the Securities
Exchange Act of 1934 (the "Exchange Act"), in order to ensure that public
information is readily accessible to all stockholders and potential investors,
and to increase the Company's access to financial markets. In the event the
Company's obligation to file periodic reports is suspended pursuant to the
Exchange Act, the Company anticipates that it will continue to voluntarily file
such reports.
NOTE REGARDING PROJECTIONS AND FORWARD LOOKING STATEMENTS
This General Form for Registration of Securities on Form 10 contains
statements that are forward-looking statements within the meaning of the federal
securities laws. These include statements about our expectations, beliefs,
intentions or strategies for the future, which we indicate by words or phrases
such as "anticipate," "expect," "intend," "plan," "will," "believe" and similar
language. These statements involve known and unknown risks, including those
resulting from economic and market conditions, the regulatory environment in
which we operate, competitive activities, and other business conditions, and are
subject to uncertainties and assumptions set forth elsewhere in this Form 10.
Our actual results may differ materially from results anticipated in these
forward-looking statements. We base our forward-looking statements on
information currently available to us, and we assume no obligation to update
these statements.
1
PART I
ITEM 1. BUSINESS.
INTRODUCTION
GENERAL
Colony Energy, Inc. (the "Company") was incorporated on July 20, 2000 under
the laws of the State of Delaware. The address of the Company is 2100 West Loop
South, Suite 900, Houston, Texas 77027, and its telephone number is
713/590-5060. The Company was formed for the purpose of providing
video-on-demand service to consumers by means of broadband or high-speed
Internet connections. In this connection, the Company raised a fairly small
amount of capital and engaged a third party contractor to develop the Company's
technology. This contractor was successful in developing the Company's
technology to the point that five-minute video clips could be downloaded over a
broadband or high-speed Internet connection using such technologies. When this
development was announced, a couple of large companies approached the Company
about joint venture possibilities that had scopes and specifications beyond the
Company's ability at that time. Moreover, additional funds were needed to move
the Company's technology beyond the point of downloading five-minute video clips
to the point that the technology would be commercially viable. The Company
engaged an investment banker to try to procure necessary funds, but due to the
state of the capital markets at that time with respect to Internet and high
technology companies the Company was not able to procure necessary funds to
continue to develop its technology and to remain in business. As a consequence,
the Company has been inactive from a business perspective since early 2001, and
the Company had existed essentially as a "shell" since that time. For reasons
given hereinafter, during the summer of 2006 the Company began considering the
possible re-activation of operations with a focus on the acquisition of
attractive crude oil and natural gas prospects, and the exploration, development
and production of oil and gas on these prospects. The Company entered into its
first project related to oil and gas in August 2007. The Company is in the
early stages of its exploration activities.
STOCK ISSUANCES
The share figures contained in this Form 10 take into account a reverse
stock split that the Company completed on October 2, 2006.
In connection with the formation of the Company, an aggregate of 5.1
millions shares of the Company's common stock were issued to four initial
stockholders of the Company near the end of July 2000 and the beginning of
August 2000. Of these shares, five million were issued to three persons for
cash in the amounts of these shares' par value at that time for an aggregate
payment of $10,000, and 100,000 were issued to one person as consideration for
services rendered. Of the five millions shares issued for cash,
* 2.5 million were issued to one individual who shortly thereafter
gifted 50,000 shares to each of three persons, for an aggregate
of 150,000 shares gifted, and who later gifted on or about
March 19, 2007 all of his remaining shares (2,325,000 shares to the
F.E.I. Energy Trust and 25,000 shares to Tufts University); and
* The remaining 2.5 million of the five millions shares issued for cash
were issued to a married couple, who on or about March 3, 2002 sold
all of their shares to Kent E. Lovelace, Jr. (currently a
director and an officer of the Company) for a nominal amount of
cash.
After Mr. Lovelace's acquisition of these shares, Mr. Lovelace was elected as
the Company's sole director and sole officer.
2
During early 2007, Mr. Lovelace began discussing with Jimmy D. Wright the
possibility of his involvement in the re-activation of Company business
activities by the Company's acquisition of attractive crude oil and natural gas
prospects, and the exploration, development and production of oil and gas on
these prospects. In this connection, Mr. Wright was elected to the Company's
Board of Directors, joining Mr. Lovelace and C. Thomas Cutter, who had shortly
prior thereto been elected to the Board. (Mr. Cutter resigned from his seat on
the Board in February 2008 for personal reasons, and the Board was contracted to
two members.) To solidify Mr. Wright's stake in the Company, on or about May
19, 2007 each of the F.E.I. Energy Trust and Mr. Lovelace sold to Westside
Resources, L.P. ("WRLP"), an entity of which Mr. Wright is sole owner, 617,784
and 657,216 (respectively) of the shares then owned by them for these shares'
par value of $.001 per share. Moreover, about the same time the Company issued
to WRLP 1,275,000 shares for these shares' par value of $.001 per share,
bringing WRLP's stock ownership to a total of 2.55 million shares. On or about
October 15, 2007, WRLP transferred 850,000 shares to each of two trusts
established for the benefit of Mr. Wright's children (for an aggregate of 1.7
million shares), leaving WRLP with 850,000 shares.
RE-ACTIVATION OF THE COMPANY AND CHANGE IN BUSINESS
In connection with the re-activation of the Company and the change in
business focus, the Company has undertaken the following activities:
* The Company expanded its Board of Directors and elected Jimmy D.
Wright to fill a newly created vacancy. Mr. Wright has considerable
experience in the oil & gas industry. Kent E. Lovelace, Jr.
remains as the Company's second director. The change in the
Company's management teams bolsters the Company's oil and gas
expertise. Mr. Wright has an extensive background in this area,
recently serving as President, Chief Executive Officer and Chief
Operating Officer of an independent, publicly traded exploration
and production company. Mr. Lovelace has participated in a number
of oil and gas investments over the past 25 years. For more
information about Messrs. Wright and Lovelace, see "ITEM 5.
DIRECTORS AND EXECUTIVE OFFICERS " herein.
* The Company raised "seed" capital in the form of several loans.
Currently, the only outstanding Company loan is in the amount of
approximately $525,000 and was provided by CEI Ventures, LLC, an
entity owned by Mr. Lovelace, the F.E.I. Energy Trust (a
significant Company stockholder), and Westside Resources, L.P.
(an entity of which Mr. Wright is sole owner and which is
referred to hereinafter as "WRLP"). This loan is secured by
all of the Company's assets, including the Company's oil and
gas interests briefly described below and elsewhere herein. For
more information about this loan, see "ITEM 2. FINANCIAL
INFORMATION - Capital Requirements" herein.
* On August 29, 2007, the Company entered into an agreement (the
"Enexco Agreement") with Enexco, Inc. ("Enexco"), a privately
held entity engaged in the drilling and completion of wells on oil
and gas leases covering lands located in Oklahoma and Texas. Under
the terms of the Enexco Agreement, the Company will make available,
at its discretion, to Enexco funds to cover 65% of the costs
incurred by Enexco in connection with its acquisition of three
certain oil and gas leases, two in Oklahoma and one in Texas. In
consideration of the Company's providing this financing, the
Company received an interest in each of the three leases, and an
option to participate in the drilling of each well on any of
these leases. Before any well can be drilled on any of these leases,
Enexco must repay the amount loaned by the Company to acquire the
lease. The Company has acquired its only oil and gas assets thus
far pursuant to the Enexco Agreement, although the Company is
currently seeking other assets to acquire. The first well in
which the Company participated pursuant to the Enexco Agreement
was drilled to its target depth and encountered the target sand.
However, the sand was "tight," and this well on the lease in
Okfuskee County, Oklahoma was plugged and abandoned. As of the date
of this Form 10, the drilling of a second well, located in Seminole
County, Oklahoma and in which the Company is participating pursuant
to the Enexco Agreement, has been drilled to its target depth.
This well encountered several prospective oil and gas
formations and testing is currently underway and additional
acreage is being acquired in the prospect area. However, the
results of this second well cannot now be determined.
3
BUSINESS
The Company is an early stage, independent oil and gas exploration and
production company. The Company intends to engage primarily in the exploration
and development of oil and gas properties, initially in the States of Oklahoma
and Texas. The Company's major emphasis will be in the participation in the oil
and gas segment, acquiring interests in producing oil or gas properties and
participating in drilling operations. The Company's principal products will be
crude oil and natural gas. The Company intends to engage in a broad range of
activities associated with the oil and gas business in an effort to develop oil
and gas reserves. With the assistance of the Company's management, independent
contractors retained from time to time by the Company, and, to a lesser extent,
unsolicited submissions, the Company intends to identify prospects that it
believes are suitable for acquisition and drilling.
When the Company acquires an interest in acreage on which exploration or
development drilling is planned, the Company will assess the relative potential
and risks of each prospect and determine the degree to which the Company will
participate in the exploration or development drilling. In the right
circumstances, the Company will assume the entire risk of the acquisition and
drilling. On the other hand, the Company may determine that it will be more
beneficial to invite industry participants to share the risk and the reward of
the prospect by financing some or all of the costs of drilling contemplated
wells. In such cases, the Company may retain a carried working interest, a
reversionary interest, or may be required to finance all or a portion of the
Company's proportional interest in the prospect. Although this approach will
reduce the Company's potential return should the drilling operations prove
successful, it will also reduce the Company's risk and financial commitment to a
particular prospect.
Conversely, the Company may from time to time participate in drilling
prospects offered by other persons if the Company believes that the potential
benefit from the drilling operations outweighs the risk and the cost of the
proposed operations. This approach will allow the Company to diversify into a
larger number of prospects at a lower cost per prospect, but these operations
(commonly known as "farm-ins") are generally more expensive than operations
where the Company offers the participation to others (known as "farm-outs").
In addition to its exploration and drilling activities, the Company expects
that it will try to accumulate oil and gas reserves through the purchase of
existing reserves from others. In this connection, the Company may initiate
work-overs, re-completions, development drilling, secondary and tertiary
recovery operations and other production enhancement techniques to maximize
current production and the ultimate recovery of reserves acquired or developed.
Before committing substantial resources, including obtaining necessary
permits and preparing for drilling on any particular leased property, the
Company plans to complete its due diligence on its leased property. The Company
expects that, in acquiring oil and gas leases or undivided interests in oil and
gas leases, the Company will not incur the expense of retaining lawyers to
examine the title to the mineral interest to be placed under lease or already
placed under lease. Rather, the Company will rely upon the judgment of oil and
gas lease brokers or landmen who perform the fieldwork in examining records in
the appropriate governmental office before attempting to place under lease a
specific mineral interest. This is customary practice in the oil and gas
industry. Prior to the drilling of an oil and gas well, however, it is the
normal practice in the oil and gas industry for the person or company acting as
the operator of the well to obtain a preliminary title review of the spacing
unit within which the proposed oil and gas well is to be drilled to ensure there
are no obvious deficiencies in title to the well. The Company does not
anticipate that it, or the person or company acting as operator of the wells
located on the properties which we intend to lease, will obtain counsel to
examine title to such spacing unit until the well is about to be drilled. These
practices could expose the Company to certain risks, which will be described in
the section captioned "RISK FACTORS" above.
Once the Company has identified a proposed drilling site, it will engage
the services of a third party operator licensed to operate oil and gas wells in
the State of Texas. The operator will be responsible for permitting the well,
which will include obtaining permission from state authorities relative to
spacing requirements and any other state and federal environmental clearances
required at the commencement of the permitting process. Additionally, the
operator will formulate and deliver to all interest owners an operating
agreement establishing each participants' rights and obligations in that
particular well based on the location of the well and the ownership. In
addition to the permitting process, the operator will be responsible for hiring
the driller, geologist and land men to make final decisions relative to the
zones to be targeted, and actually drilling the well to the target zone. Should
the well be successful, the operator would thereafter be responsible for
completing the well and connecting it to the most appropriate transmission
facility for the hydrocarbons produced. The Company expects to pay the operator
commercially prevailing rates.
4
The operator will be the caretaker of the well once production has
commenced. As such, the operator will be responsible for paying bills related
to the well, billing working interest owners for their proportionate expenses in
drilling and completing the well, and selling the production from the well.
Unless each interest owner sells its production separately, the operator will
collect purchase payments from the purchaser of the production, and, once a
division order has been established and confirmed by the interest owners, the
operator will issue the checks to each interest owner in accordance with its
appropriate interest. The operator will not perform these functions when each
interest owner sells its production separately, in which case the interest
owners will undertake these activities separately. After production commences
on a well, the operator also will be responsible for maintaining the well and
the wellhead site during the entire term of the production or until such time as
the operator has been replaced.
Although the Company presently does not intend to seek status as a licensed
operator, if in the future the Company believes that seeking licensed operator
status is appropriate and the Company has adequate staff available to it, the
Company may decide to operate its own wells.
The driller of the Company's wells will be responsible for performing, or
contracting with third parties and supervising their efforts, all aspects of the
drilling operation except for geological services. The Company currently
anticipates that it will continue to utilize outside consultants for services on
an as-needed basis.
Each well will be drilled and tested individually. If commercially
producible amounts of oil or gas are present, the well will be completed and
facilities installed to connect to gathering or pipeline facilities. Completed
wells that are producing and connected to distribution pipelines will begin
generating revenues as soon as they begin flowing although actual funds from the
sale of production may be delayed and not be received until 30 days after the
end of the month of sale or even longer. If any of the Company wells proves to
hold commercially producible gas, the Company may need to install necessary
infrastructure to permit delivery of the Company gas from the wellhead to a
major pipeline. The Company has identified the locations of all major gathering
and other facilities currently installed in the general vicinity of the
Company's targeted area and has initiated contacts with the owners of these
facilities to ascertain their specific requirements with respect to transporting
the Company's gas to pipelines for transmission, including volume and quality of
gas and connection costs. Management believes that these pipelines basically
purchase all available gas that they can. However, some of the owners of these
pipelines produce their own gas, which they also transport along with other
third-party gas such as that the Company intends to produce. Most of the
pipelines in the area of the Company's current oil and gas interests are not
required by law to transport any gas that the Company may produce. As a result,
if pipelines in the area reach capacity, any productive natural gas well
developed by the Company could be "shut-in" because of a lack of available
natural gas pipeline capacity.
