FORM 10-Q-SB
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
MARK ONE
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-9494
ASPEN EXPLORATION CORPORATION
----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 84-0811316
- ------------------------------- -------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) I.D. Number)
Suite 208, 2050 S. Oneida St., Denver, Colorado, 80224
------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(303) 639-9860
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [ ]
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock as of the latest practicable date.
Class Outstanding at February 12, 1999
- ----------------- --------------------------------
Common stock,
$.005 par value 5,191,322
1
<PAGE>
Part One. FINANCIAL INFORMATION
Item 1. Financial Statements
ASPEN EXPLORATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, June 30,
1998 1998
---- ----
(Unaudited) (Audited)
Current Assets:
Cash and cash equivalents, including ....... $ 1,626,779 $ 425,306
$913,780 and $331,894 of invested
cash at December 31, 1998 and June
30, 1998 respective
Precious metals ............................ 18,823 18,823
Accounts receivable, trade ................. 447,269 115,144
Prepaid expenses ........................... 6,142 8,762
----------- -----------
Total current assets .................... 2,099,013 568,035
----------- -----------
Investment in oil and gas properties,
at cost (full cost method of
accounting) ................................ 2,089,377 1,682,521
Less accumulated depletion and
valuation allowance ...................... (1,056,902) (1,006,902)
----------- -----------
1,032,475 675,619
----------- -----------
Property and equipment, at cost:
Furniture, fixtures and vehicles ........... 174,550 171,122
Less accumulated depreciation .............. (126,544) (120,544)
----------- -----------
48,006 50,578
----------- -----------
Undeveloped mining properties, at cost ....... 25,856 27,826
Cash surrender value, life insurance ......... 231,314 231,314
Other ........................................ -- 3,400
=========== ===========
TOTAL ASSETS ............................ $ 3,436,664 $ 1,556,772
=========== ===========
(Statement Continues)
See notes to Consolidated Financial Statements
2
<PAGE>
ASPEN EXPLORATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
1998 1998
---- ----
(Unaudited) (Audited)
Current liabilities:
Accounts payable and accrued
expenses ............................... $ 633,141 $ 409,815
Advances from joint owners ............... 967,557 87,999
Due to related parties ................... 23,958 68,750
Notes payable - current .................. 123,462 52,205
----------- -----------
Total current liabilities ................ 1,748,118 618,769
----------- -----------
Notes payable - long term ................ 389,785 280,360
----------- -----------
Stockholders' equity:
Common stock, $.005 par value:
Authorized: 50,000,000 shares
Issued: At December 31, 1998:
5,191,322 and June 30, 1998:
4,916,322 .............................. 25,956 24,581
Capital in excess of par value ........... 5,951,602 5,677,977
Accumulated deficit ...................... (4,650,797) (5,016,915)
Deferred compensation .................... (28,000) (28,000)
----------- -----------
Total stockholders' equity ............... 1,298,761 657,643
----------- -----------
Total liabilities and stockholders'
equity ................................... $ 3,436,664 $ 1,556,772
=========== ===========
See Notes to Consolidated Financial Statements
3
<PAGE>
<TABLE>
<CAPTION>
ASPEN EXPLORATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
- ---------
<S> <C> <C> <C> <C>
Oil and gas ............ $ 332,541 $ 218,298 $ 627,803 $ 288,638
Management fees ........ 56,998 26,624 76,612 57,644
Interest and other, net 8,066 6,118 14,955 11,888
----------- ----------- ----------- -----------
Total Revenues ........... 397,605 251,040 719,370 358,170
----------- ----------- ----------- -----------
Costs and expenses:
- -------------------
Oil & gas production ... 18,920 27,312 30,182 33,169
Depreciation, depletion
and amortization ...... 28,000 10,574 56,000 21,147
Selling, general and
administrative ........ 105,475 186,146 249,303 300,710
Interest expense ....... 11,807 3,556 17,767 3,556
----------- ----------- ----------- -----------
Total Costs & Expenses ... 164,202 227,588 353,252 358,582
----------- ----------- ----------- -----------
NET INCOME (LOSS) ........ $ 233,403 $ 23,452 $ 366,118 $ (412)
=========== =========== =========== ===========
Basic earnings (loss) per
common share ........... $ .05 (.- ) $ .07 (.- )
=========== =========== =========== ===========
Diluted earnings (loss)
per common share ........ $ .05 (.- ) $ .07 (.- )
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 4,916,322 4,877,920 4,913,322 4,877,920
=========== =========== =========== ===========
The accompanying notes are an integral
part of these statements.
