Registration Number:
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
WILON ENERGY GROUP, INC.
-----------------------------
(Name of small business
issuer in its charter)
Delaware 1311 65-1185663
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(State of incorporation (Primary Standard Industrial (I.R.S. Employer
or jurisdiction Classification Code Number) Identification No.)
of organization)
931 Ashland Terrace, Chattanooga Tennessee 37415 (800) 509-8853
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(Address and telephone number of principal executive offices)
931 Ashland Terrace, Chattanooga Tennessee 37415 (800) 509-8853
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(Address of principal place of business or intended principal place of business)
Harry Thompson, 931 Ashland Terrace, Chattanooga Tennessee 37415 (800) 509-8853
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(Name, address, and telephone number of agent for service)
Copies to:
Joel Pensley, Esq.
211 Schoolhouse Road
Norfolk, Connecticut 06058
Phone: (860) 542-1122
Fax: (626) 608-3076
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: From time to time after
the effective date of the registration statement until such time that all of the
shares of common stock registered hereunder have been sold.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /x/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
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CALCULATION OF REGISTRATION FEE
Proposed Proposed
Title of Maximum Maximum
Each Class of Amount Offering Aggregate Amount of
Securities Being Being Price Per Offering Registration
Registered Registered Unit (1) Price(1) Fee
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Shares of common stock 1,879,000 $ 0.50 $ 939,500 $ 86.44
owned by existing
stockholders
Shares of common stock
to be resold by investor
pursuant to stock
purchase agreement 3,000,000 $ 0.50 $1,500,000 138.00
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TOTAL $2,795,700 $224.44
(1) Estimated solely for the purposes of computing the registration fee pursuant
to Rule 457.
The registrant hereby amends the registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that the registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL, NOR DOES IT SEEK AN OFFER TO BUY, THESE SECURITIES IN ANY STATE WHERE
THE OFFER OR SALE IS NOT PERMITTED.
Subject to completion: Dated May 15, 2003
PROSPECTUS
WILON ENERGY GROUP, INC.
4,870,000 SHARES OF COMMON STOCK
This prospectus relates to the resale by the selling stockholders who
presently own our shares of common stock of 1,879,000 shares of our common
stock. The selling stockholders may sellshares at $.50 per share from time to
time until a market develops and thereafter at the prevailing market price or in
negotiated transactions. All the shares offered are currently outstanding. None
of our affiliates are selling stockholders. We will not receive any of the
proceeds from the sale of the shares by the selling stockholders.
In addition, we registering up to an aggregate of 3,000,000 shares for
resale by Colebrook, Inc. (2,400,000 shares) and Shayna Consulting, Inc.
(600,000 shares) which they may acquire in private placements under stock
purchase agreements. In addition to being selling stockholders, the investors
are considered to be underwriters within the meaning of the Securities Act of
1933 with respect to these shares.
The investors may sell our common stock at prices and on terms determined
by the market or in negotiated transactions. We will not receive any proceeds
from the sale of shares by the investors; however, we will receive proceeds from
the investors to the extent they acquire our common stock under the stock
purchase agreements. We are not required to sell any shares to the investors
under the stock purchase agreements and we may decide not to do so. A
description of the agreements is found beginning on page 4 of the prospectus.
The investors may use this prospectus in connection with sales of up to an
aggregate of 3,000,000 shares of our common stock.
AS YOU REVIEW THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE MATTERS
DESCRIBED IN "RISK FACTORS" BEGINNING ON PAGE 4.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL, NOR DOES IT SEEK AN OFFER TO BUY, THESE SECURITIES IN ANY STATE WHERE
THE OFFER OR SALE IS NOT PERMITTED.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is , 2003.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary..................................................... 3
Information About ouf Stock Purchase Agreement with Colebrook, Inc.
and Shayna Consulting, Inc........................................... 3
The Offering........................................................... 4
Summary Financial Information.......................................... 5
Risk Factors........................................................... 7
Capitalization......................................................... 10
Dividend Policy........................................................ 10
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 11
Our Business........................................................... 16
Management............................................................. 23
Certain Related Party Transactions..................................... 26
Principal Stockholders................................................. 27
Description of Securities.............................................. 28
Selling Stockholders................................................... 29
Plan of Distribution of Shares of Existing Stockholders ............... 31
Stock Purchase Agreement............................................... 32
Investors' Plan of Distribution........................................ 35
Shares Eligible for Future Sale........................................ 27
Where You Can Find More Information.................................... 38
Legal Proceedings...................................................... 38
Legal Matters.......................................................... 38
Experts................................................................ 38
Financial Statements................................................... F-1
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You may rely only on the information contained in this prospectus. We have
not authorized anyone to provide information different from that contained in
this prospectus. Neither the delivery of this prospectus nor sale of common
stock means that information contained in this prospectus is correct after the
date of this prospectus. This prospectus is not an offer to sell or solicitation
of an offer to buy these shares of common stock in any circumstances under which
the offer or solicitation is unlawful.
2
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information in the prospectus including our financial statements and notes to
those statements appearing elsewhere in the prospectus. The prospectus contains
forward-looking statements based on current expectations of our company and our
industry. These forward-looking statements involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of the factors described in the "Risk
Factors" section and elsewhere in the prospectus.
We are an independent natural gas and oil company engaged, through our
wholly-owned subsidiary, Wilon Resources, Inc., in exploration, development and
production activities in the Appalachian Basin, particularly in Wayne County,
West Virginia and Magoffin County, Kentucky. Our business strategy focuses
primarily on the acquisition of proved developed and undeveloped properties and
on the enhancement and development of these properties. We operate gas wells in
which we own the entire or part of the working interest and also own and operate
gas transmission lines in Wayne County, West Virginia which gather natural gas
from our wells. We also lease 1,000 acres in Magoffin County, Kentucky adjacent
to two wells which we have completed and which are producing.
INFORMATION ABOUT OUR STOCK PURCHASE AGREEMENTS WITH
COLEBROOK, INC AND SHAYNA CONSULTING, INC.
We have entered into stock puchase agreements with Colebrook and Shayna
Consulting to raise up to $1.5 million ($1.2 million from Colebrook and $300,000
to Shayna Consulting) through a series of sales of our common stock. The dollar
amount of each sale is limited by our common stock's price and a minimum period
of time that must elapse between each sale. Each sale will be to both investors
in the ratio of 4:1. In turn, the investors will either hold our stock in their
own portfolios, sell our stock in the open market, or place our stock through
negotiated transactions with other investors. The prospectus covers the resale
of our stock by the investors either in the open market or to other investors.
The stock purchase agreements provide that from time to time, upon our
providing written notice but not more often than every seven trading days, over
a two year period following the date our stock commences trading, the investors
will purchase our common stock from us. We decide, in our sole discretion
(without any penalties for non-use), whether and the extent to which we wish to
require the investors to purchase our common stock. We choose the dates and the
number of shares we sell to the investors.
We may sell an aggregate of between $20,000 and $40,000 of our common
stock, each time, at 70% of the average closing bid price for the five trading
days preceding the notice of our intention to sell our stock. In order for us to
sell our shares to the investors, the trading volume for the five preceding days
must average at least 25,000 shares per day. An investor may not purchase our
shares of common stock if, at the conclusion of any purchase, that investor
would hold in excess of 9.9% of our issued and outstanding common stock. We
intend to use proceeds of stock sales to the investors for working capital.
Our agreements with the investors are not a convertible debenture,
convertible preferred stock, or similar type of investment instrument. In
addition, we are not borrowing from the investors as with a conventional cash
line of credit.
3
THE OFFERING
Shares offered by the selling
stockholders who are holders
of their shares as of the date
of the prospectus.............. 1,879,000 shares of common stock
Shares offered for resale
pursuant to the stock
purchase agreement............. A maximum of 3,000,000 shares of common stock
Offering price of ahares......... The shares underlying the stock purchase
agreementS, the resale of which are being
registered hereunder, are being offered to
Colebrook, Inc. and Shayna Consulting, Inc.
from to time at 70% of the then current mar-
ket price.
Common stock outstanding.......... 12,279,000 shares
Common stock to be................ 15,279,000 shares.
outstanding after the Pursuant to the terms of the stock purchase
private placement pursuant agreement with Colebrook, Inc. and Shayna
to the Stock Purchase Agreement Consulting, Inc., we are not obligated to
sell any of our shares, unless it is bene-
ficial to us.
4
SUMMARY FINANCIAL INFORMATION
SUMMARY FINANCIAL INFORMATION
The following table sets forth our summary unaudited financial data as of
December 31, 2001 and 2002 and for the years ended September 30, 2001 and 2002.
Statement of Operations
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Three months ended December 31,
2001 2002
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Unaudited Unaudited
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Revenues:
Gas and drilling program sales $ 230,000 $ 83,233
Royalty income 0 76,749
Sales of interest in gas
producing properties 48,000 483
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Total revenues 278,000 160,465
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Cost of gas and drilling production 15,335 5,549
Selling, general and administrative 198,241 114,863
Depreciation, depletion and amortization 4,325 6,717
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Total expenses 217,901 127,129
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Operating income 12,099 33,336
Interest income 231 0
Interest (expense) 0 0
Net Income $ 12,330 $ 33,336
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Basic and diluted earnings
per common share $ 0.00 $ 0.00
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Weighted average shares outstanding,
basic and diluted 10,400,000 10,400,000
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5
For the years ending December 31,
2001 2002
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Revenues:
Gas and drilling program sales $ 245,142 $ 566,546
Royalty income 0 49,959
Sales of interest in gas
producing properties 337,953 96,100
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Total revenues 583,095 712,605
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Cost of gas and drilling production 145,641 239,293
Selling, general and administrative 419,897 427,875
Depreciation, depletion and amortization 9,570 9,725
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Total expenses 575,108 676,893
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Operating income 7,987 35,712
Interest income 437 1,137
Interest (expense) (3,005) (3,419)
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Net Income $ 5,419 $ 33,430
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Basic and diluted earnings
per common share $ 0.00 $ 0.00
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Weighted average shares outstanding,
basic and diluted 10,400,000 10,400,000
========== ==========
6
RISK FACTORS
You should carefully consider the following factors in addition to the
other information in this prospectus, including the financial statements and
related notes, before investing in our common stock. These risk factors are all
those which we believe are material to our business. Risks and uncertainties
that we do not presently know about or that we currently believe are immaterial
may also impair our business. If any of the following risks actually occurs, our
business, financial condition or results of operations will likely suffer.
The prices we receive for our gas are volatile and, in the event of an extended
downtown in prices, will result in a decrease in revenues and an erosion in our
financial condition.
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Our reserves, profitability and future rate of growth are substantially
dependent upon prevailing prices for natural gas. Such prices can be volatile.
Prices are affected by market supply and demand factors, regional pricing
variations, governmental action and weather conditions. Thus, we cannot estimate
future prices for natural gas with any reliability. Almost all our revenues come
and are anticipated to come from the sale of natural gas. Any significant or
extended decline in the prices of natural gas could have a material adverse
effect on our revenues and thus our financial condition.
Any reduction in the Appalachian gas price premium will hurt our revenues.
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Spot prices for natural gas sold from Appalachian wells historically have
been higher than those for gas produced in the Gulf Coast and the Mid-Continent,
because of the geographic proximity to the Northeast gas markets. No assurance
can be given that this price advantage will continue. If the Appalachian gas
price premium decreases or disappears, our revenues would be reduced and profits
could disappear.
Our reserve estimates are uncertain and may prove to be less than anticipated in
which case our ability to generate revenues in the future will be jeopardized.
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Estimates of our proved reserves and future net revenues are based on
engineering reports prepared by independent petroleum engineers. Natural gas
reserves cannot be measured in an exact way, and estimates of other engineers
might differ materially. Certain events, including production history,
acquisitions and sales of properties, changes in prices and further development
could result in increases or decreases of estimated proved reserves or estimates
of future net earnings. Our estimates of future cash flows reflect average
natural gas and oil prices of $3.00 per 1,000 cubic feet, known as "mcf.". There
can be no assurance, however, that such prices will be realized or that the
volumes projected will be produced. Future performance which is lower than the
estimates derived from the engineering reports could reduce our future revenues
and profits.
7
We face risks in acquiring and drilling wells in that they may not produce as
anticipated or at all with a consequential adverse affect on our revenues and
profits.
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The future success of our operations will be largely dependent upon our
ability to replace and expand our gas and oil reserves through the acquisition
of producing properties and the development of natural gas reserves. Without
successful acquisitions and exploitation, exploration and development
operations, we will not be able to replace the reserves depleted by production,
and our revenues will decline over time. Successful acquisition of producing
properties generally requires, among other things, accurate assessments of
recoverable reserves, future natural gas prices, operating costs and potential
environmental risks and other liabilities. Such assessments are necessarily
inexact and their accuracy is inherently uncertain. Development of our natural
gas reserves involves the risk that no commercial production will be obtained or
that production will be insufficient to recover drilling and completion or
cleaning and reworking costs. Drilling also may be curtailed, delayed or
canceled as a result of many factors, including, among other things,
unacceptably low prices, title problems, weather conditions, labor shortages and
equipment delivery problems.
We may not be able to market our natural gas and thus fail to generate revenue
from gas we are capable of producing from our wells.
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The availability of a ready market for our gas depends on numerous factors
beyond our control, including, among other factors, the demand for and supply of
natural gas, the proximity of our natural gas and oil reserves to pipelines, the
capacity of such pipelines, the cooperation of pipeline owners, general economic
conditions, fluctuations in seasonal demand and the effects of inclement weather
and governmental regulation. In addition, even if we enter into natural gas
purchase arrangements, we may subject to the risk of periodic reduced purchases,
flexible pricing or access to pipelines. Any significant reduction or
curtailment of production for an extended period of time will reduce or our
revenues and reduce or eliminate our profits.
We face operating hazards and environmental risks which could subject us to
litigation or prevent from producing natural gas from our wells which could
destroy our business.
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We are subject to all risks normally incident to the development,
production and transmission of natural gas, including pipeline leaks,
uncontrollable flows of gas, oil, brine or well fluids into the environment,
fires, explosions, cratering, pollution and other environmental risks. The
occurrence of any of these hazards could, nonetheless, result in substantial
losses due to damage or destruction of gas and oil wells, formations or
production facilities, damage or injury to property and persons or suspension of
operations. We maintain insurance coverage, in amounts and against risks which
we believe to be appropriate, taking into account our size and the scope of our
operations. Our insurance policies, however, have standard exclusions. Losses
can occur from an uninsurable risk or in amounts more than existing insurance
coverage. The occurrence of an event, which is not insured or not fully insured,
would reduce our cash, and our earnings and could destroy our business.
8
As manager of our natural gas well investment programs we may be subject to
liability for our obligations with respect to their operations.
- --------------------------------------------------------------------------------
We have sold interests in wells to investors and intend to do so in the
future. The interests in these programs constitute securities; and we are
subject to potential liability to our investors in these programs, including the
possible return of their investment and damages, for failure to comply with
applicable federal and state securities laws and regulations. We could also be
enjoined from selling additional programs. Such liability could destroy our
business.
