SCHEDULE 14C
INFORMATION
Information
Statement Pursuant to Section 14(c) of the Securities
Exchange Act of
1934
Check the
appropriate box:
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Preliminary
Information Statement
o
Confidential,
for Use of the Commission Only (as permitted by
Rule 14c-5(d)(2))
o
Definitive
Information Statement
ABC
FUNDING, INC.
(Name of
Registrant as Specified in its Charter)
Payment
of Filing Fee (Check the appropriate box):
þ
No
fee required.
o
|
Fee
computed on table below per Exchange Act Rules 14c-5(g) and
0-11.
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(1)
Title of each class of securities to which transaction applies:
(2)
Aggregate number of securities to which transaction applies:
(3)
Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
(4)
Proposed maximum aggregate value of transaction:
(5)
Total fee paid:
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Fee
paid previously with preliminary materials.
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Check
box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its
filing.
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(1)
Amount Previously Paid:
(2)
Form, Schedule or Registration Statement No.:
(3)
Filing Party:
(4)
Date Filed:
ABC
FUNDING, INC.
4606
FM 1960 West, Suite 400
INFORMATION
STATEMENT
WE
ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY. THE ACTIONS, DEFINED BELOW, HAVE ALREADY BEEN APPROVED BY
WRITTEN CONSENT OF THE STOCKHOLDERS OWNING A MAJORITY OF THE OUTSTANDING SHARES
OF OUR COMMON STOCK (THE “MAJORITY STOCKHOLDERS”). A VOTE OF THE
REMAINING STOCKHOLDERS IS NOT NECESSARY.
This
Information Statement is being furnished on or about the date first set forth
above (the “Mailing Date”) to holders of record as of the close of business on
September 19, 2008 (the “Record Date”) of the common stock, $0.001 par value per
share (the “Common Stock”), of ABC Funding, Inc., a Nevada corporation (the
“Company” or “we”), in connection with the following (the
“Actions”):
1.
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Amending
the Company’s Articles of Incorporation (the “Charter Amendment”) to
provide for:
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·
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a
change of our name from “ABC Funding, Inc.” to “Cross Canyon Energy
Corp.”; and
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·
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an
increase in the number of shares of Common Stock that the Company is
presently authorized to issue from 24,000,000 to 149,000,000;
and
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2.
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Adopting
the Company’s 2008 Stock Incentive Plan (the “2008 Plan”), pursuant to
which up to an aggregate of 8,750,000 shares of our Common
Stock shall be reserved for issuance to employees and non-employee
directors of the Company (or our affiliates) in connection with their
retention and/or continued employment by the
Company.
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We are
increasing the number of our authorized shares of Common Stock to provide us
with a sufficient number of shares to issue with respect to the conversion,
exercise and exchange, as the case may be, of the following issued and
outstanding securities of ours (collectively, the “Affected Company
Securities”), the conversion, exercise and exchange of which was made subject in
each instance to the effectiveness of the Charter Amendment:
·
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Shares
of “Series D” Preferred Stock issued on September 2, 2008 to a designee of
Voyager Gas Holdings, L.P., as seller, in partial consideration for our
purchase on that date of 100% of the outstanding capital stock of Voyager
Gas Corporation (the “Voyager
Acquisition”);
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·
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Warrants
granted on September 2, 2008 to CIT Capital USA, Inc., our lender, as
additional consideration for a term loan and revolving credit facility
(“CIT Credit Facility”) entered into by us to fund the Voyager
Acquisition;
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·
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Shares
of Series E Preferred issued on September 2, 2008 to an investor in
satisfaction of a debenture issued by us to such investor for funds
advanced enabling us to fund the performance deposit in connection with
the Voyager Acquisition (the “Bridge
Loan”);
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·
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Shares
of Series A Preferred and Series B Preferred issued during May 2008 to
noteholders in exchange for outstanding indebtedness in anticipation of
our entry into the Bridge Loan (the “Exchange Transaction”);
and
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·
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Options
and restricted stock awards granted on May 22, 2008 to each of our newly
hired Chief Executive Officer and Chief Financial Officer (collectively,
the “Executive Officer Awards”).
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We
previously disclosed the issuance and granting of the Affected Company
Securities in our Current Reports on Forms 8-K filed with the Securities and
Exchange Commission (“SEC”) on each of May 23, 2008 and September 9,
2008.
We are
adopting the 2008 Plan to enable our Board to offer stock options and the other
stock-based incentives in connection with retaining the services of outstanding
personnel and in encouraging such personnel, together with existing employees,
to have a greater financial investment in the Company.
This
Information Statement contains information required under Section 14(c) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), with respect
to (i) the authorization of sufficient shares of Common Stock for issuance upon
the conversion, exercise or exchange, as applicable, of the overlying Affected
Company Securities and (ii) amending the Articles of Incorporation to effect, in
part, such increase.
By Order of the Board of
Directors
October
[ ],
2008
____________________
Robert P.
Munn, Chairman
TABLE
OF CONTENTS
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PAGE
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SUMMARY
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1
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CHARTER
AMENDMENT
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4
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ADOPTION OF 2008
STOCK INCENTIVE PLAN
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10
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INTERESTS OF CERTAIN
PERSONS IN ACTIONS BEING TAKEN
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26
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OUTSTANDING SHARES
AND VOTING RIGHTS
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31
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WHERE YOU CAN FIND
MORE INFORMATION ABOUT US
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33
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SUMMARY
The
following summary highlights selected information from this Information
Statement regarding the Actions, the Company and each of the 2008 Plan and the
Affected Company Securities for which a portion of the to be newly-authorized
shares of Common Stock will be issuable or exchangeable, as the case may
be. The Summary may not contain all of the information that may be
important to you and we encourage you to read carefully this entire Information
Statement, its exhibits and the other documents referred to
herein. Capitalized terms not otherwise defined herein have the
meanings assigned to them elsewhere in this Information Statement.
The
Company
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We
are an independent oil and natural gas company newly engaged in the
exploration, production, development, acquisition and exploitation of
natural gas and crude oil properties. Prior to our completion
of the Voyager Acquisition on September 2, 2008, we were a “shell company”
defined by, and subject to, the rules and regulations promulgated under
the Exchange Act.
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Record
Date
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September
19, 2008.
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Effective
Date
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20
th
day after mailing of a definitive Information Statement to our
stockholders of record on the Record Date, or November ___ 2008 based upon
a mailing date of October ___, 2008.
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Majority
Stockholders
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Beneficial
holders of 14,151,000 shares of our Common Stock, constituting 60.6% of
the Common Stock issued and outstanding at the Record Date, who signed the
Consent.
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Consent
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Consent
given on the Record Date by the Majority Shareholders approving the
Actions, including the Charter Amendment increasing the authorized shares
of Common Stock for issuance, in part, of Common Stock upon the
conversion, exercise and exchange, as applicable, of the Affected Company
Securities.
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Company
Transactions
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Voyager
Acquisition
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Our
September 2, 2008 purchase of 100% of the outstanding capital stock of
Voyager Gas Corporation (“Voyager”), whereby Voyager became our
wholly-owned subsidiary and we became an owner, lessee and/or operator of
all of Voyager’s oil and gas properties and assets. Consideration paid in
the Voyager Acquisition included 10,000 shares of our Series D Preferred,
having an agreed upon value of $7.0 million and, subject to the
effectiveness of the Charter Amendment, automatically convertible into
17,500,000 shares of our Common Stock .
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CIT
Credit Facility
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Senior
credit facility with CIT Capital USA, Inc. (“CIT Capital”) executed
September 2, 2008, consisting of $50.0 million revolving credit facility
and $22.0 million term loan, to fund the Voyager Acquisition and provide
working capital.
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Bridge
Loan
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Proceeds
of $800,000 raised by sale of our senior secured convertible debentures
due September 29, 2008 (the “Debentures”), in the aggregate principal
amount of $900,000 and issued at a discount of $100,000, to fund payment
of the performance deposit in the Voyager Acquisition.
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Exchange
Transaction
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Issuance
of shares of our Series A and Series B Preferred in exchange for
outstanding indebtedness, as evidenced by 10% convertible notes and 12%
convertible notes. Exchange effected during May 2008 in
anticipation of our entry into the Bridge Loan.
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Charter
Amendment
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Certificate
of Amendment of our Articles of Incorporation, providing for (i) a change
in our name to “Cross Canyon Energy Corp.” and (ii) increase in the number
of authorized shares of our Common Stock to
149,000,000.
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2008
Plan
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8,750,000
shares of Common Stock reserved at the Effective Date permitting us to
grant any one or a combination of stock options and other stock-based
incentives to retain the services of personnel and employees of the
Company
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Affected
Company Securities
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Series
A Preferred
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99,395
shares of our outstanding preferred stock designated as “Series A” in that
Certificate of Designation filed by us with the State of Nevada on May 15,
2008 and automatically convertible into 1,987,900 shares of Common Stock
upon the effectiveness of the Charter Amendment.
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Series
B Preferred
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37,100
shares of our outstanding authorized preferred stock, designated as
“Series B” in that Certificate of Designation filed by us with the State
of Nevada on May 15, 2008 and automatically convertible into 1,060,318
shares of Common Stock upon the effectiveness of the Charter
Amendment.
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Series
D Preferred
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10,000
shares of our outstanding preferred stock, designated as “Series D” in
that Certificate of Designation filed by us with the State of Nevada on
August 27, 2008 and automatically convertible into 17,500,000 shares of
Common Stock upon the effectiveness of the Charter
Amendment.
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Series
E Preferred
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10,000
shares of our outstanding preferred stock, designated as “Series E” in
that Certificate of Designation filed by us with the State of Nevada on
May 29, 2008 and automatically convertible into 1,363,636 shares of Common
Stock upon the effectiveness of the Charter Amendment.
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CIT
Warrants
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Warrants
granted to CIT Capital, our lender, as part of the CIT Credit Facility
and, subject to the effectiveness of the Charter Amendment, exercisable to
purchase up to 24,199,996 shares of Common Stock at an initial exercise
price of $0.35 per share.
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GHS
Warrants
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Warrants
granted to Global Hunter Securities LLC, our financial advisor, in
connection with the CIT Credit Facility and, subject to the effectiveness
of the Charter Amendment, exercisable to purchase up to 225,000 shares of
Common Stock at an initial exercise price of $0.33 per
share.
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Munn
Options
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Options
granted to our Chief Executive Officer and exercisable to purchase up to
1,500,000 shares of Common Stock, subject to a two-year vesting schedule
commencing upon the effectiveness of the Charter
Amendment.
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Chase
Options
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Options
granted to our Chief Financial Officer and exercisable to purchase up to
1,125,000 shares of Common Stock, subject to a two-year vesting schedule
commencing upon the effectiveness of the Charter
Amendment.
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Munn
Restricted Stock
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Award
of 1,500,000 shares of Common Stock granted to our Chief Executive
Officer, subject to a two-year vesting schedule commencing upon the
effectiveness of the Charter Amendment.
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Chase
Restricted Stock
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Award
of 1,125,000 shares of Common Stock granted to our Chief Financial
Officer, subject to a two-year vesting schedule commencing upon the
effectiveness of the Charter
Amendment.
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CONSENT
AND
DELIVERY
OF INFORMATION STATEMENT
This Information Statement is first
being mailed on or about October [ ], 2008 to our stockholders
of record on the Record Date to provide material information regarding the
Actions and business, property and financial information of the Company,
including exhibits attached hereto of the Financial Statements and the Reserve
Report (as those terms are defined elsewhere in this Information Statement under
“
The Company – The Voyager
Acquisition and Financing” and “- Our Properties and Areas of
Operation.”
On the
Record Date, Mr. Alan D. Gaines, one of our directors, and his affiliates, being
the respective record holders of 14,151,000 shares our Common Stock,
representing, in the aggregate, approximately 60.6% of the then outstanding
shares of our Common Stock and constituting the Majority Stockholders, consented
in writing to the Actions. Our Board of Directors (the “Board”) has
previously unanimously approved the Actions. Such approval and
consent are sufficient under Section 78.320 of the Nevada Revised Statutes and
our bylaws to approve the Actions. Our Board does not intend to
solicit any proxies or consents in connection with the
Actions. Accordingly, the Actions will not be submitted to our other
stockholders for a vote and this Information Statement is being furnished to
stockholders solely to provide them with certain information concerning the
Actions and the Company in accordance with the requirements of Nevada law and
Regulation 14C promulgated under the Exchange Act.
Regulation
14C promulgated by the SEC under Section 14(c) of the Exchange Act requires that
we distribute to our stockholders of record on the Record Date this Information
Statement with respect to the Actions authorized by consent of the Majority
Shareholders. Regulation 14C also provides for an effective date of
the Actions of not earlier than the 20
th
day
after the mailing of this Information Statement in the definitive form filed
with the SEC (the “Effective Date”).
Only one
Information Statement is being delivered to two or more stockholders who share
an address unless we have received a contrary instruction from one or more of
such stockholders. We will promptly deliver, upon written or oral
request, a separate copy of this Information Statement to a stockholder at a
shared address to which a single copy of the document was
delivered. If you would like to request additional copies of this
Information Statement, or if in the future you would like to receive multiple
copies of Information Statements or proxy statements, or annual reports, or if
you are currently receiving multiple copies of these documents and would, in the
future, like to receive only a single copy, please so instruct us by writing to
the corporate secretary at our executive offices at the address specified
above.
The
entire cost of furnishing this Information Statement will be borne by
us. We will request brokerage houses, nominees, custodians,
fiduciaries and other like parties to forward this Information Statement to the
beneficial owners of our Common Stock held of record by them and will reimburse
such persons for out-of-pocket expenses incurred in forwarding this Information
Statement.
Our
offices are located at 4606 FM 1960 West, Suite 400, Houston, Texas 77069 and
our telephone number is (281) 315-8890.
1.
CHARTER
AMENDMENT
The Board
of Directors has unanimously adopted and declared advisable, and the Majority
Stockholders have approved, the Charter Amendment.
As
provided below, the only amendments to our Articles of Incorporation
contemplated by the Charter Amendment are: (i) the name change from “ABC
Funding, Inc.” to “Cross Canyon Energy Corp.” and (ii) the increase of the
number of authorized shares of our Common Stock from 24,000,000 to
149,000,000.
Change of Name.
We
believe that the name change from “ABC Funding, Inc.” to “Cross Canyon Energy
Corp.” is appropriate because our business focus is in the energy industry, and
specifically the oil and natural gas industry following the Voyager
Acquisition.
Increase in Number of Authorized
Shares of Common Stock.
We believe that this increase in the number of
our authorized shares is appropriate and in our best interests in order (i) to
cover obligations to issue shares of our Common Stock arising under the Affected
Company Securities, (ii) to issue Awards under the 2008 Plan and (iii) to have
an adequate number of shares of Common Stock available otherwise for issuance in
the future.
We intend
to effect the Charter Amendment by filing with the Secretary of the State of
Nevada a Certificate of Amendment of Articles of Incorporation, substantially in
the form attached hereto as
Exhibit
A
, on the 21
st
day
following the mailing of a definitive Information Statement to all of our
stockholders of record on the Record Date. The Charter Amendment will be
effective upon filing with the Secretary of State of the State of
Nevada.
Increasing
Number of Authorized Shares
Increasing
the number of our authorized shares enables us: (i) to satisfy our obligations
to issue shares of Common Stock arising under the Affected Company Securities;
(ii) to grant Awards under our 2008 Stock Incentive Plan having been adopted by
the Majority Stockholders as disclosed elsewhere in this Information Statement;
and (iii) to have an adequate number of shares of Common Stock available
otherwise for issuance in the future.
Current
Capital Structure
Under
Nevada law, we may only issue shares of capital stock to the extent such shares
have been authorized under our Articles of Incorporation. Currently,
our Articles of Incorporation only authorize us to issue 24,000,000 shares of
Common Stock and 1,000,000 shares of preferred stock. Accordingly, we
do not presently have sufficient authorized shares to issue upon the conversion,
exercise or exchange of the Affected Company Securities or our outstanding
options.
As of the
Record Date, there were 23,363,136 shares of Common Stock issued and
outstanding. Additional shares of our Common Stock are issuable upon
the exercise or conversion, as applicable, of derivative securities, as follows:
(i) 12,675,000 shares underlying outstanding stock options, (ii) 27,424,996
shares underlying outstanding warrants, (iii) 2,625,000 shares underlying
outstanding restrictive stock awards granted to our Chief Executive Officer and
Chief Financial Officer and (iv) approximately 51,000 shares underlying an
outstanding convertible promissory note.
Additionally,
as of the Record Date there were issued and outstanding or reserved for
issuance: (i) 300,000 shares of Series A Preferred, of which 99,395
shares were outstanding; (ii) 200,000 shares of Series B Preferred, of which
37,500 shares were outstanding; (iii) 2,000 shares of Series C Preferred, of
which 1,000 shares were outstanding; (iv) 10,000 shares of Series D Preferred;
and (v) 10,000 shares of Series E Preferred. Except for the Series C
Preferred which is not convertible, the outstanding shares of preferred stock
are convertible into an aggregate of 21,911,854 shares of Common Stock upon
the effectiveness of the Charter Amendment.
Reasons
for Increasing Authorized Shares
We
believe that this increase in the number of our authorized shares is appropriate
and in our best interests in order: (i) to satisfy our obligations to issue
shares of Common Stock arising under the Affected Company Securities; (ii) to
grant Awards under the Company’s 2008 Stock Incentive Plan, being adopted by the
Majority Stockholders as of the Effective Date, as provided elsewhere in this
Information Statement under “
Adoption of 2008 Stock Incentive
Plan
”; and (iii) to have an adequate number of shares of Common Stock
available otherwise for issuance in the future.
In
addition, the number of shares of Common Stock that may be issuable under the
Affected Company Securities is subject to adjustment in certain circumstances,
and we may have to issue substantially more shares of Common Stock under these
instruments. For instance, the CIT Warrant provides for the exercise price at
which such warrant is exercisable to be adjusted downwards in the event that we
issue future shares or derivative instruments exercisable for less than $0.35
per share. Any increase in the number of shares of Common Stock to be
reserved for issuance upon exercise or conversion of our outstanding derivative
securities reduces the shares available for issuance by us in the
future.
In
addition to adjustments to the number of shares of our Common Stock issuable
upon conversion or exercise of the Affected Company Securities as provided
above, it is also possible that the holders of any warrants and options included
in the Affected Company Securities may elect never to exercise such options or
warrants for shares of our Common Stock. As a result, we are not in a
position to quantify how many shares of our Common Stock will ultimately be
issuable upon the exercise of these Affected Company Securities.
By this
Information Statement, the Majority Stockholders are adopting the 2008 Plan
previously approved by our Board, which 2008 Plan provides for us, subject to
the effectiveness of the Charter Amendment, to reserve 8,750,000 shares of
Common Stock for use in the subsequent awards to be granted from time to time by
us pursuant thereto.
Increasing
the number of shares of Common Stock authorized and generally available for
future issuance will also afford us the flexibility to issue equity in
connection with various other transactions, including, issuing shares of our
Common Stock in order to (i) raise capital to finance a potential acquisition,
(ii) issue shares of our Common Stock directly to a seller in a potential
acquisition, (iii) raise capital to refinance all or a portion of our existing
credit facility; and/or (iv) raise capital to accelerate our drilling program
and provide general working capital.
Since the
number of authorized shares of our Common Stock will be increased to
149,000,000, the issuance in the future of such authorized shares may have the
effect of diluting the earnings per share and book value per share, as well as
the stock ownership and voting rights, of the currently outstanding shares of
Common Stock.
Release
No. 34-15230 of the staff of the SEC requires disclosure and discussion of the
effects of any stockholder proposal that may be used as an anti-takeover
device. However, the proposed increase in the number of shares of
authorized Common Stock is not the result of any such specific effort; rather,
as indicated above, the purpose of the increase in the number of shares of
authorized Common Stock is to provide our management with the ability to issue
shares for future acquisitions, financings and operational possibilities, and
not to construct or enable any anti-takeover defense or mechanism on our
behalf. While it is possible that management could use the additional
shares to resist or frustrate a third-party transaction providing an
above-market premium that is favored by a majority of the independent
stockholders, we have no intent or plan to employ the additional unissued
authorized shares as an anti-takeover device. As a consequence, the
increase in authorized Common Stock may make it more difficult for, prevent or
deter a third party from acquiring control of us or changing our Board of
Directors and management, as well as inhibit fluctuations in the market price of
our shares that could result from actual or rumored takeover
attempts. We currently have no such provisions in any of our
governing documents.
As
summarized below, provisions of our Articles of Incorporation and bylaws and
applicable provisions of the Nevada Revised Statutes governing profit
corporations may have anti-takeover effects, making it more difficult for or
preventing a third party from acquiring control of us or changing our Board of
Directors and management. These provisions may also have the effect
of deterring hostile takeovers or delaying changes in our control or in our
management.
Undesignated Preferred
Stock
Our Articles of
Incorporation authorize the issuance of up to 1,000,000 shares of preferred
stock, par value $0.001 per share, of which 522,000 aggregate shares, designated
as Series A, B, C, D and E Preferred, have been issued and outstanding or
reserved for issuance as of the Mailing Date. As such, our Board of
Directors (the “Board”) is presently entitled to authorize the issuance of an
additional 478,000 shares of preferred stock in one or more series with such
designations; preferences; conversion rights; cumulative, relative;
participating; and optional or other rights, including: voting rights;
qualifications; limitations; or restrictions as may be determined in its sole
discretion, with no further authorization by security holders required for the
issuance thereof. Our Board can also fix the number of shares
constituting a series of preferred stock, without any further vote or action by
our stockholders. The issuance of undesignated preferred stock with
voting, conversion or other rights or preferences, while providing flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of (i) delaying or preventing a change in control, (ii) causing
the market price of our Common Stock to decline; or (iii) impairing the voting
power and other rights of the holders of our Common Stock.
No Cumulative
Voting
Our Articles
of Incorporation and bylaws do not provide for cumulative voting in the election
of directors. The combination of the present ownership by a few
stockholders of a significant portion of our issued and outstanding Common Stock
and lack of cumulative voting makes it more difficult for other stockholders to
replace our Board of Directors or for another party to obtain control of us by
replacing our Board of Directors.
Description
of Affected Company Securities
Set forth
below are the transactions pursuant to which we previously issued or granted the
Affected Company Securities, the conversion, exercise or exchange thereof, as
applicable, which were made subject to the effectiveness of the Charter
Amendment increasing the number of authorized shares of Common
Stock. All of these transactions were duly authorized by us and, as
indicated below, previously disclosed in our public filings with the
SEC.
Series
D Preferred to Voyager Gas Holdings, Inc.
As part
of the purchase price paid in the Voyager Acquisition, on September 2, 2008 we
issued 10,000 shares of our newly designated Series D Preferred to a designee of
Voyager Gas Holdings, L.P., the seller of the capital stock in Voyager Gas
Corporation purchased by us therein. As set forth in the Certificate
of Designations with respect to the Series D Preferred, upon the effectiveness
of the Charter Amendment each share of Series D Preferred will automatically
convert into 1,750 shares of Common Stock for an aggregate of 17,500,000 shares
of our Common Stock. The shares of Series D Preferred rank senior to
all other shares of the Company’s capital stock and in parity with the Series E
Preferred (discussed below). The Certificate of Designation provides
that if the Charter Amendment is not declared effective within one hundred fifty
(150) days from the closing of the Voyager Acquisition, then holders of our
Series D Preferred shall be entitled to the same voting rights and vote with
(and in the same class as) the holders of Common Stock with respect to every
matter voted on by the holders of Common Stock, on an “as if converted”
basis.
The
issuance of the Series D Preferred, together with governing Certificate of
Designations, was previously disclosed by us in our Current Report on Form 8-K
filed with the SEC on September 9, 2008.
Series
E Preferred and Warrant to Whalehaven Capital Fund Limited
Concurrent
with the closing of the Voyager Acquisition, on September 2, 2008 we issued
10,000 shares of our newly designated Series E Preferred to Whalehaven Capital
Fund Limited, a purchaser of our Debentures in the Bridge Loan, in satisfaction
in full of the redemption price thereof, in the amount of
$450,000. As set forth in the Certificate of Designations with
respect to the Series E Preferred, upon the effectiveness of the Charter
Amendment each share of Series E Preferred will automatically convert into
136.3636 shares of Common Stock for an aggregate of 1,363,636 shares of our
Common Stock. The shares of Series E Preferred rank senior to all
other shares of the Company’s capital stock and are on parity with the Series D
Preferred. The Certificate of Designation provides that if the
Charter Amendment is not declared effective within one hundred fifty (150) days
from the closing of the Voyager Acquisition, then holders of our Series E
Preferred Stock shall be entitled to the same voting rights and vote with (and
in the same class as) the holders of Common Stock with respect to every matter
voted on by the holders of Common Stock, on an “as if converted”
basis.
As part
of its purchase of the Debenture in the Bridge Loan, Whalehaven Capital Fund
Limited received on May 21, 2008 a warrant to purchase up to 1,200,000 shares of
our Common Stock at an initial exercise price of $0.33 per share, subject to
full anti-dilution protection in the event we issue future shares or derivative
instruments exercisable for less than the then applicable exercise price, as
well as other adjustments under certain circumstances.
The
issuance of the Series E Preferred, together with governing Certificate of
Designations, and the grant of the warrant, together with the form of warrant,
were previously disclosed by us in our Current Reports on Form 8-K filed with
the SEC on May 23, 2008 and September 9, 2008, respectively.
Warrant
to CIT Capital
As
further consideration for entering into the CIT Credit Facility discussed
elsewhere in this Information Statement under “Description of Company –
Liquidity and Capital Sources”, on September 2, 2008 we issued a warrant to CIT
Capital, the lender and administrative agent under the CIT Credit Facility (the
“CIT Warrant”), exercisable to purchase up to 24,199,996 shares of our Common
Stock, or approximately 27.5% of our Common Stock on a fully-diluted basis at
the grant date, at an exercise price of $0.35 per share. The CIT
Warrant is exercisable for a period of seven (7) years and affords the holder(s)
thereof full anti-dilution protection in the event in the event we issue future
shares or derivative instruments exercisable for less than the then applicable
exercise price, as well as other adjustments under certain
circumstances. The CIT Warrant is not exercisable until the effective
date of the Charter Amendment. The grant of the CIT Warrant, together
with the form of CIT Warrant, was previously disclosed by us in our Current
Report on Form 8-K filed with the SEC on September 9, 2008.
Warrant
to Global Hunter Securities LLC
In
connection with our entering into the CIT Credit Facility, we issued a warrant
to Global Hunter Securities LLC (the “GHS Warrant”), exercisable to purchase up
to 225,000 shares of our Common Stock, at an exercise price of $0.33 per
share. The GHS Warrant is exercisable for a period of five (5)
years. The GHS Warrants is not exercisable until the effective date
of the Charter Amendment. We had previously retained the services of Global
Hunter Securities LLC to assist us in arranging the debt facility, for which
services we agreed to pay a cash fee based upon a percentage of any debt
raised through it. The grant of the GHS Warrant, together with form
of GHS Warrant, was previously disclosed by us in our Current Report on Form 8-K
filed with the SEC on September 9, 2008.
Exchange
Transaction – Series A and Series B Preferred
During
May 2008 certain of our previously outstanding (i) convertible promissory notes,
in the aggregate principal balance of $965,000 and bearing interest at 12% per
annum from September 1, 2007, and due February 28, 2008, and (ii) convertible
promissory notes, in the aggregate principal balance of $350,000 and bearing
interest of 10% per annum, due October 31, 2008, were exchanged for shares of
our Series A Preferred and Series B Preferred, respectively, in satisfaction of
our obligations under the notes (the “Exchange Transaction”), including, without
limitation, the repayment of principal and accrued unpaid interest
thereon.
The
Exchange Transaction provided for (i) the issuance of 99,395 shares of Series A
Preferred in exchange for the 12% notes, with each share of such preferred stock
being automatically convertible into 20 shares of our Common Stock, for an
aggregate of 1,987,900 shares of our Common Stock and (ii) the issuance of
37,100 shares of Series B Preferred in exchange for the 10% notes, with each
share of such preferred stock being automatically convertible into 28.58 shares
of our Common Stock, for an aggregate of 1,060,318 shares of our Common
Stock. The Certificates of Designations with respect to the Series A
and B Preferred provide for automatic conversion into shares of our Common Stock
upon the effectiveness of the Charter Amendment.
The
issuance of the Series A and Series B Preferred, together with respective
governing Certificates of Designations, were previously disclosed by us in our
Current Report on Form 8-K filed with the SEC on May 21, 2008.
Executive
Officer Awards
In
connection with our hiring of (i) Robert P. Munn to serve as our Chief Executive
Officer and President and (ii) Carl A. Chase to serve as our Chief Financial
Officer, on May 22, 2008 we entered into restricted stock agreements with each
of Messrs. Munn and Chase, granting them restricted stock awards, as
follows:
·
|
1,500,000
shares of our Common Stock to Mr. Munn, which vest equally as to one-third
of the shares over a two year period, commencing on the effectiveness of
the Charter Amendment and at each of the first and second year anniversary
of the grant date; and
|
·
|
1,125,000
shares of our Common Stock to Mr. Chase, which vest equally as to
one-third of the shares over a two year period, commencing on the
effectiveness of the Charter Amendment and at each of the first and second
year anniversary of the grant date.
|
Each such
officer has, with respect to all of his respective restricted stock (whether
then vested or not), all of the rights of a holder of our Common Stock,
including the right to vote such shares and to receive dividends as may be
declared. Notwithstanding the preceding sentence, the restricted
stock shall not be transferable until and unless they have become vested in
accordance with the vesting schedule.
As part
of our employment agreements with Messrs. Munn and Chase, on May 22, 2008 we
also executed a series of option agreements, granting each of them options
subject to a vesting schedule and graduated exercise prices, as
follows:
·
|
Options
to Mr. Munn, exercisable to purchase up to 1,500,000 shares of Common
Stock, vesting equally as to 1/3
rd
of the shares, or 500,000 shares, over a two year period commencing upon
the effectiveness of the Charter Amendment at an exercise price
of $0.52 per share, and at each of the first and second year anniversary
of the grant date at an exercise price of $0.57 per share and $0.62 per
share, respectively, all subject to adjustment in certain circumstances
(the “Munn Options”); and
|
·
|
Options
to Mr. Chase, exercisable to purchase up to 1,125,000 shares of Common
Stock, vesting equally as to 1/3
rd
of the shares, or 375,000 shares, over a two year period commencing upon
the effectiveness of the Charter Amendment at an exercise price
of $0.52 per share, and at each of the first and second year anniversary
of the grant date at an exercise price of $0.57 per share and $0.62 per
share, respectively, all subject to adjustment in certain circumstances
(the “Chase Options”)
|
The
holders of the options shall have none of the rights and privileges of a
stockholder with respect to any of the underlying shares of Common Stock, in
whole or in part, prior to the exercise of the options with respect to such
underlying shares. With respect to both the restricted stock awards and option
grants (collectively, the “Executive Officer Awards”), the vesting schedule is
subject to the executive officer being continuously employed by us at the
applicable vesting date. The Executive Officer Awards, together with the
underlying restricted stock agreements and option agreements, were previously
disclosed by us in our Current Report on Form 8-K filed with the SEC on May 23,
2008.
Certain
Registration Rights
Neither
the Affected Company Securities nor the underlying shares of Common Stock
issuable upon the conversion, exercise or exchange of such instruments are
registered under state or federal securities laws and, as provided below with
respect to certain of the Affected Company Securities, are subject to
registration rights as agreed between us and such holder.
On
September 2, 2008, we entered into a registration rights agreement with CIT
Capital and Voyager Gas Holdings, LP (the “Registration Rights Agreement”),
whereby we agreed to file, within ninety (90) days from the closing of the
Voyager Acquisition, a registration statement with respect to all shares of
Common Stock underlying the CIT Warrant and the shares of Series D
Preferred. In the event that a registration statement covering all
such shares is not deemed effective within one hundred eighty (180) days from
the closing of the Voyager Acquisition, then we will be obligated to pay
liquidated damages on the unregistered shares as set forth in the Registration
Rights Agreement.
By that
registration rights agreement dated May 21, 2008, between us and the purchasers
of Debentures in the Bridge Loan, we agreed, subject to certain cutbacks as
applicable, to file a registration statement covering the shares of Common Stock
underlying the warrants and the Debentures issued in the Bridge Loan for resale
within 90 days from the closing of the Voyager Acquisition, and to cause such
registration statement to become effective within 180 days following such
closing date. Upon the occurrence of certain events described in the
registration rights agreement, we will be obligated to pay to the purchasers
certain penalties. The Common Stock underlying the Series E Preferred
issued in exchange for the Debenture is subject to the foregoing registration
rights.
We also
granted “piggy-back” registration rights with respect to (i) the shares of
Common Stock underlying the options granted to Messrs. Munn and Chase and (ii)
the shares of Common Stock underlying the GHS Warrant, affording each the option
and warrant holders the opportunity to include for sale in any registration
statement under the Securities Act of 1933 (other than in connection with a Form
S-8 or any successor form registering any employee benefit plan) we propose to
file with respect to our securities, provided, however, in the case of the GHS
Warrant shares, that if our underwriter shall advise us in writing that in its
opinion the number of shares to be included in such registration is too large,
then we will include only such number of underlying Common Stock as such
underwriter shall so advise
.
2. ADOPTION
OF 2008 STOCK INCENTIVE PLAN
On
September 19, 2008 our Board authorized the adoption of the ABC Funding, Inc.
2008 Stock Incentive Plan (the “2008 Plan”). The 2008 Plan was subsequently
approved by the Majority Stockholders on the Record Date. In accordance with
Regulation 14C promulgated by the SEC, the 2008 Plan will become effective on
the Effective Date.
Our Board
believes that stock options and the other stock-based incentives offered under
the 2008 Plan play an important role in retaining the services of outstanding
personnel and in encouraging such personnel, together with existing employees,
to have a greater financial investment in the Company.
The 2008
Plan, which is incorporated herein, is set forth in its entirety in
Exhibit
D
attached to this Information Statement. Set forth below is a summary of
certain aspects of the 2008 Plan:
General
Information
Administration of the 2008
Plan
. The 2008 Plan will be administered by a Compensation Committee to
be appointed by our Board (the “Committee”), which Committee shall be comprised
of two or more “outside directors” as described in Section 162(m) of the
Internal Revenue Code of 1986, as amended (the “Code”). Subject to certain
limitations in the 2008 Plan, the Committee establishes the terms and conditions
of awards granted under the 2008 Plan, interprets the 2008 Plan and all awards
under the 2008 Plan, and administers the 2008 Plan. To the extent no Committee
is appointed or is in existence during any time the 2008 Stock Plan is in
effect, our Board shall be deemed the “Committee” for purposes of administering
the 2008 Stock Plan.
Benefits under the 2008 Plan
As defined under the 2008 Plan, the Committee may grant any one or a combination
of Incentive Options, Non-Qualified Stock Options, Restricted Stock, Stock
Appreciation Rights and Phantom Stock Awards, as well as Purchased Stock, Bonus
Stock and other Performance Awards (collectively, “Awards”).
Eligible Participants under the 2008
Plan
. Except for Incentive Options which may only be granted to Employees
of the Company, Awards under the 2008 Plan may be granted to Employees and
Non-Employee Directors of the Company (as such terms are defined in the 2008
Plan) who are designated by the Committee. No employee may receive Options or
Stock Appreciation Rights under this 2008 Plan in any given year which, singly
or in the aggregate, cover more than 2,000,000 shares of the Company’s Common
Stock.
Shares Available under the 2008
Plan
. The aggregate number of shares of Common Stock that may be issued
or transferred to grantees under the 2008 Plan shall not exceed 8,779,998
shares. If there is a stock split, stock dividend or other relevant change
affecting the Company’s shares, appropriate adjustments will be made in the
number of shares that may be issued or transferred in the future and in the
number of shares and price of all outstanding Awards made before such event. If
shares under an Award are not issued or transferred, those shares would again be
available for inclusion in future Award grants.
Awards
Under the 2008 Plan
Options
. The Committee may
grant Options qualifying as incentive stock options under the Code and
nonqualified stock options. The term of an option shall be fixed by the
Committee, but shall not exceed ten years. In the case of death of the holder of
the option or upon the termination, removal or resignation of the option holder
for any reason other than for cause within one year of the occurrence of a
Change of Control (as that term is defined in the 2008 Plan), an option may be
extended for up to 12 months depending on the circumstances. The option price
shall not be less than the fair market value of the Common Stock on the date of
grant. In the case of an award of Incentive Options to an employee possessing
more than 10% of the total combined voting power of all classes of stock of the
Company or any parent corporation or subsidiary corporation as those terms are
defined in the Code, the option price shall not be less than 110% of the fair
market value of the Common Stock on the date of grant and the option term shall
not exceed five years from date of grant. Payment of the option price may be by
cash or, with the consent of the Committee, by tender of shares of Common Stock
having an equivalent fair market value or delivery of shares of Common Stock for
which the option is being exercised to a broker for sale on behalf of the option
holder. With respect to Incentive Options, the aggregate fair market value of
shares of Common Stock for which one or more options granted may for the first
time become exercisable during any calendar year shall not exceed
$100,000.
