SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999 File No. 0-09482
COLORADO WYOMING RESERVE COMPANY
(Name of Small Business Issuer as Specified in its Charter)
WYOMING 83-0246080
(State of other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
751 HORIZON COURT, SUITE 205, GRAND JUNCTION, COLORADO 81506
(Address of Principal Executive Office)
Issuer's telephone number including area code: (970) 255-9995
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK; $.01 PAR VALUE
Title of Class
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State Issuer's revenues for its most recent fiscal year: $7,517
As of September 28, 1999, 10,607,694 shares of common stock $.01 par value were
outstanding. The aggregate market value of voting stock held by non-affiliates
of the Registrant was $7,550,761 based on the average bid and ask price of the
Company's Common Stock of $1.00, as reported by the NASD on the OTC Bulletin
Board System on September 28, 1999.
<PAGE>
PART I
ITEM 1. BUSINESS
(a) Business Development. Colorado Wyoming Reserve Company (formerly Mystique
Developments, Inc.) ("CWYR" or the "Company"), with its mailing address at 751
Horizon Court, Suite 205, Grand Junction, Colorado 81506, telephone number (970)
255-9995, was incorporated as a Wyoming corporation on November 7, 1979. CWYR
was organized for the purpose of engaging in oil and gas activities including
exploration for and development and production of oil and gas reserves.
(b) Business of Issuer
`
GENERAL
The Company is an oil and natural gas exploration and production company with a
geographical focus in the Rocky Mountain region of the western United States.
Management's primary objective is the acquisition of interests in undeveloped
oil and gas properties, and the location and development of economically
attractive accumulations of hydrocarbons in such properties through the use of a
highly-integrated, interpretive approach to the application of 3-D geophysical
data (seismic data acquired and processed to yield a three-dimensional picture
of the subsurface). The Company's acquisitions of undeveloped oil and gas
properties are accomplished primarily by the acquisition of direct mineral
leasehold interests from private, state and federal lands.
The Company is currently focusing its exploratory efforts in the central Paradox
Basin area of southeastern Utah (the "Paradox Basin Project"), having sold its
North Dakota properties in November 1998. See Item 12 - "Certain Relationships
and Related Transactions." The Paradox Basin Project will utilize geoscientists
and technology that have had previous success in the Paradox Basin, and will
focus on areas previously under-explored by conventional methodology. CWYR has
access to results of exploratory drilling in the Project area which will supply
a database of subsurface geologic information to assist the Company in
determining the best location for a 3-D seismic survey.
Currently, however, the Company has no revenues and continues to incur certain
general and administrative expenses and obligations related to the Paradox Basin
Project. As more fully discussed in Item 6 "Management's Discussion and Analysis
of Financial Condition and Results of Operations", the Company is seeking an
industry partner to enable it to exploit its Paradox Basin Project. Such
exploitation includes the shooting and interpretation of seismic as well as the
acquisition of additional acreage in the project area. The terms of any joint
venture the Company enters are negotiable, but it is the Company's intention to
maintain an interest in the property going forward.
EQUIPMENT, PRODUCTS AND RAW MATERIALS
CWYR owns no drilling rigs, and drilling, if any, will be accomplished by
independent contractors, typically on a footage or day rate basis, for which the
Company may bear the risks of fire, blowout or other catastrophe to its
property.
As noted above, during the Company's second fiscal quarter, the Company sold all
of its developed acreage and currently owns only leasehold interests in
undeveloped acreage in the Paradox Basin.
The existence of commercial oil and gas reserves is essential to the ultimate
realization of value from the Company's presently-undeveloped properties. The
acquisition, development, production and sale of oil and gas is subject to many
factors which are outside the Company's control. These factors include national
and international economic conditions, market forces, transportation
constraints, geologic anomalies and regulation by federal and state governmental
authorities. CWYR acquires leasehold interests in oil and gas properties from
landowners, other owners of interests in such properties, or governmental
entities. For information relating to specific properties of CWYR, see Item 2.
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<PAGE>
COMPETITION
There is significant competition for the acquisition of properties capable of
producing oil and gas, as well as for the equipment and labor required to
develop and operate such properties. Many of the Company's competitors have
financial resources and exploration and development budgets that are
substantially greater than those of the Company, which may adversely affect the
Company's ability to compete with those companies in the acquisition of
attractive oil and gas properties on terms it considers acceptable. In addition,
the Company will face competition for the sale of its oil and gas, should such
be produced, from a substantial number of companies, many of which have greater
financial or other resources than the Company.
REGULATION
If the Company is successful in developing the Paradox Basin Project, the
availability of a ready market for its oil and gas production will depend upon
numerous factors beyond the Company's control. These factors include regulation
of natural gas and oil transportation, federal and state regulations governing
environmental quality and pollution control, the amount of natural gas and oil
available for sale, the availability of adequate pipeline and other
transportation and processing facilities and the marketing of competitive fuels.
State and federal regulations generally are intended to prevent waste of natural
gas and oil, protect rights to produce natural gas and oil between owners in a
common reservoir, and control contamination of the environment.
Sales of crude oil, condensate and gas liquids are currently not subject to
federal regulation and are made at market prices. The state of Utah, in which
the Company's properties are located, regulates the production and sale of
natural gas and oil, including requirements for obtaining drilling permits, the
method of developing new fields, the spacing and operation of wells and the
prevention of waste of natural gas and other resources. Such provisions may
restrict the number of wells that may be drilled on a particular lease or in a
particular field. Recent trends indicate increased state and local regulation of
oil and gas activities and pipeline operations which may impact the Company's
operations; however, these impacts are not expected to be significant.
ENVIRONMENTAL LAWS
The Company's operations are subject to numerous laws and regulations governing
the discharge of materials into the environment or otherwise relating to
environmental or cultural resource protection. These laws and regulations may
(a) require the acquisition of a permit prior to constructing a drill site,
commencing drilling or constructing pipelines; (b) restrict the types,
quantities and concentration of various substances that can be released into the
environment in connection with drilling and production activities; (c) limit or
prohibit drilling activities on certain lands lying within wilderness, wetlands,
culturally sensitive and other protected areas; and (d) impose substantial
liabilities for pollution resulting from the Company's operations. Moreover, the
recent trend toward stricter standards in environmental legislation and
regulations is likely to continue. Existing, as well as future legislation and
regulations, could cause additional expense, capital expenditures, restrictions
and delays in the development of properties, the extent of which cannot be
predicted. Management believes that the Company is in substantial compliance
with current applicable environmental laws and regulations and that continued
compliance with existing requirements will not have a material adverse impact on
the Company. Since inception, the Company has not been required to make any
material expenditures with respect to compliance with environmental laws and
does not expect to make any material expenditures during the current and
following fiscal year.
EMPLOYEES
As of June 30, 1999, the Company had one part-time employee. The Company employs
consultants as needed.
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<PAGE>
ITEM 2. PROPERTIES
The Company's principal office is located at 751 Horizon Court, Suite 205, Grand
Junction, Colorado 81506.
Producing Wells and Acreage. CWYR owned no productive oil and gas wells or
developed acreage at June 30, 1999. The following table sets forth the Company's
interest in undeveloped acreage at June 30, 1999:
UNDEVELOPED ACREAGE
GROSS NET
-------- --------
Utah 55,868 55,868
CWYR's oil and gas properties are in the form of mineral leases. As is customary
in the oil and gas industry, a preliminary investigation of title is made at the
time of acquisition of undeveloped properties. Title investigations are
generally completed, however, before commencement of drilling operations. CWYR
believes that its methods of investigating are consistent with practices
customary in the industry and that it has generally satisfactory title to its
leases. In connection with a fiscal 1999 financing transaction, the Company
granted an interest in all of its properties to secure the repayment of a bridge
loan in the principal amount of $120,000 (later increased to $130,000) from The
James E. Moore Revocable Trust, u/d/t dated July 28, 1994 (the "Trust"). The
loan was repaid during fiscal 1999 and the secured interest was released by the
Trust. For additional discussion about the loan, see Item 12 "Certain
Relationships and Related Transactions."
During fiscal 1999 and 1998:
o There have been no reserve estimates filed with any other United States
federal authority or agency.
o The Company was not a party to any long-term supply or similar agreements
with foreign governments or authorities in which CWYR acted as a producer.
o The Company drilled no productive or dry exploratory or development wells.
o The Company was not (nor is it currently) obligated to provide a fixed and
determinable quantity of oil and gas pursuant to any contracts or agreements.
AVERAGE SALES PRICE AND PRODUCTION COST
-------------------------------------------------------------
1999 1998
------ ------
Average sales price per $ 8.36 $15.49
equivalent barrel of oil
Average production (lifting) cost $13.32 $15.96
per equivalent barrel of oil (1)
- ---------------------
(1) Natural gas equivalents are determined using a ratio of six MCF of natural
gas to one barrel of crude oil.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this Annual Report, no
matter was submitted to a vote of CWYR's security holders through the
solicitation of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Common Stock of CWYR is traded on the OTC Bulletin Board System. The
following table sets forth the high and low bid prices of the Common Stock as
reported by the NASD in the over-the-counter market for the periods indicated.
The bid prices represent prices between dealers, without retail markups,
markdowns or commissions, and may not represent actual transactions. Public
trading in the Common Stock of CWYR is minimal.
For the Quarter Ended Low High
--------------------- ------ -----
September 30, 1997 $ 2.00 $3.00
December 31, 1997 $ 1.13 $2.00
March 31, 1998 $ 1.13 $3.56
June 30, 1998 $ 1.44 $3.13
September 30, 1998 $ .81 $1.81
December 31, 1998 $ .88 $1.75
March 31, 1999 $ .25 $1.50
June 30, 1999 $ .25 $1.00
The number of record holders of Common Stock of CWYR as of September 28, 1999,
was approximately 2,785. The closing price as of that date, as quoted by the
NASD OTC Bulletin Board under the symbol "CWYR," was $1.00.
Holders of Common Stock are entitled to receive dividends as may be declared by
the Board of Directors out of funds legally available therefor. No dividends
have been declared to date by CWYR, nor does CWYR anticipate declaring and
paying cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
On May 28, 1999, the Company closed a private offering of 7,845,000 shares of
its Common Stock, raising approximately $785,000 ($767,000 net of offering
costs) for repayment of debt and working capital. The shares were offered
pursuant to an exemption from registration provided by Rule 505 of Regulation D
of the Securities Act of 1933, as amended. Shares were purchased by accredited
investors and less than 25 non-accredited investors.
During the fiscal year, the Company issued warrants to purchase 330,000 shares
of the Company's Common Stock to the James E. Moore Revocable Trust, u/d/t dated
July 28, 1994 (the "Trust"), as consideration for a bridge loan in the amount of
$120,000 (later increased to $130,000) and extensions of the loan repayment date
at various times during the fiscal year. The warrants have a term of ten years
from the date of issuance, and an exercise price of $0.10 per share. See Note 8
to the Company's Financial Statements for additional information about the
bridge loan.
