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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
COMMISSION FILE NO. 0-09482
COLORADO WYOMING RESERVE COMPANY
(Exact Name of Small Business Issuer as Specified in its Charter)
WYOMING 83-0246080
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
751 HORIZON COURT, SUITE 205
GRAND JUNCTION, COLORADO 81506
(Address of principal executive offices) (Zip Code)
(970) 255-9995
(Issuer's telephone number)
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 /_/ No /X /
There were 2,491,694 shares of the Registrant's $.01 par value common stock
outstanding as of January 7, 1999.
Transitional Small Business Disclosure: Yes /_/ No /X /
COLORADO WYOMING RESERVE COMPANY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
as of as of
SEPTEMBER 30, JUNE 30,
1998 1998
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CURRENT ASSETS:
Cash and cash equivalents $ -- $ --
Trade accounts receivable 8,113 3,593
Related party receivable -- --
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8,113 3,593
Assets held for sale 74,460 10,000
Prepaid expenses 3,224 5,686
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Total current assets 85,797 19,279
PROPERTY AND EQUIPMENT:
Unproved oil and gas properties 680,540 653,250
Proved oil and gas properties -- 64,460
Other property and equipment 13,645 13,645
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694,185 731,355
Less accumulated depreciation, depletion and amortization:
Proved properties -- --
Other property and equipment (7,452) (6,383)
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(7,452) (6,383)
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Net property and equipment 686,733 724,972
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$ 772,530 $ 744,251
==================== =================
CURRENT LIABILITIES:
Trade accounts payable $ 80,341 $ 67,017
Bank overdrafts 393 19,444
Notes payable, 6% per annum, maturity date of October 31,
1998 (net of unamortized discount of $33,000) 87,000 --
Other accrued liabilities 24,225 30,067
Property remediation 64,000 64,000
Related party payables 72,602 46,596
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328,561 227,124
EQUITY
Common stock, $.01 par value: authorized -- 75,000,000 shares;
issued and outstanding -- 2,491,694 and 2,467,694 shares at
September 30, 1998 and June 30, 1998, respectively 24,917 24,677
Additional paid-in capital 4,388,080 4,283,320
Warrants 66,000 --
Accumulated deficit (4,035,028) (3,790,870)
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443,969 517,127
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$ 772,530 $ 744,251
==================== =================
The accompanying notes are an integral part of these financial statements.
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COLORADO WYOMING RESERVE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1998 1997
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Revenues
Oil and gas sales $ 5,277 $ 14,717
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Total Revenues 5,277 14,717
Expenses
Operation of producing properties 12,516 8,700
Production taxes 331 858
Exploration cost 9,826 --
Depreciation, depletion and amortization 1,069 2,227
General and administrative 192,101 166,430
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Total expenses 215,843 178,215
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Operating (loss) (210,566) (163,498)
OTHER INCOME (EXPENSE)
Interest expense (33,592) --
Interest Income -- 8,166
Gain on sale of assets -- 7,682
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Loss before income taxes (244,158) (147,650)
============ ============
Provision for income taxes -- --
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Net loss $ (244,158) $ (147,650)
============ ============
Net loss per share $ (0.10) $ (0.09)
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Weighted average common shares outstanding 2,487,691 1,595,076
============ ============
The accompanying notes are an integral part of these financial statements.
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COLORADO WYOMING RESERVE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1997
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Cash flows from operating activities:
Net loss $ (244,158) $ (147,650)
Adjustments to reconcile net loss to net used in
operating activities:
Depletion, depreciation and amortization 1,069 2,227
(Gain) on asset sale -- (7,682)
Amortization of note payable discount 33,000 --
Equity issued as compensation 81,000 --
Changes in current assets and liabilities:
Receivables (4,520) 672
Payables 14,437 13,420
Prepaid expenses 2,462 (1,999)
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Net cash used in operating activities (116,710) (141,012)
Cash flows from investing activities:
Additions to unproved properties (27,290) --
Proceeds from asset sales -- 44,682
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Net cash (used in) provided by investing activities (27,290) 44,682
Cash flows from financing activities:
Notes payable 120,000 --
Sale of common stock 24,000 --
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Net cash provided by financing activities 144,000 --
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Net decrease in cash and equivalents -- (96,330)
Cash and equivalents at beginning of period -- 748,459
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Cash and equivalents at end of period $ -- $ 652,129
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The accompanying notes are an integral part of these financial statements.