Restricted Stock
. The
Committee may also award shares of Restricted Stock. The shares will be issued
as restricted stock within the meaning of Rule 144 of the Securities Act of
1933, as amended. Such grant would set forth the terms and conditions of the
award, including the imposition of a vesting schedule during which the grantee
must remain in the employ of the Company in order to retain the shares under
grant. If the grantee’s employment terminates during the period, the grant would
terminate and the grantee would be required to return any unvested shares to the
Company. However, the Committee may provide complete or partial exceptions to
this requirement as it deems equitable. Unless an Award specifically provides
otherwise, any shares not otherwise vested shall vest upon the death,
disability, termination, removal or resignation of the grantee for any reason
other than for cause within one year of the occurrence of a Change of Control
(as that term is defined in the 2008 Plan). The grantee can not dispose of the
shares prior to the expiration of forfeiture restrictions set forth in the
grant. During this period, however, the grantee would be entitled to vote the
shares and, at the discretion of the Committee, receive dividends. Each
certificate would bear a legend giving notice of the restrictions in the
grant.
Stock Appreciation Rights and
Phantom Stock Awards
. The Committee may grant stock appreciation rights
(“SARs”), either singly or in combination with an underlying stock option under
the 2008 Plan, and Phantom Stock Awards. SARs entitle the recipient to receive,
upon exercise, the excess of the fair market value per share on the date of
exercise over the grant price as determined by the Committee, subject to a
specified cap amount, and are designed to give the grantee the same economic
value that would have been derived from exercise of an option. Phantom Stock
Awards are rights granted to a recipient to receive cash or Common Stock equal
to the fair market value of a specified number of shares of Common Stock at the
end of a specified deferral period. The term of a SAR or Phantom Stock Award
shall be fixed by the Committee. Payment under SARs and Phantom Stock Awards may
be made in cash, in shares or a combination of both at the discretion of the
Committee. If a SAR granted in combination with an underlying stock option is
exercised, the right under the underlying option to purchase shares would
terminate.
Bonus Stock and Performance
Awards
. The Committee may grant Bonus Stock in consideration of services
performed or Performance Awards, under which payment may be made in shares of
the Common Stock, a combination of shares and cash or cash if the performance of
the Company or any subsidiary or affiliate of the Company selected by the
Committee meets certain goals established by the Committee and approved by our
Board during an award period. Subject to the approval of our Board, the
Committee would determine the goals, the length of an award period (not less
than one year and not more than ten years), the maximum payment value of a
Performance Award (not to exceed $1,000,000 to any employee in any one year) and
the minimum performance required before a payment would be made. In order to
receive payment, a grantee must remain in the employ of the Company until the
completion of, and settlement under, the award period, except that the Committee
may provide complete or partial exceptions to that requirement as it deems
equitable.
Performance
Awards may contain performance measures based on one or more of the following
criteria:
(i) Total
shareholder return;
(ii) Return
on assets, equity, capital, capital employed, or investment;
(iii) Pre-tax
or after-tax profit levels, including: earnings per share; earnings
before interest and taxes; earnings before interest, taxes, depreciation, and
amortization; net operating profits after tax, and net income;
(iv) Cash
flow, free cash flow, and cash flow return on investment;
(v) Operational
measures including growth in reserves for the prior period and percentage or
absolute increase in production for the prior period; and
(vi) Levels
of cost including finding and development costs, and cash costs (interest
expense, G&A, and LOE) expressed in relationship to Mcfe/produced during the
Performance Period.
Any of
the above goals will be determined on the absolute or relative basis or as
compared to the performance of a published or special index including, but not
limited to, the Standard & Poor’s 500 Stock Index or a group of comparable
companies.
Other Stock or
Performance-Based Awards.
The Committee also may grant shares of Common
Stock or performance based Awards on the terms and conditions it determines in
its discretion, as well as other rights not an Award otherwise described in the
2008 Plan but is denominated or payable in, valued in whole or in part by
reference to, or otherwise based on or related to, shares of Common Stock or
cash as are deemed by the Committee to be consistent with the purposes of the
2008 Plan. Such other stock or performance-based Awards may be in addition to,
or in lieu of, cash or other compensation due the grantee.
Purchased Stock
. The
Committee may sell shares of Common Stock on such terms and conditions it
determines.
U.S.
Federal Income Tax Consequences
Following
is an explanation of the U.S. federal income tax consequences for grantees who
are subject to tax in the United States.
Option
. The grant of an
Incentive Option or a Non-qualified Option would not result in income for
the grantee or a deduction for the Company.
The
exercise of a Non-qualified Option would result in ordinary income for the
grantee and a deduction for the Company measured by the difference between the
option price and the fair market value of the shares received at the time of
exercise. Income tax withholding would be required.
The basis
of the shares is the option price plus an amount equal to any income recognized
as a result of the exercise of the option.
The
exercise of an Incentive Option would not result in income for the grantee
if the grantee (i) does not dispose of the shares within two years after
the date of grant or one year after the transfer of shares upon exercise and
(ii) is an employee of the Company or a subsidiary of the Company from the
date of grant and through and until three months before the exercise date. If
these requirements are met, the basis of the shares upon later disposition would
be the option price. Any gain will be taxed to the employee as long-term capital
gain and the Company would not be entitled to a deduction. The excess of the
market value on the exercise date over the option price is an item of tax
preference, potentially subject to the alternative minimum tax.
If the
grantee disposes of the shares prior to the expiration of either of the holding
periods, the grantee would recognize ordinary income and the Company would be
entitled to a deduction equal to the lesser of the fair market value of the
shares on the exercise date minus the option price or the amount realized on
disposition minus the option price. Any gain in excess of the ordinary income
portion would be taxable as long-term or short-term capital gain.
SARs and Performance Awards
.
The grant of a SAR or a Performance Award would not result in income for the
grantee or a deduction for the Company. Upon the exercise of a SAR or the
receipt of shares or cash under a Performance Award, the grantee would recognize
ordinary income and the Company would be entitled to a deduction measured by the
fair market value of the shares plus any cash received. Income tax withholding
would be required.
Restricted Stock Grants.
The
grant of Restricted Stock should not result in income for the grantee or in a
deduction for the Company for federal income tax purposes, assuming the shares
transferred are subject to restrictions resulting in a “substantial risk of
forfeiture” as intended by the Company, and further assuming no Section 83(b)
election is made by the grantee. If there are no such restrictions, the grantee
would recognize ordinary income upon receipt of the shares. Any dividends paid
to the grantee while the stock remained subject to restriction would be treated
as compensation for federal income tax purposes. At the time the restrictions
lapse, the grantee would receive ordinary income and the Company would be
entitled to a deduction measured by the fair market value of the shares at the
time of lapse. Income tax withholding would be required.
Purchased Stock and Phantom Stock
Awards
. If Purchased Stock is sold to the grantee for less than its fair
market value, the grantee would recognize ordinary income upon receipt of the
shares based on such discount. If granted in the form of Phantom Stock,
they generally would be taxable as ordinary income equal to the aggregate of
their fair market value when convertible to cash or shares that are not subject
to a substantial risk of forfeiture. In all events, the Company would be
entitled to a deduction for the amount included in the grantee’s
income.
Other Tax Considerations
.
Section 162(m) of the Code places a $1,000,000 annual limit on the compensation
deductible by us paid to covered employees. The limit, however, does not apply
to “qualified performance-based compensation”. We believe that grants of stock
options, SARs, Performance Awards and other Awards payable upon the attainment
of performance goals under the 2008 Plan will qualify as qualified
performance-based compensation. Also, section 409A of the Code provides that
deferrals of compensation under a nonqualified deferred compensation plan for
all taxable years are currently includible in gross income to the extent not
subject to a substantial risk of forfeiture and not previously included in gross
income, unless certain requirements are met. The Committee intends to structure
deferred compensation items to be exempt from or compliant with
Section 409A. In addition, Awards that are granted, accelerated or enhanced upon
the occurrence of a Change in Control may give rise, in whole or in part, to
“excess parachute payments” within the meaning of Internal Revenue Code Section
280G and, to such extent, will be non-deductible by the Company and subject to a
20% excise tax on the participant.
State tax
consequences may in some cases differ from the federal tax consequences. In
addition, awards under the 2008 Plan may in some instances be made to recipients
who are subject to tax in jurisdictions other than the United States and may
result in consequences different from those described above.
The
foregoing summary of the U.S. income tax consequences in respect of the 2008
Plan is for general information only. All parties should consult their own
advisors as to specific tax consequences, including the application and effect
to foreign, state and local tax laws.
Other
Information
The 2008
Plan will be effective approximately 20 days after the mailing of this
Information Statement to all stockholders of the Company on the Record Date and
will terminate on the tenth (10
th
) year
anniversary thereof, unless terminated earlier by our Board or extended by our
Board with the approval of the stockholders.
Our Board
may amend, suspend or terminate the 2008 Plan at any time, but such amendment,
suspension or termination shall not adversely affect any Award then outstanding
without the participant’s consent. Any amendment that would be a “material
amendment” of the 2008 Plan (as determined by the Committee, in their sole
discretion, subject to the rules and regulations of the OTC Bulletin Board, if
any, governing the use of such term in the context of an employee benefit plan),
as amended, shall be subject to stockholder approval. Likewise, if the Exchange
Act requires the Company to obtain stockholder approval, then such approval will
be sought.
Unless
approved by stockholders or as specifically otherwise required by the 2008 Plan
(for example, in the case of a stock split), no adjustments or reduction of the
exercise price of any outstanding incentive may be made in the event of a
decline in stock price, either by reducing the exercise price of outstanding
incentives or by canceling outstanding incentives in connection with re-granting
incentives at a lower price to the same individual.
Awards
may be exercised only by the Employee or Non-Employee Director to whom they are
granted and are generally not assignable or transferable except for limited
circumstances upon a grantee’s death, or pursuant to rules that may be adopted
by the Committee. The Committee may establish rules and procedures to permit a
grantee to defer recognition of income or gain for incentives under the 2008
Plan.
Specific
Award Grants
Employees
or Non-Employee Directors who will participate in the 2008 Plan in the future
and the amounts of their allotments are to be determined by the Committee
subject to any restrictions outlined above. No determinations have yet been made
and it is not possible to state the terms of any individual options which may be
issued under the 2008 Plan or the names or positions of, or respective amounts
of the allotment to, any individuals who may participate.
THE
COMPANY
Overview
We were
incorporated as a Nevada corporation in May 2004. With the completion
of the Voyager Acquisition on September 2, 2008, we became an independent oil
and natural gas company engaged in the exploration, production, development,
acquisition and exploitation of natural gas and crude oil
properties. Our oil and natural gas operations and assets are
situated with Voyager Gas Corporation, now our wholly-owned subsidiary, acquired
in the Voyager Acquisition
Prior to
the Voyager Acquisition on September 2, 2008, we were a “shell company” as that
term is defined under Rule 12b-2 under the Exchange Act, and as such, were
subject to rules of the SEC applicable to shell companies. We had
only conducted nominal operations and had only nominal assets during this
time. To date, our activities primarily had involved capital-raising
activities and business planning, with the stated intention to engage in the oil
and natural gas industry by (i) acquiring established oil and gas properties and
exploiting them through the application of conventional and specialized
technology to increase production, ultimate recoveries, or both, and (ii)
participating in joint venture drilling programs with repeatable low risk
results.
We were
initially incorporated to be a mortgage brokerage firm and prior to April 2006,
our operations as a mortgage broker consisted of originating or locating
possible mortgage loans, including, conventional loans, jumbo loans, home equity
and second mortgages, non-conforming loans, sub-prime loans and construction
loans, that we would refer to lending sources to fund. However, we
never funded any loans.
On April
28, 2006, Energy Venture, Inc., a privately-held Delaware corporation (“Energy
Venture”) consummated its acquisition of shares of our Common Stock in
accordance with the terms of a stock purchase agreement among Energy Venture and
certain selling stockholders named therein. Under the stock purchase
agreement, Energy Venture acquired a total of 8,200,000 shares of our Common
Stock, constituting, in the aggregate, 82% of our then issued and outstanding
shares of Common Stock.
On May
26, 2006, we and our wholly-owned subsidiary, EVI Acquisition Corp., a
newly-formed Nevada corporation, entered into, and consummated, an agreement and
plan of merger with Energy Venture. Pursuant to the merger agreement,
Energy Venture merged with and into EVI Acquisition Corp. and, in return: (i)
each share of common stock of Energy Venture, par value $.0001 per share, then
issued and outstanding was exchanged for one share of our Common Stock; (ii)
each outstanding option to purchase shares of common stock of Energy Venture was
exchanged for an option to purchase, at the same exercise price, an equal number
of shares of our Common Stock; and (iii) all of the obligations and liabilities
of Energy Venture were assumed by us. As part of the merger, EVI
Acquisition Corp. amended its Articles of Incorporation to change its name to
“Energy Venture, Inc.” As a result of the merger, the former
stockholders of Energy Venture became our controlling stockholders.
Since we
had no substantial assets immediately prior to the merger, the transaction was
treated for accounting purposes as a reverse acquisition and was accounted for
as a recapitalization of Energy Venture rather than a business
combination. Consequently, the historical financial statements of
Energy Venture became the historical financial statements of the
Company.
The
Voyager Acquisition and Financing
Voyager
Acquisition
On
September 2, 2008, we consummated the Voyager Acquisition, whereby we purchased
all of the outstanding capital stock of Voyager Gas Corporation, the owner of
interests in oil and gas lease blocks located on approximately 14,300 net acres
located in Duval County, Texas, as more particularly described below under
“– Our Properties and Areas of
Operation,
” including working and other interests in oil and gas leases,
producing wells, and properties, together with rights under related operating,
marketing, and service contracts and agreements, seismic exploration licenses
and rights, and personal property, equipment and facilities. Included
in the assets owned by Voyager was a proprietary 3-D seismic data base covering
a majority of the property. The Voyager Acquisition was made pursuant
to that Stock Purchase and Sale Agreement, dated May 22, 2008, and subsequently
amended by the First Amendment to the Stock Purchase and Sale Agreement dated
August 15, 2008 and the Second Amendment to the Stock Purchase and Sale
Agreement dated September 2, 2008 among the parties thereto.
A
description of Voyager’s properties and assets – all of which are situated in
our new wholly-owned subsidiary following the Voyager Acquisition - is discussed
below under “
– Our Properties
and Areas of Operation
” and elsewhere in this Information Statement
regarding our business, properties and financial information, including
Exhibit
B
attached hereto and made a part hereof setting forth: (i) the
historical consolidated financial statements of the Company for the years ended
June 30, 2008 and 2007; (ii) the historical financial statements of Voyager Gas
Corporation, our newly-acquired subsidiary following the Voyager Acquisition,
for the years ended December 31, 2007 and 2006 and for the six month stub period
ended June 30, 2008 and 2007; and (iii) pro forma condensed consolidated
financial statements of the Company for the year ended June 30, 2008, giving
effect to the Voyager Acquisition as if it completed on July 1, 2007
(collectively, the “Financial Statements’)
The
purchase price in the Voyager Acquisition consisted of cash consideration of
$35.0 million and 10,000 shares of our Series D Preferred, having an agreed upon
value of $7.0 million and, subject to the effectiveness of the Charter
Amendment, automatically convertible into 17,500,000 shares of our Common
Stock.
The
Financing
CIT Credit
Facility
On
September 2, 2008, we entered into (i) a credit agreement among the Company, CIT
Capital (“CIT Capital”), as Administrative Agent and the lender named therein
and (ii) a second lien term loan agreement among the Company, CIT Capital and
the lender. The credit agreement and the term loan agreement are
collectively referred to herein as the “CIT Credit Facility.”
The
credit agreement provides for a $50.0 million senior secured revolving credit
facility which is subject to an initial borrowing base of $14.0 million, or an
amount determined based on semi-annual review of our proved oil and gas
reserves. As of September 24, 2008, we had $11.5 million borrowed
pursuant to the revolver to finance the Voyager Acquisition, to repay the
related bridge loan and transaction expenses, and to fund capital expenditures
generally.
The term
loan agreement provides for a one-time advance to us of $22.0
million. We drew down the full amount on September 2, 2008 to finance
the Voyager Acquisition and to repay the related bridge loan and transaction
expenses.
Bridge Loan
.
On May 21, 2008, we entered
into a Securities Purchase Agreement with those purchasers identified therein
(the “Bridge Loan”), whereby we received proceeds of $800,000 evidenced by
senior secured convertible debentures (the “Debentures”). The
proceeds from the Debentures were used to fund our payment of the deposit under
the Voyager Agreement.
The
Debentures matured the earlier of September 29, 2008, or the closing date under
the Voyager Agreement, and could be satisfied in full by our payment of the
aggregate redemption price of $900,000 or, at the election of the Debenture
holders, by the conversion of the Debentures into shares of our Series E
Preferred Stock, at an initial conversion price of $0.33 subject to full-ratchet
protection and other adjustments under certain circumstances.
On
September 2, 2008, we repaid $450,000 principal amount of the Debentures in cash
from our CIT Credit Facility and issued, in full satisfaction of our obligation
with respect to the other $450,000 principal amount, 10,000 shares of our Series
E Preferred.
Our
Properties and Areas of Operation
With the completion of the Voyager
Acquisition, the oil and natural gas properties of our newly-acquired subsidiary
consist of approximately 14,300 net acres located in Duval County, South Texas,
on trend with several prolific producing Frio, Jackson and Yegua (Oligocene and
Eocene) fields (the “Duval County Properties”).
The Duval County Properties have
established production over a substantial acreage position with proved and
probable reserves from over ten different horizons located at depths ranging
from 4,000 to 7,500 feet. As of April 1, 2008, the Duval County
Properties had independently engineered proved reserves of 16.2
Bcfe. By category, this includes 5.2 Bcfe of proved developed
producing, 5.6 Bcfe of proved developed non-producing, and 5.4 Bcfe of proved
undeveloped reserves. Approximately 69% of total proved reserves is
natural gas. In addition to proved reserves, our management has
identified net unrisked probable reserves of 7.4 Bcfe covering seven drilling
locations. Net daily production averaged over 3.0 Mmcfe for the month
of August 2008.
The SEC net present value of proved
reserves (PV10) as of April 1, 2008 totaled $75.6 million, $122.9 million
including probable reserves, as per the independent reserve report of Voyager
Gas Corporation, now a wholly-owned subsidiary of ours (the “Reserve Report”),
which Reserve Report is attached as
Exhibit
C
hereto and incorporated herewith. We are the operator and own an
average 100% working interest in its proved reserve base.
The
process of estimating oil and natural gas reserves is complex and it requires
interpretations of available technical data and many assumptions, including
assumptions relating to economic factors. Any significant
inaccuracies in these interpretations or assumptions could materially affect the
estimated quantities and present value of our reported reserves. In
order to prepare our estimates, we must project production rates and the timing
of development expenditures, analyze available geological, geophysical,
production and engineering data, as well as make economic assumptions about
matters such as oil and natural gas prices, drilling and operating expenses,
capital expenditures, taxes and availability of funds. Due to the
inherent uncertainties and the limited nature of reservoir data, proved reserves
are subject to change as additional information becomes available. Our use of a
10% discount factor for reporting purposes may not necessarily represent the
most appropriate discount factor, given actual interest rates and risks to which
our business or the oil and natural gas industry in general are
subject.
Our
Corporate Office
Presently, our corporate office is an
executive office suite located at 4606 FM 1960 West, Suite 400, Houston, Texas
77069. The lease covering such space is a month-to-month lease and
calls for minimum monthly rental payments of approximately $1,612 plus the cost
of rental furniture, telephone lines and Internet connections, which costs
average approximately$1,300 per month. We intend to relocate to
permanent office space in the near term to provide space for the technical and
administrative employees we intend to employ to develop our Voyager Acquisition
and implement our business plan of growth.
Employees
We
currently have three employees, Robert P. Munn, our Chief Executive Officer,
Carl A. Chase, our Chief Financial Officer and Steven Barrenechea, our former
CEO, who serves as an advisor. Going forward, it is our intention to
add additional employees as required to provide the technical expertise and
administrative support to fully develop and implement the Voyager
Acquisition.
Competition
The oil and natural gas industry is a
highly competitive environment. Many of our competitors are large,
well-established companies that have been engaged in the natural gas and oil
business for much longer than we have and possess substantially larger operating
staffs and greater capital resources than we do. Our ability to explore for oil
and natural gas reserves and to acquire additional properties in the future will
be dependent upon our ability to conduct our operations, to evaluate and select
suitable properties and to consummate transactions in this highly competitive
environment. Our ability to acquire additional prospects and to
find and develop reserves in the future will depend on our ability to evaluate
and select suitable properties and to consummate transactions in a highly
competitive environment. In addition, there is substantial
competition for capital available for investment in the oil and natural gas
industry. We may not be able to compete successfully in the future in
acquiring prospective reserves, developing reserves, marketing oil and natural
gas, attracting and retaining quality personnel and raising additional
capital.
Regulation
of the Oil and Natural Gas Industry
With the acquisition of the Duval
County Properties under the Voyager Acquisition, our future operations will be
subject to the regulatory regime affecting the oil and natural gas
industry.
Regulation of Transportation and Sale
of Oil
Sales of crude oil, condensate and
natural gas liquids are not currently regulated and are made at negotiated
prices. Nevertheless, Congress could reenact price controls in the future. Our
sales of crude oil will be affected by the availability, terms and cost of
transportation. The transportation of oil in common carrier pipelines is also
subject to rate regulation. The Federal Energy Regulatory Commission, or the
FERC, regulates interstate oil pipeline transportation rates under the
Interstate Commerce Act. In general, interstate oil pipeline rates must be
cost-based, although settlement rates agreed to by all shippers are permitted
and market-based rates may be permitted in certain circumstances. Effective
January 1, 1995, the FERC implemented regulations establishing an indexing
system (based on inflation) for transportation rates for oil that allowed for an
increase or decrease in the cost of transporting oil to the purchaser. A review
of these regulations by the FERC in 2000 was successfully challenged on appeal
by an association of oil pipelines. On remand, the FERC in February 2003
increased the index slightly, effective July 2001. Intrastate oil pipeline
transportation rates are subject to regulation by state regulatory commissions.
The basis for intrastate oil pipeline regulation, and the degree of regulatory
oversight and scrutiny given to intrastate oil pipeline rates, varies from state
to state. Insofar as effective interstate and intrastate rates are equally
applicable to all comparable shippers, the regulation of oil transportation
rates are not anticipated to affect our operations in any way that is of
material difference from those of our competitors.
Further, interstate and intrastate
common carrier oil pipelines must provide service on a non-discriminatory basis.
Under this open access standard, common carriers must offer service to all
similarly situated shippers requesting service on the same terms and under the
same rates. When oil pipelines operate at full capacity, access is governed by
prorationing provisions set forth in the pipelines’ published tariffs.
Accordingly, we believe that access to oil pipeline transportation services
generally will be available to us to the same extent as to our
competitors.
Regulation of Transportation and Sale
of Natural Gas
Historically, the transportation and
sale for resale of natural gas in interstate commerce have been regulated
pursuant to the Natural Gas Act of 1938, the Natural Gas Policy Act of 1978 and
regulations issued under those Acts by the FERC. In the past, the federal
government has regulated the prices at which natural gas could be sold. While
sales by producers of natural gas can currently be made at uncontrolled market
prices, Congress could reenact price controls in the future. Deregulation of
wellhead natural gas sales began with the enactment of the Natural Gas Policy
Act. In 1989, Congress enacted the Natural Gas Wellhead Decontrol Act. The
Decontrol Act removed all Natural Gas Act and Natural Gas Policy Act price and
non-price controls affecting wellhead sales of natural gas effective
January 1, 1993.
FERC regulates interstate natural gas transportation rates and service
conditions, which affects the marketing of natural gas that we produce, as well
as the revenues we receive for sales of our natural gas. Since 1985, the FERC
has endeavored to make natural gas transportation more accessible to natural gas
buyers and sellers. The FERC has stated that open access policies are necessary
to improve the competitive structure of the interstate natural gas pipeline
industry and to create a regulatory framework that will put natural gas sellers
into more direct contractual relations with natural gas buyers by, among other
things, unbundling the sale of natural gas from the sale of transportation and
storage services. Beginning in 1992, the FERC issued Order No. 636 and a
series of related orders to implement its open access policies. As a result of
the Order No. 636 program, the marketing and pricing of natural gas have
been significantly altered. The interstate pipelines’ traditional role as
wholesalers of natural gas has been eliminated and replaced by a structure under
which pipelines provide transportation and storage service on an open access
basis to others who buy and sell natural gas. Although the FERC’s orders do not
directly regulate natural gas producers, they are intended to foster increased
competition within all phases of the natural gas industry.
In 2000, the FERC issued Order
No. 637 and subsequent orders, which imposed a number of additional reforms
designed to enhance competition in natural gas markets. Among other things,
Order No. 637 effected changes in FERC regulations relating to scheduling
procedures, capacity segmentation, penalties, rights of first refusal and
information reporting.
We cannot accurately predict whether
the FERC’s actions will achieve the goal of increasing competition in markets in
which natural gas may be sold by us. Additional proposals and proceedings that
might affect the natural gas industry are pending before the FERC and the
courts. The natural gas industry historically has been very heavily regulated.
Therefore, we cannot provide any assurance that the less stringent regulatory
approach recently established by the FERC will continue. However, we do not
believe that any action taken will affect us in a way that materially differs
from the way it affects other natural gas producers.
Gathering service, which occurs
upstream of jurisdictional transmission services, is regulated by the states on
shore and in state waters. Although its policy is still in flux, FERC has
reclassified certain jurisdictional transmission facilities as
non-jurisdictional gathering facilities, which has the tendency to increase our
costs of getting natural gas to point of sale locations.
Intrastate natural gas transportation
is also subject to regulation by state regulatory agencies. The basis for
intrastate regulation of natural gas transportation and the degree of regulatory
oversight and scrutiny given to intrastate natural gas pipeline rates and
services varies from state to state. Insofar as such regulation within a
particular state will generally affect all intrastate natural gas shippers
within the state on a comparable basis, we believe that the regulation of
similarly situated intrastate natural gas transportation in any states in which
we operate and ship natural gas on an intrastate basis will not affect our
operations in any way that is of material difference from those of our
competitors. Like the regulation of interstate transportation rates, the
regulation of intrastate transportation rates affects the marketing of natural
gas that we produce, as well as the revenues we receive for sales of our natural
gas.
Regulation of Production
The production of oil and natural gas
is subject to regulation under a wide range of local, state and federal
statutes, rules, orders and regulations. Federal, state and local statutes and
regulations require permits for drilling operations, drilling bonds and reports
concerning operations. All of the states in which we own and operate properties
have regulations governing conservation matters, including provisions for the
unitization or pooling of oil and natural gas properties, the establishment of
maximum allowable rates of production from oil and natural gas wells, the
regulation of well spacing, and plugging and abandonment of wells. The effect of
these regulations is to limit the amount of oil and natural gas that we can
produce from our wells and to limit the number of wells or the locations at
which we can drill, although we can apply for exceptions to such regulations or
to have reductions in well spacing. Moreover, each state generally imposes a
production or severance tax with respect to the production and sale of oil,
natural gas and natural gas liquids within its jurisdiction.
The failure to comply with these
rules and regulations can result in substantial penalties. Our competitors in
the oil and natural gas industry are subject to the same regulatory requirements
and restrictions that affect our operations.
Environmental
Matters and Other Regulation
Our currently anticipated business
operations will be subject to stringent and complex federal, state and local
laws and regulations governing environmental protection as well as the discharge
of materials into the environment. These laws and regulations may,
among other things:
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require
the acquisition of various permits before drilling
commences;
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restrict
the types, quantities and concentration of various substances that can be
released into the environment in connection with oil and natural gas
drilling and production activities;
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limit
or prohibit drilling activities on certain lands lying within wilderness,
wetlands and other protected areas;
and
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require
remedial measures to mitigate pollution from former and ongoing
operations, such as requirements to close pits and plug abandoned
wells.
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These
laws and regulations may also restrict the rate of oil and natural gas
production below the rate that would otherwise be possible. The regulatory
burden on the oil and gas industry increases the cost of doing business in the
industry and consequently affects profitability. Additionally, Congress and
federal and state agencies frequently revise environmental laws and regulations,
and any changes that result in more stringent and costly waste handling,
disposal and cleanup requirements for the oil and gas industry could have a
significant impact on our operating costs.
The following is a summary of some of
the pertinent laws, rules and regulations to which our business operations will
be subject.
Waste
Handling
The Resource Conservation and Recovery Act, or RCRA,
and comparable state statutes, regulate the generation, transportation,
treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes.
Under the auspices of the federal Environmental Protection Agency, or EPA, the
individual states administer some or all of the provisions of RCRA, sometimes in
conjunction with their own, more stringent requirements. Drilling fluids,
produced waters and most of the other wastes associated with the exploration,
development and production of crude oil or natural gas are currently regulated
under RCRA or state non-hazardous waste provisions. Releases or spills of these
regulated materials may result in remediation liabilities under these statutes.
It is possible that certain oil and natural gas exploration and production
wastes now classified as non-hazardous could be classified as hazardous wastes
in the future. Any such change could result in an increase in our costs to
manage and dispose of wastes, which could have a material adverse effect on our
currently projected results of operations and financial position.
Comprehensive Environmental
Response, Compensation, and Liability Act
The Comprehensive
Environmental Response, Compensation, and Liability Act, or CERCLA, also known
as the Superfund Law, imposes joint and several liability, without regard to
fault or legality of conduct, on classes of persons who are considered to be
responsible for the release of a hazardous substance into the environment. These
persons include the current or former owner or operator of the site where the
release occurred and anyone who disposed or arranged for the disposal of a
hazardous substance released at the site. Under CERCLA, such persons may be
subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment, for damages
to natural resources and for the costs of certain health studies. In addition,
it is not uncommon for neighboring landowners and other third parties to file
claims for personal injury and property damage allegedly caused by the hazardous
substances released into the environment.
In the course of our future operations, we expect to generate wastes that may
fall within CERCLA’s definition of hazardous substances. As a result of the
Voyager Acquisition, we now own, lease or operate properties that have been used
for oil and natural gas exploration and production for many years. Hazardous
substances or petroleum may have been released on, at or under the Duval County
Properties or on, at or under other locations, including off-site locations,
where such hazardous substances or other wastes have been taken for disposal. In
addition, to the extent the Duval County Properties have been operated by third
parties or by previous owners or operators whose handling, treatment and
disposal of hazardous substances, petroleum, or other materials or wastes were
not under our control, such properties and the substances or materials disposed
or released on, at or under them may be subject to CERCLA, RCRA or analogous or
other state laws. Under such laws, we could be required to remove previously
disposed substances and wastes or released petroleum, remediate contaminated
property or perform remedial plugging or pit closure operations to prevent
future contamination.
Water Discharges
The Federal Water Pollution Control Act, or the Clean Water
Act, and analogous state laws, impose restrictions and strict controls with
respect to the discharge of pollutants, including spills and leaks of oil and
other substances into waters of the United States or state waters. Under these
laws, the discharge of pollutants into regulated waters is prohibited except in
accordance with the terms of a permit issued by EPA or an analogous state
agency. Federal and state regulatory agencies can impose administrative, civil
and criminal penalties for non-compliance with discharge permits or other
requirements of the Clean Water Act and analogous state laws and regulations.
The Oil Pollution Act of 1990, or OPA, which amends and augments the Clean Water
Act, establishes strict liability for owners and operators of facilities that
are the site of a release of oil into waters of the United States. In addition,
OPA and regulations promulgated pursuant thereto impose a variety of regulations
on responsible parties related to the prevention of oil spills and liability for
damages resulting from such spills. OPA also requires certain oil and natural
gas operators to develop, implement and maintain facility response plans,
conduct annual spill training for certain employees and provide varying degrees
of financial assurance.
At this time, it is not possible to
accurately estimate how potential future laws or regulations addressing
greenhouse gas emissions would impact our business.
We are not aware of any environmental
claims existing as of the Mailing Date, which would have a material impact on
our financial position or results of operations. There can be no assurance,
however, that current regulatory requirements will not change, or past
non-compliance with environmental laws will not be discovered on our
properties.
OUR
BUSINESS OPERATIONS
Plan
of Operations
On September 2, 2008, we completed the
Voyager Acquisition. The Voyager Acquisition is the first oil and gas
acquisition consummated by us. Previously, we have not had any
revenues from operations; rather, we have primarily been involved in conducting
business planning and capital-raising activities in our bid to become an
independent oil and natural gas company.
Having consummated the Voyager
Acquisition, we intend to engage in the exploration, production and development
of the crude oil and natural gas properties located in the Duval County
Properties. We believe that these properties and other assets
acquired in the Voyager Acquisition will provide us a number of opportunities to
realize increased production and revenues. We also believe that the
reserve base located in the Duval County Properties can be further developed
through infill and step-out drilling of new wells, workovers targeting proved
reserves and stimulating existing wells. As such, we plan to
investigate and evaluate various formations therein to potentially recover
significant incremental oil and natural gas reserves and to create new drilling
programs to exploit the full reserve potential of the fields located
therein.
Pursuant to our third party independent
reservoir engineering report, we have identified four non-productive wells with
immediate recompletion potential to currently non-producing formations in these
wellbores. We will immediately prepare recompletion procedures which
target these proved non-producing reserves identified in the
report. Our estimated capital expenditures for these recompletions
are $400,000, or $100,000 per well. In addition to the recompletions,
pursuant to the reserve report, we have identified drilling opportunities for
six proved undeveloped locations and seven probable locations. Total
estimated capital expenditures for drilling of these 13 wells are $11.7
million. These recompletions and drilling opportunities will be
funded through a combination of cash flow from the Duval County Properties and
borrowings under our CIT Credit Facility.
We expect to utilize 3-D seismic
analysis and other modern technologies and production techniques to improve
drilling results and ultimately enhance our production and
returns. We also believe use of such technologies and production
techniques in exploring for, developing and exploiting oil and natural gas
properties will help us reduce drilling risks, lower finding costs and provide
for more efficient production of oil and natural gas from our
properties.
We will continue to review
opportunities to acquire additional producing properties, leasehold acreage and
drilling prospects that are located in and around the Duval County Properties,
or which might result in the establishment of new drilling
areas. When identifying acquisition candidates, we focus primarily on
underdeveloped assets with significant growth potential. We seek
acquisitions which allow us to absorb, enhance and exploit properties without
taking on significant geologic, exploration or integration risk.
Our prospects must be considered in
light of the risks, expenses, delays, problems and difficulties frequently
encountered in the establishment of a new business in the energy industry, given
the volatile nature of the energy markets. Our ability to
successfully implement our business operations and generate income will be
subject to a number of operating risks and uncertainties beyond our control
associated with drilling for and producing oil and natural gas, including the
possibility of:
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delays
imposed by or resulting from compliance with regulatory
requirements;
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pressure
or irregularities in geological
formations;
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shortages
of or delays in obtaining equipment and qualified
personnel;
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equipment
failures, accidents or mechanical
difficulties;
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adverse
weather conditions and natural
disasters;
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reductions
in oil and natural gas prices;
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oil
and natural gas property title
problems;
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market
limitations for oil and natural
gas.
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environmental
hazards, such as uncontrollable flows of oil, natural gas, brine, well
fluids, toxic gas or other pollution into the environment, including
groundwater and shoreline
contamination;
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fires
and explosions; and
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personal
injuries and death.
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The above
risks are not the only ones that we may face and additional risks that we do not
yet know of or that we currently think are not material may also have an adverse
effect on our anticipated business operations. Any of these risks
could adversely affect our ability to conduct operations or result in
substantial losses to the Company.
The implementation of our foregoing
strategy will also require that we make significant capital expenditures
relating to the development of our infrastructure and business. In
order to finance our capital program, we will depend on cash flow from
anticipated operations, cash or cash equivalents on hand, or committed credit
facilities, as discussed below in
“- Liquidity and Capital
Resources.”
If we are unable to raise additional
capital from conventional sources, including lines of credit and additional
sales of additional stock in the future, we may be forced to curtail or cease
our business operations, as well as reduce or delay acquisitions or capital
expenditures, sell assets, reduce operating expenses, refinance all or a portion
of our debt, or delay or reduce important drilling or enhanced production
initiatives. We may also be required to seek additional capital by
selling debt or equity securities, selling assets, or otherwise be required to
bring cash flows in balance when we approach a condition of cash
insufficiency. We cannot assure you, however, that financing will be
available in amounts or on terms acceptable to us, or at all. Even if
we are able to continue our operations, the failure to obtain sufficient
financing could have a substantial adverse effect on our business prospects and
financial results.
Liquidity
and Capital Resources
We expect
that our main sources of liquidity and capital resources for the fiscal year
2009 will be cash, short-term cash equivalent investments on hand, anticipated
internally generated cash flows from operations following the Voyager
Acquisition and committed credit facilities.
At
present, we believe our short-term and long-term liquidity is adequate to fund
operations, including capital expenditures and interest during our fiscal year
ending June 30, 2009.