4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ASPEN EXPLORATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended December 31,
1998 1997
---- ----
Cash flows from operating activities:
- -------------------------------------
<S> <C> <C>
Net gain (loss) ........................................ $ 366,118 $ (412)
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Depreciation, depletion & amortization ............... 56,000 21,147
Loss on write off of investments ..................... 3,400 --
Services rendered for stock .......................... -- 69,900
Changes in assets and liabilities:
Increase in accounts receivable ...................... (332,125) (1,444,206)
Decrease in prepaid expense .......................... 2,620 1,764
Increase in accounts payable and accrued expense ..... 1,102,884 1,214,449
Increase (decrease) in due to related parties ........ (44,792) 33,393
----------- -----------
Net cash provided (used) by operating activities ..... 1,154,105 (103,965)
----------- -----------
Cash flows from investing activities:
- -------------------------------------
Conveyance of oil & gas properties for cash .......... 477,950 --
Development & acquisition of oil & gas properties .... (403,556) (283,684)
Purchase of office equipment ......................... (3,428) --
Sale of mining data .................................. 1,970 --
Additions, undeveloped mining properties ............. -- (2,596)
Prospect fees ........................................ -- 86,500
Additions to cash surrender value .................... -- (9,487)
----------- -----------
Net cash used in investing activities ................ 72,936 (209,267)
----------- -----------
Cash flows from financing activities:
- -------------------------------------
Note payable - proceeds .............................. 2,571 151,000
Repayment of notes payable ........................... (28,139) (9,251)
----------- -----------
(25,568) 141,749
Net increase in cash and cash equivalents ............ 1,201,473 (171,483)
Cash and cash equivalents, beginning of year ......... 425,306 238,465
----------- -----------
Cash and cash equivalents, end of year ............... $ 1,626,779 $ 66,982
=========== ===========
Interest paid ........................................ $ 17,767 $ 3,556
=========== ===========
Schedule of non cash investing and financing activities:
- --------------------------------------------------------
Stock issued for services & mining data .............. $ -- $ 19,500
Notes payable issued for properties .................. 206,250 --
Common stock issued for properties ................... 275,000 --
----------- -----------
$ 481,250 $ 19,500
=========== ===========
The accompanying notes are an integral
part of these statements.
5
</TABLE>
<PAGE>
ASPEN EXPLORATION CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
December 31, 1998
Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Aspen Exploration Corporation ("the Company") was incorporated on February
28, 1980 and is engaged in the business of acquiring and developing
interests in domestic oil and gas properties and uranium and other mineral
properties.
The Company has oil and gas operations in California. The Company's primary
mineral projects and targets of exploration (uranium) are in central
Wyoming.
The Company has two wholly owned subsidiaries: Aspen Gold Mining Company
and Aspen Recursos de Mexico. Aspen Gold Mining has staked 6 claims on
Valdez Creek in central Alaska. Other than those claims, neither of the
subsidiaries have any assets, liabilities or operations.
A summary of the Company's significant accounting policies follows:
Consolidated financial statements
---------------------------------
The consolidated financial statements include the Company and its
wholly-owned subsidiaries, Aspen Gold Mining Company and Aspen Recursos de
Mexico. Significant intercompany accounts and transactions, if any, have
been eliminated.
Statement of cash flows
-----------------------
For statement of cash flow purposes, the Company considers short-term
investments with original maturities of three months or less to be cash
equivalents. Cash restricted from use in operations beyond three months is
not considered a cash equivalent.