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COLORADO WYOMING RESERVE COMPANY
("CWYR" or the "Company")
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 AND JUNE 30, 1998
(1) INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements are unaudited. However, in
the opinion of management, the accompanying financial statements reflect all
adjustments necessary for a fair presentation.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations. Management believes the disclosures made are
adequate to make the information not misleading and suggests that these
financial statements be read in conjunction with the Company's June 30, 1998
Form 10-KSB.
(2) PRIVATE FINANCING TRANSACTION
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 4).
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(3) 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 for a fee of $3,000 per month and reimbursement of
certain Trinity hourly personnel charges and 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 of Trinity through his ownership of
Butler Resources, LLC. In connection with certain additional services provided
to the Company by Trinity pursuant to the 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.
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 is
for a term of one year, but may be terminated by either party with or without
cause upon 30 days written notice to the other party. 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, which options have been repriced as of December 4, 1998 to
$1.00 per share pursuant to the Bridge Loan Extension described below. Coupled
with its prior ownership of the Company's Common Stock, SCI beneficially owns
approximately 11.1 percent of the Company. 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. Effective November 1, 1998, however, the ST Agreement
was assigned by the Company to FM Energy, LLC in connection with the North
Dakota Agreement. See Note 4.
The Company entered into an employment contract with Mr. Fuerst on October 1,
1996 pursuant to which Mr. Fuerst receives 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. The contract is
for an initial term of three years commencing October 1, 1996 and may be
terminated by Mr. Fuerst upon 90 days prior written notice to the Company, and
by the Company
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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.
(4) SUBSEQUENT EVENTS
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
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 "Bridge 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 April 1, 1999, thereby increasing the beneficial ownership by
the Trust to approximately 7.6 percent. As additional consideration, the
Bridge Loan 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 price described above for the
newly-granted warrants; (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.
(5) LOSS PER SHARE
Basic and diluted earnings per share are the same, as the effect of warrants and
options is antidilutive.
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(6) RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standard ("SFAS") No. 130, REPORTING COMPREHENSIVE INCOME, in June
1997. This statement, which is effective for fiscal years beginning after
December 15, 1997, establishes standards for reporting of comprehensive income
and its components. The Company adopted this statement effective July 1, 1998.
The adoption had no impact on the financial statements.
The FASB also issued SFAS No. 131, SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, in June 1997. This statement, which is effective for fiscal years
beginning after December 15, 1997, establishes standards for the way the public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. The Company's business is conducted in a single operating
segment.
In June 1998, SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, was issued. SFAS No. 133 establishes 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. SFAS
No. 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. The Company believes that this statement will have no material
effect on the Company's financial statements.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, CWYR had no cash and, after the fiscal 1999 property sale
described below and short term financing obtained by the Company during November
1998, had less than $10,000 cash at December 20, 1998. Further, the Company
currently has no revenues and continues to incur obligations related to certain
general and administrative expense items. The Company's existence is contingent
upon its ability to raise additional capital in the very near future.
The Company is currently reviewing financing alternatives with the view to
raising that capital. Continued development of the Company's only significant
asset, the Paradox Basin Project (see below), is dependent on success of the
capital raising efforts. Since the Company has negative operating cash flow, the
capital raised must be sufficient to cover day-to-day operations as well as
development of the Paradox Basin Project. Failure to raise the capital could
lead to liquidation of CWYR's assets on terms unfavorable to the Company. No
firm commitment from a capital source presently exists.
During the fiscal year ended June 30, 1997, the Company pursued a strategy of
identifying and acquiring Rocky Mountain natural gas producing properties with
development potential. However, relatively high Rocky Mountain natural gas
prices together with perceptions of a strong future pricing environment, created
a situation that precluded the Company from consummating a producing property
purchase on terms that would allow for an adequate return on the Company's
capital.
Given the preceding, during fiscal 1998 the Company revised its strategy and
entered into an exploration joint venture and a merger agreement. In conjunction
with the merger agreement, the Company amassed a block of exploratory acreage in
the Paradox Basin (Utah). To date, the Company has acquired a total of
approximately 53,000 acres and, subject to financing, could acquire additional
acreage. The project will require 3-D seismic surveys in order to determine if
the acreage is likely to contain hydrocarbons and whether drilling will be
economically feasible. Initially, a 26-square mile seismic shoot would be
conducted. CWYR has undertaken discussions with several seismic companies in an
effort to arrange a financing plan that would provide for the Company's
financial obligation to be conditioned upon successful identification and
definition of a well site(s). Management anticipates that the Company would have
complete access to (although not ownership of) the seismic data.
Pursuant to the joint venture mentioned in the preceding paragraph, 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 have been acquired. However, in order to raise cash for its short term
obligations, the Company sold the property subsequent to September 30, 1998.