CIT Credit Facility
The CIT
Credit Facility entered into on September 2, 2008 consists of (i) a $50.0
million senior secured revolving credit facility which is subject to an initial
borrowing base of $14.0 million, or an amount determined based on semi-annual
reviews of our proved oil and gas reserves and (ii) a term loan of $22.0
million. All borrowings under the credit agreement are secured by a
first lien on all of our assets and those of our subsidiaries. All
borrowings under the term loan agreement are secured by a second lien on all of
our assets and those of our subsidiaries.
As
of the Mailing Date, we had borrowed $11.5 million under the revolver to finance
the Voyager Acquisition, to repay the Bridge Loan and related transaction
expenses, and to fund capital expenditures generally. Monies advanced
under the revolver mature in three years and bear interest at a rate equal to
LIBOR plus 1.75% to 2.50%, as the case may be. On September 2, 2008,
we also drew down the full amount of the term loan to finance the Voyager
Acquisition and related transaction expenses. Monies borrowed under
the term loan mature in three and one-half years and bear interest at a rate
equal to LIBOR plus 5% during the first twelve months after closing and LIBOR
plus 7.50%, thereafter.
The
credit agreement contains various restrictive covenants, including financial
covenants requiring that we will not: (i) as of the last day of any fiscal
quarter, permit our ratio of EBITDAX for the period of four fiscal quarters then
ending to interest expense for such period to be less than 2.0 to 1.0; (ii) at
any time permit our ratio of total debt as of such time to EBITDAX for the four
fiscal quarters ending on the last day of the fiscal quarter immediately
preceding the date of determination for which financial statements are available
to be greater than 4.0 to 1.0; and (iii) permit, as of the last day of any
fiscal quarter, our ratio of (a) consolidated current assets (including the
unused amount of the total commitments, but excluding non-cash assets under FAS
133) to (b) consolidated current liabilities (excluding non-cash obligations
under FAS 133 and current maturities under the CIT Credit Facility) to be less
than 1.0 to 1.0.
The term
loan agreement contains various restrictive covenants, including financial
covenants requiring that we will not: (i) permit, as of the last day of any
fiscal quarter, our ratio of (a) consolidated current assets (including the
unused amount of the total commitments, but excluding non-cash assets under FAS
133) to (b) consolidated current liabilities (excluding non-cash obligations
under FAS 133 and current maturities under the CIT Credit Facility) to be less
than 1.0 to 1.0; and (ii) as of the date of any determination permit our ratio
of total reserve value as in effect on such date of determination to total debt
as of such date of determination to be less than 2.0 to 1.0
Upon our
failure to comply with covenants, the lender has the right to refuse to advance
additional funds under the revolver and/or declare any outstanding principal and
interest immediately due and payable.
CIT
Capital, as lender, is entitled to a one percent (1%) overriding royalty
interest of our net revenue interest in the oil and gas properties acquired in
the Voyager Acquisition. The overriding royalty interest is
applicable to any renewal, extension or new lease taken by us within one year
after the date of termination of the ORRI Properties, as defined in the
overriding royalty agreement covering the same property, horizons and
minerals.
CIT
Capital also received, and is entitled to receive in its capacity as
administrative agent, various fees from us while monies advanced or loaned
remain outstanding, including an annual administrative agent fee of $20,000 for
each of the revolver and term loan and a commitment fee ranging from 0.375% to
0.5% of any unused portion of the borrowing base available under the
revolver.
Under the
CIT Credit Facility, we were required to enter into hedging arrangements
mutually agreeable between us and CIT Capital. Effective on September 2, 2008,
we entered into hedging arrangements with a bank whereby we hedged 65% of our
proved developed producing natural gas production and 25% of our proved
developed producing oil production through December 2011 at $7.82 per Mmbtu and
$110.35 per barrel, respectively.
Bridge Loan - Debentures
On May
21, 2008, we entered into the Bridge Loan, whereby we issued the Debentures and
used the proceeds to fund our payment of the performance deposit required to be
posted in the Voyager Acquisition. The Debentures matured the earlier of
September 29, 2008 and the completion of the Voyager Acquisition, and may be
satisfied in full by our payment of the aggregate redemption price of $900,000
or, at the election of the purchasers, by the conversion of the Debentures into
shares of our Common Stock, at an initial conversion price of $0.33 subject to
adjustments and full-ratchet protection under certain
circumstances.
On
September 2, 2008, we repaid $450,000 principal amount of the Debentures in cash
from our CIT Credit Facility and issued, in full satisfaction of our obligation
with respect to the other $450,000 principal amount, 10,000 shares of our Series
E Preferred. Each share of preferred stock is automatically
convertible into 136.3636 shares of our Common Stock, for an aggregate of
1,363,636 shares of our Common Stock upon the effectiveness of the Charter
Amendment.
While the
Debentures were outstanding, our performance thereunder was secured by our grant
of a security interest and first lien on all of our existing and after-acquired
assets, the guarantee of our wholly-owned subsidiary, Energy Venture, Inc., and
the pledge of an aggregate of all of the shares of our Common Stock currently
held by Mr. Alan Gaines, one of our directors, and his affiliates, which pledged
shares represent approximately 60.6% of the shares of our Common Stock issued
and outstanding as of the grant date. The security interests in
collateral granted were released upon our satisfaction in full of the Debentures
on September 2, 2008.
2007 Convertible Notes
On
November 1, 2007, we sold $350,000 in convertible notes (the "2007 Notes"),
which 2007 Notes were to mature on October 31, 2008 and bear interest at 10% per
annum, payable in either cash or shares of our Common Stock based upon a
conversion price of $0.35 per share. The investors in the 2007 Notes
also received 200,004 shares of Common Stock. During May 2008, we
exchanged 37,100 shares of our Series B Preferred in full satisfaction of the
then outstanding principal and accrued interest under the 2007 Notes, with each
share of such preferred stock being automatically convertible into 28.58 shares
of our Common Stock, for an aggregate of 1,060,318 shares of our Common Stock,
upon the effectiveness of the Charter Amendment.
2006 Convertible Notes
As part
of the May 2006 Merger between us and Energy Venture, we assumed $1,500,000 of
convertible promissory notes (the "2006 Notes") previously sold by Energy
Venture. The 2006 Notes had an original maturity date of August 31,
2007, carried an interest rate of 10% per annum, payable in either cash or
shares, and were convertible into shares of Common Stock at a conversion price
of $0.50 per share at the option of the investor. Each investor also
received a number of shares of Common Stock equal to 20% of his or her
investment divided by $0.50, for a total of 600,000 shares that were initially
issued to investors in the 2006 Notes.
On August
31, 2007 (the original maturity date), we repaid in cash six of the holders of
the 2006 Notes an aggregate amount of $424,637 in principal and accrued
interest. On September 4, 2007, an additional $44,624 of accrued and
current period interest was repaid through the issuance of 89,248 shares of our
Common Stock. The remaining holders of the 2006 Notes entered into an
agreement with us whereby the maturity date of the 2006 Notes was extended to
February 28, 2008 and, beginning September 1, 2007 until the 2006 Notes are paid
in full, the interest rate on the outstanding principal was increased to 12% per
annum. In addition, we agreed to issue to the remaining holders of
the 2006 Notes 218,000 additional shares of our Common Stock in consideration
for them extending the 2006 Note's maturity date.
On February 28, 2008, $1,090,000 of the
2006 Notes came due and we were unable to repay them. We continued to
accrue interest on the notes at 12%, the agreed upon rate for the extension
period. On March 6, 2008, we issued 130,449 shares of Common Stock in
lieu of cash in payment of $65,221 of accrued and current period interest to
holders of the 2006 Notes. On April 22, 2008, we repaid $100,000
principal amount in cash to one of the holders of the 2006 Notes in satisfaction
thereof. During May 2008, we exchanged 99,395 shares of our Series A
Preferred for the remaining 2006 Notes in payment of the $965,000 of principal
and $28,950 of interest thereunder. Each share of Series A Preferred
is automatically convertible into 20 shares of our Common Stock, for an
aggregate of 1,987,900 shares of our Common Stock, upon the effectiveness of the
Charter Amendment. As of the Mailing Date, $25,000 principal amount
of the 2006 Notes held by one noteholder remained outstanding.
Off-Balance-Sheet
Arrangements.
We
currently have no off balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures, or capital resources that is material to any investor in
our securities.
INTERESTS OF CERTAIN PERSONS
I
N
ACTIONS BEING TAKEN
Our
executive officers and directors do not have any interest in the Actions,
including the Charter Amendment increasing the number of authorized shares of
our Common Stock, except as follows:
·
|
Respective
interests as stockholders, as disclosed elsewhere in this Information
Statement under “
Security Ownership of Certain
Beneficial Owners and Management
”
and
|
·
|
Respective
interests as holders, as applicable, of the Affected Company Securities,
as disclosed elsewhere in this Information Statement under “
Description of Affected
Company Securities.
” None of the Affected Company
Securities, however, vest or otherwise become exercisable or convertible,
as the case may be, until the effectiveness of the Charter
Amendment.
|
COMPENSATION
INFORMATION CONCERNING
EXECUTIVE
OFFICERS AND DIRECTORS
Executive
Compensation.
The following sets forth the annual and
long-term compensation received by (i) our Chief Executive Officer ("CEO"), (ii)
our two most highly compensated executive officers, if any, other than the CEO,
whose total compensation during fiscal year 2008 exceeded $100,000 and who were
serving as executive officers at the end of the 2008 fiscal year and (iii) the
two most highly compensated former officers (collectively, the "Named Executive
Officers"), at our fiscal years ended June 30, 2008 and 2007:
Summary
Compensation Table
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan Compensation
($)
|
Change
in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total
($)
|
Robert
P. Munn
Chief
Executive
Officer
(1)
|
2008
|
24,716
|
--
|
780,000
|
738,674
|
--
|
--
|
650
(2)
|
1,544,040
|
Carl
A. Chase
Chief
Financial
Officer
(3)
|
2008
|
19,773
|
--
|
585,000
|
554,006
|
--
|
--
|
--
|
1,158,779
|
Steven
Barrenechea
Chief
Executive
Officer
(4)
|
2008
|
27,000
|
--
|
--
|
239,423
|
--
|
--
|
--
|
266,423
|
Richard
Cohen
Chief
Financial
Officer
(5)
|
2008
|
36,000
|
--
|
--
|
72,564
|
--
|
--
|
--
|
108,564
|
|
2007
|
72,000
|
--
|
--
|
294,623
|
--
|
--
|
--
|
366,623
|
(1)
|
Mr.
Munn was employed as our Chief Executive Officer on May 22,
2008.
|
(2)
|
Includes
$650 monthly car allowance.
|
(3)
|
Mr.
Chase was employed as our Chief Financial Officer on May 22,
2008.
|
(4)
|
Mr.
Barrenechea served as our Chief Executive Officer and a director from
September 2007 until his resignation on May 22, 2008, and continues to be
employed by us as an advisor.
|
(5)
|
Mr.
Cohen served as our Chief Financial Officer until his resignation in
January 2008.
|
The following table indicates the
total number and value of exercisable stock options and restricted stock awards
held by the Named Executive Officers during the 2008 fiscal year:
|
Outstanding
Equity Awards at June 30, 2008
|
Name
|
Number
of Securities Underlying Unexercised Options
(#)
Exercisable
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
(#)
|
Option
Exercise Price
($)
|
Option
Expiration Date
|
Number
of Shares or Units of Stock That Have Not Vested
(#)
|
|
Market
Value of Shares or Units of Stock That Have Not Vested
($)
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Rights That
Have Not Vested
(#)
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
Other Rights That Have Not Vested
($)
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
|
(h)
|
(i)
|
(j)
|
Robert
P. Munn,
Chief
Executive
Officer
(1)
|
--
|
500,000
|
--
|
$0.52
|
5/20/13
|
1,500,000
|
(2)
|
825,000
|
--
|
--
|
--
|
500,000
|
--
|
$0.57
|
5/20/13
|
--
|
|
--
|
|
|
--
|
500,000
|
--
|
$0.62
|
5/20/13
|
--
|
|
--
|
|
|
Carl
A. Chase,
Chief
Financial
Officer
(3)
|
--
|
375,000
|
--
|
$0.52
|
5/20/13
|
1,125,000
|
(4)
|
618,750
|
--
|
--
|
--
|
375,000
|
--
|
$0.57
|
5/20/13
|
--
|
|
--
|
--
|
--
|
--
|
375,000
|
--
|
$0.62
|
5/20/13
|
--
|
|
--
|
--
|
--
|
Steven
Barrenechea,
Chief
Executive
Officer
(5)
|
--
|
500,000
|
--
|
$0.35
|
12/29/12
|
--
|
|
--
|
--
|
--
|
--
|
250,000
|
--
|
$0.52
|
2/27/13
|
--
|
|
--
|
--
|
--
|
Richard
Cohen,
Chief
Financial
Officer
(6)
|
--
|
250,000
|
--
|
$0.30
|
5/22/12
|
--
|
|
--
|
--
|
--
|
--
|
250,000
|
--
|
$0.35
|
10/26/12
|
--
|
|
--
|
--
|
--
|
(1)
|
Mr.
Munn was employed as our Chief Executive Officer on May 22,
2008.
|
(2)
|
Restricted
Stock Awards vest with respect to 1/3
rd
of the total shares, or 500,000 shares, awarded on each of the effective
date of the Charter Amendment and the first and second year anniversary of
the grant date.
|
(3)
|
Mr.
Chase was employed as our Chief Financial Officer on May 22,
2008.
|
(4)
|
Restricted
Stock Awards vest with respect to 1/3
rd
of the total shares, or 375,000 shares, awarded on each of the effective
date of the Charter Amendment and the first and second year anniversary of
the grant date.
|
(5)
|
Mr.
Barrenechea served as our Chief Executive Officer and a director from
September 2007 until his resignation on May 22, 2008, and continues to be
employed by us as an advisor.
|
(6)
|
Mr.
Cohen served as our Chief Financial Officer until his resignation in
January 2008.
|
Employment
Agreements
We currently have in place employment
agreements with respect to our principal executive and financial officers,
providing for the following:
·
|
Robert
P. Munn to serve as our President and Chief Executive Officer, at an
initial annual base salary of $225,000, which base salary shall increase
to $260,000 at the first anniversary date of his employment, subject to
increase upon review of our Board;
and
|
·
|
Carl
A. Chase to serve as our Chief Financial Officer, at an initial annual
base salary of $180,000, which base salary shall increase to $210,000 at
the first anniversary date of his employment, subject to increase upon
review of our Board.
|
The initial term of employment under the Employment Agreements is two (2) years,
unless earlier terminated by us or the executive officer by reason of death,
disability, without cause, for cause, for "good reason," change of control or
otherwise.
In addition to their base salaries,
Messrs. Munn and Chase are guaranteed an annual bonus of $45,000 and $36,000,
respectively, on the first year anniversary and an amount up to 100% and 75%,
respectively, of such officer's then applicable base salary, as determined by
our Board or committee thereof, based on such officer's performance and
achievement of quantitative and qualitative criteria set by our Board, for such
year. Each of Messrs. Munn and Chase is further eligible under his
employment agreement to participate, subject to any eligibility, co-payment and
waiting period requirements, in all employee health and/or benefit plans offered
or made available to our senior officers.
Upon termination of an officer without
"cause", upon the resignation of either officer for "good reason", or upon his
termination following a "change of control" (each as defined in the employment
agreements), such officer will be entitled to receive from us, in addition to
his then current base salary through the date of resignation or termination, as
applicable, and pro rata bonus and fringe benefits otherwise due and unpaid at
the time of resignation or termination, a severance payment equal to twelve (12)
months base salary at the then current rate plus pro rata performance bonus
earned and unpaid through the date of termination or resignation, as
applicable. Each such officer shall also be entitled to any unpaid
bonus from the preceding year of employment, and any restricted stock granted to
him shall immediately vest and all other stock options or grants, if any, made
to him pursuant to any incentive or benefit plans then in effect shall vest and
be exercisable, as applicable, in accordance with the terms of any such plans or
agreements.
We have also agreed to pay these
executive officers an additional gross-up amount equal to all Federal, state or
local taxes that may be imposed upon them by reason of the severance
payments.
Each of Messrs. Munn and Chase have
agreed that, during the respective term of his employment and for a one-year
period after his termination (other than termination by him for good reason or
by us without cause or following a change of control), not to engage, directly
or indirectly, as an owner, employee, consultant or otherwise, in any business
engaged in the exploration, drilling or production of natural gas or oil within
any five (5) mile radius from any property that we then have an ownership,
leasehold or participation interest. Each officer is further
prohibited during the above time period from soliciting or inducing, directly or
indirectly, any of our then-current employees or customers, or any customers of
ours during the one year preceding the termination of his
employment.
Restricted
Stock Agreements
Pursuant to the restricted stock
agreements, we granted restricted stock awards to each of Messrs. Munn and
Chase, as follows:
·
|
1,500,000
shares of our Common Stock to Mr. Munn, which vest equally as to one-third
of the shares over a two year period, commencing on the effective date of
the Charter Amendment in the State of Nevada and each of the first and
second year anniversary of the grant date;
and
|
·
|
1,125,000
shares of our Common Stock to Mr. Chase, which vest equally as to
one-third of the shares over a two year period, commencing on the
effective date of the Charter Amendment in the State of Nevada and each of
the first and second year anniversary of the grant
date.
|
The above vesting schedule is subject
to the officer being continuously employed by us at the applicable vesting
date.
As
provided in the restricted stock agreements, we have also agreed to pay each
above executive officer an additional gross-up amount equal to all federal,
state or local taxes imposed upon him by reason of the restricted stock
awards.
Each officer has, with respect to all
of the restricted shares (whether then vested or not), all of the rights of a
holder of our Common Stock, including the right to vote such shares and to
receive dividend as may be declared. Notwithstanding the proceeding
sentence, the restricted stock shall not be transferable until and unless they
have become vested in accordance with the vesting schedule.
Option
Agreements
As part of the employment agreement
with Mr. Munn, on May 22, 2008, we granted stock options, exercisable for up to
1,500,000 shares of our Common Stock, as follows:
·
|
option
exercisable for up to 500,000 shares, at an exercise price of $0.52 per
share (the closing price of our Common Stock, as reported by the OTC
Bulletin Board on May 22, 2008), which option vests with respect to these
shares on the effectiveness of the Charter Amendment in the State of
Nevada;
|
·
|
option
exercisable for up to 500,000 shares, at an exercise price of $0.57 per
share, which option vests with respect to these shares on May 22, 2009;
and
|
·
|
option
exercisable for up to 500,000 shares, at an exercise price of $0.62 per
share, which option vests with respect to these shares on May 22,
2010.
|
As part of the Employment Agreement
with Mr. Chase, on May 22, 2008 we granted stock options, exercisable for up to
1,125,000 shares of our Common Stock, as follows:
·
|
option
to Mr. Chase for up to 375,000 shares, at an exercise price of $0.52 per
share (the closing price of our Common Stock, as reported by the OTC
Bulletin Board on May 22, 2008), which option vests with respect to these
shares upon the effectiveness of the Charter Amendment in the State of
Nevada;
|
·
|
option
to Mr. Chase for up to 375,000 shares, at an exercise price of $0.57 per
share, which option vests with respect to these shares on May 22, 2009;
and
|
·
|
option
to Mr. Chase for up to 375,000 shares, at an exercise price of $0.62 per
share, which option vests with respect to these shares on May 22,
2010.
|
Options vesting on May 22, 2009 and May
22, 2010 are subject to acceleration in the event we undergo a "change of
control" while such executive officer is still employed by us. All
options expire on May 22, 2015.
The holders of the options shall have
none of the rights and privileges of a stockholder of the Company with respect
to any of the underlying shares of Common Stock, in whole or in part, prior to
the exercise of the options with respect to such underlying shares.
We granted "piggy-back" registration
rights to the option holders affording each of them the opportunity to include
for sale in any registration statement under the Securities Act (other than in
connection with a Form S-8 or any successor form registering any employee
benefit plan) we propose to file with respect to our securities any time during
the next five (5) years, commencing May 22, 2009.
2004
Non-Statutory Stock Option Plan
Pursuant to the May 14, 2004 Board’s
approval and subsequent stockholder approval, the Company adopted our 2004
Non-Statutory Stock Option Plan (the "2004 Plan") whereby we reserved for
issuance up to 1,500,000 shares of our Common Stock. On September 19,
our Board terminated the 2004 Plan in favor of the 2008 Plan. As of
the Record Date, no options had been issued under the 2004 Plan.
Director
Compensation
Directors of the Company are not
compensated in cash for their services but are reimbursed for out-of-pocket
expenses incurred in furtherance of our business.
OUTSTANDING SHARES AND VOTING
RIGHTS
As of the
Record Date, our authorized capitalization consisted of 24,000,000 shares of
Common Stock, of which 23,363,136 shares were issued and
outstanding. Holders of Common Stock have equal rights to receive
dividends when, as and if declared by our Board of Directors, out of funds
legally available therefore. Holders of Common Stock have one vote
for each share held of record and do not have cumulative voting rights and are
entitled, upon liquidation, to share ratably in the net assets available for
distribution, subject to the rights, if any, of holders of any preferred stock
then outstanding. Shares of Common Stock are not redeemable and have
no preemptive or similar rights. All outstanding shares of Common
Stock are fully paid and nonassessable.
SECURITY
OWNERSHIP OF CERTAIN
BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain
information regarding the beneficial ownership of our Common Stock as of (1) the
Record Date and (2) the Effective Date, giving pro forma effect only with
respect to those additional shares of Common Stock issued under the Affected
Company Securities which automatically convert upon the effectiveness of the
Charter Amendment (e.g. outstanding shares of preferred stock and restricted
stock awards) by (i) each person who, to our knowledge, beneficially owns more
than five percent (5%) of the outstanding shares of our Common Stock; (ii) each
of our current directors and executive officers; and (iii) all of our current
directors and executive officers as a group. Unless otherwise noted
below, we believe that all persons named in the table have sole voting and
investment power with respect to all shares of Common Stock beneficially owned
by them.
|
At
Record Date
(1)
|
|
At
Effective Date
(2)
|
Name
of Beneficial Owner
|
Amount
(3)
|
Percent
of Class
|
|
Amount
(3)
|
Percent
of Class
|
Directors
and Executive Officers
(4)
|
|
|
|
|
|
Robert
P. Munn, President,
Chief
Executive Officer and Director
|
1,000,000
(5)
|
4.1%
|
|
1,000,000
(5A)
|
2.1%
|
Alan
D. Gaines, Director
|
11,151,000
(6)
|
47.7%
|
|
11,151,000
(6)
|
24.2%
|
Carl
A. Chase, Chief Financial Officer
|
750,000
(7)
|
3.1%
|
|
750,000
(7A)
|
1.6%
|
Officers
and Directors as a Group
(3
persons)
|
12,901,000
(5) (6)
(7)
|
51.4%
|
|
12,901,000
(5A) (6)
(7A)
|
27.4%
|
Holders
of 5% or Greater
|
|
|
|
|
|
Amiel
David
|
5,000,000
(8)
|
17.8%
|
|
5,000,000
(8)
|
9.8%
|
Whalehaven
Capital Fund Limited
|
2,563,636
(9)
|
9.9%
|
|
2,563,636
(9A)
|
5.4%
|
Natural
Gas Partners VII, LP
|
17,500,000
(10)
|
42.8%
|
|
17,500,000
|
37.9%
|
CIT
Capital USA Inc.
|
24,199,996
(11)
|
50.9%
|
|
24,199,996
(11)
|
34.4%
|
____________________
(1)
|
At
the Record Date, a total of 23,363,136 shares of our Common Stock were
issued and outstanding.
|
(2)
|
Assumes
issuance of 21,911,854 shares underlying Series A, B, D and E Preferred
and 875,000 shares underlying Munn and Chase restricted stock awards upon
the effectiveness of the Charter Amendment, for a total of 46,149,999
shares of our Common Stock issued and
outstanding.
|
(3)
|
For
purposes hereof, a person is deemed to be the beneficial owner of
securities that can be acquired by such person within sixty (60) days from
the Record Date, upon the exercise of warrants or options or the
conversion of convertible securities. Each beneficial owner's
percentage ownership is determined by assuming that any warrants, options
or convertible securities that are held by such person (but not those held
by any other person) and which are exercisable or convertible within sixty
(60) days from the Record Date have been exercised or converted, as the
case may be.
|
(4)
|
The
address for each of our officers and directors is 4606 FM 1960 West, Suite
400, Houston, Texas 77069.
|
(5)
|
Represents
(i) option exercisable to purchase 500,000 shares of our Common Stock at a
purchase price of $0.52 per share, which option will be exercisable upon
the effectiveness of the Charter Amendment and (ii) 500,000 shares of
restricted stock awarded May 22, 2008, issuable upon the effectiveness of
the Charter Amendment. Excludes (i) options to purchase 500,000
shares at $0.57 per share and options to purchase 500,000 shares at $0.62,
per share, which options become exercisable on May 22, 2009 and 2010,
respectively, and (ii) 500,000 shares of restricted stock that vest on May
22, 2009 and 500,000 shares of restricted stock that vest on May 22,
2010.
|
(5A)
|
Includes
option exercisable to purchase 500,000 shares of our Common Stock at a
purchase price of $0.52 per share, which option will be exercisable upon
the effectiveness of the Charter Amendment. Excludes (i)
options to purchase 500,000 shares at $0.57 per share and options to
purchase 500,000 shares at $0.62, per share, which options become
exercisable on May 22, 2009 and 2010, respectively, and (ii) 500,000
shares of restricted stock that vest on May 22, 2009 and 500,000 shares of
restricted stock that vest on May 22,
2010.
|
(6)
|
Excludes
an aggregate of 3,000,000 shares of Common Stock held by two sons and a
daughter of Mr. Gaines, each of whom is greater than 18 years of age,
which shares Mr. Gaines may be deemed a beneficial owner thereof because
of such relationship. Mr. Gaines expressly disclaims beneficial
ownership of these securities, and this report shall not be deemed to be
an admission that he is the beneficial owner of these securities for
purposes of Sections 13(d) or 16 or for any other
purpose.
|
(7)
|
Represents
(i) option exercisable to purchase 375,000 shares of our Common Stock at a
purchase price of $0.52 per share, which option will be exercisable upon
the effectiveness of the Charter Amendment and (ii) 375,000 shares of
restricted stock awarded May 22, 2008, issuable upon the effectiveness of
the Charter Amendment. Excludes (i) options to purchase 375,000
shares at $0.57 per share and options to purchase 375,000 shares at $0.62
per share, which options become exercisable on May 22, 2009 and 2010,
respectively, and (ii) 375,000 shares of restricted stock that vest on May
22, 2009 and 375,000 shares of restricted stock that vest on May 22,
2010.
|
(7A)
|
Includes
option exercisable to purchase 375,000 shares of our Common Stock at a
purchase price of $0.52 per share, which option will be exercisable upon
the effectiveness of the Charter Amendment. Excludes (i)
options to purchase 375,000 shares at $0.57 per share and options to
purchase 375,000 shares at $0.62 per share, which options become
exercisable on May 22, 2009 and 2010, respectively, and (ii) 375,000
shares of restricted stock that vest on May 22, 2009 and 375,000 shares of
restricted stock that vest on May 22,
2010.
|
(8)
|
Includes
(i) option currently exercisable at $0.35 per share for an aggregate of
1,500,000 shares of Common Stock and (ii) option currently exercisable at
$0.53 per share for 3,300,00 shares of Common Stock. Mr.
David’s address is 5707 Spanish Oak Drive, Houston, Texas
77066.
|
(9)
|
Represents
(i) 1,363,636 shares of our Common Stock underlying 10,000 shares of
Series E Preferred issued by us in satisfaction of the Bridge Loan which
automatically convert upon the effectiveness of the Charter Amendment (ii)
up to 1,200,000 shares of our Common Stock underlying a warrant granted by
us in the Bridge Loan, at an exercise price of $0.33 per share, subject to
adjustments and full-ratchet protection under certain circumstances.
Whalehaven Capital Fund Limited’s address is 160 Summit Avenue, Montvale,
NJ 07645.
|
(9A)
|
Includes
warrant exercisable to purchase up to 1,200,000 shares of our Common
Stock, at a warrant purchase price of $0.33 per share subject to
adjustments and full-ratchet protection under certain
circumstances.
|
(10)
|
Represents
17,500,000 shares of our Common Stock underlying 10,000 shares of Series D
Preferred issued by us in the Voyager Acquisition which automatically
convert upon the effectiveness of the Charter
Amendment. Holder’s address is c/o Natural Gas Partners, 125 E.
John Carpenter Fwy., Ste. 600, Irving,
TX 75062.
|
(11)
|
Represents
up to 24,199,996 shares of our Common Stock underlying a warrant granted
by us in connection with the CIT Credit Facility, which warrant is
exercisable upon the effectiveness of the Charter Amendment at an exercise
price of $0.35 per share, subject to adjustments and full-ratchet
protection under certain circumstances. CIT Capital USA Inc.’s
address is 505 Fifth Avenue, 10
th
Floor, New York, NY 10017.
|
Change
in Control
As disclosed elsewhere in this
Information Statement, in connection with the Voyager Acquisition we issued
10,000 shares of our Series D Preferred, which shares will automatically convert
into 17,500,000 shares of our Common Stock upon the effectiveness of the Charter
Amendment. After giving effect to the issuance of shares of Common
Stock under the Series D Preferred, and assuming no additional issuance of our
securities, the shares of Common Stock issuable upon conversion of the Series D
Preferred represents an ownership interest of approximately 37.9% of our then
issued and outstanding shares.
WHERE YOU CAN FIND MORE INFORMATION
ABOUT US
We file
annual, quarterly and current reports, proxy statements and other information
with the SEC pursuant to Section 13(a), 13(c) or 15(d) of the Exchange Act. You
may read and copy this Information Statement and any other documents we have
filed at the SEC, including any exhibits and schedules, at the SEC’s public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You
may obtain information on the operation of the public reference room by calling
the SEC at 1-800-SEC-0330, and may obtain copies of our filings from the public
reference room by calling (202) 942-8090. The SEC maintains a web
site (www.sec.gov) that contains the reports, proxy and information statements
and other information regarding companies that file electronically with the SEC
such as us.
October
[ ],
2008 By
order of the Board of Directors,
_________________________
Robert
P. Munn, Chairman
EXHIBIT
A
CERTIFICATE
OF AMENDMENT
OF
ARTICLES
OF INCORPORATION
OF
ABC
FUNDING, INC.
ROSS
MILLER
Secretary
of State
204
North Carson Street, Ste 1 Carson City, Nevada 89701-4299 (775) 684
5708
Website:
secretaryofstate. biz
|
(PURSUANT
TO NRS 78.385 AND 78.390)
USE BLACK INK ONLY - DO NOT
HIGHLIGHT ABOVE
SPACE IS FOR OFFICE USE ONLY
Certificate of Amendment to
Articles of Incorporation
For Nevada Profit
Corporations
(Pursuant
to NRS 78.385 and 78.390 - After Issuance of Stock)
1.
Name of
corporation:
ABC
Funding, Inc.
2.
The
articles have been amended as follows (provide article numbers, if
available):
The
Articles of Incorporation of the Corporation are hereby amended by
replacing in its entirety Article I thereof with the following new Article
I:
"Article I: "The name
of Corporation is: “Cross Canyon Energy Corp."
The
Articles of Incorporation of the Corporation are further amended to
increase the number of authorized shares of common stock by replacing
paragraph a) of Article IV thereof with the following new paragraph
a):
"Article
III: a) The Corporation shall be authorized to issue
the following shares:
Class
Number of Shares
Par Value
Common
149,000,000
$.001
per share
Preferred
1,000,000
$.001 per
share”
|
3.
The vote
by which the stockholders holding shares in the corporation entitling them to
exercise at least a majority of the voting power, or such greater proportion of
the voting power as may be required in the case of a vote by classes or
series, or as may be required by the provisions of the * articles of
incorporation have voted in favor of the amendment
is: 14,151,000
4.
Effective
date of filing (optional):
(must not
be later than 90 days after the certificate is filed)
5. Officer Signature
(Required):
x
_______________________
Robert P. Munn, Chief Executive
Officer
*
If any proposed amendment
would alter or change any preference or any relative or other right given to any
class or series of outstanding shares, then the amendment must be approved by
the vote, in addition to the affirmative vote otherwise required, of the holders
of shares representing a majority of the voting power of each class or series
affected by the amendment regardless of limitations or restrictions on the
voting power thereof.
IMPORTANT:
Failure to include any of the above information and submit the proper fees may
cause this filing to be rejected.
EXHIBIT
B
INDEX
TO FINANCIAL STATEMENTS
(a)
Financial Statements of ABC
Funding, Inc.
|
Page
|
Report of Independent Registered Public Accounting Firm
|
B-2
|
Consolidated Balance Sheets at June 30, 2008 and 2007
|
B-3
|
Consolidated Statements of Operations for the Years Ended June 30,
2008 and 2007 and the Period February 21, 2006 (Inception) through
June 30, 2008
|
B-4
|
Consolidated Statement of Changes in Stockholders’ Deficit for the
Years Ended June 30, 2008 and 2007 and the Period February 21,
2006 (Inception) through June 30, 2008
|
B-5
|
Consolidated Statements of Cash Flows for the Years Ended June 30,
2008 and 2007 and the Period February 21, 2006 (Inception) through
June 30, 2008
|
B-6
|
Notes to Consolidated Financial Statements
|
B-8
|
(b)
Financial Statements of Business Acquired
|
B-20
|
Report of Independent Registered Public Accounting Firm
|
B-21
|
Balance Sheets at December 31, 2007 and 2006
|
B-22
|
Statements of Operations for the Years Ended December 31, 2007 and
2006
|
B-23
|
Statement of Changes in Stockholders’ Equity for the Years Ended
December 31, 2007 and 2006
|
B-24
|
Statements of Cash Flows for the Years Ended December 31, 2007 and
2006
|
B-25
|
Notes to Financial Statements
|
B-26
|
|
|
Balance Sheets at June 30, 2008 (unaudited) and December 31,
2007
|
B-39
|
Statements of Operations for the Three and Six Month Periods Ended June
30, 2008 and 2007 (unaudited)
|
B-40
|
Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007
(unaudited)
|
B-41
|
Notes to Unaudited Financial Statements
|
B-42
|
(c)
Pro Forma Financial Information of ABC Funding, Inc.
|
|
Unaudited Pro Forma Condensed Consolidated Balance Sheet at June 30,
2008
|
B-46
|
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
Year Ended June 30, 2008
|
B-47
|
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
Year Ended June 30, 2007
|
B-48
|
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements
|
B-49
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors
ABC
Funding, Inc.
(a
Development Stage Company)
Houston,
Texas
We have audited the accompanying
consolidated balance sheet of ABC Funding, Inc. ("the Company") (a Development
Stage Company) as of June 30, 2008 and 2007, and the related consolidated
statements of operations, cash flows and changes in stockholders' deficit for
the years ended June 30, 2008 and 2007, and for the period from February 21,
2006 (inception) through June 30, 2008, respectively. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance
with standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit
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 consolidated
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of the Company as of June 30, 2008 and 2007,
and the consolidated results of its operations and its cash flows for the
periods described in conformity with accounting principles generally accepted in
the United States of America.
/s/ Malone & Bailey,
PC
www.malone-bailey.com
Houston,
Texas
September
8, 2008
ABC
FUNDING, INC.
AND
SUBSIDIARY
(A
DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
BALANCE SHEETS
JUNE
30, 2008 AND 2007
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
12,158
|
|
|
$
|
550,394
|
|
Prepaid
expenses and other current assets
|
|
|
31,215
|
|
|
|
30,428
|
|
Deferred
financing costs, net of amortization of $55,871
|
|
|
143,472
|
|
|
|
--
|
|
Total
current assets
|
|
|
186,845
|
|
|
|
580,822
|
|
Acquisition
costs
|
|
|
976,284
|
|
|
|
--
|
|
Fixed
assets, net of accumulated depreciation of $183
|
|
|
7,881
|
|
|
|
--
|
|
Total
assets
|
|
$
|
1,171,010
|
|
|
$
|
580,822
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
404,027
|
|
|
$
|
7,180
|
|
Accounts
payable – related parties
|
|
|
20,825
|
|
|
|
--
|
|
Accrued
liabilities
|
|
|
1,397
|
|
|
|
188,996
|
|
Convertible
debt, net of unamortized discount of $0 and $36,973
at
June
30, 2008 and 2007, respectively
|
|
|
25,000
|
|
|
|
1,463,027
|
|
Senior
secured convertible debentures, net of unamortized
discount
of $778,362
|
|
|
121,638
|
|
|
|
--
|
|
Derivative
liabilities
|
|
|
11,893,573
|
|
|
|
--
|
|
Total
current liabilities
|
|
|
12,466,460
|
|
|
|
1,659,203
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
Preferred
stock - 863,505 undesignated authorized, $0.001 par value at June 30, 2008
and 2007
|
|
|
|
|
|
|
|
|
Series A Preferred stock, $0.001 par value, 99,395 authorized and
outstanding at June 30, 2008
|
|
|
99
|
|
|
|
--
|
|
Series B Preferred stock, $0.001 par value, 37,100 authorized and
outstanding at June 30, 2008
|
|
|
37
|
|
|
|
--
|
|
Common
stock, $0.001 par value, 24,000,000 shares authorized,
24,378,376
and 22,065,000 issued and outstanding at June 30,
2008
and 2007, respectively
|
|
|
24,378
|
|
|
|
22,065
|
|
Additional
paid-in capital
|
|
|
769,318
|
|
|
|
1,244,765
|
|
Deficit
accumulated during the development stage
|
|
|
(12,089,282
|
)
|
|
|
(2,345,211
|
)
|
Total
stockholders’ deficit
|
|
|
(11,295,450
|
)
|
|
|
(1,078,381
|
)
|
Total
liabilities and stockholders' deficit
|
|
$
|
1,171,010
|
|
|
$
|
580,822
|
|
See the
accompanying summary of accounting policies and notes to financial
statements.