In connection with the Company's merger with Shoreline Resource Company, Inc.,
the Company issued to Trinity Petroleum Management LLC 25,000 restricted shares
of Common Stock on January 22, 1998, as consideration for certain additional
services provided by Trinity. See Note 2 to the Company's Financial Statements
for additional information about the merger.
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<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
UNCERTAINTY OF FORWARD-LOOKING INFORMATION
This annual report on Form 10-KSB includes statements that are not purely
historical and are "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward -looking statements involve risks and
uncertainties that could cause actual results to differ from projected results.
Such statements address activities, events or developments that the Company
expects, believes, projects, intends or anticipates will or may occur, including
such matters as future capital, anticipated expenditures, effect of changes in
accounting standards, locating and aligning with an industry partner, ability to
maintain an interest in the Paradox Basin properties, governmental regulation,
drilling of exploration and development wells, cash flow and anticipated
liquidity, prospect development and property acquisition. Factors that could
cause actual results to differ materially ("Cautionary Disclosures") include,
among others: general economic conditions, the market price of oil and natural
gas, concentration of the Company's properties in a small area in the Paradox
Basin, the strength and financial resources of the Company's competitors,
climatic conditions, environmental risks, the results of financing efforts and
regulatory developments. Many of such factors are beyond the Company's ability
to control or predict. All forward-looking statements included or incorporated
by reference in this Form 10-KSB are based on information available to the
Company on the date hereof. Although the Company believes that the assumptions
and expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to have been correct or
that the Company will take any actions that may presently be planned. All
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the Cautionary Disclosures.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1998 the Company revised its strategy of seeking to purchase
producing oil and gas properties and, instead, implemented a strategy centered
on exploration. To help implement its new strategy, the Company entered into an
exploration joint venture and a merger agreement. In conjunction with its merger
with Shoreline Resource Company, Inc., the Company obtained its Paradox Basin
acreage. See Note 2 to the Company's Financial Statements for additional
information about the merger.
Pursuant to the joint venture mentioned above, the Company purchased a once
producing field in North Dakota from a financially distressed entity. The
purchase included seven producing wells, a saltwater disposal well and a total
of 1,300 acres. Subsequently, an additional 1,700 developmental acres were
acquired. However, in order to raise cash for its short term obligations, the
Company sold the property during the quarter ended December 31, 1998. See Item
12 for discussion about the sale of the North Dakota property.
During the first fiscal quarter, the Company obtained a bridge loan in the
amount of $120,000 (later increased to $130,000) to provide working capital
until a private equity sale could be consummated. During the quarter ended
June 30, 1999, the Company raised approximately $785,000 ($767,000 net of
offering costs) in a private equity sale. The proceeds allowed the Company to
settle all outstanding payables (including repayment of the bridge loan), and
provided funds for recurring administrative costs and the cost of marketing its
Paradox Basin Project. The proceeds also allowed the Company to meet delay lease
rental obligations (necessary for the Company to maintain ownership of the
leases underlying its Paradox Basin Project) during the quarter ended
September 30, 1999. The Company had a cash balance of approximately $200,000 at
September 30, 1999.
The Company currently has no revenues and continues to incur the obligations
outlined in the previous paragraph. During the 12 months ending September 30,
2000, the Company will have lease rental obligations totaling approximately
$71,000. While the Paradox Basin Project is a marketable asset as it is
currently configured, the Company believes its marketability would increase
should the Company be able to add additional acreage. Towards that end, the
Company purchased options giving it the right to purchase approximately 14,000
additional acres. Those options, which expire in February and March 2000, give
the Company the right to extend the option for an additional year at an
approximate cost of $69,000 or to exercise a five-year term lease at a cost of
approximately $518,000. The Company's existing financial resources, however, are
insufficient to allow it to exercise its purchase option.
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The Company is currently seeking a joint venture partner having financial
resources significant enough to enable the Company to exploit fully its Paradox
Basin Project. Such exploitation includes the shooting and interpretation of
seismic as well as the acquisition of additional acreage in the project area.
The terms of any joint venture the Company enters are negotiable, but it is the
Company's intention to maintain an interest in the property going forward.
Recent increases in oil and gas prices have resulted in increased investor
interest in the oil and gas industry. The Company could attempt to capitalize
on this interest by raising additional equity funds. Given the Company's cash
flow position, debt financing is an unlikely alternative.
In summary, the Company has no cash flow from operations and will require
additional funding, through either a joint venture or from selling additional
equity capital, to convert its only significant asset into a cash generating
investment. Failure to secure a joint venture partner or raise additional
capital could result in the Company being liquidated on terms unfavorable to its
shareholders.
OPERATIONS. Cash used in operating activities was $512,441 in 1999 versus
$469,784 in 1998, an increase of approximately ten percent. The increase results
primarily from a $115,000 increase in payables in 1998 versus a $111,000
decrease in 1999, a net negative effect of $226,000.
INVESTING. Cash from investing activities was $33,090 in 1999 versus cash used
in investing activities of $328,675 in 1998. In order to raise cash to fund its
operations and finance its Paradox Basin Project acquisition, the Company sold
all of its producing properties during fiscal years 1998 (proceeds of $53,335)
and 1999 (proceeds of $61,642). During fiscal 1998, the cost of the Company's
Paradox Basin Project acquisitions exceeded the proceeds from its producing
property sales, while during 1999, sales proceeds exceeded acquisition costs.
FINANCING. As described above, the Company closed a private equity offering
during fiscal 1999. Additionally, the Company used short term financing (repaid
during the quarter ended June 30, 1999) to cover its operational cash flow
shortfall during the year.
RESULTS OF OPERATIONS
OIL AND GAS OPERATIONS. The Company's producing properties began losing money
during fiscal 1998. For this reason, and due to the Company's lack of liquidity,
all of the Company's producing properties were sold during each of the last two
fiscal years.
EXPLORATION COSTS. Exploration costs incurred in both fiscal 1999 ($64,215) and
1998 ($28,796) represent costs incurred in conjunction with CWYR's Paradox Basin
Project. The higher 1999 figure is due to the fact the Company owned the
properties for the full 12 months of 1999 versus only part of 1998.
IMPAIRMENT EXPENSE. Impairment expense of $45,212 was incurred during fiscal
1998 when the Company wrote down its producing properties to fair market value.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense included
noncash charges for equity issued as compensation of $252,600 and $792,500
during fiscal 1999 and 1998, respectively. General and administrative expense
exclusive of the noncash items for the respective years was $375,000 and
$575,000. The 35 percent reduction from 1998 to 1999 resulted from lower salary
expense and lower overhead (primarily rent, travel and telephone) partially
attributable to the closing of the Company's office in California. Additionally,
the Company cut its investor relations expense during fiscal 1999.
OTHER. Interest expense during fiscal 1999 of $154,831 consisted of interest on
the short term 1999 financing, including amortization of the note payable
discount (a total of $148,000) resulting from the issuance of warrants in
conjunction with the financing. The Company had no debt during fiscal 1998.
Interest income of $19,135 realized during fiscal 1998 derived from the
investment of excess cash. No excess cash was available during fiscal 1999.
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YEAR 2000. The Company does not anticipate incurring any costs associated with
modifying its computer system to be Year 2000 compatible. The initial design of
the system used to process the Company's accounting data and well operations
information incorporated Year 2000 capability. The Company currently has no
electronic data processing systems other than the accounting and well operations
system. Since the Company currently has no significant field operations it has
no material relationships with third parties. Accordingly, the Company has
limited exposure regarding Year 2000 issues related to third party companies.
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standard ("SFAS") 133 ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES in June 1998. SFAS 133 established new accounting and
reporting standards for derivative instruments and for hedging activities. This
statement requires an entity to establish at the inception of a hedge, the
method it will use for assessing the effectiveness of the hedging derivative and
the measurement approach for determining the ineffective aspect of the hedge.
Those methods must be consistent with the entity's approach to managing risk. In
June 1999 the FASB issued SFAS 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT 133. SFAS
137 states that SFAS 133 shall be effective for all fiscal quarters beginning
after June 15, 2000.
The Company believes that these statements will have no material effect on the
Company's financial statements.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Included at Pages 11 through 25 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
As previously reported on Form 8-K, filed with the SEC on May 20, 1999,
PricewaterhouseCoopers LLP resigned as the Company's accountant on May 14, 1999.
During September 1999, the Board of Directors approved the engagement of Hein +
Associates LLP as the Company's independent accountants and filed its Form 8-K
on September 30, 1999 to report such engagement. There were no material
disagreements between the Company and its accountants on any matter or
accounting principles, practices or financial statement disclosure.
