Registration Number:
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM SB-2/A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Amendment No. 8)
WILON RESOURCES, INC.
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(Name of small business
issuer in its charter)
Tennessee 1311 62-1757285
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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:
Louis M. Smith, Esq.
4306 Talahi Way
Louisville, Kentucky 40207
Phone: (800) 509-8853
Fax: (423) 876-8549
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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Common stock 4,000,000 $ 1.00 $ 4,000,000 $ 506.80
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TOTAL $ 4,000,000 $ 506.80
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(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.
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These securities may not be sold until the registration statement filed with the
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securities and exchange commission is effective. This prospectus is not an offer
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to sell, nor does it seek an offer to buy, these securities in any state where
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the offer or sale is not permitted.
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Subject to completion: Dated November 10, 2003
PROSPECTUS
WILON RESOURCES, INC.
4,000,000 SHARES OF COMMON STOCK
This prospectus relates to the sale of 4,000,000 shares of common stock of
our initial public offering. We are offering on a best-efforts no minimum up to
a maximum of 4,000,000 shares. There will be no escrow/trust fund and the
Company will have immediate use of such funds.
The offering will expire two years from the effective date of the
registration statement of which the prospectus is a part. None of our securities
trades on any securities market and currently, no public market exists for the
shares. We intend to sell the shares of common stock through our underwriter,
Midas Securities, Inc. In connection with this engagement, Midas will perform
services which are normal and customary for a placement agent to perform in
connection with the transactions. The Company agrees to pay Midas for its
services a fee equal to ten percent of the aggregate gross proceeds received or
to be received by the Company from the sale of securities in any transaction
during the term and also, five year warrants to purchase an amount of securities
equal to ten percent of the securities sold in the transactions at a per share
exercise price equal to the offering price of the securities.
As you review the prospectus, you should carefully consider the matters
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described in "Risk Factors" beginning on page 5.
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Neither the Securities and Exchange Commission nor any state securities
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commission has approved or disapproved of these securities or passed on the
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accuracy or adequacy of the prospectus. Any representation to the contrary is a
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criminal offense.
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Per share Total
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Public offering price $1.00 $4,000,000
Proceeds, before expenses $4,000,000
Underwriting expenses $ 400,000
The shares will be ready for delivery on or about __________, 2005.
Midas Securities, Inc.
The date of this prospectus is November 10, 2003.
////PAGES SUBJECT TO CONFIRMATION////
TABLE OF CONTENTS
PAGE
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Prospectus Summary..................................................... 1
The Offering........................................................... 2
Summary Financial Information.......................................... 3
Risk Factors........................................................... 5
Use of Proceeds. ...................................................... 10
Determination of Offering Price ....................................... 11
Dilution .............................................................. 11
Plan of Distribution .................................................. 12
Capitalization......................................................... 13
Dividend Policy........................................................ 13
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 14
Our Business........................................................... 20
Management............................................................. 31
Certain Related Party Transactions..................................... 35
Principal Stockholders................................................. 36
Description of Securities.............................................. 37
Shares Eligible for Future Sale........................................ 39
Where You Can Find More Information.................................... 39
Legal Proceedings...................................................... 40
Legal Matters.......................................................... 40
Experts................................................................ 40
Financial Statements................................................... F-1
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.
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 company engaged 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 drilling/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 marjority of the working
interest and also own and operate a gas gathering system in Wayne County, West
Virginia which gathers natural gas from our wells.
We were formed under the laws of Tennessee in October, 1998.
Our executive officers are located at 931 Ashland Terrace, Chattanooga
Tennessee 37415; and our telephone number at that address is (800) 509-8853.
1
THE OFFERING
Common stock offered .......... 4,000,000 shares common stock
Shares outstanding after
this offering ..............15,995,000 shares of common stock
Use of proceeds................. Drilling of natural gas wells,
(only common stock develop our existing wells and
offered) extend gathering system.
Risk factors An investment in our shares involves risks.
Please read "Risk Factors" beginning on page
five of this prospectus.
2
SUMMARY FINANCIAL INFORMATION
SUMMARY FINANCIAL INFORMATION
The following table sets forth our summary financial data for the three
months ended December 31, 2004(unaudited) and 2003(unaudited) and for the years
ended September 30, 2004 and 2003.
Statement of Operations
Unaudited
For the three months For the years
ended December 31, ended September 30,
2004 2003 2004 2003
--------- --------- ---------- -------
Revenues:
Gas sales $ 342,387 $ 415,000 $1,559,869 $1,079,366
Sale of royalty interest in gas
producing properties 0 0 0 316,942
------- ------- ------- -------
Total revenues 342,387 415,000 1,559,869 1,396,308
------- ------- ------- -------
Cost of gas and drilling production 148,779 186,318 612,465 363,419
Selling, general and administrative 76,412 87,494 506,807 475,189
Depreciation, depletion and
amortization 28,254 22,034 92,460 73,874
------- ------- ------- -------
Total expenses 253,445 295,846 1,211,732 912,482
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Operating income 88,942 119,154 348,137 483,826
Interest income 0 992 1,142 912
Interest (expense) (345) 0 (345) 0
------- ------- ------- -------
Net income before income tax expense 88,597 120,146 348,934 484,738
Provision for income taxes 18,373 21,716 118,638 122,993
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Net Income $ 70,224 $ 98,430 $ 230,296 $ 361,745
========= ========== ========== ========
Basic and diluted earnings
per common share $ .01 $ .01 $ .02 $ .03
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Weighted average shares outstanding,
basic and diluted 11,995,000 11,995,000 11,995,000 11,995,000
========== ========== ========= =========
3
Unaudited
For the three months For the years
ended December 31, ended September 30,
2004 2003 2004 2003
--------- --------- ---------- -------
Operating Data
Net production:
Natural gas-Net Sales $ 168,183 $211,937 $ 870,367 $ 649,137
Natural gas (Mcf) 77,463 110,963 352,912 288,601
Average sales price:
Natural gas (per Mcf) $ 4.42 $ 3.74 $ 4.42 $ 3.74
Other Financial Information:
Net cash provided (used) by
Operating activities ($ 7,238) $ 116,835 $ 460,415 $ 183,727
Cash used by investing activities:
Capital expenditures $ 0 $ 112,415 $ 461,133 $ 158,567
Net cash provided (used) by financing
Activities-net debt repayments ($ 3,891) ($ 2,307) $ 19,556 ($ 18,810)
Unaudited
As of December 31, As of September 30,
2004 2003 2004 2003
Balance Sheet Data
Total assets $1,414,876 $1,179,941 $1,454,259 $1,087,447
Long-term debt $ 21,683 $ 1,589 $ 23,267 $ 3,896
Stockholders' equity $1,356,689 $1,154,599 $1,286,465 $1,056,169
4
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.
RISKS RELATING TO OUR BUSINESS
Natural gas prices are volatile. A substantial decrease in prices would
decrease our revenues and the value of our natural gas properties.
The prices we receive for our gas are volatile. Our future financial
condition and results of operations, and the value of our natural gas
properties, will depend upon market prices for natural gas. Natural gas prices
historically have been volatile and will likely continue to be volatile in the
future. Prices for natural gas are dictated by supply and demand. The factors
affecting supply include:
* the availability of pipeline capacity;
* domestic governmental regulations and taxes; and
* political instability or armed conflict in gas producing regions.
The factors affecting demand include:
* weather conditions;.
* the price and availability of alternative fuels;
* the price and level of foreign imports; and
* the overall economic environment.
These factors and the volatility of the energy markets make it extremely
difficult to predict future gas price movements with any certainty. Price
fluctuations can materially adversely affect us because:
* price decrease will reduce our revenues;
* price decreases may make it more difficult to obtain financing for our
drilling and development operations through sponsored drilling investment
partnerships, borrowing or otherwise; and
* price decreases may make some reserves uneconomic to produce, reducing our
reserves and cash flow.
5
If we cannot replace reserves, our revenues and production will decline.
We face risks in acquiring and drilling wells in that they may not produce
as anticipated or which would reduce our revenues and reduce or eliminate our
profits. 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.
Estimates of proved reserves may vary and, as a result, revenues from
production may vary significantly from our expectations.
We base our estimates of our proved natural gas reserves and future net
revenues from those reserves upon analyses that rely upon various assumptions,
including those required by the Securities and Exchange Commission, as to
natural gas prices, taxes, development expenses, capital expenses, operating
expenses and availability of funds. There are numerous uncertainties inherent in
estimating quantities of reserves of gas and in projecting future rates of
production and the timing of development expenditures, including many factors
beyond the Company's control. The reserve estimates in this prospectus are based
on various assumptions, including, for example, constant gas prices, operating
expenditures and the availability of funds, and, therefore, are inherently
imprecise indications of future net cash flows. Actual future production, cash
flows, taxes, operating expenses, development expenditures and quantities of
recoverable gas reserves may vary substantially from those in the estimates. Any
significant variance in these assumptions could materially affect the estimated
quantity and value of reserves set forth in this prospectus. Additionally, the
Company's reserves may be subject to downward or upward revision based upon
actual production performance, results of future development and exploration,
prevailing gas prices and other factors, many of which are beyond the Company's
control.
6
Competition in the natural gas industry is intense, which may adversely
affect our ability to acquire gas properties and companies and to obtain
capital.
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.
Our operations may incur substantial liabilities to comply with
environmental laws and regulations, well blowouts, pipeline ruptures and other
operating losses to us.
We face operating hazards and environmental risks which could subject us to
litigation or prevent us from producing natural gas from our wells which could
destroy our business. 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.
7
Our future success is dependent, in part, on the performance and continued
service of our President.
One of our four directors do not have any prior business experience in
natural gas production. The Company depends to a large extent on the services of
the President of the Company and a loss of his services would have a material
adverse effect on our financial condition, operating results, and on the public
market for our common stock.
Our controlling shareholders may exercise significant control over us
following this offering, depriving other stockholders of the ability to elect
directors or effect other corporate actions.
The Company's executive officers and directors and certain 5% shareholders
hold approximately 87% of the Company's outstanding shares of common stock. As a
result, officers, directors and such shareholders have the ability to exert
significant influence over the business affairs of the Company, including the
ability to control the election of directors and results of voting on all
matters requiring shareholder approval. This concentration of voting power may
delay or prevent a potential change in control.
Our revenue model may not be successful and our business may decline.
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; and, as a result,
our business could decline. 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.
8
Our common stock is subject to the "Penny Stock" rules of the SEC and the
trading market in our securities is limited, which makes transactions in our
stock cumbersome and may reduce the value of an investment in our stock.