ABC
FUNDING, INC.
AND
SUBSIDIARY
(A
DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007 AND
THE
PERIOD FEBRUARY 21, 2006 (INCEPTION) THROUGH JUNE 30, 2008
|
|
|
|
|
February
21,
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
(Inception)
|
|
|
|
|
|
|
Through
|
|
|
|
Years
Ended June 30,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative:
|
|
|
|
|
|
|
|
|
|
Payroll
and related expenses
|
|
$
|
3,593,652
|
|
|
$
|
589,346
|
|
|
$
|
4,608,516
|
|
Office
and administration
|
|
|
40,263
|
|
|
|
72,216
|
|
|
|
123,491
|
|
Professional
fees
|
|
|
307,508
|
|
|
|
267,945
|
|
|
|
732,294
|
|
Depreciation
expense
|
|
|
183
|
|
|
|
--
|
|
|
|
183
|
|
Other
|
|
|
110,755
|
|
|
|
14,319
|
|
|
|
567,414
|
|
Total
general and administrative
|
|
|
4,052,361
|
|
|
|
943,826
|
|
|
|
6,031,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
5,174
|
|
|
|
31,163
|
|
|
|
41,523
|
|
Interest
expense
|
|
|
(2,039,213
|
)
|
|
|
(332,329
|
)
|
|
|
(2,441,236
|
)
|
Change
in fair value of derivatives
|
|
|
(3,657,671
|
)
|
|
|
--
|
|
|
|
(3,657,671
|
)
|
Total
other expense
|
|
|
(5,691,710
|
)
|
|
|
(301,166
|
)
|
|
|
(6,057,384
|
)
|
Net
loss
|
|
$
|
(9,744,071
|
)
|
|
$
|
(1,244,992
|
)
|
|
$
|
(12,089,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share:
Basic
and diluted
|
|
$
|
(0.42
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
Basic
and diluted
|
|
|
23,067,241
|
|
|
|
22,065,000
|
|
|
|
|
|
See the
accompanying summary of accounting policies and notes to financial
statements.
ABC
FUNDING, INC.
AND
SUBSIDIARY
(A
DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007 AND
THE
PERIOD FEBRUARY 21, 2006 (INCEPTION) THROUGH JUNE 30, 2008
|
|
Series
A Preferred
|
|
|
Series
B Preferred
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Deficit
Accumulated
During
Development
|
|
|
Total
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stage
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
February 21, 2006
|
|
|
--
|
|
|
$
|
--
|
|
|
|
--
|
|
|
$
|
--
|
|
|
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
Proceeds
from issuance of
common stock
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
19,665,000
|
|
|
|
19,665
|
|
|
|
(17,698
|
)
|
|
|
--
|
|
|
|
1,967
|
|
Proceeds
from issuance of
common stock
to
note holders
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
600,000
|
|
|
|
600
|
|
|
|
249,400
|
|
|
|
--
|
|
|
|
250,000
|
|
Shares
issued in reverse merger
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
1,800,000
|
|
|
|
1,800
|
|
|
|
(1,800
|
)
|
|
|
--
|
|
|
|
--
|
|
Stock
based compensation
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
425,518
|
|
|
|
--
|
|
|
|
425,518
|
|
Net
loss
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(1,100,219
|
)
|
|
|
(1,100,219
|
)
|
Balance,
June 30, 2006
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
22,065,000
|
|
|
|
22,065
|
|
|
|
655,420
|
|
|
|
(1,100,219
|
)
|
|
|
(422,734
|
)
|
Stock
based compensation
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
589,345
|
|
|
|
--
|
|
|
|
589,345
|
|
Net
loss
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(1,244,992
|
)
|
|
|
(1,244,992
|
)
|
Balance,
June 30, 2007
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
22,065,000
|
|
|
|
22,065
|
|
|
|
1,244,765
|
|
|
|
(2,345,211
|
)
|
|
|
(1,078,381
|
)
|
Shares
issued for services
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
1,365,240
|
|
|
|
1,365
|
|
|
|
672,060
|
|
|
|
--
|
|
|
|
673,425
|
|
Stock
based compensation
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
2,865,196
|
|
|
|
--
|
|
|
|
2,865,196
|
|
Convertible
debenture tainted
warrants
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(5,856,395
|
)
|
|
|
--
|
|
|
|
(5,856,395
|
)
|
Stock
issued for note extensions
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
218,000
|
|
|
|
218
|
|
|
|
97,882
|
|
|
|
--
|
|
|
|
98,100
|
|
Stock
issued with convertible
notes
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
200,004
|
|
|
|
200
|
|
|
|
58,133
|
|
|
|
--
|
|
|
|
58,333
|
|
Beneficial
conversion feature
related to convertible
notes
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
58,333
|
|
|
|
--
|
|
|
|
58,333
|
|
Stock
issued for payment of
interest
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
530,132
|
|
|
|
530
|
|
|
|
264,530
|
|
|
|
--
|
|
|
|
265,060
|
|
Preferred
stock issued for note
conversions
|
|
|
96,500
|
|
|
|
96
|
|
|
|
35,000
|
|
|
|
35
|
|
|
|
--
|
|
|
|
--
|
|
|
|
1,314,869
|
|
|
|
--
|
|
|
|
1,315,000
|
|
Preferred
stock issued for
payment of
interest
|
|
|
2,895
|
|
|
|
3
|
|
|
|
2,100
|
|
|
|
2
|
|
|
|
--
|
|
|
|
--
|
|
|
|
49,945
|
|
|
|
--
|
|
|
|
49,950
|
|
Net
loss
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(9,744,071
|
)
|
|
|
(9,744,071
|
)
|
Balance,
June 30, 2008
|
|
|
99,395
|
|
|
$
|
99
|
|
|
|
37,100
|
|
|
$
|
37
|
|
|
|
24,378,376
|
|
|
$
|
24,378
|
|
|
$
|
769,318
|
|
|
$
|
(12,089,282
|
)
|
|
$
|
(11,295,450
|
)
|
See the
accompanying summary of accounting policies and notes to financial
statements.
ABC
FUNDING, INC.
AND
SUBSIDIARY
(A
DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007 AND
THE
PERIOD FEBRUARY 21, 2006 (INCEPTION) THROUGH JUNE 30, 2008
|
|
|
|
|
|
|
|
February
21,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
(Inception)
|
|
|
|
|
|
|
|
|
|
Through
|
|
|
|
Years
Ended June 30,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(9,744,071
|
)
|
|
$
|
(1,244,992
|
)
|
|
$
|
(12,089,282
|
)
|
Adjustments
to reconcile net loss to cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
183
|
|
|
|
--
|
|
|
|
183
|
|
Share
based compensation
|
|
|
3,538,621
|
|
|
|
589,345
|
|
|
|
4,553,484
|
|
Common
stock issued for interest
|
|
|
225,704
|
|
|
|
--
|
|
|
|
225,704
|
|
Preferred
stock issued for interest
|
|
|
49,950
|
|
|
|
--
|
|
|
|
49,950
|
|
Common
stock issued for loan extensions
|
|
|
98,100
|
|
|
|
--
|
|
|
|
98,100
|
|
Amortization
of deferred financing costs
|
|
|
55,871
|
|
|
|
--
|
|
|
|
55,871
|
|
Amortization
of debt discounts
|
|
|
1,743,593
|
|
|
|
182,482
|
|
|
|
1,956,620
|
|
Change
in fair value of derivatives
|
|
|
3,657,671
|
|
|
|
--
|
|
|
|
3,657,671
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
and other current assets
|
|
|
896
|
|
|
|
36,033
|
|
|
|
(29,532
|
)
|
Accounts
payable, related parties and other
|
|
|
417,672
|
|
|
|
(56,407
|
)
|
|
|
424,852
|
|
Accrued
liabilities
|
|
|
(148,245)
|
|
|
|
134,417
|
|
|
|
40,751
|
|
Net
cash used in operating activities
|
|
|
(104,055
|
)
|
|
|
(359,122
|
)
|
|
|
(1,055,628
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
costs of oil and gas properties
|
|
|
(976,284
|
)
|
|
|
--
|
|
|
|
(976,284
|
)
|
Purchase
of fixed assets
|
|
|
(8,064
|
)
|
|
|
--
|
|
|
|
(8,064
|
)
|
Deposits
|
|
|
(1,682
|
)
|
|
|
--
|
|
|
|
(1,682
|
)
|
Net
cash used in investing activities
|
|
|
(986,030
|
)
|
|
|
--
|
|
|
|
(986,030
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock
|
|
|
--
|
|
|
|
--
|
|
|
|
1,967
|
|
Proceeds
from convertible debentures
|
|
|
800,000
|
|
|
|
--
|
|
|
|
800,000
|
|
Debt
issuance costs
|
|
|
(88,151
|
)
|
|
|
--
|
|
|
|
(88,151
|
)
|
Proceeds
from convertible notes
|
|
|
350,000
|
|
|
|
15,000
|
|
|
|
1,850,000
|
|
Repayment
of convertible notes
|
|
|
(510,000
|
)
|
|
|
--
|
|
|
|
(510,000
|
)
|
Net
cash provided by financing activities
|
|
|
551,849
|
|
|
|
15,000
|
|
|
|
2,053,816
|
|
Net
increase (decrease) in cash
|
|
|
(538,236
|
)
|
|
|
(344,122
|
)
|
|
|
12,158
|
|
Cash
at beginning of period
|
|
|
550,394
|
|
|
|
894,516
|
|
|
|
--
|
|
Cash
at end of period
|
|
$
|
12,158
|
|
|
$
|
550,394
|
|
|
$
|
12,158
|
|
Supplemental
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
14,637
|
|
|
$
|
--
|
|
|
$
|
14,637
|
|
Cash
paid for income taxes
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
See the
accompanying summary of accounting policies and notes to financial
statements.
ABC
FUNDING, INC.
AND
SUBSIDIARY
(A
DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007 AND
THE
PERIOD FEBRUARY 21, 2006 (INCEPTION) THROUGH JUNE 30, 2008
(Continued)
|
|
Years
Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Non-Cash
Investing and Financing Activities:
|
|
|
|
|
|
|
Common
shares issued in payment of interest
|
|
$
|
39,355
|
|
|
$
|
--
|
|
Preferred
shares issued in payment of principal
|
|
$
|
1,315,000
|
|
|
$
|
--
|
|
Warrants
issued for convertible debenture commission
|
|
$
|
111,192
|
|
|
$
|
--
|
|
Discount for beneficial conversion feature and debt discount
|
|
$
|
116,666
|
|
|
$
|
--
|
|
See the
accompanying summary of accounting policies and notes to financial
statements.
ABC
FUNDING, INC.
AND
SUBSIDIARY
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
NOTE
1.
ORGANIZATION AND BASIS OF PREPARATION
Headquartered
in Houston, Texas, ABC Funding, Inc. (the “Company”, “ABC”, “we” or “us”), is a
development stage company incorporated in Nevada, with our primary business
focus to engage in the acquisition, exploitation and development of
properties for the production of crude oil and natural gas. We intend
to explore for oil and gas reserves through the drill bit and acquire
established oil and gas properties. We intend to exploit oil and
gas properties through the application of conventional and specialized
technology to increase production, ultimate recoveries, or both, and participate
in joint venture drilling programs with repeatable low risk
results.
We were
incorporated in Nevada on May 13, 2004. In May 2006, Energy
Venture, Inc., a Delaware corporation ("EV Delaware") merged into EVI
Acquisition Corp. ("EVI"), a wholly-owned subsidiary of ABC. In
connection with the merger, EVI, a Nevada corporation, changed its name to
Energy Venture, Inc. ("EV Nevada"). The merger transaction was
accounted for as a reverse merger with EV Delaware being deemed the acquiring
entity for financial accounting purposes. Thus, the historical
financial statements of the Company prior to the effective date of the merger
have been restated to be those of EV Delaware. Since the merger, we
have primarily been involved in conducting business planning and capital-raising
activities.
As of June 30, 2008, we have one
subsidiary, Energy Venture, Inc., a Nevada corporation. Energy
Venture, Inc. currently has no operations, assets or
liabilities. However, we intend to use this subsidiary in the future
as an operating company to perform the operations of our oil and gas
business.
The
consolidated financial statements include the accounts of ABC Funding, Inc. and
its subsidiary, which is wholly owned. All inter-company transactions
are eliminated upon consolidation.
NOTE
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Use of
Estimates.
In preparing financial statements, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities in the balance sheet and revenue and expenses in the statement of
operations. Actual results could differ from those
estimates.
Cash and Cash
Equivalents.
For purposes of the statement of cash flows, we
consider all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
Revenue
Recognition.
Revenue is recognized when persuasive evidence of
an arrangement exists, services have been rendered, the sales price is fixed or
determinable, and collectability is reasonably assured. There were no
revenues from inception (February 21, 2006) through June 30, 2008.
Income Taxes
. We
recognize deferred tax assets and liabilities based on differences between the
financial reporting and tax bases of assets and liabilities using the enacted
tax rates and laws that are expected to be in effect when the differences are
expected to be recovered. We provide a valuation allowance for
deferred tax assets for which we do not consider realization of such assets to
be more likely than not.
Basic and Diluted Net Loss Per
Share.
We compute net income (loss) per share pursuant to
Statement of Financial Accounting Standards No. 128 “Earnings per
Share”. Basic net income (loss) per share is computed by dividing
income or loss applicable to common shareholders by the weighted average number
of shares of our Common Stock outstanding during the period. Diluted
net income (loss) per share is determined in the same manner as basic net income
(loss) per share except that the number of shares is increased assuming exercise
of dilutive stock options, warrants and convertible debt using the treasury
stock method and dilutive conversion of our convertible preferred
stock.
During the year ended June 30, 2008, convertible preferred stock
convertible into 3,048,218 shares of common stock; a convertible note and
accrued interest convertible into 52,000 shares of common stock; vested options
to purchase 11,150,000 shares of common stock; convertible debt convertible into
2,777,273 shares of common stock; and warrants to purchase 3,225,000 shares of
common stock were excluded from the calculation of net loss per share since
their inclusion would have been anti-dilutive. During the year ended
June 30, 2007, convertible debt and accrued interest, convertible into 3,377,992
shares of common stock and vested stock options to purchase 3,650,000 shares of
common stock were excluded from the calculation of net loss per share since
their inclusion would have been anti-dilutive. During the year ended
June 30, 2007, there was no convertible preferred stock
outstanding.
Stock Based
Compensation
. In December 2004, the FASB issued SFAS No. 123R,
"Share-Based Payments" ("FAS 123R"). We adopted the disclosure
requirements of FAS 123R as of July 1, 2006 using the modified prospective
transition method approach as allowed under FAS 123R. FAS 123R
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. FAS 123R
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. FAS 123R
requires that the fair value of such equity instruments be recognized as expense
in the historical financial statements as services are
performed.
Valuation of the
Embedded and Warrant Derivatives.
The valuation of our embedded
derivatives and warrant derivatives is determined primarily by a lattice model
using probability weighted discounted cash flow based upon future projections
over a range of potential outcomes and the Black-Scholes option pricing
model. An embedded debenture derivative is a derivative instrument that is
embedded within a contract, which under the convertible debenture (the host
contract) includes the right to convert the debenture by the holder, reset
provisions with respect to the conversion provisions, call/redemption options
and liquidated damages. In accordance with FASB Statement 133, as amended,
Accounting for Derivative Instrumments and Hedging Activities, these embedded
derivatives are marked-to-market each reporting period, with a corresponding
non-cash gain or loss charged to the current period. A warrant derivative
liability is determined in accordance with Emerging Issues Task Force ("EITF")
Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company's Own Stock" ("EITF 00-19"). Based
on EITF 00-19, warrants which are determined to be classified as derivative
liabilities are marked-to-market each reporting period, with a corresponding
non-cash gain or loss charged to the current period. The practical effect
of this has been that when our stock price increases so does our derivative
liability, resulting in a non-cash loss charge that reduces earnings and
earnings per share. When our stock price declines, we record a non-cash
gain, increasing our earnings and earnings per share.
To determine the fair
value of our embedded derivativs, management evaluates assumptions regarding the
probability of certain events. Other factors used to determine fair value
include our period end stock price, historical stock volatility, risk free
interest rate and derivative term. The fair value recorded for the
derivative liability varies from period to period. This variability may
result in the actual derivative liability for a period either above or below the
estimates recorded on our consolidated financial statements, resulting in
significant fluctuations in other income (expense) because of the corresponding
non-cash gain or loss recorded.
Fair Value of
Financial Instruments
. Our financial instruments consist of
cash and cash equivalents, accounts payable and notes payable. The
carrying amounts of cash and cash equivalents, accounts payable and notes
payable approximate fair value due to the highly liquid nature of these
short-term instruments.
Reclassifications.
Certain prior period
amounts have been reclassified to conform to the current year
presentation.
New Accounting
Pronouncements
. During February 2007, the Financial
Accounting Standards Board (“FASB”) issued FASB Statement of Accounting
Standards (“SFAS”) No 159, “The Fair Value Option for Financial Assets and
Financial Liabilities” (“SFAS No. 159”) which permits all entities to choose, at
specified election dates, to measure eligible items at fair
value. SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value, and thereby mitigate volatility
in reported earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting
provisions. This Statement also establishes presentation and
disclosure requirements designed to facilitate comparisons between entities that
choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007. We
are evaluating the impact that this Statement will have on our financial
statements.
During
September 2006, the FASB issued FASB Statement of Accounting Standards (“SFAS”)
No. 157, "Fair Value Measurements." This Statement defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, where fair value
has been determined to be the relevant measurement attribute. This
Statement is effective for fiscal years beginning after November 15,
2007. We are evaluating the impact that this Statement will have on
our financial statements.
NOTE
3. ACQUISITION
COSTS
We have entered into a stock purchase
and sale agreement to acquire from Voyager Gas Holdings, L.P. all of the issued
and outstanding shares of common stock of Voyager Gas Corporation, a Delaware
corporation. (See Note 8. “Subsequent Events”). The
following table summarizes costs incurred pursuant to the acquisition as of June
30, 2008.
Acquisition
costs:
|
|
|
|
Earnest
money deposit
|
|
$
|
800,000
|
|
Legal
fees
|
|
|
99,731
|
|
Third
party engineering fees
|
|
|
71,915
|
|
Other
|
|
|
4,638
|
|
Total
acquisition costs
|
|
$
|
976,284
|
|
NOTE
4. NOTES
PAYABLE
Convertible
Debentures
On May
21, 2008, we entered into a Securities Purchase Agreement with those purchasers
identified therein (the “Bridge Financing”), whereby we received proceeds of
$800,000 evidenced by senior secured convertible debentures (the “Debentures”)
with a principal amount of $900,000, issued at a discount of
$100,000. The proceeds from the Debentures were used to fund our
payment of the deposit under the Voyager Gas Corporation stock purchase and sale
agreement (the “Voyager Agreement”).
The
Debentures mature the earlier of September 29, 2008, or the closing date under
the Voyager Agreement, and may be satisfied in full by our payment of the
aggregate redemption price of $900,000 or, at the election of the purchasers, by
the conversion of the Debentures into shares of our common stock (the
“Conversion Shares”), at an initial conversion price of $0.33, subject to
adjustments and full-ratchet protection under certain
circumstances. Alternatively, the purchasers may elect to participate
in a Subsequent Financing (as such term is defined in the Securities Purchase
Agreement) by exchanging all or some of their Debentures for securities issued
in the Subsequent Financing, upon the same terms being offered under the
Subsequent Financing.
Under the
Debentures, so long as any portion of the Debentures remain outstanding, we are
precluded from incurring additional indebtedness or suffering additional liens
on our property, subject to limited exceptions therein, including, without
limitation, such indebtedness incurred by us in connection with the financing of
the consideration owing under the Voyager Agreement.
As
additional consideration for the bridge loan evidenced by the Debentures, we
issued common stock purchase warrants to the purchasers and their affiliates,
exercisable to purchase up to 3,000,000 shares of our common stock (the “Warrant
Shares”), based upon an initial exercise price of $0.33 subject to adjustments
and full-ratchet protection under certain circumstances.
Our
performance under the Debentures, including payment of the redemption amount
thereof or conversion thereunder, is secured by (i) our grant of a security
interest and first lien on all of our existing and after-acquired assets, (ii)
the guarantee of our wholly-owned subsidiary, Energy Venture, Inc., and (iii)
the pledge of an aggregate of 14,151,000 shares of our common stock currently
held by Mr. Alan D. Gaines, one of our directors, and his affiliates, which
pledged shares represent approximately 60.6% of the shares of our common stock
issued and outstanding as of the grant date.
We
incurred debt issuance costs of $199,343 associated with the issuance of the
Debentures. These costs were capitalized as deferred financing costs
and are being amortized over the life of the Debentures using the effective
interest method. Amortization expense related to the deferred
financing costs was $55,871 for the period May 21, 2008 through June 30,
2008.
Common
shares issuable if the Debentures were converted would exceed the number of
authorized shares we have available for issuance. In addition, the
Debentures contain more than one embedded derivative feature which would
individually warrant separate accounting as derivative instruments under SFAS
No. 133 and EITF 00-19. We evaluated the application of SFAS No. 133 and
EITF 00-19 and determined the various embedded derivative features have been
bundled together as a single, compound embedded derivative instrument that has
been bifurcated from the debt host contract, and referred to as the "Single
Compound Embedded Derivatives within Convertible Note". The single
compound embedded derivative features include the conversion feature with the
reset provisions within the Debentures, the call/redemption options and
liquidated damages. The value of the single compound embedded
derivative liability was bifurcated from the debt host contract and recorded as
a derivative liability, which results in a reduction of the initial carrying
amount (as unamortized discount) of the Debentures of the value at
inception. The value of the embedded derivative at issuance exceeded
the notional amount of the loan, and the excess amount was expensed to interest
in the amount of $1,468,316. The unamortized discount has been
amortized to interest expense using the effective interest method over the life
of the Debentures. At June 30, 2008, $121,638 has been amortized with
an unamortized discount balance remaining of $778,362.
Due to
the insufficient unissued authorized shares to share settle the Debentures, this
caused other convertible instruments, specifically the Series A and B Preferred,
the convertible note and non-employee stock options, to also be classified as
derivative liabilities under FAS 133. Each reporting period, this
derivative liability is marked-to-market with the non-cash gain or loss recorded
in the period as a gain or loss on derivatives. At June 30, 2008, the
aggregate derivative liability was $11,893,573.
On
September 2, 2008, we satisfied in full the Debentures by repayment of $450,000
of principal with funds advanced under the CIT Credit Facility (as defined in
Note 8 hereto) and by delivery of shares of our Series E Preferred in exchange
for the principal amount of $450,000, which shares of preferred stock
automatically convert into an aggregate of 1,363,636 shares of our common stock,
based upon an implied conversion price of $0.33 per share of common stock upon
the effectiveness of the Charter Amendment.
Probability
- Weighted Expected Cash Flow Methodology
Assumptions: Single
Compound Embedded Derivative within Debentures
|
|
Transaction
Date
|
|
|
As
of
|
|
|
|
May
21, 2008
|
|
|
June
30, 2008
|
|
Risk
free interest rate
|
|
|
4.53
|
%
|
|
|
4.59
|
%
|
Timely
registration
|
|
|
95.00
|
%
|
|
|
95.00
|
%
|
Default
status
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
Alternative
financing available and exercised
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Trading
volume, gross monthly dollars monthly rate increase
|
|
|
1.00
|
%
|
|
|
1.00
|
%
|
Annual
growth rate stock price
|
|
|
29.14
|
%
|
|
|
29.20
|
%
|
Future
projected volatility
|
|
|
150.00
|
%
|
|
|
150.00
|
%
|
The stock
purchase warrants are freestanding derivative financial instruments which were
valued using the Black-Scholes method. The fair value of the
derivative liability of the single compound embedded derivatives, the warrants
issued with the Debentures and the other tainted convertible instruments and
options was recorded at $1,470,868 and $5,967,587, respectively, on May 21,
2008. Consequently, the Debentures were initially recorded at zero, after
application of the discounts. The unamortized discount will be
accreted to interest expense using the effective interest method over the life
of the Debentures. The total accretion expense was $121,638 for
the period May 21, 2008 through June 30, 2008. The remaining value of
$1,468,316 was expensed at inception to interest expense since the total fair
value of the derivatives at inception exceeded the face value of the
Debentures. The effective interest rate on the Debentures is
1,441.9%.
So long
as the Debentures were outstanding, they were potentially convertible into an
unlimited number of common shares, resulting in us no longer having the control
to physically or net share settle existing non-employee stock
options. Thus under EITF 00-19, all non-employee stock options that
are exercisable during the period that the Debentures are outstanding are
required to be treated as derivative liabilities and recorded at fair value
until the provisions requiring this treatment have been settled.
As of the
date of issuance of the notes on May 21, 2008, the fair value of options to
purchase 8,900,000 shares and other tainted convertible
instruments totaling $5,856,395 was reclassified to the liability caption
“Derivative liabilities” from additional paid-in capital. The change
in fair value of $2,703,694 as of June 30, 2008, has been included in earnings
under the caption “Change in fair value of derivatives.”
Variables
used in the Black-Scholes option-pricing model include: (1) 4.53% to 4.59%
risk-free interest rate; (2) expected warrant life is the actual remaining life
of the warrant as of each period end; (3) expected volatility is 150.00%; and
(4) zero expected dividends.
Both the
embedded and freestanding derivative financial instruments were recorded as
liabilities in the consolidated balance sheet and measured at fair
value. These derivative liabilities will be marked-to-market each
quarter with the change in fair value recorded as either a gain or loss in the
income statement.
The
impact of the application of SFAS No. 133 and EITF 00-19 in regards to the
derivative liabilities on the balance sheet and statements of operations as of
inception (May 21, 2008) and through June 30, 2008 are as follows:
|
|
|
|
|
Liability
As
of
|
|
|
|
May
21, 2008
|
|
|
June
30, 2008
|
|
Derivative
liability – single compound embedded derivatives
within
the debentures
|
|
$
|
797,447
|
|
|
$
|
797,447
|
|
Derivative
liability – warrants, non-employee options and other tainted convertible
instruments
|
|
|
7,438,455
|
|
|
|
7,438,455
|
|
Net
change in fair value of derivatives
|
|
|
--
|
|
|
|
3,657,671
|
|
Derivative
liabilities
|
|
$
|
8,235,902
|
|
|
$
|
11,893,573
|
|
The
following summarizes the financial presentation of the Debentures at inception
(May 21, 2008) and at June 30, 2008:
|
|
At
Inception
|
|
|
As
of
|
|
|
|
May
21, 2008
|
|
|
June
30, 2008
|
|
Notional
amount of debentures
|
|
$
|
900,000
|
|
|
$
|
900,000
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
Discount
for single compounded embedded derivatives
within
debentures and original issue discount
|
|
|
(900,000
|
)
|
|
|
(900,000
|
)
|
Amortized
discount on debentures
|
|
|
--
|
|
|
|
121,638
|
|
Convertible
debentures balance, net
|
|
$
|
--
|
|
|
$
|
121,638
|
|
Convertible
Notes
At June 30, 2008 and 2007,
convertible short-term debt consisted of the following:
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
12%
convertible notes due February 28, 2008
|
|
$
|
25,000
|
|
|
$
|
1,500,000
|
|
Unamortized
discount
|
|
|
--
|
|
|
|
(36,973
|
)
|
Total
convertible debt
|
|
$
|
25,000
|
|
|
$
|
1,463,027
|
|
2006
Convertible Notes
During 2006, EV Delaware sold
$1,500,000 of convertible promissory notes (the "2006 Notes") which were
expressly assumed by us. The 2006 Notes had an original maturity date
of August 31, 2007, carried an interest rate of 10% per annum, payable in either
cash or shares, and were convertible into shares of Common Stock at a conversion
rate of $0.50 per share at the option of the investor. Each investor
also received a number of shares of Common Stock equal to 20% of his or her
investment divided by $0.50. Thus, a total of 600,000 shares were
initially issued to investors in the 2006 Notes. The relative fair
value of these shares was $250,000 and was recorded as a debt discount and as
additional paid-in capital. The debt discount was amortized over the
original term of the notes payable using the effective interest
method. The original issue discount rate was
23.44%. During the period from February 21, 2006 (inception) to
August 31, 2007, the entire discount of $250,000 was amortized and recorded as
interest expense.
We evaluated the application of SFAS
No. 133 and EITF 00-19. Based on the guidance of SFAS No. 133 and
EITF 00-19, we concluded that these instruments were not required to be
accounted for as derivatives.
On August 31, 2007 (the original
Maturity Date), we repaid in cash six of the holders of the 2006 Notes an
aggregate amount of $424,637, of which $410,000 represented principal and
$14,637 represented accrued interest. On September 4, 2007, an
additional $44,624 of accrued and current period interest was repaid through the
issuance of 89,248 shares of our Common Stock. The remaining holders
of the 2006 Notes entered into an agreement with us whereby the maturity date of
the 2006 Notes was extended to February 28, 2008 and, beginning September 1,
2007 until the 2006 Notes are paid in full, the interest rate on the outstanding
principal increased to 12% per annum. In addition, we agreed to issue
to the remaining holders of the 2006 Notes, 218,000 shares of our common stock
with a value of $98,100 as consideration for extending the 2006 Note's maturity
date. We evaluated the application of EITF 96-19, "Debtor's
Accounting for a Modification or Exchange of Debt Instruments" and concluded
that the revised terms constituted a debt modification rather than a debt
extinguishment and accordingly, the value of the common stock has been treated
as interest expense in the accompanying statements of operations.
On February 28, 2008, $1,090,000 of
the 2006 Notes came due and we were unable to repay them. We
continued to accrue interest on the notes at 12%, the agreed upon rate for the
extension period. On March 6, 2008, we issued 130,449 shares of
common stock in lieu of cash in payment of $65,221 of accrued and current period
interest to holders of 2006 Notes. On April 22, 2008, we repaid
$100,000 principal amount in cash to one of the holders of the
notes. During May 2008, we exchanged 99,395 shares of our Series A
Preferred in full satisfaction of our obligation under the notes to pay $965,000
of principal and $28,950 of interest, with each share of such preferred stock
being automatically convertible into 20 shares of our common stock, for an
aggregate of 1,987,900 shares of our common stock. The Series A
Preferred will automatically convert into shares of our Common Stock upon the
effectiveness of the Charter Amendment. At June 30, 2008, we have
outstanding $25,000 principal amount of the 2006 Notes with one
noteholder.
2007
Convertible Notes
On November 1, 2007, we sold $350,000
in convertible notes (the "2007 Notes") on the following terms: each note
matures October 31, 2008 and a 10% interest rate payable in shares of our Common
Stock based upon a conversion price of $ 0.35 per share. The
investors in the 2007 Notes also received 200,004 shares of Common
Stock. The total proceeds from the sale of the 2007 Notes were
allocated between the 2007 Notes and the related common stock based upon the
relative fair value, which resulted in the allocation of $58,333 to the common
stock and $291,667 to the 2007 Notes. The $58,333 was recorded as a
discount to the 2007 Notes and as additional paid in capital. The
debt discount was being amortized over the term of the 2007 Notes using the
effective interest method.
We evaluated the application of SFAS
133 and EITF 00-19 for the 2007 Notes and concluded these instruments were not
required to be accounted for as derivatives. We also evaluated the
application of EITF 98-05, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,"
and EITF 00-27, "Application of Issue No. 98-5 to Certain Convertible
Instruments" and concluded that the conversion option was a beneficial
conversion feature with intrinsic value. After allocation of the
proceeds between the 2007 Notes and the common stock, the conversion option had
an intrinsic value of $58,333. This resulted in an additional
discount to be amortized over the term of the 2007 Notes as additional interest
expense using the effective interest method. The original issue
discount rate was 53.83%.
During May 2008, we exchanged 37,100
shares of our Series B Preferred in full satisfaction of our obligation under
the notes to pay $350,000 of principal and $21,000 of interest, with each share
of such preferred stock being automatically convertible into 28.58 shares of our
common stock, for an aggregate of 1,060,318 shares of our common
stock. The Series B Preferred will automatically convert into shares
of our Common Stock upon the effectiveness of the Charter
Amendment.
NOTE
5. PREFERRED
STOCK AND COMMON STOCK
Preferred
Stock
Certain
of our outstanding (i) convertible promissory notes, in the aggregate principal
amount of $965,000 and bearing interest at 12% per annum from September 1, 2007
and (ii) convertible promissory notes, in the aggregate principal amount of
$350,000 and bearing interest of 10% per annum, due October 31, 2008, were
exchanged for shares of our Series A and Series B Preferred stock in
full satisfaction of our obligations under the notes including, without
limitation, the repayment of principal and accrued unpaid interest
thereon.
Pursuant
to the exchange transaction, we issued 99,395 shares of Series A Preferred in
exchange for the redemption of $965,000 of principal and $28,950 of accrued
interest on the 12% notes, with each share of such preferred stock being
automatically convertible into 20 shares of our common stock, for an aggregate
of 1,987,900 shares of our common stock. Additionally, we issued
37,100 shares of Series B Preferred in exchange for the redemption of $350,000
of principal and $21,000 of accrued interest on the 10% notes, with each share
of such preferred stock being automatically convertible into 28.58 shares of our
common stock, for an aggregate of 1,060,318 shares of our common
stock. The Series A and Series B Preferred stock will automatically
convert into shares of our common stock upon the effectiveness of the Charter
Amendment. The 12% notes matured on February 28, 2008 and the 10%
notes were due to mature on October 31, 2008.
Common
Stock
On August 21, 2007, we issued 100,000
shares of common stock with a value of $45,000 to a non-employee as compensation
for services rendered.
On September 4, 2007, we issued
89,248 shares of common stock in lieu of cash in payment of $44,624 of accrued
and current period interest to noteholders who chose to redeem their
notes. (See Note 4.)
On September 4, 2007, we issued
218,000 shares of common stock with a value of $98,100 as consideration to those
noteholders who chose to extend the maturity date of their notes to February 28,
2008. (See Note 4.)
On September 17, 2007, we issued
100,000 shares of common stock with a value of $45,000 to a non-employee as
compensation for services rendered.
On September 19, 2007, our Board of
Directors approved the issuance of 150,000 shares of common stock with a value
of $55,500 to a former member of our Board of Directors as compensation for
assuming the role of Chief Executive Officer.
On November 1, 2007, we issued
200,004 shares of common stock with a relative fair market value of $58,333 to
purchasers of $350,000 of our newly issued convertible notes. (See
Note 4.)
On November 7, 2007, we issued
310,435 shares of common stock in lieu of cash in payment of $155,215 of accrued
interest to holders of convertible notes issued in 2006 who chose to extend the
maturity date of their notes through February 28, 2008. (See Note
4.)
On March 4, 2008, our Board of
Directors and the holders of a majority of the Company's outstanding shares of
common stock, approved an increase in the number of authorized common shares
that the Company may issue to 149,000,000 shares. As of the date
hereof, the number of shares of common stock that the Company may issue is
24,000,000, pending the effectiveness of the Charter Amendment.
On March 6, 2008, we issued 130,449
shares of common stock in lieu of cash in payment of $65,221 of accrued and
current period interest to holders of our 2006 Notes. (See Note
4.)
Pursuant
to restricted stock agreements entered into with Robert P. Munn, our Chief
Executive Officer and Carl A. Chase, our Chief Financial Officer, we have agreed
upon the effectiveness of the Charter Amendment to grant restricted stock to
each of Messrs. Munn and Chase. Mr. Munn is to receive 1,500,000
shares and Mr. Chase is to receive 1,125,000 shares of our Common Stock, each
which vests equally as to one-third of the shares over a two year period,
commencing on the effectiveness of the Charter Amendment and each of the first
and second year anniversary of the grant dates. We valued the
restricted stock issuances on the grant date of their respective restricted
stock agreements, May 22, 2008, at $0.52 per share and recorded compensation
expense for Mr. Munn of $301,671 and Mr. Chase of $226,254 for the vested
portion of their restricted stock awards. In addition, we
represent on our consolidated balance sheets and consolidated statement of
changes in stockholders’ deficit the issuance 580,137 shares of the restricted
stock to Mr. Munn and 435,103 shares of restricted stock to Mr.
