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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the fiscal year ended June 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from _______ to ______
Commission file number: 001-12531
ASPEN EXPLORATION CORPORATION
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(Name of small business issuer in its charter)
Delaware 84-0811316
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2050 S. Oneida St., Suite 208
Denver, Colorado 80224-2426
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (303) 639-9860
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.005 par value
------------------------------
Check whether the issuer (1) 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 in this form, 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. Yes X No
--- ---
Aspen's revenues for the fiscal year ended June 30, 2002 were $869,522.
At September 19, 2002, the aggregate market value of the shares held by
non-affiliates was approximately $1,153,567.90. The aggregate market value was
calculated by multiplying the mean of the closing bid and asked prices ($0.305)
of the common stock of Aspen on the Over-the-Counter Bulletin Board listing for
that date, by the number of shares of stock held by non-affiliates of Aspen
(3,782,190).
At September 19, 2002, there were 5,863,828 shares of common stock (Aspen's
only class of voting stock) outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
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PART I
ITEM 1. BUSINESS
-----------------
Because we want to provide you with more meaningful and useful information,
this Annual Report on Form 10-KSB contains certain "forward-looking statements"
(as such term is defined in Section 21E of the Securities Exchange Act of 1934,
as amended). These statements reflect our current expectations regarding our
possible future results of operations, performance, and achievements. These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995.
Wherever possible, we have tried to identify these forward-looking
statements by using words such as "anticipate," "believe," "estimate," "expect,"
"plan," "intend," and similar expressions. These statements reflect our current
beliefs and are based on information currently available to us. Accordingly,
these statements are subject to certain risks, uncertainties, and contingencies,
which could cause our actual results, performance, or achievements to differ
materially from those expressed in, or implied by, such statements. These risks,
uncertainties and contingencies include, without limitation, the factors set
forth under "Item 6. Management's Discussion and Analysis of Financial
Conditions or Plan of Operation - Factors that may affect future operating
results." We have no obligation to update or revise any such forward-looking
statements that may be made to reflect events or circumstances after the date of
this Form 10-KSB.
Summary of Our Business
Aspen was incorporated under the laws of the State of Delaware on February
28, 1980 for the primary purpose of acquiring, exploring and developing oil and
gas and other mineral properties. Our principal executive offices are located at
2050 S. Oneida St., Suite 208, Denver, Colorado 80224-2426. Our telephone number
is (303) 639-9860, and our facsimile number is 303-639-9863. Our websites are
www.aspenexploration.com and www.aspnx.com and our email address is
aecorp2@qwest.net. We are currently engaged primarily in the exploration and
development of oil and gas properties in California. We also have a 25% interest
in Aspen Power Systems, LLC, a company we incorporated to investigate, finance,
and construct electrical power generation projects. We have also acquired some
acreage in Colorado for a possible coalbed methane project.
Oil and Gas Exploration and Development. Our major emphasis has been
participation in the oil and gas segment, acquiring interests in producing oil
or gas properties and participating in drilling operations. We engage in a broad
range of activities associated with the oil and gas business in an effort to
develop oil and gas reserves. With the assistance of our management, independent
contractors retained from time to time by Aspen, and, to a lesser extent,
unsolicited submissions, we have identified and will continue to identify
prospects that we believe are suitable for drilling and acquisition.
Currently, our primary area of interest is in the state of California. We
have acquired a number of interests in oil and gas properties in California, as
described below in more detail. In addition, we also act as operator for most of
our producing wells and receive management fees for these services.
Aspen has information on hand which indicates coal deposits exist under the
approximate 2,074 acres of leases which Aspen has obtained in Arapahoe and
Elbert Counties, Colorado. We do not know if it is possible or economically
feasible to produce any coalbed methane which may exist on these leases. The
leases are paid-up oil and gas leases (which include coalbed methane) with a
three year term and are renewable for an additional two years. As of June 30,
2002 we have approximately 2,074 gross and net acres of nonproducing leasehold
in Colorado. We do not intend to proceed with exploration and development of
these properties on our own, rather, we intend to farm out the project to
another party. There is no assurance we will be successful in so doing.
Mineral Exploration and Development. During fiscal 1997 and 1998, we also
focused our attention on uranium deposits in sandstone in Wyoming.
We have curtailed, for the time being, exploration for precious metals in
Alaska and for uranium in Wyoming. We believe that pursuing activities in the
mineral segment would not be beneficial to Aspen at the present time.
Power Generation. In 1999, we formed a subsidiary named Aspen Power
Systems, LLC ("APS"), a Colorado limited liability company to provide an
opportunity for Aspen to participate in the growing demand for electrical power
2
generated by turbines. Our objectives for APS were to seek opportunities or
situations where our analysis indicated that a gas turbine generation plant
could be constructed and operate profitably. Any plant construction will require
a significant amount of capital for property acquisition, permitting,
engineering and design, and construction. Neither Aspen nor the other owners of
APS will be able to provide this required capital. Consequently, any such
activities will likely require the availability of funds from third parties, and
we cannot offer any assurance that such funding will be available when needed on
commercially-reasonable terms. Currently Aspen owns a 25% interest in APS and we
are continuing to provide certain administrative services to APS. APS reimburses
us for the salary of R. V. Bailey when he is working on matters for APS.
APS reimbursed us $42,700 for the 2001 fiscal year, and $10,406 for the
2002 fiscal year. At June 30, 2002 APS had paid us for all chargeable time of
our president.
APS is currently being managed by Larry Baccari of Sheridan, Wyoming, an
electrical engineer with experience in constructing turbine power plants. The
board of directors of APS consists of Mr. Baccari, R. V. Bailey, President of
Aspen Exploration, and Ray K. Davis, accounting consultant to Aspen Exploration.
In addition to Aspen, Messrs. Bailey, Baccari and Davis each own 25% of
APS. We account for our 25% interest in APS using the equity method of
accounting. As of December 31, 2001 (APS's most current reporting period), we
recorded net ordinary loss of $27,971 from APS. During fiscal 2002, we advanced
an additional $5,500 to APS. As of this writing, APS has not repaid that amount.
Although APS has attempted to undertake projects with other power producers
(and received reimbursement of $246,000 in fees and expenses relating to our
Solano, California, project from a third party), there is currently no project
being actively pursued. We are now reviewing our possible options with regard to
the projects we had previously considered and other possibilities for the
future. See Item 12 for more information regarding APS.
Company Strategy:
We believe that it is in our shareholders' best interests to diversify our
investments in all aspects of our operations. It is for this reason that we
reduced our interest in APS, we attempted to develop our uranium prospects
through a third party, and we frequently obtain financing for our oil and gas
acquisition and drilling activities from third parties.