The Company cannot accurately predict the costs of transporting its gas
products to existing pipelines until it locates its first successful well. The
cost of installing an infrastructure to deliver the Company's gas to a pipeline
or gatherer will vary depending upon the distance the gas must travel from the
wellhead to the tap, tap fees, and whether the gas first must be treated to meet
the purchasing company's quality standards. To minimize the costs of
transporting gas to existing pipelines, the Company intends to drill as close to
existing pipelines as practicable. However, ultimate connection costs cannot
now be accurately predicted.
There can be no assurance that the Company will be successful in its
exploratory and production activities. The oil and gas business involves
numerous risks, the principal ones of which are described in the section
captioned "RISK FACTORS" above.
5
LOAN TO ENEXCO
On August 29, 2007, the Company entered into an agreement (the "Enexco
Agreement") with Enexco, Inc. ("Enexco"), a privately held entity engaged in the
drilling and completion of wells on various oil and gas leases covering lands
located in Oklahoma and Texas. Under the terms of the Enexco Agreement, the
Company will make available, at its discretion, to Enexco, on a revolving basis,
funds of up to an unspecified maximum sum. The funds will be advanced to cover
65% of the costs incurred by Enexco in connection with its acquisition of three
certain oil and gas leases, a 341.3 net acre lease in Okfuskee County, Oklahoma,
a 177.3 net acre lease in Seminole County, Oklahoma, and a 247.6 net acre lease
in Hamilton County, Texas. In consideration of the Company's providing this
financing, the Company received (a) 25% of any profits derived from any drilling
on, or from any sale of, any of the three preceding leases, and (b) an option to
participate up to 25% in the drilling of each well on any of these leases, which
may be exercised by paying a portion of the drilling costs of the related well
equal to the percentage of the interest sought up to 25%. All amounts advanced
by the Company with respect to any particular leases must be repaid to the
Company before the commencement of the drilling of a test well on such leases.
Otherwise, amounts advanced pursuant to the Agreement and accrued interest must
be paid in full by August 29, 2008. The term of this lending arrangement is for
12 months, and will continue thereafter on a month-to-month basis until
terminated by either party. The leases with respect to which amounts are
advanced secure amounts advanced pursuant to the Agreement. As of the date of
this Form 10, Enexco had borrowed approximately $217,412 from the Company, all
of which has been repaid to the Company. Enexco completed the drilling of one
well on the lease in Okfuskee County, Oklahoma (the McVeigh #1 well). This
well was drilled to its target depth and encountered the target sand. However,
the sand was "tight," and this well was plugged and abandoned. As of the date
of this Form 10, the drilling of a second well located in Seminole County,
Oklahoma (the Betty Marchant #1 well) and in which the Company is participating
pursuant to the Enexco Agreement, has been drilled to its target depth. This
well encountered several prospective oil and gas formations and testing is
currently underway and additional acreage is being acquired in the prospect
area. However, the results of this second well cannot now be determined.
PLAN OF OPERATION
PROPOSED INITIAL ACTIVITIES
The Company only recently began its pursuit of oil and gas exploration
opportunities, and thus the Company does not have any estimates of oil and gas
reserves on the properties in which it holds interest. Consequently the Company
has not reported its reserve estimates to any state or federal authority. The
Company cannot assure anyone that it will find commercially producible amounts
of oil and gas. Moreover, at the present time, the Company can finance only the
limited exploration activity by the Enexco Agreement described below. The
Company is currently trying to determine the scope of the business activities
that it wishes to pursue. The amount of capital that the Company will need will
depend on the scope of the business activities that the Company ultimately
decides to pursue, which is uncertain at this time. However, for the Company to
pursue business activities much greater than those related to the Enexco
Agreement, the Company would be required to undertake certain financing
activities. The success of the Company's plan of operation depends upon the
success of its exploration activities and its ability to obtain additional
capital to pursue additional opportunities. The Company cannot assure anyone
that it will be successful in its exploration activities and be able to obtain
necessary capital.
Currently, the Company's only oil and gas opportunity is the one provided
by the Enexco Agreement. The first well in which the Company has participated
that has been drilled pursuant to the Enexco Agreement (the McVeigh #1 well on
the lease in Okfuskee County, Oklahoma) was drilled to its target depth. The
McVeigh #1 well encountered the target sand. However, the sand was "tight," and
this well was plugged and abandonedIn connection with this well, the Company
incurred expenses in the amount of $64,383, all of which have been written-off.
However, prior to the drilling of this first well, the Company was repaid
approximately $95,613 of the outstanding balance under the Enexco Agreement.
The operator is currently proposing another well in the prospect acreage
containing the McVeigh #1 well during early 2008. However, management does not
currently believe that it will participate in the drilling of any further wells
on the lease in Okfuskee County, Oklahoma. The second well in which the Company
is participating (the Betty Marchant #1 on the lease in Seminole County
Oklahoma) has been drilled to its target depth. The Company has participated in
the 177 gross (38.8 net) acre prospect for a 21.875 percent working interest at
a total net cost of $223,112 as of February 5, 2008. This well encountered
several prospective oil and gas formations and testing is currently underway and
additional acreage is being acquired in the prospect area. The Company
estimates that its share of drilling costs for this second well will be
approximately $271,681, and the Company received a repayment of approximately
6
$48,569 pursuant to the Enexco Agreement prior to the commencement of the
drilling of this second well. The results of this second well cannot now be
determined.
If the Company is successful in its initial activities, the Company intends
to continue with further exploration and development of additional
opportunities. The continuation of the Company's business activities depends on
the development of operating wells that are producing oil and gas, and are
generating revenues.
MARKETS AND MARKETING
Oil and natural gas prices are currently at very high levels. Based on
worldwide supply and demand projections and the potential for instability in
areas that currently provide a large proportion of the world's petroleum, we
believe that prices are likely to remain at high levels for the foreseeable
future. A number of factors, including, high product prices, the ease of
availability of capital, and the influx of that capital into the oil and natural
gas sector has resulted in tremendous competition for prospects, people,
equipment and services. We believe that this environment presents a tremendous
opportunity for our company to pursue attractive opportunities. Our goal is to
grow our company and increase shareholder value in a favorable petroleum-pricing
environment.
The Company does not expect to refine any of its production, although the
Company may have to process some of its production to transport it or to meet
the purchasing company's quality standards. Instead, the Company expects that
all or nearly all of its production will be sold to a relatively small number of
customers. Production from the Company's properties will be marketed consistent
with industry practices. The availability of a ready market for the Company's
production will depend upon a number of factors beyond the Company's control,
including the availability of other domestic production, price, crude oil
imports, the proximity and capacity of oil and gas pipelines, and general
fluctuations in supply and demand. Although the effect of these factors cannot
be accurately predicted or anticipated, the Company does not anticipate any
unusual difficulty in contracting to sell its production of oil and gas to
purchasers and end-users at prevailing market prices and under arrangements that
are usual and customary in the industry. However, there can be no assurance
that market, economic and regulatory factors will not in the future materially
adversely affect the Company's ability to sell its production. The Company will
strive to develop markets with end-users, local distribution companies, and
natural gas brokers for gas produced from successful exploratory wells and
development wells. The Company expects that most of the natural gas that the
Company is able to find (if any) will be transported through gas gathering
systems and gas pipelines that are not owned by the CompanyThe Company's current
leased land is in fairly close proximity to gas pipelines suitable for carrying
the Company's production. Transportation space on gas gathering systems and
pipelines is occasionally limited and at times unavailable due to repairs or
improvements being made to the facilities or due to use by other gas shippers
with priority transportation agreements or who own or control the relevant
pipeline. If transportation space is restricted or is unavailable, the
Company's cash flow from the affected properties could be adversely affected.
The Company does not now have any long-term sales contracts for any crude oil
and natural gas production that it realizes, but it expects that it will
generally sell any production that it develops pursuant to these types of
contracts. The Company does not believe that it will have any difficulty in
entering into long-term sales contracts for its production, although there can
be no assurance in this regard.
Sales prices for oil and gas production are negotiated based on factors
normally considered in the industry, such as the spot price for gas or the
posted price for oil, price regulations, regional price variations, distance
from the well to the pipeline, well pressure, estimated reserves, commodity
quality and prevailing supply conditions. Historically, prices of crude oil and
natural gas market have experienced high volatility. This high volatility is a
result of ever changing perceptions throughout the industry centered on supply
and demand. Although the Company cannot predict the occurrence of events that
may affect oil and gas prices or the degree to which oil and gas prices will be
affected, the prices for any oil or gas that the Company produces should be
equivalent to current market prices in the geographic region, and the Company
will strive to obtain the best price in the area of its production. The
Company's revenues, profitability and future growth will depend substantially on
prevailing prices for crude oil and natural gas. Decreases in the prices of oil
and gas would likely adversely affect the carrying value of any proved reserves
that the Company is successful in establishing and the Company's prospects,
revenues, profitability and cash flow.
7
COMPETITION
The Company operates in the highly competitive areas of oil and gas
exploration, development and production. The Company believes that the level of
competition in these areas will continue into the future and may even intensify.
In the areas of oil and gas exploration, development and production, competitive
advantage is gained through superior capital investment decisions, technological
innovation and costs management. The Company's competitors include major oil
and gas companies, a large number of independent oil and gas companies, and
numerous individuals. Competition focuses primarily on the acquisitions of
properties that appear attractive for the exploration for oil and gas. The
principal competitive factors in the acquisition of oil and gas properties
include the staff and data necessary to identify, investigate and purchase such
properties and the financial resources necessary to acquire and develop them.
The Company also will compete for the equipment and labor required to operate
and to develop its properties. Most of the Company's competitors have
substantially larger operating staffs and greater financial and other resources.
In addition, larger competitors may be able to absorb the burden of any changes
in federal, state and local laws and regulations more easily than the Company
can, which would adversely affect the Company's competitive position. These
competitors may be able to pay more for natural gas and oil properties and may
be able to define, evaluate, bid for and acquire a greater number of properties
than the Company can. In addition, most of the Company's competitors have been
operating for a much longer time than the Company has and have demonstrated the
ability to operate through a number of industry cycles. The Company's ability
to acquire additional properties and to discover reserves in the future will
depend upon its ability to evaluate and select suitable properties and to
consummate transactions in this highly competitive environment. The effect of
the intense competition that the Company will face cannot now be determined.
REGULATION
REGULATION OF OIL AND NATURAL GAS EXPLORATION AND PRODUCTION
Exploration and production operations are subject to various types of
regulation at the federal, state and local levels. This regulation includes
requiring permits to drill wells, maintaining bonding requirements to drill or
operate wells, and regulating the location of wells, the method of drilling and
casing wells, the surface use and restoration of properties on which wells are
drilled, and the plugging and abandoning of wells. Our operations will also be
subject to various conservation laws and regulations. These include the
regulation of the size of drilling and spacing units or proration units, the
density of wells that may be drilled in a given field, and the unitization or
pooling of oil and natural gas properties. Some states allow the forced pooling
or integration of tracts to facilitate exploration while other states rely on
voluntary pooling of lands and leases. In addition, state conservation laws
establish maximum rates of production from oil and natural gas wells, generally
prohibiting the venting or flaring of natural gas and imposing certain
requirements regarding the ratability of production. The effect of these
regulations is to limit the amounts of oil and natural gas that can produce from
wells, and to limit the number of wells or the locations where we can drill.
Because these statutes, rules and regulations undergo constant review and often
are amended, expanded and reinterpreted, we are unable to predict the future
cost or impact of regulatory compliance. The regulatory burden on the oil and
gas industry increases its cost of doing business and, consequently, affects its
profitability. We do not believe, however, we are affected differently by these
regulations than others in the industry.
NATURAL GAS MARKETING, GATHERING AND TRANSPORTATION
Federal legislation and regulatory controls have historically affected the
price of the natural gas and the manner in which production is transported and
marketed. Under the Natural Gas Act of 1938 (NGA), the FERC regulates the
interstate sale for resale of natural gas and the transportation of natural gas
in interstate commerce, although facilities used in the production or gathering
of natural gas in interstate commerce are generally exempted from FERC
jurisdiction. Although considerable deregulation has occurred in this area of
law such that a lot of natural gas production may now be sold at market prices,
natural gas sales prices continue to be affected by intrastate and interstate
gas transportation regulation, because the prices for production are affected by
the cost of transporting the gas to the consuming market. Through a series of
comprehensive rulemakings, beginning with Order No. 436 in 1985 and continuing
through Order No. 636 in 1992 and Order No. 637 in 2000, the FERC has adopted
regulatory changes that have significantly altered the transportation and
marketing of natural gas. These changes were intended by the FERC to foster
competition by, among other things, transforming the role of interstate pipeline
companies from wholesale marketers of gas to the primary role of gas
transporters, and by increasing the transparency of pricing for pipeline
services. The FERC has also established interim rules governing the
8
relationship of pipelines with their marketing affiliates, and has initiated a
rulemaking proceeding to consider whether to make those rules permanent. The
FERC has also implemented standards relating to the use of electronic data
exchange by the pipelines to make transportation information available on a
timely basis and to enable transactions to occur on a purely electronic basis.
In light of these statutory and regulatory changes, most pipelines have
divested their gas sales functions to marketing affiliates, which operate
separately from the transporter and in direct competition with all other
merchants, and most pipelines have also implemented the large-scale divestiture
of their gas gathering facilities to affiliated or non-affiliated companies.
Interstate pipelines thus now generally provide unbundled, open and
nondiscriminatory transportation and transportation-related services to
producers, gas marketing companies, local distribution companies, industrial end
users and other customers seeking such services. Sellers and buyers of gas have
gained direct access to the particular pipeline services they need, and are
better able to conduct business with a larger number of counter-parties. These
changes have probably and improved access to markets generally while, at the
same time, substantially increasing competition in the natural gas marketplace.
We cannot predict what new or different regulations the FERC and other
regulatory agencies may adopt, or what effect subsequent regulations may have on
our activities. Similarly, it is impossible to predict what proposals, if any,
that affect the oil and natural gas industry might actually be enacted by
Congress or the various state legislatures and what effect, if any, such
proposals might have on us. Similarly, and despite the recent trend toward
federal deregulation of the natural gas industry, whether or to what extent that
trend will continue, or what the ultimate effect will be on our sales of gas
that we are able to produce, cannot be predicted.