Chase.
NOTE
6. GRANTS
OF WARRANTS AND OPTIONS
Effective
July 1, 2006, we adopted the fair value recognition provisions of Statement of
Financial Accounting Standard 123(R) “
Share-Based Payment”
(“SFAS
123(R)”) using the modified prospective transition method. In
addition, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 107 “
Share-Based
Payment
” (“SAB 107”) in March 2005, which provides supplemental SFAS
123(R) application guidance based on the views of the SEC. Under the
modified prospective transition method, compensation cost recognized in the
fiscal year ended June 30, 2007, includes: (a) compensation cost for all
share-based payments granted prior to, but not yet vested as of July 1, 2006,
based on the grant date fair value estimated in accordance with the original
provisions of SFAS No. 123, and (b) compensation cost for all share-based
payments granted beginning July 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of SFAS 123(R). In
accordance with the modified prospective transition method, results for prior
periods have not been restated.
We use
the Black-Scholes option-pricing model to estimate option fair values. The
option-pricing model requires a number of assumptions, of which the most
significant are: expected stock price volatility, the expected pre-vesting
forfeiture rate and the expected option term (the amount of time from the grant
date until the options are exercised or expire).
Volatilities
are based on the historical volatility of our closing common stock
price. Expected term of options and warrants granted represents the
period of time that options and warrants granted are expected to be
outstanding. The risk-free rate for periods within the contractual
life of the options and warrants is based on the comparable U.S. Treasury rates
in effect at the time of each grant. The weighted average grant-date
fair value of options granted during the years ended June 30, 2008 and 2007, was
$2.26 and $3.56, respectively. The weighted average grant date fair
value of warrants granted during the years ended June 30, 2008 and 2007 was
$2.36 and $4.39, respectively. There have been no options or warrants
exercised during the period May 12, 2006 through June 30, 2008.
None of the stock options or warrants
listed below are exercisable until such time as we file our Articles of
Amendment to our Articles of Incorporation with the State of Nevada to increase
our authorized shares of common stock from the current authorized of 24,000,000
shares to 149,000,000 shares.
O
n
December 28, 2006, we granted two non-employees warrants to purchase up to an
aggregate of 1,500,000 shares of our common stock at an exercise price of $0.25
per share for services rendered. The options vested immediately and terminate on
December 28, 2011. The fair value of the warrants was determined utilizing the
Black-Scholes stock option valuation model. The significant assumptions used in
the valuation were: the exercise price as noted above; the market value of our
common stock on December 28, 2006, $0.25; expected volatility of 105%; risk free
interest rate of 4.69%; and a term of five years. The fair value of the warrants
was $294,722 at December 28, 2006 and was recorded as share based
compensation.
On May
22, 2007, we granted three non-employees warrants to purchase up to an aggregate
of 1,050,000 shares of our common stock at an exercise price of $0.30 per share
for services rendered. The warrants vested immediately and terminate on May 22,
2012. The fair value of the warrants was determined utilizing the Black-Scholes
option-pricing model. The significant assumptions used in the valuation were:
the exercise price as noted above; the market value of our common stock on May
22, 2007, $0.30; expected volatility of 160%; risk free interest rate of 4.76%;
and a term of five years. The fair value of the warrants was $294,623 at May 22,
2007 and was recorded as share based compensation.
On October 26, 2007, we granted 250,000 employee options and 1,000,000 warrants
to two non-employees to purchase up to an aggregate of 1,250,000 shares of
our common stock at an exercise price of $0.35 per share for services
rendered. The options and warrants vested immediately and terminate
on October 26, 2012. The fair value of the options and warrants of
$362,822, which was expensed immediately due to the vesting provisions and the
lack of a future service requirement, was determined utilizing the Black-Scholes
option-pricing model. The significant assumptions used in the
valuation were: the exercise price as noted above; the market value of ABC's
common stock on October 26, 2007, $0.35; expected volatility of 170%; risk free
interest rate of 4.04%; and an expected term of 2.5 years. Due to the
limited trading history of our common stock, the volatility assumption was
estimated by averaging the volatility of two active companies that have
operations similar to ours. The warrants qualify as “plain vanilla”
warrants under the provisions of Staff Accounting Bulletin No. 107 ("SAB 107")
and, due to limited warrant exercise data available to us, the term was
estimated pursuant to the provisions of SAB 107.
On
December 19, 2007, we granted our former CEO, options to purchase up to 500,000
shares of our common stock at an exercise price of $0.35 per share for services
rendered. The options vested immediately and terminate on December
19, 2012. The fair value of the options of $124,997, which was
expensed immediately due to the vesting provisions and the lack of a future
service requirement, was determined utilizing the Black-Scholes option-pricing
model. The significant assumptions used in the valuation were: the
exercise price as noted above; the market value of ABC's common stock on
December 19, 2007, $0.30; expected volatility of 177%; risk free interest rate
of 3.46%; and a term of 2.5 years. Due to the limited trading history
of our common stock, the volatility assumption was estimated by averaging the
volatility of two active companies that have operations similar to
ours. The options qualify as “plain vanilla” options under the
provisions of Staff Accounting Bulletin No. 107 ("SAB 107") and, due to limited
option exercise data available to us, the term was estimated pursuant to the
provisions of SAB 107.
On December 19, 2007, we granted two
non-employees warrants to purchase up to an aggregate of 1,100,000 shares of our
common stock at an exercise price of $0.35 per share for services
rendered. The warrants vested immediately and terminate on December
19, 2012. The fair value of the warrants of $274,993, which was
expensed immediately due to the vesting provisions and the lack of a future
service requirement, was determined utilizing the Black-Scholes option-pricing
model. The assumptions and term utilized in the valuation were
identical to those described above for valuation of the options granted to our
former CEO on December 19, 2007.
On February 28, 2008, we granted our
former CEO, additional options to purchase up to 250,000 shares of our common
stock at an exercise price of $0.54 per share for services
rendered. The options vested immediately and terminate on February
27, 2013. The fair value of the options of $114,425, which was
expensed immediately due to the vesting provisions and the lack of a future
service requirement, was determined utilizing the Black-Scholes option-pricing
model. The significant assumptions used in the valuation were: the
exercise price as noted above; the market value of ABC's common stock on
February 28, 2007, $0.54; expected volatility of 178%; risk free interest rate
of 2.73%; and a term of 2.5 years. Due to the limited trading history
of our common stock, the volatility assumption was estimated by averaging the
volatility of two active companies that have operations similar to
ours. The options qualify as “plain vanilla” options under the
provisions of Staff Accounting Bulletin No. 107 ("SAB 107") and, due to limited
option exercise data available to us, the term was estimated pursuant to the
provisions of SAB 107.
On February 28, 2008,
we granted a non-employee warrant to purchase up to an aggregate of 3,300,000
shares of our common stock at an exercise price of $0.54 per share for services
rendered. The warrants vested immediately and terminate on February
27, 2013. The fair value of the warrants of $1,510,408, which was
expensed immediately due to the vesting provisions and the lack of a future
service requirement, was determined utilizing the Black-Scholes option-pricing
model. The assumptions and term utilized in the valuation were
identical to those described above for valuation of the options granted to our
former CEO on February 28, 2008.
As part
of our employment agreement with Mr. Munn, our CEO, we granted stock options,
exercisable for up to 500,000 shares of our common stock, at an exercise price
of $0.52 per share, which option vests with respect to these shares on the
effectiveness of the Articles of Amendment to the Articles of Incorporation,
500,000 shares, at an exercise price of $0.57 per share, which option vests on
May 22, 2009, and 500,000 shares, at an exercise price of $0.62 per share, which
option vests on May 22, 2010. The fair value of the $0.52 options of
$232,369, which was expensed immediately due to the vesting provisions; the
$0.57 options of $252,090 which is being amortized over the one year vesting
period and the $0.62 options of $254,215 which is being amortized over the two
year vesting period, was determined using the Black-Scholes option-pricing
model. The significant assumptions used in the valuation were: (i)
for the $0.52 options; the exercise price, the market value of our Common Stock
on May 22, 2007, $0.52; expected volatility of 169%; risk free interest rate of
3.52%; and a term of 3.5 years; (ii) for the $0.57 options; the exercise price,
the market value of our Common Stock on May 22, 2007, $0.52; expected volatility
of 216%; risk free interest rate of 3.52%; and a term of 4.0; and (iii) for the
$0.62 options; the exercise price, the market value of our Common Stock on May
22, 2007, $0.52; expected volatility of 216%; risk free interest rate of 3.52%;
and a term of 4.5 years. The options qualify as “plain vanilla”
options under the provisions of Staff Accounting Bulletin No. 107 ("SAB 107")
and, due to limited option exercise data available to us, the term was estimated
pursuant to the provisions of SAB 107.
As part of our employment agreement
with Mr. Chase, our CFO, we granted stock options, exercisable for up to 375,000
shares of our common stock, at an exercise price of $0.52 per share, which
option vests with respect to these shares on the effectiveness of the Articles
of Amendment to the Articles of Incorporation, 375,000 shares, at an exercise
price of $0.57 per share, which option vests on May 22, 2009, and 375,000
shares, at an exercise price of $0.62 per share, which option vests on May 22,
2010. The fair value of the $0.52 options of $174,277, which was
expensed immediately due to the vesting provisions; the $0.57 options of
$189,068 which is being amortized over the one year vesting period and the $0.62
options of $190,661 which is being amortized over the two year vesting period,
was determined using the Black-Scholes option-pricing model. The
assumptions and term utilized in the valuation were identical to those described
above for valuation of the options granted to our CEO on May 22,
2008.
As part of a commission due to the
investment banking firm that identified the holders of the Convertible
Debentures, we have agreed to grant warrants, exercisable for up to 225,000
shares of our Common Stock, at an exercise price of $0.33 per
share. The warrants vested immediately and terminate on May 22,
2013. The fair value of the warrants of $111,192, which was
capitalized as deferred financing costs to be amortized over the life of the
Debentures using the effective interest rate method, was determined
utilizing the Black-Scholes option-pricing model. The significant
assumptions used in the valuation were: the exercise prices as noted above; the
market value of ABC's common stock on May 22, 2008, $0.52; expected volatility
of 216%; risk free interest rate of 3.24%; and a term of 2.5
years. The options qualify as “plain vanilla” options under the
provisions of Staff Accounting Bulletin No. 107 ("SAB 107") and, due to limited
option exercise data available to us, the term was estimated pursuant to the
provisions of SAB 107.
Due to
the limited trading history of our common stock, the volatility assumption was
estimated by using the volatility of two active companies that have operations
similar to ours.
A summary
of stock option transactions for the years ended June 30, 2008 and 2007 is
as follows:
|
|
2008
|
|
|
2007
|
|
|
|
Options
|
|
|
Wtd.
Avg.
Exercise
Price
|
|
|
Options
|
|
|
Wtd.
Avg.
Exercise
Price
|
|
Outstanding
beginning of year
|
|
|
150,000
|
|
|
$
|
0.30
|
|
|
|
--
|
|
|
$
|
--
|
|
Granted
|
|
|
3,625,000
|
|
|
$
|
0.52
|
|
|
|
150,000
|
|
|
$
|
0.30
|
|
Exercised
|
|
|
--
|
|
|
$
|
--
|
|
|
|
--
|
|
|
$
|
--
|
|
Forfeited
|
|
|
--
|
|
|
$
|
--
|
|
|
|
--
|
|
|
$
|
--
|
|
Outstanding
end of year
|
|
|
3,775,000
|
|
|
$
|
0.51
|
|
|
|
150,000
|
|
|
$
|
0.30
|
|
Exercisable
end of year
|
|
|
2,025,000
|
|
|
$
|
0.44
|
|
|
|
150,000
|
|
|
$
|
0.30
|
|
Weighted
average fair value of options granted
|
|
|
|
|
|
$
|
2.26
|
|
|
|
|
|
|
$
|
3.56
|
|
At June
30, 2008, the range of exercise prices and weighted average remaining
contractual life of outstanding options was $0.30 to $0.62 and 4.75 years,
respectively.
A summary
of warrant transactions for the years ended June 30, 2008 and 2007 is as
follows:
|
|
2008
|
|
|
2007
|
|
|
|
Warrants
|
|
|
Wtd.
Avg.
Exercise
Price
|
|
|
Warrants
|
|
|
Wtd.
Avg.
Exercise
Price
|
|
Outstanding
beginning of year
|
|
|
3,500,000
|
|
|
$
|
0.32
|
|
|
|
1,100,000
|
|
|
$
|
0.43
|
|
Granted
|
|
|
8,625,000
|
|
|
$
|
0.42
|
|
|
|
2,400,000
|
|
|
$
|
0.27
|
|
Exercised
|
|
|
--
|
|
|
$
|
--
|
|
|
|
--
|
|
|
$
|
--
|
|
Forfeited
|
|
|
--
|
|
|
$
|
--
|
|
|
|
--
|
|
|
$
|
--
|
|
Outstanding
end of year
|
|
|
12,125,000
|
|
|
$
|
0.39
|
|
|
|
3,500,000
|
|
|
$
|
0.32
|
|
Exercisable
end of year
|
|
|
12,125,000
|
|
|
$
|
0.39
|
|
|
|
3,500,000
|
|
|
$
|
0.32
|
|
Weighted
average fair value of warrants granted
|
|
|
|
|
|
$
|
2.36
|
|
|
|
|
|
|
$
|
4.39
|
|
At June
30, 2008, the range of exercise prices and weighted average remaining
contractual life of outstanding warrants was $0.05 to $0.60 and 3.8 years,
respectively.
NOTE
7.
INCOME TAXES
ABC uses the liability method, where
deferred tax assets and liabilities are determined based on the expected future
tax consequences of temporary differences between the carrying amounts of assets
and liabilities for financial and income tax reporting
purposes. During fiscal years ended June 30, 2008,and 2007, ABC
incurred net losses and, therefore, has no tax liability. The net
deferred tax asset generated by the loss carry-forward has been fully
reserved. The cumulative net operating loss carry-forward is
approximately $2,684,552 at June 30, 2008.
At June 30, 2008 and 2007, deferred
tax assets consisted of the following:
|
2008
|
|
2007
|
|
Deferred
tax assets:
|
|
|
|
|
Net
operating loss
|
$
939,593
|
|
$
|
465,622
|
|
Less:
valuation allowance
|
(939,593)
|
|
|
(465,622
|
)
|
Net
deferred tax assets
|
$
--
|
|
$
|
--
|
|
The net operating loss will expire
beginning in 2027. The valuation allowance increased by $473,971
during the year ended June 30, 2008.
NOTE
8. SUBSEQUENT
EVENTS
Acquisition
of Voyager Gas Corporation
On May
22, 2008, we entered into a Stock Purchase and Sale Agreement (the “Voyager
Agreement”) with Voyager Gas Holdings, L.P. (“Seller”) and Voyager Gas
Corporation (“Voyager”). On September 2, 2008, we completed our
purchase of all of the outstanding capital stock of Voyager Gas Corporation, the
owner of interests in oil and gas lease blocks located in Duval County, Texas,
including working and other interests in oil and gas leases, wells, and
properties, together with rights under related operating, marketing, and service
contracts and agreements, seismic exploration licenses and rights, and personal
property, equipment and facilities (the "Voyager Acquisition"). Upon
the completion of the Voyager Acquisition, Voyager Gas Corporation became a
wholly-owned subsidiary of our Company. Our newly acquired
subsidiary’s properties consist of approximately 14,300 net acres located in
Duval County, Texas, or the Duval County Properties, as defined and more
particularly described elsewhere in this annual report under “
Item 2. Description of
Properties
.” The purchase price also included a proprietary
3-D seismic data base covering a majority of the property.
The purchase price
paid in the Voyager Acquisition consisted of cash consideration of $35.0
million, plus 10,000 newly issued shares of our preferred stock designated as
Series D preferred stock (the “Series D Preferred”), having an agreed upon value
of $7.0 million. Upon the effectiveness of an amendment to our
Articles of Incorporation increasing the number of shares of Common Stock that
we may issue (the “Charter Amendment”), the Series D Preferred will
automatically convert into 17.5 million shares of our Common Stock, as provided
by the Certificate of Designation with respect to the Series D Preferred filed
with the State of Nevada on August 27, 2008.
CIT
Credit Facility
On
September 2, 2008, we entered into (i) a First Lien Credit Agreement (the
“Revolving Loan”) among the Company, CIT Capital USA Inc. (“CIT Capital”), as
Administrative Agent and the lenders named therein and party thereto (the
“Lenders”) and (ii) a Second Lien Term Loan Agreement (the “Term Loan”) among
the Company, CIT Capital and the Lenders. The Revolving Loan and Term
Loan are collectively referred to herein as the “CIT Credit
Facility.”
The
Revolving Loan provides for a $50.0 million senior secured revolving credit
facility which is subject to an initial borrowing base of $14.0 million, or an
amount determined based on semi-annual review of our proved oil and gas
reserves. As of September 4, 2008, we had borrowed $11.5 million
under the Revolving Loan to finance the Voyager Acquisition, to repay the
related bridge loan and transaction expenses, and to fund capital expenditures
generally. Monies advanced under the Revolving Loan mature in three
years and bear interest at a rate equal to LIBOR plus 1.75% to 2.50% based upon
a percentage of funds advanced against the Revolving Loan as it relates to the
borrowing base.
The Term
Loan provides for a one-time advance to us of $22.0 million. We drew
down the full amount on September 2, 2008 to finance the Voyager Acquisition and
to repay the related bridge loan and transaction expenses. Monies
borrowed under the Term Loan mature in three and one-half years and bear
interest at a rate equal to LIBOR plus 5% during the first twelve months after
closing and LIBOR plus 7.50%, thereafter.
All of
the oil and natural gas properties acquired in the Voyager Acquisition are
pledged as collateral for the CIT Credit Facility. We have also agreed not to
pay dividends on our Common Stock.
As further
consideration for entering into the CIT Credit Facility, we issued to CIT
Capital a warrant exercisable at an exercise price of $0.35 per share for up to
24,199,996 shares of our common stock, or approximately 27.5% of our common
stock on a fully-diluted basis at September 2, 2008. The warrant is
exercisable for a period of seven years, contains certain anti-dilution
provisions and is not exercisable until the effective date of the Charter
Amendment.
Related
Party Transaction
On August 20, 2008, we issued 500
shares of our newly designated Series C Preferred (defined below) to Alan D.
Gaines, our largest stockholder and a director of our Company, in exchange for
the cancellation of a promissory note made by us in favor of Mr. Gaines, in the
principal amount of $50,000. In addition to these shares of Series C
Preferred, on August 20, 2008 we also issued an additional 500 shares of Series
C Preferred to Mr. Gaines for cash consideration of $50,000. The
Series C Preferred are automatically redeemable by our Company at the rate of
$100 for every one (1) share of Series C Preferred being redeemed upon the
closing of a debt or equity financing whereby we realize gross proceeds in
excess of $5,000,000.
Shares of preferred stock, $.001 par
value, designated out of our authorized “blank check preferred stock” by our
Board as “Series C Preferred Stock” (the “Series C Preferred”), have the rights,
preferences, powers, restrictions and obligations set forth in the Certificate
of Designation filed with the Secretary of State of the State of Nevada on
August 20, 2008, including the automatic redemption rights referenced
above. However, holders of the Series C Preferred are not entitled to
any dividends, preemption, voting, conversion or other rights as a stockholder
of our Company.
(b)
Financial Statements of Voyager Gas
Corporation
Voyager
Gas Corporation
|
Financial
Statements Together With
|
|
Report
of Independent Auditors
|
|
December
31, 2007 and 2006
|
Montgomery
Coscia Greilich LLP
Certified
Public Accountants
Montgomery
Coscia Greilich LLP
Certified
Public Accountants
2701
Dallas Parkway, Suite 300
Plano,
Texas 75093
972.378.0400
p
972.378.0416
f
Thomas A.
Montgomery, CPA
Matthew
R. Coscia, CPA
Paul E.
Greilich, CPA
Jeanette
A. Musacchio
James M.
Lyngholm
Chris C.
Johnson, CPA
INDEPENDENT
AUDITOR’S REPORT
To the
Stockholders of
Voyager
Gas Corporation
We have
audited the accompanying balance sheets of Voyager Gas Corporation as of
December 31, 2007 and 2006 and the related statements of operations, changes in
stockholders’ equity and cash flows for the years then ended. 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 auditing standards generally accepted in
the United States of America. 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 consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Voyager Gas Corporation as of
December 31, 2007 and 2006, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/ MONTGOMERY
COSCIA GREILICH LLP
Montgomery
Coscia Greilich LLP
Plano,
Texas
May 8,
2008
VOYAGER
GAS CORPORATION
BALANCE
SHEETS
DECEMBER
31, 2007 AND 2006
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
--
|
|
|
$
|
631,755
|
|
Trade
accounts receivable, net of allowance of $0
|
|
|
1,791,519
|
|
|
|
1,811,319
|
|
Option
contracts
|
|
|
205,639
|
|
|
|
1,445,403
|
|
Other
current assets
|
|
|
7,933
|
|
|
|
6,333
|
|
Total
current assets
|
|
|
2,005,091
|
|
|
|
3,894,810
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
38,798,447
|
|
|
|
52,763,865
|
|
Other
long-term assets
|
|
|
16,728
|
|
|
|
17,714
|
|
Total
assets
|
|
$
|
40,820,266
|
|
|
$
|
56,676,389
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Bank
overdraft
|
|
$
|
316,239
|
|
|
$
|
--
|
|
Accounts
payable and accrued expenses
|
|
|
1,517,811
|
|
|
|
1,190,080
|
|
Credit
facility, current
|
|
|
--
|
|
|
|
15,000,000
|
|
Deferred
taxes
|
|
|
--
|
|
|
|
511,506
|
|
Income
taxes currently payable
|
|
|
771,352
|
|
|
|
--
|
|
Total
current liabilities
|
|
|
2,605,402
|
|
|
|
16,701,586
|
|
|
|
|
|
|
|
|
|
|
Credit
facility, long-term
|
|
|
15,116,287
|
|
|
|
29,965,589
|
|
Deferred
income taxes
|
|
|
4,876,267
|
|
|
|
369,447
|
|
Total
liabilities
|
|
|
22,597,956
|
|
|
|
47,036,622
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock, $.01 par value, 10 shares authorized, issued
|
|
|
|
|
|
|
|
|
and
outstanding
|
|
|
--
|
|
|
|
--
|
|
Additional
paid-in capital
|
|
|
7,140,000
|
|
|
|
7,140,000
|
|
Retained
earnings
|
|
|
11,082,310
|
|
|
|
2,499,767
|
|
Total
stockholders’ equity
|
|
|
18,222,310
|
|
|
|
9,639,767
|
|
Total
liabilities and stockholders' equity
|
|
$
|
40,820,266
|
|
|
$
|
56,676,389
|
|
The
accompanying notes are an integral part of these financial
statements.
VOYAGER
GAS CORPORATION
STATEMENTS
OF OPERATIONS
FOR
THE YEARS MONTHS ENDED DECEMBER 31, 2007 AND 2006
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Oil
and gas revenue
|
|
$
|
10,739,352
|
|
|
$
|
15,370,438
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
Lease
operating expenses
|
|
|
2,464,653
|
|
|
|
2,936,265
|
|
Production
tax
|
|
|
836,349
|
|
|
|
721,510
|
|
Exploration
expenses
|
|
|
9,399
|
|
|
|
391,482
|
|
Depletion,
depreciation and amortization
|
|
|
4,834,352
|
|
|
|
5,440,973
|
|
Interest
expense
|
|
|
979,832
|
|
|
|
1,928,909
|
|
General
and administrative
|
|
|
970,701
|
|
|
|
785,059
|
|
Total
costs and expenses
|
|
|
10,095,286
|
|
|
|
12,204,198
|
|
Income
from operations
|
|
|
644,066
|
|
|
|
3,166,240
|
|
|
|
|
|
|
|
|
|
|
Other
income:
|
|
|
|
|
|
|
|
|
Gain
on sale of lease
|
|
|
12,702,811
|
|
|
|
--
|
|
Income
before provision for income taxes
|
|
|
13,346,877
|
|
|
|
3,166,240
|
|
Income
tax expense
|
|
|
(4,764,334
|
)
|
|
|
(805,503
|
)
|
Net
income
|
|
$
|
8,582,543
|
|
|
$
|
2,360,737
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
VOYAGER
GAS CORPORATION
STATEMENTS
OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Common
Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2005
|
|
|
10
|
|
|
$
|
--
|
|
|
$
|
7,140,000
|
|
|
$
|
139,030
|
|
|
$
|
7,279,030
|
|
Net
income
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
2,360,737
|
|
|
|
2,360,737
|
|
Balance,
December 31, 2006
|
|
|
10
|
|
|
|
--
|
|
|
|
7,140,000
|
|
|
|
2,499,767
|
|
|
|
9,639,767
|
|
Net
income
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
8,582,543
|
|
|
|
8,582,543
|
|
Balance,
December 31, 2007
|
|
|
10
|
|
|
$
|
--
|
|
|
$
|
7,140,000
|
|
|
$
|
11,082,310
|
|
|
$
|
18,222,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
VOYAGER
GAS CORPORATION
STATEMENTS
OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$
|
8,582,543
|
|
|
$
|
2,360,737
|
|
Adjustments
to reconcile net income to cash provided
by
operating activities:
|
|
|
|
|
|
Depletion,
depreciation and amortization
|
|
|
4,834,351
|
|
|
|
5,440,973
|
|
Deferred
income taxes
|
|
|
3,995,314
|
|
|
|
805,503
|
|
Gain
on sale of leased property
|
|
|
(12,702,811
|
)
|
|
|
370,188
|
|
Unrealized
derivative (gain) loss
|
|
|
1,239,764
|
|
|
|
(1,868,442
|
)
|
(Increase)
decrease in operating assets:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
19,800
|
|
|
|
(1,194,427
|
)
|
Other
current assets
|
|
|
(1,600
|
)
|
|
|
853
|
|
Other
long-term assets
|
|
|
986
|
|
|
|
(7866
|
)
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
327,731
|
|
|
|
400,440
|
|
Income
taxes payable
|
|
|
771,352
|
|
|
|
(11,572
|
)
|
Net
cash provided by operating activities
|
|
|
7,067,430
|
|
|
|
6,296,387
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of oil and gas properties
|
|
|
(7,195,160
|
)
|
|
|
(44,656,768
|
)
|
Proceeds
from sale of oil and gas properties
|
|
|
29,029,038
|
|
|
|
--
|
|
Net
cash provided by (used in) investing activities
|
|
|
21,833,878
|
|
|
|
(44,656,768
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
(repayments) proceeds from long-term debt
|
|
|
(29,849,302
|
)
|
|
|
39,172,563
|
|
Bank
overdraft
|
|
|
316,239
|
|
|
|
(180,427
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(29,533,063
|
)
|
|
|
38,992,136
|
|
Net
increase (decrease) in cash
|
|
|
(631,755
|
)
|
|
|
631,755
|
|
Cash
at beginning of year
|
|
|
631,755
|
|
|
|
--
|
|
Cash
at end of year
|
|
$
|
--
|
|
|
$
|
631,755
|
|
Supplemental
information:
|
|
|
Cash
paid for interest
|
$ 1,255,923
|
$ 1,635,908
|
Cash
paid for income taxes
|
$ --
|
$ --
|
The
accompanying notes are an integral part of these financial
statements.
Voyager
Gas Corporation
Notes to
Financial Statements
December
31, 2007 and 2006
Note
1. Organization
Voyager
Gas Corporation (the “Company”) was formed in May 2004 as a Delaware
corporation. The Company is engaged in the acquisition, development,
production, and sale of oil and gas. The Company sells its oil and
gas products primarily to domestic pipelines and refineries.
Note
2. Summary of Significant Accounting Policies
A summary
of the Company’s significant accounting policies consistently applied in the
preparation of the accompanying financial statements as follows:
Basis
of Accounting and Revenue Recognition
The financial statements are prepared
on the accrual basis of accounting in accordance with generally accepted
accounting principles. Revenues and their related costs are
recognized when petroleum products are delivered to the customer in accordance
with the underlying sales contract.
Cash
and Cash Equivalents
For
purposes of the statement of cash flows, the Company considers all short-term
securities with an original maturity of three months or less to be cash
equivalents. There were no cash equivalents at December 31, 2007 or
2006.
Accounts
Receivable
At
December 31, 2007 and 2006, accounts receivable consisted primarily of accrued
oil and gas revenue. The Company extends unsecured credit to its
customers in the ordinary course of business but mitigates the associated credit
risk by performing credit checks and actively pursuing past due accounts. The
company does not have a history of uncollectible accounts, and did not record an
allowance for bad debt at December 31, 2007 or 2006.
Property
and Equipment
The
Company capitalizes all exploratory well costs until a determination is made
that the well has found proved reserves or is deemed noncommercial, in which
case the well costs are charged to exploration expense.
The Company uses the successful efforts method of accounting for oil and gas
producing activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that find proved reserves, to
drill and equip development wells and related asset retirement costs are
capitalized. Costs to drill exploratory wells that do not find proved reserves,
geological and geophysical costs, and costs of carrying and retaining unproved
properties are expensed. Exploratory expenses and unsuccessful
exploratory well costs were $9,399 and $391,482 for the year ended December 31,
2007 and 2006 respectively.
Voyager
Gas Corporation
Notes to
Financial Statements, Continued
Note
2. Summary of Significant Accounting Policies, continued
Property
and Equipment, continued
Unproved
oil and gas properties that are individually significant are periodically
assessed for impairment of value and a loss is recognized at the time of
impairment by providing an impairment allowance. There were no
unproved oil and gas properties at December 31, 2007 and 2006.
Other
property and equipment consists of lease and well equipment, automobiles and
office furniture and equipment. Major renewals and improvements are
capitalized while the costs of repairs and maintenance are charged to expense as
incurred. The costs of assets retired or disposed and the related
accumulated depreciation are removed from the accounts, and the resulting gain
or loss is reflected in operations.
The
Company provides depreciation, depletion and amortization of their investment in
producing oil and natural gas properties on the units-of-production method,
based upon qualified internal reserve engineer estimates of recoverable oil and
natural gas reserves from the property. Depreciation expense for other property
and equipment is depreciated on a straight-line basis over the estimated useful
lives of three to seven years.
Impairment
of Assets
The
Company evaluates producing property costs for impairment and reduces such costs
to fair value if the sum of expected undiscounted future cash flows is less than
net book value pursuant to SFAS 144,
Accounting for the Impairment or
Disposal of Long-Lived Assets
. The Company assesses impairment of
non-producing leasehold costs and undeveloped mineral and royalty interests
periodically on a property-by-property basis. The Company charges any impairment
in value to expense in the period incurred. There was no impairment
loss recognized for the year ended December 31, 2007 and 2006.
Capitalized
Interest
The
Company capitalizes interest on significant investments in unproved properties
that were not being currently depreciated, depleted or amortized and on which
exploration activities were in progress. Interest is capitalized
using the weighted average interest rate on our outstanding
borrowings. There was no capitalized interest for the years ended
December 31, 2007 and 2006.
Income
taxes
Provisions
for income taxes are based on taxes payable or refundable for the current year
and deferred taxes on temporary differences between the amount of taxable income
and pretax financial income and between the tax bases of assets and liabilities
and their reported amounts in the financial statements. Deferred tax assets and
liabilities are included in the financial statements at currently enacted income
tax rates applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled as prescribed in SFAS 109,
Accounting for Income Taxes.
As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income
taxes.
Voyager
Gas Corporation
Notes to
Financial Statements, Continued
Note
2. Summary of Significant Accounting Policies, continued
Use
of estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant
estimates include the evaluation of proved reserves and related depletion
expense as well as changes in the value of unrealized option
contracts.
Environmental
Matters
Environmental
expenditures are expensed or capitalized, as appropriate, depending on their
future economic benefit. Expenditures that relate to an existing condition
caused by past operations, and that do not have future economic benefit are
expensed. Liabilities related to future costs are recorded on an undiscounted
basis when environmental assessments and/or remediation activities are probable
and the costs can be reasonably estimated. Any insurance recoveries are recorded
as assets when received. There are no estimated environmental
liabilities at December 31, 2007 and 2006.
Abandonment
Costs
SFAS 143
requires that the fair value of a liability for a retirement obligation be
recognized in the period in which the liability is incurred. For oil
and gas properties, this is the period in which an oil and gas well is acquired
or drilled. The asset retirement obligation is capitalized as part of
the carrying amount of our oil and gas properties at its discounted fair
value. The liability is then accreted each period until the liability
is settled or the well is sold, at which time the liability is
reversed. The Company has not recorded an abandonment cost liability
at December 31, 2007 or 2006 because it believes that any costs, net of related
salvage value, are insignificant.
Option
Contracts
The
Company enters into option contracts to reduce the effect of the volatility of
price changes on the oil and gas products sold. Realized gains and
losses on option contracts are included as component of oil and gas
sales. Unrealized gains and losses due to changes in fair value of
option contracts not qualifying for designation as either cash flow or fair
value hedges that occur prior to maturity are also included as a component of
oil and gas sales.
The
Company has established the fair value of all derivative instruments using
estimates determined by financial risk management professionals engaged to
execute hedging activities on behalf of the Company. These values are
based upon, among other things, futures prices, volatility, time to maturity and
credit risk. The values the Company reports in their financial statements change
as these estimates are revised to reflect actual results, changes in market
conditions or other factors.
Voyager
Gas Corporation
Notes to
Financial Statements, Continued
Note
2. Summary of Significant Accounting Policies, continued
Option
Contracts, continued
SFAS 133,
Accounting for Derivative
Instruments and Hedging Activities
, establishes accounting and reporting
standards requiring that derivative instruments (including certain derivative
instruments embedded in other contracts) be recorded at fair value and included
in the balance sheet as assets or liabilities. The accounting for changes in the
fair value of a derivative instrument depends on the intended use of the
derivative and the resulting designation, which is established at the inception
of a derivative. For derivative instruments designated as cash flow hedges,
changes in fair value, to the extent the hedge is effective, are recognized in
other comprehensive income until the derivative instrument is sold or recognized
in earnings. Any change in the fair value resulting from ineffectiveness, as
defined by SFAS 133, is recognized in oil and gas sales.
No option
contracts expense or benefit was recognized in other comprehensive income in
2007 or 2006. For the years ended December 31, 2007 and 2006,
realized gains (losses) of $630,539 and ($267,852) and unrealized gains (losses)
of ($1,239,764) and $1,868,442 were recorded, net, in oil and gas sales,
respectively.
Concentrations
and Credit Risk
Financial
instruments that potentially subject us to a concentration of credit risk
consist principally of cash, accounts receivable and our option contract
instruments. The Company places its cash with high credit quality financial
institutions and has not experience any such losses. The Company sells its oil
and natural gas to one customer. The Company places their option
contract instruments with financial institutions and other firms that they
believe have high credit ratings.
Note
3. Acquisitions and Sales of Lease Properties
Voyager
South Texas Holdings, L.L.C. (“VST”) was formed in May 2006, in order to
facilitate a Section 1031 exchange of certain oil gas lease
properties. The Company borrowed and guaranteed funds under its
credit facility to fund the acquisition of the Duval Lease property through
VST.
The acquisition of the Duval Lease was
recorded by allocating the total purchase consideration to the fair values of
the net assets acquired as follows:
Net
Assets Acquired:
|
|
|
|
Proven,
developed properties
|
|
$
|
22,065,415
|
|
Proven,
undeveloped properties
|
|
|
13,298,590
|
|
Tangible
drilling costs
|
|
|
5,508,670
|
|
Total
purchase price
|
|
$
|
40,872,675
|
|
Voyager
Gas Corporation
Notes to
Financial Statements, Continued
Note
3. Acquisitions and Sales of Lease Properties, continued
To
complete the IRS Section 1031 exchange, the Company executed an asset sale
agreement in January 2007 to sell the Garza Lease property for approximately
$29,000,000 in cash, resulting in a gain of approximately
$13,000,000. Included in property and equipment is approximately
$16,000,000 of assets held for sale at December 31, 2006. In February
2007, VST was merged with the Company. As a result of the economic
dependencies and debt guarantees between the Company and VST at December 31,
2006, the financial statements of VST have been combined for financial statement
presentation purposes. All inter-company profits, transactions and
balances have been eliminated in the combined financial statements.
The IRS
Section 1031 exchange did not qualify for like-kind exchange accounting for book
purposes because the counter parties were not the same and the earnings process
was completed with each leg of the exchange.
Note
4. Property and Equipment
Property
and equipment consisted of the following at December 31, 2007 and
2006:
|
|
2007
|
|
|
2006
|
|
Non-producing
leaseholds
|
|
$
|
13,298,591
|
|
|
$
|
14,025,344
|
|
Producing
leaseholds and related costs
|
|
|
33,287,330
|
|
|
|
43,691,392
|
|
Lease
and well equipment
|
|
|
1,125,349
|
|
|
|
1,522,491
|
|
Furniture,
fixtures, and office equipment
|
|
|
25,400
|
|
|
|
24,650
|
|
Automobiles
|
|
|
28,688
|
|
|
|
28,688
|
|
|
|
|
47,765,358
|
|
|
|
59,292,565
|
|
Accumulated
depreciation, depletion and amortization
|
|
|
(8,966,911
|
)
|
|
|
(6,528,700
|
)
|
|
|
$
|
38,798,447
|
|
|
$
|
52,763,865
|
|
Depreciation,
depletion and amortization expense for the years ended December 31, 2007 and
2006 was $4,834,351 and $5,440,973, respectively.