At the present time, we cannot finance our oil and gas acquisitions and
drilling activities solely through our own resources. Consequently, we identify
prospects or production to acquire and drill prospects, and seek other industry
investors who are willing to participate in these activities with us. We
frequently retain a promotional interest in these prospects, but generally we
have to finance a portion (and sometimes a significant portion) of the
acquisition and drilling costs. We have in the past acquired interests in
producing properties by issuing shares of our common stock, but because of the
current low price of our stock, it has become more difficult and expensive to do
so.
Where we acquire an interest in acreage on which exploration or development
drilling is planned, we will seldom assume the entire risk of acquisition or
drilling. Rather, we prefer to assess the relative potential and risks of each
prospect and determine the degree to which we will participate in the
exploration or development drilling. Generally, we have determined that it is
more beneficial to invite industry participants to share the risk and the reward
of the prospect by financing some or all of the costs of drilling contemplated
wells. In such cases, we may retain a carried working interest, a reversionary
interest, or may be required to finance all or a portion of our proportional
interest in the prospect. Although this approach reduces our potential return
should the drilling operations prove successful, it also reduces our risk and
financial commitment to a particular prospect.
Conversely, we may from time to time participate in drilling prospects
offered by other persons if we believe that the potential benefit from the
drilling operations outweighs the risk and the cost of the proposed operations.
This approach allows us to diversify into a larger number of prospects at a
lower cost per prospect, but these operations (commonly known as "farm-ins") are
generally more expensive than operations where we offer the participation to
others (known as "farm-outs"). As of this writing, we have participated in the
drilling of two farm-in wells.
3
Principal Products Produced and Services Rendered. Our principal products
during fiscal 2002 were crude oil and natural gas. Crude oil and natural gas are
generally sold to various entities, including pipeline companies, which usually
service the area in which our producing wells are located. In the fiscal year
ended June 30, 2002, crude oil and natural gas sales and revenues from operating
oil and gas properties accounted for $828,150, or 95% of our total revenues;
while $41,372, or 5% was from interest and other income.
Distribution Methods of the Products or Services. We are not involved in
the distribution aspect of the oil and gas industry.
Status of any Publicly Announced New Products or Services. We do not have a
new product or service that would require the investment of a material amount of
our assets or which we believe is material to our business. Therefore, we have
not made a public announcement of nor have we made information otherwise public
about any such product or service.
Although we are attempting to enter the electric power generation business
through Aspen Power Systems, LLC, no progress has been made thus far in that
attempt. If a situation is found where all the factors needed to generate
electrical power are present, of which there is no assurance, APS would have to
find a source of funding prior to initiating any significant activities.
Competitive Business Conditions: The exploration for, and development,
production and acquisition of, oil, gas, precious metals and other minerals are
subject to intense competition, as is the production and sale of electrical
power. The principal methods of compensation for the acquisition of oil and gas
and other mineral properties are the payment of:
(i) cash bonuses at the time of the acquisition of leases;
(ii) delay rentals and the amount of annual rental payments;
(iii) advance royalties and the use of differential royalty rates; and
(iv) the stipulations requiring exploration and production commitments by
the lessee.
General compensation in the electrical generation industry is price
sensitive. Electrical power can be sold into the local electrical power grid,
but the price at which the power can be sold may not be economical unless the
project has been economically acquired and designed, efficiently completed and
functions in accordance with its specifications.
Some of our current competitors, and many of our potential competitors in
each of these industries have vast experience, are larger and have significantly
greater financial resources, existing staff and labor forces, equipment, and
other resources than we do. Consequently, these competitors may be in a better
position to compete for projects in our diverse industries.
In addition, the availability of a ready market for oil and gas will depend
upon numerous factors beyond our control, including the extent of domestic
production and imports of oil and gas, proximity and capacity of pipelines, and
the effect of federal and state regulation of oil and gas sales, as well as
environmental restrictions on exploration and usage of oil and gas. Further, we
expect that competition for leasing of oil and gas prospects will become even
more intense in the future. We have a minimal competitive position in the oil
and gas industry. Should we participate in the electrical power generation
industry, we will also have a minimal competitive position in that industry.
Sources and Availability of Raw Materials: To conduct business, we depend
on such items as drilling rigs and other equipment, casing pipe, drilling mud
and other supplies, core drilling equipment, and other equipment necessary for
our operations. Should APS commence constructing a plant, APS will be dependent
(among other things) on the availability of appropriate gas turbines for
generating electricity. Such items have been commonly available from a number of
sources. Although we foresee no short supply or difficulty in acquiring any
equipment relevant to the conduct of business, we cannot offer any assurances
that these items will be available or that we will be able to acquire the items
on economically feasible terms.
Dependence Upon One or a Few Major Customers: We generally sell our oil and
gas production to a limited number of companies. In fiscal 2002 we obtained more
than 10% of our revenues from sales to Phillips Petroleum, Calpine Corporation
and Slawson Corporation; in 2001 more than 10% of our revenues derived from
Tosco Refining Company, Calpine Corporation and Enserco Energy, Inc. We do not
4
believe the loss of these customers would adversely impact our revenues because
we believe that oil and gas sales are primarily market driven and are not
dependent on particular purchasers. Consequently, we believe that substitute
purchasers would be available based on the widespread uses of and the need for
oil and gas.
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements
or Labor Contracts (Including Duration). We do not own any patents, licenses,
franchises, or concessions except oil, gas and other mineral interests granted
by governmental authorities and private landowners. We received a trademark
registration (serial no. 74-396,919 registered on March 1, 1994) for our
corporate logo. The registration is for a term of ten years. To maintain the
registration for its entire term we filed an affidavit of commercial use on
February 21, 2000.
Need for Governmental Approval of Principal Products or Services. We do not
need to seek government approval of our principal products.
Effect of Existing or Probable Governmental Regulation. Oil and gas
exploration and production, electric power generation, as well as mining
activities, are open to significant governmental regulation including worker
health and safety laws, employment regulations and environmental regulations.
Operations that occur on public lands may be subject to further regulation by
the Bureau of Land Management, the U.S. Army Corps of Engineers, or the U.S.
Forest Service as well as other federal and state agencies.
Estimate of Amounts Spent on Research and Development Activities. We have
not engaged in any material research and development activities since our
inception.
Costs and Effects of Compliance with Environmental Laws (federal, state and
local). Because we are engaged in extracting natural resources, our business is
subject to various federal, state and local provisions regarding environmental
and ecological matters. Therefore, compliance with environmental laws may
necessitate significant capital outlays, affect our earnings potential, and
cause material changes in our current and proposed business activities.
At the present time, however, the environmental laws do not materially
hinder nor adversely affect our business. Capital expenditures relating to
environmental control facilities have not been material to our operations since
our inception.
Employees.
At June 30, 2002, we employed three full-time persons. We also employ
independent contractors and other consultants, as needed.
ITEM 2. PROPERTIES
-------------------
General Information:
We have a significant amount of information regarding the proven developed
and undeveloped oil and gas reserves which can be found in below in this Item 2
as well as in the notes to our financial statements.