Our revenue model may not be successful and our business may decline.
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Our revenue model calls for increased production from existing wells and
production from new wells. It also calls for our ownership of the entire working
interest of the wells we acquire and for the formation of gas well partnerships
and other ventures We can give no assurance that this revenue model will be
successful. If it is not successful, our plans to expand production will not
come to fruition and our revenues and earnings will decline.
We depend on income from a narrow range of activities so that we cannot leverage
any adverse economic circumstances with revenues from other businesses.
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We intend to derive our revenue from the purchase and development of gas
wells in Appalachia. We cannot predict our total revenue as that is a function
of the productive capacity of our existing and future wells and the price we
receive for the gas we sell. If revenues from Appalachia gas wells do not
materialize or are not as robust as we predict, our business and hence our
financial condition would decline and our operations could cease.
We may be unable to obtain sufficient funds from the stock purchase agreements
with the investors to meet our needs in which event we will not be able to
expand.
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When we desire to obtain funds for our business through the stock purchase
agreements with Colebrook and Shayna Consulting , the volume of trading may too
low to sell stock to the investors, or the market price of our stock may result
in unacceptable dilution or any sale may result in either of the investors'
owning more than 9.9% of our issued and outstanding common stock which would
prohibit us from selling our stock to that investor. As a result, we may be
unable to obtain any or sufficient funds from the stock purchase agreements to
meet our financial needs for completing, drilling or cleaning bondin. Thus, we
will not be able to expand our business.
An active market for our common stock may not develop, making it difficult for
you to sell your stock and preventing us from raising money through our stock
purchase agreements.
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Prior to the date of the prospectus, there has been no public market for
our common stock. It is uncertain the extent to which a trading market will
develop or how liquid that market might become. An illiquid market for our stock
may result in price volatility and poor execution of buy and sell orders for
investors. Historically, stock prices and trading volumes for newly public
companies fluctuate widely for a number of reasons, including some reasons that
may be unrelated to their business or results of operations. The price of our
common stock may be low and our volume below that which we need to sell our
stock to Colebrook and Shayna Consulting pursuant to the stock purchase
agreements. Thus, the possibility of funding our ongoing operations and
expansion will cease in the event an active trading market does not develop.
9
The exercise of our rights to sell our common stock may substantially dilute the
interests of other security holders.
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We will issue shares to the investors upon exercise of our rights to sell
our common stock under the stock purchase agreement at a price equal to 70% of
the average closing bid price for the five days preceding the date we give
notice of our intention to exercise any put. Accordingly, the sale of our stock
to the investors under the stock purchase agreement may result in substantial
dilution to other holders of our common stock. Depending on the price per share
of our common stock, we may need to register additional shares for resale to
access the full amount of financing available.
Registering additional shares could have a further dilutive effect on the
value of our common stock. If we are unable to register the additional shares of
common stock, we may experience delays in, or be unable to, access some of the
$1.5 million available under the stock purchase agreement. In addition, resale
of the shares purchase by the investors may put downnward pressure on the price
of our common stock which would further dilute our stockholders' interest.
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 2002.
December 31,
2002
-----------
(Unaudited)
Long-term debt (related party) $ -0-
---------
Shareholders' equity:
Preferred stock $.001 par value;
Authroized 10,000,000 shares; issued
And outstanding -0- shares
Common stock $.001 par value;
authorized 50,000,000 shares; issued
and outstanding 10,400,000 shares 10,400
Retained earnings 717,360
---------
Total shareholders' equity (deficiency) 727,760
---------
Total capitalization $ 727,760
=========
DIVIDEND POLICY
We have not declared or paid any cash dividends on our capital stock and do
not anticipate paying any cash dividends in the foreseeable future.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
- --------
The following discussion of our financial condition and results of
operations should be read in conjunction with the financial statements and notes
appearing elsewhere in the prospectus.
It is difficult for us to forecast our revenues or earnings accurately. We
believe that future period-to-period comparisons of our operating results may
not be meaningful and should not be relied upon as an indication of future
performance as we have and will have no backlog of orders. Our operating results
in one or more future quarters may fall below investor expectations which,
assuming our common stock trades on a recognized market, would almost certainly
cause the future trading price of our common stock to decline. You should read
the following discussion together with the consolidated financial statements and
their accompanying notes, included elsewhere in the prospectus.
We are engaged in the acquisition and enhancement of developed natural gas
producing properties and the exploration, development and efficient production
of undeveloped natural gas properties which we own in whole or in part. We
derive our revenues from our own gas production, well operations, gas gathering,
transportation and gas marketing services we provide for third parties who own
interests in wells we operate. We also derive income from the sale of interests
in our gas producing properties.
Critical Accounting Policies and Estimates
- ------------------------------------------
Our results of operations are based on the preparation of financial
statements in conformity with accounting principles generally accepted in the
United States. The preparation of financial statements requires management to
select accounting policies for critical accounting areas as well as estimates
and assumptions that affect the amounts reported in the consolidated financial
statements. Significant changes in assumptions and/or conditions in our critical
accounting policies could materially impact our operating results.
Our significant accounting policies are described in Note A to the
financial statements. We believe our most critical accounting policies include
revenue recognition as it relates to the method of accounting for gas
properties, recognition of income and costs, deferred revenue and accounting for
income taxes.
We use the successful efforts method of accounting for gas producing
activities. Under successful efforts, costs to acquire mineral interests in gas
properties, to drill and equip exploratory wells that find proved reserves, and
to drill and equip developmental wells are capitalized. Costs to drill
exploratory wells that do not find proved reserves, costs of developmental wells
on properties the we have no further interest in, geological and geophysical
costs, and costs of carrying and retaining unproved. properties are expensed.
Unproved gas properties that are significant are periodically assessed for
impairment of value and a loss is recognized at the time of impairment by
providing an impairment allowance. Other unproved properties are expensed when
surrendered or expired.
11
When a property is determined to contain proved reserves, the capitalized
costs of such propertiesare transferred from unproved properties to proved
properties and are amortized by the unit-of-production method based upon
estimated proved developed reserves. To the extent that capitalized costs of
groups of proved properties having similar characteristics exceed the estimated
future net cash flows, the excess capitalized costs are written down to the
present value of such amounts. Estimated future net cash flows are determined
based primarily upon the estimated future proved reserves related to our current
proved properties and, to a lesser extent, certain future net cash flows related
to operating and related fees due us related to our management of various
partnerships. We follow Statement of Financial Accounting Standards ("SFAS") No.
121 which requires a review for impairment whenever circumstances indicate that
the carrying amount of an asset may not be recoverable. Impairment is recorded
as impaired properties are identified.
On sale or abandonment of an entire interest in an unproved property, gain
or loss is recognized, taking into consideration the amount of any recorded
impairment. If a partial interest in an unproved property is sold, the amount
received is treated as a reduction of the cost of the interest retained. The
carrying cost of unproved properties is not significant.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
that will apply in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date. Since we have Section 29 tax credits in excess of any tax
liability, there are no deferred taxes arising from the timing differences of
the deferred income liability.
As of September 30, 2002 and December 31, 2002, we had deferred income in
the amount of $306,996 and $230,247, respectively, which is recognized as
long-term debt. This income will be recognized as production is established and
matched toward this income. For the three months ended December 31, 2002,
approximately $76,749 was allocated as earned during this period. The following
table is a review of the results of our operations for the fiscal year ended
September 30, 2001 and 2002 and three months ended December 31, 2001 and 2002.
All items in the table are calculated as a percentage of total revenues.
Fiscal Years Ended Three Months Ended
September 30, December 31,
------------------- ------------------
2002 2001 2002 2001
------------------- ------------------
Unaudited
---------
Revenues:
Gas and drilling program
Sales 79.5% 42.0% 51.9% 82.7%
Royalty income 7.0% 0.0% 47.8% 0.0%
Sales on Interest in gas producing
Properties 13.5% 58.0% 0.3% 17.3%
------ ------ ----- -----
Total Revenues 100.0% 100.0% 100.0% 100.0%
Expenses:
Gas production and drilling costs 33.6% 25.9% 3.5% 5.5%
General and administrative . 60.0% 72.0% 71.6% 71.3%
Depreciation, depletion and
Amortization 1.4% 1.6% 4.2% 1.6%
Interest (net) 0.3% 0.5% 0.0% 0.0%
Net Income 4.7% 0.9% 20.8% 4.4%
==== ==== ===== ====
12
The following discussion and analysis reviews our results of operations and
financial condition for the years ended September 30, 2001 and 2002 and for the
three months ended December 31, 2001 and 2002. This review should be read in
conjunction with the Financial Statements and other financial data presented
elsewhere herein.
COMPARISON OF THE YEAR ENDED SEPTEMBER 30, 2002 TO THE YEAR ENDED
DECEMBER 31, 2001.
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The following statement of income shows the results of operations for the
year ended September, 2002 and the comparable year ended September 30, 2001 and
the results of operations for the three months ended December 31, 2002 and the
comparable three months ended December 31, 2001.
Information presented below and in the following discussion which relates
to the year ended September 30, 2001 and 2002 was derived from audited financial
information.
Year ended September 30,
2001 2002
------ ------
Revenues:
Gas and drilling program sales $ 245,142 $ 566,546
Royalty income 49,959 0
Sales of interest in gas
producing properties 337,953 96,100
---------- ----------
Total revenues 583,095 712,605
---------- ----------
Cost of gas and drilling production 145,641 239,293
Selling, general and administrative 419,897 427,875
Depreciation, depletion and amortization 9,570 9,725
---------- ----------
Total expenses 575,108 676,893
Operating income 7,987 35,712
Interest income 437 1,137
Interest (expense) (3,005) (3,419)
---------- ----------
Net Income $ 5,419 $ 33,430
13
Three months ended December 31,
2001 2002
------ ------
Unaudited
---------
Revenues:
Gas and drilling program sales $ 230,000 $ 83,233
Royalty income 76,749 0
Sales of interest in gas
producing properties 48,000 483
---------- ----------
Total revenues 278,000 160,465
Cost of gas and drilling production 15,335 5,549
Selling, general and administrative 198,241 114,863
Depreciation, depletion and amortization 4,325 6,717
---------- ----------
Total expenses 217,901 127,129
Operating income 12,099 33,336
Interest income 231 0
Interest (expense) 0 0
---------- ----------
Net Income $ 12,330 $ 33,336
Revenues
- --------
Revenues from gas and drilling program sales increased $321,404 from
revenue of $245,142 for the year ended September 30, 2001 to $566,546 for the
year ended September 30, 2002. There was a $146,767 reduction in revenue for the
three months ended December 31,2002 of $83,233 as compared to revenue of
$230,000 for the three months ended December 31, 2001.
Royalty income increased by $49,959 for the year ended September 30, 2002
as compared to $-0- for the year ended September 30, 2001. Royalty income
increased by $76,749 for the three months ended December 31, 2002 as compared to
$-0- for the three months ended December 31, 2001.
Sales of interests in gas producing properties decreased by $241,853 from
revenues earned through program sales aggregating $96,100 for the year ended
September 30, 2002 as compared to revenue from program sales of $337,953 for the
year ended December 31, 2001.
14
Expenses
- --------
The cost of gas and drilling production increased by $93,652 from costs
aggregating $239,293 for the year ended September 30, 2002 as compared to
$145,641 for the year ended September 30, 2001.
The cost of gas and drilling production decreased by $9,789 from costs
aggregating $5,549 for the three months ended December 31, 2002 as compared to
$15,335 for the the months ended December 31, 2001.
Selling, general and administrative expenses increased by $7,978 from costs
aggregating $427,875 for the year ended September 30, 2002 as compared to
$419,897 for the year ended September 30, 2001.
Selling, general and administrative expenses decreased by $ 83,378 from
costs aggregating $114,863 for the three months ended December 31, 2002 as
compared to $198,241 for the three months ended December 31, 2001.
Depreciation, depletion and amortization increased $155 to $9,725 in the
year ended September 30, 2002 compared to $9,570 in the year ended September 30
2001.
Depreciation, depletion and amortization increased $2,392 to $6,717 for the
three months ended December31, 2002 as compared to $4,325 for the three months
ended December 31, 2001.
Operating income from operations for the year ended September 30, 2002
increased by $27,725 to $35,712 as compared to $7,987 for the year ended
September 30, 2001. The increase in income from operations was primarily due to
a combination of the items discussed above.
Operating income from operations for the three months ended December 31,
2002 increased by $21,237 to $33,336 as compared to $12,099 for the three months
ended December 31, 2001 The increase in income from operations was primarily due
to a combination of the items discussed above.
Net interest expense decreased by $2,568 to $2,282 for the year ended
September 30, 2002 as compared to $2,568 for the year ended September 30, 2001.
Inflation and Changes in Prices
- -------------------------------
Inflation affects our operating expenses as does interest rates, which may
have an effect on our profitability. Gas prices have not followed inflation and
have fluctuated widely during recent years as a result of other forces such as
OPEC, economic factors, demand for and supply of natural gas in the United
States and within our regional area of operation. Natural gas prices increased
during the year ended September 30, 2002 and for the three months ended December
31, 2002 due to higher energy consumption during the summer of 2002, a much
colder winter in 2002/2003 and to some extent a slight recovery in economic
growth in the United States. As a result of these market forces, we received an
average price of $3.64 per mcf for its natural gas in the year ended September
30, 2002 compared to $3.43 for 2001.
We cannot predict the duration of the current condition of gas markets and
prices, because of the forces noted above, as well as other variables, may
change.
15
Liquidity and capital rsources
- ------------------------------
Our cash position decreased by $6,243 from $6,659 at September 30, 2001 to
$416 at September 30, 2002. We were funded through cash provided from operations
of $58,502 as compared to being funded through borrowings of $33,180 for the
year ended September 30, 2001. Our capital expenditures increased by $39,119
from $9,911 for the year ended September 30, 2001 as compared to $49,030 for the
year ended September 30, 2002. Working capital at decreased by 38,379 from a
positive working capital at September 30, 2001 of $4,510 to a negative $33,869
at September 30, 2002.
OUR BUSINESS
Brief History of Oil and Gas Operations in Appalachia
- -----------------------------------------------------
According to the West Virginia Geological & Economic Survey, Native
Americans recognized and perhaps used as a fuel source the "burning springs" and
outflows of petroleum on the Little Kanawha, Kanawha, and Big Sandy rivers.
Records show that the early settlers were also aware of the "burning springs"
which were natural gas vents. George Washington visited one such burning spring,
located on the Kanawha River, in 1775.
The oil and gas industry in West Virginia began as an outgrowth of the salt
industry. In the early 1800s, saltmakers frequently hit oil or gas in their
drilling, but considered it a nuisance. In fact, so much oil was diverted to the
Kanawha River by salt manufactures that it was long known as "Old Greasy" to the
boatmen. Gas was first struck in a well drilled for salt at Charleston in 1815.