-8-
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INDEPENDENT AUDITOR'S REPORT
Board of Directors
Colorado Wyoming Reserve Company
Grand Junction, Colorado
We have audited the accompanying consolidated balance sheet of Colorado Wyoming
Reserve Company as of June 30, 1999, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Colorado Wyoming
Reserve Company as of June 30, 1999, and the results of their operations and
their cash flows for year ended June 30, 1999 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring negative cash flows
from operations and has limited available funds. These items raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
HEIN + ASSOCIATES LLP
Denver, Colorado
October 8, 1999
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Colorado Wyoming Reserve Company:
In our opinion, the accompanying balance sheet and the related consolidated
statement of operations, stockholders' equity, and cash flows present fairly, in
all material respects, the financial position of Colorado Wyoming Reserve
Company at June 30, 1998, and the results of its operations and its cash flows
for the year ended June 30, 1998 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring negative cash flows
from operations and has limited available funds. These items raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
PricewaterhouseCoopers LLP
Denver, Colorado
December 23, 1998
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<TABLE>
<CAPTION>
COLORADO WYOMING RESERVE COMPANY
CONSOLIDATED BALANCE SHEETS
As of June 30, 1999 and 1998
1999 1998
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 241,455 $ --
Trade accounts receivable 1,388 3,593
Related party receivable 756 --
----------- -----------
243,599 3,593
Assets held for sale -- 10,000
Prepaid expenses 3,224 5,686
----------- -----------
Total current assets 246,823 19,279
PROPERTY AND EQUIPMENT:
Unproved oil and gas properties 567,559 653,250
Proved oil and gas properties -- 64,460
Other property and equipment 13,645 13,645
----------- -----------
581,204 731,355
Less accumulated depreciation, other property and equipment (10,659) (6,383)
----------- -----------
Net property and equipment 570,545 724,972
----------- -----------
Total assets $ 817,368 $ 744,251
=========== ===========
CURRENT LIABILITIES:
Trade accounts payable $ 9,134 $ 67,017
Bank overdrafts -- 19,444
Other accrued liabilities 33,324 30,067
Property remediation -- 64,000
Related party payables 9,988 46,596
----------- -----------
Total current liabilities 52,446 227,124
Commitments and contingencies (notes 1 and 5)
EQUITY
Common Stock, $.01 par value: authorized--
75,000,000 shares; issued and outstanding--
10,552,694 and 2,467,694 shares at June 30, 1999
and 1998, respectively 105,527 24,677
Additional paid-in capital 5,254,276 4,283,320
Warrants 148,100 --
Subscription receivable (78,500) --
Accumulated deficit (4,664,481) (3,790,870)
----------- -----------
764,922 517,127
----------- -----------
Total liabilities and equity $ 817,368 $ 744,251
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<TABLE>
<CAPTION>
COLORADO WYOMING RESERVE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999 AND 1998
1999 1998
----------- -----------
<S> <C> <C>
REVENUES:
Oil and gas sales $ 7,517 $ 32,798
Other -- --
----------- -----------
Total revenues 7,517 32,798
EXPENSES:
Operation of producing properties 16,635 37,665
Exploration cost 64,215 28,796
Depreciation, depletion and amortization 4,276 3,962
Impairment expense -- 45,212
Bad debt expense -- 1,694
General and administrative 628,111 1,367,399
----------- -----------
Total expenses 713,237 1,484,728
----------- -----------
Operating loss (705,720) (1,451,930)
OTHER INCOME (EXPENSE)
Interest (expense) income (154,831) 19,135
(Loss) gain on sale of assets (13,060) 16,336
----------- -----------
Loss before income taxes (873,611) (1,416,459)
Provision for income taxes -- --
----------- -----------
Net loss $ (873,611) $(1,416,459)
=========== ===========
Basic and diluted loss per share $ (0.19) $ (0.73)
=========== ===========
Weighted average common shares outstanding 4,511,570 1,941,494
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<TABLE>
<CAPTION>
COLORADO WYOMING RESERVE COMPANY
Consolidated Statement of Stockholders' Equity
Years Ended June 30, 1999 and 1998
---Common Stock---
------------------------- Additional
Subscription Paid-in Accumulated
Shares Par Value Warrants Receivable Capital Deficit Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 1,595,076 $ 15,951 -- -- $ 3,175,545 $(2,374,411) $ 817,085
Equity issued as compensation 25,000 250 -- -- 792,250 -- 792,500
Common stock issued in merger 797,618 7,976 -- -- 266,025 -- 274,001
Sale of common stock 50,000 500 -- -- 49,500 -- 50,000
Net (loss) for the year ended --
June 30, 1998 -- -- -- -- -- (1,416,459) (1,416,459)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 1998 2,467,694 $ 24,677 $ -- $ -- $ 4,283,320 $(3,790,870) $ 517,127
----------- ----------- ----------- ----------- ----------- ----------- -----------
Equity issued as compensation 216,000 2,160 -- -- 250,440 -- 252,600
Warrants issued pursuant to -- -- 148,100 -- -- -- 148,100
financing
Sale of common stock 7,869,000 78,690 -- (78,500) 720,516 -- 720,706
Net (loss) for the year ended
June 30, 1999 -- -- -- -- -- (873,611) (873,611)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 1999 10,552,694 $ 105,527 $ 148,100 $ (78,500) $ 5,254,276 $(4,664,481) $ 764,922
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
COLORADO WYOMING RESERVE COMPANY
CONSOLIDATED CASH FLOW STATEMENTS
Years Ended June 30, 1999 and 1998
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (873,611) $(1,416,459)
Adjustments to reconcile net loss to net used
in operating activities:
Depletion, depreciation and amortization 4,276 3,962
Loss (gain) on asset sale 13,060 (16,337)
Impairment expense -- 45,212
Amortization of note payable discount 148,000 --
Equity issued as compensation 252,600 792,500
Other noncash compensation 50,000 --
Changes in current assets and liabilities:
Receivables 1,449 11,420
Payables (110,677) 114,750
Prepaids 2,462 (4,832)
----------- -----------
Net cash (used in) operating activities (512,441) (469,784)
Cash flows from investing activities:
Additions to unproved properties (28,473) (326,250)
Additions to proved properties -- (53,460)
Asset purchases -- (2,300)
Proceeds from asset sales 61,562 53,335
----------- -----------
Net cash provided by (used in) investing activities 33,089 (328,675)
Cash flows from financing activities:
Notes payable 57,693 --
Sale of warrants 72,408 --
Repayment of note payable (130,000) --
Sale of common stock 720,706 50,000
----------- -----------
Net cash provided by financing activities 720,807 50,000
----------- -----------
Net increase (decrease) in cash and equivalents 241,455 (748,459)
Cash and equivalents at beginning of period -- 748,459
----------- -----------
Cash and equivalents at end of period $ 241,455 $ --
=========== ===========
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
FISCAL 1999
The Company issued 216,000 common shares to two directors pursuant to a stock
purchase agreement. The shares issued were valued at $.10 per share, the price
of the shares sold in the Company's May 1999 private placement. The Company
paid approximately $6,000 in interest during 1999.
The agreement for sale of a producing property to the Company's president also
included a provision extinguishing a liability to the president for past salary
of $50,000 ($10,000 of which related to fiscal 1998 salary).
FISCAL 1998
The Company issued 25,000 common shares to its management company for services
rendered. The Shares issued were valued at $1.50 per share, the market price at
the date of issuance. Additionally, the Company issued 797,618 common shares
valued at $.34 per share for all of the outstanding shares of Shoreline Resource
Company, Inc.
The accompanying notes are an integral part of these financial statements.
-14-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS:
The Company is an oil and natural gas exploration and production company
with a geographical focus in the Rocky Mountain region of the western
United States. Management's primary objective is the acquisition of
interests in undeveloped oil and gas properties, and the location and
development of economically attractive accumulations of hydrocarbons in
such properties through the use of a highly-integrated, interpretive
approach to the application of 3-D geophysical data (seismic data acquired
and processed to yield a three-dimensional picture of the subsurface). The
Company's acquisitions of undeveloped oil and gas properties are
accomplished primarily by the acquisition of direct mineral leasehold
interests from private, state and federal lands.
The company is currently focusing its exploratory efforts in the central
Paradox Basin areas of southeastern Utah (the "Paradox Basin Project"),
having sold its North Dakota properties in November 1998. As a result of
this sale, the Company has no revenues and continues to incur certain
general and administrative expenses and obligations related to the Paradox
Basin Project. The Company is seeking an industry partner to enable it to
fully exploit its Paradox Basin Project. Such exploitation includes the
shooting and interpretation of seismic as well as the acquisition of
additional acreage in the project area. The terms of any joint venture the
Company enters are negotiable, but it is the Company's intention to
maintain an interest in the property going forward.
GOING CONCERN:
The Company currently has no significant revenue source and continues to
incur obligations with respect to certain general and administrative items.
Additionally, the Company must fund certain obligations related to its
significant asset, the Paradox Basin Project. These factors raise
substantial doubt about the Company's ability to continue as a going
concern. During the fourth quarter of fiscal 1999, the Company raised
additional capital through a private placement of its common stock and is
currently looking at other financing or joint venture alternatives for
exploration of the Paradox Basin Project. Failure to either raise
additional funds or find a joint venture partner for its Paradox Basin
Project could result in the liquidation of the Company.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents. The
carrying value of cash and cash equivalents approximates fair value because
the instruments have maturity dates of three months or less.
CONCENTRATION OF CREDIT RISK:
The Company currently has no material trade receivables. Historically,
however, substantially all of the Company's trade receivables were within
the oil and gas industry, primarily from purchasers of oil and gas and
joint venture participants, and collectibility has been dependent upon the
general economic conditions of the industry. The receivables were not
collateralized.
The Company generally invests its excess cash in money market funds having
minimal credit risk.
-15-
<PAGE>
OIL AND GAS PRODUCING ACTIVITIES:
The Company follows the successful efforts method of accounting for its oil
and gas properties. Under this method of accounting, all property
acquisition costs and costs of exploratory and development wells are
capitalized when incurred, pending determination of whether the well has
found proved reserves. If an exploratory well has not found proved
reserves, the costs of drilling the well are charged to expense. The costs
of development wells are capitalized whether productive or nonproductive.
Geological and geophysical costs on exploratory prospects and the costs of
carrying and retaining unproved properties are expensed as incurred. An
impairment allowance is provided to the extent that capitalized costs or
unproved properties, on a property-by-property basis, are considered to be
not realizable. Depletion, depreciation and amortization ("DD&A") of
capitalized costs of proved oil and gas properties is provided on a
property-by-property basis using the units of production method based upon
proved reserves. The computation of DD&A takes into consideration
restoration, dismantlement and abandonment costs and the anticipated
proceeds from equipment salvage.
The Company tests for impairment of its producing properties by comparing
expected undiscounted future net revenues on a property-by-property basis
with the related net capitalized costs at the end of each period. When the
net capitalized costs exceed the undiscounted future net revenues, the cost
of the property is written down to "fair value," which is estimated using
discounted future net revenues from the producing property. Gains and
losses are recognized on sales of entire interests in proved and unproved
properties. Sales of partial interests are generally treated as recoveries
of costs. With regard to properties held for sale, the Company uses the
estimated net sales proceeds as its estimate of fair value.
OTHER PROPERTY AND EQUIPMENT:
Other property and equipment is depreciated using the straight line method
over the estimated useful life of the property.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company's
wholly-owned subsidiary. Intercompany transactions and accounts are
eliminated in consolidation.
INCOME TAXES:
Deferred income taxes are provided on the difference between the tax basis
of an asset or liability and its reported amount in the financial
statements. This difference will result in taxable income or deductions in
future years when the reported amount of the asset or liability is
recovered or settled, respectively.
STOCK OPTIONS:
As permitted under the Statement of Financial Accounting Standards No. 123
(SFAS No. 123), Accounting for Stock-Based Compensation, the Company
accounts for its stock-based compensation for options issued to employees
and directors in accordance with the provisions of Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. As
such, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price.
Certain pro forma net income and EPS disclosures for employee stock option
grants are also included in the notes to the financial statements as if the
fair value methods as defined in SFAS No. 123 had been applied.
Transactions in equity instruments with non-employees for goods or services
are accounted for by the fair value method.
For options repriced, the Company fair values the option immediately
preceding the repricing, and any incremental difference to the fair value
of the option after repricing is either disclosed in the pro forma
information for options issued to employees or directors or expensed in
operations for options issues to others. Under a proposal generated by the
Financial Accounting Standards Board, the Company may be required, if the
new rules are implemented as
-16-
<PAGE>
proposed, to value all repriced options similar to a variable stock plan.
This could result in additional expense being recorded in future periods as
a result of price changes in the Company's traded common stock.