Note
5. Credit Facility
On March
22, 2005, the Company entered into a three-year asset-based borrowing facility
with Bank of Texas (the “Credit Facility”). The total commitment
under the Credit Facility is $75,000,000. The borrowing base is set
by the bank every March 1
st
and
September 1
st
of each
year and is based on the present value of the future net income accruing to the
property. The borrowing base was $17,000,000 at December 31,
2007.
Voyager
Gas Corporation
Notes to
Financial Statements, Continued
Note
5. Credit Facility, continued
Interest
on the Credit Facility is payable quarterly and is based upon the prime rate or
LIBOR rate, in each case plus an applicable margin, at the option of the Company
(6.72% and 7.94% weighted average interest rates at December 31, 2007 and 2006
respectively). On December 31, 2007, the Company had $15,116,287 in
outstanding borrowings and $1,833,713 available for borrowings. The
Company is subject to a floating unused borrowing base commitment fee of 0.25%
to 0.50% (0.375% and 0.500% at December 31, 2007 and 2006). The
Credit Facility matures on March 22, 2009 at which time all unpaid principal and
interest are due. The Credit Facility is collateralized by all the
Company’s assets. The entire principal balance outstanding at
December 31, 2007 is due at maturity.
The
Credit Facility contains various affirmative and negative
covenants. These covenants, among other things, limit additional
indebtedness, the sale of assets, and require the Company to meet certain
financial ratios. Specifically, the Company must maintain a current
ratio greater than or equal to 1.0, an interest coverage ratio greater than or
equal to 3.0 and a funded debt to EBITDA less than 3.5. As of
December 31, 2007, the Company was in compliance with regard to the
covenants.
The
Credit Facility requires the Company to enter into option contracts to hedge
crude oil prices. The Credit Facility allows for additional lines of
credit not to exceed $500,000 securing obligations of the Company under its
option contracts with other parties.
Note
6. Income Taxes
The components of the provision for
income taxes at December 31, 2007 and 2006:
|
|
2007
|
|
|
2006
|
|
Current
income tax expense
|
|
$
|
(769,019
|
)
|
|
$
|
-
|
|
Deferred
income tax expense
|
|
|
(3,995,315
|
)
|
|
|
(805,503
|
)
|
Total
income tax expense
|
|
$
|
(4,764,334
|
)
|
|
$
|
(805,503
|
)
|
The
Company’s effective income tax rate differed from the federal statutory rate as
follows at December 31, 2007 and 2006.
|
|
2007
|
|
|
2006
|
|
U.S.
Federal statutory rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State
Income Tax
|
|
|
0.80
|
%
|
|
|
0.50
|
%
|
Permanent
differences
|
|
|
(0.00
|
)%
|
|
|
(10.30
|
)%
|
Valuation
allowance
|
|
|
(0.00
|
)%
|
|
|
(0.00
|
)%
|
Other
|
|
|
1.00
|
%
|
|
|
1.23
|
%
|
|
|
|
35.8
|
%
|
|
|
25.43
|
%
|
Voyager
Gas Corporation
Note
6. Income Taxes, continued
Temporary differences in the amount
of assets and liabilities recognized for financial reporting and tax purposes
create deferred tax assets and liabilities, which are summarized as follows at
December 31, 2007 and 2006.
|
|
2007
|
|
|
2006
|
|
Current
deferred tax assets (liabilities):
|
|
|
|
|
|
|
Unrealized
loss on option contracts
|
|
$
|
-
|
|
|
$
|
(500,977
|
)
|
Other
|
|
|
-
|
|
|
|
(10,529
|
)
|
|
|
$
|
-
|
|
|
$
|
(511,506
|
)
|
|
|
|
|
|
|
|
|
|
Non-current
deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Unrealized
loss on option contracts
|
|
$
|
(71,274
|
)
|
|
$
|
-
|
|
Depletion,
depreciation, and amortization
|
|
|
(249,428
|
)
|
|
|
(279,066
|
)
|
Net
operating losses
|
|
|
-
|
|
|
|
829,332
|
|
Intangible
drilling costs
|
|
|
(109,509
|
)
|
|
|
(919,713
|
)
|
Gain
on sale of oil and gas properties
|
|
|
(4,402,795
|
)
|
|
|
-
|
|
Other
|
|
|
(43,261
|
)
|
|
|
-
|
|
|
|
$
|
(4,876,267
|
)
|
|
$
|
(369,447
|
)
|
Note
7. Lease Commitments
The
Company presently leases office space under a non-cancelable operating
lease. Rent expense for the years ended December 31, 2007 and 2006
was $20,404 was $28,912, respectively. Future minimum lease payments
under this lease as of December 31, 2007 are as follows:
Years
ending December 31,
|
|
|
|
2008
|
|
|
15,754
|
|
|
|
$
|
15,754
|
|
Note
8. Related Party Transactions
During
2004, the Company entered into an Advisory Services, Reimbursement, and
Indemnification Agreement (“The Agreement”) with Natural Gas Partners (NGP), a
related party. NGP is a majority partner in Voyager Gas Holdings LLP
which owns one hundred percent of the Company’s common stock. This
Agreement states that the Company will pay NGP $75,000 per year in advisory fees
beginning in May 2005 until the earlier of (i) the date of dissolution of the
company or (ii) the second anniversary of an initial public offering by the
company. During 2007 and 2006 the total amounts paid to NGP for
advisory fees was $75,000 and $75,000 respectively.
NGP also
serves as a director of the Company and was paid $30,000 and $30,000 in
director’s fees during 2007 and 2006 respectively.
Voyager
Gas Corporation
Notes to
Financial Statements, Continued
Note
9. Common Stock
Authorized
and outstanding shares of common stock are as follows:
|
|
Authorized
|
|
|
Outstanding
|
|
|
Par
Value
|
|
Common
stock
|
|
|
10
|
|
|
|
10
|
|
|
$
|
0.01
|
|
Holders
of the common stock have exclusive voting rights and powers at shareholders’
meetings, including the exclusive right to notice of such shareholders’
meetings.
Note
10. Oil and Natural Gas Producing Activities (Unaudited)
The
estimates of proved reserves are made using available geological and reservoir
data as well as production performance data. These estimates are
reviewed annually and revised, either upward or downward, as warranted by
additional data. Revisions are necessary due to changes in, among
other things, reservoir performance, prices, economic conditions and
governmental restrictions as well as changes in the expected recovery rates
associated with infill drilling. Decreases in prices, for example,
may cause a reduction in some proved reserves due to reaching economic limits
sooner.
The
supplementary oil and gas data that follows is presented in accordance with SFAS
No. 69, “Disclosures about Oil and Gas Producing Activities” and includes (1)
capitalized costs, costs incurred and results of operations related to oil and
gas producing activities, (2) net proved oil and gas reserves, and (3) a
standardized measure of discounted future net cash flows relating to proved oil
and gas reserves. During July 2006 the Company acquired the Duval
Lease located in Duval County, Texas and in January 2007 sold its Garza Lease
located in Garza County, Texas.
Proved
oil and gas reserves estimates, all of which are located in the United States,
were prepared solely by Company engineers and is the responsibility of
management. The reserve reports were prepared in accordance with
guidelines established by the Securities and Exchange Commission and,
accordingly, were based on existing economic and operating
conditions. Crude oil prices in effect as of the date of the reserve
reports were used without any escalation. Operating costs, production
and ad valorem taxes and future development costs were based on current costs
with no escalation.
There are
numerous uncertainties inherent in estimating quantities of proved reserves and
in projecting the future rates of production and timing of development
expenditures. The following reserve data represents estimates only
and should not be construed as being exact. Moreover, the present
values should not be construed as the current market value of the Company’s
crude oil and natural gas reserves or the costs that would be incurred to obtain
equivalent reserves.
Voyager
Gas Corporation
Notes to
Financial Statements, Continued
Note
10. Oil and Natural Gas Producing Activities (Unaudited),
continued
The
changes in proved reserves for the years ended December 31, 2007 and 2006 were
as follows:
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Oil
|
|
|
Natural
Gas
|
|
|
Oil
|
|
|
Natural
Gas
|
|
|
|
(Mbbls)
|
|
|
(MMcf)
|
|
|
(Mbbls)
|
|
|
(MMcf)
|
|
Beginning
balance
|
|
|
2,881
|
|
|
|
10,453
|
|
|
|
2,800
|
|
|
|
382
|
|
Revisions
|
|
|
659
|
|
|
|
7,461
|
|
|
|
(446
|
)
|
|
|
(537
|
)
|
Extensions/discoveries
|
|
|
242
|
|
|
|
2,718
|
|
|
|
320
|
|
|
|
38
|
|
Purchases
in place
|
|
|
--
|
|
|
|
--
|
|
|
|
342
|
|
|
|
11,562
|
|
Sales
in place
|
|
|
(2,564
|
)
|
|
|
(351
|
)
|
|
|
--
|
|
|
|
--
|
|
Production
|
|
|
(46
|
)
|
|
|
(1,068
|
)
|
|
|
(135
|
)
|
|
|
(992
|
)
|
Ending
balance
|
|
|
1,172
|
|
|
|
19,213
|
|
|
|
2,881
|
|
|
|
10,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
capitalized costs relating to oil and gas producing activities and the related
accumulated depletion, depreciation and amortization as of December 31, 2007 and
2006 were as follows:
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Non-producing
leaseholds
|
|
$
|
13,298,591
|
|
|
$
|
14,025,344
|
|
Proved
properties
|
|
|
34,412,679
|
|
|
|
45,213,883
|
|
Accumulated
depletion and depreciation
|
|
|
(8,936,029
|
)
|
|
|
(6,510,338
|
)
|
Net
capitalized costs
|
|
$
|
38,775,241
|
|
|
$
|
52,728,889
|
|
|
|
|
|
|
|
|
|
The
following table reflects total costs incurred, both capitalized and expensed,
for oil and gas property acquisitions and exploration and development activities
during the years ended December 31, 2007 and 2006.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Property
acquisition costs:
|
|
|
|
|
|
|
Proved
|
|
$
|
--
|
|
|
$
|
27,574,085
|
|
Unproved
|
|
|
--
|
|
|
|
13,298,590
|
|
Total
acquisition costs
|
|
|
--
|
|
|
|
40,872,675
|
|
Unproved
acreage
|
|
|
--
|
|
|
|
--
|
|
Development
costs
|
|
|
7,195,160
|
|
|
|
3,784,093
|
|
Exploration
costs
|
|
|
9,399
|
|
|
|
391,482
|
|
Total
|
|
$
|
7,204,559
|
|
|
$
|
45,048,250
|
|
|
|
|
|
|
|
|
|
Voyager
Gas Corporation
Notes to
Financial Statements, Continued
Note
10. Oil and Natural Gas Producing Activities (Unaudited),
continued
Net
revenues from production in the following schedule include only the revenues
from the production and sale of oil and natural gas. The income tax
expense is calculated by applying the current statutory tax rates to the
revenues after deducting costs, which include DD&A
allowances. The results of operations exclude general office overhead
and interest expense attributable to oil and gas activities. Results
of operations from producing operations for the years ended December 31, 2007
and 2006 are set forth below:
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Oil
and gas sales
|
|
$
|
10,739,352
|
|
|
$
|
15,370,438
|
|
Oil
and gas production costs
(1)
|
|
|
(3,301,002
|
)
|
|
|
(3,657,775
|
)
|
Exploration
expense
|
|
|
(9,399
|
)
|
|
|
(391,482
|
)
|
Depletion
expense
|
|
|
(4,824,336
|
)
|
|
|
(5,430,957
|
)
|
Gross
profit
|
|
|
2,604,615
|
|
|
|
5,890,224
|
|
Income
tax expense
|
|
|
(911,615
|
)
|
|
|
(2,061,578
|
)
|
Results
from producing activities
|
|
$
|
1,693,000
|
|
|
$
|
3,828,646
|
|
|
|
|
|
|
|
|
|
(1)
|
Production
costs consist of oil and natural gas operations expense and production and
ad valorem taxes.
|
The
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proved Oil and Natural Gas Reserves (“Standardized Measure”) do not
purport to present the fair market value of the Company’s crude oil and natural
gas properties. An estimate of such value should consider, among
other factors, anticipated future prices of crude oil and natural gas, the
probability of recoveries in excess of existing proved reserves, the value of
probable reserves and acreage prospects, and perhaps different discount
rates. It should be noted that estimates of reserve quantities,
especially from new discoveries, are inherently imprecise and subject to
substantial revision.
Under the
Standardized Measure, future cash inflows were estimated by applying year-end
prices to the estimated future production of the year-end
reserves. These prices have varied widely and have a significant
impact on both the quantities and value of the proved reserves as reduced prices
cause wells to reach the end of their economic life much sooner and also make
certain proved undeveloped locations uneconomical, both of which reduce
reserves.
At
December 31, 2007, the present value (discounted at 10%) of future net cash
flows from the Company’s proved reserves was $87.8 million, (stated in
accordance with the regulations of the SEC and the FASB). The
increase of $14.6 million or 20% in 2007 compared to 2006 is primarily due to
higher oil and natural gas prices at year-end 2007 and successful exploration
and development, partially offset by the sale of the Company’s West Texas
properties.
Voyager
Gas Corporation
Notes to
Financial Statements, Continued
Note
10. Oil and Natural Gas Producing Activities (Unaudited),
continued
The
present value of future net cash flows does not purport to be an estimate of the
fair market value of the Company’s proved reserves. An estimate of
fair value would also take into account, among other things, anticipated changes
in future prices and costs, the expected recovery of reserves in excess of
proved reserves and a discount factor more representative of the time value of
money and the risks inherent in producing oil and gas. Significant
changes in estimated reserve volumes or commodity prices could have a material
effect on the Company’s financial statements.
The
standardized measure of discounted cash flows related to proved oil and gas
reserves at December 31, 2007 and 2006 were as follows:
|
|
Years
Ended December 31,
|
|
(Dollars
in thousands)
|
|
2007
|
|
|
2006
|
|
Future
revenues
|
|
$
|
211,713
|
|
|
$
|
215,413
|
|
Future
production costs
|
|
|
(51,454
|
)
|
|
|
(70,592
|
)
|
Future
development costs
|
|
|
(12,350
|
)
|
|
|
(11,395
|
)
|
Future
net cash flows
|
|
|
147,909
|
|
|
|
133,426
|
|
10%
discount factor
|
|
|
(60,147
|
)
|
|
|
(60,143
|
)
|
Standardized
measure of discounted future net cash
relating
to proved reserves
|
|
$
|
87,762
|
|
|
$
|
73,284
|
|
|
|
|
|
|
|
|
|
Future
cash flows are computed by applying year-end prices, adjusted for location and
quality differentials on a property-by-property basis, to year-end quantities of
proved reserves, except in those instances where fixed and determinable price
changes are provided by contractual arrangements at year-end. The
discounted future cash flow estimates do not include the effects of the
Company’s derivative instruments.
The
following table reflects the year-end prices for crude oil and natural
gas.
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Average
crude oil price per Bbl
|
|
$
|
71.40
|
|
|
$
|
52.41
|
|
Average
natural gas price per Mcf
|
|
$
|
6.66
|
|
|
$
|
6.16
|
|
Voyager
Gas Corporation
Notes to
Financial Statements, Continued
Note
10. Oil and Natural Gas Producing Activities (Unaudited),
continued
The
primary changes in the standardized measure of discounted future net cash flows
for the years ended December 31, 2007 and 2006 were as follows:
|
|
Years
Ended December 31,
|
|
(Dollars
in thousands)
|
|
2007
|
|
|
2006
|
|
Standardized
measure, beginning balance
|
|
$
|
73,284
|
|
|
$
|
42,196
|
|
Oil
and gas sales, net of costs
|
|
|
(7,228
|
)
|
|
|
(11,713
|
)
|
Discoveries,
extensions and transfers
|
|
|
9,964
|
|
|
|
3,788
|
|
Purchase
of minerals in place
|
|
|
--
|
|
|
|
47,313
|
|
Sales
of minerals in place
|
|
|
(32,402
|
)
|
|
|
--
|
|
Changes
in estimates of future development costs
|
|
|
4,520
|
|
|
|
(4,045
|
)
|
Net
changes in prices
|
|
|
11,035
|
|
|
|
13,453
|
|
Development
costs incurred during the period
|
|
|
7,195
|
|
|
|
3,784
|
|
Revisions
of estimates and other
|
|
|
21,395
|
|
|
|
(21,492
|
)
|
Standardized
measure, ending balance
|
|
$
|
87,763
|
|
|
$
|
73,284
|
|
|
|
|
|
|
|
|
|
Voyager
Gas Corporation
VOYAGER
GAS CORPORATION
BALANCE
SHEETS
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
708,367
|
|
|
$
|
--
|
|
Restricted
cash
|
|
|
801,525
|
|
|
|
--
|
|
Trade
accounts receivable, net of allowance of $0
|
|
|
576,214
|
|
|
|
1,791,519
|
|
Option
contracts
|
|
|
--
|
|
|
|
205,639
|
|
Other
current assets
|
|
|
9,124
|
|
|
|
7,933
|
|
Total
current assets
|
|
|
2,095,230
|
|
|
|
2,005,091
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
37,347,690
|
|
|
|
38,798,447
|
|
Other
long-term assets
|
|
|
48,365
|
|
|
|
16,728
|
|
Total
assets
|
|
$
|
39,491,285
|
|
|
$
|
40,820,266
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Bank
overdraft
|
|
$
|
--
|
|
|
$
|
316,239
|
|
Accounts
payable and accrued expenses
|
|
|
71,823
|
|
|
|
1,517,811
|
|
Credit
facility – short-term
|
|
|
12,239,193
|
|
|
|
--
|
|
Option
contracts
|
|
|
1,037,295
|
|
|
|
--
|
|
Earnest
money deposit
|
|
|
800,000
|
|
|
|
--
|
|
Income
taxes currently payable
|
|
|
689,115
|
|
|
|
771,352
|
|
Total
current liabilities
|
|
|
14,837,426
|
|
|
|
2,605,402
|
|
|
|
|
|
|
|
|
|
|
Credit
facility, long-term
|
|
|
--
|
|
|
|
15,116,287
|
|
Deferred
income taxes
|
|
|
4,876,267
|
|
|
|
4,876,267
|
|
Total
liabilities
|
|
|
19,713,693
|
|
|
|
22,597,956
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
Common
stock, $.01 par value, 10 shares authorized, 10 shares
issued
|
|
|
|
|
|
|
|
|
and
outstanding at June 30, 2008 and December 31, 2007
|
|
|
--
|
|
|
|
--
|
|
Additional
paid-in capital
|
|
|
7,140,000
|
|
|
|
7,140,000
|
|
Retained
earnings
|
|
|
12,637,592
|
|
|
|
11,082,310
|
|
Total
shareholders’ equity
|
|
|
19,777,592
|
|
|
|
18,222,310
|
|
Total
liabilities and shareholders' equity
|
|
$
|
39,491,285
|
|
|
$
|
40,820,266
|
|
See
accompanying notes to unaudited financial statements.
VOYAGER
GAS CORPORATION
STATEMENTS
OF OPERATIONS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(Unaudited)
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas revenue
|
|
$
|
3,430,047
|
|
|
$
|
2,983,026
|
|
|
$
|
6,828,541
|
|
|
$
|
4,596,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
operating expenses
|
|
|
141,410
|
|
|
|
706,128
|
|
|
|
2,326,418
|
|
|
|
1,299,093
|
|
Production
taxes
|
|
|
267,445
|
|
|
|
182,847
|
|
|
|
370,338
|
|
|
|
366,739
|
|
Depletion,
depreciation and amortization
|
|
|
768,289
|
|
|
|
1,709,034
|
|
|
|
1,699,409
|
|
|
|
4,824,815
|
|
Interest
expense
|
|
|
152,207
|
|
|
|
259,364
|
|
|
|
401,707
|
|
|
|
308,224
|
|
General
and administrative
|
|
|
274,333
|
|
|
|
254,952
|
|
|
|
475,387
|
|
|
|
498,204
|
|
Total
costs and expenses
|
|
|
1,603,684
|
|
|
|
3,112,325
|
|
|
|
5,273,259
|
|
|
|
7,297,075
|
|
Income
(loss) from operations
|
|
|
1,826,363
|
|
|
|
(129,299
|
)
|
|
|
1,555,282
|
|
|
|
(2,700,327
|
)
|
Gain
on sale of oil and gas properties
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
12,702,811
|
|
Income
(loss) before provision for income taxes
|
|
|
1,826,363
|
|
|
|
(129,299
|
)
|
|
|
1,555,282
|
|
|
|
10,002,484
|
|
Income
tax expense
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
4,402,795
|
|
Net
income (loss)
|
|
$
|
1,826,363
|
|
|
$
|
(129,299
|
)
|
|
$
|
1,555,282
|
|
|
$
|
5,599,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to unaudited financial statements.
VOYAGER
GAS CORPORATION
STATEMENTS
OF CASH FLOWS
FOR
THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(Unaudited)
|
|
Six
Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,555,282
|
|
|
$
|
5,599,689
|
|
Adjustments
to reconcile net income to cash provided
by
operating activities:
|
|
|
|
|
|
Depletion,
depreciation and amortization
|
|
|
1,699,409
|
|
|
|
4,824,815
|
|
Deferred
income taxes
|
|
|
--
|
|
|
|
4,402,794
|
|
Gain
on sale of oil and gas properties
|
|
|
--
|
|
|
|
(12,702,811
|
)
|
Unrealized
derivative loss
|
|
|
1,242,934
|
|
|
|
942,460
|
|
Non-cash
investment interest
|
|
|
(1,525
|
)
|
|
|
--
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,215,305
|
|
|
|
626,278
|
|
Other
current assets
|
|
|
(1,191
|
)
|
|
|
--
|
|
Other
long-term assets
|
|
|
(31,637
|
)
|
|
|
(1,364
|
)
|
Accounts
payable and accrued liabilities
|
|
|
(1,445,988
|
)
|
|
|
370,698
|
|
Income
taxes payable
|
|
|
(82,237
|
)
|
|
|
--
|
|
Net
cash provided by operating activities
|
|
|
4,150,352
|
|
|
|
4,062,559
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Investment
in oil and gas properties
|
|
|
(248,652
|
)
|
|
|
(2,966,495
|
)
|
Net
proceeds from sale of oil and gas properties
|
|
|
--
|
|
|
|
29,029,038
|
|
Net
cash provided by (used in) investing activities
|
|
|
(248,652
|
)
|
|
|
26,062,543
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
(repayments) proceeds from long-term debt
|
|
|
(2,877,094
|
)
|
|
|
(30,756,857
|
)
|
Repayment
of bank overdraft
|
|
|
(316,239
|
)
|
|
|
--
|
|
Net
cash used in financing activities
|
|
|
(3,193,333
|
)
|
|
|
(30,756,857
|
)
|
Net
increase (decrease) in cash
|
|
|
708,367
|
|
|
|
(631,755
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
--
|
|
|
|
631,755
|
|
Cash
and cash equivalents, end of period
|
|
$
|
708,367
|
|
|
$
|
--
|
|
Supplemental
cash flow disclosures:
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
400,724
|
|
|
$
|
624,672
|
|
Taxes
paid
|
|
$
|
82,237
|
|
|
$
|
--
|
|
See
accompanying notes to unaudited financial statements.
VOYAGER
GAS CORPORATION
Notes to
Unaudited Financial Statements
March 31,
2008 and 2007
Note
1. Organization
The
accompanying unaudited financial statements of Voyager Gas Corporation (the
"Company" or "Voyager") have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information. They do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for a complete financial presentation. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments considered necessary for a fair presentation, have been included in
the accompanying unaudited financial statements. Operating results
for the periods presented are not necessarily indicative of the results that may
be expected for the full year.
These
unaudited financial statements should be read in conjunction with the Company’s
annual audited financial statements and footnotes for the years ended December
31, 2007 and 2006, which are included as part of this Form 8-K.
Voyager
was formed in May 2004 as a Delaware corporation. The Company is
engaged in the acquisition, development, production, and sale of oil and natural
gas and its operations are conducted primarily in Duval County,
Texas The Company sells its oil and natural gas products primarily to
domestic pipelines and refineries.
Note
2. Acquisitions
and Sales of Lease Properties
Voyager
South Texas Holdings, L.L.C. (“VST”) was formed in May 2006, in order to
facilitate a Section 1031 exchange of certain oil and gas lease
properties. The Company borrowed and guaranteed funds under its
credit facility to fund the acquisition of the Duval County, Texas lease
property through VST. The acquisition of the Duval lease was recorded
by allocating the total purchase consideration to the fair values of the net
assets acquired as follows:
Net
assets acquired:
|
|
|
|
Proven,
developed properties
|
|
$
|
22,065,415
|
|
Proven,
undeveloped properties
|
|
|
13,298,590
|
|
Tangible
drilling costs
|
|
|
5,508,670
|
|
Total
purchase price
|
|
$
|
40,872,675
|
|
To
complete the IRS Section 1031 exchange, the Company executed an asset sale
agreement in January 2007 to sell the Garza lease property located in Garza
County, Texas for approximately $29,000,000 in cash, resulting in a gain of
approximately $13,000,000. In February 2007, VST was merged with the
Company. As a result of the economic dependencies and debt guarantees
between the Company and VST at December 31, 2006, the financial statements of
VST have been combined for financial statement presentation
purposes. All inter-company profits, transactions and balances have
been eliminated in the combined financial statements. The IRS Section
1031 exchange did not qualify for like-kind exchange accounting for book
purposes because the counter parties were not the same and the earnings process
was completed with each leg of the exchange.
On May
22, 2008, the Company and Voyager Gas Holdings, L.P. (“Seller”) entered into a
Stock Purchase and Sale Agreement (the “ABC Agreement”) with ABC Funding, Inc.,
a Nevada corporation, (“Buyer”). Pursuant to the ABC Agreement, as
amended on August 15, 2008 and September 2, 2008, on September 2, 2008, Seller
sold to Buyer all of the issued and outstanding shares of common stock of
Voyager Gas Corporation. Included in the sale were the Company’s
interests in its oil and gas field located in Duval County, Texas, including
working and other interests in oil and gas leases, wells, and properties,
together with rights under related operating, marketing, and service contracts
and agreements, seismic exploration licenses and rights, and personal property,
equipment, and facilities. The purchase price also included a
proprietary 3-D seismic data base covering a majority of the
property.
The sales price received in the sale
consisted of cash consideration of $35.0 million, plus 10,000 newly issued
shares of ABC’s preferred stock designated as Series D preferred stock, having
an agreed upon value of $7.0 million. Upon the effectiveness of an
amendment to ABC’s Articles of Incorporation increasing the number of shares of
common stock that it may issue, the Series D preferred stock will automatically
convert into 17.5 million shares of ABC’s common stock, as provided by the
Certificate of Designation with respect to the Series D preferred filed by ABC
Funding, Inc. with the State of Nevada on August 27, 2008.
Note
3. Property
and Equipment
Property
and equipment consisted of the following at June 30, 2008 and December 31,
2007:
|
|
June
30, 2008
|
|
|
December
31, 2007
|
|
Non-producing
leaseholds
|
|
$
|
13,299,340
|
|
|
$
|
13,298,591
|
|
Producing
leaseholds and related costs
|
|
|
34,661,332
|
|
|
|
34,412,679
|
|
Furniture,
fixtures and office equipment
|
|
|
24,650
|
|
|
|
25,400
|
|
Automobiles
|
|
|
28,688
|
|
|
|
28,688
|
|
|
|
|
48,014,010
|
|
|
|
47,765,358
|
|
Accumulated
depreciation, depletion and amortization
|
|
|
(10,666,320
|
)
|
|
|
(8,966,911
|
)
|
Net
property and equipment
|
|
$
|
37,347,690
|
|
|
$
|
38,798,447
|
|
|
|
|
|
|
|
|
|
Depreciation,
depletion and amortization expense for the six months ended June 30, 2008 and
2007, was $1,699,409 and $4,824,815, respectively.
Note
4. Credit
Facility
On March
22, 2005, the Company entered into a three-year asset-based borrowing facility
with Bank of Texas (the “Credit Facility”). The total commitment
under the Credit Facility is $75,000,000. The borrowing base is set
by the bank every March 1st and September 1st of each year and is based on the
present value of the future net income accruing to the property. The borrowing
base was $17,000,000 at June 30, 2008 and December 31, 2007.
Interest
on the Credit Facility is payable quarterly and is based upon the prime rate or
LIBOR rate, in each case plus an applicable margin, at the option of the
Company. On June 30, 2008, the Company had $12,239,193 in outstanding
borrowings and $4,760,807 available for borrowings. The Company is
subject to a floating unused borrowing base commitment fee of 0.25% to 0.50%
(0.375% at June 30, 2008). The Credit Facility matures on March 22,
2009, at which time all unpaid principal and interest are due. The
Credit Facility is collateralized by all the Company’s assets. The
entire principal balance outstanding at June 30, 2008, is due at
maturity. The Credit Facility contains various affirmative and
negative covenants. These covenants, among other things, limit
additional indebtedness, the sale of assets, and require the Company to meet
certain financial ratios. Specifically, the Company must maintain a
current ratio greater than or equal to 1.0, an interest coverage ratio greater
than or equal to 3.0 and a funded debt to EBITDA less than 3.5. As of
June 30, 2008, the Company was in compliance with regard to the
covenants. The Credit Facility requires the Company to enter into
option contracts to hedge crude oil and natural gas prices. The
Credit Facility allows for additional lines of credit not to exceed $500,000
securing obligations of the Company under its option contracts with other
parties.
Note
5. Lease Commitments
The
Company previously leased office space under a non-cancelable operating lease,
which lease expired on June 30, 2008. Rent expense for the six months
ended June, 2008 and 2007, was $14,120 and $14,785,
respectively. Future minimum lease payments under this lease as of
December 31, 2007 are as follows:
Years
ending December 31,
|
|
|
|
2008
|
|
$
|
15,754
|
|
Total
|
|
$
|
15,754
|
|
The Company entered into a new lease
agreement effective as of August 1, 2008, for a period of thirty-nine
months. The Company’s lease is for approximately 2,173 square feet at
an initial base monthly rental rate of $3,622 and increases to $3,712 for months
16 through 27 and $3,803 for the balance of the lease. The Company
will receive free rent for months seven through nine.
Note
6. Related
Party Transactions
During
2004, the Company entered into an Advisory Services, Reimbursement, and
Indemnification Agreement (“The Agreement”) with Natural Gas Partners (“NGP”), a
related party. NGP is a majority partner in Voyager Gas Holdings LLP
which owns one hundred percent (100%) of the Company’s common
stock. This Agreement states that the Company will pay NGP $75,000
per year in advisory fees beginning in May 2005 until the earlier of (i) the
date of dissolution of the company or (ii) the second anniversary of an initial
public offering by the company. During the six months ended June 30,
2008 and 2007, the total amounts paid to NGP for advisory fees was $37,500 in
each period. NGP also serves as a director of the Company and was
paid $15,000 in director’s fees in each of the six month periods ended June 30,
2008 and 2007.
(c)
Pro Forma Financial Information of ABC Funding,
Inc.
ABC
FUNDING, INC.
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The
following unaudited pro forma condensed consolidated financial statements and
related notes are presented to show the pro forma effects of the Voyager
Acquisition. The unaudited pro forma condensed consolidated statement
of operations for the fiscal years ended June 30, 2008 and 2007, are presented
to show income from continuing operations as if the Voyager Acquisition occurred
as of the beginning of each period. The unaudited pro forma condensed
balance sheet is based on the assumption that the Voyager Acquisition occurred
effective as of June 30, 2008.
Pro forma
data are based on assumptions and include adjustments as explained in the notes
to the unaudited pro forma condensed consolidated financial
statements. The pro forma data are not necessarily indicative of the
financial results that would have been attained had the Voyager Acquisition
occurred on the dates referenced above and should not be viewed as indicative of
operations in future periods. The unaudited pro forma condensed
consolidated financial statements should be read in conjunction with the notes
thereto of our Annual Report on Form 10-KSB for the year ended June 30, 2008 and
Voyager’s audited financial statements as of and for the years ended December
31, 2007 and 2006, and the unaudited financial statements as of and for the
six months ended June 30, 2008 and 2007, included elsewhere in this Information
Statement.
ABC
FUNDING, INC.
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
|
|
As
of June 30, 2008
|
|
|
|
ABC
Funding
|
|
|
Voyager
|
|
|
Adjustments
|
|
|
|
Pro
Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
12,158
|
|
|
$
|
708,367
|
|
|
$
|
32,990,000
|
|
(a)
|
|
$
|
382,364
|
|
|
|
|
|
|
|
|
|
|
|
|
(450,000
|
)
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,276,227
|
)
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(601,935
|
)
|
(d)
|
|
|
|
|
Restricted
cash
|
|
|
--
|
|
|
|
801,525
|
|
|
|
(751,525
|
)
|
(c)
|
|
|
50,000
|
|
Trade
accounts receivable
|
|
|
--
|
|
|
|
576,214
|
|
|
|
--
|
|
|
|
|
576,214
|
|
Prepaid
expenses and other current assets
|
|
|
31,215
|
|
|
|
9,124
|
|
|
|
75,000
|
|
(c)
|
|
|
115,339
|
|
Deferred
financing costs, net
|
|
|
143,472
|
|
|
|
--
|
|
|
|
(143,471
|
)
|
(b)
|
|
|
--
|
|
Total
current assets
|
|
|
186,845
|
|
|
|
2,095,230
|
|
|
|
(1,158,158
|
)
|
|
|
|
1,123,917
|
|
Oil
and natural gas properties, net
|
|
|
--
|
|
|
|
37,347,690
|
|
|
|
2,481,351
|
|
(c)
|
|
|
39,829,041
|
|
Fixed
assets, net
|
|
|
7,881
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
7,881
|
|
Acquisition
costs
|
|
|
976,284
|
|
|
|
--
|
|
|
|
(976,284
|
)
|
(c)
|
|
|
--
|
|
Deferred
financing costs, net
|
|
|
--
|
|
|
|
--
|
|
|
|
510,000
|
|
(a)
|
|
|
1,637,435
|
|
|
|
|
|
|
|
|
|
|
|
|
1,127,435
|
|
(d)
|
|
|
|
|
Other
assets
|
|
|
--
|
|
|
|
48,365
|
|
|
|
--
|
|
|
|
|
48,365
|
|
Total
assets
|
|
$
|
1,171,010
|
|
|
$
|
39,491,285
|
|
|
$
|
1,984,344
|
|
|
|
$
|
42,646,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
426,249
|
|
|
$
|
71,823
|
|
|
$
|
(32,000
|
)
|
(d)
|
|
$
|
466,072
|
|
Convertible
debt
|
|
|
25,000
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
25,000
|
|
Notes
payable
|
|
|
--
|
|
|
|
--
|
|
|
|
557,500
|
|
(d)
|
|
|
557,500
|
|
Senior secured
convertible debentures, net
|
|
|
121,638
|
|
|
|
--
|
|
|
|
(121,638
|
)
|
(b)
|
|
|
--
|
|
Credit
facility – short-term
|
|
|
--
|
|
|
|
12,239,193
|
|
|
|
(12,239,193
|
)
|
(c)
|
|
|
--
|
|
Option
contracts
|
|
|
--
|
|
|
|
1,037,295
|
|
|
|
--
|
|
|
|
|
1,037,295
|
|
Earnest
money deposit
|
|
|
--
|
|
|
|
800,000
|
|
|
|
(800,000
|
)
|
(c)
|
|
|
--
|
|
Derivative
liabilities
|
|
|
11,893,573
|
|
|
|
--
|
|
|
|
(1,060,366
|
)
|
(b)
|
|
|
34,060,982
|
|
|
|
|
|
|
|
|
|
|
|
|
23,227,775
|
|
(i)
|
|
|
|
|
Current
income taxes payable
|
|
|
--
|
|
|
|
689,115
|
|
|
|
(689,115
|
)
|
(c)
|
|
|
--
|
|
Total
current liabilities
|
|
|
12,466,460
|
|
|
|
14,837,426
|
|
|
|
8,842,963
|
|
|
|
|
36,146,849
|
|
Credit
facility – long-term
|
|
|
--
|
|
|
|
--
|
|
|
|
33,500,000
|
|
(a)
|
|
|
33,500,000
|
|
Deferred
income taxes
|
|
|
--
|
|
|
|
4,876,267
|
|
|
|
(4,876,267)
|
|
(c)
|
|
|
--
|
|
Total
liabilities
|
|
|
12,466,460
|
|
|
|
19,713,493
|
|
|
|
37,466,696
|
|
|
|
|
69,646,849
|
|
Shareholders'
equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
136
|
|
|
|
--
|
|
|
|
10
|
|
(b)
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
(c)
|
|
|
|
|
Common
stock
|
|
|
24,378
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
24,378
|
|
Additional
paid-in capital
|
|
|
769,318
|
|
|
|
7,140,000
|
|
|
|
1,549,277
|
|
(b)
|
|
|
9,318,585
|
|
|
|
|
|
|
|
|
|
|
|
|
(140,010
|
)
|
(c)
|
|
|
|
|
Retained
earnings (deficit)
|
|
|
(12,089,282
|
)
|
|
|
12,637,592
|
|
|
|
(960,754
|
)
|
(b)
|
|
|
(36,343,329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(12,703,110
|
)
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,227,775
|
)
|
(i)
|
|
|
|
|
Total
shareholders’ equity (deficit)
|
|
|
(11,295,450
|
)
|
|
|
19,777,592
|
|
|
|
(35,482,352
|
)
|
|
|
|
(27,000,210
|
)
|
Total
liabilities and shareholders' equity (deficit)
|
|
$
|
1,171,010
|
|
|
$
|
39,491,285
|
|
|
$
|
1,984,344
|
|
|
|
$
|
42,646,639
|
|
See notes
to unaudited pro forma condensed consolidated financial
statements.