Drilling Activity:
During the fiscal year ended June 30, 2002 we participated in the drilling
of 6 gross (1.32 net) wells, of which 4 gross (.98 net) were completed as gas
wells and 2 were dry holes. Of the 6 wells drilled, 2 operated gas wells were
drilled in the Sour Grass Prospect, 2 operated gas wells were drilled in the
Kirk-Buckeye Field, 1 operated dry hole was drilled in Kern County, and 1
non-operated dry hole was drilled in the Van Sickle Island Field.
Kirk-Buckeye Field, Colusa County, California
The Kuppenbender #20-3 was Aspen's second well in the Kirk-Buckeye field
area in Colusa County, California and was drilled to a depth of 9,000 feet.
Production casing was run based on promising mud log and electric log responses
which indicated a possible 50 feet of pay. This well was tested from a Forbes
interval at a stabilized gas rate of 2,423 MCFPD (million cubic feet per day) of
high quality natural gas. The shut in tubing pressure was 4,250 psig and the
shut in casing pressure was 4,290 psig. Gas sales commenced in late June at a
5
rate of 550 MCFPD. An additional potential gas zone exists behind-pipe in this
well. Aspen's first well in this field, the Armstrong #17-4, was drilled in July
2001 to a depth of 9,000 feet and tested gas at 2,000 MCFPD. Gas production
commenced in September 2001 at a self-imposed restricted rate of 500 MCFPD and
is still producing at 450 MCFPD after one year of production. Aspen is the
operator of both of these wells and has a 36% working interest in the Armstrong
#17-4 and a 15.2% working interest in the Kuppenbender #20-3. Aspen plans to
drill another well in this field, the Kuppenbender #20-2, in the fall of 2002.
In other future plans in this area, Aspen will commence drilling on its 600
acre Canal Prospect, located approximately 3 miles southwest of the Kirk-Buckeye
wells, in September 2002. The first well on this prospect, the McCullough #36-1,
will be drilled to a depth of 9,200 feet and has numerous targets in the Forbes
formation in addition to shallower objectives.
Sour Grass Prospect, Tehama County, California
----------------------------------------------
The Sour Grass prospect area is a 2,800 acre play located in southern
Tehama County. In this project, for which a 7.5 square mile area 3-D seismic
survey has recently been acquired, Aspen has a 23.33% operated working interest.
There is also abundant well data for the area as well as previous 2-D seismic
survey information. Five to ten prospective locations have been identified
through an analysis of the data, with numerous pay zones from 2,000 to 6,000
feet in depth. Historic production from older wells has been quite good, with
initial production from individual wells often exceeding 2,000 MCFPD and total
ultimate gas reserves in the 1 to 2 BCF (billion cubic feet) range per well.
Drilling of the first two wells in this project resulted in two producers.
The Porter #26-2 was directionally drilled in May 2002 to a depth of
approximately 6,750 feet and encountered several prospective gas zones in the
Forbes formation. One of these zones was tested at a rate of approximately 2,000
MCFPD of high quality natural gas but rapidly declined. The well was recompleted
in July 2002 and is currently producing 350 MCFPD. The other behind-pipe zones
in this well will be produced in the future.
The Leal #22-1, the second well drilled on the Sour Grass prospect, was
also drilled to a depth of 5,600 feet and completed in May 2002. This well
tested in excess of 600 MCFPD from various intervals in the Forbes formation and
has been flowing at a stable rate of 425 MCFPD.
Denverton Creek Field, Solano County, California.
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For the past three years, we have been the recipient of the California
Division of Oil, Gas, and Geothermal Resources (CDOGGR) "Outstanding Lease
Maintenance Award" for our operations in the Denverton Creek gas field. CDOGGR
gives this award to operators who not only meet, but exceed, the requirements
for producing well operations set by CDOGGR.
Aspen did not drill any wells in this field during the current fiscal year.
Aspen has drilled a total of 12 productive gas wells out of 15 attempts, an 80%
success rate. Cumulative gross production from the field is in excess of 9.2 BCF
of natural gas. The field is productive from 10 separate horizons ranging in
depth from 9,000 feet to 12,000 feet. Aspen has extended the former field limits
by 2 miles to the northeast and discovered new pay horizons. Current gross
production is in excess of 1,000 MCFPD of high quality natural gas (1097 BTU)
with numerous behind-pipe zones in many of the wells.
Drilling Activity:
The following table sets forth the results of our drilling activities
during the fiscal years ended June 30, 2000, 2001 and 2002:
Drilling Activity
-----------------
Gross Wells Net Wells
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Year Total Producing Dry Total Producing Dry
---- ----- --------- --- ----- --------- ---
2000 Exploratory 11 8 3 1.61 1.29 .32
2001 Exploratory 10 6 4 1.22 .58 .64
2002 Exploratory 6 4 2 1.32 .98 .34
6
Production Information:
Net Production, Average Sales Price and Average Production Costs (Lifting).
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The table below sets forth the net quantities of oil and gas production (net of
all royalties, overriding royalties and production due to others) attributable
to Aspen for the fiscal years ended June 30, 2000, 2001, and 2002, and the
average sales prices, average production costs and direct lifting costs per unit
of production.
Years Ended June 30,
--------------------
2002 2001 2000
---- ---- ----
Net Production
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Oil (Bbls) 3,055 5,206 6,282
Gas (MMcf) 227 377 384
Average Sales Prices
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Oil (per Bbl) $20.20 $26.64 $22.58
Gas (per Mcf) $ 2.78 $ 9.20 $ 2.94
Average Production Cost 1
-----------------------
Per equivalent
Bbl of oil $11.21 $ 7.53 $ 4.90
Average Lifting Costs 2
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Per equivalent
Bbl of oil $ 2.86 $ 1.65 $ 1.44
1 Production costs include all operating expenses, depreciation, depletion and
amortization, lease operating expenses and all associated taxes.
2 Direct lifting costs do not include impairment expense, ceiling write-down, or
depreciation, depletion and amortization.
7
Productive Wells and Acreage:
Gross and Net Productive Oil and Gas Wells, Developed Acres, and Overriding
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Royalty Interests.