Once the value of oil and gas was realized, the Great Kanawha Valley region
became a pioneer in the discovery of petroleum by boring and in the use of oil
and gas on a commercial scale. By 1826, oil was used for lamps in workshops and
factories. The drilling tools, jars, and casing, first developed for the salt
industry, became essential equipment to the petroleum industry.
On the Little Kanawha River, near the Hughes River, was a stream called
Burning Springs Run, named because there were two springs at its mouth from
which natural gas escaped. As early as 1781, Thomas Jefferson described the
brilliant flame which could be produced by thrusting a lighted candle into the
escaping gas at this site. A salt brine well struck oil at 200 feet and produced
200 barrels of oil per day. The Burning Springs oil field was one of only two
oil fields in America prior to the Civil War.
Area of Operations
- ------------------
Appalachia is surrounded by major natural gas markets in the northeastern
United States. This proximity to a substantial number of large commercial and
industrial gas markets, including natural gas powered electricity plants,
coupled with the relatively stable nature of Appalachian production and the
availability of transportation facilities has resulted in generally higher
wellhead prices for Appalachian natural gas than those prices available in the
Gulf Coast and Mid-continent regions of the United States. Appalachia includes
portions of Ohio, Pennsylvania, New York, West Virginia, Kentucky and Tennessee.
Although Appalachia has sedimentary formations indicating the potential for
deposits of gas and oil reserves to depths of 30,000 feet or more, most
production in the Basin has been from wells drilled to a number of relatively
shallow blanket formations at depths of 1,000 to 7,500 feet. These formations
are generally characterized by long-lived reserves that produce for more than 20
years. Our drilling success rates and of other operators drilling to these
formations historically have exceeded 90%.
16
Long production life and high drilling success rates to these shallow
formations has resulted in a highly fragmented, extensively drilled, low
technology operating environment in Appalachia. As a result, there has been
limited testing or development of productive and potentially productive
formations at deeper depths. Although our management believes that significant
exploration and development opportunities may exist in these deeper, less
developed formations for those operators with the capital and technical
expertise, we will not engage in drilling to such depths unless as part of a
program in which investors put up substantially all the funds needed.
Cautionary Statement Regarding Industry Forecasts
- -------------------------------------------------
Market data and certain industry forecasts used throughout the Prospectus
were obtained from internal surveys, market research, publicly available
information and industry and federal government publications. Industry
publications generally state that the information contained therein has been
obtained from sources believed to be reliable, but that the accuracy and
completeness of such information is not guaranteed. Similarly, internal surveys,
industry forecasts and market research, while believed to be reliable, have not
been independently verified and the Issuer does not make any representation as
to the accuracy of such information.
Projctions of Natural Gas Usage and Pricing
- -------------------------------------------
We believe that the market for natural gas will grow in the future due to
four main factors:
o Efficiency. Relative to other energy sources, natural gas losses
during transportation from source to destination are slight, averaging
only about 9% of the natural gas energy.
o Environmentally favorable. Natural gas is the cleanest and most
environmentally safe of the fossil fuels.
o Safety. The delivery of natural gas is among the safest means of
distributing energy to customers, as the natural gas transmission
system is fixed and is located underground.
o Price. The deregulation of the natural gas industry and a favorable
regulatory environment have resulted in end-users' ability to purchase
natural gas on a competitive basis from a greater variety of sources.
The United States Energy Information Administration of the Department of
Energy in its Annual Energy Outlook 2002 with Projections to 2020 predicts that
the price of natural gas is expected to be $3.26 per mcf in 2020.
Total energy consumption is projected to increase from 99.3 to 130.9
quadrillion British thermal units (btu) between 2000 and 2020, an average annual
increase of 1.4 percent. In 2020, this forecast is nearly 4 quadrillion Btu
higher than in 2001, primarily due to higher projected energy demand in the
commercial and transportation sectors.
Demand for natural gas has increased at an average annual rate of 2%, from
22.8 to 33.8 trillion cubic feet between 2000 and 2020, primarily due to rapid
growth in demand for electricity generation.
Our History
- ------------
Our operating subsidiary, Wilon Resources, Inc., was formed on October 1,
1998 to engage in the production of natural gas. From October, 1998 to February,
1999, we entered into 13 leases in Wayne County, West Virginia which contained a
total of 31 producing natural gas wells, a gathering system, pipelines and
meters. The leases, known as the Trace Fork Group, were with a number
non-affiliated third parties and called for the payment of an annual acreage
fee. In addition, the owners of the mineral rights receive a royalty on revenues
of 12.5% after deduction of severance taxes and costs of maintaining the wells.
17
Through 1999, we replaced three compressors in the system in order to more
efficiently deliver natural gas and we also reworked all the wells, including
cleaning them out, replacing valves and fittings, replacing tubing, improving
access roads, repairing drainage systems, replacing parts of the gathering
system and repairing and replacing parts of the pipelines. Sales of natural gas
were made to three nonaffiliated companies. Presently, the majority of the wells
on the Wayne County properties are undergoing routine maintenance.
In January, 1999, we purchased 41 natural gas wells in Wayne County, West
Virginia from Myers Drilling Company, Inc. The wells and leases encompass
approximately six thousand acres. Thirty of the wells are presently being
reworked. After the completion of the purchase of the property, we commenced to
place a few of the operating natural gas wells into production. Pipe joints had
to be replaced as the gas pressure exceeded the aggregate limits of the joints.
Most of the wells had to be cleaned out, valves and fittings were replaced,
meters repaired, tubing replaced, gathering system up graded, pipelines repaired
and replaced, and the drainage system improved.
We also acquired cquired an additional 17 natural gas wells in the same
area of operation in September, 1999. These natural gas wells had not been in
operation for a number of years and needed extensive work done to make them
operational. The work included cleaning out, replacing valves and fittings,
replacing tubing and laying of lines for the gathering system to deliver gas to
the main pipeline. The propery has an additional 1500 acres of possible
production.
Business Strategy
- -----------------
Our business strategy is to increase production, operating margins and cash
flow by
o making acquisitions of natural gas wells or properties that will, in
our management's opinion, add to our operating results and/or
beneficial to our future strategic positioning;
o through the exploration and development of our existing and acquired
acreage base;
o through selling a portion of our future gas production under fixed
price contracts with varying expiration dates, using financial hedging
instruments to realize a target price for a portion of our future gas
production.
o by improving profit margins through operational and technological
efficiencies; and
o through the further expansion of our gas gathering systems.
18
Acquisitions
- ------------
Our acquisition strategy focuses on natural gas wells and leases that can
provide:
o enhanced cash flow,
o additional drilling and development opportunities,
o synergies with our existing properties,
o enhancement potential of current operations, and/or
o economies of scale and cost efficiencies.
Natural Gas Operations, Production and Development.
- ---------------------------------------------------
Operations.
-----------
We contract for services performed on all of the wells in which we hold
working interests. We seek to maximize the value of our natural gas properties
through cleaning and reworking wells, operating cost reductions and equipment
improvements.
Our management travels to well sites on a regular basis and continuously
reviews its properties to identify actions which could reduce operating costs
and improve production.
Development.
- -----------
Our exploration and development activities have primarily involved the
acquisition of proved undeveloped gas properties and the drilling and
development of such properties.
Our Future Development Plans.
- -----------------------------
Drilling New Natural Gas Wells
- ------------------------------
With appropriate funding, we intend to drill new natural gas wells on our
existing leases to the Devonian Shale formation at a target depth of about 3,500
feet. The cost for drilling these wells will be paid from our funds or by
entering into ventures to share the working interest of the wells with other
entities. Our management, based on its previous experience, estimates that the
total costs for such drilling will be recovered within three years of the
commencement of drilling. The productive life of these wells is estimated to be
in excess of 20 years.
19
Natural Gas Wells located in Kentucky
- -------------------------------------
We have leased mineral rights with ten acre spacing in Magoffin County,
Kentucky. In 2001, for investors, we drilled four wells to a depth about
2,500-3,000 feet into the Big Six formation, Each well averages 200 mfd. We
retain a 25% working interest.
Sales of Working Interests in various wells
- -------------------------------------------
Between 1999 and 2001, we sold working interests in various natural gas
producing wells. The terms of the sales were that the purchaser pay a down
payment with the balance due within generally 12 months. If the working
interests were not paid in full within the contracted time frame for payment,
purchasers agreed to reassign to us their interests in the wells. At this time,
all of the interests sold pursuant through down payments have been reassigned.
Recompletion of Natural Gas Wells
- ---------------------------------
We presently lease approximately 15,000 acres in West Virginia that contain
producing natural gas wells. A certain number of these wells will be selected
for deepening approximately 1,500 feet to approximately 3,500 feet, the Devonian
Shale formation. Completion will be in accordance with standard completion
procedures for this area. The costs for this program will be funded by our
funds, although we may consider raising money for this purpose from investors.
We estimate, based on our experience, that the costs of deepening the wells
should be recovered in three years based on present gas prices. The production
life of these re-completed wells is estimated to be in excess of twenty years.
Reworking Existing Natural Gas Wells
- ------------------------------------
We have leased a number of producing natural gas wells that need to be
reworked in order to increase production. Reworking includes cleaning out the
wells, drilling out sediment, setting and cementing new casing, replacing valves
and fittings, repairing gathering systems and performing other maintenance.
We estimate that the production life of these wells be significantly
increased and should continue to produce for an additional ten years prior to
another reworking procedure. Total productive life is estimated at twenty years.
The Process of Drilling Natural Gas Wells
- -----------------------------------------
If wells are drilled too close together, they would communicate with each
other and each would draw off production from the other. Recently, some
geologists question if Appalachian natural gas wells draw laterally or
vertically. If vertically, then wells could be spaced closer together without
affecting one another. The reason for this speculation is that many older wells
which were shut-in for years have resumed production which supports the theory
that they are fed from below. However, our wells are generally spaced one well
every ten acres and will continue to be spaced apart.
We drill wells through the use of specialized contractors to the target
depth using air drilling equipment from a truck rig having a 25 foot mast. Pipe
of 9 inches in diameter are set in the hole. Within that pipe, another pipe of 7
inches diameter is set and cement is pushed into the center pipe and comes up to
fill the space between the pipes for a depth of several hundred feet. Finally, a
six inch pipe is inserted in the middle which extends to the bottom of the hole
and is cemented in place to cut off any water flow and to stabilize the hole.
20
We then order a radiation log which indicates the rock formation and a
temperature log. The logs indicate where to perferate. Strings of 50 caliber
shells are set off electrically; and the shot perferates the casing and the
cement - and opens up the formation. The shot is followed with approximately 500
gallons of 15% hydrochloric acid to open up the shot holes. Finally, stimulation
or fracing by forcing sand and water under pressure through the shot holes is
performed. An additional value of the sand is that it sand props up the holes.
After clean up, the wells are ready for production.
Prior to production, we install blow out preventers - large valves which
can be shut if pressure bulds up. We also install appropriate values and meters,
meter runs between the wells and the meters and meter houses to contain the
meters. We start production slowly to prevent sand from blowing back int the
wells and build up production over a period of months.
Title to Properties
- -------------------
We believe that we hold good and indefeasible title to our properties, in
accordance with standards generally accepted in the natural gas industry. A
title examination has been performed with respect to substantially all of our
producing properties. Each of our leased properties represents a material
portion of our holdings; and a title dispute could have adverse consequences for
our production and retention of revenues from production of natural gas.
Our properties are subject to royalties and other customary outstanding
interests. Our properties are also subject to liens incident to operating
agreements, current taxes, development obligations under natural gas leases and
other encumbrances, easements and restrictions. We do not believe that any of
these burdens will materially interfere with the use of our properties.
Natural Gas Sales
- -----------------
We sell the natural gas we produce to gas transmission companies,
industrial end-users and utilities under contracts with terms ranging from one
month to three years. As customary in the industry, virtually all of our
contract pricing provisions are tied to a market index, with certain adjustments
based on, among other factors, whether a well delivers to a gathering or
transmission line, quality of natural gas and prevailing supply and demand
conditions, so that the price of the natural gas fluctuates to remain
competitive with other available natural gas supplies. As a result, our revenues
from the sale of natural gas will suffer if market prices decline and benefit if
they increase.
At December 31, 2002, the weighted net average price of natural gas we
produced sold at prices averaging $3.64 per mcf, depending upon well location,
the date of the sales contract and other factors. Whenever feasible, we attempt
to explore multiple market possibilities from each of our gathering systems in
order to sell our natural gas at the highest prices.
21
A variety of factors affect the market for natural gas, including the
availability of other domestic production, natural gas imports, the availability
and price of alternative fuels, the proximity and capacity of natural gas
pipelines, general fluctuations in the supply and demand for natural gas and the
effects of state and federal regulations on natural gas production and sales.
The natural gas industry also competes with other industries in supplying the
energy and fuel requirements of industrial, commercial and individual customers.
We market our natural gas to natural gas utilities, pipelines and industrial and
commercial customers, either directly through our gathering system, or utilizing
transportation services provided by regulated interstate pipeline companies.
Financing
- ---------
We have conducted well development drilling and reworking activities for
our own account and for other investors. We intend to continue financing our
well acquisition, reworking and development drilling from funds from warrant
exercise, from reinvestment of positive cashflow from our present activities and
from investors who would share working interests with us. We presently owns
interests in two wells which were financed by investors.
Tax benefits
- ------------
Intangible Drilling Costs
- -------------------------
In general, intangible drilling costs, known as "IDC" consist of those
costs which in and of themselves have no salvage value. Congress granted to the
Treasury Secretary the authority to prescribe regulations that would allow
taxpayers the option of deducting, rather than capitalizing, intangible drilling
and development costs. The Secretary's rules state that, in general, the option
to deduct IDC applies only to expenditures for drilling and development items
that do not have a salvage value. We and any investors have the option of
deducting IDC as an expense or capitalizing it over a 60-month period beginning
in the month the expenditure is made.
We also claim depreciation, cost recovery, and amortization deductions with
respect to our basis natural gas property as permitted by the Internal Revenue
Code. The cost of lease equipment and well equipment, such as casing, tubing,
tanks, and pumping units, and the cost of pipelines cannot be deducted currently
but must be capitalized.
Tight Sands Tax Credit
- ----------------------
The owners of wells drilled to the Devonian Shale depth (considered "tight
sands") drilled prior to xxxxxxx are entitled to a tax credit per mcf on gas
produced until xxxxxxx. Certain of our wells qualify; and some of our investors
have taken these credits on their personal income tax returns. The ability of
investors to take these credits in their personal tax returns is limited by
Minimum Tax rules.
22
Employees
- ---------
As of December 31, 2002, we had three employees, all of whom are officers
and directors. We also employ consultants or consultant companies on an as
needed basis.
Facilities
- ----------
We lease modern office premises in Chattanooga, Tennessee at an annual
rental of $15,000, payable monthly. The five year lease was entered into on
November 30, 2001. We may renew for three successive five year periods
commencing December 1, 2006, upon the same terms adjusted for changes in the
Consumer Price Index.