COMPREHENSIVE INCOME:
The Company has adopted SFAS No. 130, Reporting Comprehensive Income. SFAS
No. 130 establishes new rules for the reporting and display of
comprehensive income and its components, however, it has no impact on the
Company's net loss or stockholders' equity.
NET LOSS ATTRIBUTABLE TO COMMON SHARES:
The Company adopted Statement of Financial Accounting Standard 128,
EARNINGS PER SHARE ("SFAS 128") during fiscal 1998. SFAS 128 requires the
presentation of basic and diluted earnings per share. Basic earnings per
share are calculated by dividing income available to common shareholders by
the weighted average number of common shares outstanding. Diluted earnings
per share is calculated by taking into account all potentially dilutive
securities. The Company has not included potentially dilutive securities
consisting of options and warrants to purchase 2.445 million shares and
1.715 million shares in 1999 and 1998, respectively, because they would be
anti-dilutive.
The Company believes that these statements will have no material effect on
the Company's financial statements.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
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.
ENVIRONMENTAL LIABILITIES:
The Company estimates the costs associated with plugging and abandoning its
producing oil and gas wells and accrues such costs, net of any expected
equipment salvage value, as a liability. The cost is amortized over the
life of the wells. Liabilities of this nature are disclosed as property
remediation liabilities in the balance sheet. The Company does not use
discounting in the determination of these liabilities.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS:
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("SFAS") 133 ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING Activities in June 1998. SFAS 133 established new
accounting and reporting standards for derivative instruments and for
hedging activities. This statement requires an entity to establish at the
inception of a hedge, the method it will use for assessing the
effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk. In June 1999 the
FASB issued SFAS 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT 133. SFAS 137
states that SFAS 133 shall be effective for all fiscal quarters beginning
after June 15, 2000.
2. MERGER WITH SHORELINE RESOURCE COMPANY
On February 6, 1998, the Company entered into an Agreement and Plan of
Merger, dated as of February 6, 1998 (the "Merger Agreement") with
Shoreline Resource Company, Inc., a Colorado corporation ("Shorco"), CWSub,
Inc., a wholly-owned subsidiary of the Company incorporated in the state of
Colorado ("CWSub") and F. Robert Tiddens, Cindy L. Stewart and John F.
Greene, the shareholders of Shorco (the "Shorco Shareholders"). Pursuant to
the terms of the Merger Agreement, CWSub was merged with and into Shorco,
with Shorco surviving the Merger and becoming a wholly-owned subsidiary of
the Company at the Merger Effective Time (as defined in the Merger
Agreement). The fiscal year-end of Shorco following the Merger was June 30,
1998.
-17-
<PAGE>
The Merger consideration consisted of issuance by the Company of 797,618
shares of its common stock, $.01 par value per share ("Common Stock")
valued at $274,000, in exchange for all of the issued and outstanding
common stock of Shorco. As a result of the Merger, the Shorco Shareholders,
collectively, owned approximately 33% of the outstanding Common Stock of
the Company. The acquisition was accounted for under the purchase method of
accounting.
At the time of the Merger, Shorco's only assets consisted of unproved oil,
gas and mineral leasehold interests in approximately 20,300 acres in a
targeted area in southern Utah (the Paradox Basin), along with a team of
geoscientists having access to state-of-the-art "3D" seismic processing
techniques for use in developing a "3D" seismic exploration project in such
area. Shorco had no operating activity prior to the Merger. Accordingly, no
pro forma results of operations showing the effect on the Company of the
Shorco Merger have been prepared.
3. INCOME TAXES
No tax benefits from the losses incurred during fiscal 1999 and 1998 were
recognized due to the substantial uncertainty as to their eventual
utilization.
Effective tax rates differ from the Federal income tax rate as shown in the
following table.
Percent of Pretax (Loss) Income
1999 1998
---- ----
Federal statutory rate (34)% (34)%
State income taxes (3)% (3)%
Change in valuation allowance 30% 30%
Expiration of prior year loss 7% 7%
carryforwards
---- ----
Effective rate -- --
==== ====
-18-
<PAGE>
Deferred income taxes reflect the impact of temporary differences between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. The tax effect of the temporary
differences and carryforwards giving rise to the Company's deferred tax
assets and liabilities at June 30, 1999 and 1998 are as follows:
1999 1998
----------- ---------
Deferred tax assets
Net operating loss and tax $1,211,000 $885,000
credit carryforwards
Valuation allowance (1,211,000) (885,000)
----------- ---------
Net deferred tax assets $ -- $ --
=========== =========
SFAS No. 109 requires that a valuation allowance be provided if it is more
likely than not that some portion or all of a deferred tax asset will not
be realized. The Company's ability to realize the benefit of its tax
assets will depend on the generation of future taxable income through
profitable operations and expansion of the Company's oil and gas producing
properties. The market, capital, and environmental risks associated with
that growth requirement are considerable, resulting in the Company's
conclusion that a full valuation allowance be provided, except to the
extent that the benefit of operating loss carry forwards can be used to
offset future reversals of existing deferred tax liabilities. The Company
increased its valuation allowance by $326,000 and $181,000 during fiscal
1999 and 1998, respectively.
At June 30, 1999, the Company had tax basis net operating loss carry
forwards available to offset future taxable income of $3.3 million, which
expire from 2000 to 2013. Of that amount, approximately $956,000 can never
be used by the Company and the usage of $363,000 is limited to certain
maximum yearly amounts over a 14-year period, as a result of the change in
control occurring during fiscal 1998 and 1997.
4. MAJOR CUSTOMERS
The following are considered major customers which account for ten percent
or more of total operating revenues in 1999 and 1998.
1999 1998
---- ----
Conoco Oil Company -- 23%
JN Petroleum Marketing 42% --
Texaco Oil Company -- 17%
Phillips Company -- 41%
Duke Energy 58% 19%
5. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
Effective January 1, 1998, the Company entered into an Agreement for
Administrative Services (the "Trinity Agreement") with Trinity Petroleum
Management LLC, a Colorado limited liability company ("Trinity"). Pursuant
to the terms of the Trinity Agreement, Trinity performs certain management
functions for the Company. Trinity bills for its services on an hourly
basis, receives a flat fee of $1,000 per month (formerly $3,000 per month)
and is reimbursed for third party expenses. The Trinity Agreement is for a
term of one year, continuing thereafter on a month-to-month basis,
terminable upon 60 days written notice by either party. J. Samuel Butler, a
member of the Board of Directors of the Company, currently serves as
President of Trinity and owns approximately 24 percent
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<PAGE>
of Trinity through his ownership of Butler Resources, LLC. In connection
with certain additional services provided to the Company by Trinity
pursuant to the Merger Agreement, on January 22, 1998 the Company issued to
Trinity 25,000 restricted shares of Common Stock as well as an option to
purchase up to 100,000 shares of the Company's Common Stock at an exercise
price of $1.50 per share, subsequently repriced to $.10 per share in May
1999.
Effective January 1, 1998, the Company entered into an Agreement for
Consulting Services (the "SCI Agreement") with Sayed Consulting, Inc., a
Nevada corporation ("SCI"). Pursuant to the terms of the SCI Agreement, SCI
performed certain investor and public relations functions for the Company
for a fee of $1,000 per month and reimbursement of third party expenses.
The SCI Agreement was for a term of one year. On January 30, 1998 in
connection with the SCI Agreement, the Company issued to SCI an option to
purchase up to 200,000 shares of the Company's Common Stock at an exercise
price of $1.75 per share (repriced in December 1998 to $1.00 per share and
in May 1999 to $.25 per share). Waseem A. Sayed owns 100 percent of SCI and
serves as its President. Mr. Sayed's brother, Rafiq A. Sayed, was appointed
as a member of the Company's Board of Directors effective September 4,
1998. Dr. Syed A. Daud, a recently-appointed member of the Board of
Directors, serves as Vice President of Investor Relations & Communications
for SCI.
The Company entered into a Contract Operator Agreement and Operating
Agreement, effective March 13, 1998 with ST Oil Company, a Nevada
corporation ("ST"), pursuant to which ST serves as managing agent and
attorney-in-fact for the Company, and as operator of record of the
Companies properties located in North Dakota (the "ST Agreement"). In
return for its services, ST is entitled to receive, at payout, a five
percent working interest in the leases and wells. Mr. Butler owns
approximately 52 percent of ST and serves as its President and Chief
Executive Officer. During fiscal 1999, the ST Agreement was assigned by the
Company to FM Energy, LLC in connection with the North Dakota Agreement
(defined and described below).
The Company entered into an employment contract with Mr. Fuerst on
October 1, 1996 pursuant to which Mr. Fuerst received a salary of $10,000
per month and was granted incentive stock options to purchase up to 500,000
shares of the Company's Common Stock at an exercise price of $1.00 per
share (repriced to $.25 per share in May 1999). The contract is for an
initial term of three years commencing October 1, 1996 and may be
terminated by Mr. Fuerst, if for Cause (as defined in the contract). The
Company's salary obligation to Mr. Fuerst of $10,000 per month for the
months of June through October 1998 was extinguished in connection with the
purchase by FM Energy, LLC (of which Mr. Fuerst owns 50 percent and serves
as co-manager) of the Company's properties located in North Dakota. The
satisfaction of the Company's salary obligation for such months served as
partial consideration for the purchase. Mr. Fuerst determined to forego his
salary during the months of November and December 1998, and January through
April 1999. In May 1999, Mr. Fuerst's salary was reduced to $5,000 per
month pursuant to an amendment to his employment agreement. See also Note 9
for a description of a stock option to purchase 500,000 shares of Common
Stock granted to Mr. Fuerst subsequent to the fiscal year end in July 1999.
Effective November 1, 1998, the Company accepted an Offer to Purchase
certain of its properties located in North Dakota (the "North Dakota
Agreement") submitted by FM Energy, LLC ("FM"), a California limited
liability company collectively owned by the Company's President, Kim M.
Fuerst, and the Trust. Pursuant to the North Dakota Agreement, the Company
sold its interest in certain properties in North Dakota in return for (a) a
cash payment to the Company of $50,000; (b) extinguishment of the Company's
$50,000 obligation to Kim M. Fuerst as compensation for his services as
President of the Company for the months of June through October 1998; and
(c) an extension of the repayment date for the Bridge Loan from October 31,
1998 to November 30, 1998 (subsequently extended, in a series of
transactions, to May 28, 1999). The Company acquired the North Dakota
properties during fiscal 1998 for $113,392. See Item 6 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
For related-party transactions occurring subsequent to June 30, 1999, see
Note 9.
-20-
<PAGE>
6. OPTIONS, WARRANTS AND RESERVED SHARES
On October 18, 1996 the Board of Directors of the Company adopted the
Incentive Stock Option Plan ("the ISO Plan"). On April 5, 1997 the Board
adopted the Equity Incentive Plan ("the Equity Plan"). Both plans were
approved by stockholders at the Company's 1997 annual meeting. On February
11, 1998, the Equity Plan was amended to delete the automatic six-month
vesting requirement for options granted thereunder to allow the Board of
Directors or committee broad discretion in determining such requirements.