Trading in our common stock is subject to the requirements of certain rules
under the Exchange Act which require additional disclosure by broker-dealers in
connection with any trades generally involving any non-NASDAQ equity security
that has a market price of less than $5.00 per share, subject to certain
exceptions. Such rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
associated risks, and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors. For these types of transactions, the broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transaction prior to sale. The
additional burdens imposed upon broker-dealers by such requirements may
discourage broker-dealers from effecting transactions in our Common Stock, which
could severely limit the market liquidity of our Common Stock.
There is presently no market for our common stock and such market may not
develop. In addition, our stock price may be volatile.
There is no assurance that a ready public market for our securities will
develop. It is likely that any market develops for our Common Stock will be
highly volatile and that the trading volume in such market will be limited. The
trading price of our Common Stock could be subject to wide fluctuations in
response to quarter-to-quarter variations in our operating results,
announcements of drilling results by the Company and other events or factors. In
addition, the U.S. stock market has from time to time experienced extreme price
and volume fluctuations that have affected the market price for many companies
and which often have been unrelated to the operating performance of these
companies. These broad market fluctuations may adversely affect the market price
of the Company's securities.
In the event that none or partial offering is sold, we may not have suff-
icient proceeds to implement our business plan which would cause our company to
fail.
If none or a partial offering is sold,we may not have sufficient proceeds
to implement our sales and business expansion or fund our working capital. To
the extent that other sources of funds are not available, we will not be able to
expand operations beyond current levels and we may be required to cease some or
all of our operations.
9
USE OF PROCEEDS
We estimate that the net proceeds from our sale of 4,000,000 shares of
common stock in this offering at an initial public price of $1.00 per share,
after deducting underwriting discounts and commissions and estimated offering
expenses payable by us, will be approximately $3,600,000. We expect to use the
net proceeds to expand our lease holdings, rework and deepen existing wells, and
extend our gathering system. The estimated cost on re-working and deepening our
existing wells will be approximately $150,000 per well and the estimated cost on
extending the gathering system will be approximately $1,500,000. If all or a
substantial part of the offering is not sold, the number of wells to be
reworked will be decreased by the amount of net proceeds received. The following
table details the Company's projected use of proceeds based on a best-efforts
no minimum offering.
Maximum-100%
Use of Proceeds (Amount Net of Commission)
Drilling of new gas wells $ 1,350,000
Develop existing wells 750,000
Extending gathering system 1,500,000
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Total $ 3,600,000
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Levels and Priority of Funding (Amount Net of Commission)
10% - All proceeds toward drilling of wells $ 360,000
25% - All proceeds toward drilling of wells $ 900,000
50% - First funding of $1,350,000 toward
drilling of wells and balance toward
development of existing wells $ 1,800,000
75% - All proceeds toward drilling of wells,
development of existing wells and balance
toward extending gathering system $ 2,700,000
10
DETERMINATION OF OFFERING PRICE
Since there is no established public market for the common stock being
registered, the offering price of $1.00 per share has been arbitrarily
determined by the Company based upon our assessment of the value of our company
compared to others in our market. It bears no relation to the Company's assets,
book value, or any other customary investment criteria, including the Company's
prior operating history. Among factors considered by the Company in determining
the offering price were estimates of the Company's business potential, the
limited financial resources of the Company, the amount of equity and control
desired to be retained by the present stockholders, our ability to expand and
develop our operations based upon the capital provided by this offering and the
potential value of our company if we are successful in implementing our business
plan.
DILUTION
If the maximum offering of 4,000,000 shares of common stock are sold,
persons who purchase the common shares will own 25.01% of the Company's common
stock. Present shareholders acquired their shares of common stock at prices
substantially below the offering price times the number of shares of common
stock. Thus, upon completion of the offering, there will be an immediate
substantial dilution to subscribers in the book value of each common share, and
the present shareholders will realize an immediate increase thereon. The
shareholders purchasing the common shares will suffer an immediate dilution in
value of $.89 per share in the net tangible book value of shares held by them.
The immediate dilution in value is due in part to the lower net tangible book
value of the shares of common stock outstanding prior to the offering and to the
payment of the offering expenses.
11
PLAN OF DISTRIBUTION
We and the underwriter named below have entered into an underwriting
agreement with respect to the shares of common stock being offered. We are
offering to sell on a best-efforts no minimum basis up to 4,000,000 shares of
common stock with no escrow/trust fund giving the Company immediate use of
funds. Midas Securities,Inc.,6280 Manchester Blvd. Buena Park, CA 90621, is to
act as placement agent or underwriter in connection with the proposed offering,
issuance and sale of the Company's 4,000,000 shares of common stock. In
connection with its engagement, Midas Securities, Inc. will perform services
which are normal and customary for a placement agent to perform in connection
with the transaction.The Company agrees to pay Midas Securities for its services
under the agreement as follows:
(i) a fee equal to ten percent of the aggregate gross proceeds received or
to be received by the Company from the sale of Securities in any transaction
during the Term.
(ii) five year warrants to purchase an amount of Securities equal to ten
percent of the Securities sold in the transaction at a per share exercise price
equal to the offering price of the Securities. Whether or not any transaction is
consummated, and in addition to any fees payable to Midas Securities, Inc. under
this agreement, the Company agrees to reimburse Midas Securities, Inc. upon its
request from time-to-time, for its out-of-pocket expenses related to Midas's
activities under this agreement, including the reasonable fees and disbursements
of its legal counsel, up to a maximum of $15,000. Wilon Resources, Inc. has no
material relationship with the underwriter, Midas Securities, Inc. except for
the best efforts offering of the securities as described herein.
12
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 2004
and December 31, 2004(unaudited). (unaudited)
December 31, September 30,
2004 2004
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Long-term debt $ 21,683 $ 23,267
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Shareholders' equity:
Preferred stock $.001 par value;
Authorized 10,000,000 shares; issued
And outstanding -0- shares 0 0
Common stock $.001 par value;
authorized 50,000,000 shares; issued
and outstanding 11,995,000 shares 11,995 11,995
Retained earnings 1,344,694 1,274,470
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Total shareholders' equity 1,356,689 1,286,465
--------- ---------
Total capitalization $1,378,372 $ 1,309,732
========= =========
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.
13
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,
and gas marketing services. 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.
14
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.
When a property is determined to contain proved reserves, the capitalized
costs of such properties are 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.
15
The following table is a review of the results of our operations for the
fiscal years ended September 30, 2004 and 2003 and three months ended December
31, 2004 and 2003(unaudited). All items in the table are calculated as a
percentage of total revenues.
Unaudited
Fiscal Years Ended Three Months Ended
September 30, December 31,
------------------- ------------------
2004 2003 2004 2003
------------------- ------------------
Revenues:
Gas Sales 100.0% 77.3% 100.0% 100.0%
Sale of royalty interest
in gas producing properties .0% 22.7% .0% .0%
------ ------ ----- -----
Total Revenues 100.0% 100.0% 100.0% 100.0%
Expenses:
Gas production and drilling costs 39.3% 26.0% 43.5% 44.9%
General and administrative . 32.5% 34.0% 22.3% 21.1%
Depreciation, depletion and
Amortization 5.9% 5.3% 8.3% 5.3%
Interest (expense) 0.0% (0.0%) 0.0% 0.2%
Net income before income tax expense 22.3% 34.7% 25.9% 28.9%
Provision for income taxes 7.5% 8.8% 5.4% 5.2%
Net Income 14.8% 25.9% 20.5% 23.7%
==== ==== ===== ====
The following discussion and analysis reviews our results of operations and
financial condition for the years ended September 30, 2004 and 2003 and for the
three months ended December 31, 2004(unaudited) and 2003(unaudited). This review
should be read in conjunction with the Financial Statements and other financial
data presented elsewhere herein.
COMPARISON OF THE YEARS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003 AND THE
THREE MONTH PERIODS ENDED DECEMBER 31, 2004(UNAUDITED) AND 2003(UNAUDITED).
- --------------------------------------------------------------------------------
The following statements of income shows the results of operations for the
year ended September 30, 2004 and the comparable year ended September 30, 2003
and the results of operations for the three months ended December 31, 2004
(unaudited) and the comparable three months ended December 31, 2003 (unaudited).
Information presented below and in the following discussion which relates
to the years ended September 30, 2004 and 2003 was derived from audited
financial information.
16
For the years ending September 30,
2004 2003
---------- ----------
Revenues:
Gas sales $1,559,869 $1,079,366
Sales of royalty interest in gas
producing properties 0 316,942
------- -------
Total revenues 1,559,869 1,396,308
------- -------
Cost of gas and drilling production 612,465 363,419
Selling, general and administrative 506,807 475,189
Depreciation, depletion and amortization 92,460 73,874
------- -------
Total expenses 1,211,732 912,482
------- -------
Operating income 348,137 483,826
Interest income 1,142 912
Interest (expense) (345) 0
-------- ---------
Net income before income tax expense 348,934 484,738
Provision for income taxes 118,638 122,993
-------- --------
Net income $ 230,296 $ 361,745
========= ==========
Statement of Operations
- ----------------------- (unaudited)
Three months ended December 31,
2004 2003
--------- ---------
Revenues:
Gas sales $ 342,387 $ 415,000
Sales of royalty interest in gas
producing properties 0 0
------- -------
Total revenues 342,387 415,000
------- -------
Cost of gas and drilling production 148,779 186,318
Selling, general and administrative 76,412 87,494
Depreciation, depletion and amortization 28,254 22,034
------- -------
Total expenses 253,445 295,846
------- -------
Operating income 88,942 119.154
Interest income 0 992
Interest (expense) (345) 0
------- -------
Net income before income tax expense 88,597 120,146
Provision for income taxes 18,373 21,716
------- -------
Net Income $ 70,224 $ 98,430
======= =======
17
Revenues
- --------
Revenues from gas and drilling program sales in the year ended September
30, 2004 were $1,559,869 compared to revenue of $1,079,366 for the year ended
September 30, 2003, an increase of $480,503. These increases were due mainly
from the increased production from wells that were reworked and cleaned out.
There was a decrease of $72,613 in revenue for the three months ended December
31, 2004 of $342,387 as compared to revenue of $415,000 for the three months
ended December 31, 2003. This decrease was due to extremely bad weather
conditions for the three months period ended December 31, 2004.
Sales of royalty interest in gas producing properties decreased $316,942
from revenues earned through program sales for the year ended September 30, 2003
as compared to revenue from program sales of $ 0 for the year ended September
30, 2004. This decline was due to managements decision to concentrate on gas
production with total ownership for greater returns in the future. For the three
months ended December 31, 2004, and December 31, 2003, there were no sales of
royalty interests. This was mainly due to greater concentration on production.
Expenses
- --------
The cost of gas and drilling production increased $249,046 from costs
aggregating $612,465 for the year ended September 30, 2004 as compared to
$363,419 for the year ended September 30, 2003. The main reason for this
increase has to do with the volume of natural gas produced during these periods.