-----------------
Leasehold Interests - Productive Wells and Developed Acres: The tables
below sets forth Aspen's leasehold interests in productive and shut-in oil and
gas wells, and in developed acres, at June 30, 2002:
Producing and Shut-In Wells
---------------------------
Gross Net 1
----- ----
Prospect Oil Gas Oil Gas
-------- --- --- --- ---
California:
Armstrong 17-4 -- 1 -- 0.36000
Brandt 16X 1 -- 0.18 --
Brandt 26X 1 -- 0.1343 --
Comber 4 -- 1 -- 0.03000
Cygnus 2 -- 1 -- 0.05125
Deane 1 -- 1 -- 0.12938
Dragon 1 -- 1 -- 0.28350
Eastby 36-2 -- 1 -- 0.07770
Elektra 1 -- 1 -- 0.07560
Emigh 3-1 -- 1 -- 0.23800
Emigh 34-1 -- 1 -- 0.28800
Emigh 35-1 -- 1 -- 0.28525
Emigh 35-2 -- 1 -- 0.32800
Emigh 35-3 -- 1 -- 0.11900
Emigh 35-4 - 1 -- 0.05125
Emigh 35-5 -- 1 -- 0.23800
Firestone 1-10 -- 1 -- 0.03850
Gay Unit -- 2 -- 0.42000
Gay Unit 12-1 -- 1 -- 0.10500
Grey Wolf 1 -- 1 -- 0.18000
Houghton 25-1 -- 1 -- 0.07770
Johnson Unit -- 4 -- 0.84000
Kuppenbender 20-3 -- 1 -- 0.15200
Leal 22-1 -- 1 -- 0.23334
Pinheiro 1-10 -- 1 -- 0.01890
Pinheiro 2-10 -- 1 -- 0.01890
Porter 26-2 -- 1 -- 0.23334
Sanborn 3-3 -- 1 -- 0.12762
Sanborn 4-10 -- 1 -- 0.02979
Sciortino 1-7 -- 1 -- 0.03000
Tiahrt 1-4 -- 1 -- 0.03617
Zimmerman 1-24 -- 1 -- 0.23334
TOTAL 2 34 0.3143 5.32953
1 A net well is deemed to exist when the sum of fractional ownership working
interests in gross wells equals one. The number of net wells is the sum of the
fractional working interests owned in gross wells expressed as whole numbers and
fractions thereof.
8
Developed Acreage Table
-----------------------
Aspen's Developed Acres1
Prospect Gross 2 Net 3
-------- ----- ---
California:
Denverton Creek 1,431 244
Firestone 1-10 160 6
Grey Wolf 1 120 22
Kirk Buckeye 800 199
Malton Black
Butte Field 2,023 321
Phillips Acquisition 1,280 71
Sour Grass 694 162
W Bellevue Ext Fld 160 25
----- -----
TOTAL 6,668 1,050
===== =====
1 Consists of acres spaced or assignable to productive wells.
2 A gross acre is an acre in which a working interest is owned. The number of
gross acres is the total number of acres in which a working interest is owned.
3 A net acre is deemed to exist when the sum of fractional ownership working
interests in gross acres equals one. The number of net acres is the sum of the
fractional working interests owned in gross acres expressed as whole numbers and
fractions thereof.
Royalty Interests in Productive Wells and Developed Acreage: The following
tables set forth Aspen's royalty interest in productive gas wells and developed
acres at June 30, 2002:
Overriding Royalty Interests
----------------------------
Productive Wells Gross
---------------- -----
Prospect Interest(%) Oil Gas Acreage 1
-------- ----------- --- --- --------
California:
Emigh 3-1 1.260150 -- 1 160
Emigh 35-3 1.142816 -- 1 80
Gay Unit 5.000000 -- 1 585
Gay Unit 12-1 2.500000 -- 1 60
Sanborn 3-3 0.101590 -- 1 615
-- --- ----
TOTAL -- 5 1,500
== == =====
1 Consists of acres spaced or assignable to productive wells.
9
Undeveloped Acreage:
Leasehold Interests Undeveloped Acreage: The following table sets forth Aspen's
leasehold interest in undeveloped acreage at June 30, 2002:
Undeveloped Acreage
-------------------
Gross Net
----- ---
California:
CIA 233 35
Denverton Creek 834 89
Kern River Vedder 7,415 2,175
McCullough 36-1 583 115
North Orland 235 202
Randall Island 639 639
Sacreiter 245 245
Sour Grass 2,141 500
Sugarfield 75 38
------ -----
Sub Total 12,400 4,038
Colorado:
Coalbed Methane Prospect 2,074 2,074
------ -----
TOTAL 14,474 6,112
====== =====
Delivery Commitments:
We are not obligated to provide a fixed and determinable quantity of oil
and gas in the future under existing contracts and agreements.
Drilling Commitments:
At June 30, 2002, we were committed to the following drilling and
development projects in California:
Project Aspen Cost
------- ----------
Klingenberg 24-1 $115,000
Kuppenbender 20-2 65,000
McCullough 36-1 65,000
HSRCC 1 10,000
--------
Total $255,000
--------
Reserve Information - Oil and Gas Reserves:
Cecil Engineering, Inc evaluated our oil and gas reserves attributable to
our properties at June 30, 2002. Reserve calculations by independent
petroleum engineers involve the estimation of future net recoverable
reserves of oil and gas and the timing and amount of future net revenues to
be received therefrom. Those estimates are based in numerous factors, many
of which are variable and uncertain. Reserve estimators are required to
make numerous judgments based upon professional training, experience and
educational background. The extent and significance of the judgments in
them are sufficient to render reserve estimates of future events, actual
production determinations involve estimates inherently imprecise, since
reserve revenues and operating expenses may not occur as estimated.
Accordingly, it is common for the actual production and revenues later
received to vary from earlier estimates. Estimates made in the first few
years of production from a property are generally not as reliable as later
estimates based on a longer production history. Reserve estimates based
upon volumetric analysis are inherently less reliable than those based on
10
lengthy production history. Also, potentially productive gas wells may not
generate revenue immediately due to lack of pipeline connections and
potential development wells may have to be abandoned due to unsuccessful
completion techniques. Hence, reserve estimates may vary from year to year.
Estimated Proved Reserves/ Developed and Undeveloped Reserves: The
following tables set forth the estimated proved developed and proved undeveloped
oil and gas reserves of Aspen for the years ended June 30, 2000 and 2001. See
Note 9 to the Consolidated Financial Statements and the above discussion.
Estimated Proved Reserves
-------------------------
Proved Reserves Oil (Bbls) Gas (Mcf)
--------------- ---------- ---------
Estimated quantity, June 30, 2000 15,000 2,373,000
Revisions of previous estimates 1,000 (362,000)
Discoveries 2,000 589,000
Production (5,000) (377,000)
Purchased reserves 0 20,000
--------- ---------
Estimated quantity, June 30, 2001 13,000 2,243,000
--------- ---------
Revisions of previous estimates 2,000 (115,000)
Discoveries 0 258,000
Production (3,000) (227,000)
Purchased reserves 0 51,000
Sold reserves (1,000) 0
--------- ---------
Estimated quantity, June 30, 2002 11,000 2,210,000
========= =========
Developed and Undeveloped Reserves
----------------------------------
Developed Undeveloped Total
--------- ----------- -----
Oil (Bbls)
June 30, 2001 9,000 4,000 13,000
June 30, 2002 7,000 4,000 11,000
Gas (Mcf)
June 30, 2001 584,000 1,659,000 2,243,000
June 30, 2002 482,000 1,728,000 2,210,000
For information concerning the standardized measure of discounted future
net cash flows, estimated future net cash flows and present values of such cash
flows attributable to our proved oil and gas reserves as well as other reserve
information, see Note 9 to the Consolidated Financial Statements.