Management's Use of Estimates
-----------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent liabilities at the date of the
financial statements and reported amounts of revenues and expenses. Actual
results could differ from those estimates.
6
<PAGE>
Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The mining and oil and gas industries are subject, by their nature, to
environmental hazards and cleanup costs for which the Company carries
catastrophe insurance. At this time, management knows of no substantial
costs from environmental accidents or events for which it may be currently
liable. In addition, the Company's oil and gas business makes it vulnerable
to changes in wellhead prices of crude oil and natural gas. Such prices
have been volatile in the past and can be expected to be volatile in the
future. By definition, proved reserves are based on current oil and gas
prices and estimated reserves. Price declines reduce the estimated quantity
of proved reserves and increase annual amortization expense (which is based
on proved reserves).
Impairment of Long-lived Assets
-------------------------------
The Company evaluates the carrying value of assets other than oil and gas
assets for potential impairment on an ongoing basis. The Company evaluates
the carrying value of long-lived assets and long-lived assets to be
disposed of for potential impairment periodically. The Company considers
projected future operating results, cash flows, trends and other
circumstances in making such estimates and evaluations.
Financial Instruments
---------------------
The carrying value of current assets and liabilities reasonably
approximates their fair value due to their short maturity periods. The
carrying value of the Company's debt obligations reasonably approximates
their fair value as the stated interest rate approximates current market
interest rates of debt with similar terms.
New Accounting Pronouncements
-----------------------------
Earnings Per Share
------------------
In February 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 128 ("SFAS No. 128"), addressing earnings per
share. SFAS No. 128 changed the methodology of calculating earnings per
share and renamed the two calculations basic earnings per share and diluted
earnings per share. The calculations differ by eliminating any common stock
equivalents (such as stock options, warrants, and convertible preferred
stock) from basic earnings per share and changes certain calculations when
computing diluted earnings per share. The Company adopted SFAS No. 128 in
fiscal year 1998.
7
<PAGE>
Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following is a reconciliation of the numerators and denominators used
in the calculations of basic and diluted earnings (loss) per share for the
six months ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
-------------------------------- ------------------------------
Per Per
Net Share Net Share
Income Shares Amount Loss Shares Amount
------ ------ ------ ---- ------ ------
Basic earnings per share:
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)
and share amounts 366,118 4,916,322 .07 (412) 4,877,920 --
Dilutive securities
stock options 460,000
Repurchased shares (277,600)
--------------------------------------------------------------
Diluted earnings per share:
Net income and assumed
share conversion 366,118 5,098,722 .07 (412) 4,877,920 --
========= ========= === ========= ========= ====
</TABLE>
Precious metals and revenues
----------------------------
Precious metals inventories are valued at the lower of cost (specific
identification method) or market. There was no allowance for unrealized
losses against inventories due to market decline at December 31, 1998.
Oil and gas properties
----------------------
The Company follows the "full-cost" method of accounting for oil and gas
properties. Under this method, all costs associated with property
acquisition, exploration and development activities, including internal
costs that can be directly identified with those activities, are
capitalized within one cost center. No gains or losses are recognized on
the receipt of prospect fees or on the sale or abandonment of oil and gas
properties, unless the disposition of significant reserves is involved.
Depletion and amortization of the full-cost pool is computed using the
units-of-production method based on proved reserves as determined annually
by the Company and independent engineers. An additional depletion provision
in the form of a valuation allowance is made if the costs incurred on oil
and gas properties, or revisions in reserve estimates, cause the total
8
<PAGE>
Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
capitalized costs of oil and gas properties in the cost center to exceed
the capitalization ceiling. The capitalization ceiling is the sum of (1)
the present value of future net revenues from estimated production of
proved oil and gas reserves applicable to the cost center plus (2) the
lower of cost or estimated fair value of the cost center's unproved
properties less (3) applicable income tax effects. The valuation allowance
was $281,719 at December 31, 1998 and December 31, 1997.