The cost of gas and drilling production from the three months period ended
December 31, 2004 decreased from $186,318 to $148,779 for the same three months
period ended December 31, 2003. A decrease of $37,539. This decrease resulted
from extremely bad weather conditions during the three months period ended
December 31, 2004, causing lower production.
Selling, general and administrative expenses increased by $31,618 from
costs aggregating $506,807 for the year ended September 30, 2004 as compared to
$475,189 for the year ended September 30, 2003 consisting of the following
categories as a percentage of revenues for the year ended September 30, 2004:
Rent $15,000 (.96%) Consulting fees $13,975 (.90%) Salaries $181,244 (11.62%)
Telephone $24,484 (1.57%) Travel $3,250 (.21%) Legal and professional $34,171
(2.19%) Office expense $12,242 (.78%) Taxes and licenses $27,478 (1.76%) Vehicle
expense $18,042 (1.16%) Utilities $9,596 (.62%) Miscellaneous $15,174 (.97%).
This increase of $31,618 was a result of increased expenses for professional
fees, salaries, taxes and licenses, and other administrative expenses.
Selling, general and administrative expenses decreased by $11,082 from
costs aggregating $87,494 for the three months ended December 31, 2003 as
compared to $76,412 for the three months ended December 31, 2004 consisting of
the following categories as a percentage of revenues for the three months ended
December 31, 2004: Rent $3,750 (1.10%) Consulting fees $15,000 (4.38%) Salaries
$65,141 (19.03%) Vehicle expense $3,475 (1.01%) Legal & professional $5,800
(1.69%). This decrease of $11,082 was mainly due to consulting and legal fees.
Depreciation, depletion and amortization increased $18,586 to $92,460 in
the year ended September 30, 2004 compared to $73,874 in the year ended
September 30, 2003. This increase was due to increased capital expenditures
during this period.
Depreciation, depletion and amortization increased $6,220 to $28,254 for
the three months ended December 31, 2004 as compared to $22,034 for the three
months ended December 31, 2003. This increase of $6,220 was a result of
increased capital expenditures during this period.
Operating income from operations for the year ended September 30, 2004
decreased by $135,689 to $348,137 as compared to $483,826 for the year ended
September 30, 2003. The decrease in income from operations was primarily due to
no revenue earned from the sale of royalty interest in gas producing properties
during the year ended September 30, 2004 as compared to $316,942 in the sale of
royalty interest in gas producing properties for the prior year ended September
30, 2003. Management concentrated more on production than from the sale of
royalty interest in the wells.
18
Operating income from operations for the three months ended December 31,
2004 decreased by $30,212 to $88,942 as compared to $119,154 for the three
months ended December 31, 2003. The decrease in income from operations was
primarily due to extremely bad weather conditions for the three months period
ended December 31, 2004. Production was therefore at a lower level.
Interest expense and income increased for the year ended September 30,2004
as compared to the year ended September 30, 2003. Interest expense increased
from $ 0 to $345 due to the new vehicle note being financed at 7.9 percent.
Interest income increased from $912 to $1,142 due to average balances in fund
accounts being higher than the prior year ending September 30, 2003.
Interest income decreased by $992 for the three months ended December 31,
2004, as compared to the three months period ended December 31, 2003. This
decrease was due to converting funds needed for production or capital
expenditures.
Income tax expense decreased from $122,993 for the year ended September 30,
2003 as compared to $118,638 for the year ended September 30, 2004, a decrease
of $4,355. This decrease was due to a reduction of taxable income for the year
ended September 30, 2004.
Income tax expense decreased from $21,716 for the three months ended
December 31, 2003 as compared to $18,373 for the three months ended December 31,
2004, a decrease of $3,343. This decrease was due to a reduction of taxable
income for the three months period ended December 31, 2004.
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, 2004 and for the three months ended December
31, 2004 due to higher energy consumption during the summer of 2004, a much
colder winter in 2002/2003 and, to some extent, a slight economic recovery in
the United States. As a result of these market forces, we received an average
price of $4.42 per mcf for its natural gas in the year ended September 30, 2004
as compared to $3.74 for 2003.
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.
Liquidity and capital resources
- ------------------------------
We fund our exploration and production operations from cash generated by
operations. Proceeds from this offering will expand our production operations
and generate transportation revenue from the pipeline gathering system.
Our cash position decreased by $11,129 from $25,604 at September 30, 2004
to $14,475 at December 31, 2004. We were funded through cash used from
operations of $7,238 as compared to cash provided by operations of $460,415 for
the year ended September 30, 2004. Our capital expenditures increased by
$302,566 for the year ended September 30, 2004 as compared to $158,567 for the
year ended September 30, 2003. This increase was due to major repairs and
reworking of existing wells that were capitalized. Working capital decreased by
$96,894 from a negative working capital at September 30, 2004 of $118,923 to a
negative working capital of $22,029 at December 31, 2004. This decrease in
negative working capital was due mainly from the estimated income taxes on the
interim three months statement at December 31, 2004.
Our liquidity is affected by national, regional and local economic trends
and uncertainties as well as trends and uncertainties more particular to us,
including natural gas prices and our ability to raise funds through this
offering.
19
OUR BUSINESS
Gas Operations in Appalachia
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%.
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.
21
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.
Projections 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 clean and
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, referred to as BTUs 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.
22
Our History
- ------------
We were formed under the laws of Tennessee as Wilon Resources, Inc., 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,
and meters. The leases, known as the Trace Fork Group, were with a number of
nonaffiliated third parties and called for the payment of an annual acreage fee
of $2 per acre (if non-producing) or a 12.5% royalty fee if producing. In
addition, royalty of 12.5% on revenues are before the deduction of taxes and
costs of maintaining the wells. The thirteen leases encompass between two to
three thousand acres. The Company has an 100% working interest in all leases
with no unaffiliated third party ownership.
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, and replacing parts of the gathering
system. Sales of natural gas were made to nonaffiliated companies, Alliance
Energy Partners, representing over 90% of the sales. Presently, the majority of
the wells on the Wayne County properties are undergoing routine maintenance.
Maintenance cost averages $250 per day per well.
In January, 1999, we purchased 41 natural gas wells in Wayne County, West
Virginia from Myers Drilling Company, Inc., at a cost of $80,000. The wells and
leases encompass approximately six thousand acres. Thirty of the wells are
presently being reworked at a cost of $10,000 per well. 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, and the drainage system improved.
We also acquired an additional 17 natural gas wells in the same area of
operation in September, 1999 at a cost of $45,000. 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.
In the year 2001, the Company acquired the mineral rights of 120 acres in
Magoffin County, Kentucky. These leases are under the same terms and conditions
as the leases in Wayne County, West Virginia, with annual acreage fee of $2 per
acre (if non-producing) or a 12.5% royalty fee if producing. In addition,
royalty of 12.5% on revenues are before the deduction of taxes and costs of
maintaining the wells. All thirteen wells are producing with a range of 48% to
56% operating profit.
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.
23
Competitive Strengths
- ---------------------
Our natural gas properties are located in the Appalachian Basin and are
characterized by long-lived reserves, a high success rate in drilling and
completing wells, favorable pricing for our production and readily available
transportation. Based upon fiscal 2003 production and reserve levels, our proved
reserves-to-production ratio, or reserve life, was 20 years. Moreover, because
our production in the Appalachian Basin is near markets in the northeast United
States, we generally receive a premium over quoted prices on the NYMEX for the
natural gas we produce. Since the Company has only an approximate 5% of the
market in the area that our operations represent, there are numerous competitors
that give us advantages and disadvantages. These competitors have pipeline
access that we both utilize and by completion of our gathering system, another
source of revenue will be obtained through their use. However, the competitors
at this time, have greater sources of funding that enables them to produce a
greater quantity of natural gas.
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. The Company has a "Gas Well Operating Agreement" between R &
D Drilling & Completion, Inc.and it's affiliate company, P & J Resources, Inc.
They act as an independent contractor as the operator of the Company's gas
wells. The operating area is designated as the Butler District, Wayne County,
West Virginia and shall include the wells, the surface and subsurface equipment
associated with the gas wells, the gas gathering system, the gas pipelines from
the wells to the master sales meters and the well access roads. The terms of the
operating agreements became effective January 2, 2002, and shall continue and
remain in force and effective during the productive life of the wells. The
compensation terms of the operating agreement between R & D and P & J are as
fol- lows: they shall be paid the invoice price for all supplies, equipment,
insurance, labor and services, including third party services that they supply,
purchases or contracts for, pertaining to or for the benefit of the wells and a
monthly operat- ing fee of $250 per well, for each month a well has any
production. R & D and P & J shall not start any project or incur any
extraordinary costs to the wells reason- aby estimated to result in an
expenditure of more than $1,000,without first sending written notice and then
receiving written approval from Wilon Resources, Inc. The agreements shall
terminate between the parties,upon the earliest of (a) the plugging or
abandonment of the wells, (b) the resignation of the operators, which may be
effected with just cause, upon ninety (90) days prior written notice to Wilon,
or (c) the removal of R & D or P & J as operator, which may be effected with
just cause, upon thirty (30) days prior written notice to R & D or P & J, from
Wilon. Both agreements are the same with no variances. The Company conducts all
of the production operations through these companies. 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. Eric Thompson, Vice-President of the Company, spends
approximately 20% of his time at the well sites in order to assess operating
costs and improvements in production.
24
Developed and Undeveloped Acreage/ Productive Wells
- ---------------------------------------------------
Our exploration and development activities have primarily involved the
acquisition of proved developed and undeveloped gas properties and the drilling
and development of such properties. The following table sets forth information
as of December 31, 2004 regarding productive natural gas wells in which we have
a working interest and information about our developed and undeveloped natural
gas acreage. All of the following producing wells are profitable with ranges of
48% to 56% operating profit for the years 2002 to present. Since the value of
the natural gas reserves are not stated on the Company's assets, the results of
operations are increased by that factor.
Wayne County, West Virgina:
No. of Leases No. of Wells Acreage Producing Developed Undeveloped
-------- ------------ ------ --------- --------- ---------
79 104 11,056.2 61 x
8 0 1,195.6 0 x
---- ------- -----
Totals 104 12,251.8 61
---- ------- -----
Magoffin County, Kentucky
No. of Leases No. of Wells Acreage Producing Developed Undeveloped
- ---------- ------------ ------ --------- --------- ---------
11 13 120 13 x
---- ------ -----
Totals 13 120 13
---- ----- -----
Grand Totals 117 12,371.8 74
==== ========= =====
All of the above leases remain in force for a term of one year and as long
thereafter as oil, gas and/or coalbed methane are produced from the premises or
operations by drilling or injection are continued, or thereafter, to pay the
Lessor a delay rental at the rate of a minimum fee of $2 per acre per annum. The
Company also has a 100% working interest in the leases with an obligation to pay
the Lessor 12.5% royalty fee for all marketed gas of the price received at the
wellhead or meter station.