FEDERAL REGULATION OF PETROLEUM
Sales of oil and natural gas liquids are not regulated and are at market
prices. The price received from the sale of these products is affected by the
cost of transporting the products to market. Much of that transportation is
through interstate common carrier pipelines. Effective January 1, 1995, the
FERC implemented regulations generally grand-fathering all previously approved
interstate transportation rates and establishing an indexing system for those
rates by which adjustments are made annually based on the rate of inflation,
subject to certain conditions and limitations. These regulations may tend to
increase the cost of transporting oil and natural gas liquids by interstate
pipeline, although the annual adjustments may result in decreased rates in a
given year. Every five years, the FERC must examine the relationship between
the annual change in the applicable index and the actual cost changes
experienced in the oil pipeline industry. In March 2006, to implement this
required five-yearly re-determination, the FERC established an upward adjustment
in the index to track oil pipeline cost changes and determined that the Producer
Price Index for Finished Goods plus 1.3 percent should be the oil pricing index
for the five-year period beginning July 1, 2006.
Another FERC proceeding that may impact transportation costs relates to an
ongoing proceeding to determine whether and to what extent pipelines should be
permitted to include in their transportation rates an allowance for income taxes
attributable to non-corporate partnership interests. Following a court remand,
the FERC has established a policy that a pipeline structured as a master limited
partnership or similar non-corporate entity is entitled to a tax allowance with
respect to income for which there is an "actual or potential income tax
liability," to be determined on a case by case basis. Generally speaking, where
the holder of a partnership unit interest is required to file a tax return that
includes partnership income or loss, such unit-holder is presumed to have an
actual or potential income tax liability sufficient to support a tax allowance
on that partnership income.
We are not able to predict with certainty the effect upon us of these
periodic reviews by the FERC of the pipeline index, or of the application of the
FERC's new policy on income tax allowances.
9
ENVIRONMENTAL REGULATIONS
- GENERAL. Our operations will be subject to extensive federal, state and
local laws and regulations relating to the generation, storage, handling,
emission, transportation and discharge of materials into the environment. A
variety of permits may required for our operations. These permits can be
revoked, modified or renewed by issuing authorities. Governmental authorities
enforce compliance with their regulations through fines, injunctions or both.
Government regulations can increase the cost of planning, designing, installing
and operating oil and gas facilities. Although we believe that compliance with
environmental regulations will not have a material adverse effect on us, risks
of substantial costs and liabilities related to environmental compliance issues
are part of oil and gas production operations. No assurance can be given that
significant costs and liabilities will not be incurred. Also, it is possible
that other developments, such as stricter environmental laws and regulations,
and claims for damages to property or persons resulting from oil and gas
production could result in substantial costs and liabilities to us.
- SOLID AND HAZARDOUS WASTE. We might generate some hazardous wastes that
are already subject to the Federal Resource Conservation and Recovery Act (RCRA)
and comparable state statutes. The Environmental Protection Agency (EPA) has
limited the disposal options for certain hazardous wastes. Certain wastes
currently exempt from treatment as hazardous wastes may in the future be
designated as hazardous wastes under RCRA or other applicable statutes. We
could, therefore, be subject to more rigorous and costly disposal requirements
in the future than we encounter today.
- SUPERFUND. The Comprehensive Environmental Response, Compensation, and
Liability Act (CERCLA), also known as the "Superfund" law, imposes liability,
without regard to fault or the legality of the original conduct, on certain
persons with respect to the release of hazardous substances into the
environment. These persons include the owner and operator of a site and any
party that disposed of or arranged for the disposal of hazardous substances
found at a site. CERCLA also authorizes the EPA, and in some cases, private
parties, to undertake actions to clean up such hazardous substances, or to
recover the costs of such actions from the responsible parties. We may in the
future be an owner or operator of sites on which hazardous substances have been
released. As a result, we may be responsible under CERCLA for all or part of
the costs to clean up sites where such wastes have been disposed.
- OIL POLLUTION ACT. The Federal Oil Pollution Act of 1990 (OPA) and
resulting regulations impose a variety of obligations on responsible parties
related to the prevention of oil spills and liability for damages resulting from
such spills in waters of the United States. The term "waters of the United
States" has been broadly defined to include inland water bodies, including
wetlands and intermittent streams. The OPA assigns liability to each
responsible party for oil removal costs and a variety of public and private
damages.
- CLEAN WATER ACT. The Federal Water Pollution Control Act (Clean Water
Act) and resulting regulations, which are implemented through a system of
permits, also govern the discharge of certain contaminants into waters of the
United States. Sanctions for failure to comply strictly with the Clean Water
Act are generally resolved by payment of fines and correction of any identified
deficiencies. However, regulatory agencies could require us to cease
construction or operation of certain facilities that are the source of water
discharges.
- CLEAN AIR ACT. Our operations will be subject to local, state and
federal laws and regulations to control emissions from sources of air pollution.
Payment of fines and correction of any identified deficiencies generally resolve
penalties for failure to comply strictly with air regulations or permits.
Regulatory agencies could also require us to cease construction or operation of
certain facilities that are air emission sources.
EMPLOYEES
As of the date of this filing, the Company had only one employee, an
office manager. The number of employees that the Company expects that it will
need in the future depends on the scope of the business activities that the
Company decides to pursue. The Company does not now foresee problems
in hiring additional qualified employees to meet its possible future labor
needs.
10
FACILITIES
The Company's principal executive offices are fairly small and are located
2100 West Loop South, Suite 900, Houston, Texas 77027. They are rented for a
term ending October 31, 2008. Management believes that additional space will be
need if the Company's plan of operation progresses in accordance with its terms.
Management further believes that such additional space and any required
alternative office space can be readily obtained if needed.
ITEM 1A. RISK FACTORS
In addition to the other information in this General Form for Registration
of Securities on Form 10, the following risk factors, among others, should be
considered carefully in evaluating the Company and its business.
RISKS RELATED TO OUR COMPANY
----------------------------
OUR EXTREMELY LIMITED HISTORY MAKES AN EVALUATION OF US AND OUR FUTURE
EXTREMELY DIFFICULT, AND PROFITS ARE NOT ASSURED.
The Company was incorporated on July 20, 2000 under the laws of the State
of Delaware for the purpose of providing video-on-demand service to consumers by
means of broadband or high-speed Internet connections. However, for a variety
of reasons, that business failed, and the Company became dormant from an
operational perspective. During the summer of 2006 the Company began
considering the possible re-activation of operations with a focus on the
acquisition of attractive crude oil and natural gas prospects, and the
exploration, development and production of oil and gas on these prospects.
During August 2007, we acquired a limited number of rights in certain oil and
gas prospects by virtue of loan that we made. As of the date of this Form 10,
we have participated in only two wells whose drilling has been completed. The
first of these wells was plugged and abandoned, while the results of the second
well are currently being evaluated, but these results cannot now be determined.
All of the oil and gas properties in which we have rights to date are considered
"undeveloped acreage," which the U.S. Securities and Exchange Commission (the
"Commission") defines as "lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and gas regardless of whether such acreage contains proved reserves." No
proved or probable reserves have been established with respect to any of the oil
and gas properties in which we have rights. In view of our extremely limited
history in the oil and gas exploration business, you may have difficulty in
evaluating us and our business and prospects. You must consider our business
and prospects in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development. For our business
plan to succeed, we must successfully undertake most of the following
activities:
* Find and acquire rights in attractive oil and gas properties;
* Drill successfully exploratory test wells on our oil and gas
properties to determine the presence of oil and gas in
commercially viable quantities;
* Develop our oil and gas properties to a stage at which oil and gas
are being produced in commercially viable quantities;
* Procure purchasers of our commercial production of oil and gas upon
such commencement;
* Comply with applicable laws and regulations;
* Identify and enter into binding agreements with suitable joint
venture partners for our future projects;
* Implement and successfully execute our business strategy;
* Respond to competitive developments and market changes; and
* Attract, retain and motivate qualified personnel.
There can be no assurance that we will be successful in undertaking
such activities. Our failure to undertake successfully most of the
activities described above could materially and adversely affect our business,
prospects, financial condition and results of operations. In addition, there
can be no assurance that our exploration and production activities will produce
oil and gas in commercially viable quantities. Moreover, even if we
succeed in producing oil and gas, we expect to incur operating losses until
such time (if ever) as we produce and sell a sufficient volume of our commercial
production to cover direct production costs as well as corporate overhead.
There can be no assurance that sales of our oil and gas production will
ever generate significant revenues, that we will ever generate positive cash
flow from our operations or that (if ever attained) we will be able to sustain
profitability in any future period.
11
OUR AUDITOR HAS GIVEN US A "GOING CONCERN" QUALIFICATION, WHICH QUESTIONS
OUR ABILITY TO CONTINUE AS A GOING CONCERN WITHOUT ADDITIONAL FINANCING.
Our independent certified public accountant has added an emphasis paragraph
to its report on our financial statements for the year ended December 31, 2007
regarding our ability to continue as a going concern. Key to this determination
is our historical losses. Management believes that most, if not nearly all, of
our expenses are within our control such that we could reduce such expenses to
remain solvent. However, any such reduction would impair our ability to
continue our exploration activities. Our oil and gas exploration activities are
being conducted with a view of realizing cash flow from oil and gas production
that would result from these efforts. There can be no assurance that we will be
successful in these activities. Moreover, even if successful, management
believes that funds generated from operations will not be sufficient to expand
the scope of our business. In order to expand such scope, we will need to
obtain additional capital. There can be no assurance that we will be successful
in this regard. In view of the foregoing uncertainties as to our success in our
exploration activities and our ability to procure additional capital, there can
be no assurance that we will become profitable or continue our business without
either a temporary interruption or a permanent cessation.
WE DEPEND ON CERTAIN KEY PERSONNEL.
We substantially depend upon the efforts and skills of our officers and
directors, and certain of our consultants and third party contractors. The
loss of the services of any of our officers or directors, or any of their
inability to devote sufficient attention to our operations, could materially and
adversely affect our operations. None of our officers or directors has entered
into an employment agreement or a covenant not to compete agreement with us. As
a result, any of them may discontinue providing services to us at any time and
for any reason, and even thereafter commence competition with us. Moreover, we
do not maintain key man life insurance on any of our officers or directors.
OUR CURRENT MANAGEMENT RESOURCES MAY NOT BE SUFFICIENT FOR THE FUTURE, AND
WE HAVE NO ASSURANCE THAT WE CAN ATTRACT ADDITIONAL QUALIFIED PERSONNEL.
There can be no assurance that the current level of management is
sufficient to perform all responsibilities necessary or beneficial for
management to perform. Our success in attracting additional qualified personnel
will depend on many factors, including our ability to provide them with
competitive compensation arrangements, equity participation and other benefits.
There is no assurance that (if we need to) we will be successful in attracting
highly qualified individuals in key management positions.
LIMITATIONS ON CLAIMS AGAINST OUR OFFICERS AND DIRECTORS, AND OUR
OBLIGATION TO INDEMNIFY THEM, COULD PREVENT OUR RECOVERY FOR LOSSES CAUSED BY
THEM.
The corporation law of Delaware allows a Delaware corporation to limit the
liability of its directors to the corporation and its stockholders to a certain
extent, and our Restated Certificate of Incorporation have eliminated our
directors' liability to the maximum extent permitted by the corporation law of
Delaware. Moreover, our Bylaws provide that we must indemnify each director,
officer, agent and/or employee to the maximum extent provided for by the
corporation law of Delaware. Further, we may purchase and maintain insurance on
behalf of any such persons whether or not we have the power to indemnify such
person against the liability insured against. Consequently, because of the
actions or omissions of officers, directors, agents and employees, we could
incur substantial losses and be prevented from recovering such losses from such
persons. Further, the Commission maintains that indemnification for liabilities
arising under the Securities Act is against the public policy expressed in the
Securities Act, and is therefore unenforceable.
12
INCUMBENT MANAGEMENT OWNS A LARGE PERCENTAGE OF OUR OUTSTANDING STOCK, AND
CUMULATIVE VOTING IS NOT AVAILABLE TO STOCKHOLDERS.
Two members of our current management, Jimmy D. Wright and Kent E.
Lovelace, Jr., currently own (directly or indirectly) approximately 42.2% of our
outstanding common stock (considered on an undiluted basis); Messrs. Wright's
and Lovelace's stock ownership would increase if they were to exercise certain
outstanding warrants issued to them directly or indirectly. Cumulative voting
in the election of directors is not provided for by law or in our Restated
Certificate of Incorporation. Accordingly, the holder or holders of a majority
of our outstanding shares of common stock may elect all of our directors.
Management's large percentage ownership of our outstanding common stock helps
enable them to maintain their positions as such and thus control of our business
and affairs.
WE MAY EXPERIENCE RAPID GROWTH, AND IN SUCH CASE WE WILL NEED TO MANAGE
THIS GROWTH EFFECTIVELY.
We believe that, given the right business opportunities, we may expand our
operations rapidly and significantly. If rapid growth were to occur, it could
place a significant strain on our management, operational and financial
resources. To manage any significant growth of our operations, we will be
required to undertake the following successfully:
* Manage relationships with various strategic partners and other third
parties;
* Hire and retain skilled personnel necessary to support our business;
* Train and manage a growing employee base; and
* Continually develop our financial and information management systems.
If we fail to make adequate allowances for the costs and risks associated with
this expansion or if our systems, procedures or controls are not adequate to
support our operations, our business could be harmed. Our inability to manage
growth effectively could materially adversely affect our business, results of
operations and financial condition.
FUTURE ACQUISITIONS COULD EXPOSE US TO NUMEROUS RISKS.
As part of our business strategy, we may acquire complementary companies,
products or services. Any acquisition would be accompanied by the risks
commonly encountered in such a transaction. Such risks include the following:
* Difficulty of assimilating the operations and personnel of the
acquired companies
* Potential disruption of our ongoing business
* Inability of management to maximize our financial and strategic
position through the successful incorporation of acquired
businesses
* Additional expenses associated with amortization of acquired
intangible assets
* Maintenance of uniform standards, controls, procedures and policies
* Impairment of relationships with employees, customers and vendors as
a result of any integration of new management personnel
* Potential unknown liabilities associated with acquired businesses
There can be no assurance that we would be successful in overcoming these
risks or any other problems encountered in connection with such acquisitions.