Property and equipment
----------------------
Depreciation and amortization of property and equipment are expensed in
amounts sufficient to relate the expiring costs of depreciable assets to
operations over estimated service lives, principally using the
straight-line method. Estimated service lives range from three to eight
years. When assets are sold or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and any resulting
gain or loss is reflected in operations in the period realized.
Undeveloped mining properties
-----------------------------
The Company capitalizes all costs associated with acquiring, exploring and
developing mineral properties, including certain internal costs which
specifically relate to each mining property area ("cost center").
Capitalized costs are deferred until the area of interest to which they
relate is put into operation, sold, abandoned or impaired. The Company's
pro rata share of advance mineral royalties, bonuses and other cash
payments received by the Company from joint venture or other exploration
participants reduce the amount of a cost center as a recovery of
capitalized costs. The excess of the Company's pro rata share of advance
mineral royalties, bonuses and other cash payments received by the Company
from joint venture or other exploration participants over capitalized costs
in a specific cost center are recognized as revenue in the period received.
Gains or losses on the sale or abandonment of mining properties are charged
to current operations.
Deferred compensation Costs
---------------------------
The Company records stock bonuses to employees as an expense and an
increase to paid-in capital in the year of grant unless the bonus vests
over future years. Bonuses that vest are deferred and expensed ratably over
the vesting period.
9
<PAGE>
Note 2 SEGMENT INFORMATION
The Company operates in two industry segments within the United States: (1)
oil and gas exploration and development and (2) mineral exploration and
development.
Identified assets by industry are those assets that are used in the
Company's operations in each industry. Corporate assets are principally
cash, cash surrender value of life insurance, furniture, fixtures and
vehicles.
During the fourth quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). The adoption of SFAS 131
requires the presentation of descriptive information about reportable
segments which is consistent with that made available to the management of
the Company to assess performance.
The oil and gas segment derives its revenues from the sale of oil and gas
and prospect generation and administrative overhead fees charged to
participants in its oil and gas ventures. The mining segment receives its
revenues primarily from the sale of minerals and precious metals and from
time to time from the sale of a mineral venture that it has originated.
Corporate income is primarily derived from interest income on funds held in
money market accounts.
During the six months ended December 31, 1998 there were no intersegment
revenues. The accounting policies applied by each segment are the same as
those used by the Company in general.
Net sales to one customer of the oil and gas segment totalled approximately
$540,000 of revenues or 76.7% for the six months ended December 31, 1998.
There have been no differences from the last annual report in the basis of
measuring segment profit or loss. There have been no material changes in
the amount of assets for any operating segment since the last annual report
except for the oil and gas segment which capitalized approximately $400,000
for the development and acquisition of oil and gas property and increased
its accounts receivable due from industry partners by approximately
$300,000.
10
<PAGE>
Note 2 SEGMENT INFORMATION (CONTINUED)
Segment information consists of the following:
Six months ended Twelve months ended
December 31, 1998 June 30, 1998
----------------- -------------------
Revenue:
Oil and gas ................. $ 704,415 $ 863,588
Mining ...................... -0- -0-
General corporate ........... 14,955 47,236
----------- -----------
Total revenue ............... $ 719,370 $ 910,824
=========== ===========
Results of operations
(excluding overhead
and interest costs):
Oil and gas ................. $ 624,233 $ 680,605
Mining ...................... -0- -0-
General corporate
operations ................ (258,115) (570,067)
----------- -----------
Net income ........... $ 366,118 $ 110,538
=========== ===========
Depreciation, depletion
amortization and valuation
charged to identifiable
assets:
Oil & gas depletion ....... $ 50,000 $ 107,208
Mining .................... -0- -0-
General corporate ......... 6,000 12,445
----------- -----------
Total ................ $ 56,000 $ 119,653
=========== ===========
Capitalized expenditures:
Oil and gas ............... $ 403,556 $ 545,034
=========== ===========
Mining .................... $ -0- $ 4,472
=========== ===========
Corporate ................. $ 3,428 $ 40,291
=========== ===========
Identifiable assets, net of
accumulated depreciation,
depletion and amortization:
Oil and gas ............... $ 1,479,744 $ 789,522
Mining .................... 44,679 47,890
General corporate ......... 1,912,241 719,360
----------- -----------
Total ................ $ 3,436,664 $ 1,556,772
=========== ===========
Note 3 MINING PROPERTIES
KAYCEE AND SHAMROCK URANIUM PROSPECTS
-------------------------------------
The Company has recently begun exploration for in situ uranium deposits in
Wyoming. During the years ended June 30, 1998 and 1997, the Company
expended $4,472 and $63,352, respectively, on the Kaycee and Shamrock
prospects. In addition during 1998, the Company issued to the president
100,000 shares of the Company's common stock, valued at $14,000, in
exchange for the president's 25% interest in geological and engineering
data pertaining to the Kaycee uranium prospect.