Oil and Gas Reserves Reported to Other Agencies: We did not file any
estimates of total proved net oil or gas reserves with, or include such
information in reports to, any federal authority or agency since the beginning
of the fiscal year ended June 30, 2002.
Title Examinations: Oil and Gas: As is customary in the oil and gas
industry, we perform only a perfunctory title examination at the time of
acquisition of undeveloped properties. Prior to the commencement of drilling, in
most cases, and in any event where we are the Operator, a thorough title
examination is conducted and significant defects remedied before proceeding with
operations. We believe that the title to our properties is generally acceptable
to a reasonably prudent operator in the oil and gas industry. The properties we
own are subject to royalty, overriding royalty and other interests customary in
the industry, liens incidental to operating agreements, current taxes and other
burdens, minor encumbrances, easements and restrictions. We do not believe that
any of these burdens materially detract from the value of the properties or will
materially interfere with our business.
We have purchased producing properties on which no updated title opinion
was prepared. In such cases, we have retained third party certified petroleum
landmen to review title.
11
Office Facilities:
Our principal office is located in Denver, Colorado. We also have offices
located in Castle Rock, Colorado and Bakersfield, California. The Denver office
consists of approximately 1,108 square feet with an additional 750 square feet
of basement storage. We entered into a one-year lease agreement to December 31,
2002 for a lease rate of $1,201 per month.
Aspen also subleases from R.V. Bailey, its president, a portion of an
office building owned by Mr. Bailey in Castle Rock, Colorado on a month-to-month
basis for $500 per month.
We pay $732 per month for the Bakersfield, California office, which
consists of approximately 546 square feet. The Bakersfield, California lease
expires February 2, 2003.
ITEM 3. LEGAL PROCEEDINGS
--------------------------
We are not subject to any pending or, to our knowledge, threatened, legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
No matters were presented to security holders for a vote during the year
ended June 30, 2002, or any subsequent period.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
-----------------------------------------------------------------
Market Information:
Our common stock is quoted on the Over-the-Counter Bulletin Board ("OTCBB")
under the symbol "ASPN". The quotations reflect inter-dealer prices without
retail mark-up, mark-down or commission and may not reflect actual transactions.
The OTCBB adopted new rules that result in companies not current in their
reporting requirements under the Securities Exchange Act of 1934 being removed
from the quotation service. At June 30, 2001 and 2002, we believe that we were
in full compliance with these rules.
Quarter Ended
Sept., 2001 Dec., 2001 March, 2002 June 30, 2002
Common Stock ("ASPN")
High $1.35 $1.00 $.73 $.73
Low $0.77 $0.63 $.54 $.55
Quarter Ended
Sept., 2000 Dec., 2000 March, 2001 June 30, 2001
Common Stock ("ASPN")
High $.53125 $.9375 $1.4375 $2.50
Low $.375 $.40625 $.6875 $1.25
12
Holders:
As of June 30, 2001 and 2002, there were approximately 1,319 and 1,197
holders of record of our Common Stock, respectively. This does not include an
indeterminate number of persons who hold our Common Stock in brokerage accounts
and otherwise in `street name.'
Dividends:
We have never declared or paid a cash dividend on our Common Stock. We
presently intend to retain our earnings to fund development and growth of our
business. Decisions concerning dividend payments in the future will depend on
income and cash requirements.
Holders of common stock are entitled to receive such dividends as may be
declared by Aspen's Board of Directors. There were no dividends declared by the
Board of Directors during the fiscal year ended June 30, 2002, or subsequently,
and we have paid no cash dividends on its common stock since inception. There
are no contractual restrictions on our ability to pay dividends to our
shareholders.
Securities authorized for issuance under equity compensation plans.
The following is provided with respect to compensation plans (including
individual compensation arrangements) under which equity securities are
authorized for issuance as of the fiscal year ending June 30, 2002.
-------------------------------------------------------------------------------------------
Equity Compensation Plan Information (1)
-------------------------------------------------------------------------------------------
Plan Category Number of Weighted-average Number of securities
and Description Securities to be exercise price of remaining available for
issued upon outstanding future issuance under equity
exercise of options, warrants, compensation plans
outstanding and rights (excluding securities
options, reflected in column (a))
warrants, and
rights
(a) (b) (c)
--------------------- ------------------ --------------------- ----------------------------
--------------------- ------------------ --------------------- ----------------------------
Equity compensation
plans approved by
security holders $
--------------------- ------------------ --------------------- ----------------------------
--------------------- ------------------ --------------------- ----------------------------
Equity compensation
plans not approved
by security holders 676,000 $0.57 NA
--------------------- ------------------ --------------------- ----------------------------
--------------------- ------------------ --------------------- ----------------------------
Total 676,000 $0.57 NA
--------------------- ------------------ --------------------- ----------------------------
--------------------- ------------------ --------------------- ----------------------------
(1) This does not include options held by management and directors that were
not granted as compensation. In each case, the disclosure refers to options
or warrants unless otherwise specifically stated.
13
Recent Sales of Unregistered Securities -- Item 701 Disclosure.
The following sets forth information regarding sales of unregistered securities
within the past two years as required by Item 701 of Regulation S-B.
----------------------- ------------- ------------- ------------ ---------------- -----------
Name and Date Number of Offering Registration Option
Principal Position Common Price Exemption Exercise
Shares Sold ($) Price Per
(#) Share ($)
----------------------- ------------- ------------- ------------ ---------------- -----------
R. K. Davis, 2/27/2001 100,000 26,000 Rule 144 .26
consultant, options
exercised
----------------------- ------------- ------------- ------------ ---------------- -----------
----------------------- ------------- ------------- ------------ ---------------- -----------
J. L. Shelton, office 2/27/2001 100,000 26,000 Rule 144 .26
manager, options
exercised
----------------------- ------------- ------------- ------------ ---------------- -----------
----------------------- ------------- ------------- ------------ ---------------- -----------
R. V. Bailey, officer 6/11/2001 200,000 52,000 Rule 144 .26
& director, options
exercised
----------------------- ------------- ------------- ------------ ---------------- -----------
----------------------- ------------- ------------- ------------ ---------------- -----------
R. A. Cohan, officer 1/06/2001 200,000 52,000 Rule 144 .26
& director,
options exercised
----------------------- ------------- ------------- ------------ ---------------- -----------
----------------------- ------------- ------------- ------------ ---------------- -----------
R. F. Sheldon, 12/17/2001 80,000 20,800 Rule 144 .26
director, options
exercised
----------------------- ------------- ------------- ------------ ---------------- -----------
----------------------- ------------- ------------- ------------ ---------------- -----------
Total 680,000 176,800 .26
----------------------- ------------- ------------- ------------ ---------------- -----------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
------------------------------------------------------------------------------
OPERATION
---------
Overview:
Founded in 1980, Aspen Exploration Corporation is an oil and gas company,
which participates in the oil and gas segment by acquiring interest in producing
oil and gas properties, and participating in drilling operations. Historically
we have also participated in exploration for precious minerals and, in uranium
exploration.