Due to all of the foregoing, any future acquisition may materially adversely
affect our business, results of operations, financial condition and cash flows.
Although we do not expect to use cash for acquisitions, we may be required to
obtain additional financing if we choose to use cash in the future. There can
be no assurance that such financing will be available on acceptable terms. In
addition, if we issue stock to complete any future acquisitions, existing
stockholders will experience further ownership dilution.
13
WE HAVE ENTERED INTO CERTAIN TRANSACTIONS WITH PERSONS WHO ARE OUR OFFICERS
AND DIRECTORS.
We have entered into certain transactions (the "Related Party
Transactions") either directly with, or with entities controlled by one or both
of, Jimmy D. Wright, one of our directors and our Chairman of the Board, Kent E.
Lovelace, Jr., one of our directors and our President and Chief Financial
Officer, and the F.E.I. Energy Trust, a significant Company stockholder. The
Related Party Transactions are described in "ITEM 7. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS." None of the Related Party Transactions were the result
of arms-length negotiations. Accordingly, there can be no assurance that the
terms and conditions of the Related Party Transactions are as favorable to us as
those that could have been obtained in true arms-length negotiations. However,
we believe that all Related Party Transactions were fair as to the Company at
the time they were authorized or approved. Moreover, because of the positions
of Messrs. Wright and Lovelace and the F.E.I. Energy Trust with us, there can be
no assurance that we would enforce a claim against either of them arising out of
any of the Related Party Transactions.
RISKS RELATED TO OUR BUSINESS
-----------------------------
OIL AND GAS PRICES ARE VOLATILE, HAVE BEEN LOW IN RECENT YEARS, AND COULD
BE LOW AGAIN IN THE FUTURE.
Our revenues, profitability and future growth and the carrying value of our
properties will depend substantially on the prices we realize for our oil and
gas production. Our realized prices will also affect the amount of cash flow
available for capital expenditures and our ability to borrow and raise
additional capital. Oil and gas are commodities and, therefore, their prices
are subject to wide fluctuations in response to relatively minor changes in
supply and demand. Historically, the markets for oil and gas have been
volatile, and they are likely to continue to be volatile in the future. For
example, oil and natural gas prices increased significantly in late 2000 and
early 2001 and then steadily declined in 2001, only to climb again in recent
years to near all-time highs before declining again in late 2006. Prices of
oil have risen again prior to the date of this Form 10 to all-time highs.
Despite the fairly high current prices for natural gas and oil, there can be no
assurance that low prices will not be experienced again in the future. Among
the factors that can cause price volatility are:
* worldwide or regional demand for energy, which is affected by
economic conditions;
* the domestic and foreign supply of oil and gas;
* weather conditions;
* domestic and foreign governmental regulations;
* political conditions in gas or oil producing regions;
* the ability of members of the Organization of Petroleum Exporting
Countries to agree upon and maintain oil prices and production
levels; and
* the price and availability of alternative fuels.
Oil and gas price movements cannot be predicted with certainty. Lower oil and
gas prices may not only decrease our revenues on a per unit basis but also may
reduce the amount of oil and gas that we can produce economically. A
substantial or extended decline in oil and gas prices may materially and
adversely affect our future business, financial condition, results of
operations, liquidity and ability to finance capital expenditures.
14
THE SUCCESS OF OUR BUSINESS DEPENDS ON OUR ABILITY TO SELECT OIL AND GAS
PROJECTS THAT ULTIMATELY PROVE SUCCESSFUL ECONOMICALLY.
We intend to drill exploratory test wells on properties with no proved oil
and gas reserves, although such properties will typically be situated in areas
of proved production reserves. Drilling of oil and gas wells always involves
the risk that no commercially productive oil or gas reservoirs will be
encountered. While all drilling (whether developmental or exploratory) involves
this risk, exploratory drilling involves greater risks of dry holes or failure
to find commercial quantities of oil and gas. Because of our proposed
exploratory drilling activities, we are especially likely to experience
exploration and abandonment expenses from time to time in the future. The
economic success of any project will depend on a number of factors, including
our ability to discern and estimate the volumes of recoverable reserves relating
to the project, rates of future production, future commodity prices, operating
costs, and possible environmental liabilities. All of these factors affect
whether or not a project will ultimately generate cash flows sufficient to
provide a suitable return on investment. Our assessments and estimations of
these factors (which are inherently inexact and uncertain) may prove inaccurate.
Moreover, there is no specific criterion for selecting the oil and gas projects
that we will decide to pursue. Accordingly, we will have significant
flexibility in selecting such projects. There can be no assurance that we will
be able to identify economically successful oil and gas projects or that we will
be able to pursue these projects successfully even if identified. Our failure
to select economically successful oil and gas project will materially and
adversely affect our business, results of operations and financial condition.
Even if we create reserves through our exploration activities, our reserves will
decline as they are produced. We will be constantly constrained to add new
reserves through further exploration or further development of our existing
properties. There can be no assurance that our exploration and development
activities will be successful in adding new reserves. If we fail to replace
reserves, our level of production and cash flows will be adversely impacted.
THE SELECTION OF OIL AND GAS PROJECTS INVOLVES NUMEROUS RISKS UNRELATED TO
THE PRESENCE OR ABSENCE OF RECOVERABLE RESERVES RELATING TO THE PROJECT.
Even though we intend to perform a review (that we believe is consistent
with industry practices) of each project we decide to pursue, reviews of this
nature are often limited in scope. Moreover, these reviews may not reveal all
existing or potential problems nor will they permit us to become sufficiently
familiar with the related properties to fully assess their deficiencies and
capabilities. In addition, inspections may not always be performed on every
platform or well, and structural or environmental problems may not be observable
even when an inspection is undertaken. Even when problems are identified, the
seller or lessor may be unwilling or unable to provide effective contractual
protection against all or part of the problems. We are generally not entitled
to contractual indemnification for environmental liabilities, and we may be
required to pursue many projects on an "as is" basis. Accordingly, we may be
required to make significant expenditures to cure environmental contamination
relating to acquired properties. If we are unable to remedy or cure any title
defect or potential environmental problem of a nature such that drilling
operations on the property would not be prudent, we could suffer a loss of our
entire investment in the property.
OUR APPROACH TO TITLE ASSURANCE COULD MATERIALLY ADVERSELY AFFECT OUR
BUSINESS AND OPERATIONS.
We intend to purchase working and revenue interests in oil and gas
leasehold interests. The existence of a material title deficiency can render a
lease worthless and can result in a large expense to our business. In some
instances, we may forego the expense of retaining lawyers to examine the title
to the mineral interest to be placed under lease or already placed under lease.
Rather, we will rely upon the judgment of oil and gas lease brokers or landmen
who perform the field work in examining records in the appropriate governmental
office before attempting to place under lease a specific mineral interest. This
is customary practice in the oil and gas industry. Prior to the drilling of an
oil and gas well, however, it is the normal practice in the oil and gas industry
for the person or company acting as the operator of the well to obtain a
preliminary title review of the spacing unit within which the proposed oil and
gas well is to be drilled to ensure there are no obvious deficiencies in title
to the well. In some instances, we, or the person or company acting as operator
of the wells located on the properties that we intend to lease, may not obtain
counsel to examine title to such spacing unit until the well is about to be
drilled. As a result of such examinations, certain curative work may have to be
performed to correct deficiencies in the marketability of the title, and such
curative work entails expense. The work might include obtaining affidavits of
heirship or causing an estate to be administered. Occasionally, the examination
made by the title lawyers reveals that the oil and gas lease or leases are
worthless, having been purchased in error from a person who is not the owner of
the mineral interest desired. In such instances, the amount paid for such oil
15
and gas lease or leases is generally lost. If we were to lose the amount paid
for any such oil and gas lease, such loss could materially adversely affect our
business. Since we do not intend to retain title lawyers in connection with our
acquisitions, the risk of such losses in our operations is increased. We note,
however, that we did obtain a drill site title opinion for our initial well
being drilled as of the date of this Form 10.
DEVELOPMENT ACTIVITIES ON EVEN WELL-SELECTED PROJECTS MAY BE UNSUCCESSFUL
FOR MANY REASONS, INCLUDING WEATHER, COST OVERRUNS, EQUIPMENT SHORTAGES AND
MECHANICAL DIFFICULTIES.
The selection of attractive oil and gas projects does not ensure success.
The development of oil and gas projects involves a variety of operating risks,
including:
* fires;
* explosions;
* blow-outs and surface cratering;
* uncontrollable flows of natural gas, oil and formation water;
* natural disasters, such as hurricanes and other adverse weather
conditions;
* pipe, cement, subsea well or pipeline failures;
* casing collapses;
* ineffective hydraulic fracs;
* embedded oil field drilling and service tools;
* abnormally pressured formations; and
* environmental hazards, such as natural gas leaks, oil spills,
pipeline ruptures and discharges of toxic gases.
If we experience any of these problems, it could affect well bores, platforms,
gathering systems and processing facilities, which could adversely affect our
ability to conduct operations.
We could also incur substantial losses as a result of:
* injury or loss of life;
* severe damage to and destruction of property, natural resources and
equipment;
* pollution and other environmental damage;
* clean-up responsibilities;
* regulatory investigation and penalties;
* suspension of our operations; and
* repairs to resume operations.
These conditions can cause substantial damage to facilities and interrupt
production. As a result, we could incur substantial liabilities that could
reduce or eliminate the funds available for development or property
acquisitions, or result in loss of equipment and properties.
Presently, because of budget constraints, we do not maintain insurance in
accordance with prevailing industry practices, but instead we rely upon the
insurance coverage of our operators to protect us against the types of risks,
losses and liabilities that customarily arise out of oil and gas exploration and
production activities. Our operators' insurance may prove inadequate. Our lack
of customary insurance coverage may expose us to certain risks, losses and
liabilities for the indefinite future. As funds become available, we intend to
broaden our insurance coverage. However, we may never obtain insurance for some
risks if we believe the cost of available insurance is excessive relative to the
risks presented. In addition, some risks may not be fully insurable if
insurable at all. Even if we broaden our insurance coverage, our insurance
would probably not cover all potential claims or may not adequately indemnify us
for all liability to which we will be exposed. Any liability or legal defense
expenses not covered by insurance or exceeding our insurance coverage could
materially and adversely affect our business, operating results and financial
condition. Moreover, we do not currently carry business interruption insurance.
Finally, the successful drilling of an oil and gas well does not ensure a
profit on investment. A variety of factors, both geological and market-related,
can cause a well to become uneconomical or only marginally economic.
16
WE WILL RELY ON A NUMBER OF THIRD PARTIES, AND SUCH RELIANCE EXPOSES US TO
A NUMBER OF RISKS.
Our operations will depend on a number of third parties. We will have
limited control over these third parties. We will probably not have many
long-term agreements with many of them. We may rely upon various companies to
assist us in identifying desirable gas and oil prospects to acquire and provide
us with technical assistance and services. We also may rely upon the services
of geologists, geophysicists, chemists, engineers and other scientists to
explore and analyze our prospects to determine a method in which the prospects
may be developed in a cost-effective manner. In addition, we intend to rely
upon the owners and operators of oil rigs and drilling equipment, and upon
providers of oilfield services, to drill and develop our prospects to
production. Moreover, if any of our wells proves to hold commercially
producible gas, we will have to rely on third party gathering or pipeline
facilities to transport and purchase our production. We have identified the
locations of all major gathering and other facilities currently installed in the
general vicinity of our targeted area and have initiated contacts with the
owners of these facilities to ascertain their specific requirements with respect
to transporting our gas to pipelines for transmission, including volume and
quality of gas and connection costs. Management believes that these pipelines
basically purchase all available gas that they can. However, some of the owners
of these pipelines produce their own gas, which they also transport along with
other third-party gas such as that which we intend to produce. Most of the
pipelines in the area of our current oil and gas interests are not required by
law to transport any gas that we may produce. As a result, if pipelines in the
area reach capacity, any productive natural gas well that we develop could be
"shut-in" because of a lack of available natural gas pipeline capacity.
Overall, our inability to maintain satisfactory relationships with the requisite
third parties on acceptable commercial terms, or the failure of such third
parties to maintain the quality of services they provide at a satisfactory
standard, could materially adversely affect our business, results of operations
and financial condition.
THE UNAVAILABILITY OR HIGH COST OF DRILLING RIGS, EQUIPMENT, SUPPLIES,
PERSONNEL AND OILFIELD SERVICES COULD MATERIALLY ADVERSELY AFFECT US.
Either shortages or increases in the cost of drilling rigs, equipment,
supplies or personnel could delay or adversely affect our operations, which
could materially adversely affect our business, financial condition and results
of operations. Drilling activity in the area of our proposed initial activities
is comparatively high. Increased drilling activity could decrease the
availability of rigs and oilfield services. As a further result of the
increased drilling activity, associated costs (including those related to
drilling rigs, equipment, supplies and personnel and the services and products
of other vendors to the industry) could increase as well. These costs may
increase further, and necessary equipment and services may not be available to
us at economical prices.
WE MAY INCUR SUBSTANTIAL IMPAIRMENT WRITEDOWNS IN THE FUTURE.
If and when we are successful in establishing proved oil and gas
properties, we will review such properties in the future for impairment when
circumstances suggest there is a need for such a review. For each property
determined to be impaired, we will recognize an impairment loss equal to the
difference between the carrying value and the fair value of the property on our
balance sheet. Fair value is estimated to be the present value of expected
future net cash flows computed by applying estimated future oil and gas prices
(as determined by management) to the estimated future production of oil and gas
reserves over the economic life of a property. Future cash flows are based upon
an independent engineer's estimate of proved reserves. In addition, other
factors such as probable and possible reserves are taken into consideration when
justified by economic conditions and actual or planned drilling. If oil and gas
prices decrease or if the recoverable reserves on a property are revised
downward, we may be required to record impairment writedowns in the future,
which would result in a negative impact to our financial position.
17
OUR HEDGING DECISIONS MAY IMPACT OUR POTENTIAL GAINS FROM CHANGES IN
COMMODITY PRICES AND MAY RESULT IN LOSSES.