25
Our Future Development Plans.
- -----------------------------
Drilling New Natural Gas Wells
- ------------------------------
With appropriate funding through this offering, 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. We estimate a cost of $280,000 per well. The Company
will also extend the gas gathering systems as each well is drilled and placed
into production. The gas gathering system cost is expected to be approximately
one to one and a half million dollars.
18
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. All of the two
wells sold during that period were bought back at the same amount with no
material impact on the transactions.
In the year 2002 and 2003, all sales of interest in various wells have been
royalty interest sales and not working interest sales.
Recompletion of Natural Gas Wells
- ---------------------------------
We presently lease approximately 7,654 acres in West Virginia that contain
producing natural gas wells.(Total acreage exceeds 12,000). A certain number of
these wells will be selected for deepening approximately 1,500 feet to
approximately 3,750 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 this offering, 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. An average cost of reworking and deepening per well
will range from $150,000 to $175,000 per well.
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 the cost of the twenty wells needing to be reworked to be in the
$10,000 range per well. By reworking these wells, we estimate that they could
produce 200 mcf per day or an average of $1,000 per day per well. At an
estimated 48% operating profit, the Company's cash flow and profitability would
greatly increase.
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.
26
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 30 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
4 1/2 inch casing 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.
We then order a radiation log which indicates the rock formation and a
temperature log. The logs indicate where to perforate. Strings of 50 caliber
shells are set off electrically; and the shot perforates 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 nitrogen sand and under pressure through the shot holes is
performed. The additional sand is to prop up the perforated openings. 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 builds 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 into
the wells and build up production over a period of months.
27
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 Reserves
- --------------------
The following table summarize information regarding our estimated proved
natural gas reserves as of the dates indicated. All of our reserves are located
in the United States. We base our estimates relating to our proved natural gas
reserves and future net revenues of natural gas reserves upon reports prepared
by Steven P. Kohler, Engineering Consultant. In accordance with SEC guidelines,
we make the standardized and PV-10 estimates of future net cash flows from
proved reserves using natural gas sales prices in effect as of the dates of the
estimates which are held constant throughout the life of the properties. We
based our estimates of proved reserves upon the following end of the year
prices: Years ended September 30,
2004 2003 2002
Natural gas(per Mcf) $ 4.42 $ 3.74 $ 3.45
Reserve estimates are imprecise and may change as additional information
becomes available. Furthermore, estimates of natural gas reserves, of necessity,
are projections based on engineering data. There are uncertainties inherent in
the interpretation of this data as well as the projection of future rates of
production and the timing of development expenditures. Reservoir engineering is
a subjective process of estimating underground accumulations of natural gas that
cannot be measured in an exact way and the accuracy of any reserve estimate is a
function of the quality of available data and of engineering and geological
interpretation and judgement. Reserve reports of other engineers might differ
from the reports of our consultant, Steven P. Kohler. Results of drilling,
testing and production subsequent to the date of the estimate may justify
revision of this estimate. The amounts and timing of future operating and
development costs may also differ from those used. Accordingly, the reserves set
forth in the following tables ultimately may not be produced and the proved
undeveloped reserves may not be developed within the periods anticipated. You
should not construe the estimated PV-10 values as representative of the fair
market value of our proved natural gas properties. PV-10 values are based upon
projected cash inflows, which do not provide for change in natural gas prices or
for escalation of expenses and capital costs. The meaningfulness of these
estimates depends upon the accuracy of the assumptions upon which they were
based. We evaluate natural gas reserves at constant temperature and pressure. A
change in either of these factors can affect the measurement of natural gas
reserves. We deduct operating costs, development costs and production-related
and ad valorem taxes in arriving at the estimated future cash flows. We make no
provision for income taxes, and base the estimates on operating methods and
conditions prevailing as of the dates indicated. We cannot assure you that these
estimates are accurate predictions of future net cash flows from natural gas
reserves or their present value. For additional information concerning our
natural gas reserves and estimates of future net revenues, see Notes G and H to
our financial statements.
28
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 this date, the Company does not currently engage in hedging
transactions nor has any contracts with future gas production under fixed price
contracts.
At September 30, 2004, the weighted net average price of natural gas we
produced sold at prices averaging $4.42 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.
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. In
particular, gas production and related operations are or have been subject to
price controls, taxes and other laws and regulations relating to the gas
industry. Failure to comply with such laws and regulations can result in
substantial penalties. The regulatory burden on the gas industry increases the
Company's cost of doing business and affects its profitability. Although the
Company believes it is in substantial compliance with all applicable laws and
regulations, because such laws and regulations are frequently amended or
reinterpreted, the Company is unable to predict the future cost or impact of
complying with such laws and regulations.
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, industrial and
commercial customers, either directly through our gathering system, or utilizing
transportation services provided by regulated interstate pipeline companies.
29
Financing
- ---------
We have conducted well development drilling and reworking activities for
our own account and for other investors. We intend to fund our well acquisition,
reworking and development drilling primarily from funds from this offering and
from reinvestment of positive cash flow from our present activities.
Tax benefits
- ------------
Section 29 of the Internal Revenue Code provides tax credits for fuel
produced from non-conventional sources. These credits are transferable to
individuals or corporations. This credit was enacted by Congress in 1980.
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.
Devonian Shale Tax Credit
- ----------------------
The owners of wells drilled to the Devonian Shale depth drilled prior to
1993 are entitled to a tax credit per thousand cubic feet on gas produced until
January 1, 2003. Certain of our wells qualified and, as a result, some of our
investors took these credits on their personal income tax returns.
Employees
- ---------
As of December 31, 2004, we had four employees, three 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.
30
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information regarding our executive
officers and directors that are elected on an annual basis:
Name Age Position Since
- ------------------------- --- ---------------------------------- -----
Harry F. Thompson 67 President, Treasurer and a Director 1998
931 Ashland Terrace
Chattanooga Tennessee 37415
Amy Pye 33 Secretary and a Director 2002
931 Ashland Terrace
Chattanooga Tennessee 37415
Eric J. Thompson 31 Vice-President and a Director 2002
931 Ashland Terrace
Chattanooga Tennessee 37415
Bryan P. S. Gray 65 A Director 2002
5006 NW 49th Road
Tamarac, Florida 33319
- --------------------
Harry F. Thompson has been our president since our 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 Wilon Resources, Inc.
>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, in 1960.
Amy Pye has served as our Administrative Assistant since 1999 and Secretary
since April 2001. 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, The Gap, J. Crew, Adriaenne
Vittadini, Lamora's, Inc., Avanti, Inc. and in customer relations and catalog
for Expressions Catalog, Inc, and Premium Underwriters. She became a director of
our company in November 2002.
Eric J. Thompson has been our Vice-President and a director since May,
2001. From 1992 to 1993 he was warehouse shipping manager for Premiun
Underwriter, Inc. He has worked part time for Tinder Box, Inc. as sales clerk
from 1994 to 1998. Also during 1993 to 1995 Mr. Thompson was shipping manager of
Expressions Catalogue Co., Inc. and from 1998 to 2001 he was Assistant Store
Manager of Goody's Inc. He attended Chattanooga State Technical Community
College from 1994 to 1996.
32
Bryan P. S. Gray has, since 1984, acted as a consultant in real estate and
business projects. 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 analyzed and developed
offshore oil-related projects. From 1985 to 1994, he was President of ScotCan
Consulting, Ltd. He was responsible for all forms of international banking in
the Republic of Korea. As a direct result was granted permission by the
government, to open the first Canadian bank branch in Japan. From 1997 to
present he is co-owner, broker, salesperson of Mainlands Realty, Inc. in
Tamarac, Florida, using his contacts with Fortune 500 level of national and
International companies.
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,
2004 and 2003, the compensation we paid to our Chief Executive Officer(s) and
any other executive officers who earned in excess of $100,000 based on salary
and bonus. The Company intends, at a future date, to provide executive
compensation that would include, but not be limited to, stock options, warrants,
and/or cash bonuses, all being pursuant to a management contract.
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
================================================================================
Other Annual Securities
Name and Principal Compensation Underlying
Position Year Salary ($) Bonus ($) ($) Options/SARs
================================================================================
Harry Thompson 2004 104,000 -0- 10,000 -0-
Chief Executive Officer 2003 104,000 -0- 10,000 -0-
33
Option Grants for the fiscal years ended September 30, 2004 and 2003
- --------------------------------------------------------------------
The following table sets forth information concerning the grant of stock
options to the named executive officer during the fiscal years ended 2004 and
2003.
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, 2004 and
2003 and Fiscal Year-End Option Values
- --------------------------------------------------------------------------------
The following table sets forth information concerning the exercise of stock
options during the fiscal years ended September 30, 2004 and 2003 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-
================================================================================
34
Indemnification of directors and executive officers and limitation of liability
- ------------------------------------------------------------------------------
The Tennessee Business Corporation Act 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 Tennessee Business
Corporation Act, 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 Tennessee Business
Corporation Act (regarding unlawful dividends and stock purchases) or (4) for
any transaction from which the director derived an improper personal benefit.
As permitted by the Tennessee Business Corporation Act, our bylaws provide
that we are required to indemnify our directors and officers, consultants and
employees to the fullest extent permitted by the Tennessee Business Corporation
Act. 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 Tennessee Business Corporation Act, subject to certain
very limited exceptions. The rights conferred in our bylaws are not exclusive.
We have not obtained directors' and officers' liability insurance.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
this opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
CERTAIN RELATED PARTY TRANSACTIONS
We were formed in October, 1998, under the Tennessee Business Corporation
Act. In October, 1998, we issued 1,000 shares of our common stock to Harlis
Trust, the trustee of which is Harry Thompson, our President. On March 11, 2003,
we forward split our issued and outstanding shares of common stock in the ratio
of 10,400 to 1 so that Harlis Trust owned 10,400,000 shares of our common stock.
On August 11, 2003, Harlis Trust Gifted 100,000 shares each to Amy Pye, Eric
Thompson, Kevin Thompson and Stephany Rutledge, the children of Harry Thompson,
our President.
Harry Thompson, Eric J. Thompson Amy Pye and Kevin Thompson disclaim
ownership of each Other's shares.
Harry Thompson receives a salary of $104,000 per year, Amy Pye, Secretary,
his daughter, receives a salary of $26,000 per year and Eric Thompson,
Vice-President, his son, receives a salary of $26,000 per year.
35
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of our common stock as of September 30, 2004 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 10,000,000 83.37%
Amy Pye Secretary
and a Director 100,000 0.83%
Eric J. Thompson Vice-President 100,000 0.83%
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 11,995,000 shares of our common stock outstanding as of the date of the
Prospectus.