11
<PAGE>
Note 3 MINING PROPERTIES (CONTINUED)
During fiscal 1998, the Company sold the geological data of the Kaycee and
Shamrock prospects to a privately-held Canadian company and, in exchange,
received a $125,000 cash payment and a commitment to receive an additional
$125,000 prior to December 31, 1998. This payment was not received on a
timely basis and the Company is engaged in discussions with the purchaser
in order to arrange terms for the payment of the amount due. Under the
terms of the sales agreement reached in March, 1998, the Company also
received 2 million shares or approximately 25% of the common stock of the
privately-held company. To the knowledge of the Company, at the time of
this filing, the stock had no market value.
Note 4 NOTES PAYABLE
The Company owes the following debt:
December 31, June 30,
1998 1998
-------------------------
Borrowings from life insurance
company on cash surrender value of
officer life insurance, interest at
6% per annum, no specific due date,
however, the Company intends to
repay this obligation in equal
installments during fiscal years
6/30/2000 and 6/30/2001,
collateralized by cash surrender
value of policy $ 210,437 $ 210,437
Note payable to related party,
monthly principal and interest
payments of $4,269, due September,
2000, collateralized by working
interests in the Emigh lease 81,056 101,456
Note payable to auto dealership,
monthly principal and interest
payments of $879, due July, 2000,
collateralized by new vehicle 15,504 20,672
12
<PAGE>
Note 4 NOTES PAYABLE (CONTINUED)
Note payable to an unaffiliated
third party for the acquisition of
producing gas properties in Tehama
and Glenn Counties, California,
interest at 5.475% 206,250 --
---------- ----------
513,247 332,565
Less current portion 123,462 52,205
---------- ----------
$ 389,785 $ 280,360
========== ==========
Note 5 COMMITMENTS AND CONTINGENCIES
At September 30, 1998 the Company was committed to the following drilling
and development projects in California:
1. Drill, complete and equip the Emigh 35-2.
2. Drill, complete and equip the Cilker 4-1 well.
3. Drill, complete and equip the Brandt 46X-27 well.
The Emigh 35-2 well was successfully deepened to a depth of approximately
11,100' and completed as a producing gas well, producing approximately
2,100 MMBTU and 20 BO per day.
The Cilker 4-1 well was drilled and abandoned as a dry hole in November,
1998.
The drilling of the Brandt 46X-27 well was deferred until a future date
because of low oil prices.
13
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
December 31, 1998 as compared to December 31, 1997
- --------------------------------------------------
Registrant has sustained operating losses in prior years. In addition,
Registrant has used substantial amounts of working capital in its operations.