The ISO Plan was established for the purpose of providing an option to
purchase the Company's common stock to one key employee of the Company,
while the Equity Plan allows option grants to various employees,
non-employees, directors, consultants and advisors.
Options under both the plans may have a term of up to five years or ten
years; the actual term and any vesting requirements are set at the
discretion of the Board of Directors or a Committee thereof. The maximum
number of shares authorized for issuance under the ISO Plan is 500,000
shares; under the Equity Plan the maximum is 2.5 million shares.
The following is a summary of the Company's option and warrant activity for
the years ended June 30, 1999 and June 30, 1998:
<TABLE>
<CAPTION>
1999 1998
---------------------- -----------------------
Options Weighted Options Weighted
and Average and Average
Warrants Exercise Warrants Exercise
Price Price
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Options and warrants 1,915,000 $ 1.36 1,375,000 $ 1.00
outstanding, beginning
of year
Granted
Exercise price same as -- -- 200,000 $ 3.25
market price
Exercise price less 280,000 $ 1.00 315,000 $ 1.59
than market price
Exercise price greater 250,000 $ 1.00 125,000 1.50
than market price
Expired -- -- (50,000) 1.00
Exercised -- -- (50,000) 1.00
--------- -------- --------- --------
Options and warrants 2,445,000 $ 0.20 1,915,000 $ 1.36
outstanding, end of year
========= ======== ========= ========
Exercisable at end of year 2,445,000 $ 0.20 1,690,000 $ 1.14
========= ======== ========= ========
</TABLE>
During the fourth quarter of fiscal 1999, the Company repriced options
covering 530,000 shares of common stock to $.10 per share; the remaining
1,915,000 shares under option were repriced to $.25 per share. There was no
increase in incremental value on the repriced options over the value of the
options immediately preceding the repricing.
-21-
<PAGE>
Exercise prices for options and warrants outstanding as of June 30, 1999:
Exercise Options and Weighted Options and
Price Warrants Average Warrants
Outstanding Contractual Exercisable
June 30, 1999 Life June 30, 1999
-------- ------------- ----------- -------------
$0.10 530,000 7.93 530,000
$0.25 1,915,000 7.81 1,915,000
------------- ----------- -------------
2,445,000 7.84 2,445,000
In October 1995, the FASB issued SFAS No. 123, "Accounting for StockBased
Compensation." This Statement establishes a fair value method of accounting
for stockbased compensation plans either through recognition or disclosure.
The Company has elected to continue following Accounting Principles Board
Opinion No. 25 ("APB No. 25"), ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
and has elected to adopt SFAS No. 123 through compliance with the
disclosure requirements set forth in the Statement. Pro forma information
regarding net income and earnings per share is required by SFAS No. 123 and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value of
all options was estimated at the date of grant using the BlackScholes
option pricing model with the following weighted-average assumptions.
Years Ended June 30,
------------------------------
1999 1998
------------ ------------
Risk free interest rate 4.7% to 4.9% 5.9% to 6.5%
Volatility factor 134% to 166% 160%
Dividend yield 0% 0%
Expected term of options 10 years 10 years
Weighted average fair value of options granted:
Exercise price equals $ -- $ 3.23
market price
Exercise price less than $ 0.81 $ 1.85
the market price
Exercise price greater than $ 1.50 1.36
the market price
The BlackScholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, it is management's opinion that the existing
models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
Had compensation cost been determined based on the fair value at grant
dates for all stock option awards consistent with SFAS No. 123, the
Company's net loss and net loss per share would have been increased to the
pro forma amounts indicated below:
-22-
<PAGE>
FOR THE YEARS ENDED JUNE 30,
-------------------------------
1999 1998
------------ --------------
Net loss as reported $ (873,611) $ (1,416,459)
Pro forma $ (873,611) $ (2,061,935)
Net loss per share $ (0.19) $ (0.73)
as reported
Pro forma $ (0.19) $ (1.06)
7. SUPPLEMENTAL OIL AND GAS INFORMATION
Capitalized costs relating to oil and gas producing activities at June 30,
1999 and 1998 are as follows:
1999 1998
-------- --------
Unproved oil and gas properties $567,559 $653,250
Proved oil and gas properties -- 64,460
Less accumulated depreciation -- --
and depletion -------- --------
Net capitalized cost $567,559 $717,710
======== ========
Costs incurred in oil and gas property acquisition, exploration, and
development activities for the years ended June 30, 1999 and 1998 are as
follows:
1999 1998
------- --------
Acquisition of unproved $28,473 $653,250
properties
Acquisition of proved -- 64,460
properties ------- --------
Net capitalized cost $28,473 $717,710
======= ========
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<PAGE>
Results of operations for oil and gas producing activities for the years
ended June 30, 1999 and 1998 are as follows:
1999 1998
------- --------
Revenues $7,517 $32,798
Production costs 16,635 37,665
Depreciation, depletion and -- 45,212
impairments
------- --------
16,635 82,877
======= ========
Results of operations from
producing activities
(excluding corporate $(9,118) $(50,079)
overhead and interest costs) ======= ========
RESERVES (UNAUDITED)
The Company had no proved oil and gas reserves at June 30, 1999 and 1998.
8. FINANCINGS
On September 2, 1998, the Company completed a financing transaction with
the James E. Moore Revocable Trust, u/d/t/ dated July 28, 1994 (the
"Trust"), by executing a Loan Agreement, dated as of August 25, 1998 (the
"Loan Agreement"), pursuant to which the Trust loaned $120,000 (the "Bridge
Loan") to the Company to be repaid on or before October 31, 1998. In return
for the Bridge Loan, the Company granted the Trust a security interest in
its properties located in the Paradox Basin of southern Utah and a ten-year
warrant to purchase up to 180,000 shares of the Company's Common Stock at
an exercise price of $1.00 per share. In addition, Mr. Rafiq A. Sayed was
appointed to serve on the Company's Board of Directors as a designee of the
Trust in connection with the Bridge Loan. As of September 2, 1998, the
Trust beneficially owned approximately 9.4 percent of the Company's Common
Stock. However, effective as of November 23, 1998, the Trust conveyed
warrants to purchase up to 150,000 shares of the Company's Common Stock to
various third parties in private transactions, thereby reducing the Trust's
beneficial ownership in the Company to approximately four percent. The
repayment date of the Bridge Loan was subsequently extended to November 30,
1998 in connection with the North Dakota Agreement (as defined and
described in Note 5).
On December 4, 1998, the Trust agreed to extend the repayment date for the
Bridge Loan from November 30, 1998 to January 15, 1999 (the "Second Loan
Extension"). As partial consideration therefore, the Trust received an
additional warrant for the purchase of up to 100,000 shares of Common Stock
at a price per share of the lower of (i) $1.00 or (ii) the lowest price per
share of Common Stock or Common Stock equivalent issued by the Company in
any offering of its securities occurring prior to Apri1 1999. As
additional consideration for the Second Loan Extension, the Company agreed
(a) to reprice the warrants to purchase 180,000 shares of Common Stock
previously granted to the Trust at $1.00 in accordance with the price
described above for the newly-granted warrants; (b) to reprice certain
other options held by a key consultant to the Company from $1.75 to $1.00
per share; and to appoint Dr. S.M. Aslam Daud as a member of the Board of
Directors.
Effective December 30, 1998, the principal amount of the Bridge Loan was
increased by $10,000 to $130,000 in exchange for a cash payment to the
Company to enable it to meet certain lease rental obligations due
January 1, 1999. At the same time, the repayment due date of January 15,
1999 was further extended to February 15, 1999 (the "Third Loan Extension")
and as consideration therefore, the Company agreed to issue to the Trust an
additional warrant to purchase 50,000 shares of the Company's Common Stock
under the same terms and conditions applicable to the previously-issued
warrant, and to extend the expiration of the warrant exercise price
adjustment mechanism for all warrants issued in connection with the Bridge
Loan, from April 1, 1999 to July 1, 1999.
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In conjunction with the warrants issued as consideration for the Loan
Extensions, $148,000 was recorded as loan discount and amortized as
interest expense.
Subsequent to the Third Loan Extension, the Bridge Loan repayment date was
further extended to April 30, May 17 and May 28, 1999 to accommodate a
delay in closing the Company's private financing transaction.
During May 1999, the options and warrants described in this note (other
than those issued to Trinity and the Trust) were repriced to $.25 per
share. Pursuant to the terms of the Second Loan Extension and the Third
Loan Extension, the Trust warrants, as well as options and warrants
previously granted to Trinity, were repriced to $.10 per share.
The Company closed a private equity offering on May 28, 1999, selling 7.845
million restricted shares of Common Stock at $.10 per share pursuant to an
exemption from registration under Rule 505 of Regulation D of the
Securities Act of 1933, as amended. The Trust purchased 2.8 million shares
and Mr. Kim Fuerst, the Company's president, purchased 2 million shares. At
June 30, 1999, 78,500 private offering shares were subscribed but not paid
for; payment for those shares occurred during the first quarter of fiscal
2000.
9. SUBSEQUENT EVENTS
During July 1999, the Company granted to its president an incentive stock
option pursuant to the Equity Incentive Plan, to purchase 500,000 shares of
Common Stock at an exercise price of $.75 per share (determined to be at
least 110% of the fair market value at the date of grant). The option has a
five year life and is exercisable as of the date of grant.
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PART III
9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and titles of the
executive officers and the members of the Board of Directors of
the Company.
Name Age Position
- ---------------------- ---------- --------------------------------
Kim M. Fuerst......... 48 President, Chief Executive
Officer, Treasurer and Director
Faisal Chaudhary..... 26 Secretary and Director
J. Samuel Butler..... 54 Director
John F. Greene....... 59 Director
F. Robert Tiddens.... 45 Director
Rafiq A. Sayed....... 45 Director
Dr. Syed A. Daud..... 35 Director
KIM M. FUERST, 48, has been President, Chief Executive Officer and Director
since September 1996, and Treasurer and Chief Financial and Accounting Officer
since October 17, 1997. From 1994 to 1996 he was a Vice President and head of
the energy group of Van Kasper and Company, an investment banking firm. From
1989 to 1994 he served in various capacities at Great Northern Gas Company
including Vice President of Finance and as a Director. From 1982 to 1990 he was
President and Chief Operating Officer of Karen Oil Company which, during this
period, drilled over 100 wells and operated those wells that were producing
wells. Over the past 25 years he has worked in a variety of energy related
positions, both as an independent producer and as an investment banker.