36
(2) The shares beneficially owned by Harry Thompson are held as follows:
Harlis Trust 10,000,000 shares
(3) Harry Thompson is the father of Amy Pye and Eric Thompson.
Harry Thompson, Amy Pye and Eric Thompson disclaim ownership of each others
shares.
DESCRIPTION OF SECURITIES
Common Stock
- ------------
We are authorized to issue 50,000,000 shares of common stock, $.001 par
value per share, of which 11,995,000 shares are issued and outstanding. 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 noncumulative 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.
37
Preferred Stock
- ---------------
We may, subject to limitations prescribed by Tennessee 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.
38
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 Liberty Transfer Co., Inc., Long Island, New York, as
transfer agent for our shares of common stock.
SHARES ELIGIBLE FOR FUTURE SALE
No public trading market presently exists for our securities.
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 159,950 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.
The Company has issued, and there currently are outstanding, 11,995,000
shares of common stock, par value $.001. 10,000,000 of these shares of common
stock were issued over one year ago to an officer of the Company who continues
to hold these shares. These 10,000,000 shares of common stock are currently
eligible for resale under Rule 144, provided the selling shareholder, and the
sale of the shares, comply with all provisions, requirements and restrictions of
Rule 144.
We can offer no assurance that an active public market in our shares
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. We intend to file annual and quarterly reports, proxy statements and
other reports, if required, with the SEC. If in the future, we are not required
to deliver an annual report to security holders, we will voluntarily send an
annual report which will include audited financial statements. 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 at (http://www.sec.gov).
39
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 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,
Louis M. Smith,Jr., Attorney at Law, 4306 Talahi Way, Louisville, Kentucky
40207.
EXPERTS
Our financial statements as of September 30, 2004 and 2003 and December 31,
2004(unaudited) and 2003(unaudited) have been included herein and in the
registration statement in reliance upon the report of Drakeford & Drakeford,LLC,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of as an expert in accounting and auditing.
40
INDEX TO FINANCIAL STATEMENTS
Part 1 - Financial Information
Page
Item 1 - Financial Statements Report of Independent Auditors
Balance Sheets as of December 31, 2004 (unaudited) and September 30, 2004 F-3
Statements of Operations for the years ended September 30, 2004 and
2003
F-4
Statements of Operations for the three months ended December 31, 2004
(unaudited) and 2003 (unaudited) F-5
Statements of Changes in Stockholders' Equity for the three months ended
December 31, 2004 (unaudited) and years ended September 30, 2004 and 2003 F-6
Statements of Cash Flows for the years ended September 30, 2004 and
2003
F-7
Statements of Cash Flows for the three months ended December 31, 2004
(unaudited) and 2003 (unaudited) F-8
Notes to Financial Statements F-9 - F-25
F-1
DRAKEFORD & DRAKEFORD, LLC
CERTIFIED PUBLIC ACCOUNTANTS
554 Duncan Road
Royston, Georgia 30662
770-575-0915
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
Wilon Resources, Inc.
We have audited the balance sheet of Wilon Resources, Inc. as of September
30,2004,and the related statements of operations, changes in stockholders'
equity, and cash flows for the years ended September 30, 2004 and 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Wilon Resources, Inc., as of
September 30, 2004, and the results of its operations and its cash flows for the
years ended September 30,2004 and 2003 in conformity with accounting principles
generally accepted in the United States of America.
S/Drakeford & Drakeford, LLC
- -------------------------------------
January 27, 2005
WILON RESOURCES, INC.
BALANCE SHEETS
(unaudited)
ASSETS December 31, 2004 September 30, 2004
CURRENT ASSETS
Cash and cash equivalents $ 14,475 $ 25,604
Total current assets 14,475 25,604
PROPERTY AND EQUIPMENT, at cost
Gas properties 1,532,771 1,532,771
Furniture and fixtures 8,410 8,410
Vehicles 73,820 73,820
1,615,001 1,615,001
Less: accumulated depreciation,
depletion, amortization (214,800) (186,546)
Total property and equipment, net 1,400,201 1,428,455
OTHER ASSETS
Deposits 200 200
Total other 200 200
assets
TOTAL ASSETS $ 1,414,876 $ 1,454,259
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 11,024 $ 16,475
Income taxes payable 18,373 118,638
Notes payable, vehicles 7,107 9,414
Total current liabilities 36,504 144,527
LONG-TERM LIABILITIES
Note payable, vehicle 21,683 23,267
Total long-term liabilities 21,683 23,267
STOCKHOLDERS EQUITY
Preferred stock, authorized 10,000,000 shares at
$.001 par value; no outstanding shares at December
31, 2004 and September 30, 2004 0 0
Common stock, $.001 par value; authorized 50,000,000 shares;
issued and outstanding 11,995,000 shares at December 31, 2004
and September 30, 2004
11,995 11,995
Retained Earnings 1,344,694 1,274,470
Total stockholders equity 1,356,689 1,286,465
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 1,414,876 $ 1,454,259
The accompanying notes are an integral part of these statements.
WILON RESOURCES, INC.
STATEMENTS OF OPERATIONS
Years Ended September 30,
2004 2003
Revenues:
Gas sales $ 1,559,869 $ 1,079,366
Sale of royalty interest in gas producing properties 0 316,942
Total revenues 1,559,869 1,396,308
Cost of gas and drilling production 612,465 363,419
Selling, general and administrative 506,807 475,189
Depreciation, depletion and amortization 92,460 73,874
Total expenses 1,211,732 912,482
Operating income 348,137 483,826
Interest income 1142 912
Interest (expense) (345) 0
Net income before income tax expense 348,934 484,738
Provision for income taxes 118,638 122,993
Net income $ 230,296 $ 361,745
Basic and diluted earnings per common share $ .02 $ .03
Weighted average shares outstanding, basic and diluted 11,995,000 11,995,000
The accompanying notes are an integral part of these statements.
WILON RESOURCES, INC.
STATEMENTS OF OPERATIONS
Fot The Three Months Ended December 31,
(Unaudited)
2004 2003
(unaudited) (unaudited)
Revenues:
Gas sales $ 342,387 $ 415,000
Sale of royalty interest in gas producing properties 0 0
Total revenues 342,387 415,000
Cost of gas and drilling production 148,779 186,318
Selling, general and administrative 76,412 87,494
Depreciation, depletion and amortization 28,254 22,034
Total expenses 253,445 295,846
Operating income 88,942 119,154
Interest income (expense) (345) 992
Net income before income tax expense 88,597 120,146
Provision for income taxes 18,373 21,716
Net Income $ 70,224 $ 98,430
Basic and diluted earnings per common share $ .01 $ .01
Weighted average shares outstanding, basic and diluted 11,995,000 11,995,000
The accompanying notes are an integral part of these statements.
WILON RESOURCES, INC.
STATEMENT OF STOCKHOLDERS EQUITY
Additional
Preferred stock Common stock paid-in Accumulated
Shares Amount Shares Amount capital earnings Total
Balance at
September
30, 2001 0 0 11,995,000 11,995 0 648,999 660,994
Net Income for
the year ended
September 30, 2002 ____ ____ ____ 33,430 33,430
Balance at
September
30, 2002 0 0 11,995,000 11,995 0 682,429 694,424
Net Income for
the year ended
September 30, 2003 361,745 361,745
------ ------ ------ ---- ---- ------- -------
Balance at
September
30, 2003 0 0 11,995,000 11,995 0 1,044,174 1,056,169
Net income for the year ended September 30, 2004 230,296 230,296
---- ---- ----- ----- ---- -------- -------
Balance at
September
30, 2004 0 0 11,995,000 11,995 0 1,274,470 1,286,465
Net income for
the three months
ended December
31, 2004
(unaudited) _______ _____ ________ _______ ____ 70,224 70,224
Balance at
December 31,
2004
(unaudited) 0 $ 0 11,995,000 $11,995 $0 $ 1,344,694 $1,356,689
The accompanying notes are an integral part of this statement.
F-26
WILON RESOURCES, INC.
STATEMENT OF CASH FLOWS
For The Years Ended September 30,
2004 2003
OPERATING ACTIVITIES
Net Income $ 230,296 $361,745
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation, depletion and amortization 92,460 73,874
Changes in operating assets and liabilities:
Loan receivable-officer 20,699 39,301
Deposits 0 (306,996)
Accounts payable and accrued expenses 672 15,803
Loan payable (2,350) 0
Income taxes payable 118,638 0
Cash provided by operating activities 460,415 183,727
INVESTING ACTIVITIES
Capital expenditures (461,133) (158,567)
Cash (used) by investing activities (461,133) (158,567)
FINANCING ACTIVITIES
Proceeds from vehicle note 31,691 0
Debt repayments (12,135) (18,810)
Cash provided (used) by financing activities 19,556 (18,810)
INCREASE IN CASH AND EQUIVALENTS 18,838 6,350
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 6,766 416
CASH AND EQUIVALENTS AT END OF PERIOD $ 25,604 $ 6,766
Supplemental information:
Interest paid $ 345 $ 0
Taxes paid $ 0 $ 0
The accompanying notes are an integral part of these statements
WILON RESOURCES, INC.
STATEMENT OF CASH FLOWS
For The Three Months Ended December 31,
(Unaudited)
2004 2003
(unaudited) (unaudited)
OPERATING ACTIVITIES
Net Income $70,224 $ 98,430
Adjustments to reconcile net income to cash provided by
operating activities
Depreciation, depletion and amortization 28,254 22,034
Changes in operating assets and liabilities:
Income taxes payable (100,265) 0
Accounts payable and accrued expenses (5,451) (3,629)
Cash provided (used) by operating activities (7,238) 116,835
INVESTING ACTIVITIES
Capital expenditures 0 (112,415)
Cash (used) by investing activities 0 (112,415)
FINANCING ACTIVITIES
Debt repayments (3,891) (2,307)
Cash (used) by financing activities (3,891) (2,307)
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (11,129) 2,113
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 25,604 6,766
CASH AND EQUIVALENTS AT END OF PERIOD $ 14,475 $ 8,879
Supplemental information:
Interest paid $ 345 $ 0
Taxes paid $ 0 $ 0
The accompanying notes are an integral part of these statements
WILON RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
Three months ended December 31, 2004 (unaudited) and 2003
(unaudited) and September 30, 2004 and 2003
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Wilon Resources, Inc. ("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 1500 feet to the Devonian Shale formation.
Completion will be in accordance with standard completion procedures for the
area.
Basis of Presentation
The financial statements have been prepared for purpose of registration
with the Securities and Exchange Commission ("SEC"), and have been prepared in
conformity with accounting principles generally accepted in the United States of
America.