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information regarding our executive
officers and directors:
Name Age Position Since*
- ------------------------- --- ---------------------------------- -----
Harry F. Thompson 66 President, Treasurer and a Director 1998
931 Ashland Terrace
Chattanooga Tennessee 37415
Amy Pye 31 Secretary and a Director 2002
931 Ashland Terrace
Chattanooga Tennessee 37415
Eric J. Thompson 28 Vice-President and a Director 2002
931 Ashland Terrace
Chattanooga Tennessee 37415
Bryan P. S. Gray 63 A Director 2002
5006 NW 49th Road
Tamarac, Florida 33319
- --------------------
* Refers to the date on which each person became a director of our operating
subsidiary, Wilon Resources, Inc. All our directors took office in May,
2003.
Harry F. Thompson has been President of Wilon Resources since its inception
in 1998. From 1994 to 1998, he was President of CBG, Inc., a natural gas
production company located in Chattanooga, TN. He sold the company to found
Resources. From 1991 to 1994, Mr. Thompson was an independent business
consultant in Chattanooga, TN. From 1983 to 1991, he was President of Tricor,
Inc., an oil and gas production company. From 1960 - 1981, Mr. Thompson
maintained a general and corporate practice of law business in Huntington, WV.
He received is B. S. in Zoology from Marshall University, Huntington, WV in 1957
and his LLB from the T.C. Williams School of Law, University of Richmond, VA.
23
Amy Pye has served Wilon Resources as the Administrative Assistant since
1999 and Secretary of since April 2001 and our Secretary since August, 2002.
From 1997 to 1999, she served as a manager for the following Chattanooga-based
retail stores: Goody's Department Store, The Limited and Nautica and in retail
sales for Proffitts, and The Gap, J. Crew, Adrienne Vittadini, Lamora's, Inc.,
Avanti, Inc. in customer relations in catalog sales for Expressions Catalog,
Inc., and Premium Underwriters, Inc. Ms. Pye attended Chattanooga State
Technical Community College from 1992 to 1993.
Eric J. Thompson has been Vice-President and a director of Wilon Resources
since May, 2001. From 1998 to 2001, he served Wilon Resources, Inc. as
administrative assistant on a part time basis. He has worked part time for
Tinder Box, Inc. as sales clerk from 1994 to the present. Mr. Thompson was
Shipping Manager from 1993 to 1995 of Expressions Catalogue Co., Inc. and, from
1998 to 2001, he was Assistant Store Manager of Goody's, Inc. From 1992 to 1993
he was warehouse shipping manager for Premium Underwriter, Inc. Mr. Thompson
attended Chatanoooga University from 1994 to 1996.
Bryan P. S. Gray has, since 1984, acted as a consultant in real estate and
business projets. He was, from 1983 to 1984, successively Director of Finance
and Administration and General Manager for Confederation Offshore Limited, St.
John's, Newfoundland, a consortium of companies which analysed and developed
offshore oil-related projects. From 1981 to 1983, he was President of ScotCan
Consulting, Ltd. Mr. Gray, was from 1965 to 1981 affiliated with the Bank of
Nova Scotia in capacities ranging from Business Development Representative,
Deputy Manager, Senior Representatives and Branch Manager.
Director Compensation
- ---------------------
Our directors do not receive cash compensation for their services as
directors but are reimbursed for their reasonable expenses for attending board
and board committee meetings.
Compensation Arrangements
- -------------------------
We have not entered into employment contracts with any of our management
employees.
Executive Compensation
- ----------------------
The following table sets forth for the fiscal years ended September 30,
2002 and 2001, the compensation we paid to our Chief Executive Officer(s) and
any other executive officers who earned in excess of $100,000 based on salary
and bonus.
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
============================================================================================
Other Annual Securities
Name and Principal Compensation Underlying
Position Year Salary ($) Bonus ($) ($) Options/SARs (#)
============================================================================================
Harry Thompson 2002 104,000 -0- 10,000 -0-
Chief Executive Officer 2001 104,000 -0- 10,000 -0-
24
Option Grants for the fiscal years ended September 30, 2002 and 2001
- --------------------------------------------------------------------
The following table sets forth information concerning the grant of stock
options to the named executive officer during the fiscal years ended 2002 and
2001.
Individual Grants
===============================================================================================
Potential Realizable
Value at Assumed
Number of % of Total Annual Rates of
Shares Options Stock Price
Underlying Granted to Exercise Appreciation
Options Employees Price Per Expiration for Option Term
Name Granted in Year Share Date 5% 10%
===============================================================================================
Harry Thompson -0- -0- -0- -0- -0- -0-
Aggregated Option Exercise for the fiscal years Ended September 30, 2002 and
2001 and Fiscal Year-End Option Values
- --------------------------------------------------------------------------------
The following table sets forth information concerning the exercise of stock
options during the fiscal years ended May 31, 2002 and 2001 by the named
executive officer, and his options outstanding at the end of the transition
period.
=====================================================================================================
Aggregate Option/SAR Exercises in Transition Period and TP-End Option/SAR Values
=====================================================================================================
Number of Securities
Underlying Unexercised
Options/SARs at TPY-End Value of Unexercised In-
Shares (#) the Money Options/SARs
Acquired on Value =========================== at TP-End ($)
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
========================================================================================================
Harry Thompson -0- -0- -0- -0- -0- -0-
========================================================================================================
25
Inemnification of directors and executive officers and limitation of liability
- ------------------------------------------------------------------------------
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act. As permitted by the Delaware General
Corporation Law, our amended certificate of incorporation includes a provision
that eliminates the personal liability of our directors for monetary damages for
breach of fiduciary duty as a director, except for liability (1) for any breach
of the director's duty of loyalty to our company or our stockholders, (2) for
acts or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (3) under section 174 of the Delaware General
Corporation Law (regarding unlawful dividends and stock purchases) or (4) for
any transaction from which the director derived an improper personal benefit.
As permitted by the Delaware General Corporation Law, our bylaws provide
that we are required to indemnify our directors and officers, consultants and
employees to the fullest extent permitted by the Delaware General Corporation
Law. Subject to certain very limited exceptions, we are required to advance
expenses, as incurred, in connection with a legal proceeding to the fullest
extent permitted by the Delaware General Corporation Law, subject to certain
very limited exceptions. The rights conferred in our bylaws are not exclusive.
We have not obtained directors' and officers' liability insurance.
CERTAIN RELATED PARTY TRANSACTIONS
In 1998, we issued to Harlis Trust, 1,000 shares for $1,000. In 2003, these
shares were forward split 10,400:1 so that Harlis Trust's shares aggregated
10,400,000. The trustee of Harlis Trust is Harry Thompson, our President. Harlis
Trust transferred an aggregate of 900,000 shares for no consideration as
follows, leaving it with 9,500,000 shares. The trustee of Harlis Trust is Harry
Thompson, our President.
Distributee Shares
- ----------- --------
Amy Pye 100,000
Eric Thompson 100,000
Kevin Thompson 100,000
S. J. Rutledge 100,000
Vera F. Baker Trust 400,000
Joel Pensley, Esq. 100,000
1. Amy Pye, Secretary, is the daughter of Harry Thompson, our President. They
disclaim ownership of each others' shares. Ms. Pye also purchased 5,000
shares of Wilon Energy Group which became 5,000 of our shares after the
merger of Wilon Energy Group into Wilon Resosurces.
2. Eric S. Thompson, Vice-President, is a son of Harry Thompson, our
President. They disclaim ownership of each others' shares. Mr. Thompson
also purchased 5,000 shares of WEG which became 5,000 of our shares after
the merger ot WEG into Wilon Resosurces.
3. Kevin Thompson is a son of Harry Thompson, our President. They disclaim
ownership of each others' shares. Mr. Thompson also purchased 5,000 shares
of WEG which became 5,000 of our shares after the merger ot WEG into Wilon
Resosurces.
4. The trustee of the Vera Baker Trust is Vera Baker. Vera Baker is the wife
of Myron Baker, a stockholder, and the mother of Gregory Baker, a
stockholder and Myron Baker, Jr., a stockholder.
5. Keon Transport, American Energy Holdings and Harliss Trust which are
beneficially owned by Harry Thompson each purchased 5,000 shares in a
private placement of Wilon Energy Group.
Harry Thompson receives a salary of $104,000 per year, Amy Pye, Secretary,
his daughter, receives a salary fo $26,000 per year and Eric Thompson,
Vice-President, his son, receives a salary fo $26,000 per year.
26
PRINCIPAL STOCKHOLDERS//NUMBERS AND PERCENTAGES
The following table sets forth certain information with respect to
beneficial ownership of our common stock as of May 7, 2003 by each stockholder
known by us to be the beneficial owner of more than 5% of our common stock, each
of our directors and executive officers and all executive officers and directors
as a group.
Shares of Common Stock Beneficially Owned(1)
--------------------------------------------
Name Title Number Percent
- ---------------------- ---------- -------------- -------
Harry F. Thompson President, Treasurer
and a Director 9,515,000 77.2%
Amy Pye Secretary
and a Director 105,000 0.9%
Eric J. Thompson Vice-President 105,000 0.9%
and a Director
Bryan P. S. Gray A Director 0 0.0%
Directors and officers %
(4 persons)
- ------------------
(1) Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to
securities. Unless otherwise indicated below, the persons and entity named
in the table have sole voting and sole investment power with respect to all
shares beneficially owned, subject to community property laws where
applicable. Shares of our common stock underlying warrants or options that
are currently exercisable or exercisable within 60 days of the date of the
Prospectus are deemed to be outstanding and to be beneficially owned by the
person holding such options for the purpose of computing the percentage
ownership of such person but are not treated as outstanding for the purpose
of computing the percentage ownership of any other person. The percentage
of beneficial ownership is based on 12,279,000 shares of our common stock
outstanding as of the date of the Prospectus.
(2) The shares beneficially owned by Harry Thompson are held as follows:
Harliss Trust 9,500,000 shares
Keon Transport 5,000 shares
American Energy Holdings 5,000 shares
(3) Harry Thompson is the father of Amy Pye and Eric Thompson.
27
DESCRIPTION OF SECURITIES
Common Stock
- ------------
We are authorized to issue 50,000,000 shares of common stock, $.001 par
value per share, of which 12,279,000 shares are issued and outstanding as of the
date of the prospectus. Each outstanding share of common stock is entitled to
one vote, either in person or by proxy, on all matters that may be voted upon by
their holders at meetings of the stockholders.
Holders of our common stock (i) have equal ratable rights to dividends from
funds legally available therefor, if declared by our board of directors; (ii)
are entitled to share ratably in all of our assets available for distribution to
holders of common stock upon our liquidation, dissolution or winding up; (iii)
do not have preemptive, subscription or conversion rights, or redemption or
sinking fund provisions; and (iv) are entitled to one non-cumulative vote per
share on all matters on which stockholders may vote at all meetings of our
stockholders. Cumulative voting for the election of directors is not provided
for in our amended certificate of incorporation, which means that the holders of
a majority of the shares voted can elect all of the directors then standing for
election.
Subject to preferences that may apply to shares of preferred stock
outstanding at the time, the holders of outstanding shares of our common stock
are entitled to receive dividends out of legally available funds at such times
and in such amounts as our board of directors may from time to time determine.
Each stockholder is entitled to one vote for each share of our common stock held
on all matters submitted to a vote of stockholders. Our common stock is not
entitled to preemptive rights and is not subject to conversion or redemption.
Upon a liquidation, dissolution or winding-up, the assets legally available for
distribution to stockholders are distributable ratably among the holders of our
common stock and any participating preferred stock outstanding at that time
after payment of liquidation preferences, if any, on any outstanding preferred
stock and payment of other claims of creditors.
Preferred Stock
- ---------------
We may, subject to limitations prescribed by Delaware law, provide for the
issuance of up to 10,000,000 shares of our preferred stock in one or more
series, to establish from time to time the number of shares to be included in
each such series, to fix the rights, preferences and privileges of the shares of
each wholly unissued series and any qualifications, limitations or restrictions
thereon, and to increase or decrease the number of shares of any such series
(but not below the number of shares of such series then outstanding) without any
further vote or action by the stockholders. Our board of directors may authorize
the issuance of preferred stock with voting or conversion rights that could
adversely affect the voting power or other rights of the holders of our common
stock. The issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could, among
other things, have the effect of delaying, deferring or preventing a change in
control and may adversely affect the market price of the common stock and the
voting and other rights of the holders of common stock. We have no current plans
to issue any shares of preferred stock.
28
Reports to Stockholders
- -----------------------
We intend to furnish our stockholders with annual reports containing
audited financial statements as soon as practicable after the end of each fiscal
year. Our fiscal year ends on September 30th.
Transfer Agent
- --------------
We have appointed Interwest Transfer Co, Inc., Salt Lake City, Utah as
transfer agent for our shares of common stock.
SELLING STOCKHOLDERS
1,879,000 of the shares offered under this prospectus may be sold by
holders who have previously acquired their shares. We will not receive any of
the proceeds from sales of shares offered under the prospectus. All costs,
expenses and fees in connection with the registration of the selling
stockholdrs' shares will be borne by us. All brokerage commissions, if any,
attributable to the sale of shares by selling stockholders will be borne by
selling stockholders.
The selling stockholders are offering a maximum of 1,879,000 shares of our
common stock. The following table sets forth:
o the name of each person who is a selling stockholder;
o the title of each person who is one of our officers or directors;
o the number of securities owned by each such person at the date of the
prospectus; and
o the number of shares of common stock such person will own after
the offering.
The column "Shares Owned After the Offering" gives effect to the sale of
all the shares of common stock being offered by the prospectus.