In fiscal 2000, we expanded our business scope to include a goal of
participating in the electric power segment. We are not currently actively
pursuing either precious minerals exploration or participation in the electric
power segment (although we retain our 25% interest in APS as described above).
We have also acquired an interest in leases for approximately 2,074 acres which
we believe contain coalbed methane gas deposits.
Critical Accounting Policies and Estimates:
We believe the following critical accounting policies affect our most
significant judgments and estimates used in the preparation of our Consolidated
Financial Statements.
Reserve Estimates:
-----------------
Our estimates of oil and natural gas reserves, by necessity, are
projections based on geologic and engineering data, and there are uncertainties
inherent in the interpretation of such data as well as the projection of future
rates of production and the timing of development expenditures. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and natural gas that are difficult to measure. The accuracy of any reserve
estimate is a function of the quality of available data, engineering and
geological interpretation and judgment. Estimates of economically recoverable
14
oil and natural gas reserves and future net cash flows necessarily depend upon a
number of variable factors and assumptions, such as historical production from
the area compared with production from other producing areas, the assumed
effects of regulations by governmental agencies and assumptions governing future
oil and natural gas prices, future operating costs, severance and excise taxes,
development costs and workover and remedial costs, all of which may in fact vary
considerably from actual results. For these reasons, estimates of the
economically recoverable quantities of oil and natural gas attributable to any
particular group of properties, classifications of such reserves based on risk
of recovery, and estimates of the future net cash flows expected there from may
vary substantially. Any significant variance in the assumptions could materially
affect the estimated quantity and value of the reserves, which could affect the
carrying value of our oil and gas properties and/or the rate of depletion of the
oil and gas properties. Actual production, revenues and expenditures with
respect to our reserves will likely vary from estimates, and such variances may
be material.
Many factors will affect actual future net cash flows, including:
- the amount and timing of actual production;
- supply and demand for natural gas;
- curtailments or increases in consumption by natural gas purchasers;
and
- changes in governmental regulations or taxation.
Property, Equipment and Depreciation:
------------------------------------
We follow the full-cost method of accounting for oil and gas properties.
Under this method, all productive and nonproductive costs incurred in connection
with the exploration for and development of oil and gas reserves are
capitalized. Such capitalized costs include lease acquisition, geological and
geophysical work, delay rentals, drilling, completing and equipping oil and gas
wells, including salaries, benefits and other internal salary related costs
directly attributable to these activities. Costs associated with production and
general corporate activities are expensed in the period incurred. Interest costs
related to unproved properties and properties under development are also
capitalized to oil and gas properties. If the net investment in oil and gas
properties exceeds an amount equal to the sum of (1) the standardized measure of
discounted future net cash flows from proved reserves, and (2) the lower of cost
or fair market value of properties in process of development and unexplored
acreage, the excess is charged to expense as additional depletion. Normal
dispositions of oil and gas properties are accounted for as adjustments of
capitalized costs, with no gain or loss recognized.
We apply SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of." Under SFAS No. 121, long-lived
assets and certain intangibles are reported at the lower of the carrying amount
or their estimated recoverable amounts. Long-lived assets subject to the
requirements of SFAS No. 121 are evaluated for possible impairment through
review of undiscounted expected future cash flows. If the sum of undiscounted
expected future cash flows is less than the carrying amount of the asset or if
changes in facts and circumstances indicate, an impairment loss is recognized.
Liquidity and Capital Resources:
During prior years, we had to finance many of our oil and gas operations
through short-term borrowings, which were paid back out of the funds generated
from our operations. During fiscal 2002 and 2001, we were able to finance all of
our oil and gas operations from funds generated from operations and through
farmout agreements and other forms of third party participation. In fiscal 2001
we received cash flow from operations of nearly $3.8 million, a significant
portion of which was due to our positive net income of $2.5 million (which, in
turn, was due to abnormally high prices we were receiving for our California
natural gas production). We also increased our accounts payable and accrued
expenses by almost $925,000 during fiscal 2001 which also had a positive impact
on cash flow from operations. At the end of the 2001 fiscal year, we had working
capital in excess of $1.8 million. We used these funds to finance our use of
cash in operations ($640,954) and use of cash in investing activities
($1,138,628) during the 2002 fiscal year, resulting in working capital of
$844,599 remaining at year-end 2002.
We did not have sufficient cash available to assist us in financing our
operations in prior years, and we may not in future years, since our ability to
generate working capital depends almost entirely on the prices we receive for
our natural gas production. For example, during the 2000 fiscal year, we
withdrew $125,000 against a split dollar life insurance plan to provide
financing for our operations and to pay interest in the amount of $30,430.
Previously, during October of 1997, we borrowed $130,000 from an affiliate to
finance our share of drilling an offset well on the Denverton Creek property. At
June 30, 2001, the $155,430 insurance loan was paid in full and the balance due
15
to the affiliate was also paid in full from cash made available by operations.
Because of our working capital surpluses through 2002, we did not need to borrow
any funds for operations or investing activities. We cannot now predict whether
we will be required to borrow funds or find alternative means of financing
operations during the fiscal year ending June 30, 2003.
June 30, 2002 as compared to June 30, 2001
------------------------------------------
June 30, 2002 June 30, 2001
------------- -------------
Current Assets $1,333,221 $3,303,463
Current Liabilities $ 488,622 $1,480,947
Working Capital $ 844,599 $1,822,516
Investments in Oil & Gas
Properties/Drilling Activities $1,195,536 $1,370,905
Compared to fiscal 2001, there was a 54% decrease in working capital. Our
investment in drilling projects and the acquisition of producing properties of
approximately $1,200,000 accounted for much of the decline in current assets.
2002 was a successful drilling year for us, having participated in the drilling
of six wells in California, four of them successful, for a 67% success ratio.
During 2002 we also acquired various interests in producing properties located
in California as well as increasing our working interests in three wells in the
Denverton Creek field. We believe that the increased revenues derived from the
late year drilling activities and acquisitions will have a positive effect on
next year's working capital and contribute significantly to our cash flow in the
year ahead. However, the average price we received during fiscal 2002 for our
oil and gas was $20.20 per barrel and $2.78 per MCF compared to $26.64 per
barrel and $9.20 per MCF for fiscal 2001. Given the current downturn of our
economy, we do not see any significant improvement, other than seasonal
adjustments, to natural gas prices in the short term. The price for oil has been
stable to improving due to unrest in the Middle East, but we derive only a small
portion of our revenue from oil sales. Our capital requirements can fluctuate
over a twelve month period because our drilling activities are usually carried
out during California's dry season (from late April until October) after which
wet weather either precludes further activity or makes it cost prohibitive.