FAISAL CHAUDHARY, 26, has been Secretary and a Director since September
1996. He is presently President and a director of Sedco, Inc. in Santa Maria,
California and President, CEO and a director of Zelcom Industries, Inc. in
Orange, California, having served in such capacities since approximately January
1999. He is a graduate of Chapman University with a Masters in Commerce and a
degree in law. In April 1999, Mr. Chaudhary was appointed by his majesty, Prince
Shaman Azman of Malaysia, as the official Investments Relations officer for the
Prince's foreign investments, currently consisting of three international
companies based in Singapore, Japan, and Thailand.
J. SAMUEL BUTLER, 54, Director, formed Trinity Petroleum Management, LLC
and ST Oil Company in 1996 and serves as President and Chief Executive Officer
of both companies. During 1998, Mr. Butler was instrumental in organizing
Professional Energy Advisors, LLC, and serves on the Board of Managers thereof.
In addition, he became a member of the Board of Directors of Greystone Energy,
Inc., a Colorado corporation, in 1998. From 1989 to 1994, he served as a
director, President and Chief Executive Officer of Sterling Energy Corp. and the
Chief Executive Officer of Sheffield Exploration Company, Inc. from September
1990 to May 1996. Also during the period of September, 1989 to December, 1994,
Mr. Butler was a founding principal in Petrie Parkman & Co., an investment
banking firm specializing in upstream energy financing. Previously, he was
President and Chief Operating Officer of Columbus Energy Corp. (Denver,
Colorado) from 1985 to 1989, and today, continues to serve as a director at
Columbus. Mr. Butler joined the predecessor of Columbus, Consolidated Oil and
Gas, Inc., in 1974 and held the position of Vice President of Exploration,
Senior Vice President of Oil and Gas Operations and Executive Vice President and
Chief Operating Officer. After receiving a degree in Petroleum Engineering from
the Colorado School of Mines, Mr. Butler pursued graduate studies in the field
of Mineral Economics at
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<PAGE>
that institution. He is a past director of the Independent Petroleum Association
of America and past director of the Independent Petroleum Association of the
Mountain States.
DR. SYED ASLAM DAUD, 35, a Director since December, 1998, is currently Vice
President, Investor Relations & Communications of Sayed Consulting Inc. in
Toronto, Ontario, Canada, a position he has held since January 1996. During a
nine-month period from December 1997 to September of 1998, Dr. Daud was also an
Investor Relations and Communications officer of Trivalence Mining Corporation.
Prior to joining Sayed Consulting, Inc., he worked from September 1990 to
October 1995 in various capacities at Shoppers Drug Mart and Shoppers Home
Health Care (a division of Iamsco, Inc.), including Pharmacy System Trainer and
Corporate Manager. Since 1994, Dr. Daud has served as national President of a
nonprofit youth organization. Dr. Daud received his M.B.B.S. degree in Medicine
and Surgery from Dow Medical College, University of Karachi, Pakistan. Dr. Daud
has also completed various certificate courses in computers and adult education.
JOHN F. GREENE, 59, Director, has over 25 years experience in the oil and
gas exploration and production industry. From 1985 until his retirement in 1995,
Mr. Greene served as executive vice president of worldwide exploration and
production for the Louisiana Land and Exploration Company, where he served on
the board of directors from 1989 until his retirement. From 1981 to 1985, Mr.
Greene was president and chief executive officer for Milestone Petroleum and
then executive vice president of exploration for Meridian Oil and Gas Company
via its merger with Milestone. He began his career at Continental Oil Company
holding various positions including director of exploratory projects for onshore
and offshore offices and a division exploration manager for the western United
States. Mr. Greene has been a director of Basin Exploration, Inc. since February
1996 and a director of CWYR since February 1998.
RAFIQ A. SAYED, 45, Director since September, 1998, is a technology
executive with over 22 years of experience in the global telecommunications and
energy industries and broad based technical management experience. He has been
recognized for identifying core business needs and applying state-of-the-art
technology solutions. Presently, Mr. Sayed is consulting for Enron Energy
Services where he supports the Chief Information Officer in defining business
processes relative to deregulation. He served on the Board of Directors of
Meteor Industries, Inc., a position he held from April 1996 until September
1998. From 1981 to 1997 Mr. Sayed was with Nortel Technology in various
positions of increasing responsibility, and most recently as Senior Director
managing over 300 professionals and a budget in excess of $30 million, and where
he was the architect in charge of the design of a state-of-the-art automation
platform for large telephony switching platforms and for re-engineering of the
feature processing environment for the DM8-100. Mr. Sayed graduated from
Southbank College in London, England in 1975 with an H.N.D. in
Electrical/Electronic Engineering (equivalent of a BSEE). He also attended Essex
University in London, England where he was enrolled in an advanced computer
science program with an emphasis in Operating Systems, Software Engineering and
Programming.
F. ROBERT TIDDENS, 45, Director, has over 20 years experience in oil and
gas exploration, production and acquisition activities in all producing states
in the continental United States. Since 1995, Mr. Tiddens was President and
Chief Executive Officer of Shoreline Resource Company, Inc., a Denver based
private oil and gas exploration concern he founded and subsequently merged into
a subsidiary of the Company in February 1998, at which time he became a director
of the Company. From 1990 to 1995, Mr. Tiddens was a consultant advising client
companies in all facets relating to the oil and gas industry. Prior thereto, Mr.
Tiddens was Vice President of Land & Acquisitions for Presidio Oil Company, a
rapidly-growing American Stock Exchange Company based in Denver and New York.
Mr. Tiddens is a graduate of the University of Wisconsin with a
finance/economics degree.
All directors of the Company serve one year terms and hold office until the
annual meeting in the year in which their respective terms expire or until their
respective successors are duly elected and qualified. Mr. Sayed and Dr. Daud
were selected to serve on the Board of Directors pursuant to certain agreements
between the Company and The Trust in connection with a loan from the Trust to
the Company, and an extension of the repayment due date of such loan. See Item
12 "Certain Relationships and Related Transactions" for additional discussion
regarding the loan and related documents. All officers of the Company serve at
the discretion of the Board of Directors and until the next annual meeting of
directors of the Company. There are no family relationships between any
director, officer or person nominated or chosen to become a director or officer
and any other such persons.
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<PAGE>
COMMITTEES AND MEETINGS
During the fiscal year ended June 30, 1999, the Board of Directors held
five meetings. Faisal Chaudhary attended less than 75% of such meetings. The
Board of Directors of the Company has no established committees to which it has
delegated any authority.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company's directors, executive officers and persons who are beneficial
owners of more than ten percent of the Company's Common Stock are required to
file reports of their holdings and transactions in Common Stock with the
Commission and to furnish the Company with such reports. Based solely upon its
review of the copies the Company has received or upon written representations it
has obtained from certain of these persons, the Company believes that, as of
June 30, 1999, the following persons failed to timely file the following forms:
Dr. A.S. Aslam Daud - Form 3 reflecting his appointment as a director; Rafiq A.
Sayed - Form 3 reflecting his appointment as director.
10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid by the
Company to the individuals serving as the Company's chief executive officers for
each of the Company's last three fiscal years:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards
------
Securities Underlying
Name and Position(1) Year Salary($) Options/SARS (#)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Kim M. Fuerst, 1999 50,000(2)(3) 500,000(4)
President,
Chief Executive Officer,
Treasurer 1998 120,000(3)
1997 90,000(5)
</TABLE>
- ---------------
(1) No other executive officer of the Company received more than $100,000
during the fiscal year ended June 30, 1999.
(2) Mr. Fuerst determined to forego his monthly salary of $10,000 for the
months of November and December 1998, and January through April 1999, and
received $5,000 per month for each of May and June 1999 in accordance with
an amendment to his employment agreement.
(3) Includes $40,000 in fiscal 1999 and $10,000 in fiscal 1998 of salary
obligation of the Company to Mr. Fuerst extinguished as partial payment for
the purchase of the Company's North Dakota properties by FM Energy, LLC, of
which Mr. Fuerst owns 50 percent. See Item 12.
(4) The options shown were originally granted in 1996. On May 17, 1999, the
options were repriced to $0.25 per share. See "Report on Repricing of
Options" herein.
(5) Represents payment for nine months of service.
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<PAGE>
OPTION GRANTS
There were no grants of stock options made during the fiscal year ended
June 30, 1999 to the Company's single named executive officer.
The following table shows the number of shares covered by all exercisable
and unexercisable stock options held by the named executive officer as of
June 30, 1999, as well as the value of unexercised "in the money" options
at such date. No stock options were exercised by the named executive officer
during the last fiscal year.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
Number of Securities Value of Unexercised
Underlying Unexercised Money Options/SARs at
Options/SARs at FY-End(#) FY-End
Name Exercisable/Unexercisable Exercisable/Unexercisable
- -------------- -------------------------- -------------------------
<S> <C> <C>
Kim M. Fuerst 500,000/0 $155,000/0*
</TABLE>
- ------------------------
(*) Amount shown represents aggregated fair market value based upon the
mean of the closing bid and asked price on June 30, 1999 of $0.56 per
share, less aggregate exercise price of $0.25 per share for the
unexercised in-the-money options held. Actual gains, if any, on exercise
will depend on the value of the Common Stock on the date of exercise.
EMPLOYMENT CONTRACTS
The Company entered into an employment contract with Mr. Fuerst on
October 1, 1996 pursuant to which Mr. Fuerst received a salary of $10,000
per month and was granted incentive stock options to purchase up to 500,000
shares of Common Stock at an exercise price of $1.00 per share. The contract is
for an initial term of three years commencing October 1, 1996 and is
renewed automatically for succeeding periods of one year unless terminated. The
contract may be terminated by Mr. Fuerst upon 90 days prior written notice to
the Company, and by the Company without prior notice to Mr. Fuerst, if for Cause
(as defined in the contract). The Company's salary obligation to Mr. Fuerst of
$10,000 per month for the months of June through October 1998 was extinguished
in connection with the purchase by FM Energy, LLC (of which Mr. Fuerst owns 50
percent and serves as co-manager) of the Company's properties located in North
Dakota. The satisfaction of the Company's salary obligation for such months
served as partial consideration for the purchase. See Item 12 - "Certain
Relationships and Related Transactions." In May 1999, Mr. Fuerst's employment
agreement was amended to reduce his salary to $5,000 per month.
COMPENSATION OF DIRECTORS
The Directors of CWYR, who do not receive annual salaries from CWYR, may
receive reimbursement for travel expenses. Other than the stock option grants
discussed below, no consulting fees, finder's fees or commissions were paid to
Directors of the Company during the fiscal year ended June 30, 1999.
During fiscal 1998, the Board of Directors and Shareholders approved an
Equity Incentive Plan (the "Equity Plan") in which Directors are eligible to
participate. A total of 2,500,000 shares of Common Stock have been reserved for
issuance under the Equity Plan, subject to adjustments to reflect changes in the
Company's capitalization resulting from stock splits, stock dividends and
similar events. The Equity Plan currently is administered by the Board of
Directors, but may be administered b a committee appointed by the Board.