29
Shares Owned Prior to Shares Owned After
Nuumber of to the Offering the Offering
Shares --------------------- ------------------
Selling Stockholders Offered Number Percent Number Percent
- -------------------- ----------- --------- ------- ------ -------
Amcor Holdings 5,000 5,000 0.0% 0 0.0%
American Energy Holdings LLC 5,000 5,000 0.0% 0 0.0%
Arden, Amos 10,000 10,000 0.0% 0 0.0%
Shinya, Araki 5,000 5,000 0.0% 0 0.0%
Baker, Vera 5,000 5,000 0.0% 0 0.0%
Baker, Gregory 25,000 25,000 0.0% 0 0.0%
Myron Baker 40,000 40,000 0.0% 0 0.0%
Basye, Martin 20,000 20,000 0.0% 0 0.0%
Berk, Elaine 5,000 5,000 0.0% 0 0.0%
Berk Theodore 165,000 165,000 1.3% 0 0.0%%
Blundell, Richard 10,000 10,000 0.0% 0 0.0%
Brown, Michelle 5,000 5,000 0.0% 0 0.0%
Carol, Bonnie 5,000 5,000 0.0% 0 0.0%
Chadwick, Linda 5,000 5,000 0.0% 0 0.0%
Colebrook, Inc. 400,000 400,000 3.3% 0 0.0%
Cox, Neil 8,000 8,000 0.0% 0 0.0%
Elliott, Thomas 5,000 5,000 0.0% 0 0.0%
Falcon Crest Capital, Inc. 500,000 500,000 4.1% 0 0.0%
Foley, Neil 5,000 5,000 0.0% 0 0.0%
Geyer, Jean 10,000 10,000 0.0% 0 0.0%
Graham, Kelly 25,000 25,000 0.0% 0 0.0%
Harlis Trust 5,000 5,000 0.0% 0 0.0%
Hass, Emma 8,000 8,000 0.0% 0 0.0%
Heng, Ken 10,000 10,000 0.0% 0 0.0%
John, James 16,000 16,000 0.0% 0 0.0%
Kaly Trust 5,000 5,000 0.0% 0 0.0%
Keon Transport, LLC 5,000 5,000 0.0% 0 0.0%
Koeller, Melvin 5,000 5,000 0.0% 0 0.0%
Kovalsky, Susan 5,000 5,000 0.0% 0 0.0%
Krimmel, Max 5,000 5,000 0.0% 0 0.0%
Lawson, Joseph A. 5,000 5,000 0.0% 0 0.0%
Lutsky, Donna 5,000 5,000 0.0% 0 0.0%
Lutsky, Jay 5,000 5,000 0.0% 0 0.0%
McGuire, Malcolm 10,000 10,000 0.0% 0 0.0%
Neil, Sue 8,000 8,000 0.0% 0 0.0%
Nexgen Holdings, Inc. 230,000 230,000 1.9% 0 0.0%
O'Hara, Kevin 8,000 8,000 0.0% 0 0.0%
Olson Jewelers 8,000 8,000 0.0% 0 0.0%
Oustz, Bettye 8,000 8,000 0.0% 0 0.0%
Pahng, Seon-Hwa 5,000 5,000 0.0% 0 0.0%
Palmisano, Angelo 5,000 5,000 0.0% 0 0.0%
Pol, Ed 5,000 5,000 0.0% 0 0.0%
Polevoy, Carol 8,000 8,000 0.0% 0 0.0%
Pye, Amy 5,000 5,000 0.0% 0 0.0%
Reisfield, Lisa 5,000 5,000 0.0% 0 0.0%
Renegade Consultants, Inc. 160,000 160,000 1.3%
Rutledge, S.J. 5,000 5,000 0.0% 0 0.0%
Sessions, Dean 5,000 5,000 0.0% 0 0.0%
Sessions, Patsy 5,000 5,000 0.0% 0 0.0%
Sessions, Robert 5,000 5,000 0.0% 0 0.0%
Sessions, Tanna 5,000 5,000 0.0% 0 0.0%
Sichel, Bart 5,000 5,000 0.0% 0 0.0%
Sichel, Jeffrey 5,000 5,000 0.0% 0 0.0%
Sichel, Michael B. 5,000 5,000 0.0% 0 0.0%
Pembridge Capital Establishment 5,000 5,000 0.0% 0 0.0%
Thompson, Eric 5,000 5,000 0.0% 0 0.0%
Thompson, Kevin 5,000 5,000 0.0% 0 0.0%
Weggeland, Layne 5,000 5,000 0.0% 0 0.0%
Whitbeck, John 5,000 5,000 0.0% 0 0.0%
Wong, Philip 8,000 8,000 0.0% 0 0.0%
- -----------------
1. Myron and Vera Baker are husband and wife. Gregory Baker is an adult son.
Kelly Graham is the son-in-law of Myron Baker and Vera Baker. Each
disclaims ownership of each others' shares.
2. Theodore Berk and Elaine Berk are husband and wife. Each disclaims
ownership of each others' shares.
3. Jay Lutsky and Donna Lutsky are husband and wife and disclaim any ownership
in each other's shares.
4. American Energy Holdings, Harliss Trust and Keon Transport are beneficially
owned by Harry Thompson, President.
5. Dean Sessions and Patsy Sessions are husband and wife. Robert Sessions is
the brother of Dean Sessions and the husband of Tanna Sessions.Each
disclaims ownership of each others' shares.
6. Rochfort Young is the beneficial owner of the Pembridge Capital
Establishment.
Common stock registered for resale constitutes approximately 15.2% of our
issued and outstanding common shares as of the date of the prospectus.
30
PLAN OF DISTRIBUTION OF SHARES OF EXISTING STOCKHOLDERS
The shares covered by this prospectus may be offered and sold from time to
time by the selling stockholders. The term "selling stockholders" includes
donees, pledgees, transferees or other successors-in-interest selling shares
received after the date of the prospectus from a selling stockholder as a gift,
pledge, partnership distribution or other non-sale related transfer. Selling
stockholders will act independently of us in making decisions with respect to
the timing, manner and size of each sale. Sales may be made on one or more
exchanges or in the over-the-counter market or otherwise, at prices and under
terms then prevailing or at prices related to the then current market price or
in negotiated transactions. Selling stockholders may sell their shares by one or
more of, or a combination of, the following methods:
o purchases by a broker-dealer as principal and resale by such broker-dealer
for its own account pursuant to the prospectus;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
o block trades in which the broker-dealer so engaged will attempt to sell the
shares as agent; and
o in privately negotiated transactions.
In addition, any shares that qualify for sale pursuant to Rule 144 may be
sold under Rule 144 rather than pursuant to the prospectus.
To the extent required, the prospectus may be amended or supplemented from
time to time to describe a specific plan of distribution. In connection with
distributions of the shares or otherwise, the selling stockholders may enter
into hedging transactions with broker-dealers or other financial institutions.
In connection with such transactions, broker-dealers or other financial
institutions may engage in short sales of the common stock in the course of
hedging the positions they assume with the selling stockholders. The selling
stockholders may also sell their common stock short and redeliver the shares to
close out such short positions. Selling stockholders may also enter into option
or other transactions with broker-dealers or other financial institutions which
require the delivery to such broker-dealer or other financial institution of
shares offered by this prospectus, which shares such broker-dealer or other
financial institution may resell pursuant to the prospectus (as supplemented or
amended to reflect such transaction). Selling stockholders may also pledge
shares to a broker-dealer or other financial institution, and, upon a default,
such broker-dealer or other financial institution, may effect sales of the
pledged shares pursuant to this prospectus (as supplemented or amended to
reflect such transaction).
In effecting sales, broker-dealers or agents engaged by selling
stockholders may arrange for other broker-dealers to participate. Broker-dealers
or agents may receive commissions, discounts or concessions from the selling
stockholders in amount to be negotiated immediately prior to the sale.
In offering the shares covered by the prospectus, selling stockholders and
any broker-dealers who execute sales for the selling stockholders may be deemed
to be "underwriters" within the meaning of the Securities Act in connection with
such sales. Any profits realized by selling stockholders and the compensation of
any broker-dealer may be deemed to be underwriting discounts and commissions.
In order to comply with the securities laws of certain states, shares must
be sold in such jurisdictions only through registered or licensed brokers or
dealers. In addition, in certain states, shares may not be sold unless they have
been registered or qualified for sale in the applicable state or an exemption
from the registration or qualification requirement is available and is complied
with.
31
We have advised the selling stockholders that the anti-manipulation rules
of Regulation M under the Exchange Act may apply to sales of shares in the
market and to the activities of the selling stockholders and their affiliates.
In addition, we will make copies of this prospectus available to the selling
stockholders for the purpose of satisfying the prospectus delivery requirements
of the Securities Act. Selling stockholders may indemnify any broker-dealer
participating in transactions involving the sale of the shares against certain
liabilities, including liabilities arising under the Securities Act.
At the time a particular offer of shares is made, if required, a prospectus
supplement will be distributed that will set forth the number of shares being
offered and the terms of the offering, including the name of any underwriter,
dealer or agent, the purchase price paid by any underwriter, any discount,
commission and other item constituting compensation, any discount, commission or
concession allowed or reallowed or paid to any dealer, and the proposed selling
price to the public.
We have agreed to indemnify the selling stockholders against certain
liabilities, including certain liabilities under the Securities Act.
We have agreed with the selling stockholders to keep the registration
statement of which this prospectus constitutes a part effective until the
earlier of:
o such time as all of the shares covered by this prospectus have been
disposed of pursuant to and in accordance with the Registration
Statement or
o two years from the effective date of the registration statement.
STOCK PURCHASE AGREEMENT
The following table sets forth certain information as of the date of the
prospectus, with respect to the investors for whom we are registering the resale
of the shares we may sell to the investors in the stock purchase agreements. The
investors propose selling all of their shares, in which case they would
beneficially own no shares after the offering. Neither of the investors is a
currently an affiliate of ours, has not had a material relationship with us
during the past three years, and is affiliated with a registered broker-dealer.
Name Shares Owned Prior Shares to be Sold Shares to be Owned % Owned After
to the Offering in the Offering After the Offering the Offering (1)
- --------------------- ------------------ ----------------- ------------------ ----------------
Colebrook, Inc. 500,000 (2)(3) 12,000,000 (2) 500,000 3.2%
Shayna Consultants, 5,000 300,000 5,000 0.0%
Inc.
------------------ ----------------- ------------------ ----------------
Totals 3,000,000 3,000,000 500,000 3.2%
1. Elaine Berk is the beneficial owner of Shayna Consultants and the owner of
5,000 of our shares of common stock
32
(1) Based on 12,279,000 shares of our common stock issued and outstanding as
of the date of the prospectus.
(2) Represents up to 3,000,000 shares of our common stock that we may sell to
the investors pursuant to the stock purchase agreement. Neither investor
may purchase our shares pursuant to the stock purchase agreement if, as a
result of such purchase, it would own in excess of 9.9% of our issued and
outstanding shares of common stock; and it will not own beneficially more
than 9.9% of our outstanding common stock at any time. The President of
Colebrook is Gerald Rehrer and of Shayna is Theodore Berk.
(3) The number of shares sold to the investors at any time may not exceed that
number of our shares the average closing bid price of which for the five
days preceding our notice that we are selling shares is greater than
$40,000 and that when added to the current number of shares acquired by
either investor during the 61 days preceding the put date or when added to
our shares owned by either investor, would exceed 9.9% of the total number
of shares of our common stock outstanding.
(4) Share ownership of investors to be completed++It is
obligated to purchase common stock under the stock purchase agreement; it
has no other commitments or arrangements to purchase or sell any of our
securities and will receive no commissions, fees or warrants from us.
On May 7, 2003, we entered into stock purchase agreements with Colebrook
and Shayna. The stock purchase agreement entitles us to issue and sell up to
$1.5 million of our common stock to the investors following the commencement of
trading of our common stock, in tranches not less than $22,000 not to exceed
$40,000.
We may start selling our common stock after the date our common stock
commences to trade and continue for a two year period. For us to sell stock to
the investors, there must be an effective registration statement on file with
the SEC covering the resale to the public by the investors of any shares that
they acquire under the stock purchase agreements. Also, we must give the
investors a one trading day advance notice of the date on which we intend to
exercise a particular put. The notice must indicate the number of shares of
common stock we intend to sell to the investors and the aggregate price of the
shares we are selling.
We cannot issue additional shares to the investors that, when added to the
shares either investor owns will result in that investor holding over 9.9% of
our outstanding shares upon completion of the put.
The investors will pay us 70% of the market price for each share of our
common stock. Market price is defined as the average closing bid price of our
common stock during the five trading days preceding the date of the notice.
33
Limitations and conditions to our rights to sell stock
- -------------------------------------------------------
Our ability to sell shares of our common stock, and the investors'
obligation to purchase the shares, is subject to the satisfaction of certain
conditions. These conditions, among others, include:
o we have satisfied all obligations under the stock purchase agreement;
o our common stock is quoted and traded on the O.T.C. Bulletin Board, or
listed on Nasdaq or an exchange;
o our representations and warranties in the stock purchase agreement are
accurate as of the date of each sale of our stock;
o we have reserved for issuance a sufficient number of shares of our
common stock to satisfy our obligations to issue our shares;
o the registration statement for the shares we will be issuing to the
investors is effective as of the each date on which we sell shares and
no stop order with respect to the registration statement is in effect;
o a minimum of seven trading days has passed from the date of the prior
sale before engaging a subsequent sale; and
o our trading volume averages at least 25,000 shares per day during the
five trading days preceding each notice to sell our shares.
The investors are not required to acquire and pay for any additional shares
of our common stock once the have acquired an aggregate of $1.5 million worth of
our shares. Additionally, the investors are not required to acquire and pay for
any shares of common stock with respect to any particular sale for which,
between the date we give advance notice of an intended sale and the date the
particular sale closes:
o we announce or implement a stock split or combination of our common
stock;
o we pay a dividend on our common stock;
o we make a distribution of all or any portion of our assets or
evidences of indebtedness to the holders of our common stock; or
o we consummate a major transaction, such as a sale of all or
substantially all of our assets or a merger or tender or exchange
offer that results in a change in control.
We may not require the investors to purchase any shares if:
o we, or any of our directors or executive officers, have engaged in a
transaction or conduct related to us that resulted in:
o an SEC enforcement action, administrative proceeding or civil lawsuit;
or
o a civil judgment or criminal conviction or for any other offense that,
if prosecuted criminally, would constitute a felony under applicable
law;
o we file for bankruptcy or any other proceeding for the relief of
debtors; or
o we breach covenants contained in the stock purchase agreement.
34
Termination
- -----------
We may terminate our right to initiate further sales of our stock or
terminate the stock purchase agreement at any time by providing the investors a
written notice of our intention to terminate. However, termination will not
affect any other rights or obligations we have concerning the stock purchase
agreement.
Right of Indemnification
- ------------------------
We have agreed to indemnify the investors from all liability and losses
resulting from any misrepresentations or breaches we make in connection with the
stock purchase agreement or the registration statement.
Effect on our Outstanding Common Stock
- --------------------------------------
The issuance of common stock under the stock purchase agreement will not
affect the rights or privileges of existing holders of common stock except that
the issuance of shares will dilute the economic and voting interests of each
shareholder.
We cannot determine the exact number of shares of our common stock issuable
under the stock purchase agreement and the resulting dilution to our existing
shareholders, which will vary with the extent to which we utilize the stock
purchase agreement and the market price of our common stock. The potential
effects of any dilution on our existing shareholders include the significant
dilution of the current shareholders' economic and voting interests in us.
THE INVESTORS' PLAN OF DISTRIBUTION
The investors are free to offer and sell its shares of our common stock at
such times, in such manner and at such prices as they may determine on a best
efforts basis. The types of transactions in which the shares of our common stock
are sold may include transactions in the over-the-counter market (including
block transactions), negotiated transactions, or a combination of such methods
of sale. The sales will be at market prices prevailing at the time of sale or at
negotiated prices. Such transactions may or may not involve brokers or dealers.
The investors have advised us that the have not entered into any agreement,
understanding or arrangement with any broker-dealers regarding the sale of its
shares, and do not have a coordinating broker acting in connection with the
proposed sale of our common stock.
The investors may sell their shares directly to purchasers or to or through
broker-dealers, which may act as agents. These broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
selling shareholders. They may also receive compensation from the purchasers of
our common stock for whom such broker-dealers may act as agents.