Interim Financial Information (Unaudited)
The interim financial statements of the Company as of December 31, 2004 and
for the three months ended December 31, 2004 and 2003, included herein, have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the SEC. The unaudited interim financial statements include all
adjustments, consisting of normal recurring adjustments, considered necessary
for a fair presentation of the results for the interim periods presented.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations relating
to interim financial statements. In the opinion of management, the accompanying
unaudited statements reflect all adjustments necessary to present fairly the
results of its operations and its cash flows for the three months ended December
31, 2004 and 2003.
WILON RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Three months ended December 31, 2004 (unaudited) and 2003
(unaudited) and September 30, 2004 and 2003
NOTE A- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-(Continued)
Revenue and Cost Recognition
Revenues from the sale of natural gas are recognized when the gas is
delivered to the purchaser. Other revenues are from the sale of royalty interest
in gas property entitling the owner to a share of natural gas production free of
costs of production. The Company records the income from the royalty interest
and/or working interest when the assignment is sold and in effect. When an
assignment is contracted, the Company is obligated to make royalty payments to
the assignee as the natural gas is produced and sold. No related parties have
any assigned well leases from the Company.
The Company has adopted the successful efforts method of accounting for gas
properties producing activities. Management believes adoption of the successful
efforts method more accurately reflects management's exploration objectives and
results. See " Gas Properties" footnote.
Office and Other Equipment
The estimated service lives of property and equipment are principally as
follows: Furniture and fixtures 5- 7 years
Computer equipment 3- 7 years
Computer software 2- 7 years
Vehicles 5-7 years
Repairs and maintenance are expensed as incurred. Expenditures that
increase the value or productive capacity of assets are capitalized.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
FASB No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed Of. The Company does not believe the adoption of these
standards will have a material impact on the Company's financial statements.
WILON RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Three months ended December 31, 2004 (unaudited) and 2003
(unaudited) and September 30, 2004 and 2003
NOTE A- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-(Continued)
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 properties are 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.
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. There are no deferred taxes arising from timing differences as
of December 31, 2004 and September 30, 2004. (See Note-F )
WILON RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Three months ended December 31, 2004 (unaudited) and 2003
(unaudited) and September 30, 2004 and 2003
NOTE A-ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-(Continued)
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- D, there were no dilutive securities during the
periods ended December 31, 2004 and 2003 and September 30, 2004 and 2003.
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.
Advertising Cost
The Company has no advertising cost at this time.
WILON RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Three months ended December 31, 2004 (unaudited) and 2003
(unaudited) and September 30, 2004 and 2003
NOTE A-ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-(Continued)
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 of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. 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 Company and industry
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.
WILON RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Three months ended December 31, 2004 (unaudited) and 2003
(unaudited) and September 30, 2004 and 2003
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.
Recent Accounting Pronouncements
New accounting statements issued and adopted by the Company, include the
following:
In July 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), which requires that goodwill and certain other
intangible assets having indefinite lives no longer be amortized to earnings,
but instead be subject to periodic testing for impairment. Intangible assets
determined to have definitive lives will continue to be amortized over their
useful lives. This Statement is effective for the Company's 2003 fiscal year.
However, goodwill and intangible assets acquired after June 30, 2001 are subject
immediately to the non-amortization and amortization provisions of this
Statement. The adoption of SFAS 142 did not have an impact on the Company's
results of operations, financial position or cash flows.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which excludes from
the definition of long-lived assets goodwill and other intangibles that are not
amortized in accordance with SFAS 142. SFAS 144 requires that long-lived assets
to be disposed of by sale be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discontinued operations. SFAS 144 also expands the reporting of discontinued
operations to include components of an entity that have been or will be disposed
of rather than limiting such discontinuance to a segment of a business. This
Statement is effective for the
WILON RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Three months ended December 31, 2004 (unaudited) and 2003
(unaudited) and September 30, 2004 and 2003
NOTE A-ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-(Continued)
Recent Accounting Pronouncements (continued)
New accounting statements issued and adopted by the Company, include the
following:
Company's 2003 fiscal year, and early adoption is permitted. The adoption
of SFAS 144 did not have a material impact on the Company's results of
operations, financial position or cash flows.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
Among other provisions, this Statement eliminates the requirement that gains and
losses from extinguishment of debt be classified as extraordinary items. The
Company will adopt SFAS 145 in fiscal 2003, and has determined it will not
impact the Company's financial position, results of operations or cash flows.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This Statement requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred, rather than when a company commits to an exit plan as was
previously required. SFAS 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. The Company will adopt SFAS 146 in fiscal
2003, and has determined it will not impact the Company's financial position,
results of operations or cash flows.
In November 2002, FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees and
Indebtedness of Others," was issued. This interpretation requires the initial
recognition and initial measurement, on a prospective basis only, to guarantees
issued or modified after December 31, 2002. Additionally, certain disclosures
requirements are effective for financial statements ending after December 15,
2002. There were no disclosures required of the Company in the fiscal 2003 and
2002 financial statements.
In January 2003, FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities," ("VIE's") was issued. This interpretation clarifies
situations in which entities shall be subject to consolidation. This
interpretation is effective for all VIE's created after January 31, 2003. The
Company does not believe that the adoption of this interpretation will have any
impact on its financial statements.
WILON RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Three months ended December 31, 2004 (unaudited) and 2003
(unaudited) and September 30, 2004 and 2003
Recent Accounting Pronouncements (continued)
New accounting statements issued and adopted by the Company, include the
following:
The oil and gas industry is currently discussing the appropriate balance
sheet classification of oil and gas mineral and drilling rights held by lease or
contract. The Company classifies these assets as property, plant and equipment
in accordance with its interpretation of FAS No. 19 and common industry
practice. There is also a view that these mineral rights are intangible assets
as defined in FAS No. 141, Business Combinations, and, therefore should be
classified separately on the balance sheet as intangible assets. If the
accounting for mineral rights held by lease or contract is ultimately changed,
the Company believes that any such reclassification of mineral rights could
amount to approximately $ 243,058 at September 30, 2004 and $189,656 at
September 30, 2003. The determination of this amount is based on the Company's
current understanding of this evolving issue and how the provisions of FAS No.
141 might be applied to oil and gas mineral rights. This potential balance sheet
reclassification would not affect results of operations or cash flows.
In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS
No. 149 ("SFAS 149") "Amendment of Statement 133 on Derivative Instruments and
Hedging Activates. " SFAS 149 is effective for contracts entered into or
modified after June 30, 2003 and amends and clarifies financial accounting and
reporting for derivative instruments. The adoption of SFAS 149 did not have a
material effect on the financial position or results of operations.
In May 2003, the FASB issued Statement No. 150 ("SFAS 150") "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity." SFAS 150 requires that certain instruments that were previously
classified as equity on a Company's statement of financial position now be
classified as liabilities. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS 150 did not have an impact on the Company's results of
operations or financial position.
Hedging Activities:
Under Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities" (as amended by SFAS 138 and SFAS 149), all
derivative financial instruments are recognized in the financial statements as
either assets or liabilities measured at fair value and the changes in the fair
value recognized in income or other comprehensive income, depending on their
classification. The Company has no derivative financial instruments.
WILON RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Three months ended December 31, 2004 (unaudited) and 2003
(unaudited) and September 30, 2004 and 2003
NOTE B - SHORT-TERM AND LONG-TERM DEBT OBLIGATIONS
Details of Short-Term Debt:
December 31, 2004 September 30, 2004
Ford Credit-Vehicles $ 7,107 $9,414
Details of Long-Term Debt:
Ford Credit-Vehicles 21,683 23,267
Total Debt $ 28,790 $ 32,681
The Company has two vehicle notes with Ford Credit, financing two Ford
Explorers. Payments are $769.08 with no interest and $643.16 with an annual
percentage rate of 7.90%.
NOTE C - LEASE OBLIGATIONS
The Company leases it's office space at an annual rental of Fifteen
Thousand Dollars, payable in monthly installments of One Thousand Two Hundred
Fifty Dollars each. The five year lease was entered into contract on November
30, 2001. The renewal terms of the lease gives the Company an option to renew
the lease for three successive five year periods commencing on the 1st day of
December, 2006, respectively, 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, published by
the Bureau of Labor Statistics of the United States Department of Labor-or such
other similar index if the Consumer Price Index is no longer so published. (see
Note-E).
NOTE D- SHAREHOLDERS EQUITY
The Company amended it's certificate of incorporation to increase the
authorized number of shares to 50,000,000 shares of common stock at $0.001 par
value and 10,000,000 shares of preferred stock at $0.001 par value. 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.
There have been no options or warrants issued or granted.
WILON RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Three months ended December 31, 2004 (unaudited) and 2003
(unaudited) and September 30, 2004 and 2003
NOTE E -RELATED PARTY TRANSACTIONS
The Company leases office space from Harlis Trust, whom the President of
the Company, Harry Thompson, is the beneficiary. (see Note-C).
NOTE F - INCOME TAXES AND TAX BENEFITS
The Company provides for the tax effects of transactions reported in the
financial statements. The provision if any, consists of taxes currently due plus
deferred taxes related primarily to differences between the basis of assets and
liabilities for financial and income tax reporting. The deferred tax assets and
liabilities, if any, represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled.
Tax Credits Accounted for on the Cost Reduction Method:
Section 29 tax credits (credit for producing fuel from a nonconventional
source) are accounted for as decreases in the production cost of producing
natural gas. The credits are included in income through a reduction of the
amount of production cost for the period which would otherwise be charged to
operations.
As of September 30, 2003, the Company's year-end and also tax year-end,
income taxes have been offset by Code Section 29 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, 2003, credits in the amounts of $ 122,993, were utilized in
order to offset income taxes for the current tax period. Also on December 31,
2002, Code Section 29 tax credits expired and therefore the Company has over
$250,000 tax credits that can not be utilized unless these credits are extended
for another five year period. Although the Company's year ended September 30,
2003, the tax credits could be utilized during that fiscal year since the
reporting period was for the income taxable year 2002.
WILON RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Three months ended December 31,
2004 (unaudited) and 2003
(unaudited) and September
30, 2004 and 2003
NOTE F - INCOME TAXES AND TAX BENEFITS (continued)
The federal and state income tax provision (benefit) is summarized as
follows:
Years ended September 30,
2004 2003
Current:
Federal $ 118,638 $122,993
State (no tax district)
Deferred: $ 0 $ 0
A reconciliation of the provision (benefit) for income taxes with amounts
determined by applying the statutory U.S. federal income tax rate to income
before income taxes is as follows:
Years ended September 30,
2004 2003
Computed tax at the federal statutory rate of 34% $ 118,638 $ 164,811
State taxes 0 0
Sec 29 tax credits 0 (122,993)
Reduction in valuation allowance 0 0
Reduction in production cost 0 81,175
Provision for income taxes $ 118,638 $ 122,993
Effective tax rate 34% 25%
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. As of September 30, 2004
and 2003, there were no temporary differences between the carrying amounts of
assets and liabilities of the Company and therefore, deferred taxes are not
applicable.