In connection with their respective appointments to the Board of Directors,
each of Mr. Sayed and Dr. Daud received options to purchase 100,000 shares of
Common Stock on September 4, 1998 and December 4, 1998, respectively. The
options were granted pursuant to the Company's Equity Incentive Plan, were
originally exercisable at $1.00 (the fair
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<PAGE>
market value at the date of grant) and were immediately vested. Effective May
17, 1999, the Board of Directors voted to reprice all outstanding options to
$.25 per share to reflect a decrease in the fair market value of the Company's
Common Stock.
Options granted to directors under the Equity Plan expire ten years from
the date of grant. The option exercise price for non-statutory options is
determined by the Board of Directors and may be paid in cash or by surrendering
to the Company outstanding Common Stock already owned by the optionee, valued at
fair market value, by delivering a promissory note, or by a combination of such
means of payment, as may be determined by the Board. Options granted pursuant to
the Equity Plan may not b exercised more than three months after the option
holder ceases to be a director of the Company, except that in the event of the
death or permanent and total disability of the option holder, the option may be
exercised by the holder (or his estate, as the case may be), for a period of up
to one year after the date of death or permanent or total disability. Options
granted to directors under the Equity Plan are treated as non-statutory stock
options under the Internal Revenue Code. On February<-1- 95>11, 1998, the Board
of Directors amended the Equity Plan to delete the automatic six-month vesting
requirement for options granted thereunder to allow the Board or committee broad
discretion in determining such requirements.
REPORT ON REPRICING OF OPTIONS
Effective May 17, 1999, the Board of Directors voted to reprice all
outstanding options and warrants to reflect a decrease in value of the Company's
Common Stock. Options for 500,000 shares of Common Stock granted to Mr. Fuerst,
the Company's single named executive officer, were repriced to $0.25 per share
from their original price of $1.00 per share at the time of grant in 1996.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as to the number of
shares of Common Stock of the Company beneficially owned as of September 28,
1999, by (i) each person who is known to the Company to be the beneficial owner
of more than five percent of the Common Stock of the Company; (ii) each of the
Company's directors; (iii) the five most highly compensated executive officers,
including the Chief Executive Officer; and (iv) all of the executive officers
and directors of the Company as a group. Except as otherwise indicated, the
Company believes that the beneficial owners of the Common Stock listed below,
based on information furnished by such holders, have sole investment and voting
power with respect to such shares, subject to community property laws, where
applicable.
Percentage
Number of Beneficially
Name and Address Shares(a) Owned (b)
- ----------------------------------- ------------- -----------
Kim M. Fuerst...................... 3,112,500(c) 26.8%
751 Horizon Court, Ste. 205
Grand Junction, Colorado 81506
Faisal Chaudhary................... 612,500(d) 5.5%
151 Toby Lane
Anaheim Hills, California 92807
J. Samuel Butler................... 325,000(e) 3.0%
1801 Broadway, Suite 600
Denver, Colorado 80202
Syed A. Daud....................... 100,000(f) 0.9%
64 Hainsworth Ct.
Markham, Ontario L3S1T5
Canada
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<PAGE>
Percentage
Number of Beneficially
Name and Address Shares(a) Owned (b)
- ----------------------------------- ------------- -----------
John F. Greene..................... 453,303(f) 4.2%
1569 Royal Buffalo Drive
Silverthorne, Colorado 80498
Rafiq A. Sayed..................... 108,600(f) 1.0%
102 Avenue of the Estates
Cary, North Carolina 27511
F. Robert Tiddens.................. 545,030(f) 5.1%
8360 East Hinsdale Avenue
Englewood, Colorado 80112
The James E. Moore Revocable Trust, 3,050,000(g) 28.3%
u/d/t dated July 28, 1994
7827 Berger Avenue
Playa del Rey, California 90293
All executive officers and directors 5,256,933(h) 41.0%
as a Group (7 persons).............
- ---------------------
(a) All shares are owned both of record and beneficially unless otherwise
specified by footnote to this table.
(b) Based on 10,607,694 shares of Common Stock outstanding at
September 28, 1999.
(c) Includes 500,000 shares issuable upon exercise of stock options granted
under the Incentive Stock Option Plan in 1996, and 500,000 shares issuable
upon exercise of stock options granted under the Equity Incentive Plan.
(d) Includes 500,000 shares issuable upon exercise of stock options granted
under a director stock option plan in 1996.
(e) Includes 200,000 shares issuable upon exercise of stock options granted
under a director stock option plan in 1996; 100,000 shares issuable upon
exercise of a stock option granted to Trinity Petroleum Management LLC, of
which Mr. Butler owns approximately 24 percent and serves as the President
and CEO; and 25,000 restricted shares owned by ST Oil Company, of which Mr.
Butler owns approximately 52 percent and serves as the President and CEO.
(f) Includes 100,000 shares issuable upon exercise of director stock options
granted under the Equity Incentive Plan.
(g) Includes 180,000 shares issuable upon exercise of warrants granted in
connection with Bridge Loan and extensions thereof.
(h) Includes 2,200,000 shares issuable upon exercise of options and warrants.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Set forth below is a description of transactions entered into between the
Company and certain of its officers, directors, and/or employees during the last
two fiscal years.
Effective January 1, 1998, the Company entered into an Agreement for
Administrative Services (the "Trinity Agreement") with Trinity Petroleum
Management LLC, a Colorado limited liability company ("Trinity"). Pursuant to
the terms of the Trinity Agreement, Trinity performs certain management
functions for the Company. Trinity bills for its services on an hourly basis,
receives a flat fee of $1,000 per month (formerly $3,000 per month) and is
reimbursed for third party expenses. The Trinity Agreement is for a term of one
year, continuing thereafter on a month-to-month basis, terminable upon 60 days
written notice by either party. J. Samuel Butler, a member on the Board of
Directors of the Company, currently serves as President of Trinity and owns
approximately 24 percent of Trinity through his ownership of Butler Resources,
LLC.
During the fiscal year ended June 30, 1998, the Company paid Trinity
$143,408 pursuant to the Trinity Agreement. In January 1998, as partial
consideration for certain additional services provided to the Company by Trinity
in connection with the Company's merger with Shoreline Resource Company, Inc.,
the Company issued to Trinity 25,000 restricted shares
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<PAGE>
of Common Stock as well as an option to purchase of up to 100,000 shares of the
Company's Common Stock at an exercise price of $1.50 per share, subsequently
repriced to $.10 per share in May 1999. During the last fiscal year, the Company
paid Trinity $82,960 for its services.
Effective as of January 1, 1998, the Company entered into an Agreement for
Consulting Services (the "SCI Agreement") with Sayed Consulting, Inc., a Nevada
corporation ("SCI"). Pursuant to the terms of the SCI Agreement, SCI performs
certain investor and public relations functions for the Company for a fee of
$1,000 per month and reimbursement of third party expenses. The SCI Agreement
was for a term of one year. On January 30, 1998 in connection with the SCI
Agreement, the Company issued to SCI an option to purchase up to 200,000 shares
of the Company's Common Stock at an exercise price of $1.75 per share, (repriced
in December 1998 to $1.00 per share and in May 1999 to $.25 per share). Waseem
A. Sayed owns 100 percent of SCI and serves as its President. Mr. Sayed's
brother, Rafiq A. Sayed, was appointed as a member of the Company's Board of
Directors effective September 4, 1998. Dr. Syed A. Daud, a recently-appointed
member of the Board of Directors, serves as Vice President of Investor Relations
& Communications for SCI.
On September 2, 1998, the Company completed a financing transaction with
the James E. Moore Revocable Trust, u/d/t dated July 28, 1994 (the "Trust"), by
executing a Loan Agreement, dated as of August 25, 1998 (the "Loan Agreement"),
pursuant to which the Trust loaned $120,000 (the "Bridge Loan") to the Company
to be repaid on or before October 31, 1998. In return for the Bridge Loan, the
Company granted the Trust a security interest in its properties located in the
Paradox Basin of southern Utah, and a ten-year warrant to purchase up to 180,000
shares of the Company's Common Stock at an exercise price of $1.00 per share. In
addition, Mr. Rafiq A. Sayed was appointed to serve on the Company's Board of
Directors as a designee of the Trust in connection with the Bridge Loan. As of
September 2, 1998, the Trust beneficially owned approximately 9.4 percent of the
Company's Common Stock. However, effective as of November 23, 1998, the Trust
conveyed warrants to purchase up to 150,000 shares of the Company's Common Stock
to various third parties in private transactions, thereby reducing the Trust's
beneficial ownership in the Company to approximately four percent. The repayment
date of the Bridge Loan was subsequently extended to November 30, 1998 in
connection with the North Dakota Agreement (as defined and described below).
Effective as of November 1, 1998, the Company accepted an Offer to Purchase
certain of its properties located in North Dakota (the "North Dakota Agreement")
submitted by FM Energy, LLC ("FM"), a California limited liability company
collectively owned by the Company's President, Kim M. Fuerst, and the Trust.
Pursuant to the North Dakota Agreement, the Company sold its interest in certain
properties located in North Dakota in return for (a) a cash payment to the
Company of $50,000; (b) extinguishment of the Company's $50,000 obligation to
Kim M. Fuerst as compensation for his services as President of the Company for
the months of June through October 1998; and (c) an extension of the repayment
date for the Bridge Loan from October 31, 1998 to November 30, 1998. The Company
had acquired the North Dakota properties during fiscal 1998 for $113,392. See
Item 6 "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
On December 4, 1998, the Board of Directors of the Company approved an
agreement with the Trust to extend the repayment date for the Bridge Loan from
November 30, 1998 to January 15, 1999 (the "Second Extension"). As partial
consideration therefore, the Trust received an additional warrant for the
purchase of up to 100,000 shares of Common Stock at $0.10 per share, the lesser
of (i) $1.00 or (ii) the lowest price per share of Common Stock or Common Stock
equivalent issued by the Company in any offering of its securities occurring
prior to April 1, 1999 (the "Option Price Formula"), thereby increasing the
beneficial ownership by the Trust to approximately 7.6 percent. As additional
consideration, the Second Extension agreement provided that the Company (a)
reprice the warrants to purchase 180,000 shares of Common Stock previously
granted to the Trust at $1.00 in accordance with the Option Price Formula; (b)
reprice the options held by SCI from $1.75 to $1.00 per share; and (c) appoint
Dr. Daud as a member of the Board of Directors.