To reduce our exposure to fluctuations in the prices of oil and gas, we may
in the future enter into hedging arrangements with respect to a portion of our
expected production. Hedging arrangements expose us to risk of financial loss
in some circumstances, including the following:
* production is less than expected;
* the other party to the hedging contract defaults on its contract
obligations;
* we could be required to post additional cash to cover margin
requirements, which could materially adversely affect our
liquidity;
* we could be unable to meet additional margin requirements, which
could result in the closing of our positions thereby leading to a
financial loss as well as the possible loss of the anticipated
benefits of the related hedging transactions; and
* there is a change in the expected differential between the underlying
price in the hedging agreement and actual prices received.
These hedging arrangements may limit the benefit we would receive from
increases in the prices for oil and gas. Furthermore, if we choose not to
engage in hedging arrangements in the future, we may be more adversely affected
by changes in oil and gas prices than had we engaged in hedging arrangements.
WE ARE SUBJECT TO COMPLEX LAWS AND REGULATIONS, INCLUDING ENVIRONMENTAL
REGULATIONS, WHICH CAN ADVERSELY AFFECT THE COST, MANNER OR FEASIBILITY OF DOING
BUSINESS.
Development, production and sale of oil and gas are subject to extensive
laws and regulations, including environmental laws and regulations. We may be
required to make large expenditures to comply with environmental and other
governmental regulations. Matters subject to regulation include:
* discharge permits for drilling operations;
* bonds for ownership, development and production of oil and gas
properties;
* reports concerning operations; and
* taxation.
Under these laws and regulations, we could be liable for personal injuries,
property damage, oil spills, discharge of hazardous materials, remediation and
clean-up costs and other environmental damages. Failure to comply with these
laws and regulations also may result in the suspension or termination of our
operations and subject us to administrative, civil and criminal penalties.
Moreover, these laws and regulations could change in ways that substantially
increase our costs. Accordingly, any of these liabilities, penalties,
suspensions, terminations or regulatory changes could materially adversely
affect our financial condition and results of operations.
OUR COMPETITORS MAY HAVE GREATER RESOURCES, WHICH COULD ENABLE THEM TO PAY
A HIGHER PRICE FOR PROPERTIES AND TO BETTER WITHSTAND PERIODS OF LOW MARKET
PRICES FOR OIL AND NATURAL GAS.
The petroleum and natural gas industry is intensely competitive, and we compete
with other companies that have substantially larger financial resources,
operations, staffs and facilities. Many of these companies not only explore for
and produce crude oil and natural gas but also carry on refining operations and
market oil and other products on a regional, national or worldwide basis. Such
companies may be able to pay more for productive oil and natural gas properties
and exploratory prospects or define, evaluate, bid for and purchase a greater
number of properties and prospects than our financial or human resources permit.
In addition, such companies may have a greater ability to continue exploration
activities during periods of low hydrocarbon market prices. Our ability to
acquire additional properties and to discover reserves in the future will be
dependent upon our ability to evaluate and select suitable properties and to
consummate transactions in a highly competitive environment. For more
information regarding the competition to which we will be exposed, see " ITEM 1.
BUSINESS - COMPETITION."
18
RISKS RELATED TO OUR COMMON STOCK
OUR AUTHORIZED PREFERRED STOCK EXPOSES HOLDERS OF OUR COMMON STOCK TO
CERTAIN RISKS.
Our Restated Certificate of Incorporation, as amended, authorizes the
issuance of up to 10,000,000 shares of preferred stock, par value $.01 per
share. The authorized but unissued preferred stock constitutes what is commonly
referred to as "blank check" preferred stock. This type of preferred stock may
be issued by the Board of Directors from time to time on any number of
occasions, without stockholder approval, as one or more separate series of
shares comprised of any number of the authorized but unissued shares of
preferred stock, designated by resolution of the Board of Directors stating the
name and number of shares of each series and setting forth separately for such
series the relative rights, privileges and preferences thereof, including, if
any, the: (i) rate of dividends payable thereon; (ii) price, terms and
conditions of redemption; (iii) voluntary and involuntary liquidation
preferences; (iv) provisions of a sinking fund for redemption or repurchase; (v)
terms of conversion to common stock, including conversion price, and (vi) voting
rights. Such preferred stock may provide our Board of Directors the ability to
hinder or discourage any attempt to gain control of us by a merger, tender offer
at a control premium price, proxy contest or otherwise. Consequently, the
preferred stock could entrench our management. The market price of our common
stock could be depressed to some extent by the existence of the preferred stock.
As of the date of this Form 10, no shares of preferred stock had been issued.
WE HAVE CERTAIN OBLIGATIONS AND THE GENERAL ABILITY TO ISSUE ADDITIONAL
SHARES OF COMMON STOCK IN THE FUTURE, AND SUCH FUTURE ISSUANCES MAY DEPRESS THE
PRICE OF OUR COMMON STOCK.
Warrants to purchase 1,050,001 unregistered shares of common stock had been
issued as of the date of this Form 10. These warrants permit the holders to
purchase shares of common stock at specified prices. These purchase prices may
be less than the then current market price of our common stock. Any shares of
common stock issued pursuant to these warrants would further dilute the
percentage ownership of existing stockholders. The terms on which we could
obtain additional capital during the life of these warrants may be adversely
affected because of such potential dilution. Finally, we may issue additional
shares in the future other in connection with these warrants. There are no
preemptive rights in connection with our common stock. Thus, the percentage
ownership of existing stockholders may be diluted if we issue additional shares
in the future. For issuances of shares and grants of options to consultants,
our Board of Directors will determine the timing and size of the issuances and
grants and the consideration or services required therefor. Our Board of
Directors intends to use its reasonable business judgment to fulfill its
fiduciary obligations to our then existing stockholders in connection with any
such issuance or grant. Nonetheless, future issuances of additional shares
could cause immediate and substantial dilution to the net tangible book value of
shares of common stock issued and outstanding immediately before such
transaction. Any future decrease in the net tangible book value of such issued
and outstanding shares could materially and adversely affect the market value of
the shares.
OUR COMMON STOCK HAS NOT BEEN PUBLICLY TRADED BEFORE.
There has never been any established public market for the trading of our
common stock. Subject to the sponsorship of a market maker, shares of our
common stock will be traded in the over-the-counter market on the OTC Electronic
Bulletin Board after our shares become legally eligible to trade. There can be
no assurance as to the prices at which the shares of our common stock will
trade, if at all. Until shares of our common stock become more broadly held and
orderly markets develop and even thereafter, the prices of our common stock may
fluctuate significantly. Prices for our common stock will be determined in the
marketplace and may be influenced by many factors, including the following:
* The depth and liquidity of the markets for our common stock;
* Investor perception of us and the industry in which we participate;
* General economic and market conditions;
* Responses to quarter-to-quarter variations in operating results;
* Failure to meet securities analysts' estimates;
* Changes in financial estimates by securities analysts;
* Conditions, trends or announcements in the oil and gas industry;
* Announcements of significant acquisitions, strategic alliances, joint
ventures or capital commitments by us or our competitors;
* Additions or departures of key personnel;
* Sales of our common stock;
* Accounting pronouncements or changes in accounting rules that affect
our financial statements; and
* Other factors and events beyond our control.
19
The market price of our common stock could experience significant
fluctuations unrelated to our operating performance. As a result, a stockholder
(due to personal circumstances) may be required to sell such stockholder's
shares of our common stock at a time when our stock price is depressed due to
random fluctuations, possibly based on factors beyond our control.
THE TRADING PRICE OF OUR COMMON STOCK MAY ENTAIL ADDITIONAL REGULATORY
REQUIREMENTS, WHICH MAY NEGATIVELY AFFECT SUCH TRADING PRICE.
The trading price of our common stock may commence below $5.00 per share.
As a result of this price level, trading in our common stock would be subject to
the requirements of certain rules promulgated under the Exchange Act. These
rules require additional disclosure by broker-dealers in connection with any
trades generally involving any non-NASDAQ equity security that has a market
price of less than $5.00 per share, subject to certain exceptions. Such rules
require the delivery, before any penny stock transaction, of a disclosure
schedule explaining the penny stock market and the risks associated therewith,
and impose various sales practice requirements on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). For these types of transactions, the broker-dealer
must determine the suitability of the penny stock for the purchaser and receive
the purchaser's written consent to the transaction before sale. The additional
burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers from effecting transactions in our common stock. As a
consequence, the market liquidity of our common stock could be severely affected
or limited by these regulatory requirements.
BECAUSE OUR BOARD OF DIRECTORS DOES NOT INTEND TO PAY DIVIDENDS ON OUR
COMMON STOCK IN THE FORESEEABLE FUTURE, STOCKHOLDERS MAY HAVE TO SELL THEIR
SHARES OF OUR COMMON STOCK TO REALIZE A RETURN ON THEIR INVESTMENT IN THE
COMPANY.
The holders of our common stock are entitled to receive dividends when, as
and if declared by our Board of Directors out of funds legally available
therefor. To date, we have paid no dividends. Our Board of Directors does not
intend to declare any dividends in the foreseeable future, but instead intends
to retain all earnings, if any, for use in our business operations.
Accordingly, a return on an investment in shares of our common stock may be
realized only through a sale of such shares, if at all.
ITEM 2. FINANCIAL INFORMATION.
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our financial
statements and related notes included elsewhere in this Form 10. In addition to
historical information, the discussion in this report contains forward-looking
statements that involve risks and uncertainties. Actual results could differ
materially from those anticipated by these forward-looking statements due to
factors including, but not limited to, those factors set forth under "ITEM 1A.
Risk Factors" and elsewhere in this Form 10.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion of our financial condition and results of operations is
based on the information reported in our financial statements. The preparation
of our financial statements requires us to make assumptions and estimates that
affect the reported amounts of assets, liabilities, revenues and expenses as
well as the disclosure of contingent assets and liabilities as of the date of
our financial statements. We base our assumptions and estimates on historical
experience and other sources that we believe to be reasonable at the time.
Actual results may vary from our estimates due to changes in circumstances,
weather, politics, global economics, mechanical problems, general business
conditions and other factors. Our significant accounting policies are detailed
in Note 3 to our financial statements included in this Form 10. We have outlined
below certain of these policies that have particular importance to the reporting
of our financial condition and results of operations and that require the
application of significant judgment by our management.
20
KEY DEFINITIONS
Proved reserves, as defined by the SEC, are the estimated quantities of
crude oil, condensate, natural gas and natural gas liquids that geological and
engineering data demonstrate with reasonable certainty are recoverable in future
years from known reservoirs under existing economic and operating conditions.
Valuations include consideration of changes in existing prices provided only by
contractual arrangements, but not on escalations based upon future conditions.
Prices do not include the effect of derivative instruments, if any, entered into
by us.
Proved developed reserves are those reserves expected to be recovered
through existing equipment and operating methods. Additional oil and gas volumes
expected to be obtained through the application of fluid injection or other
improved recovery techniques for supplementing the natural forces and mechanisms
of primary recovery are included as proved developed reserves only after testing
of a pilot project or after the operation of an installed program has confirmed
through production response that increased recovery will be achieved.
Proved undeveloped reserves are those reserves that are expected to be
recovered from new wells on non-drilled acreage, or from existing wells where a
relatively major expenditure is required for re-completion. Reserves on
non-drilled acreage are limited to those drilling units offsetting productive
units that are reasonably certain of production when drilled. Proved reserves
for other non-drilled units are claimed only where it can be demonstrated with
certainty that there is continuity of production from the existing productive
formation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
OIL AND GAS PROPERTIES
The Company accounts for its oil and natural gas producing activities using
the full cost method of accounting as prescribed by the United States Securities
and Exchange Commission (SEC). Accordingly, all costs incurred in the
acquisition, exploration, and development of proved oil and natural gas
properties, including the costs of abandoned properties, dry holes, geophysical
costs, and annual lease rentals are capitalized. All general and administrative
corporate costs unrelated to drilling activities are expensed as incurred. Sales
or other dispositions of oil and natural gas properties are accounted for as
adjustments to capitalized costs, with no gain or loss recorded unless the ratio
of cost to proved reserves would significantly change. Depletion of evaluated
oil and natural gas properties is computed on the units of production method
based on proved reserves. The net capitalized costs of proved oil and natural
gas properties are subject to a full cost ceiling limitation in which the costs
are not allowed to exceed their related estimated future net revenues discounted
at 10%, net of tax considerations. Costs associated with unevaluated properties
are excluded from the full cost pool until the Company has made a determination
as to the existence of proved reserves. The Company reviews its unevaluated
properties at the end of each quarter to determine whether the costs incurred
should be transferred to the full cost pool and thereby subject to amortization
and ceiling test.
ASSET RETIREMENT OBLIGATIONS
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS 143). SFAS 143 requires that the fair value of an
asset retirement cost, and corresponding liability, should be recorded as part
of the cost of the related long-lived asset and subsequently allocated to
expense using a systematic and rational method.
REVENUE RECOGNITION
The Company recognizes oil and natural gas revenue under the sales method
of accounting for its interests in producing wells as oil and natural gas is
produced and sold from those wells.
21
PROVISIONS FOR TAXES
The Company has adopted SFAS No. 109 "Accounting for Income Taxes".
Pursuant to this pronouncement, income taxes are accounted for using an asset
and liability approach. SFAS No. 109 requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of temporary
differences between the financial statements and tax bases of assets and
liabilities at the applicable tax rates. A valuation allowance is utilized when
it is more likely than not, that some portion of, or all of the deferred tax
assets will not be realized. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of enactment.
RESULTS OF OPERATION
The Company had minimal operations in fiscal 2007 consisting of the
activation of the Company's oil and gas exploration and production activities.
In fiscal 2006, the Company's activities were even more minimal as the Company
merely prepared to activate its exploration and production activities. The
Company had no revenues in either fiscal year 2007 or 2006. In 2007, the
Company's only expenses consisted of $41,864 in general and administrative
expenses, $64,383 in impairment expense, and $14,139 in interest expense,
resulting in a $120,386 loss for 2007, or $.02 per share. In 2006, the
Company's only expenses consisted of $4,028 in general and administrative
expenses and $500 in interest expense, resulting in a $4,528 loss for 2006.