ABC
FUNDING, INC.
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
|
|
Twelve
Months Ended June 30, 2008
|
|
|
|
ABC
Funding
|
|
|
Voyager
|
|
|
Adjustments
|
|
|
|
Pro
Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas revenue
|
|
$
|
--
|
|
|
$
|
12,971,145
|
|
|
$
|
-
|
|
|
|
$
|
12,971,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
operating expenses
|
|
|
--
|
|
|
|
3,491,978
|
|
|
|
--
|
|
|
|
|
3,491,978
|
|
Production
taxes
|
|
|
--
|
|
|
|
839,948
|
|
|
|
--
|
|
|
|
|
839,948
|
|
Exploration
expenses
|
|
|
--
|
|
|
|
9,399
|
|
|
|
--
|
|
|
|
|
9,399
|
|
Depletion,
depreciation and amortization
|
|
|
183
|
|
|
|
1,708,946
|
|
|
|
88,426
|
|
(j)
|
|
|
1,797,555
|
|
General
and administrative
|
|
|
4,052,178
|
|
|
|
947,884
|
|
|
|
5,000
|
|
(c)
|
|
|
5,005,062
|
|
Total
costs and expenses
|
|
|
4,052,361
|
|
|
|
6,998,155
|
|
|
|
93,426
|
|
|
|
|
11,143,942
|
|
Income
(loss) from operations
|
|
|
(4,052,361
|
)
|
|
|
5,972,990
|
|
|
|
(93,426
|
)
|
|
|
|
1,827,203
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
5,174
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
5,174
|
|
Interest
expense
|
|
|
(2,039,213
|
)
|
|
|
(1,073,315
|
)
|
|
|
(921,833
|
)
|
(b)
|
|
|
(6,369,295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(60,518
|
)
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(467,839
|
)
|
(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,806,577
|
)
|
(h)
|
|
|
|
|
Change
in fair value of derivatives
|
|
|
(3,657,671
|
)
|
|
|
--
|
|
|
|
(38,921
|
)
|
(b)
|
|
|
(3,696,592
|
)
|
Total
other
|
|
|
(5,691,710
|
)
|
|
|
(1,073,315
|
)
|
|
|
(3,295,688
|
)
|
|
|
|
(10,060,713
|
)
|
Income
(loss) before provision for income taxes
|
|
|
(9,744,071
|
)
|
|
|
4,899,675
|
|
|
|
(3,389,114
|
)
|
|
|
|
(8,233,510
|
)
|
Income
tax expense
|
|
|
--
|
|
|
|
(361,539
|
)
|
|
|
--
|
|
|
|
|
(361,539
|
)
|
Net
income (loss)
|
|
$
|
(9,744,071
|
)
|
|
$
|
4,538,136
|
|
|
$
|
(3,389,114
|
)
|
|
|
$
|
(8,595,049
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
23,067,241
|
|
|
|
|
|
|
|
|
|
|
|
|
23,067,241
|
|
See notes
to unaudited pro forma condensed consolidated financial
statements.
ABC
FUNDING, INC.
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
|
|
Twelve
Months Ended June 30, 2007
|
|
|
|
ABC
Funding
|
|
|
Voyager
|
|
|
Adjustments
|
|
|
|
Pro
Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas revenue
|
|
$
|
--
|
|
|
$
|
16,661,492
|
|
|
$
|
--
|
|
|
|
$
|
16,661,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
operating expenses
|
|
|
--
|
|
|
|
3,437,409
|
|
|
|
--
|
|
|
|
|
3,437,409
|
|
Production
taxes
|
|
|
--
|
|
|
|
994,493
|
|
|
|
--
|
|
|
|
|
994,493
|
|
Exploration
expenses
|
|
|
--
|
|
|
|
385,719
|
|
|
|
--
|
|
|
|
|
385,719
|
|
Depletion,
depreciation and amortization
|
|
|
--
|
|
|
|
9,646,288
|
|
|
|
550,491
|
|
(j)
|
|
|
10,196,779
|
|
General
and administrative
|
|
|
943,826
|
|
|
|
920,487
|
|
|
|
5,000
|
|
(c)
|
|
|
1,869,313
|
|
Total
costs and expenses
|
|
|
943,826
|
|
|
|
15,384,396
|
|
|
|
555,491
|
|
|
|
|
16,883,713
|
|
Income
(loss) from operations
|
|
|
(943,826
|
)
|
|
|
1,277,096
|
|
|
|
(555,491
|
)
|
|
|
|
(222,221
|
)
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
31,163
|
|
|
|
--
|
|
|
|
|
|
|
|
|
31,163
|
|
Interest
expense
|
|
|
(332,329
|
)
|
|
|
(2,070,380
|
)
|
|
|
(60,518
|
)
|
(c)
|
|
|
(3,190,585
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(467,839
|
)
|
(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(259,519
|
)
|
(g)
|
|
|
|
|
Gain
on sale of oil and gas properties
|
|
|
--
|
|
|
|
12,702,811
|
|
|
|
--
|
|
|
|
|
12,702,811
|
|
Total
other
|
|
|
(301,166
|
)
|
|
|
10,632,431
|
|
|
|
(787,876
|
)
|
|
|
|
9,543,389
|
|
Income
(loss) before provision for income taxes
|
|
|
(1,244,992
|
)
|
|
|
11,909,527
|
|
|
|
(1,343,367
|
)
|
|
|
|
9,321,168
|
|
Income
tax expense
|
|
|
--
|
|
|
|
(5,013,513
|
)
|
|
|
--
|
|
|
|
|
(5,013,513
|
)
|
Net
income (loss)
|
|
$
|
(1,244,992
|
)
|
|
$
|
6,896,014
|
|
|
$
|
(1,343,367
|
)
|
|
|
$
|
4,307,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
22,065,000
|
|
|
|
|
|
|
|
|
|
|
|
|
22,065,000
|
|
See notes
to unaudited pro forma condensed consolidated financial
statements.
ABC
FUNDING, INC.
NOTES
TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis
of Presentation
On
September 2, 2008, we consummated the Voyager Acquisition, whereby we purchased
all of the outstanding capital stock of Voyager Gas Corporation, the owner of
interests in oil and gas lease blocks located in Duval County, Texas, including
working and other interests in oil and gas leases, producing wells, and
properties, together with rights under related operating, marketing, and service
contracts and agreements, seismic exploration licenses and rights, and personal
property, equipment and facilities. The Voyager Acquisition was made
pursuant to the Purchase Agreement, as amended by the First Amendment to the
Stock Purchase and Sale Agreement dated August 15, 2008 and the Second Amendment
to the Stock Purchase and Sale Agreement dated September 2, 2008 among the
parties thereto.
The
purchase price paid in the Voyager Acquisition consisted of cash consideration
of $35.0 million and, as amended by the Second Amendment, 10,000 newly issued
shares of our preferred stock designated as Series D preferred stock (the
“Series D Preferred”), having an agreed upon value of $7.0
million. Upon the effectiveness of an amendment to our Articles of
Incorporation increasing the number of shares of Common Stock that we may issue
(the “Charter Amendment”), the Series D Preferred will automatically convert
into 17.5 million shares of our Common Stock.
The acquisition will be accounted for
in accordance with the provisions of Statement of Financial Standards (“SFAS”)
No. 141, “Business Combinations.” The total purchase price of
$42,000,000 will be allocated to the net tangible assets based on the estimated
fair values. No goodwill will be recorded as there will be no excess
of the purchase price over the net tangible assets to be acquired.
On
September 2, 2008, we entered into (i) a credit agreement (the “Revolving Loan”)
among the Company, CIT Capital USA Inc. (“CIT Capital”), as Administrative Agent
and the lender named therein and (ii) a second lien term loan agreement (the
“Term Loan”) among the Company, CIT Capital and the lender. The
Revolving Loan and Term Loan are collectively referred to herein as the “CIT
Credit Facility.”
The
Revolving Loan provides for a $50.0 million senior secured revolving credit
facility which is subject to an initial borrowing base of $14.0 million, or an
amount determined based on semi-annual review of our proved oil and gas
reserves. As of September 4, 2008, we had $11.5 million borrowed to
finance the Voyager Acquisition, to repay the related bridge loan and
transaction expenses, and to fund capital expenditures
generally. Monies advanced under the Revolving Loan mature in three
years and bear interest at a rate equal to LIBOR plus 1.75% to 2.50%, as the
case may be.
The Term
Loan provides for a one-time advance to us of $22.0 million. We drew
down the full amount on September 2, 2008 to finance the Voyager Acquisition and
to repay the related bridge loan and transaction expenses. Monies
borrowed under the Term Loan mature in three and one-half years and bear
interest at a rate equal to LIBOR plus 5% during the first twelve months after
closing and LIBOR plus 7.50%, thereafter.
The unaudited pro forma condensed
consolidated statement of operations for the twelve months ended June 30, 2008
and 2007, and the unaudited pro forma condensed consolidated balance sheet as of
June 30, 2008, are based on the consolidated financial statements of ABC
Funding, Inc. and Voyager Gas Corporation for the twelve months ended June
30, 2008 and 2007, and the adjustments and assumptions are described
below.
2. ABC/Voyager
Pro Forma Adjustments:
The unaudited pro forma financial
statements reflect the following adjustments:
a.
|
Record
the net proceeds from the CIT Credit Facility and CIT’s fees as deferred
financing costs to be amortized over the life of the loan, or three and
one-half years.
|
b.
|
Record
the cash payment of $450,000 principal amount to retire a portion of the
convertible debentures and conversion of $450,000 principal amount into
our Series E Preferred.
|
c.
|
Record
the cash payment of $35.0 million, as adjusted, pursuant to the Voyager
Acquisition and issuance of 10,000 shares of our Series D Preferred having
an agreed upon value of $7.0
million.
|
d.
|
Record
the commission due Global Hunter Securities LLC pursuant to the CIT
funding, the cash payment for a portion of the commission and the issuance
of a non-interest bearing promissory note due March 15, 2009, for the
balance.
|
e.
|
Record
amortization of deferred financing costs over the three and one-half year
term of the CIT Credit Facility for the twelve months ended June 30,
2007.
|
f.
|
Record
amortization of deferred financing costs over the three and one-half year
term of the CIT Credit Facility for the twelve months ended June 30,
2008.
|
g.
|
Adjust
interest expense to exclude interest expense from redeemed existing debt
of Voyager and include $2,329,899 associated with the CIT Credit Facility
for the twelve months ended June 30,
2007.
|
h.
|
Adjust
interest expense to exclude interest expense from redeemed existing debt
of Voyager and include $2,879,892 associated with the CIT Credit Facility
for the twelve months ended June 30,
2008.
|
i.
|
Record
the derivative liability, change in fair value of derivatives and
mark-to-market for the tainted warrants issued to CIT pursuant to the CIT
Credit Facility.
|
j.
|
Record
the incremental increase in depletion associated with the increased
capital investment in the oil and gas properties acquired in the Voyager
Acquisition of approximately $7.4
million.
|
Explanatory Note:
The derivative liabilities exist because we
have insufficient authorized and unissued shares of our Common Stock to
settle our contracts including the outstanding preferred stock
(Series A, B, D, and E), our outstanding warrants and stock options and our
outstanding convertible debt. Upon the effectiveness of the Charter
Amendment to increase our number of authorized shares of Common Stock from
24,000,000 to 149,000,000 we will have sufficient authorized and unissued
shares to settle these contracts. At that point, the derivative
liability will be eliminated and we will record a gain on the change in fair
value of derivatives.
EXHIBIT
C
Ralph
E. Davis Associates, Inc.
1717 St.
James Place
Suite
460
Houston,
Texas 77056
May
13, 2008
ABC
Funding, Inc.
c/o
Mr. Matt Cohen
Thompson
& Knight, LLP
919
Third Avenue, 39
th
Floor
New
York, NY 10022
|
Attention: Dr.
Amiel David
|
Re:
Estimated
Reserves and Non Escalated Future
Net
Revenue Remaining as of April 1, 2008
Voyager
Gas Corporation
Dear
Dr. David:
At
your request the firm of Ralph E. Davis Associates, Inc. of Houston, Texas has
prepared an estimate of the oil and natural gas reserves on specific leaseholds
in which Voyager Gas Corporation (Voyager) has certain interests. The
interests evaluated are applicable to specific oil and gas properties in which
Voyager may or may not be the operator. The attached summaries
present our estimate of the proved developed producing, non-producing and
undeveloped reserves anticipated to be produced from those
leaseholds.
The
reserves associated with these estimates have been classified in accordance with
the definitions of the Securities and Exchange Commission as found in Rule
4-10(a) of regulation S-X of the Securities Exchange Act of 1934 and attached
hereto. We have also estimated the future net revenue and discounted
present value associated with these reserves as of April 1, 2008, utilizing a
scenario of non-escalated product prices as well as non-escalated costs of
operations, i.e., prices and costs were not escalated above current values as
detailed later in this report. The present value is presented for
your information and should not be construed as an estimate of the fair market
value.
The
results of our study may be summarized as follows:
Non
Escalated Pricing Scenario
Estimated
Reserves and Future Net Income
Net
to Voyager Gas Corporation
As
of April 1, 2008
|
|
Estimated
Net Reserves
|
|
|
Estimated
Future Net Income ($1,000)
|
|
Reserve
Category
|
|
MBbls
|
|
|
Mmcf
|
|
|
Undiscounted
|
|
|
Discounted
@ 10%
|
|
Proved
Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
Producing
|
|
|
246.93
|
|
|
|
3,731.56
|
|
|
$
|
44,756.55
|
|
|
$
|
32,603.84
|
|
Non-Producing
|
|
|
331.36
|
|
|
|
3,570.99
|
|
|
|
53,735.40
|
|
|
|
16,229.38
|
|
Undeveloped
|
|
|
249.28
|
|
|
|
3,925.76
|
|
|
|
47,759.48
|
|
|
|
26,801.08
|
|
Total
Proved
|
|
|
827.57
|
|
|
|
11,228.31
|
|
|
$
|
146,251.43
|
|
|
$
|
75,634.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquid
volumes are expressed in thousands of barrels (MBbls) of stock tank
oil. Gas volumes are expressed in millions of standard cubic feet
(MMSCF) at the official temperature and pressure bases of the areas wherein the
gas reserves are located.
DATA
SOURCE
Basic
well and field data used in the preparation of these summaries were furnished by
Voyager or were obtained from commercial sources. Records as they
pertain to factual matters such as acreage controlled, the number and depths of
wells, reservoir pressure and production history, the existence of contractual
obligations to others and similar matters were accepted as
presented.
Additionally,
the analyses of these properties utilized not only the basic data on the subject
wells but also data on analogous properties as provided. Well logs,
ownership interest, revenues received from the sale of products and operating
costs were furnished by Voyager. No physical inspection of the
properties was made nor any well tests conducted.
Operating
cost data for the previous twelve month period for which data was available were
provided by Voyager along with an average of each property’s lease operating
expense and well operating expense for the same time period. This
data was utilized to determine the direct cost of operation for each property or
producing unit.
RESERVE
ESTIMATES
The
estimate of reserves is based primarily upon production history or analogy with
wells in the area producing from the same or similar formations. In
addition to individual well production history, geological, 3D seismic and well
test information, when available, were utilized in the evaluation.
The
accuracy of reserve estimates is dependent upon the quality of available data
and upon the independent geological and engineering interpretation of that
data. Reserve estimates presented in these summaries are calculated
using acceptable methods and procedures and are believed to be reasonable;
however, future reservoir performance may justify revision of these
estimates.
PRODUCING
RATES
Estimated
reserves are scheduled for recovery primarily on the basis of actual producing
rates or appropriate well test information. They were prepared giving
consideration to engineering and geological data such as reservoir pressure,
anticipated producing mechanisms, the number and types of completions, as well
as past performance of analogous reservoirs.
These
and other future rates may be subject to regulation by various agencies, changes
in market demand or other factors; consequently, reserves recovered and the
actual rates of recovery may vary from the estimates included
herein.
PRICING
PROVISIONS
Crude Oil and
Condensate -
The unit price used for crude oil and condensate is based
upon the posted price for liquids in effect as of March 31, 2008, the last
trading day of the month. A crude oil posted price for West Texas
Intermediate crude of $105.56 per barrel was held constant throughout the
producing life of the property. A pricing differential from this
posted price for each producing property had been developed based upon
historical sales information. This pricing differential was similarly
held constant. Prices for liquid reserves scheduled for initial
production at some future date were estimated using current prices on the same
properties.
Natural
Gas
- The unit price used for natural gas is based upon an initial gas
price of $9.59 per MMBtu, the March 31, 2008, NYMEX natural gas price in
effect. A similar pricing differential for each property had been
developed, and this differential as well as the price for gas was held constant
throughout the producing life of the property. Prices for gas
reserves scheduled for initial production at some future date were estimated
using this same price.
FUTURE
NET INCOME
Future
net income is based upon gross income from future production, less direct
operating expenses and taxes (production, severance, ad valorem or
other). Estimated future capital for development and workover costs
was also deducted from gross income at the time it will be
expended. No allowance was made for depletion, depreciation, income
taxes or administrative expense.
Direct
lease operating expense includes direct cost of operations of each lease or an
estimated value for future operations based upon analogous
properties. Lease operating expense and/or capital costs for drilling
and/or major workover expense were held constant throughout the remaining
producing life of the properties. Neither the cost to abandon onshore
properties nor the salvage value of equipment was considered.
Future
net income has been discounted for present worth at values ranging from 0 to 100
percent using yearly discounting. The future net income is discounted
at a primary rate of ten (10.0) percent.
GENERAL
Voyager
Gas Corporation has provided access to all of its accounts, records, geological
and engineering data, reports and other information as required for this
investigation. The ownership interests, product classifications
relating to prices and other factual data were accepted as furnished without
verification.
No
consideration was given to either gas contract disputes including take or pay
demands or gas sales imbalances.
No
consideration was given to potential environmental liabilities which may exist,
nor were any costs included for potential liability to restore and clean up
damages, if any, caused by past operating practices.
If
investments or business decisions are to be made in reliance on these estimates
by anyone other than our client, such person with the approval of our client is
invited to arrange a visit so that he can evaluate the assumptions made and the
completeness and extent of the data available on which the estimates are
made.
This
has been prepared for the exclusive use of Voyager Gas Corporation and shall not
be reproduced, distributed or made available to any other company without the
written consent of Ralph E. Davis Associates, Inc. Such consent will
not be unreasonably withheld if the information is utilized in its
entirety.
|
RALPH
E. DAVIS ASSOCIATES, INC.
|
CLASSIFICATION
OF RESERVES
Proved
Oil and Gas Reserves
Proved
oil and gas reserves are the estimated quantities of crude oil, 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.
1.
|
Reservoirs
are considered proved if economic producibility is supported by either
actual production or conclusive formation test. 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.
|
2.
|
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.
|
3.
|
Estimates
of proved reserves do not include the following: (A) oil that may become
available from known reservoirs but is classified separately as indicated
additional reserves; (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, natural gas, and natural gas
liquids, that may be recovered from oil shales, coal, gilsonite and other
such sources.
|
Proved
Developed Oil and Gas Reserves
Proved
developed oil and gas reserves are reserves that can be expected to be recovered
through existing wells with existing equipment and operating
methods. Additional oil and 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.
Proved
Undeveloped Reserves
Proved
undeveloped oil and gas reserves are reserves that are expected to be recovered
from new wells on undrilled acreage, or from existing wells where a relatively
major expenditure is required for recompletion. Reserves on undrilled
acreage shall be limited to those drilling units offsetting productive units
that are reasonably certain of production when drilled. Proved
reserves for other undrilled units can be claimed only where it can be
demonstrated with certainty that there is continuity of production
from the existing
productive formation. Under no circumstances should estimates for
proved undeveloped reserves be attributable to any acreage for which an
application of fluid injection or other improved recovery technique is
contemplated, unless such techniques have been proved effective by actual tests
in the area and in the same reservoir.
(Classification
of reserves as found in Rule 4-10(a) of Regulation S-X of the per Securities and
Exchange Act)
EXHIBIT
D
ABC
FUNDING, INC.
2008
STOCK INCENTIVE PLAN
ARTICLE
I
INTRODUCTION
1.1
Purpose.
The
ABC Funding, Inc. 2008 Stock Incentive Plan (the “
Plan
”)
is intended to promote the interests of ABC Funding, Inc., a Nevada corporation,
(the “
Company
”)
and its stockholders by encouraging Employees and Non-Employee Directors of the
Company or its Affiliates (as defined below) to acquire or increase their equity
interests in the Company, thereby giving them an added incentive to work toward
the continued growth and success of the Company. The Board of Directors of the
Company (the “
Board
”)
also contemplates that through the Plan, the Company and its Affiliates will be
better able to compete for the services of the individuals needed for the
continued growth and success of the Company.
1.2
Definitions
.
As
used in the Plan, the following terms shall have the meanings set forth
below:
“
Affiliate
” means (i) with
respect to the issuance of Incentive Options, any “parent corporation” of the
Company (as defined in Section 424(e) of the Code), or any “subsidiary
corporation” of the Company (as defined in Section 424(f) of the Code);
(ii) with respect to the issuance of Non-Qualified Options or Stock Appreciation
Rights, any corporation or other entity in a chain of corporations and/or other
entities in which the Company has a “controlling interest” within the meaning of
Treas. Reg. § 1.414(c)-2(b)(2)(i), but using the threshold of 50 percent
ownership wherever 80 percent appears; and (iii) with respect to all other
Awards, any trades or businesses, whether or not incorporated, which are members
of a controlled group or are under common control (as defined in Sections 414(b)
or (c) of the Code) with the Company.
“
Awards
”
means, collectively, Options, Purchased Stock, Bonus Stock, Stock Appreciation
Rights, Phantom Stock, Restricted Stock, Performance Awards, or Other Stock or
Performance Based Awards.
“
Bonus
Stock
” is defined in Article V.
“
Cause
”
for termination of any Participant who is a party to an agreement of employment
with or services to the Company shall mean termination for “Cause” as such term
is defined in such agreement, the relevant portions of which are incorporated
herein by reference. If such agreement does not define “Cause” or if
a Participant is not a party to such an agreement, “Cause” means (i) the willful
commission by a Participant of a criminal or other act that causes or is likely
to cause substantial economic damage to the Company or an Affiliate or
substantial injury to the business reputation of the Company or Affiliate; (ii)
the commission by a Participant of an act of fraud in the performance of such
Participant’s duties on behalf of the Company or an Affiliate; or (iii) the
continuing willful failure of a Participant to perform the duties of such
Participant to the Company or an Affiliate (other than such failure resulting
from the Participant’s incapacity due to physical or mental illness) after
written notice thereof (specifying the particulars thereof in reasonable detail)
and a reasonable opportunity to be heard and cure such failure are given to the
Participant by such entity or person as is designated by the
Board. For purposes of the Plan, no act, or failure to act, on the
Participant’s part shall be considered “willful” unless done or omitted to be
done by the Participant not in good faith and without reasonable belief that the
Participant’s action or omission was in the best interest of the Company or an
Affiliate, as the case may be.
“
Change in
Control
” shall be deemed to have occurred upon any of the following
events:
(i) A
merger or consolidation to which the Company is a party if the individuals and
entities who were stockholders of the Company immediately prior to the effective
date of such a merger or consolidation have beneficial ownership or less than
50% of the total combined voting power for election of directors of the
surviving corporation following the effective date of such merger or
consolidation; or
(ii) The
sale of all or substantially all of the assets of the Company to any person or
entity that is not a wholly owned subsidiary of the Company.
“
Code
”
means the Internal Revenue Code of 1986, as amended from time to time, and the
rules and regulations thereunder.
“
Committee
”
means the Compensation Committee appointed by the Board to administer the Plan
or, if none, the Board; [provided however, that with respect to any Award
granted to a Covered Employee which is intended to be “performance-based
compensation” as described in Section 162(m)(4)(c) of the Code, the Committee
shall consist solely of two or more “outside directors” as described in Section
162(m)(4)(c)(i) of the Code].
“Common Stock”
means the common stock of the Company, $.001 par value per
share.
“Covered
Employee”
shall mean each of the Employees/officers of the Company as
described in Section 162(m) of the Code and applicable rules, regulations and
guidance issued thereunder.
“
Disability
”
means either (i) an inability of the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical mental
impairment that can be expected to result in death or can be expected to last
for a continuous period of not less than 12 months or (ii) the receipt of income
replacements by the Participant, by reason of any medically determinable
physical or mental impairment that can be expected to result in death or can be
expected to last for a continuous period of not less than 12 months, for a
period of not less than 3 months under the Company's accident and health
plan.
“Effective
Date”
means the date that is (i) adopted by the Board; and (ii) approved
by shareholders of the Company, provided that such shareholder approval occurs
not more than one-year period prior to or after the date of such
adoption. The provisions of the Plan are applicable to all Awards
granted on or after the Effective Date.
“
Employee
”
means any common law employee of the Company or an Affiliate.
“
Employment
”
includes any period in which a Participant is an Employee to the Company or an
Affiliate.
“Exchange Act”
means the Securities Exchange Act of 1934, as
amended.
“
Fair Market
Value or FMV Per Share
”.
The
Fair Market Value or FMV Per Share of the Common Stock shall be the closing
price on the OTC Bulletin Board, or other over-the-counter market, or national
securities exchange, if applicable, for the date of the determination, or if no
trade of the Common Stock shall have been reported for such date, the closing
price quoted on such over-the-counter market for the most recent trade prior to
the determination date. If shares of the Common Stock are not listed
or admitted to trading on any exchange, over-the-counter market or any similar
organization as of the determination date, the Fair Market Value or FMV Per
Share shall be determined by the Committee (i) with respect to Incentive Stock
Options, in good faith within the meaning of Section 422 of the Code or (ii)
with respect to other Awards, in good faith using a “reasonable application of a
reasonable valuation method” within the meaning of Treasury Regulation Section
1.409A-1(b)(5)(iv)(B).
“
Incentive
Option
” means any option that satisfies the requirements of Code Section
422 and is granted pursuant to Article III of the Plan.
“
Non-Employee
Director
” means persons who are members of the Board but who are not
Employees of the Company or any Affiliate. Non-Employee Director
shall include any non-elected director emeritus serving in an advisory capacity
to the Board.
“
Non-Qualified
Option
” shall mean an option not intended to satisfy the requirements of
Code Section 422 and which is granted pursuant to Article II of the
Plan.
“
Option
”
means an option to acquire Common Stock granted pursuant to the provisions of
the Plan, and refers to either an Incentive Stock Option or a Non-Qualified
Stock Option, or both, as applicable.
“
Option
Expiration Date
” means the date determined by Committee, which shall not
be more than ten years after the date of grant of an Option.
“Optionee”
means a Participant who has received or will receive an
Option.
“
Other Stock or
Performance-Based Award
” means an award granted pursuant to Article IX of
the Plan that is not otherwise specifically provided for, the value of which is
based in whole or in part upon the value of a share of Common
Stock.
“
Participant
”
means any Employee and Non-Employee Director granted an Award under the
Plan.
“
Performance
Award
” means an Award granted pursuant to Article VIII of the Plan,
which, if earned, shall be payable in shares of Common Stock, cash or any
combination thereof.
“
Purchased
Stock
” means a right to purchase Common Stock granted pursuant to Article
IV of the Plan.
“
Phantom
Stock
” means an Award of the right to receive cash or shares of Common
Stock issued at the end of a Restricted Period that is granted pursuant to
Article VI of the Plan.
“
Restricted
Period
” shall mean the period established by the Committee with respect
to an Award during which the Award either remains subject to forfeiture or is
not exercisable by the Participant.
“
Restricted
Stock
” shall mean any share of Common Stock, prior to the lapse of
restrictions thereon, granted under Article VII of the Plan.
“Spread”
means the amount determined pursuant to Section 6.1(a) of the
Plan.
“
Stock
Appreciation Rights
” means an Award granted pursuant to Article VI of the
Plan.
1.3
Shares
Subject to the Plan.
The
aggregate number of shares of Common Stock that may be issued under the Plan
shall not exceed 8,750,000 shares of Common Stock (subject to adjustment as
described below). In addition, during any
calendar year
, the
number of shares of Common Stock issued or reserved for issuance as options
under the Plan to any one Participant plus the number of such shares underlying
Stock Appreciation Rights that may be granted to that same Participant shall not
exceed 2,000,000 shares. Notwithstanding the above, however, in the
event that at any time after the Effective Date the outstanding shares of Common
Stock are changed into or exchanged for a different number or kind of shares or
other securities of the Company by reason of a merger, consolidation,
recapitalization, reclassification, stock split, stock dividend, combination of
shares or the like, the aggregate number and class of securities available under
the Plan shall be ratably adjusted by the Committee. Upon the occurrence of any
of the events described in the immediately preceding sentence, in order to
ensure that after such event the shares of Common Stock subject to the Plan and
each Participant’s proportionate interest shall be maintained substantially as
before the occurrence of such event, the Committee shall, in such manner as it
may deem equitable, adjust (i) the number of shares of Common Stock with respect
to which Awards may be granted, (ii) the number of shares of Common Stock
subject to outstanding Awards, and (iii) the grant or exercise price with
respect to an Award; provided, however, that such adjustment in an outstanding
Option shall be made (i) without change in the total price applicable to the
Option or any unexercised portion of the Option (except for any change in the
aggregate price resulting from rounding-off of share quantities or prices) and
(ii) with any necessary corresponding adjustment in exercise price per share;
provided, further, that outstanding Incentive Options shall be adjusted only in
accordance with Sections 422 and 424 of the Code and the regulations thereunder,
and that outstanding Non-Qualified Options and Stock Appreciation Rights shall
be adjusted only in accordance with Section 409A of the Code and the regulations
thereunder. The Committee’s determinations shall be subject to
approval by the Board. In the event the number of shares to be
delivered upon the exercise or payment of any Award granted under the Plan is
reduced for any reason whatsoever or in the event any Award (or portion thereof)
granted under the Plan can no longer under any circumstances be exercised or
paid, the number of shares no longer subject to such Award shall thereupon be
released from such Award and shall thereafter be available under the Plan for
the grant of additional Awards. Shares that cease to be subject to an
Award because of the exercise of the Award, or the vesting of a Restricted Stock
Award or similar Award, shall no longer be subject to any further grant under
the Plan. Shares issued pursuant to the Plan (i) may be treasury
shares, authorized but unissued shares or, if applicable, shares acquired in the
open market and (ii) shall be fully paid and nonassessable. No
fractional shares shall be issued under the Plan; payment for any fractional
shares shall be made in cash.
1.4
Administration
of the Plan.
The
Plan shall be administered by the Committee. Subject to the
provisions of the Plan, the Committee shall interpret the Plan and all Awards
under the Plan, shall make such rules as it deems necessary for the proper
administration of the Plan, shall make all other determinations necessary or
advisable for the administration of the Plan and shall correct any defect or
supply any omission or reconcile any inconsistency in the Plan or in any Award
under the Plan in the manner and to the extent that the Committee deems
desirable to effectuate the Plan. No member of the Committee shall
vote or act upon any matter relating solely to himself. Grants of
Awards to any Participant, the terms thereof and any amendment thereto shall be
subject to approval by the Board.
1.5
Amendment
and Discontinuance of the Plan.
The
Board may amend, suspend or terminate the Plan; provided, however, no amendment,
suspension or termination of the Plan may without the consent of the holder of
an Award terminate such Award or adversely affect such person’s rights with
respect to such Award in any material respect; provided further, however, that
any amendment which would constitute a “material amendment” of the Plan (as
determined by the Committee, subject to applicable rules and regulations of the
OTC Bulletin Board, if any, governing the use of such term in the context of
employee benefit plans) shall be subject to shareholder approval.
1.6
Granting
of Awards to Participants.
Subject
to approval of the Board, the Committee shall have the authority to grant, prior
to the expiration date of the Plan, Awards to such Employees and Non-Employee
Directors as may be selected by it on the terms and conditions hereinafter set
forth in the Plan. In selecting the persons to receive Awards,
including the type and size of the Award, the Committee may consider any factors
that it may deem relevant.
1.7
Term
of Plan.
If
not sooner terminated under the provisions of the Plan, the Plan shall terminate
upon, and no further Awards shall be made, after the tenth (10
th
)
anniversary of the Effective Date.
1.8
Leave
of Absence.
If
an Employee is on military, sick leave or other bona fide leave of absence, such
person shall be considered an “Employee” for purposes of an outstanding Award
during the period of such leave provided it does not exceed 90 days, or, if
longer, so long as the person’s right to reemployment is guaranteed either by
statute or by contract. If the period of leave exceeds 90 days, the
employment relationship shall be deemed to have terminated on the 91st day of
such leave, unless the person’s right to reemployment is guaranteed by statute
or contract.
ARTICLE
II
NONQUALIFIED
STOCK OPTIONS
2.1
Eligibility.
All
Employees and Non-Employee Directors shall be eligible for grants of Options
according to the terms set forth below. Each Non-Qualified Option
granted under the Plan shall be evidenced by a written agreement between the
Company and the individual to whom Non-Qualified Options were
granted.
2.2
Exercise
Price.
The
exercise price to be paid for each share of Common Stock deliverable upon
exercise of each Option granted under this Article II shall not be less than the
FMV Per Share on the date of grant of such Option. The exercise price
for each Option granted under Article II shall be subject to adjustment as
provided in Section 10.13.
2.3
Terms
and Conditions of Options.
Options
shall be in such form as the Committee may from time to time recommend and the
Board shall approve, shall be subject to the following terms and conditions and
may contain such additional terms and conditions as are not inconsistent with
this Article II:
(a)
Option Period
and Conditions and Limitations on Exercise
. No Option shall be
exercisable later than the Option Expiration Date. To the extent not
prohibited by other provisions of the Plan, each Option shall be exercisable at
such time or times as may be determined at the time such Option is
granted.
(b)
Manner of
Exercise
. To exercise an Option, the person or persons
entitled to exercise it shall provide notice to the Company at its principal
executive office, directed to the Committee, such exercise to be effective at
the time of receipt of such notice at the Company’s principal executive office
during normal business hours, stating the number of shares with respect to which
the Option is being exercised together with payment for such shares plus any
required withholding taxes, unless other arrangements for withholding tax
liability have been made with the Committee. The notice shall be
delivered in person, by certified or regular mail,
or by such other
method as determined from time to time by the Committee or Plan
Administrator.
(c)
Payment of
Exercise Price and Required Withholding.
In order to exercise
an Option, the person or persons entitled to exercise it shall deliver to the
Company payment in full for (i) the shares being purchased, and (ii) unless
other arrangements have been made with the Committee, any required withholding
taxes. The payment of the exercise price for each Option shall either
be (i) in cash or by check payable and acceptable to the Company, (ii) with the
consent of the Committee, by tendering to the Company shares of Common Stock
having an aggregate Fair Market Value as of the date of exercise that is not
greater than the full exercise price for the shares with respect to which the
Option is being exercised and by paying any remaining amount of the exercise
price as provided in (i) above (provided, that such tendered shares of Common
Stock have been owned on a fully vested basis by the optionee for more than six
(6) months prior to exercise), or (iii) with the consent of the Committee and
subject to such instructions as the Committee may specify, at the person’s
written request the Company may deliver certificates for the shares of Common
Stock for which the Option is being exercised to a broker for sale on behalf of
the person, provided that the person has irrevocably instructed such broker to
remit directly to the Company on the person’s behalf the full amount of the
exercise price from the proceeds of such sale. In the event that the
Optionee elects to make payment as allowed under clause (ii) above, the
Committee may, upon confirming that the Optionee owns the number of additional
shares being tendered, authorize the issuance of a new certificate for the
number of shares being acquired pursuant to the exercise of the Option less the
number of shares being tendered upon the exercise and return to the person (or
not require surrender of) the certificate for the shares being tendered upon the
exercise. If the Committee so requires, such person or persons shall
also deliver a written representation that all shares being purchased are being
acquired for investment and not with a view to, or for resale in connection
with, any distribution of such shares.