Investments in Oil and Gas Properties/Drilling Activities
---------------------------------------------------------
We invested $1,370,905 and $1,195,536 in our oil and gas properties for the
fiscal years ended June 30, 2001 and 2002. While we have not finalized drilling
plans for fiscal 2003, we have committed to participate in the drilling of 4
wells through June 2003, with our share of drilling costs estimated to be
approximately $255,000, and we anticipate additional drilling will occur in
fiscal 2003. We believe that internally generated funds will be sufficient to
finance our drilling and operating expenses for the next twelve months. We have
eliminated our outstanding loans in fiscal 2001 but may be required to again
seek outside funding to facilitate our fiscal 2003 drilling program.
Termination and Release of Agreement with Canadian Company
----------------------------------------------------------
In March 1998, we negotiated an agreement with a privately-held Canadian
company which provided for Aspen to receive certain cash payments from, and to
be issued 2,000,000 shares of stock in, the Canadian company. In exchange, we
conveyed all of our interest in two uranium projects in Wyoming to the Canadian
company. On August 31, 2000, pursuant to a Termination Agreement and Release we
released the Canadian company from any further obligations in exchange for the
return of all of Aspen's geological data. These Canadian shares have no value
and we did not receive any cash from the Canadian company.
Aspen Power Systems, LLC
------------------------
During fiscal 1999 and 2000, we dedicated certain cash resources to APS to
investigate the economic possibilities of the sale, design, construction and/or
operation of gas turbines to produce electricity. Through June 30, 2000, we
expended approximately $130,000 on this project, $45,657 of which was expensed
in the twelve months ended June 30, 2000. During fiscal 2001, we advanced a
further $20,000 to defray APS operating costs which were recorded as a
receivable at June 30, 2001. During fiscal 2002 an additional $5,500 was
advanced to APS to retire existing obligations of APS. Both the $20,000 and
$5,500 advances were expensed by us at June 30, 2002. The funding to APS came
from our operating funds derived from oil and gas production. As discussed
above, we did not assign a value to the $130,000 note receivable due from APS
and do not anticipate any significant future requirements to fund further
projects of APS.
16
Contractual Obligations
We had contractual and other obligations that will require use of our
working capital resources as of June 30, 2002. The following table lists our
significant obligations at June 30, 2002:
Payments Due By Period
-------------------------------------------------------------
Less than
Contractual Obligations 1 year 2-3 years 4-5 years After 5 years Total
----------------------- ------ --------- --------- ------------- -----
Operating leases $13,062 $-0- $-0- $-0- $13,062
------- ---- ---- ---- -------
Total contractual
cash obligations $13,062 $-0- $-0- $-0- $13,062
======= ==== ==== ==== =======
At June 30, 2002, we were committed to the following drilling and
development projects in California:
Project Aspen Cost
------- ----------
Klingenberg 24-1 $115,000
Kuppenbender 20-2 65,000
McCullough 36-1 65,000
HSRCC 1 10,000
--------
Total $255,000
========
We lease corporate offices in Denver, Colorado with support offices in
Castle Rock, Colorado and Bakersfield, California. The Denver office lease
expires December 31, 2002, the Bakersfield office lease expires February 28,
2003 and the Castle Rock office is leased on a month to month basis. Combined
yearly lease payments are approximately $13,062.
In addition to office leases, we are responsible for various compressor
rentals located on our California producing properties. These leases are on a
month to month basis and total approximately $21,500 per year.
17
Results of Operations:
We continued to focus our operations on the production of oil and gas and
the investigation for possible acquisition of producing oil and gas properties
during the twelve months ended June 30, 2002.
June 30, 2002 as compared to June 30, 2001
------------------------------------------
The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of net revenues. The
table and the discussion below should be read in conjunction with the audited
financial statements and the notes thereto appearing elsewhere in this report.
Year Ended
June 30,
-----------------------
2002 2001
------ ------
Oil and Gas Revenues(a) $ 828,150 $ 3,867,482
Oil and Gas Production Expenses (117,014) (122,114)
Depreciation, depletion and amortization (358,912) (412,688)
Total operating expenses (630,585) (567,833)
----------- -----------
278,361 2,764,847
Other income 41,372 73,081
----------- -----------
Operating Income (loss) (236,989) 2,837,928
Income tax (expense) recovery 114,904 (339,424)
----------- -----------
Net income (loss) $ (122,085) $ 2,498,504
=========== ===========
(a) Oil and gas revenues includes income from management fees
Oil and Gas Revenues
--------------------
For the twelve months ended June 30, 2002, oil and gas revenues decreased
$3,039,332, a 79% decline. There were two major reasons for the decline in oil
and gas revenues, production declines and prices. The average price decreased
for gas (our major source of revenue) declined from $9.20 per MCF in 2001 to
$2.78 in fiscal 2002. The average price in fiscal 2001 was impacted positively
by the uncertainties in the California electric generation market caused by the
state's deregulation of the wholesale portion of that market. The resolution of
the long term electrical generation problems in California and the return to
more normal weather conditions during the summer months drove the price of
natural gas down to more traditions levels. Production declines in our more
mature producing properties had an adverse effect on revenues in fiscal 2002.
Oil production declined 2,151 barrels, or 41% when comparing fiscal 2002 to
fiscal 2001. This production decline was primarily due to the sale of our Arco
wells in Kern County during the third quarter of fiscal 2002. Gas production
declined 150,000 MCF from 377,000 MCF in fiscal 2001 to 227,000 in fiscal 2002,
a 40% decline. Abandonment of uneconomic wells in our Denverton Creek field and
normal production declines of our more mature properties contributed to the
overall reduction in produced reserves. However, the drilling of four successful
wells and the acquisition of several producing properties from unaffiliated
third parties late in fiscal 2002 should mitigate these declines in the coming
months.
Oil and Gas Production Expenses
-------------------------------
Oil and gas production expenses decreased $5,100, or 4%. While we had a
larger number of producing wells in fiscal 2002, our recompletion and workover
expenses were lower than fiscal 2001 and we sold 2 oil wells with high operating
costs.
Depletion, depreciation and amortization decreased $53,776, or 13% from
$412,688 in fiscal 2001 to $358,912 in fiscal 2002. While the depletable assets
in the full cost pool increased by approximately $1,120,000 in fiscal 2002, the
proved, recoverable reserves of oil and gas decreased from BOE 387,000 (barrel
of oil equivalent) in fiscal 2001 to BOE 380,000 in fiscal 2002, a 1% decrease.
While our reserves held fairly constant, our production rate declined by
approximately 28% causing the decline in depletion expense.
Selling, general and administrative expenses increased $44,722 or 8% during
fiscal 2002, due to higher salary, consulting, audit and temporary services. We
continue our commitment to contain costs and increase cash flow wherever
possible.