The investors are "underwriters" within the meaning of Section 2(a)(11) of
the Securities Act. Any commissions received by broker-dealers and any profit on
the resale of the shares of our common stock sold by them might be deemed to be
underwriting discounts or commissions. The investors may agree to indemnify
broker-dealers for transactions involving sales of our common stock against
certain liabilities, including liabilities arising under the Securities Act.
35
Because the investors are underwriters within the meaning of Section
2(a)(11) of the Securities Act, it will be subject to prospectus delivery
requirements.
We have informed the investors that the anti-manipulation rules of the SEC,
including Regulation M promulgated under the Securities Exchange Act of 1934,
will apply to its sales in the market, and have provided them with a copy of
such rules and regulations.
Regulation M may limit the timing of purchases and sales of any of the
shares of our common stock by the investors and any other person distributing
our common stock. The anti-manipulation rules under the Securities Exchange Act
may apply to sales of shares of our common stock in the market and to the
activities of the investors and its affiliates. Furthermore, Regulation M of the
Securities Exchange Act may restrict the ability of any person engaged in the
distribution of shares of our common stock to engage in market-making activities
with respect to the particular shares of common stock being distributed for a
period of up to five business days prior to the commencement of such
distribution. All of the foregoing may affect the marketability of our common
stock and the ability of any person or entity to engage in market-making
activities with respect to our common stock.
Rules 101 and 102 of Regulation M under the Securities Exchange Act, among
other things, generally prohibit certain participants in a distribution from
bidding for or purchasing for an account in which the participant has a
beneficial interest, any of the securities that are the subject of the
distribution. Rule 104 of Regulation M provides that no person, directly or
indirectly, may stabilize, effect any syndicate covering transaction, or impose
a penalty bid in connection with an offering of any security in contravention of
the rule's provisions.
The investors may not rely upon Rule 144 for the sale of our common shares
in the open market since it is an underwriter within the meaning of Section
2(a)(11) of the Securities Act and the safe-harbor provided by Rule 144 is not
available to underwriters of our common stock.
We will pay all expenses in connection with the registration and sale of
the common stock by the selling security holders. The investors will pay all
commissions, transfer taxes and other expenses associated with their sales. The
shares offered hereby are being registered pursuant to our contractual
obligations, and we have agreed to pay the expenses of the preparation of this
prospectus.
We have agreed to indemnify and reimburse the investors against any losses,
claims, damages or liabilities to which they may become subject under the
Securities Act of 1933, the Securities Exchange Act of 1934, or any other
federal or state law, insofar as such losses arise out of or are based upon (i)
any untrue statement or alleged untrue statement of a material fact contained in
a registration statement, or (ii) the omission or alleged omission of a material
fact required to be stated therein or necessary to make the statements therein
not misleading.
We believe that the securities purchase agreement complies with the
guidelines contained in the SEC's interpretative discussion on equity line
financings of April, 2001.
36
SHARES ELIGIBLE FOR FUTURE SALE
Upon the effectiveness of the registration statement, 1,879,000 shares of
our common stock presently held by stockholders will be freely tradable without
restriction under the Securities Act. None of these shares are held by our
affiliates as that term is defined in Rule 144 under the Securities Act. In
addition, up to 3,000,000 shares of our common stock pursuant to the stock
acquisition agreement may be resold publicly.
Shares held by affiliates will be eligible for sale in the public market,
subject to certain volume limitations and the expiration of applicable holding
periods under Rule 144 under the Securities Act. In general, under Rule 144 as
currently in effect, a person (or persons whose shares are aggregated) who has
beneficially owned restricted shares for at least one year (including the
holding period of any prior owner except an affiliate) would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of (1) 1% of the number of shares of common stock then outstanding
(which will equal approximately 150,279 shares assuming all the shares
underlying the stock purchase agreement are issued) or (2) the average weekly
trading volume of the common stock during the four calendar weeks preceding the
filing of a Form 144 with respect to such sale. Sales under Rule 144 are also
subject to certain manner of sale provisions and notice requirements and to the
availability of current public information about us. Under Rule 144(k), a person
who is not deemed to have been an affiliate of us at any time during the three
months preceding a sale, and who has beneficially owned the shares proposed to
be sold for at least two years (including the holding period of any prior owner
except an affiliate), is entitled to sell such shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144.
We can offer no assurance that an active public market in our shares or
warrants will develop initially on the OTCBB. Future sales of substantial
amounts of our shares (including shares issued upon exercise of outstanding
options) in the public market could adversely affect market prices prevailing
from time to time and could impair our ability to raise capital through the sale
of our equity securities.
WHERE YOU CAN FIND MORE INFORMATION
We have not previously been required to comply with the reporting
requirements of the Securities Exchange Act. We have filed with the SEC a
registration statement on Form SB-2 to register the securities offered by the
prospectus. The prospectus is part of the registration statement, and, as
permitted by the SEC's rules, does not contain all of the information in the
registration statement. For further information about us and the securities
offered under the prospectus, you may refer to the registration statement and to
the exhibits and schedules filed as a part of the registration statement. You
can review the registration statement and its exhibits at the public reference
facility maintained by the SEC at Judiciary Plaza, Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549 Please call the SEC at 1-800-SEC-0330 for further
information on the public reference facility. The SEC maintains an Internet site
at http://www.sec.gov that contains reports, proxy and information statements,
and other information regarding issuers, such as our company, that file
electronically with the SEC.
37
LEGAL PROCEEDINGS
We are not a party to nor are we aware of any material existing, pending or
threatened lawsuits or other legal actions.
LEGAL PROCEEDINGS
We are not a party to nor are we aware of any existing, pending or
threatened lawsuits or other legal actions.
LEGAL MATTERS
Certain legal matters, including the legality of the issuance of the shares
of common stock offered herein, are being passed upon for us by our counsel,
Joel Pensley, Esq., 211 Schoolhouse Road, Norfolk, Connecticut 06058. Mr.
Pensley is the beneficial owner of 360,000 shares of our common stock.
EXPERTS
Our financial statements as of December 31, 2001 and 200 have been included
herein and in the registration statement in reliance upon the report of xxx, an
independent certified public accountant, appearing elsewhere herein, and upon
the authority of as an expert in accounting and auditing.
38
WILON RESOURCES, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Balance Sheets as of December 31, 2002 and
September 30, 2002 (unaudited) F-3
Statements of Operations for the three months
ended December 31, 2002 and December 31, 2001 (unaudited) F-4
Statements of Operations for the years ended
September 30, 2002 and 2001 F-5
Statement of Stockholders' Equity for the three months
ended December 31, 2002 (unaudited) F-6
Statement of Cash Flows for the three months ended
December 31, 2002 and December 31, 2001 (unaudited) F-7
Notes to Financial Statements F-8 - F-15
Proforma Financial Statements F-16 - F-20
F-1
DRAKEFORD & DRAKEFORD, LLC
CERTIFIED PUBLIC ACCOUNTANTS
A LIMITED LIABILITY CORPORATION
ACCOUNTANTS & CONSULTANTS
601 Jefferson Davis Hwy Telephone: 770-575-0915
Fredericksburg, Va. 22408
To The Board of Directors and Shareholders of Wilon Resources, Inc.
We have audited the accompanying balance sheet of Wilon Resources, Inc. as
of September 30, 2002 and the related statements of operations, cash flows and
shareholders' equity for the years ended September 30, 2001 and 2002. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles 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 Wilon Resources, Inc. as of
September 30, 2002 and the results of its operations, shareholders' equity and
cash flows for the years ended September 30, 2001 and 2002 in conformity with
generally accepted accounting principles.
/s/ Drakeford & Drakeford, LLC
- --------------------------------
Drakeford & Drakeford, LLC
Certified Public Accountants
December 10, 2002
F-2
WILON RESOURCES, INC.
BALANCE SHEETS
ASSETS
September 30, 2002 December 31, 2002
------------------ -----------------
Unaudited
---------
CURRENT ASSETS
Cash and cash equivalents $ 416 $ 22,450
----------- -----------
Total current assets 416 22,450
PROPERTY AND EQUIPMENT, at cost
Gas properties 948,279 948,279
Furniture and fixtures 5,615 5,615
Vehicles 41,407 41,407
----------- -----------
995,301 995,301
Less: accumulated depreciation,
depletion, amortization (20,212) (26,929)
----------- -----------
Total property and equipment, net 975,089 968,372
OTHER ASSETS
Deposits 200 200
Loan receivable-officer 60,000 10,699
----------- -----------
Total other assets 60,200 10,899
----------- -----------
TOTAL ASSETS $1,035,705 1,001,721
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Payroll taxes and withholdings $ 0 $ 11,736
Loan payable 2,350 2,350
Notes payable 31,935 29,628
----------- -----------
Total current liabilities 34,285 43,714
LONG-TERM LIABILITIES
Deferred income 306,996 230,247
STOCKHOLDERS' EQUITY
Preferred Stock authroized
10,000,000shares, $0.001 par
value each. At December 31,
2002, there are no shares
outstanding
Common stock, no par value;
authorized - 1,000 shares;
issued and outstanding -
10,400,000 shares at September 30,
2002 and December 31, 2002 10,400 10,400
Retained Earnings 684,024 717,360
----------- -----------
Total stockholders' equity 694,424 727,760
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,035,705 $1,001,721
=========== ===========
The accompanying notes are an integral part of these statements.
F-2
WILON RESOURCES, INC.
STATEMENT OF OPERATIONS
Three Months Ended December 31, 2002 and 2001
Unaudited
Three months ended December 31,
2001 2002
---- ----
Revenues:
Gas and drilling program sales $ 230,000 $ 83,233
Royalty income 0 76,749
Sales of interest in gas producing properties 48,000 483
--------- ----------
Total revenues 278,000 160,465
--------- ----------
Cost of gas and drilling production 15,335 5,549
Selling, general and administrative 198,241 114,863
Depreciation, depletion and amortization 4,325 6,717
--------- ----------
Total expenses 217,901 127,129
Operating income 12,099 33,336
Interest income 231 0
Interest (expense) 0 0
--------- ----------
Net Income $ 12,330 $ 33,336
========= ==========
Basic and diluted earnings per common share $ 0.00 $ 0.00
========= ==========
Weighted average shares outstanding,
basic and diluted 10,400,000 10,400,000
========== ===========
The accompanying notes are an integral part of these statements.
F-3
WILON RESOURCES, INC.
STATEMENTS OF OPERATIONS
Years Ended September 30, 2001 and 2002
2001 2002
--------- --------
Revenues:
Gas and drilling program sales $ 245,142 $ 566,546
Royalty income 0 49,959
Sales of interest in gas producing properties 337,953
Total revenues 583,095 712,605
Cost of gas and drilling production 145,641 239,293
Selling, general and administrative 419,897 427,875
Depreciation, depletion and amortization 9,570 9,725
--------- ----------
Total expenses 575,108 676,893
--------- ----------
Operating income 7,987 35,712
Interest income 437 1,137
Interest (expense) (3,005) (3,419)
========= ==========
Net Income $ 5,419 $ 33,430
========= ==========
Basic and diluted earnings per common share $ 0.00 $ 0.00
========= ==========
Weighted average shares outstanding,
basic and diluted 10,400,000 10,400,000
=========== ==========
The accompanying notes are an integral part of these statements.
F-4
WILON RESOURCES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
Unaudited
Additional
Preferred stock Common stock paid-in Accumulated
Shares Amount Shares Amount capital earnings Total
------ ------ --------- -------- ------- -------- ------
Balance at September 30, 2000 0 $ 0 10,400,000 $ 10,400 $ 0 $ 645,175 $ 655,575
Net Income for the year
ended September 30, 2001 5,419 5,419
Balance at September 30, 2001 0 0 10,400,000 10,400 0 650,594 660,994
Net Income for the year ended
September 30, 2002 33,430 33,430
Net Income for the three months ended
December 31, 2002 (unaudited) 33,336 33,336
------ ------ ---------- -------- ------ --------- ---------
Balance at December 31, 2002
(unaudited) 0 $ 0 10,400,000 $ 10,400 $ 0 $ 717,360 $ 727,760
====== ====== ========== ========= ====== ========== ==========
The accompanying notes are an integral part of this statement.
F-6
WILON RESOURCES, INC.
STATEMENT OF CASH FLOWS
Three Months Ended December 31, 2002 and 2001
Unaudited
2001 2002
------ ------
OPERATING ACTIVITIES
Net Income $ 12,330 $ 33,336
Adjustments for noncash and nonoperating items:
Depreciation, depletion and amortization 4,325 6,717
Changes in operating assets and liabilities,
net of acquisitions:
Loan receivable-officer (24,550) 49,301
Deferred income 0 (76,749)
Payroll taxes and withholdings 2,415 11,736
---------- ----------
Cash provided by operating activities (5,480) 24,341
INVESTING ACTIVITIES
Property and equipment addition 1,145 0
FINANCING ACTIVITIES
Loans payable 44,315 (2,307)
---------- ----------
Cash provided (used) by financing activities 44,315 (2,307)
INCREASE IN CASH AND EQUIVALENTS 39,980 22,034
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 12,435 416
---------- ----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 52,415 $ 22,450
========== ==========
SUPPLEMENTAL CASH INFORMATION
Income Taxes 0 0
Interest expense 3,005 3,419
The accompanying notes are an integral part of these statements.
F-7
WILON RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Wilon Resources, Inc. (the "Company") was incorporated in October 1998 in
the state of Tennessee. The Company is engaged in natural gas exploration,
development and production, with primary emphasis on the production of gas
reserves through acquisitions of proved, producing gas properties in the states
of West Virginia and Kentucky. The Company presently holds approximately 15,000
acres by leases that have producing natural gas wells. A certain number of these
wells will be selected for deepening approximately 1,500 feet to the Devonian
Shale formation. Completion will be in accordance with standard completion
procedures for the area.
Office and Other Equipment
Office and other equipment are stated at cost and depreciated by the
straight-line method over estimated useful lives ranging from five to seven
years. Depreciation and amortization of office and other equipment amounted to
$6,717 for the period ended December 31, 2002.
Gas Properties
The Company uses the successful efforts method of accounting for gas
producing activities. Under successful efforts, costs to acquire mineral
interest in gas properties, to drill and equip exploratory wells that find
proved reserves, and to drill and equip developmental wells are capitalized.
Costs to drill exploratory wells that do not find proved reserves, costs of
developmental wells on properties the Company has no further interest in,
geological and geophysical costs, and costs of carrying and retaining unproved
properties are expensed. Unproved gas properties that are significant are
periodically assessed for impairment of value and a loss is recognized at the
time of impairment by providing an impairment allowance. Other unproved
properties are expensed when surrendered or expired.
When a property is determined to contain proved reserves, the capitalized
costs of such propertiesare transferred from unproved properties to proved
properties and are amortized by the unit-of-production method based upon
estimated proved developed reserves. To the extent that capitalized costs of
groups of proved properties having similar characteristics exceed the estimated
future net cash flows, the excess capitalized costs are written down to the
present value of such amounts. Estimated future net cash flows are determined
based primarily upon the estimated future proved reserves related to the
Company's current proved properties and, to a lesser extent, certain future net
cash flows related to operating and related fees due the Company related to its
management of various partnerships. The Company follows Statement of Financial
Accounting Standards ("SFAS") No. 121 which requires a review for impairment
whenever circumstances indicate that the carrying amount of an asset may not be
recoverable. Impairment is recorded as impaired properties are identified.