However, at December 31, 1998 current assets exceeded current liabilities by
$350,895, and cash provided by operations was approximately $1,154,000. At June
30, 1998 current liabilities exceeded current assets by $50,734 and Registrant
had a working capital deficit to that extent. The improvement of $401,629 in
working capital from a negative $50,734 to a positive $350,895 is due primarily
a significant increase in net income and cash flow from its California
properties during the six months ended December 31, 1998 and the acquisition of
a net 21% working interest (16.17% net revenue interest) in two natural gas
units, the Johnson and Gay Units, in addition to a 5.00% royalty interest in the
Gay Unit, located in Tehama and Glenn Counties, California. Registrant acquired
a 100% working interest in the two properties from D. E. Craggs, Inc., an
unaffiliated third party for $68,500 in cash a note for $206,500 and 275,000
shares of Registrant's restricted common stock valued at $1.00 per share.
Simultaneously with the acquisition Registrant sold a 79% working interest in
the two prospects to certain unaffiliated and three affiliated purchasers for a
total price of $477,950. The date of the acquisition and disposition was July
16, 1998. Pursuant to the agreement with Craggs, Registrant paid Craggs 25% of
the cash and stock at the closing ($68,750 and 68,750 shares) and is obligated
to pay an additional 25% (plus interest on the cash from the date of closing at
the daily rate of 0.015%) in January 1999, 2000, and 2001.
In light of recent successful drilling operations and the acquisition of
producing properties, increased revenues will continue to have a positive effect
on Registrant's working capital and contribute significantly to its cash flow in
the coming months.
Registrant is now focusing most of its efforts on drilling for or acquiring oil
and gas production in the state of California.
Registrant shares certain oil and gas drilling opportunities with third party
investors (including some affiliated investors) and takes a reduced interest
until after payout to the third party investors. Payout in Registrant's major
oil and gas projects has occurred, and consequently Registrant is now receiving
increased revenues from its oil and gas operations. This commenced in the first
quarter of calendar year 1997 when Emigh 34-1 paid out, and will continue for
the foreseeable future.
14
<PAGE>
Results of Operations
---------------------
December 31, 1998 Compared to December 31, 1997
- -----------------------------------------------
For the six months ended December 31, 1998 Registrant's operations continued to
be focused on the production of oil and gas, and the investigation for possible
acquisition of producing oil and gas properties.
Oil and gas revenues for the six months ended December 31, 1998 increased
$339,165, from $288,638 to $627,803, a 118% increase. This increase reflects
Registrant's continued successful efforts in drilling exploratory and extension
wells in California as well as bringing recent acquisitions into the revenue
stream.
Oil and gas production expenses decreased $2,987 or 9% from $33,169 to $30,182
for the period ended December 31, 1998. This decrease was due to a number of new
wells coming into production during the past year on the same lease and
location, thereby providing increased operating efficiencies. These new wells
also reflect positively on increased oil and gas revenue. Production costs as a
percentage of oil and gas revenues were 4.8% for the six months ended December
31, 1998 compared to 11.5% for the six months ended December 31, 1997.
Depletion, depreciation and amortization increased significantly, from $21,147
to $56,000, a $34,853 or 165% increase. This increase reflects added volumes
produced from the new wells which caused Registrant to deplete the full cost
pool at a higher rate.
Selling, general and administrative expenses decreased by $51,407 or 17.1% from
$300,710 to $249,303. The bulk of this decrease resulted from the absence of
stock issued for services rendered in the current period. During the same period
ended December 31, 1997 Registrant issued common stock valued at $66,000 for
services. Salary expense was reduced by $12,500 because Registrant's president
took a voluntary $25,000 per year pay reduction. Administrative expenses were
further reduced by $20,500 because Registrant's commitment to fund its
president's split dollar life insurance plan has been fulfilled. These decreases
were offset in part by increases in accounting and audit fees of approximately
$32,000 over the prior year because Registrant had no audit performed for fiscal
1997 and an increase in accounting consulting fees due to increased drilling and
acquisition activities in California. Consulting fees increased by approximately
$12,000 because Registrant began actively reviewing potential mining and
electrical generation projects.
As a result of Registrant's operations for the three and six months ended
December 31, 1998, net income was $233,403 for the three month period compared
to $23,452 for the same period ended December 31, 1997, an increase of
approximately $210,000, or 895%. Net income for the six months ended December
31, 1998 compared to December 31, 1997 was $366,118 for 1998 and a loss of
15
<PAGE>
($412) for 1997. Net income on a diluted earnings per share basis was $.05 per
share and $.07 per share of common stock for the three and six months ended
December 31, 1998.