Because of the Company's minimal operations in fiscal 2007 and fiscal 2006, the
Company believes that the results in such years are not necessarily indicative
of the results that the Company will experience in the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company has already raised "seed" capital in the form of a loan in the
amount of approximately $525,000. The party who made this loan was CEI
Ventures, LLC, an entity owned by Kent E. Lovelace, Jr. (a director and an
officer of the Company), the F.E.I. Energy Trust (a significant Company
stockholder), and WRLP. The bulk of the proceeds of this loan went to fund the
Company's obligations under the Enexco Agreement. This loan is secured by all
of the Company's assets, including the Company's oil and gas interests briefly
described above and more extensively described herein as well as all future oil
and gas interests. Interest accrues on this loan at a rate of 10% per annum.
This loan can become due and payable at any time upon the demand of the lender.
In consideration of making the loan, the Company granted warrants to the owners
of CEI Ventures, LLC to purchase up to an aggregate of 1,050,001 shares of the
Company's common stock for a per-share exercise price of $.50. These warrants
have a term of and are exercisable for five years. In connection with this
loan, the Company agreed to register all shares separately owned by the owners
of CEI Ventures, LLC or to be acquired pursuant to derivative securities,
including the shares to be acquired upon exercise of the warrants issued in
connection with the loans described above. In connection with this loan, the
Company entered into a "piggy back" registration rights agreements with the
owners of CEI Ventures, LLC, whereby each of them will have the right to include
in any registration with the U.S. Securities and Exchange Commission any and all
shares owned by them or to be acquired pursuant to derivative securities,
including the shares to be acquired upon exercise of the warrants issued in
connection with the loan described above.
Currently, the Company can finance only the limited exploration activity by
the Enexco Agreement described above. The Company will have to obtain
additional financing to pursue additional opportunities. At the present time,
the Company is currently trying to determine the scope of the business
activities that it wishes to pursue. The amount of capital that the Company
will need will depend on the scope of the business activities that the Company
ultimately decides to pursue, which is uncertain at this time. However, for the
22
Company to pursue business activities much greater than those related to the
Enexco Agreement, the Company would be required to undertake certain financing
activities. The Company currently does not have any binding commitments for, or
readily available sources of, additional financing. The Company cannot assure
anyone that additional financing will be available to it when needed or, if
available, that it can be obtained on commercially reasonably terms. If the
Company does not obtain additional financing it will not be able to expand the
scope of its business or even stay in business for that matter. If the Company
is able to obtain additional funds, the Company may have to reduce the scope its
business activities. If the Company does not obtain additional financing, the
Company may be constrained to attempt to sell its oil and gas interests that it
has accumulated. However, the Company cannot assure anyone that the Company
will be able to find interested buyers or that the funds received from any such
sale would be adequate to fund its activities. Under certain circumstances, the
Company could be forced to cease its operations and liquidate its remaining
assets, if any.
Production from the Company's exploration and drilling efforts would
provide the Company with cash flow, and a proven reserve would increase the
value of the Company's leased rights and should enable the Company to obtain
bank financing (after the wells have produced for a period of time to satisfy
the related lender).
To conserve on the Company's capital requirements, the Company intends
occasionally to seek other industry investors who are willing to participate in
the Company's exploration and production activities. The Company expects to
retain a promotional interest in these prospects, but generally the Company will
have to finance a portion (and sometimes a significant portion) of the
acquisition and drilling costs. Also, the Company may acquire interests in
properties by issuing shares of its common stock.
ITEM 3. PROPERTIES.
For a description of the Company's current assets, see "ITEM 1. BUSINESS -
LOAN TO ENEXCO" and "ITEM 1. BUSINESS - FACILITIES."
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of March 3, 2008 information regarding
the beneficial ownership of Common Stock (i) by each person who is known by the
Company to own beneficially more than 5% of the outstanding Common Stock; (ii)
by each director; and (iii) by all directors and officers as a group. The
address for all directors and officers of the Company is Colony Energy, Inc.,
2100 West Loop South, Suite 900, Houston, Texas 77027.
Name and Address of Beneficial Ownership (1)
Beneficial Owner Number Percent
----------------- --------------------------
Kent E. Lovelace, Jr. 2,158,756 (2) 32.3%
Westside Resources, L.P. 1,286,684 (3) 18.9%
Jimmy D. Wright 1,286,684 (4) 18.9%
All directors and officers 3,445,440 (5) 48.3%
as a group (two persons)
F.E.I. Energy Trust 2,004,561 (6) 30.0%
c/o Kenneth J. Vacovec
255 Washington St. Suite 340
Newton, MA 02458
Kenneth J. Vacovec 1,889,883 (7) 30.0%
255 Washington St. Suite 340
Newton, MA 02458
Douglas C. Atnipp 1,700,000 (8) 26.7%
1000 Louisiana, Suite 1800
Houston, Texas 77002
Jordan Marie Wright 2007 Investment Trust 850,000 (9) 13.3%
c/o Douglas C. Atnipp
1000 Louisiana, Suite 1800
Houston, Texas 77002
Jacob Earl Wright 2007 Investment Trust 850,000 (9) 13.3%
c/o Douglas C. Atnipp
1000 Louisiana, Suite 1800
Houston, Texas 77002
23
(1) Includes shares beneficially owned pursuant to options and warrants
exercisable within 60 days.
(2) Includes 1,842,784 shares held directly and 315,972 shares that may be
purchased pursuant to warrants that are currently exercisable.
(3) Includes 850,000 shares held directly and 436,684 shares that may be
purchased pursuant to warrants that are currently exercisable. Jimmy D. Wright
has sole voting power and sole investment power over these shares. These shares
are also included in the table in the figure of shares beneficially owned by Mr.
Wright.
(4) All of these shares are held by Westside Resources, L.P., an entity over
which Mr. Wright has complete control. Accordingly, Mr. Wright has sole voting
power and sole investment power over these shares. These shares are also
included in the table in the figure of shares beneficially owned by Westside
Resources, L.P.
(5) Includes 1,842,784 shares held directly, 850,000 shares held by a
related entity, and 752,656 shares that may be purchased pursuant to warrants
that are currently exercisable.
(6) Includes 1,707,216 shares held directly and 297,345 shares that may be
purchased pursuant to warrants that are currently exercisable. Kenneth J.
Vacovec, as trustee of this trust, has sole voting power and sole investment
power over these shares. These shares are also included in the table in the
figure of shares beneficially owned by Mr. Vacovec.
(7) The F.E.I. Energy Trust, a trust for which Mr. Vacovec serves as
trustee, holds all of these shares. Accordingly, Mr. Vacovec has sole voting
power and sole investment power over these shares. These shares are also
included in the table in the figure of shares beneficially owned by the F.E.I.
Energy Trust.
(8) Either the Jordan Marie Wright 2007 Investment Trust or the Jacob Earl
Wright 2007 Investment Trust, trusts for which Mr. Atnipp serves as trustee,
holds all of these shares. Accordingly, Mr. Atnipp has sole voting power and
sole investment power over these shares. These shares are also included in the
table in the figures of shares beneficially owned separately by the Jordan Marie
Wright 2007 Investment Trust and the Jacob Earl Wright 2007 Investment Trust.
(9) Douglas C. Atnipp, as trustee of this trust, has sole voting power and
sole investment power over these shares. These shares are also included in the
table in the figure of shares beneficially owned by Mr. Atnipp.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
The directors and executive officers of the Company are as follows:
Name Age Positions
Jimmy D. Wright 48 Chairman of the Board &
Treasurer
Kent E. Lovelace, Jr. 71 Director, Chief Executive
Officer, President, Chief
Financial Officer & Secretary
JIMMY D. WRIGHT - Chairman of the Board & Treasurer. Mr. Wright has been a
Director, Chairman of the Board and Treasurer of the Company since February
2007. From February 2004 through April 2007, he served in various executive
capacities (including Chief Executive Officer, President, Chief Operating
Officer and Chief Financial Officer) of Westside Energy Corporation, a publicly
traded oil and gas exploration and production company. From February 1997 to
June 2001, Mr. Wright held various senior management positions with Midcoast
Energy Resources Inc., which merged into Enbridge, Inc. While at Enbridge, Mr.
Wright became Chief Executive Officer of Midcoast Canada Operating Company, a
publicly traded international subsidiary of Enbridge Energy Partners, LP. From
2001 to 2002, he was Senior Vice President and subsequently President of
EnergyClear Operating Corporation, the operator of EnergyClear Corporation, then
an over-the-counter energy clearinghouse. Mr. Wright received a B.S. in
mechanical engineering from the University of Memphis.
24
KENT E. LOVELACE, JR. - Director, Chief Executive Officer, President, Chief
Financial Officer & Secretary. Mr. Lovelace has been a Director, Chief
Executive Officer, President and Secretary of the Company since March 2002. He
also served as Chairman of the Board and Treasurer of the Company until he
relinquished these offices in favor of Mr. Wright in February 2007. Since 1975,
Mr. Lovelace has served as President and Chief Executive Officer of Equitrust
Mortgage Corporation, formerly Hancock Mortgage Corporation.
The authorized number of directors of the Company is presently fixed at
two. A director serves for a term of one year that expires at the following
annual stockholders' meeting. Each officer serves at the pleasure of the Board
of Directors and until a successor has been qualified and appointed. Currently,
the sole director of the Company receives no remuneration for his services as
such.
There are no family relationships, or other arrangements or understandings
between or among any of the directors, executive officers or other person
pursuant to which such person was selected to serve as a director or officer.
ITEM 6. EXECUTIVE COMPENSATION.
As of the date of this General Form for Registration of Securities on Form
10, the Company had paid no compensation to any officer or director of the
Company during the Company's past three fiscal years. In addition, the Company
has not awarded any equity or option grants, or established any retirement,
pension, profit sharing, stock option or insurance programs or other similar
programs for the benefit of its officers, directors or employees. The Company
does not expect to pay any remuneration to its officers or directors (other than
expense reimbursements) until such time as the Company has completed a
significant financing that would provide sufficient funds for such remuneration
while also permitting the Company to expand the scope of its business. If such
a financing is completed, the Company expects that it will start paying to its
officers and outside directors salaries and fees at market levels, consistent
with any restrictions on salaries and fees imposed by the investors providing
the additional funds.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company raised "seed" capital in the form of several loans from related
parties, all but one of which has been repaid. The first of these total an
aggregate of $12,500, and has been repaid in full. More significantly, on
August 16, 2007 the Company borrowed $350,000 from Westside Resources, L.P., an
entity of which Jimmy D. Wright (a director and an officer of the Company) is
sole owner and which is referred to hereinafter as "WRLP"). This loan was
undertaken to provide funds to enter into the Company's agreement with Enexco,
Inc., accrued interest at a rate of 10% per annum, was outstanding for one
month, and has been repaid in full.
Currently, the only outstanding Company loan is in the amount of
approximately $525,000 and was provided by CEI Ventures, LLC, an entity owned by
Kent E. Lovelace, Jr. (a director and an officer of the Company), the F.E.I.
Energy Trust (a significant Company stockholder), and WRLP. This loan is
secured by all of the Company's assets, including the Company's oil and gas
interests received in connection with the Enexco loan, as well as all future oil
and gas interests. Interest accrues on this loan at a rate of 10% per annum.
This loan can become due and payable at any time upon the demand of the lender.
In consideration of making the loan, the Company granted warrants to the owners
of CEI Ventures, LLC to purchase up to an aggregate of 1,050,001 shares of the
Company's common stock for a per-share exercise price of $.50. These warrants
have a term of and are exercisable for five years. In connection with this
loan, the Company agreed to register all shares separately owned by the owners
of CEI Ventures, LLC or to be acquired pursuant to derivative securities,
including the shares to be acquired upon exercise of the warrants issued in
connection with the loans described above.
25
ITEM 8. LEGAL PROCEEDINGS.
The Company is not now involved in any legal proceedings. There can be no
assurance, however, that the Company will not in the future be involved in
litigation incidental to the conduct of its business.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
GENERAL.
The Company's common stock has never been publicly traded. As of March 3,
2008, the Company had ten holders of record. Subject to the sponsorship of a
market maker, shares of our common stock will be traded in the over-the-counter
market on the OTC Electronic Bulletin Board after our shares become legally
eligible to trade. The Company has never paid cash dividends, and has no
intentions of paying cash dividends in the foreseeable future.
OUTSTANDING WARRANTS.
The Company has issued and outstanding warrants to purchase an aggregate of
1,050,001 unregistered shares of common stock as of the date of this Form 10 at
a per-share purchase price of $.50. These warrants have a term of and are
exercisable for five years.
SHARES ELIGIBLE FOR FUTURE SALE.
Sales of a substantial amount of Common Stock in the public market, or the
perception that such sales may occur, could adversely affect the market price of
the Common Stock prevailing from time to time in the public market and could
impair the Company's ability to raise additional capital through the sale of its
equity securities in the future. As of March 3, 2008, the Company has issued
and outstanding 6,375,000 shares of Common Stock. For purposes of the remainder
of this section, "restricted" shares are shares acquired from the Company or an
"affiliate" other than in a public offering, while "control" shares are those
held by affiliates of the Company regardless as to how they were acquired. An
"affiliate" is a person who controls, is controlled by, or is under common
control with the Company.
"Restricted" and "control" shares must generally be sold in accordance with
the requirements of Rule 144 under the Securities Act of 1933 (the "Act").
Effective February 14, 2008, the Commission has revised Rule 144. In general,
under Rule 144 as revised, six months must have elapsed since the later of the
date of acquisition of restricted shares from the Company or any affiliate of
the Company. No time needs to have lapsed in order to sell control shares.
After the six-month holding period has run, holders who are not affiliates of
the Company may sell all or any portion of their shares so long as the Company
is current in its SEC filings, and after the running of a one-year holding
period, they may sell regardless of whether or not the Company is current in its
SEC filings. After the six-month holding period has run (in the case of
restricted shares) or at any time (in the case of control shares), holders who
are affiliates of the Company are entitled to sell within any three-month period
such number of restricted or control shares that does not exceed the greater of
1% of the then outstanding shares or (in certain cases not currently applicable
to the Company and if greater) the average weekly trading volume of shares
during the four calendar weeks preceding the date on which notice of the sale is
filed with the Commission. Sales by affiliates under Rule 144 are also subject
to certain restrictions on the manner of selling, notice requirements and the
availability of current public information about the Company. Notwithstanding
the preceding, because the Company was at one time a "shell" company, the
Company's currently outstanding shares must be held for a period of one year
after the filing of this Form 10 before they may be sold pursuant to Rule 144.