F-8
WILON RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- (Continued)
On sale or abandonment of an entire interest in an unproved property, gain
or loss is recognized, taking into consideration the amount of any recorded
impairment. If a partial interest in an unproved property is sold, the amount
received is treated as a reduction of the cost of the interest retained. The
carrying cost of unproved properties is not significant.
Income Taxes-Deferred Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
that will apply in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date. Since the Company has Sec 29 tax credits in excess of any tax
liability, there are no deferred taxes arising from the timing differences of
the deferred income liability. (See Note F)
Earnings Per Common Share
The Company has adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings per Share. SFAS No. 128 requires the
presentation of basic earnings (loss) per share (EPS) and diluted EPS. Basic EPS
is calculated by dividing net income or loss (available to common stockholders)
by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock, such as stock options, warrants,
convertible preferred stock and convertible debentures, were exercised or
converted into common stock. As discussed in Note F, there were no dilutive
securities during the period ended December 31, 2002. The weighted average
number of common and shares outstanding was 1,000 shares for the period ended
December 31, 2002.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk consists primarily of trade accounts receivable
with a variety of local, national, and international oil and natural gas
companies. Such credit risks are considered by management to be limited due to
the financial resources of the oil and natural gas companies.
Risk Factors
The Company operates in an environment with many financial risks including,
but not limited to, the ability to acquire additional economically recoverable
gas reserves, the continued ability to market drilling programs, the inherent
risks of the search for, development of and production of gas, the ability to
sell natural gas at prices which will provide attractive rates of return, the
volatility and seasonality of gas production and prices, and the highly
competitive nature of the industry as well as worldwide economic conditions.
F-9
WILON RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- (Continued)
Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed Of
The Company has adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
This statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. During the period ended December 31, 2002, the Company's management
concluded that there was no impairment of its long-lived assets.
Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
certificates of deposit and other financial instruments with maturity dates of
three months or less to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
Significant estimates used in calculating the Company's depletion, depreciation
and amortization which could be subject to significant near term revision
include estimated gas reserves. The Company's reserve estimates could vary
significantly depending on various factors, including, but not limited to
volatility of natural gas prices.
Certain Significant Estimates
Management estimates included in these financial statements for which it is
reasonably possible that a future event in the near term could cause the
estimate to change and the change could have a severe impact, are as follows:
Management's estimates of gas reserves are based on various assumptions,
including constant gas prices. Actual future production, cash flows, taxes,
operating expenses, development expenditures and quantities of recoverable gas
reserves may vary substantially from those assumed in the estimate. The accuracy
of any reserve estimate is a function of the quality of available data,
engineering and geological interpretation, and judgment. Subsequent evaluation
of the same reserves based upon production history will result in variations,
which may be substantial, in the estimated reserves. While it is at least
reasonably possible that the estimates above will change materially in the near
term, no estimate can be made of the range of possible losses that might occur.
F-10
WILON RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- (Continued)
Fair Value of Financial Instruments
The Company defines the fair value of a financial instrument as the amount
at which the instrument could be exchanged in a current transaction between
willing parties. Financial instruments included in the Company's financial
statements include cash and cash equivalents, short-term investments, accounts
receivable, other receivables, other assets, accounts payable, notes payable and
due to affiliates. Unless otherwise disclosed in the notes to the financial
statements, the carrying value of financial instruments is considered to
approximate fair value due to the short maturity and characteristics of those
instruments. The carrying value of debt approximates fair value as terms
approximate those currently available for similar debt instruments.
Gas Revenue
The Company recognizes gas revenues as income as the gas, extracted from
its properties, is sold. In the three months ended December 31, 2002, gas sales
increased by approximately $83,233 as compared to $230,000 for the three months
ended December 31, 2001. Well operating, gathering and other revenues include
operating fees charged to outside working interest owners in operated wells,
gathering fees (including transportation allowances and compression fees) ,
third party gas sales associated with purchased natural gas and other
miscellaneous revenues. Such revenue is recognized at the time it is earned and
the Company has a contractual right to receive payment.
F-11
WILON RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
(Continued)
NOTE B - DEFERRED INCOME
As of December 31, 2002, the Company had deferred income in the amount of
$230,247 recognized as long-term debt. This income will be recognized as the
production is established and matched toward this income. For the three months
ended December 31, 2002, approximately $76,749 was allocated as earned during
this period.
NOTE C - NOTES PAYABLE
The Company had outstanding a vehicle note in the amount of $20,046 with no
interest financed with Ford Credit and a line of credit with Cornerstone
Community Bank in the amount of $9,582 as of December 31, 2002.
NOTE D - LEASE OBLIGATIONS
The Company leases its office space at an annual rental of $15,000, payable
in monthly installments of $1,250. The five year lease was entered into on
November 30, 2001. The renewal term of the lease gives the Company an option to
renew the lease for three successive five year periods commencing on December 1,
2006, upon all terms, conditions and obligations set forth in the original lease
contract. Terms of any renewed lease is based upon the Consumer Price Index-All
Urban Consumers, U.S. City Average or a similar index if this index is no longer
published.
NOTE E - SHAREHOLDERS' EQUITY
Subsequent to the date of the Company's financial statements, the Company
amended its certificate of incorporation to increase the authorized number of
shares to 50,000,000 shares of common stock, $0.001 par value each share and
10,000,000 shares of preferred stock, $0.001 par value each share.
The shares of preferred stock may be issued from time to time in one or
more classes or series with such dividend rates, voting rights, rights of
conversion, rights upon dissolution or liquidation, and with such designations
or restrictions thereof as shall be determined by resolution adopted by the
Board of Directors at the time such stock is issued without further approval of
the shareholders.
Subsequent to the date of the financial statements, the Company authorized
a 10,400 to 1 forward split of the number of shares outstanding from 1,000 to
10,400,000. The number of shares outstanding for each period presented has been
restated to reflect a forward split of shares of common stock.
F-12
WILON RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
(Continued)
NOTE F - RELATED PARTY TRANSACTIONS
A promissory note dated September 29, 2002, has been executed in the amount
of Sixty Thousand ($60,000), with interest at the rate of 8% per annum, and
payable in equal yearly installments of $12,000, commencing October 1, 2003. As
of December 31, 2002, this note has been reduced to $10,699.
At this time, there are no employment agreements or contracts with related
parties or officers'.
NOTE G - INCOME TAXES
As of September 30, 2002, the Company's net income has been offset by the
Code Section 29 (credit for producing fuel from a nonconventional source) tax
credits that the Company has generated under Title 26. Section 29 of the
Internal Revenue Code specifies a credit of $3 for each barrel-of-oil equivalent
(BOE) of qualified fuel produced from a nonconventional source which is
attributable to the taxpayer. As of September 30, 2002, credits in the amounts
of $5,015, were utilized to offset income taxes for the current tax period.
NOTE H - GAS RESERVES INFORMATION
The estimates of proved gas reserves utilized in the preparation of the
financial statements are estimated in accordance with guidelines established by
the Securities and Exchange Commission and the Financial Accounting Standards
Board, which require that reserve estimates be prepared under existing economic
and operating conditions with no provision for price and cost escalations over
prices and costs existing at year end except by contractual arrangements.
The Company emphasizes that reserve estimates are inherently imprecise.
Accordingly, the estimates are expected to change as more current information
becomes available. The Company's policy is to amortize capitalized gas costs on
the unit of production method, based upon these reserve estimates. It is
reasonably possible that, because of changes in market conditions or the
inherent imprecision of these reserve estimates, that the estimates of future
cash inflows, future gross revenues, the amount gas reserves, the remaining
estimated lives of the gas properties, or any combination of the above may be
increased or reduced in the near term.
Proved developed and undeveloped reserves: (Natural gas )
Proved, developed, non-producing 0.5 BCF (Devonian Shale) $ 5,500,000
Proved, undeveloped 24.5 BCF (Devonian Shale) $ 17,885,000
Probable 12.5 BCF (Silurian-Mckenzie/
Keefer/Big Six) $ 12,500,000
F-13
WILON RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
NOTE H - GAS RESERVES INFORMATION (continued)
The Devonian Shale analysis is based upon 120-acre well spacing over a
reported 12,000 leased acres. Per well recovery is estimated at 0.25 BCF.
The above stated reserves do not include five other producing formations
known as the Saltsand, Mixim, Big Injun, Berea, and Clinton.
NOTE I - SUPPLEMENTAL INFORMATION RELATING TO GAS PRODUCING
ACTIVITIES
CAPITALIZED COSTS RELATING TO GAS PRODUCING ACTIVITIES
September 30, 2002 December 31, 2002
------------------ -----------------
Proved gas properties $ 948,279 $ 948,279
Less accumulated depreciation,
depletion, and impairment 15,249 19,450
------------ -----------
Net capitalized costs $ 933,030 $ 928,829
COST INCURRED IN GAS PRODUCING ACTIVITIES
Year ended Year ended Three months ended Three months ended
September 30, September 30, December 31, December 31,
2001 2002 2001 2002
Property acquisition costs $ 64,166 $ 39,946 $ 0 $ 0
Exploration costs 120,795 2,580 0 0
Development costs 684,506 14,620 0 0
Property acquisition costs include purchases of proved and unproved gas
properties.
F-14
WILON RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
(Continued)
NOTE I - SUPPLEMENTAL INFORMATION RELATING TO GAS PRODUCING
ACTIVITIES (continued)
RESULTS OF OPERATIONS FOR GAS PRODUCING ACTIVITIES
Year ended Year ended Three months ended Three months ended
September 30, September 30, December 31, December 31,
2001 2002 2001 2002
------ ------ ------ ------
Gas production $ 245,142 $ 566,546 $ 230,000 $ 83,233
Loss on sale of gas prop. 0 0 0 0
Production costs 123,794 203,402 15,335 5,549
Exploration expenses 21,847 35,891 0 0
Depreciation, depletion.
amortization and other 7,875 8,150 2,985 3,850
Provision for
income taxes 0 0 0 0
Results of operations for gas
gas producing activities
(excluding) corporate
overheadand financing costs) $ 91,626 $ 319,103 $ 211,680 $ 73,834
F-15
WILON RESOURCES, INC
Pro Forma Condensed Financial Statements
(Unaudited)
The following unaudited proforma combined condensed financial statements
present a combined balance sheet and related statement of operations of Wilon
Resources, Inc. (the "Company")and Wilon Energy Group, Inc., a Delaware
corporation giving effect to the reverse acquisition and using the purchase
method of accounting for the combination pursuant to an Acquisition Agreement,
the ("Agreement"), dated on March 1, 2003.
The transaction has been accounted for as the issuance of shares of common
stock by a private company for the net assets of the Company, accompanied by a
recapitalization. Accordingly, the financial statements of Company became the
consolidated financial statements of Wilon Resources, Inc.
The pro forma combined condensed balance sheet as of March 1, 2003 and the
related statements of income at March 1, 2003 which includes the statement of
income for the year ended December 31, 2002 gives effect to the transaction as
if it had been in effect throughout the periods presented. The information shown
is based upon numerous assumptions and estimates and is not necessarily
indicative of the results of future operations of the combined entities or the
actual results that would have occurred had the transaction been consummated
during the periods indicated. These statements should be read in conjunction
with the financial statements of the Company included herein.
F-16
WILON RESOURCES, INC.
PROFORMA CONSOLIDATED BALANCE SHEET
March 1, 2003
Wilon Wilon Consolidated
Resources Energy Wilon Resources,
Inc. Group, Inc. Adjustments Inc.
------------ ------------ ------------ ----------------
Assets
Current assets
Cash and cash
equivalents $ 22,450 $ 545 $ 22,995
---------- ------- -----------
Current assets 22,450 545 22,995
Property and
equipment-net 968,372 968,372
Other assets 10,899 10,899
Goodwill $1,336 1,336
Total assets $1,001,721 $545 $1,336 $1,003,602
========== ======= ===========
Liabilities and Stockholders' Equity
Current liabilities
Payroll taxes and withholdings $ 11,736 $ 11,736
Loan payable 2,350 2,350
---------- ----------
Notes payable 29,628 29,628
Total current liabilities 43,714
Deferred income 230,247 230,247
Stockholders' equity
Preferred Stock
authorized 10,000,000 shares,
$0.001 par value each. At
December 31, 2002, there were
no shares outstanding.
Common Stock 10,400 1,879 12,279
authorized 50,000,000 shares,
$0.001 par value each.
At December 31, 2001, there
were 10,400,000 shares
outstanding .
Additional paid-in capital 16,911 (16,911)
Retained earnings 717,360 (18,245) 18,245 717,360
---------- -------- -------- ----------
Total stockholders' equity 727,760 545 1,336 726,969
---------- -------- -------- ----------
Total liabilities and
stockholders' equity $1,001,721 $545 $1,336 $1,003,602
========== ======== ======== ==========
F-17
WILON RESOURCES, INC.
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
Wilon Wilon Consolidated
Resources Energy Wilon Resources,
Inc. Group, Inc. Adjustments Inc.
------------ ------------ ------------ ----------------
Revenue
Gas and drilling $ 83,233 $ 83,233
program sales
Royalty income 76,749 76,749
Sales of interests in gas 483 483
---------- ---------- ----------
producing properties
Total revenues 160,465 160,465
Cost of gas and 5,549 5,549
drilling production
Selling, general and 114,863 18,245 133,108
administrative
Non cash compensation
legal and consulting fees
Depreciation and amortization 6,717 _______ 6,717
Total expense 127,129 18,245 145,379
---------- ---------- ----------
Net income $ 33,336 $ (18,245) $ 15,091
========== ========== ==========
F-18
WILON RESOURCES, INC.
NOTES TO PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL
On March 1, 2003, the Company entered into a merger agreement with Wilon
Energy Group, Inc., ("Wilon Energy") a Delaware corporation under which Wilon
Energy was merged into the Company which was the surviving company in the
merger. The Company issued 1,879,000 shares of common stock to the stockholders
of Wilon Energy in exchange for all of the capital stock of Wilon Energy; and
the stockholders of the Company became the majority stockholders of the combined
entity. The transaction has been accounted using the purchase method of
accounting, and the purchase price of the transaction is based on the fair
market value of the Company's common stock issued. The purchase price will be
allocated to the Company's assets acquired by the Company based on their
relative fair market values at the acquisition date for as the issuance of
shares of common stock. Accordingly, the financial statements of Company became
the consolidated financial statements of Wilon Resources, Inc.
(2) FISCAL YEAR ENDS
The unaudited proforma consolidated balance sheet includes the balance
sheet of the as at December 31, 2002 and Wilon Energy as at March 1, 2003 and
unaudited statement of operations for the Company for the year ended December
31, 2002 and the unaudited statements of operations for Wilon Energy for the
period from inception to March 1, 2003.