WILON RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Three months ended December 31,
2004 (unaudited) and 2003
(unaudited) and September
30, 2004 and 2003
NOTE F - INCOME TAXES AND TAX BENEFITS (continued)
The following sets forth certain unaudited quarterly statements of federal
and state income tax provision (benefits):
Three months ended December 31,
2004 2003
Federal $ 18,373 $ 21,716
State (no tax district)
Deferred $ 0 $ 0
Reconciliation of the provision (benefit) for income taxes with amounts
determined by applying the statutory U.S. federal income tax rate to income
before income taxes as follows:
Computed tax at the federal statutory rate of 34% $ 30,123 $ 40,850
State taxes 0 0
Sec 29 tax credits 0 (21,716)
Reduction in income tax rate brackets (11,750) (19,134)
Reduction in production cost 0 21,716
Provision for income taxes $ 18,373 $ 21,716
Effective tax rate 20.1% 18.1%
NOTE G - GAS RESERVES INFORMATION (unaudited)
The information presented below represents estimates of proved natural gas
reserves. Reserves 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. Proved
reserves are estimated quantities of natural gas which geological and
engineering data demonstrate with reasonable certainty to be recoverable in the
future years from known reservoirs. Proved developed reserves are those which
are expected to be recovered through existing wells with existing equipment and
operating methods.
The reserve data presented represents estimates only and should not be
construed as being exact.
WILON RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Three months ended December 31,
2004 (unaudited) and 2003
(unaudited) and September
30, 2004 and 2003
NOTE G - GAS RESERVES INFORMATION (unaudited) (continued)
In addition, the standardized measures of discounted future net cash flows may
not represent the fair market value of the Company's gas reserves or the present
value of future cash flows of equivalent reserves, due to anticipated future
changes in gas prices and in production and development costs and other factors
for which effects have not been provided.
The Company's reconciliation of changes in proved reserve quantities is as
follows (unaudited): (Also includes estimates from other formations not yet
based on reports by the engineer due to time restraints.)
Developed reserves: (Natural gas ) (MCF)
Balance October 1, 2001
Developed reserves 5,875,000
Production (164,216)
Balance September 30, 2002 5,710,784
Production (288,601)
Balance September 30, 2003 5,422,183
Production (398,690)
Balance September 30, 2004 5,023,493
Production (92,475)
Balance December 31, 2004 4,931,018
NOTE H - SUPPLEMENTAL INFORMATION RELATING TO GAS PRODUCING
ACTIVITIES (unaudited)
The supplementary information summarized below presents the results of
natural gas activities in accordance with SFAS No. 69, "Disclosures About Oil
and Gas Producing Activities".
CAPITALIZED COSTS RELATING TO GAS PRODUCING ACTIVITIES
December 31, 2004 September 30,2004 September 30, 2003
Proved gas properties $ 1,532,771 $1,532,771 $ 1,105,099
Less accumulated depreciation,
depletion, and impairment 184,521 159,096 82,059
Net capitalized costs $ 1,348,250 $1,373,675 $ 1,023,040
WILON RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Three months ended December 31,
2004 (unaudited) and 2003
(unaudited) and September
30, 2004 and 2003
NOTE H - SUPPLEMENTAL INFORMATION RELATING TO GAS PRODUCING
ACTIVITIES (unaudited) (continued)
COST INCURRED IN GAS PRODUCING ACTIVITIES
Three months ended Year ended Year ended
December 31, September 30, September 30,
2004 2004 2003
Property acquisition costs $ 0 $ 0 $ 0
Exploration costs 0 0 156,820
Development costs 0 427,672 0
Property acquisition costs include purchases of proved and unproved gas
properties.
RESULTS OF OPERATIONS FOR GAS PRODUCING ACTIVITIES
Three months ended Three months ended Year ended Year ended
December 31, December 31, September 30, September 30,
2004 2003 2004 2003
Gas production $342,387 $415,000 $1,559,869 $1,079,366
Loss on sale of gas prop. 0 0 0 0
Production costs 148,779 186,318 612,465 284,121
Exploration expenses 0 0 0 79,298
Depreciation, depletion.
amortization and other 25,425 16,745 77,037 66,810
Results of operations for gas
producing activities (excluding
corporate overhead, financ-
ing costs and taxes) $ 168,183 $ 211,937 $ 870,367 $ 649,137
WILON RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Three months ended December 31,
2004 (unaudited) and 2003
(unaudited) and September
30, 2004 and 2003
NOTE H - SUPPLEMENTAL INFORMATION RELATING TO GAS PRODUCING
ACTIVITIES (unaudited) (continued)
GAS RESERVE INFORMATION (UNAUDITED)
The estimates of the Company's proved and unproved gas reserves are
based upon evaluations made by management and verified by Steven P. Kohler,
engineering consultant, as of September 30, 2004 and 2003, and December 31,
2004. All reserves are located within the United States. Reserves 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 provisions for price and cost escalation
except by contractual arrangements.
Proved gas reserves are the estimated quantities of natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions, i.e. prices
and costs as of the date the estimate is made. Prices include consideration
of changes in existing prices provided only by contractual arrangements,
but not on escalations based upon future conditions.
o Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation
tests. The area of a reservoir considered proved includes (a) that
portion delineated by drilling and defined by gas-oil and/or
oil-water contacts, if any; and (b) the immediately adjoining
portions not yet drilled, but which can be reasonably judged as
economically productive on the basis of available geological and
engineering data. In the absence of information on fluid contacts,
the lowest known structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
o Reserves which can be produced economically through application of
improved recovery techniques (such as fluid injection) are
included in the "proved" classification when successful testing by
a pilot project, or the operation of an installed program in the
reservoir, provides support for the engineering analysis on which
the project or program was based.
o Estimates of proved reserves do not include the following: (a) oil
that may become avaailable from known reservoirs but is classified
separately as "indicated additional reservoirs"; (b) crude oil,
natural gas, and natural gas liquids, the recovery of which is
subject to reasonable doubt because of uncertainty as to geology,
reservoir characteristics or economic factors; (c) crude oil,
natural gas and natural gas liquids, that may occur in undrilled
prospects; and (d) crude oil and natural gas, and natural gas
liquids, that may be recovered from oil shales, coal, gilsonite
and other such sources.
WILON RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Three months ended December 31,
2004 (unaudited) and 2003
(unaudited) and September
30, 2004 and 2003
NOTE H - SUPPLEMENTAL INFORMATION RELATING TO GAS PRODUCING
ACTIVITIES (unaudited) (continued)
GAS RESERVE INFORMATION (UNAUDITED)-continued
Proved developed gas reserves are reserves that can be expected to be
recovered through existing wells with existing equipment and operation
methods. Additional gas expected to be obtained through the application of
fluid injection or other improved recovery techniques for supplementing the
natural forces and mechanisms of primary recovery should be included as
"proved developed reserves" only after testing by a pilot project or after
the operation of an installed program has confirmed through production
response that increased recovery will be achieved.
The reserve data presented represents estimates only and should not be
construed as being exact. In addition, the standardized measures of
discounted future net cash flows may not represent the fair market value of
the Company's gas reserves or the present value of future cash flows of
equivalent reserves, due to anticipated future changes in gas prices and in
production and development costs and other factors for effects have not
been proved.
The following schedule presents the standardized measure of estimated
discounted future net cash flows relating to proved gas reserves. The
estimated future production is priced at fiscal year-end prices, adjusted
only for fixed and determinable increases in natural gas prices provided by
contractual agreements. The resulting estimated future cash inflows are
reduced by estimated future costs to develop and produce the proved
reserves based on fiscal year-end cost levels. The future net cash flows
are reduced to present value amounts by applying a 10% discount factor. The
standardized measure of future cash flows was prepared using the prevailing
economic conditions existing at September 30, 2004 and 2003 and such
conditions continually change. Accordingly such information should not
serve as a basis in making any judgement on the potential value of
recoverable reserves or in estimating future results of operations
(unaudited).
WILON RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Three months ended December 31,
2004 (unaudited) and 2003
(unaudited) and September
30, 2004 and 2003
NOTE H - SUPPLEMENTAL INFORMATION RELATING TO GAS PRODUCING
ACTIVITIES (unaudited) (continued)
GAS RESERVE INFORMATION (UNAUDITED)-continued
Three months ended Years ended September 30,
December 31, 2004 2004 2003
Future cash inflows $ 579,064 $2,475,875 $1,867,947
Future production costs ( 225,835) ( 998,216) ( 728,499)
Future development costs ( 66,572) ( 298,471) ( 214,748)
Future income tax expense ( 97,463) ( 431,457) ( 314,398)
Future net cash flows 189,194 747,731 610,302
Less 10% annual discount for
estimated timing of cash flows ( 52,109) ( 184,618) ( 168,094)
Standard measure of discounted future
net cash flows $ 137,085 $ 563,113 $ 442,208
The following table summarizes the changes in the standardized measure
of discounted future net cash flows estimated production of proved gas reserves
after income taxes (unaudited):
Three months ended Years ended September 30,
December 31, 2004 2004 2003
Balance, beginning of year $ 563,113 $ 442,208 $ 406,968
Increase in discounted future net cash
flows:
Sales and transfers of gas, net of related
costs (595,591) (546,087) (523,236)
Revision of previous quantity/price 95,716 376,491 350,035
Net change in future income taxes 73,847 290,501 208,441
Balance, end of year $ 137,085 $ 563,113 $ 442,208
Dealer Prospectus Delivery Obligation
Until ___________, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
4,000,000 Common Shares
WILON RESOURCES, INC.
________________________________________
PROSPECTUS
~~~~~~ _________________________________________
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Tennessee Business Corporation Act provides for the indemnification of
the officers, directors and corporate employees and agents of Wilon Resources,
Inc. (the "Registrant") under certain circumstances as follows:
48-18-501. Part definitions.