26
REGISTRATION RIGHTS.
In connection with the loan transaction pursuant to which the Company
issued its 1,050,001 outstanding warrants, the Company entered into a "piggy
back" registration rights agreements with each of warrant holders, whereby each
of them will have the right to include in any registration with the U.S.
Securities and Exchange Commission any and all shares owned by them or to be
acquired pursuant to derivative securities, including the shares to be acquired
upon exercise of the warrants issued in connection with the loan transaction as
well as all previously owned shares.
PENNY STOCK RULES.
Effective August 11, 1993, the Securities and Exchange Commission adopted
Rule 15g-9, which established the definition of a "penny stock," for purposes
relevant to the Company, as any equity security that has a market price of less
than $5.00 per share or with an exercise price of less than $5.00 per share,
subject to certain exceptions. For any transaction involving a penny stock,
unless exempt, the rules require: (i) that a broker or dealer approve a person's
account for transactions in penny stocks; and (ii) the broker or dealer receive
from the investor a written agreement to the transaction, setting forth the
identity and quantity of the penny stock to be purchased. In order to approve a
person's account for transactions in penny stocks, the broker or dealer must (i)
obtain financial information and investment experience and objectives of the
person; and (ii) make a reasonable determination that the transactions in penny
stocks are suitable for that person and that person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks. The broker or dealer must also deliver, prior to
any transaction in a penny stock, a disclosure schedule prepared by the
Commission relating to the penny stock market, which, in highlight form, (i)
sets forth the basis on which the broker or dealer made the suitability
determination; and (ii) that the broker or dealer received a signed, written
agreement from the investor prior to the transaction. Disclosure also has to be
made about the risks of investing in penny stocks in both public offerings and
in secondary trading, and about commissions payable to both the broker-dealer
and the registered representative, current quotations for the securities and the
rights and remedies available to an investor in cases of fraud in penny stock
transactions. Finally, monthly statements have to be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stocks.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
During September and November 2007, in consideration of a loan in the
approximate aggregate amount of $525,000 from CEI Ventures, LLC ("CEI"), the
Company issued (without any further consideration) warrants to purchase up to
1,050,001 shares of the Company's common stock at a per share price of $.50.
These warrants were issued to CEI's equity owners, who included an entity owned
by Mr. Kent E. Lovelace, Jr. (a Company officer, director and significant
stockholder), the F.E.I. Energy Trust (a significant Company stockholder), and
Westside Resources, L.P. (an entity of which Jimmy D. Wright, a Company director
and significant stockholder, is sole owner, and which is referred to hereinafter
as "WRLP"). The issuances of the warrants are claimed to be exempt, and the
issuances of the common stock underlying the warrants will be claimed to be
exempt, pursuant to Sections 4(6) of, and Rule 506 of Regulation D under, the
Act.
In May 2007, we sold to WRLP 1,275,000 shares of our common stock for these
shares' par value of $.001 per share. Because Mr. Wright, the controlling
person of WRLP, was a director and an officer of the Company at the time of this
sale, the sale of these shares is claimed to be exempt, pursuant to Section 4(2)
of the Securities Act of 1933.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
Pursuant to this Form 10, the Company is registering its class of common
shares. This section discusses both the common and preferred classes of the
Company's capital stock.
27
CAPITAL STOCK.
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, par value $.001 per share, and 10,000,000 shares of Preferred
Stock, par value $.01 per share.
COMMON STOCK.
The authorized Common Stock of the Company consists of 50,000,000 shares,
par value $.001 per share. As March 3, 2008, 6,375,000 shares of Common Stock
were outstanding. All of the shares of Common Stock are validly issued, fully
paid and non-assessable. Holders of record of Common Stock will be entitled to
receive dividends when and if declared by the Board of Directors out of funds of
the Company legally available therefor. In the event of any liquidation,
dissolution or winding up of the affairs of the Company, whether voluntary or
otherwise, after payment of provision for payment of the debts and other
liabilities of the Company, including the liquidation preference of all classes
of preferred stock of the Company, each holder of Common Stock will be entitled
to receive his pro rata portion of the remaining net assets of the Company, if
any. Each share of Common stock has one vote, and there are no preemptive,
subscription, conversion or redemption rights. Shares of Common Stock do not
have cumulative voting rights, which means that the holders of a majority of the
shares voting for the election of directors can elect all of the directors.
PREFERRED STOCK.
The Company's Restated Certificate of Incorporation authorizes the issuance
of up to 10,000,000 shares of the Company's preferred stock, par value $.01 per
share (the "Preferred Stock"). As of March 3, 2008, no shares of Preferred
Stock were outstanding. The Preferred Stock constitutes what is commonly
referred to as "blank check" preferred stock. "Blank check" preferred stock
allows the Board of Directors, from time to time, to divide the Preferred Stock
into series, to designate each series, to issue shares of any series, and to fix
and determine separately for each series any one or more of the following
relative rights and preferences: (i) the rate of dividends; (ii) the price at
and the terms and conditions on which shares may be redeemed; (iii) the amount
payable upon shares in the event of involuntary liquidation; (iv) the amount
payable upon shares in the event of voluntary liquidation; (v) sinking fund
provisions for the redemption or purchase of shares; (vi) the terms and
conditions pursuant to which shares may be converted if the shares of any series
are issued with the privilege of conversion; and (vii) voting rights. Dividends
on shares of Preferred Stock, when and as declared by the Board of Directors out
of any funds legally available therefor, may be cumulative and may have a
preference over Common Stock as to the payment of such dividends. The
provisions of a particular series, as designated by the Board of Directors, may
include restrictions on the ability of the Company to purchase shares of Common
Stock or to redeem a particular series of Preferred Stock. Depending upon the
voting rights granted to any series of Preferred Stock, issuance thereof could
result in a reduction in the power of the holders of Common Stock. In the event
of any dissolution, liquidation or winding up of the Company, whether voluntary
or involuntary, the holders of each series of the then outstanding Preferred
Stock may be entitled to receive, prior to the distribution of any assets or
funds to the holders of the Common Stock, a liquidation preference established
by the Board of Directors, together with all accumulated and unpaid dividends.
Depending upon the consideration paid for Preferred Stock, the liquidation
preference of Preferred Stock and other matters, the issuance of Preferred Stock
could result in a reduction in the assets available for distribution to the
holders of the Common Stock in the event of liquidation of the Company. Holders
of Preferred Stock will not have preemptive rights to acquire any additional
securities issued by the Company. Once a series has been designated and shares
of the series are outstanding, the rights of holders of that series may not be
modified adversely except by a vote of at least a majority of the outstanding
shares constituting such series.
One of the effects of the existence of authorized but unissued shares of
Common Stock or Preferred Stock may be to enable the Board of Directors of the
Company to render it more difficult or to discourage an attempt to obtain
control of the Company by means of a merger, tender offer at a control premium
price, proxy contest or otherwise and thereby protect the continuity of or
entrench the Company's management, which concomitantly may have a potentially
adverse effect on the market price of the Common Stock. If in the due exercise
of its fiduciary obligations, for example, the Board of Directors were to
determine that a takeover proposal were not in the best interests of the
Company, such shares could be issued by he Board of Directors without
stockholder approval in one or more private placements or other transactions
that might prevent or render more difficult or make more costly the completion
of any attempted takeover transaction by diluting voting or other rights of the
proposed acquirer or insurgent stockholder group, by creating a substantial
voting block in institutional or other hands that might support the position of
the incumbent Board of Directors, by effecting an acquisition that might
complicate or preclude the takeover, or otherwise.
28
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law sets forth the
conditions and limitations governing the indemnification of officers, directors
and other persons. This section permits a corporation to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative by reason of the fact that the person is or was
a director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding. The required conditions are that the person
acted in good faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe the person's
conduct was unlawful, provided; however, that, with respect to a suit by or in
the right of the corporation, no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper. The determination as to whether a person seeking
indemnification has met the required standard of conduct must be made (1) by a
majority vote of the directors who are not parties to such action, suit or
proceeding, even though less than a quorum, or (2) by a committee of such
directors designated by majority vote of such directors, even though less than a
quorum, or (3) if there are no such directors, or if such directors so direct,
by independent legal counsel in a written opinion, or (4) by the stockholders.
The Company's Certificate of Incorporation and Bylaws require the Company to
indemnify the Company's directors and officers to the fullest extent authorized
by the Delaware General Corporation Law or any other applicable law in effect if
the required conditions are met. Moreover, Section 145 provides for mandatory
indemnification of a present or former director or officer of a corporation who
has been successful on the merits or otherwise in defense of any action, suit,
proceeding, claim, issue or matter against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection therewith.
Section 145 provides that expenses (including attorneys' fees) incurred by
an officer or director in defending any civil, criminal, administrative or
investigative action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that such person is not entitled to
be indemnified by the corporation as authorized in this section. Both the
Company's Certificate of Incorporation and By-laws require such expenses to be
so advanced. Each of Section 145 and the Company's Certificate of Incorporation
and Bylaws provides that the indemnification and advancement of expenses
provided by, or granted pursuant to, it shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in such person's
official capacity and as to action in another capacity while holding such
office. Section 145 provides that a corporation has the power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against such person and incurred by such person in any such capacity,
or arising out of such person's status as such, whether or not the corporation
would have the power to indemnify such person against such liability under this
section. The Company's By-laws contain a provision to a similar effect.
The Company's Certificate of Incorporation limits (to the fullest extent
permitted by the General Corporation Law of Delaware) the personal liability of
a director to the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director.
29
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
An index of the Financial Statements of the Company appears in Item 15
hereof. The report of Company's Independent Auditors appears at Page F-2 hereof,
and the Financial Statements and related footnotes of the Company appear at
Page F-2 through F-9 hereof
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) The following financial statements and related items are filed herewith:
Independent Auditor's Report F-1
Balance Sheets as of December 31, 2007
and December 31, 2006 F-2
Statements of Operations for the years ended
December 31, 2007 and December 31, 2006 F-3
Statements of Stockholders' Deficit for the
years ended December 31, 2007 and December 31, 2006 F-4
Statements of Cash Flows for years ended December
31, 2007 and December 31, 2006 F-6
Notes to Financial Statements F-7
(b) The following Exhibits are filed herewith:
EXHIBIT NO. DESCRIPTION
3.01 First Amended and Restated Certificate of Incorporation of the
Company
3.02 Bylaws of the Company
4.01 Specimen Common Stock Certificate
10.01 Agreement by and between the Company and Enexco, Inc. ("Enexco")
10.02 Promissory Note made payable by Enexco to the order of the
Company in an unspecified original principal amount
10.03 Deed of Trust, Assignment of Proceeds of Production, Security
Agreement and Financing Statement executed by Enexco in favor
of the Company
10.04 Promissory Note made payable by the Company to the order of
Westside Resources, L.P. ("WRLP") in the original principal amount
of $350,000.00
10.05 Promissory Note made payable by the Company to the order of CEI
Ventures, LLC ("CEI") in the original principal amount of
$322,531.73
10.06 Security Agreement executed by the Company in favor of the CEI
10.07 Warrant to Purchase the Company's common stock issued in the name
of WRLP
10.08 Warrant to Purchase the Company's common stock issued in the name
of Kent E. Lovelace, Jr.
10.09 Warrant to Purchase the Company's common stock issued in the name
of the F.E.I. Energy Trust
10.10 Form of Registration Rights Agreement entered into with each of
WRLP, Mr. Lovelace, and the F.E.I. Energy Trust
10.11 Promissory Note made payable by the Company to the order of CEI
in the original principal amount of $202,468.26
10.12 Warrant to Purchase the Company's common stock issued in the name
of WRLP
10.13 Warrant to Purchase the Company's common stock issued in the name
of Kent E. Lovelace, Jr.
10.14 Warrant to Purchase the Company's common stock issued in the name
of the F.E.I. Energy Trust
30
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Act of 1934,
the registrant has caused this Registration Statement to be signed by the
undersigned, thereunto duly authorized.
March 3, 2008 COLONY ENERGY, INC.
By: /s/ Kent E. Lovelace, Jr.
-----------------------------
Kent E. Lovelace, Jr.,
President
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Colony Energy, Inc.
(An exploration stage company)
Houston, Texas
We have audited the accompanying balance sheets of Colony Energy, Inc. (the
"Company") (an exploration stage company), as of December 31, 2007 and 2006 and
the related statements of operations, cash flows and changes in stockholders'
deficit for the years then ended, and for the period from June 20, 2000
(inception) to December 31, 2007. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2007 and 2006, and the results of its operations and its cash flows for the
periods described above in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered a loss from operations, which
raises substantial doubt about its ability to continue as a going concern.
Management's plans regarding those matters also are described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Malone & Bailey, PC
www.malone-bailey.com
Houston, Texas
March 5, 2008
F-1
Colony Energy, Inc.
(An Exploration Stage Company)
Consolidated Balance Sheets
December 31, 2007 December 31, 2006
------------------ ------------------
ASSETS
Current Assets
Cash $ 136,168 $ 972
Prepaid expenses 1,470 -
---------------------------------
Total Current Assets 137,638 972
OIL AND GAS PROPERTIES, full cost method
Unevaluated properties - Net of
Impairment Expense 277,383 -
---------------------------------
TOTAL ASSETS $ 415,021 $ 972
=================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accrued interest payable $ 6,767 $ 732
Accounts Payable 6,532 -
---------------------------------
Total Current Liabilities 13,299 732
Notes payable - related parties 525,000 5,000
---------------------------------
Total Liabilities 538,299 5,732
STOCKHOLDERS' DEFICIT
Preferred stock, $0.01 par value,
10,000,000 shares authorized, none
outstanding - -
Common stock, 50,000,000 common shares
authorized with a par value of
$0.001, 6,375,000 and 5,100,000
common shares issued and outstanding
respectively 6,375 5,100
Subscription receivable (9,000) (9,000)
Additional paid-in capital 5,693 5,100
Deficit accumulated during the exploration
stage (126,346) (5,960)
-------------------------------
Total Stockholders' Deficit (123,278) (4,760)
-------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 415,021 $ 972
===============================
See accompanying notes to financial statements
F-2
Colony Energy, Inc.