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OPERATIONS. Decreases in cash used for general and administrative expense during
the three months ending September 30, 1998 more than offset lower revenue during
the period, resulting in a lower deficit from operations than incurred during
the three months ending September 30, 1997.
INVESTING. The asset sale proceeds realized during the three months ending
September 30, 1997 were derived from the sale of the Company's undeveloped
Canadian property. The purchase of additional Paradox Basin acreage during the
three months ending September 30, 1998 accounted for the increase in unproved
oil and gas properties.
FINANCING. During the quarter ended September 30, 1998, the Company sold 24,000
shares of its common stock at $1 per share and, as described in Note 2 to the
Consolidated Financial Statements, entered into a financing arrangement
resulting in the borrowing of $120,000.
RESULTS OF OPERATIONS
OIL AND GAS OPERATIONS. The Company's producing properties operated at a loss
during the quarter ending September 30, 1998. For this reason and due to the
Company's lack of liquidity, all producing properties have been classified as
"Assets held for sale" on the balance sheet. As discussed in Note 4 to the
Consolidated Financial Statements, the Company's most significant producing
property was sold during November 1998.
EXPLORATION COSTS. Exploration costs incurred during the quarter ending
September 30, 1998 represents costs incurred in conjunction with CWYR's Paradox
Basin property (which the Company did not own during the quarter ending
September 30, 1997).
GENERAL AND ADMINISTRATIVE EXPENSE. Although general and administrative expense
is higher during the quarter ended September 30, 1998 than for the corresponding
quarter in 1997, the 1998 figure includes a noncash charge of $81,000 for
equity issued as compensation; there was no such charge in 1997. General and
administrative expense exclusive of the equity issued as compensation charge was
$111,101 and $166,430 for the quarters ended September 30, 1998 and 1997,
respectively. The decrease in this measure of 1998 expense is primarily due to
the fact that certain professional expenses incurred during the quarter ended
September 1997 were not incurred until the second quarter of fiscal 1999.
Additionally, the Company cut certain administrative costs during the quarter
ended September 30, 1998 due to its lack of cash.
OTHER. Prior year's first quarter interest income derives from the investment of
excess cash in 1997; no excess cash was available during the quarter ended
September 30, 1998. Interest expense during the quarter ended September 30, 1998
related to the financing transaction entered into by the Company during the
quarter.
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
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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 PRONOUNCEMENTS
The FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME, in June 1997. This
statement, which is effective for fiscal years beginning after December 15,
1997, establishes standards for reporting of comprehensive income and its
components. The Company adopted this statement effective July 1, 1998. The
adoption had no impact on the financial statements.
The FASB also issued SFAS No. 131, SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION, in June 1997. This statement, which is effective for fiscal
years beginning after December 15, 1997, establishes standards for the way the
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. The Company's business is conducted in a single operating
segment.
In June 1998, SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, was issued. SFAS No. 133 establishes 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. SFAS
No. 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. The Company believes that the adoption of this statement will
have no material effect on the Company's financial statements.
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PART II
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
The Company sold 12,000 shares of Common Stock to each of two
directors of the Company on September 1, 1998 in private
transactions exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended. The Company received cash in
the amount of $12,000 from each director.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. 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.
None.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Issuer caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized.
COLORADO WYOMING RESERVE COMPANY
Dated: January 8, 1999 By: /S/ KIM M. FUERST
---------------------------------------
Kim M. Fuerst, President
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EXHIBIT INDEX
3.1 Articles of Incorporation. (a)
3.2 Bylaws. (a)
10.1 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"). (b)
10.2 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. (b)
10.3 Promissory Note, dated August 25, 1998, in the principal amount of
$120,000.00, from the Company to the Trust. (b)
10.4 Warrant Agreement, dated as of August 25, 1998, between the Company and
the Trust. (b)
10.5 Registration Rights Agreement, dated as of August 25, 1998, between the
Company and the Trust. (b)
10.6 Extension, dated as of December 4, 1998, to the Bridge Loan between the
Company and the Trust. (b)
10.7 Amendment No. 1 to Registration Rights Agreement and Promissory Note,
dated as of December 4, 1998, between the Company and the Trust. (b)
10.8 Warrant Agreement, dated as of December 4, 1998, between the Company and
the Trust. (b)
10.9 Offer to Purchase, dated as of November 2, 1998, from FM Energy, LLC to
the Company. (b)
27 Financial Data Schedule.
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(a) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended May 31, 1983.
(b) Incorporated by reference to the Company's Form 10-KSB for the
fiscal year ended June 30, 1998.
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