(3) PRO FORMA ADJUSTMENTS
The adjustments to the accompanying unaudited consolidated balance sheet
are described below:
(A) Adjustment to reflect issuance of approximately 1,879,000 shares of
the Company's stock in exchange for all of the issued and outstanding
shares of common stock of Wilon Energy.
Under this accounting treatment, the assets acquired of Wilon Energy have
been recorded at their estimated fair values as of the date of acquisition. The
excess purchase price over the fair value of the assets acquired has been
recorded as goodwill.
The following shows the allocation of the purchase price to the assets of
the Company.
Assets acquired at fair value $ 545
Goodwill 1,336
----------
Purchase price $ 1,881
==========
There are no anticipated adjustments to the statements of operations and
cash flows as a result of the acquisition.
F-19
(4) Transactions of Wilon Energy Group, Inc.
Prior to the merger of Wilon Energy into the Company, Wilon Energy issued
an aggregate of 1,550,000 shares of its common stock in consideration of
consulting services valued at $15,500 or $0.01 per share. The shares were issued
as follows: 400,000 shares to Colebrook, Inc.; 230,000 shares to Nexgen
Holdings, Inc.; 500,000 shares to Falcon Crest, Inc.; 160,000 shares to to
Theodore Berk; 160,000 shares to Renegade Consulting, Inc. and 100,000 shares to
Joel Pensley, Esq. for legal services. Joel Pensley, Esq. is the beneficial
owner of Renegade Consulting.
Prior to the merger of Wilon Energy into the Company, Wilon Energy also
sold 329,000 of its shares of common stock in a private placement for an
aggregate consideration of $3,290 or $0.01 per share.
(5) Change in Company's Capitalization
Subsequent to the date of the Company's financial statements, the Company
amended its certificate of incorporation to increase the authorized number of
shares to 50,000,000 shares of common stock, $0.001 par value each share and
10,000,000 shares of preferred stock, $0.001 par value each share.
Shares of preferred stock may be issued from time to time in one or more
classes or series with such dividend rates, voting rights, rights of conversion,
rights upon dissolution or liquidation, and with such designations or
restrictions thereof as shall be determined by resolution adopted by the Board
of Directors at the time such stock is issued without further approval of the
shareholders.
Subsequent to the date of the financial statements and prior to the merger
with Wilon Energy, the Company authorized a 10,400 to 1 forward split of the
number of shares outstanding from 1,000 to 10,400,000. The number of shares
outstanding for each period presented has been restated to reflect the forward
split of shares of common stock.
(6) Change of Domicile
On May 12, 2003, the Company exchanged issued and ouststanding shares on a
one-for-one basis with a newly formed Delaware corporation, Wilon Energy Group,
Inc. (WEG). It thus became the operating subsidiary of WEG which became its
holding company.
WEG's certificate of incorporation authorizes the issuance of 50,000,000
shares of common stock, $0.001 par value each share and 10,000,000 shares of
preferred stock, $0.001 par value each share.
Shares of preferred stock may be issued from time to time in one or more
classes or series with such dividend rates, voting rights, rights of conversion,
rights upon dissolution or liquidation, and with such designations or
restrictions thereof as shall be determined by resolution adopted by the Board
of Directors at the time such stock is issued without further approval of the
shareholders.
F-20
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law provides for the indemnification of
the officers, directors and corporate employees and agents of Wilon Energy
Group, Inc. (the "Registrant") under certain circumstances as follows:
INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS; INSURANCE.
(a) A corporation may 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 (other than an action by or in the right of the corporation)
by reason of the fact that he 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 him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
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 his conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction,
or upon a plea of nolo contendere or its equivalent, shall not, of itself,
create a presumption that the person did not act in good faith and in a
manner which he 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 reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he 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) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation and except that 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 circumstance of the case, such person is fairly and reasonably entitled
to indemnity for such expenses which the Court of Chancery or such court
shall deem proper.
(c) To the extent that a director, officer, employee or agent of a corporation
has been successful on the merits or otherwise in defense of any action,
suit or proceeding referred to in subsections (a) and (b) of this section,
or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorney's fees) actually and
reasonably incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section (unless
ordered by a court) shall be made by the corporation only as authorized in
the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances because
he has met the applicable standard of conduct set forth in subsections (a)
and (b) of this section. Such determination shall be made (1) by the board
of directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (2) if such a
quorum is not obtainable, or, even if obtainable a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, or
(3) by the stockholders.
(e) Expenses 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 to repay such amount if it shall ultimately be determined that he
is not entitled to be indemnified by the corporation as authorized in this
section. Such expenses including attorneys' fees incurred by other
employees and agents may be so paid upon such terms and conditions, if any,
as the board of directors deems appropriate.
(f) The indemnification and advancement expenses provided by, or granted
pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement expenses may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in
his official capacity and as to action in another capacity while holding
such office.
(g) A corporation shall have 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 him and incurred by him in any such capacity or arising out of his
status as such, whether or not the corporation would have the power to
indemnify him against such liability under this section.
(h) For purposes of this Section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers and
employees or agents so that any person who is or was a director, officer,
employee or agent of such constituent corporation, or is or was serving at
the request of such constituent corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise, shall stand in the same position under this section
with respect to the resulting or surviving corporation as he would have
with respect to such constituent corporation as he would have with respect
to such constituent corporation if its separate existence had continued.
(i) For purposes of this section, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan;
and references to "serving at the request of the corporation" shall include
any service as a director, officer, employee or agent of the corporation
which imposes duties on, or involves services by, such director, officer,
employee, or agent with respect to an employee benefit plan, its
participants, or beneficiaries; and a person who acted in good faith and in
a manner he reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit plan shall be deemed to have acted
in a manner "not opposed to the best interests of the corporation" as
referred to in this section.
(j) The indemnification and advancement of expenses provided by, or granted
pursuant to, this section shall, unless otherwise provided when authorized
or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors, and administrators of such person.
Articles Eighth and Ninth of the Registrant's certificate of incorporation
provide as follows:
EIGHTH
The personal liability of the directors of the Corporation is hereby
eliminated to the fullest extent permitted by the provisions of paragraph (7) of
subsection (b) of Section 102 of the Delaware General Corporation Law, as the
same may be amended and supplemented.
NINTH
The Corporation shall, to the fullest extent permitted by the provisions of
Section 145 of the Delaware General Corporation Law, as the same may be amended
and supplemented, indemnify any and all persons whom it shall have power to
indemnify under said section from and against any and all of the expenses,
liabilities or other matters referred to in or covered by said section, and the
indemnification provided for herein shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any by-law, agreement,
vote of stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action In another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person. The foregoing right of
indemnification shall in no way be exclusive of any other rights of
indemnification to which such person may be entitled under any by-law,
agreement, vote of stockholders or disinterested directors, or otherwise.
Article XII of the Registrant's by-laws provides as follows:
ARTICLE XII--INDEMNIFICATION OF DIRECTORS AND OFFICERS
1. Indemnification. The corporation shall indemnify any person who was or
is a party or is threatened to be made a party to any proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that such person is or was a
director, trustee, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, trustee, 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 such person
in connection with such action, suit or proceeding if such person acted in good
faith and in a manner such 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 such person's conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, by itself, create a presumption that the person did not act in good
faith and in a manner which the person reasonably believed to be in or not
opposed to the best interest of the corporation, and with respect to any
criminal action or proceeding, had reasonable cause to believe that such
person's conduct was lawful.
2. Derivative Action. The corporation shall indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in the corporation's favor by reason of the fact that such person is or
was a director, trustee, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, trustee, officer,
employee or agent of any other 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 such person
in connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the corporation; provided, however, that 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 for gross negligence or
willful misconduct in the performance of such person's duty to the corporation
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expenses as such court shall deem proper. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, by itself, create a presumption that
the person did not act in good faith and in a manner which the person reasonably
believed to be in or not opposed to the best interest of the corporation.
3. Successful Defense. To the extent that a director, trustee, officer,
employee or agent of the corporation has been successful, on the merits or
otherwise, in whole or in part, in defense of any action, suit or proceeding
referred to in paragraphs 1 and 2 above, or in defense of any claim, issue or
matter therein, such person shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
therewith.
4. Authorization. Any indemnification under paragraph 1 and 2 above (unless
ordered by a court) shall be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the director,
trustee, officer, employee or agent is proper in the circumstances because such
person has met the applicable standard of conduct set forth in paragraph 1 and 2
above. Such determination shall be made (a) by the board of directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, (b) by independent legal counsel (selected by one or
more of the directors, whether or not a quorum and whether or not disinterested)
in a written opinion, or (c) by the stockholders. Anyone making such a
determination under this paragraph 4 may determine that a person has met the
standards therein set forth as to some claims, issues or matters but not as to
others, and may reasonably prorate amounts to be paid as indemnification.
5. Advances. Expenses incurred in defending civil or criminal actions,
suits or proceedings shall be paid by the corporation, at any time or from time
to time in advance of the final disposition of such action, suit or proceeding
as authorized in the manner provided in paragraph 4 above upon receipt of an
undertaking by or on behalf of the director, trustee, officer, employee or agent
to repay such amount unless it shall ultimately be determined by the corporation
that the payment of expenses is authorized in this Section.
6. Nonexclusivity. The indemnification provided in this Section shall not
be deemed exclusive of any other rights to which those indemnified may be
entitled under any law, by-law, agreement, vote of stockholders or disinterested
director or otherwise, both as to action in such person's official capacity and
as to action in another capacity while holding such office, and shall continue
as to a person who has ceased to be a director, trustee, officer, employee or
agent and shall insure to the benefit of the heirs, executors, and
administrators of such a person.
7. Insurance. The Corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, trustee, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, trustee, officer, employee or agent of any
corporation, partnership, joint venture, trust or other enterprise, against any
liability assessed against 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.
8. "Corporation" Defined. For purpose of this action, references to the
"corporation" shall include, in addition to the corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had the power and authority to indemnify its directors, trustees, officers,
employees or agents, so that any person who is or was a director, trustee,
officer, employee or agent of such of constituent corporation will be considered
as if such person was a director, trustee, officer, employee or agent of the
corporation.
ITEM 25. EXPENSES OF ISSUANCE AND DISTRIBUTION.
The other expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered are estimated as
follows:
Securities and Exchange Commission Registration Fee............. $ 225
Legal Fees...................................................... 20,000*
Accounting Fees................................................. 22,000
Printing and Engraving.......................................... 500
Blue Sky Qualification Fees and Expenses........................ 500
Transfer Agent Fee.............................................. 1,000
Miscellaneous................................................... 1,000
-----------
Total.................................................... $ 45,225
* Joel Pensley, Esq. has received 200,000 shares of our common stock as
securities counsel. He will not receive any cash fee.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The registrant was formed on May 7, 2003 under the laws of Delaware. On
March 1, 2003, Wilon Energy Group, Inc. (WEGI) merged into the registrant and
the registrant was the surviving company. Prior to the merger, WEGI issued an
aggregate of 1,550,000 shares of its common stock in consideration of consulting
services valued at $15,500 or $0.01 per share. The shares were issued as
follows: 400,000 shares to Colebrook, Inc.; 230,000 shares to Nexgen Holdings,
Inc.; 500,000 shares to Falcon Crest, Inc.; 160,000 shares to to Theodore Berk;
160,000 shares to Renegade Consulting, Inc. and 100,000 shares to Joel Pensley,
Esq. for legal services. Joel Pensley, Esq. is the beneficial owner of Renegade
Consulting. It also offered and sold pursuant to a private placement under Rule
504 to the Securities Act 329,000 shares at $.01/share
Wilon Resources, in 1998, issued 1,000 shares of its common stock to Harlis
Trust, beneficially owned by its President, Harry Thompson, for $1,000 cash. In
April, Wilon Resources forward split its common stock in the ratio of 1,400:1 so
that there were 10,400,000 shares of its common stock outstanding. In April,
2003, Harlis Trust distributed 900,000 shares as follows:
Distributee Shares
- ----------- --------
Amy Pye 100,000
Eric Thompson 100,000
Kevin Thompson 100,000
S. J. Rutledge 100,000
Vera F. Baker Trust 400,000
Joel Pensley, Esq. 100,000
These securities were sold under the exemption from registration provided
by Section 4(2) of the Securities Act. Neither the Registrant nor any person
acting on its behalf offered or sold the securities by means of any form of
general solicitation or general advertising. All purchasers represented in
writing that they acquired the securities for their own accounts. A legend was
placed on the stock certificates stating that the securities have not been
registered under the Securities Act and cannot be sold or otherwise transferred
without an effective registration or an exemption therefrom.
II-4
ITEM 28. UNDERTAKINGS.
The Registrant undertakes:
(1) To file, during any period in which offers or sales are being made,
post-effective amendment to this registration statement (the
"Registration Statement"):
(i) To include any prospectus required by Section 10 (a) (3) of the
Securities Act of 1933 (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising after
the Effective Date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement;
(iii)To include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in this
registration statement, including (but not limited to) the
addition of an underwriter.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be treated as
a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to any provisions contained in its Certificate of
Incorporation, or by-laws, or otherwise, the Registrant has been advised that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-5
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certified that it has reasonable grounds to believe that it meets all
of the requirements of the filing on Form SB-2 and authorized the registration
statement to be signed on its behalf by the undersigned, in Chattanooga,
Tennessee on May 15, 2003.
WILON ENERGY GROUP, INC.
By: /s/ Harry Thompson
----------------------------------
Harry Thompson
President
Chief Executive Officer
Chief Financial Officer
In accordance with the requirements of the Securities Act of 1933, the
registration statement was signed by the following pesons in the capacities and
on the dates stated.
SIGNATURE TITLE DATED
- ---------------------- --------------------------- ------------------
/s/ Harry Thompson
- ----------------------
Harry Thompson President, Treasurer, May 15, 2003
and a Director
/s/ Amy Pye
- ----------------------
Amy Pye Secretary and a Director May 15, 2003
/s/ Eric J. Thompson
- ----------------------
Eric J. Thompson Vice-President and a Director May 15, 2003
/s/ Bryan P. S. Gray
- ----------------------
Bryan P. S. Gray Director May 15, 2003
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Certificate of Incorporation of Wilon Energy Group, Inc.
3.2 By-Laws of Wilon Energy Group, Inc.
3.3 Agreement and Plan of Merger by and between Wilon Resources, Inc. and
Wilon Energy Group, Inc. (to be submitted by amendment)
4.1 Specimen Certificate of Common Stock
4.2 Acquisition of Wilon Resources, Inc. by Wilon Energy Group, Inc.
5.1 Opinion of Counsel
10.1 Stock Purchase Agreement by and between Wilon Energy Group, Inc. and
Colebrook, Inc.
10.3 Stock Purchase Agreement by and between Wilon Energy Group, Inc. and
Shayna Consulting, Inc.
10.4 Gas Well Operating Agreement between Wilon Resources, Inc. with Mid
American Completion Co., Inc.
23.1 Accountant's Consent
23.2 Counsel's Consent to Use Opinion
- ------------------
II-9