( An Exploration Stage Company)
Consolidated Statements of Expenses
July 20, 2000
(Inception)
Years Ended through
December 31, December 31, December 31
2007 2006 2007
OPERATING EXPENSES:
General and administrative $ 41,864 $ 4,028 $ 47,092
Impairment of unevaluated
oil and gas properties 64,383 - 64,383
------------------------------------------
Total Operating Expenses 106,247 4,028 111,475
------------------------------------------
LOSS FROM OPERATIONS 106,247 4,028 111,475
------------------------------------------
OTHER EXPENSE
Interest expense 14,139 500 14,871
------------------------------------------
Total Other Expenses 14,139 500 14,871
------------------------------------------
NET LOSS $ 120,386 $ 4,528 $ 126,346
==========================================
Net basic and diluted per
common share $ (0.02) $ (0.00)
Weighted average shares
outstanding - basic and diluted 5,896,438 5,100,000
==========================
See accompanying notes to financial statements
F-3
Colony Energy, Inc.
(An Exploration Stage Company)
Consolidated Statement of Stockholders' Deficit
Period From July 20, 2000 (Inception) Through December 31, 2007
Additional
Preferred Stock Common Stock Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------- ---------
Balance, July 20, 2000 - - - - -
Common stock issued for
cash - - 5,000,000 5,000 5,000
Common stock issued for
services - - 100,000 100
Net loss for the period
from July 20, 2000
(Inception) to December
31, 2005 - - - - -
-----------------------------------------------------
Balance, December 31, 2005 - - 5,100,000 $ 5,100 $ 5,100
-----------------------------------------------------
Net loss - - - - -
-----------------------------------------------------
Balance, December 31, 2006 - - 5,100,000 5,100 5,100
-----------------------------------------------------
Common Stock issued for
cash at $0.001 per share - - 1,275,000 1,275 -
Warrants issued at $0.50
share - - - - 593
Net loss - - - - -
-----------------------------------------------------
Balance, December 31, 2007 - - 6,375,000 $ 6,375 $ 5,693
=====================================================
See accompanying notes to financial statements
F-4
Colony Energy, Inc.
(An Exploration Stage Company)
Consolidated Statement of Stockholders' Deficit (continued)
Period From July 20, 2000 (Inception) Through December 31, 2007
Deficit
Accumulated
During
Subscription Exploration
Receivable Stage Total
----------- ------------ ---------
Balance, July 20, 2000 - - -
Common stock issued for
cash (9,000) - 1,000
Common stock issued for
services - - 200
Net loss for the period
from July 20, 2000
(Inception) to December
31, 2005 - (1,432) (1,432)
------------------------------------------
Balance, December 31, 2005 $ (9,000) $ (1,432) $ (232)
------------------------------------------
Net loss - (4,528) (4,528)
------------------------------------------
Balance, December 31, 2006 (9,000) (5,960) (4,760)
------------------------------------------
Common Stock issued for
cash at $0.001 per share - - 1,275
Warrants issued at $0.50
share - - 593
Net loss - (120,386) (120,386)
-----------------------------------------
Balance, December 31, 2007 $ (9,000) $ (126,346) $ (123,278)
=========================================
See accompanying notes to financial statements
F-5
Colony Energy, Inc.
(An Exploration Stage Company)
Consolidated Statements of Cash Flows
July 20, 2000
Years Ended (Inception)
December 31 December 31 through
2007 2006 December 31, 2007
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net loss $ (120,386) $ (4,528) $ (126,346)
Adjustments to reconcile net loss
to cash used in operating
activities:
Change in:
Warrants issued for
compensation 593 - 593
Stock compensation
expense - - 200
Impairment of unevaluated
oil and gas properties 64,383 - 64,383
Changes in assets and
liabilities:
Prepaid expenses (1,470) - (1,470)
Accounts payable and
accrued liabilities 6,035 5,500 6,967
-------------------------------------------
Net Cash provided by (used in)
Operating Activities (50,845) 972 (55,673)
-------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Purchase of oil and gas property (335,234) - (335,234)
------------------------------------------
Net Cash Used in Investing
Activities (335,234) - (335,234)
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Proceeds from the sale of
common stock 1,275 - 2,275
Proceeds of note payable 982,500 - 987,500
Repayment of note payable (462,500) - (462,500)
------------------------------------------
Net cash Provided by
Financing Activities 521,275 - 527,275
------------------------------------------
NET INCREASE IN CASH 135,196 972 136,368
CASH AT BEGINNING OF PERIOD 972 - -
------------------------------------------
CASH AT END OF PERIOD $ 136,168 $ 972 $ 136,368
==========================================
Supplemental cash flow Disclosures
Interest Paid $ 8,104 $ - $ -
Income taxes Paid $ - $ - $ -
==========================================
See accompanying summary of
accounting policies and notes to financial statements
F-6
COLONY ENERGY, INC.
(AN EXPLORATION STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Colony Energy, Inc. ("Colony" or the "Company") was originally incorporated in
the State of Delaware on July 7, 2000 as "DirectMoviesOnline.Com Inc" but
changed its name to Colony Energy, Inc. on September 12, 2006. The Company
engages primarily in the exploration and development of oil and gas properties
in the United States. The Company currently participates in the exploration of
several unevaluated oil and gas properties.
Basis of Presentation
The accompanying financial statements of Colony have been prepared in accordance
with accounting principles generally accepted in the United States of America
and the rules of the Securities and Exchange Commission.
Exploration Stage Company
Colony's activities have been accounted for as those of an "Exploration Stage
Enterprise" as set forth in SFAS No. 7, "Accounting for Development Stage
Entities." Among the disclosures required by SFAS No. 7 are that Colony's
financial statements be identified as those of an exploration stage company. In
addition, the statements of operations, stockholders' deficit and cash flows are
required to disclose all activity since its date of inception. Colony will
continue to prepare its financial statements and related disclosures in
accordance with SFAS No. 7 until such time that Colony's oil and gas properties
have generated significant revenues.
Reverse Stock Split
Effective October 2, 2006, Colony approved a two to one reverse stock split.
Accordingly, all references to number of shares and to per share information in
the financial statements have been adjusted to reflect the reverse stock split
on a retroactive basis.
NOTE 2. GOING CONCERN
Colony has been in the exploration stage since its formation and has not yet
realized any revenues from its planned operations. It is primarily engaged in
the acquisition, exploration and development of oil and gas properties. The
ability of the Company to emerge from the exploration stage with respect to its
principal business activity is dependent upon its successful efforts to raise
additional debt and/or equity financing and generate significant revenue. Colony
has incurred losses of $126,346 since inception. These factors raise substantial
doubt regarding Colony's ability to continue as a going concern. Management
plans to raise additional capital through equity and/or debt financings. Colony
cannot offer any assurances that it will be successful in executing its plans to
continue as a going concern. Colony's financial statements at December 31, 2007
do not include any adjustments that might result from the inability to continue
as a going concern.
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NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
Cash and Cash Equivalents
Cash equivalents include demand deposits with banks and all highly liquid
investments with original maturities of three months or less.
Fair Value of Financial Instruments
The amounts of financial instruments including cash, prepaid expenses, accounts
payable and notes payable, approximated their fair values as of December 31,
2007 and 2006.
Oil and Gas Properties
The Company accounts for its oil and natural gas producing activities using the
full cost method of accounting as prescribed by the United States Securities and
Exchange Commission (SEC). Accordingly, all costs incurred in the acquisition,
exploration, and development of proved oil and natural gas properties, including
the costs of abandoned properties, dry holes, geophysical costs, and annual
lease rentals are capitalized. All general and administrative corporate costs
unrelated to drilling activities are expensed as incurred. Sales or other
dispositions of oil and natural gas properties are accounted for as adjustments
to capitalized costs, with no gain or loss recorded unless the ratio of cost to
proved reserves would significantly change. Depletion of evaluated oil and
natural gas properties is computed on the units of production method based on
proved reserves. The net capitalized costs of proved oil and natural gas
properties are subject to a full cost ceiling limitation in which the costs are
not allowed to exceed their related estimated future net revenues discounted at
10%, net of tax considerations.
Costs associated with unevaluated properties are excluded from the full cost
pool until Colony has made a determination as to the existence of proved
reserves. Colony reviews its unevaluated properties at the end of each quarter
to determine whether the costs incurred should be transferred to the full cost
pool and thereby subject to amortization and ceiling test.
Asset Retirement Obligations
In August 2001, the FASB issued SFAS No. 143,"Accounting for Asset Retirement
Obligations" (SFAS 143). SFAS 143 requires that the fair value of an asset
retirement cost, and corresponding liability, should be recorded as part of the
cost of the related long-lived asset and subsequently allocated to expense using
a systematic and rational method.
Revenue Recognition
Colony recognizes oil and natural gas revenue under the sales method of
accounting for its interests in producing wells as oil and natural gas is
produced and sold from those wells.
Provision for Taxes
Colony has adopted SFAS No. 109 "Accounting for Income Taxes". Pursuant to this
pronouncement, income taxes are accounted for using an asset and liability
approach. SFAS No. 109 requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the financial statements and tax bases of assets and liabilities at the
applicable tax rates. A valuation allowance is utilized when it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Loss per Share of Common Stock
Basic loss per share of common stock is calculated by dividing net loss
available to common stockholders by the weighted average number of common shares
issued and outstanding during the year. Common stock equivalents are excluded
from the calculations when their effect is anti-dilutive.
F-8
NOTE 4. NOTES PAYABLE - RELATED PARTY
During 2005, Colony entered into two Promissory Notes with shareholders in the
amount of $2,500 each with maturity dates of February 28, 2009 with interest of
10% per annum. On November 6, 2007 these notes were repaid in full.
During 2007, Colony entered into two Promissory Notes with a shareholder in the
amounts of $7,500 and $350,000 with maturity dates of May 31, 2009 and August
16, 2012, respectively, and with interest of 10% per annum. These notes were
paid in full on November 6, 2007 and December 6, 2007, respectively.
On September 27, 2007 Colony borrowed $322,532 from a related entity with a
maturity date of September 26, 2012 and interest of 10% per annum. The note is
due on demand.
On November 29, 2007 Colony borrowed $202,469from a related entity with a
maturity date of November 28, 2012 and interest of 10% per annum. The note is
due on demand.
NOTE 5. RELATED PARTY TRANSACTIONS
During 2007 Colony entered into $525,000 promissory notes agreements with a
related entity. The proceeds of the note were used to repay existing notes to
shareholders and to acquire oil and gas properties. See details at footnote 4
and 6.
NOTE 6. WARRANTS
During the twelve months ending December 31, 2007 Colony issued warrants to the
equity holders of the entity loaning $525,000 to the Company to purchase up to
1,050,001 shares of the Company's common stock for a per-share exercise price of
$.50. Using a Black Sholes calculation it was estimated that the fair value of
these warrants was $593 based on the stock price at the date of issuance of
$0.001, volitility of 176%, expected life of 5 years and no dividends. 645,064
of the warrants expire on September 28, 2012 and the remaining warrants expire
on November 29, 2012.
NOTE 7. UNEVALUATED OIL AND GAS PROPERTIES
During 2007, the Company acquired $335,234 of unevaluated oil and gas
properties. The drilling of the Company's first well, the McVeigh #1 in Okfuskee
County, Oklahoma has been drilled to its target depth and has been determined to
be a dry hole. This well was plugged and abandoned and $64,383 of impairment
expense has been recognized. The operator is currently proposing another well in
the prospect acreage containing the McVeigh #1 well during early 2008.
The drilling of the Company's second well the Betty Marchant #1 in Seminole
County, Oklahoma, has been drilled to its target depth. This well encountered
several prospective oil and gas formations and testing is currently underway and
additional acreage is being acquired in the prospect area.
NOTE 8 - INCOME TAXES
The Company uses the liability method, where deferred tax assets and liabilities
are determined based on the expected future tax consequences of temporary
differences between the carrying amounts of assets and liabilities for financial
and income tax reporting purposes. During 2007 and 2006, the Company incurred
net losses and, therefore, has no tax liability. The net deferred tax asset
generated by the loss carry-forward has been fully reserved. The cumulative net
operating loss carry-forward is approximately $58,895 at December 31, 2007, and
will expire through 2025.
At December 31, 2007, deferred tax assets consisted of the following:
Deferred tax assets $ 20,024
Less: valuation allowance (20,024)
---------
Net deferred tax assets $ -
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EXHIBITS INDEX
EXHIBIT
NUMBER DESCRIPTION
3.01 First Amended and Restated Certificate of Incorporation of the
Company
3.02 Bylaws of the Company
4.01 Specimen Common Stock Certificate
10.01 Agreement by and between the Company and Enexco, Inc. ("Enexco").
10.02 Promissory Note made payable by Enexco to the order of the
Company in an unspecified original principal amount
10.03 Deed of Trust, Assignment of Proceeds of Production, Security
Agreement and Financing Statement executed by Enexco in favor
of the Company
10.04 Promissory Note made payable by the Company to the order of
Westside Resources, L.P. ("WRLP") in the original principal amount
of $350,000.00
10.05 Promissory Note made payable by the Company to the order of CEI
Ventures, LLC ("CEI") in the original principal amount of
$322, 531.73
10.06 Security Agreement executed by the Company in favor of the CEI
10.07 Warrant to Purchase the Company's common stock issued in the name
of WRLP
10.08 Warrant to Purchase the Company's common stock issued in the name
of Kent E. Lovelace, Jr.
10.09 Warrant to Purchase the Company's common stock issued in the name
of the F.E.I. Energy Trust
10.10 Form of Registration Rights Agreement entered into with each of
WRLP, Mr. Lovelace, and the F.E.I. Energy Trust
10.11 Promissory Note made payable by the Company to the order of CEI
in the original principal amount of $202,468.26
10.12 Warrant to Purchase the Company's common stock issued in the name
of WRLP
10.13 Warrant to Purchase the Company's common stock issued in the name
of Kent E. Lovelace, Jr.
10.14 Warrant to Purchase the Company's common stock issued in the name
of the F.E.I. Energy Trust