In this part:
(1) "Corporation" includes any domestic or foreign predecessor entity of a
corporation in a merger or other transaction in which the predecessor's
existence ceased upon consummation of the transaction;
(2) "Director" means an individual who is or was a director of a
corporation including individuals acting pursuant to section 48-18-101, or an
individual who, while a director of a corporation, is or was serving at the
corporation's request as a director, officer, partner, trustee, employee, or
agent of another foreign or domestic corporation, partnership, joint venture,
trust, employee benefit plan, or other enterprise. A director is considered to
be serving an employee benefit plan at the corporation's request if the
director's duties to the corporation also impose duties on or otherwise involve
services by the director to the plan or to participants in or beneficiaries of
the plan. "Director" includes, unless the context requires otherwise, the estate
or personal representative of a director;
(3) "Expenses"includes counsel fees:
(4) "Liability" means the obligation to pay a judgment, settlement,
penalty, fine (including an excise tax assessed with respect to an employee
benefit plan), or reasonable expenses incurred with respect to a proceeding;
(5) "Official capacity" means:
(A) When used with respect to a director, the office of director in a
corporation; and
(B) When used with respect to an individual other than a director, as
contemplated in section 48-18-507a the office in a corporation held by the
officer or the employment or agency relationship undertaken by the employee
or agent on behalf of the corporation. "Official capacity" does not include
service for any other foreign or domestic corporation or any partnership,
joint venture, trust, employee benefit plan, or other enterprise;
(6) "Party" includes an individual who was, is, or is threatened to be made
a named defendant or respondent in a proceeding; and
II - 1
(7) "Proceeding" means any threatened, pending, or completed action, suit,
or proceeding, whether civil, criminal, administrative, or investigative and
whether formal or informal.
48-18-502. Authority to indemnify.
(a) Except as provided in subsection (d), a corporation may indemnify an
individual made a party to a proceeding because the individual is or was a
director against liability incurred in the proceeding if:
(1) The individual's conduct was in good faith; and
(2) The individual reasonably believed:
(A) In the case of conduct in the individual's official capacity with the
corporation, that the individual's conduct was in is best interest; and
(B) In all other cases, that the individual's conduct was at least not
opposed to its best interests; and
(3) In the case of any criminal proceeding, the individual had no
reasonable cause to believe the individual's conduct was unlawful.
(b) A director's conduct with respect to an employee benefit plan for a
purpose the director reasonably believed to be in the interests of the
participants in and beneficiaries of the plan is conduct that satisfies the
requirement of subdivision (a) (2) (B).
(c) The termination of a proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent is not, of
itself, determinative that the director did not meet the standard of conduct
described in this section.
(d) A corporation may not indemnify a director under this section:
(1) In connection with a proceeding by or in the right of the corporation
in which the director was adjudged liable to the corporation; or
(2) In connection with any other proceeding charging improper personal
benefit to the director, whether or not involving action in the director's
official capacity, in which the director was adjudged liable on the basis that
personal benefit was improperly received by the director.
48-18-503. Mandatory indemnification.
Unless limited by its charter, a corporation shall indemnify a director who
was wholly successful, on the merits or otherwise, in the defense of any
proceeding to which the director was a party because the director is or was a
director of the corporation against reasonable expenses incurred by the director
in connection with the proceeding.
48-18-504. Advance for expenses.
(a) A corporation may pay for or reimburse the reasonable expenses incurred
by a director who is a party to a proceeding in advance of final disposition of
the proceeding if:
(1) The director furnishes the corporation a written affirmation of the
director's good faith belief that the director has met the standard of conduct
descried in section 48-18-502;
(2) The director furnishes the corporation a written undertaking executed
personally or on the director's behalf, to repay the advance if it is ultimately
determined that the director is not entitled to indemnification; and
II - 2
(3) A determination is made that the facts then known to those making the
determination would not preclude indemnification under this part.
(b) The undertaking required by subdivision (a) (2) must be an unlimited
general obligation of the director but need not be secured and may be accepted
without reference to financial ability to make payment.
(c) Determinations and authorizations of payments under this section shall
be made in the manner specified in section 48-18-506.
48-18-505. Indemnification of directors.
Unless a corporation's charter provides otherwise, a director of the
corporation who is a party to a proceeding may apply for indemnification to the
court conducting the proceeding or to another court of competent jurisdiction.
On receipt of an application, the court, after giving any notice the court
considers necessary, may order indemnification if it determines the director is:
(1) Entitled to mandatory indemnification under section 48-18-503, in which
case the court shall also order the corporation to pay the director's reasonable
expenses incurred to obtain court-ordered indemnification; or
(2) Fairly and reasonably entitled to indemnification in view of all the
relevant circumstances, whether or not the director met the standard of conduct
set forth in section 48-18-502 or was adjudged liable as described in section
48-18-502 (d), but if the director was adjudged so liable the director's
indemnification is limited to reasonable expenses incurred.
48-18-506. Determination and authorization of indemnification.
(a) A corporation may not indemnify a director under section 48-18-502
unless authorized in the specific case after a determination has been made that
indemnification of the director is permissible in the circumstances because the
director has met the standard of conduct set forth in section 48-18-502.
(b) The determination has been made:
(1) by the board of directors by majority vote of a quorum consisting of
directors not at the time parties to the proceeding;
(2) If a quorum cannot be obtained under subdivision (b) (1), by majority
vote of a committee duly designated by the board of directors (in which
designation directors who are parties may participate), consisting solely
of two (2) or more directors not at the time parties to the proceeding;
(3) By independent special legal counsel:
(A) Selected by the board of directors or its committee in the manner
prescribed in subdivision (b) (1) or (2); or
(B) If a quorum of the board of directors cannot be obtained under
subdivision (b) (1) and a committee cannot be designated under subdivision ()
(2), selected majority vote of the full board of directors (in which selection
directors who are parties may participate); or
(4) By the shareholders, but shares owned by or voted under the control of
directors who are at the time parties to the proceeding may not be voted on the
determination.
(c) Authorization of indemnification and evaluation as to reasonableness of
expenses shall be made in the same manner as the determination that
indemnification is permissible, except that if the determination is made by
special legal counsel, authorization of indemnification and evaluation as to
reasonableness of expenses shall be made by those entitled under subdivision (b)
(3) to select counsel.
II - 3
48-18-507. Indemnification of officers, employees and agents.
Unless a corporation's charter provides otherwise:
(1) An officer of the corporation who is not a director is entitled to
mandatory indemnification under section 48-18-503 and is entitled to apply for
court-ordered indemnification under section 48-18-505 in each case to the same
extent as to a director; and
(2) The corporation may indemnify and advance expenses under this part to
an officer, employee, or agent of the corporation who is not a director to the
same extent as to a director; and
(3) A corporation may also indemnify and advance expenses to an officer,
employee, or agent who is not a director to the extent, consistent with public
policy that may be provided by its charter, bylaws, general or specific action
of its board of directors, or contract.
48-18-508. Insurance.
A corporation may purchase and maintain insurance on behalf of an
individual who is or was a director, officer, employee, or agent of the
corporation, is or was serving at the request of the corporation as a director,
officer, partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan, or other
enterprise, against liability asserted against or incurred by the individual in
that capacity or arising from the individual's status as a director, officer,
employee or agent, whether or not the corporation would have power to indemnify
the individual against the same liability under section 48-18-502 or section
48-18-503.
48-18-509. Application of part.
(a) The indemnification and advancement of expenses granted pursuant to, or
provided by, chapters 11-27 of this title shall not be deemed exclusive of any
other rights to which a director seeking indemnification or advancement of
expenses may be entitled, whether contained in chapters 11 - 27 of this title,
the charter, or the bylaws or, when authorized by such charter or bylaws, in a
resolution of shareholders, a resolution of directors, or an agreement providing
for such indemnification; provided that no indemnification may be made to or on
behalf of any director if a judgment or other final adjudication adverse to the
director establishes the director's liability:
(1) Fro any breach of the duty of loyalty to the corporation or its
shareholders;
(2) For acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; or
(3) Under section 48-18-304.
Nothing contained in chapters 11 - 27 of this title shall affect any rights
to indemnification to which corporate personnel, other than directors, may be
entitled by contract or otherwise under law. If the charter limits
indemnification or advance for expenses, indemnification and advance for
expenses are valid only to the extent consistent with the charter.
(b) This part does not limit a corporation's power to pay or reimburse
expenses incurred by a director in connection with the director's
appearance as a witness in a proceeding at a time when the director has
not been made a named defendant or respondent to the proceeding.
II - 4
Articles 8 and 9 of the Registrant's amended charter provide as follows:
Article 8
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 Tennessee Business Corporation Act, as the
same may be amended and supplemented.
Article 9
The Corporation shall, to the fullest extent permitted by the provisions of
Tennessee Business Corporation Act, 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............. $ 507
Legal Fees...................................................... 10,000
Accounting Fees................................................. 22,000
Printing and Engraving.......................................... 500
Blue Sky Qualification Fees and Expenses........................ 500
Transfer Agent Fee.............................................. 1,000
Miscellaneous................................................... 1,000
-----------
Total.................................................... $ 35,507
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The registrant was formed in October, 1998 under the Tennessee Business
Corporation Act. In October, 1998, it issued 1,000 shares of its common stock to
Harlis Trust, controlled by Harry Thompson, its President. On March 11, 2003,
the registrant amended its charter to authorize 50,000,000 shares of common
stock. On that date, it's issued and outstanding stock was forward split in the
ratio of 10,400 to 1 so that Harlis Trust owned 10,400,000 shares of common
stock. On August 11, 2003, Harlis Trust gifted 100,000 shares each to Amy Pye,
Eric Thompson, Kevin Thompson and Stephany Rutledge, the children of Harry
Thompson. The forward split of the other shares increased the total outstanding
shares to 11,995,000 as of this date.
ITEM 27. EXHIBITS.
(a) Exhibits.
Exhibit No. Description
_________ ________________________________
1.1 Underwriting agreement
3.1 Form of Amended and Restated Articles of Incorporation.
3.2 Bylaws.
5.1 Opinion re: legality
10.1 Gas Well Operating Agreement.
10.2 Oil,Gas, & Coalbed Methane Lease.
10.3 Engineering Reserve Evaluation Update
10.4 Gas Well Operating Agreement 2.
23.1* Consent of Drakeford & Drakeford, LLC.
23.2 Consent of Steven P. Kohler,Engineering Consultant
23.3* Consent of Louis M. Smith, Esq.
* Filed with this amendment.
(b) Financial Statement Schedules.
All schedules are omitted since the required information is not present, or
is not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the financial statements and
notes thereto.
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.
(4)To provide to the Underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the Underwriter to permit prompt delivery to each
purchaser.
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 bylaws, 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 he 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.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all 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 April 21, 2005.
WILON RESOURCES, 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 persons in the capacities
and on the dates stated.
SIGNATURE TITLE DATE
------------------ --------------- ---------------
/s/ Harry Thompson
-------------------
Harry Thompson President, Treasurer, April 21, 2005
and a Director
/s/ Amy Pye
-------------------
Amy Pye Secretary and a Director April 21, 2005
/s/ Eric J. Thompson
--------------------
Eric J. Thompson Vice-President and a
Director April 21, 2005
/s/ Bryan P. S. Gray
--------------------
Bryan P. S. Gray Director April 21, 2005