(d)
Options not
Transferable
. Except as provided below, no Non-Qualified
Option granted hereunder shall be transferable other than by (i) will or by the
laws of descent and distribution or (ii) pursuant to a domestic relations order
and, during the lifetime of the Participant to whom any such Option is granted,
and it shall be exercisable only by the Participant (or his
guardian). Any attempt to transfer, assign, pledge, hypothecate or
otherwise dispose of, or to subject to execution, attachment or similar process,
any Option granted hereunder, or any right thereunder, contrary to the
provisions hereof, shall be void and ineffective, shall give no right to the
purported transferee. With Committee approval, the Participant (or
his guardian) may transfer, for estate planning purposes, all or part of a
Non-Qualified Option to one or more immediate family members or related family
trusts or partnerships or similar entities.
(e)
Listing and
Registration of Shares
. Each Option shall be subject to the
requirement that if at any time the Committee determines that the listing,
registration, or qualification of the shares subject to such Option under any
securities exchange or under any state or federal law, or the consent or
approval of any governmental regulatory body, is necessary or desirable as a
condition of, or in connection with, the issue or purchase of shares thereunder,
such Option may not be exercised in whole or in part unless such listing,
registration, qualification, consent or approval shall have been effected or
obtained and the same shall have been free of any conditions not acceptable to
the Committee.
2.4
Option
Repricing.
With
Board and shareholder approval, the Committee may grant to holders of
outstanding Non-Qualified Options, in exchange for the surrender and
cancellation of such Non-Qualified Options, new Non-Qualified Options having
exercise prices lower (or higher with any required consent) than the exercise
price provided in the Non-Qualified Options so surrendered and canceled and
containing such other terms and conditions as the Committee may deem
appropriate; provided that such new Non-Qualified Options are structured to be
either exempt from or in compliance with Section 409A of the
Code.
2.5
Amendment.
Subject
to Board approval, the Committee may, without the consent of the person or
persons entitled to exercise any outstanding Option, amend, modify or terminate
such Option; provided, however, such amendment, modification or termination
shall not, without such person’s consent, reduce or diminish the value of such
Option determined as if the Option had been exercised, vested, cashed in or
otherwise settled on the date of such amendment or
termination. Subject to Board approval, the Committee may at any time
or from time to time, in the case of any Option which is not then immediately
exercisable in full, accelerate the time or times at which such Option may be
exercised to any earlier time or times.
2.6
Acceleration
of Vesting.
Any
Option granted hereunder which is not otherwise vested shall
vest (unless specifically provided to the contrary in the document or
instrument evidencing an Option granted hereunder) upon (i) termination, removal
or resignation of an Employee or Non-Employee Director for any reason (except
for Cause) within one (1) year after the effective date of the Change in
Control, (ii) death or Disability of the Participant, or (iii) subject to Board
approval, at such other times as the Committee, in its discretion,
determines.
ARTICLE
III
INCENTIVE
OPTIONS
The
terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Article III,
all the provisions of Article II shall be applicable to Incentive
Options. Options which are specifically designated as Non-Qualified
Options shall
not
be subject to the terms of this Section III.
3.1
Eligibility.
Incentive
Options may only be granted to Employees.
3.2
Exercise
Price.
The
exercise price per Share shall not be less than one hundred percent (100%) of
the FMV Per Share on the option grant date.
3.3
Dollar
Limitation.
The
aggregate Fair Market Value (determined as of the respective date or dates of
grant) of shares of Common Stock for which one or more options granted to any
Employee under the Plan (or any other option plan of the Corporation or any
Parent or Subsidiary) may for the first time become exercisable as Incentive
Options during any one (1) calendar year shall not exceed the sum of One Hundred
Thousand Dollars ($100,000). To the extent the Employee holds two (2)
or more such options which become exercisable for the first time in the same
calendar year, the foregoing limitation on the exercisability of such options as
Incentive Options shall be applied on the basis of the order in which such
options are granted.
3.4
10%
Stockholder.
If
any Employee to whom an Incentive Option is granted owns stock possessing more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or any “parent corporation” of the Company (as defined in
Section 424(e) of the Code) or any “subsidiary corporation” of the Company (as
defined in Section 424(f) of the Code), then the exercise price per share shall
not be less than one hundred ten percent (110%) of the FMV Per Share on the date
of grant and the option term shall not exceed five (5) years measured from the
date of grant. For purposes of the immediately preceding sentence,
the attribution rules under Section 424(d) of the Code shall apply for purposes
of determining an Employee’s ownership.
3.5
Options
Not Transferable.
No
Incentive Option granted hereunder shall be transferable other than by will or
by the laws of descent and distribution and shall be exercisable during the
Optionee’s lifetime only by such Optionee.
3.6
Compliance
with 422.
All
Options that are intended to be Incentive Stock Options shall be designated as
such in the Option grant and in all respects shall be issued in compliance with
Code Section 422. The maximum aggregate number of Incentive Stock
Options that may be issued under the Plan is 2,000,000 shares of Common
Stock.
3.7
Limitations
on Exercise.
No
Incentive Option shall be exercisable more than three (3) months after the
Optionee ceases to be an Employee for any reason other than death or Disability,
or more than one (1) year after the Optionee ceases to be an Employee due to
death or Disability.
ARTICLE
IV
PURCHASED
STOCK
4.1
Eligible
Persons.
Subject
to approval by the Board, the Committee shall have the authority to sell shares
of Common Stock to such Employees and Non-Employee Directors of the Company or
its Affiliates as may be selected by it, on such terms and conditions as it may
establish, subject to the further provisions of this Article IV. Each
issuance of Common Stock under this Plan shall be evidenced by an agreement
which shall be subject to applicable provisions of this Plan and to such other
provisions not inconsistent with this Plan as the Committee may recommend and
the Board may approve for the particular sale transaction.
4.2
Purchase
Price.
Subject
to approval by the Board, the price per share of Common Stock to be purchased by
a Participant under this Plan shall be determined by the Committee, and may be
less than, but shall not greater than the FMV Per Share at the time of purchase.
4.3
Payment
of Purchase Price.
Payment
of the purchase price of Purchased Stock under this Plan shall be made in full
in cash.
ARTICLE
V
BONUS
STOCK
The Committee
may, from time to time and subject to the provisions of the Plan and approval by
the Board, grant shares of Bonus Stock to Employees and Non-Employee
Directors. Such grants of Bonus Stock shall be in consideration of
performance of services by the Participant without additional consideration
except as may be required by the Committee or pursuant to Article
XI. Bonus Stock shall be shares of Common Stock that are not subject
to a Restricted Period under Article VII. Payment of Bonus Stock
shall be made by the later of (i) the date that is 2½ months after the
end of the Participant’s taxable year in which the Bonus Stock is earned under
the Plan or (ii) the date that is 2½ months after the end of the
Company’s taxable year in which the Bonus Stock is earned under the Plan, and
such payment shall not be subject to any election by the Participant to defer
the payment to a later period
.
ARTICLE
VI
STOCK
APPRECIATION RIGHTS AND PHANTOM STOCK
6.1
Stock
Appreciation Rights.
All
Employees and Non-Employee Directors shall be eligible to receive grants of
Stock Appreciation Rights on the following terms and conditions.
(a)
Right to
Payment
. A Stock Appreciation Right shall confer on the
Participant to whom it is granted a right to receive, upon exercise thereof, the
excess of (A) the FMV Per Share on the date of exercise over (B) the grant price
of the Stock Appreciation Right as determined by the Committee, which shall not
be less than the FMV Per Share on the date of grant (the
“Spread”). Notwithstanding the foregoing, the Award may provide, that
the Spread covered by a Stock Appreciation Right may not exceed a specified
amount.
(b)
Rights Related
to Options
. A Stock Appreciation Right granted in connection
with an Option shall entitle a Participant, upon exercise thereof, to surrender
that Option or any portion thereof, to the extent unexercised, and to receive
payment of the amount of the Spread computed pursuant to Subsection 6.1(a)
hereof. That Option shall then cease to be exercisable to the extent
surrendered.
(c)
Terms
. The
Award shall set forth the time or times at which and the circumstances under
which a Stock Appreciation Right may be exercised in whole or in part (including
based on achievement of performance goals and/or future service requirements),
the method of exercise, whether or not a Stock Appreciation Right shall be in
tandem or in combination with any other Award, and any other terms and
conditions of any Stock Appreciation Right.
6.2
Phantom
Stock Awards.
All
Employees and Non-Employee Directors shall be eligible to receive grants of
Phantom Stock Awards, which are rights to receive cash or Common Stock equal to
the Fair Market Value of specified number of shares of Common Stock at the end
of a specified deferral period, subject to the following terms and
conditions:
(a)
Award and
Restrictions
.
Satisfaction
(vesting) of a Phantom Stock Award shall occur upon expiration of the deferral
period specified for such Phantom Stock Award. In addition, Phantom
Stock Awards shall be subject to such restrictions (which may include a
“substantial risk of forfeiture” as determined in accordance with Code Section
409A), if any, as the Committee (with Board approval) may impose, which
restrictions may lapse at the expiration of the deferral period or at earlier
specified times (including based on achievement of performance goals and/or
future service requirements), separately or in combination, installments or
otherwise, as the Committee (with Board approval) may
determine. Phantom Stock Awards shall not be transferable (other than
by will or the laws of descent and distribution).
(b)
Forfeiture
. Except
as otherwise may be set forth in any Award, employment or other agreement
pertaining to a Phantom Stock Award, upon termination of employment or services
during the applicable deferral period or portion thereof to which forfeiture
conditions apply, all Phantom Stock Awards that are at that time subject to a
deferral period (other than a deferral at the election of the Participant) shall
be forfeited; provided that the Committee (with Board approval) may provide, by
rule or regulation or in any Award agreement, or may determine in any individual
case, that restrictions or forfeiture conditions relating to Phantom Stock
Awards shall be waived in whole or in part in the event of terminations
resulting from specified causes, and the Committee (with Board approval) may in
other cases waive in whole or in part the forfeiture of Phantom Stock
Awards.
(c)
Performance
Goals
. To the extent that any Award granted pursuant to this
Article VI is intended to constitute performance-based compensation for purposes
of Section 162(m) of the Code, the grant or settlement of the Award shall be
subject to the achievement of performance goals determined and applied in a
manner consistent with Section 8.2.
(d)
Timing of
Distributions
.
To
the extent a Phantom Stock Award is subject to a substantial risk of forfeiture,
such Phantom Stock Award shall be paid to the Participant in a single lump sum
no later than the fifteenth (15
th
)
day of the third (3
rd
)
month following the date on which such substantial risk of forfeiture
lapses. Otherwise, a Phantom Stock Award shall be paid in a manner
which is either exempt from or in compliance with Code Section 409A as specified
in the Phantom Stock Award. Should the Participant die before
receiving all amounts payable hereunder, the balance shall be paid to the
Participant’s estate in the same manner as payable to the
Participant.
(e)
Unsecured
General Creditor
. Participant’s rights to any Phantom Stock
Award shall not rise above those of a general unsecured creditor of the
Company.
ARTICLE
VII
RESTRICTED
STOCK
7.1
Eligible
Persons.
All
Employees and Non-Employee Directors shall be eligible to receive grants of
Restricted Stock.
7.2
Restricted
Period and Vesting.
(a)
The
Restricted Stock shall be subject to such forfeiture restrictions (including,
without limitation, limitations that qualify as a “substantial risk of
forfeiture” within the meaning given to that term under Section 83 of the Code)
and restrictions on transfer by the Participant and repurchase by the Company as
shall be set forth in such Award. Prior to the lapse of such
restrictions the Participant shall not be permitted to transfer such
shares. The Company shall have the right to repurchase or recover
such shares for the amount of cash paid therefor, if any, if (i) the Participant
shall terminate Employment from or services to the Company prior to the lapse of
such restrictions under circumstances that do not cause such restrictions to
lapse or (ii) the Restricted Stock is forfeited by the Participant pursuant to
the terms of the Award.
(b)
Notwithstanding
the foregoing, unless the Award specifically provides otherwise, all Restricted
Stock not otherwise vested shall vest upon (i) termination, resignation or
removal of an Employee or Non-Employee Director for any reason (except for
Cause) within one (1) year after the effective date of a Change in Control, (ii)
death or Disability of the Participant, or (iii) subject to Board approval, at
such other times as the Committee, in its discretion,
determines.
(c)
Each
certificate representing Restricted Stock awarded under the Plan shall be
registered in the name of the Participant and, during the Restricted Period,
shall be left in deposit with the Company and a stock power endorsed in blank
until such time as the restrictions on transfer have lapsed. The
grantee of Restricted Stock shall have all the rights of a stockholder with
respect to such shares including the right to vote and the right to receive
dividends or other distributions paid or made with respect to such
shares. Any certificate or certificates representing shares of
Restricted Stock shall bear a legend similar to the
following:
"The shares
represented by this certificate have been issued pursuant to the terms of the
ABC Funding, Inc. 2008 Stock Incentive Plan and may not be sold, pledged,
transferred, assigned or otherwise encumbered in any manner except as is set
forth in the terms of such Plan or award dated __________, 20__."
ARTICLE
VIII
PERFORMANCE
AWARDS
8.1
Performance
Awards.
All
Employees and Non-Employee Directors shall be eligible to receive Performance
Awards. Performance Awards may be based on performance criteria
measured over a period of not less than one year and not more than ten
years. The Committee may use such business criteria and other
measures of performance as it may deem appropriate in establishing any
performance conditions, and may exercise its discretion to increase the amounts
payable under any Award subject to performance conditions except as limited
under Section 8.2 in the case of a Performance Award granted to a Covered
Employee.
8.2
Performance
Goals.
The
grant and/or settlement of a Performance Award shall be contingent upon terms
set forth in this Section 8.2.
(a)
General
.
The
performance goals for Performance Awards shall consist of one or more business
criteria and a targeted level or levels of performance with respect to each of
such criteria, as specified by the Committee and approved by the
Board. In the case of any Award granted to a Covered Employee,
performance goals shall be designed to be objective and shall otherwise meet the
requirements of Section 162(m) of the Code and regulations thereunder (including
Treasury Regulation Section 1.162-27 and successor regulations thereto),
including the requirement that the level or levels of performance are such that
the achievement of performance goals is “substantially uncertain” at the time of
grant. Performance Awards shall be granted and/or settled upon
achievement of any one or more such performance goals. Performance
goals may differ among Performance Awards granted to any one Participant or for
Performance Awards granted to different Participants. The value of
any cash-denominated Performance Award issued to any one Covered Employee in any
one year shall not exceed $1,000,000.
(b)
Business
Criteria
. One or more of the following business criteria for
the Company, on a consolidated basis, and/or for specified subsidiaries,
divisions or business or geographical units of the Company (except with respect
to the total stockholder return and earnings per share criteria), shall be used
in establishing performance goals for Performance Awards granted to a
Participant:
(i)
Total
shareholder return;
(ii)
Return
on assets, equity, capital, capital employed, or investment;
(iii)
Pre-tax
or after-tax profit levels, including: earnings per share; earnings
before interest and taxes; earnings before interest, taxes, depreciation, and
amortization; net operating profits after tax, and net
income;
(iv)
Cash
flow, free cash flow, and cash flow return on investment;
(v)
Operational
measures including growth in reserves for the prior period and percentage or
absolute increase in production for the prior period;
(vi)
Levels
of cost including finding and development costs, and cash costs (interest
expense, G&A, and LOE) expressed in relationship to Mcfe/produced during the
Performance Period.
Any of the
above goals shall be determined on the absolute or relative basis or as compared
to the performance of a published or special index including, but not limited
to, the Standard & Poor’s 500 Stock Index or a group of comparable
companies.
(c)
Performance
Period; Timing for Establishing Performance Goals
. Achievement
of performance goals in respect of Performance Awards shall be measured over a
performance period of not less than one year and not more than ten years, as
specified in the Award. Performance goals in the case of any Award
granted to a Participant shall be established not later than 90 days after the
beginning of any performance period applicable to such Performance Awards, or at
such other date as may be required or permitted for “performance-based
compensation” under Section 162(m) of the Code.
(d)
Settlement of
Performance Awards; Other Terms
.
After
the end of each performance period, the Committee shall determine the amount, if
any, of Performance Awards payable to each Participant based upon achievement of
business criteria over a performance period. Payment described in the
immediately preceding sentence shall be made by the later of (i) the date
that is 2½ months after the end of the Participant’s taxable year in which
the Performance Award is earned under the Plan or (ii) the date that is
2½ months after the end of the Company’s taxable year in which the
Performance Award is earned under the Plan, and such payment shall not be
subject to any election by the Participant to defer the payment to a later
period. The Committee may not exercise discretion to increase any
such amount payable in respect of a Performance Award to a Covered Employee if
such Award states that it is intended to comply with Section 162(m) of the
Code. The Award shall specify the circumstances in which such
Performance Awards shall be paid or forfeited in the event of termination of
employment by the Participant prior to the end of a performance period or
settlement of Performance Awards.
(e)
Written
Determinations
. All determinations by the Committee as to the
establishment of performance goals, the amount of any Performance Award, and the
achievement of performance goals relating to Performance Awards shall be made in
writing in the case of any Award granted to a Participant and shall be subject
to approval by the Board. The Committee may not delegate any
responsibility relating to any Performance Awards to a Covered
Employee.
(f)
Status of
Performance Awards under Section 162(m) of the Code
. It is the
intent of the Company that Performance Awards granted to persons who are
designated by the Committee as likely to be Covered Employees within the meaning
of Section 162(m) of the Code and regulations thereunder (including Treasury
Regulations sec. 1.162-27 and successor regulations thereto) shall, if so
designated by the Committee, constitute “performance-based compensation” within
the meaning of Section 162(m) of the Code and regulations
thereunder. Accordingly, the terms of this Section 8.2 shall be
interpreted in a manner consistent with Section 162(m) of the Code and
regulations thereunder. The foregoing notwithstanding, because the
Committee cannot determine with certainty whether a given Participant will be a
Covered Employee with respect to a fiscal year that has not yet been completed,
the term Covered Employee as used herein shall mean only a person designated by
the Committee, at the time of grant of a Performance Award, who is likely to be
a Covered Employee with respect to that fiscal year. If any provision
of the Plan as in effect on the date of adoption or any agreements relating to
Performance Awards that are designated as intended to comply with Section 162(m)
of the Code does not comply or is inconsistent with the requirements of Section
162(m) of the Code or regulations thereunder, such provision shall be construed
or deemed amended to the extent necessary to conform to such
requirements.
ARTICLE
IX
OTHER
STOCK OR PERFORMANCE BASED AWARDS
All Employees
and Non-Employee Directors are eligible to receive Other Stock or
Performance-Based Awards, which shall consist of a right which (i) is not an
Award described in any other Article and (ii) is denominated or payable in,
valued in whole or in part by reference to, or otherwise based on or related to,
shares of Common Stock (including, without limitation, securities convertible
into shares of Common Stock) or cash as are deemed by the Committee to be
consistent with the purposes of the Plan. Subject to the terms of the
Plan and approval by the Board, the Committee shall determine the terms and
conditions of any such Other Stock or Performance-Based Award. To the
extent that any such Award includes a vesting schedule, Payment of such Award
shall be made by the later of (i) the date that is 2½ months after the
end of the Participant’s taxable year in which the Award is earned under the
Plan or (ii) the date that is 2½ months after the end of the Company’s
taxable year in which the Award is earned under the Plan, and such payment shall
not be subject to any election by the Participant to defer the payment to a
later period. Any Other Stock or Performance-Based Awards not subject
to a vesting schedule shall be paid in a manner which is either exempt from or
in compliance with Code Section 409A as specified in such Award.
ARTICLE
X
CERTAIN
PROVISIONS APPLICABLE TO ALL AWARDS
10.1
General.
Awards
shall be evidenced by a written agreement or other document and may be granted
on the terms and conditions set forth herein. All Awards and any
amendments thereto shall be subject to the approval of the Board. Any
Award or the exercise thereof, shall be subject to such additional terms and
conditions, not inconsistent with the provisions of the Plan, as the Committee
(with Board approval) shall determine, including terms requiring forfeiture of
Awards in the event of termination of employment by the Participant and terms
permitting a Participant to make elections relating to his or her
Award. The terms, conditions and/or restrictions contained in an
Award may differ from the terms, conditions and restrictions contained in any
other Award.
Subject
to approval by the Board, the Committee may, without the consent of the holder
of the Award, amend, modify or terminate an Award; provided, however, no
amendment, modification or termination of an Award shall not, without the
consent of the holder of the Award, reduce or diminish the value of such Award
determined as if the Award was exercised, vested, cashed-in, paid or otherwise
settled on the date of such amendment or termination. Subject to the
approval of the Board and the terms of the Plan or Award, the Committee shall
retain the power and discretion to accelerate or waive, at any time, any term or
condition of an Award that is not mandatory under the Plan; provided, however,
that the Committee shall not have a discretion to accelerate or waive any term
or condition of an Award that is intended to qualify as “performance-based
compensation” for purposes of Section 162(m) of the Code if such discretion
would cause the Award not to so qualify. Except in cases in which the
Committee is authorized to require other forms of consideration under the Plan,
or to the extent other forms of consideration must be paid to satisfy the
requirements of the Delaware General Corporation Law, no consideration other
than services may be required for the grant of any Award.
10.2
Stand-Alone,
Additional, Tandem, and Substitute Awards.
Subject
to Section 2.4 of the Plan, Awards granted under the Plan may be granted either
alone or in addition to, in tandem with, or in substitution or exchange for, any
other Award or any award granted under another plan of the Company, any
Affiliate, or any business entity to be acquired by the Company or an Affiliate,
or any other right of a Participant to receive payment from the Company or any
Affiliate. Such additional, tandem and substitute or exchange Awards
may be granted at any time. If an Award is granted in substitution or
exchange for another Award, the Committee shall require the surrender of such
other Award for cancellation in consideration for the grant of the new
Award. In addition, Awards may be granted in lieu of cash
compensation, including in lieu of cash amounts payable under other plans of the
Company or any Affiliate. Any such action contemplated under this
Section 10.2 shall be effective only to the extent that such action will not
cause (i) the holder of the Award to lose the protection of Section 16(b) of the
Exchange Act and rules and regulations promulgated thereunder, (ii) any Award
that is designed to qualify payments thereunder as performance-based
compensation as defined in Section 162(m) of the Code to fail to qualify as such
performance-based compensation; or (iii) any Award that is designed to satisfy
Section 409A of the Code to fail to satisfy such
section.
10.3
Term
of Awards.
In
no event shall the term of any Award exceed a period of ten years (or such
shorter terms as may be required in respect of an Incentive Option under Section
422 of the Code).
10.4
Form
and Timing of Payment under Awards; Deferrals.
Subject
to the terms of the Plan and any applicable Award agreement, payments to be made
by the Company upon the exercise of an Option or other Award or settlement of an
Award shall be made in a single payment. The settlement of any Award
may, subject to any limitations set forth in the Award agreement, be accelerated
and cash paid in lieu of shares in connection with such
settlement. Awards granted pursuant to Article VI or VIII of the Plan
may be payable in shares to the extent permitted by the terms of the applicable
Award agreement. Installment or deferred payments may be provided for
in the Award agreement or permitted with the consent or at the election of the
Participant. Payments may include, without limitation, provisions for
the payment or crediting of reasonable interest on installment or deferred
payments or the grant or crediting of amounts in respect of installment or
deferred payments denominated in shares. Any deferral shall only be
allowed as is provided in a separate deferred compensation plan adopted by the
Company. The Plan shall not constitute an “employee benefit plan” for
purposes of Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended.
10.5
Vested
and Unvested Awards.
After
the satisfaction of all of the terms and conditions set by the Committee with
respect to an Award of (i) Restricted Stock, a certificate, without the legend
set forth in Section 7.2, for the number of shares that are no longer subject to
such restrictions, terms and conditions shall be delivered to the Employee, (ii)
Phantom Stock, to the extent not paid in cash, a certificate for the number of
shares equal to the number of shares of Phantom Stock earned, and (iii) Stock
Appreciation Rights or Performance Awards, cash and/or a certificate for the
number of shares equal in value to the number of Stock Appreciation Rights or
amount of Performance Awards vested shall be delivered to the
Participant. The number of shares of Common Stock which shall be
issuable upon exercise of a Stock Appreciation Right or earning of a Performance
Award shall be determined by dividing (1) by (2) where (1) is the number of
shares of Common Stock as to which the Stock Appreciation Right is exercised
multiplied by the Spread or the amount of Performance Award that is earned and
payable, as applicable, and (2) is the FMV Per Share of Common Stock on the date
of exercise of the Stock Appreciation Right or the date the Performance Award is
earned and payable, as applicable.
10.6
Exemptions
from Section 16(b) Liability.
It
is the intent of the Company that the grant of any Awards to or other
transaction by a Participant who is subject to Section 16 of the Exchange Act
shall be exempt from Section 16(b) of the Exchange Act pursuant to an applicable
exemption (except for transactions acknowledged by the Participant in writing to
be non-exempt). Accordingly, if any provision of this Plan or any
Award agreement does not comply with the requirements of Rule 16b-3 (as
promulgated under the Exchange Act) as then applicable to any such transaction,
such provision shall be construed or deemed amended to the extent necessary to
conform to the applicable requirements of Rule 16b-3 so that such Participant
shall avoid liability under Section 16(b) of the Exchange Act.
10.7
Securities
Requirements.
No
shares of Common Stock will be issued or transferred pursuant to an Award unless
and until all then-applicable requirements imposed by federal and state
securities and other laws, rules and regulations and by any regulatory agencies
having jurisdiction and by any stock market or exchange upon which the Common
Stock may be listed, have been fully met. As a condition precedent to
the issuance of shares pursuant to the grant or exercise of an Award, the
Company may require the grantee to take any reasonable action to meet such
requirements. The Company shall not be obligated to take any
affirmative action in order to cause the issuance or transfer of shares pursuant
to an Award to comply with any law or regulation described in the second
preceding sentence.
10.8
Transferability..
(a)
Non-Transferable
Awards
. Except as otherwise specifically provided in the Plan,
no Award and no right under the Plan, contingent or otherwise, other than
Purchased Stock, Bonus Stock or Restricted Stock as to which restrictions have
lapsed, will be (i) assignable, saleable, or otherwise transferable by a
Participant except by will or by the laws of descent and distribution or
pursuant to a domestic relations order, or (ii) subject to any encumbrance,
pledge or charge of any nature. No transfer by will or by the laws of
descent and distribution shall be effective to bind the Company unless the
Committee shall have been furnished with a copy of the deceased Participant’s
will or such other evidence as the Committee may deem necessary to establish the
validity of the transfer. Any attempted transfer in violation of this
Section 10.8(a) shall be void and ineffective for all
purposes.
(b)
Ability to
Exercise Rights
. Except as otherwise specifically provided
under the Plan, only the Participant or his guardian (if the Participant becomes
Disabled), or in the event of his death, his legal representative or
beneficiary, may exercise Options, receive cash payments and deliveries of
shares, or otherwise exercise rights under the Plan. The executor or
administrator of the Participant’s estate, or the person or persons to whom the
Participant’s rights under any Award will pass by will or the laws of descent
and distribution, shall be deemed to be the Participant’s beneficiary or
beneficiaries of the rights of the Participant hereunder and shall be entitled
to exercise such rights as are provided hereunder.
10.9
Rights
as a Stockholder.
(a)
No Stockholder
Rights
. Except as otherwise provided in Section 7.2(c), a
Participant who has received a grant of an Award or a transferee of such
Participant shall have no rights as a stockholder with respect to any shares of
Common Stock until such person becomes the holder of record. Except
as otherwise provided in Section 7.2(c), no adjustment shall be made for
dividends (ordinary or extraordinary, whether in cash, securities, or other
property) or distributions or other rights for which the record date is prior to
the date such stock certificate is issued.
10.10
Listing
and Registration of Shares of Common Stock.
The
Company, in its discretion, may postpone the issuance and/or delivery of shares
of Common Stock upon any exercise of an Award until completion of such stock
exchange listing, registration, or other qualification of such shares under any
state and/or federal law, rule or regulation as the Company may consider
appropriate, and may require any Participant to make such representations and
furnish such information as it may consider appropriate in connection with the
issuance or delivery of the shares in compliance with applicable laws, rules and
regulations.
10.11
Termination
of Employment, Death and Disability.
(a)
Termination of
Employment
.
Except
as otherwise provided in the Award or in this Section 10.11, if Employment of an
Employee or service of a Non-Employee Director is terminated under circumstances
that do not cause the Participant to become fully vested in the Award, any
nonvested Award granted pursuant to the Plan outstanding at the time of such
termination and all rights thereunder shall wholly and completely terminate and
no further vesting shall occur. Any vested Award shall expire on the
earlier of (A) the expiration date set forth in the Award; or (B) the expiration
of twelve (12) months after the date of termination of Employment or service in
the case of any Award other than an Incentive Option or three (3) months after
the date of termination of Employment in the case of an Incentive Option;
provided, however, that in the event of death or Disability of a Participant
after termination of employment or service and before the expiration of such
Award the expiration of the Award shall occur twelve months after the date of
such death or Disability; and provided further, however, that in the event of
termination of an Employee or removal of a Director for Cause, such Awards shall
expire at 12:01 a.m. on the date of termination. Notwithstanding the
previous sentence, no Award shall have an expiration date which would cause such
Award to fail to satisfy Code Section 409A.
(b)
Continuation
. The
Committee, subject to the approval of the Board, may provide for the
continuation of any Award for such period and upon such terms and conditions as
are determined by the Committee and approved by the Board in the event that a
Participant ceases to be an Employee or Non-Employee
Director.
10.12
Change
in Control.
Unless
otherwise provided in the Award and subject to approval by the Board, in the
event of a Change in Control:
(i)
the
Committee may accelerate vesting and the time at which all Options and Stock
Appreciation Rights then outstanding may be exercised;
(ii)
the
Committee may waive all restrictions and conditions of all Restricted Stock and
Phantom Stock then outstanding with the result that those types of Awards shall
be deemed satisfied, and the Restriction Period or other limitations on payment
in full with respect thereto shall be deemed to have expired, as of the date of
the Change in Control, with such payment made within 45 days after the date of
the Change in Control; and
(iii)
the
Committee may determine to amend Performance Awards and Other Stock or
Performance-Based Awards, or substitute new Performance Awards and Other Stock
or Performance-Based Awards in consideration of cancellation of outstanding
Performance Awards and any Other Stock or Performance-Based Awards, in order to
ensure that such Awards shall become fully vested, deemed earned in full, with
such payment made within 45 days after the date of the Change in Control,
without regard to payment schedules and notwithstanding that the applicable
performance cycle, retention cycle or other restrictions and conditions shall
not have been completed or satisfied.
Notwithstanding the
above provisions of this Section 10.12, the Committee shall not be required to
take any action described in the preceding provisions of this Section 10.12 and
any decision made by the Committee not to take some or all of the actions
described in the preceding provisions of this Section 10.12 shall be final,
binding and conclusive with respect to the Company and all other interested
persons.
10.13
Adjustments.
In
the event that at any time after the Effective Date the outstanding shares of
Common Stock are changed into or exchanged for a different number or kind of
shares or other securities of the Company by reason of merger, consolidation,
recapitalization, reclassification, stock split, stock dividend, combination of
shares or the like, the Committee shall make an appropriate and equitable
adjustment in the number and kind of shares and the exercise price with respect
to any Awards as provided in Section 1.3; provided however, that the Committee
shall not take any actions otherwise under this Section 10.13 to the extent such
action would cause (A) an Award not subject to Code Section 409A to be subject
to such Code Section, or (B) an Award subject to Code Section 409A to violate
such Code Section.
ARTICLE
XI
WITHHOLDING
FOR TAXES
Any
issuance of Common Stock pursuant to the exercise of an Option or payment of any
other Award under the Plan shall not be made until appropriate arrangements
satisfactory to the Company have been made for the payment of any tax amounts
(federal, state, local or other) that may be required to be withheld or paid by
the Company with respect thereto. Such arrangements may, at the
discretion of the Committee, include allowing the person to tender to the
Company shares of Common Stock owned by the person (provided, that such tendered
shares of Common Stock have been owned on a fully vested basis by the person for
more than six (6) months prior to exercise), or to request the Company to
withhold shares of Common Stock being acquired pursuant to the Award, whether
through the exercise of an Option or as a distribution pursuant to the Award,
which have an aggregate FMV Per Share as of the date of such withholding that is
not greater than the sum of all tax amounts to be withheld with respect thereto,
together with payment of any remaining portion of such tax amounts in cash or by
check payable and acceptable to the Company.
Notwithstanding
the foregoing, if on the date of an event giving rise to a tax withholding
obligation on the part of the Company the person is an officer or individual
subject to Rule 16b-3, such person may direct that such tax withholding be
effectuated by the Company withholding the necessary number of shares of Common
Stock (at the tax rate required by the Code) from such Award payment or
exercise.
ARTICLE
XII
MISCELLANEOUS
12.1
No
Rights to Awards.
No
Participant or other person shall have any claim to be granted any Award, there
is no obligation for uniformity of treatment of Participants, or holders or
beneficiaries of Awards and the terms and conditions of Awards need not be the
same with respect to each recipient.
12.2
No
Right to Employment.
The
grant of an Award shall not be construed as giving a Participant the right to be
retained in the employ of the Company or any Affiliate. Further, the
Company or any Affiliate may at any time dismiss a Participant from employment,
free from any liability or any claim under the Plan, unless otherwise expressly
provided in the Plan or in any Award Agreement.
12.3
Governing
Law.
The
validity, construction, and effect of the Plan and any rules and regulations
relating to the Plan shall be determined in accordance with applicable federal
law and the laws of the
State of Nevada,
without regard to any principles of conflicts of law.
12.4
Severability.
If
any provision of the Plan or any Award is or becomes or is deemed to be invalid,
illegal, or unenforceable in any jurisdiction or as to any Participant or Award,
or would disqualify the Plan or any Award under any law deemed applicable by the
Committee, such provision shall be construed or deemed amended to conform to the
applicable laws, or if it cannot be construed or deemed amended without, in the
determination of the Committee, materially altering the intent of the Plan or
the Award, such provision shall be stricken as to such jurisdiction, Participant
or Award and the remainder of the Plan and any such Award shall remain in full
force and effect.
12.5
Other
Laws.
The
Company may refuse to issue or transfer any shares or other consideration under
an Award if it determines that the issuance of transfer or such shares or such
other consideration might violate any applicable law.
12.6
Code
Section 409A.
Notwithstanding
any other provision of the Plan to the contrary, any Award subject to Section
409A of the Code is intended to satisfy the application of Section 409A of the
Code to the Award.
12.7
No
Guarantee of Tax Consequences.
None
of the Board, the Company nor the Committee makes any commitment or guarantee
that any federal, state or local tax treatment will (or will not) apply or be
available to any person participating or eligible to participate
hereunder.
12.8
Specified
Employee under 409A.
Subject
to any other restrictions or limitations contained herein, in the event that a
“specified employee” (as defined under Section 409A and the regulations
thereunder) becomes entitled to a payment under the Plan which is subject to
Section 409A of the Code on account of a “separation from service” (as defined
under Section 409A and the regulations thereunder), such payment shall not occur
until the date that is six months plus one day from the date of such Separation
from Service. Any amount that is otherwise payable within the six
month period described herein will be aggregated and paid in a lump sum without
interest
CONSENT OF
INDEPENDENT PETROLEUM ENGINEERS
Ralph
E. Davis Associates, Inc.
1717 St.
James Place
Suite
460
Houston,
Texas 77056
September
25, 2008
ABC
Funding, Inc.
4606 FM
1960 West, Suite 400
Houston,
Texas 77069
Attn: Board
of Directors
To Whom
It May Concern:
The
undersigned consents to the use of the name Ralph E. Davis Associates, Inc. and
to the inclusion of our summary report, dated May 13, 2008, of the Estimated
Reserves and Non Escalated Future Net Revenue Remaining as of April 1, 2008 of
Voyager Gas Corporation (the “Reserve Report”) as an exhibit to the Schedule 14C
Information Statement of ABC Funding, Inc. initially filed with the Securities
and Exchange Commission on or about September 25, 2008.
Very truly yours,
RALPH E. DAVIS ASSOCIATES,
INC.
_/s/ Allen L.
Kelley_____________
Allen L. Kelley
Senior Geologist
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
ABC
Funding, Inc.
Houston,
Texas
We consent to the inclusion in this
Schedule 14C Information Statement of ABC Funding, Inc. (the “Company”),
initially filed with the Securities and Exchange Commission on or about
September 25, 2008, of our report dated September 8, 2008, relating to the
consolidated balance sheets of ABC Funding, Inc. as of June 30, 2008 and 2007,
and the related consolidated statements of operations, cash flows and changes in
stockholder’s deficit for the years ended June 30, 2008 and 2007, and for the
period from February 21, 2006 (inception) through June 30, 2008,
respectively.
/s/ Malone & Bailey,
PC
www.malone-bailey.com
Houston,
Texas
September
25, 2008