Effective as of December 30, 1998, the Company's Board of Directors
approved an agreement to increase the principal of the Bridge Loan from $120,000
to $130,000 in exchange for a cash payment to the Company, and to extend further
the repayment date to February 15, 1999 (the "Third Extension"). As partial
consideration for the Third Extension, the Trust received another Warrant for a
price of $50.00. Pursuant to the Warrant Agreement, dated as of December 30,
1998, the Trust is entitled to purchase up to 50,000 shares of restricted common
stock at an exercise price determined by the Option Price Formula.
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<PAGE>
The Warrant Agreement in connection with the Third Extension also provides
for (a) an extension of the date of the Option Price Formula from April 1, 1999
to July 1, 1999 for all warrants previously issued to the Trust in connection
with the original loan and Second Extension and (b) the repricing of certain
director options previously issued by the Company from $3.75 to $1.00 per share.
On May 28, 1999, the Company closed a private placement of 7,845,000 shares
of its Common Stock at a price of $0.10 per share, raising $785,000 ($767,000
net of placement costs). The proceeds were used to repay the Bridge Loan and for
working capital. Mr. Fuerst purchased 2,000,000 shares for a purchase price of
$200,000. The Trust purchased 2,800,000 shares for a total price of $280,000. As
a result of the per share price established in the private placement, the
exercise price for warrants issued to the Trust in connection with the Bridge
Loan and Extensions was set at $0.10 per share. Following repayment of the
Bridge Loan by the Company, the security interest in the Company's Paradox Basin
properties held by the Trust was released.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of the Exhibits required by Item 601 of Regulation S-B to be filed
as part of this report is set forth in the Index to Exhibits and is
incorporated herein by reference.
(b) Reports on Form 8-K
A current report on Form 8-K was filed on May 20, 1999 pursuant to Item 4,
to report the resignation of the Company's independent auditors.
(c) The following Financial Statements are filed as part of this Report:
PAGE
Report of Hein + Associates............................................ 9
Report of PricewaterhouseCoopers LLP................................... 10
Consolidated Balance Sheets as of June 30, 1999 and 1998............... 11
Consolidated Statements of Operations for the years ended
June 30, 1999 and 1998................................................. 12
Consolidated Statements of Stockholders' Equity for the
years ended June 30, 1999 and 1998..................................... 13
Consolidated Statements of Cash Flows for the years ended
June 30, 1999 and 1998................................................. 14
Notes to Consolidated Financial Statements............................. 15
All Financial Statement Schedules are omitted because they are not required, are
inapplicable or the information is included in the financial statements or notes
thereto.
-33-
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized.
COLORADO WYOMING RESERVE COMPANY
Dated: 10/12/99 By: /s/ KIM FUERST
-------------------------------------------
Kim Fuerst, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
Dated: 10/12/99 By: /s/ KIM FUERST
-------------------------------------------
Kim Fuerst, President, Chief Executive
Officer and Treasurer (Principal Executive
Officer, Chief Financial and Accounting
Officer)
Dated: 10/12/99 By: /s/ FAISAL CHAUDHARY
-------------------------------------------
Faisal Chaudhary, Director
and Secretary
Dated: 10/12/99 By: /s/ J. SAMUEL BUTLER
-------------------------------------------
J. Samuel Butler, Director
Dated: 10/12/99 By: /s/ JOHN F. GREENE
-------------------------------------------
John F. Greene, Director
Dated: 10/12/99 By: /s/ F. ROBERT TIDDENS
-------------------------------------------
F. Robert Tiddens, Director
Dated: 10/12/99 By: /s/ RAFIQ A. SAYED
-------------------------------------------
Rafiq A. Sayed, Director
Dated: 10/12/99 By: /s/ SYED A. DAUD
-------------------------------------------
Syed A. Daud, Director
-34-
<PAGE>
INDEX TO EXHIBITS
3.1 Articles of Incorporation. (a)
3.2 Bylaws. (a)
10.1 Employment Agreement between the Company and Kim M. Fuerst, dated
October 1, 1996 (b), as amended by Amendment, dated May 17, 1999.
10.2 Incentive Stock Option Plan, dated October 18, 1996. (b)
10.3 Incentive Stock Option Agreement between the Company and Kim M. Fuerst,
dated October 18, 1996. (b)
10.4 The Company's Equity Incentive Plan. (b)
10.5 Warrant, dated March 31, 1997, from the Company to Trinity Petroleum
Management LLC. (c)
10.6 Agreement for Administrative Services between the Company and Trinity
Petroleum Management, LLC, dated as of January 1, 1998. (e)
10.7 Agreement for Consulting Services between the Company and Sayed
Consulting, Inc., dated as of January 1, 1998. (d)
10.8 Agreement and Plan of Merger, dated as of February 6, 1998, between the
Company, CW Sub, Inc., Shoreline Resource Company, Inc., F. Robert
Tiddens, John F. Greene and Cindy L. Stewart. (d)
10.9 Loan Agreement, dated as of August 25, 1998, between the Company and the
James E. Moore Revocable Trust, u/d/t dated July 28, 1994 (the "Trust").
(e)
10.10 Mortgage, Deed of Trust, Security Agreement and Financing Statement,
dated as of August 25, 1998, from the Company to James A. Holtkamp,
Trustee and the Trust. (e)
10.11 Promissory Note, dated August 25, 1998, in the principal amount of
$120,000.00, from the Company to the Trust. (e)
10.12 Warrant Agreement, dated as of August 25, 1998, between the Company and
the Trust. (e)
10.13 Registration Rights Agreement, dated as of August 25, 1998, between the
Company and the Trust. (e)
10.14 Extension, dated as of December 4, 1998, to the Bridge Loan between the
Company and the Trust. (e)
10.15 Amendment No. 1 to Registration Rights Agreement and Promissory Note,
dated as of December 4, 1998, between the Company and the Trust. (e)
10.16 Warrant Agreement, dated as of December 4, 1998, between the Company and
the Trust. (e)
10.17 Offer to Purchase, dated November 2, 1998, from FM Energy, LLC to the
Company. (e)
10.18 Warrant Agreement, dated December 30, 1998, between the Company and the
Trust. (f)
10.19 Amendment No. 2 to Registration Rights Agreement and Promissory Note,
dated as of December 30, 1998, between the Company and the Trust. (f)
-35-
<PAGE>
10.20 Promissory Note, dated as of December 30, 1998, in original principal
amount of $10,000 from the Trust. (f)
10.21 Extension, dated as of February 17, 1999, to the Bridge Loan between the
Company and the Trust. (g)
10.22 Extension, dated as of March 31, 1999, to the Bridge Loan between the
Company and the Trust. (g)
10.23 Extension, dated as of April 9, 1999, to the Bridge Loan between the
Company and the Trust.
10.24 Extension, dated as of April 30, 1999, to the Bridge Loan between the
Company and the Trust.
10.25 Extension, dated as of May 17, 1999, to the Bridge Loan between the
Company and the Trust.
16 Resignation Letter, dated May 14, 1999, from PricewaterhouseCoopers LLP.
(h)
23.1 Consent of Hein + Associates LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.
- ------------------------------
(a) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended May 31, 1983.
(c) Incorporated by reference to the Company's Form 10-QSB for the quarter
ended March 31, 1997.
(b) Incorporated by reference to the Company's Form 10-KSB for the fiscal year
ended June 30, 1997.
(d) Incorporated by reference to the Company's Form 10-QSB for the quarter
ended March 31, 1998.
(e) Incorporated by reference to the Company's Form 10-KSB for the fiscal year
ended June 30, 1998.
(f) Incorporated by reference to the Company's Form 10-QSB for the quarter
ended December 31, 1998.
(g) Incorporated by reference to the Company's Form 10-QSB for the quarter
ended March 31, 1999.
(h) Incorporated by reference to the Company's Form 8-K, as filed with the
Securities and Exchange Commission on May 20, 1999.
-36-
AMENDMENT TO EMPLOYMENT AGREEMENT
BETWEEN
COLORADO WYOMING RESERVE COMPANY
AND
KIM M. FUERST
This AMENDMENT to the Employment Agreement, dated October 1, 1996 (the
"Agreement"), between Colorado Wyoming Reserve Company (the "Company") and Kim
M. Fuerst ("Employee"), is made as of May 17, 1999 by and between the parties
hereto.
For good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties agree as follows:
Capitalized terms used herein and not otherwise defined, have the meaning
ascribed to such terms in the Agreement. Section 2.1 of the Agreement is amended
and replaced in its entirety with the following provision:
SECTION 2.1 BASIC SALARY. Except as otherwise provided herein, the
Company shall pay to the Employee a monthly base salary during the term of this
Agreement in the amount of $5,000.00 per month.
Accepted and Agreed to this 17th day of May, 1999.
COMPANY:
COLORADO WYOMING RESERVE COMPANY
By: /s/ KIM M. FUERST
-------------------------------------
Kim M. Fuerst
President and Chief Executive Officer
EMPLOYEE:
/s/ KIM M. FUERST
- ------------------------------------------
Kim M. Fuerst
Fax To: Kim Fuerst
Sam Butler
From: Jim Moore
Date: April 9, 1999
Dear Kim and Sam:
I am sending this bridge loan extension to you today as I will be out of town
next week when the current due date expires. Therefore, as a further
accommodation to the company and the board, I hereby extend the due date of the
bridge loan to Friday, April 30, 1999, unless I rescind this extension by
written notice to you prior to this date.
Sincerely,
/s/ JIM MOORE
Jim Moore
Fax To: Kim Fuerst
Sam Butler
From: Jim Moore
Date: April 30, 1999
Dear Kim and Sam:
It is my understanding that the board has agreed to a definitive plan to move
the company forward, including the pursuit of a smaller private placement as
soon as possible. Therefore, as a further accommodation to the company and
the board, I hereby extend the due date of the bridge loan to Monday, May 17,
1999, unless I rescind this extension by written notice to you prior to this
date.
Sincerely,
/s/ JIM MOORE
Jim Moore
Fax To: Kim Fuerst
Sam Butler
From: Jim Moore
Date: May 17, 1999
Dear Kim and Sam:
I understand that the private placement CWYR has been pursuing has not yet
closed, but is near completion. Therefore, as a further accommodation to the
company and the board, I hereby extend the due date of the bridge loan to
Friday, May 28, 1999, unless I rescind this extension by written notice to you
prior to this date.
Sincerely,
/s/ JIM MOORE
Jim Moore
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement of Colorado Wyoming Reserve Company on Form S-8 (File No. 333-39979)
of our report dated October 8, 1999, relating to the financial statements which
appear in this Form 10-KSB.
HEIN + ASSOCIATES LLP
Denver, Colorado
November 8, 1999
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement of Colorado Wyoming Reserve Company on Form S-8 (File No. 333-39979)
of our report dated December 23, 1998, relating to the financial statements
which appear in
this Form 10-KSB.
PricewaterhouseCoopers LLP
Denver, Colorado
November 8, 1999
<TABLE> <S> <C>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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