The energy industry is experiencing the worst oil price in a generation. There
is little prospect for improvement in the short run. The energy industry is
suffering the negative aspects of these low prices with employee layoffs and
exploration and development curtailments. However, assuming stable oil and gas
prices at their current level, Registrant anticipates continued improvement in
its oil and gas sales with the addition of the Emigh 35-2 well which came on
line January 12, 1999. With management's continued emphasis on controlling costs
and its improving gas sales, Registrant believes its net income and per share
earnings will continue to grow through the end of its fiscal year which ends
June 30, 1999.
Year 2000
- ---------
The following Year 2000 statements constitutes a Year 2000 Readiness Disclosure
with the meaning of the Year 2000 Information and Readiness Disclosure Act of
1998.
Year 2000 issues result from the inability of certain electronic hardware and
software to accurately calculate, store or use a date subsequent to December 31,
1999. These dates can be erroneously interpreted in a number of ways, e.g., the
year 2000 could be interpreted as the year 1900. This inability could result in
a system failure or miscalculations that could in turn cause operational
disruptions. These issues could affect not only information technology ("IT")
systems, such as computer systems used for accounting, land, engineering and
seismic processing, but also systems that contain embedded chips.
Registrant has completed an assessment of its IT systems to determine whether
these systems are Year 2000 compliant. Registrant has determined that these
systems are either compliant or with relatively minor modifications or upgrades
(many of which would have been made in any event as part of Registrant's
continuing effort to enhance its IT systems) will be compliant. All necessary
modifications and upgrades and the testing thereof are expected to be completed
by the end of the second quarter of 1999.
Registrant is assessing its non-information systems to ascertain whether these
systems contain embedded computer chips that will not properly function
subsequent to December 31, 1999. These systems include office equipment and the
automatic wellhead equipment used to operate wells. All of these systems have
been determined to be Year 2000 compliant.
To date Registrant has relied upon its internal staff to access its Year 2000
readiness. The costs associated with assessing Registrant's Year 2000 internal
compliance and related systems modification, upgrading and testing are not
currently expected to be material.
16
<PAGE>
Registrant is in the process of communicating with certain of its significant
suppliers, service companies, gas gatherers and pipelines, electricity providers
and financial institutions to determine the vulnerability of Registrant to third
parties' failure to address their Year 2000 issues. While Registrant has not yet
received definitive responses indicating all such entities are Year 2000
compliant, it has not received information suggesting Registrant is vulnerable
to potential year 2000 failures by these parties. These communications are
expected to continue into the second quarter of 1999. At this time Registrant
has not developed any contingency plans to address third party non-compliance
with Year 2000 matters. However, should its communications with any third
parties indicate any vulnerability, appropriate contingency plans will be
developed.
Registrant does not anticipate any significant disruptions of its operations due
to Year 2000 issues. Among the potential "worst case" problems Registrant could
face would be the loss of electricity used to power well pumps and compressors
that would result in wells being shut-in, or the inability of a third party gas
gathering company or pipeline to accept gas from Registrant's wells or gathering
lines which would also result in Registrant's wells being shut-in. A disruption
in production would result in the loss of income.
Subsequent Events
- -----------------
Effective January 25, 1999 Lawton L. Clark resigned from Registrant's Board of
Directors and the position of Corporate Secretary for personal reasons. Mr.
Clark had no disagreement with management.
Effective January 25, 1999 Robert A. Cohan was appointed to Registrant's Board
of Directors and the position of Corporate Secretary to fill the vacancies
caused by Lawton L. Clark's resignation.
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ASPEN EXPLORATION CORPORATION
(Registrant)
/s/ R. V. Bailey
-------------------------------
By: R. V. Bailey,
February 12, 1999 Chief Executive Officer,
Principal Financial Officer
17
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