18
As a result of our operations for the fiscal year ended June 30, 2002, we
ended the year with a net loss of approximately $237,000 before recovery of
income taxes of approximately $115,000, compared to net income of approximately
$2,838,000 before a provision for income taxes of approximately $340,000. This
loss was directly attributable to a decline in both price and production rates
as discussed above as well as the 8% increase in general and administrative
costs. An Aspen Power expense of $25,500 represents a one time write off of
monies advanced to our affiliate and should not be considered a recurring item.
Interest and other income declined approximately $31,700, or 43%, and is
primarily due to declining interest rates received on our invested funds.
Factors that may Affect Future Operating Results
------------------------------------------------
In evaluating our business, readers of this report should carefully
consider the following factors in addition to the other information presented in
this report and in our other reports filed with the SEC that attempt to advise
interested parties of the risks and factors that may affect our business. As
noted elsewhere herein, the future conduct of Aspen's business, non-oil and gas
exploration activities, participation in APS stock ownership, and discussions of
possible future activities is dependent upon a number of factors, and there can
be no assurance that Aspen will be able to conduct its operations as
contemplated herein. These risks include, but are not limited to:
(1) The possibility that the described operations, reserves, or
exploration or production activities will not be completed or
continued on economic terms, if at all.
(2) The exploration and development of oil and gas, and mineral properties
are enterprises attendant with high risk, including the risk of
fluctuating prices for oil, natural gas and other minerals being
sought.
(3) Imports of petroleum products from other countries.
(4) Not encountering adequate resources despite expending large sums of
money.
(5) Test results and reserve estimates may not be accurate,
notwithstanding best effort precautions.
(6) The possibility that the estimates on which we are relying are
inaccurate and that unknown or unexpected future events may occur that
will tend to reduce or increase our ability to operate successfully,
if at all.
(7) Our ability to participate in these projects may be dependent on the
availability of adequate financing from third parties which may not be
available on commercially-reasonable terms, if at all.
(8) Although we currently do not have active operations in the mining
segment, mining exploration and mining have inherent risks including
the environment, low prices for commodities, competition from better
financed companies and the risk of failure in either exploration or
mining. There is no assurance we will be able to compete successfully
in the exploration and mining business should that course of action be
undertaken.
(9) We currently do not have active operations in the power generation
business. Risks involved in power generation include permitting,
availability of fuel and power lines on an economical basis, a market
for the product, availability of equipment, and competition from other
better financed companies. There is no assurance we will be able to
compete successfully in the power generation business should an
opportunity be found.
(10) Our stock price may be hurt by future sales of our shares or the
perception that such sales may occur. As of the date of this Form
10-KSB, approximately 2,849,367 shares of Common Stock held by
existing stockholders constitute "restricted shares" as defined in
Rule 144 under the Securities Act. These shares may only be sold if
they are registered under the Securities Act or sold under Rule 144 or
another exemption from registration under the Securities Act. Sales
under Rule 144 are subject to the satisfaction of certain holding
periods, volume limitations, manner of sale requirements, and the
availability of current public information about us.
19
ITEM 7. FINANCIAL STATEMENTS
-----------------------------
The information required by this item begins on page 32 of Part III of this
Report on Form 10-KSB and is incorporated into this part by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
--------------------------------------------------
Identification of Directors and Executive Officers:
The following table sets forth the names and ages of all the Directors and
Executive Officers of Aspen, and the positions held by each such person. As
described below, the Board of Directors is divided into three classes which,
under Delaware law, must be as nearly equal in number as possible. The members
of each class are elected for three-year terms at each successive meeting of
stockholders serve until their successors are duly elected and qualified;
officers are appointed by, and serve at the pleasure of, the Board of Directors.
We have held no annual meetings since February 25, 1994. Therefore the terms of
each class of director expires at the next annual meeting of stockholders.
Name Age Position Class Director Since
---- --- -------- ----- --------------
R. V. Bailey 70 President, Chief Executive Officer, I 1980
Chief Financial Officer, Treasurer
and Director
Robert F. Sheldon 79 Director II 1981
Robert A. Cohan 46 President, West Coast Division, III 1998
Secretary, and Director
Each of the directors will be up for reelection at the next annual meeting
of stockholders and until his successor is elected and qualified or until his or
her earlier death, resignation, or removal. We do not expect to hold an annual
meeting during fiscal 2003.
Each officer is appointed annually and serves at the discretion of the
Board of Directors until his successor is duly elected and qualified. No
arrangement exists between any of the above officers and directors pursuant to
which any of those persons was elected to such office or position. None of the
directors are also directors of other companies filing reports under the
Securities Exchange Act of 1934.
R. V. Bailey. R. V. Bailey obtained a Bachelor of Science degree in Geology
from the University of Wyoming in 1956. He has approximately 41 years experience
in exploration and development of mineral deposits, primarily gold, uranium,
coal, and oil and gas. His experience includes basic conception and execution of
mineral exploration projects. Mr. Bailey is a member of several professional
societies, including the Society for Mining and Exploration, the Society of
Economic Geologists and the American Association of Petroleum Geologists, and
has written a number of papers concerning mineral deposits in the United States.
He is the co-author of a 542-page text, published in 1977, concerning applied
exploration for mineral deposits. Mr. Bailey is the founder of Aspen and has
been an officer and director since its inception.
Robert F. Sheldon. Mr. Sheldon obtained a Bachelor of Science degree in
Geological Engineering from the University of British Columbia in 1948. He
served a total of approximately 40 years at various mining companies, with his
experience covering a wide range of mineral commodities including gold, silver,
20
copper, uranium, lead, zinc, nickel, mercury, molybdenum and tungsten. He is a
member of the Professional Engineers of British Columbia, the Society of Mining
Engineers, the Canadian Institute of Mining and Metallurgy, and the Yukon
Chamber of Mines (where he served as an officer for four years). Mr. Sheldon
joined Aspen's Board of Directors in April 1981.
Robert A. Cohan. Mr. Cohan obtained a Bachelor of Science degree in Geology
from the State University College at Oneonta, NY in 1979. He has approximately
23 years experience in oil and gas exploration and development, including
employment in Denver, CO with Western Geophysical, H. K. van Poollen & Assoc.,
Inc., as a Reservoir Engineer and Geologist, Universal Oil & Gas, and as a
principal of Rio Oil Co., Denver, CO. Mr. Cohan served as Manager, Oil & Gas
Operations, Aspen Exploration Corporation, Denver, CO from 1989 to 1992. He was
employed as Vice President, Oil & Gas Operations, for Tri-Valley Oil & Gas Co.,
Bakersfield, CA. from 1992 to April 1995, at which time Mr. Cohan rejoined Aspen
Exploration Corporation as Vice President (now President), West Coast Division,
opening an office in Bakersfield, CA. He is a member of the Society of Petroleum
Engineers (SPE) and the American Association of Petroleum Geologists (AAPG).
Meetings of the Board and Committees:
The Board of directors held one formal meeting during the fiscal year ended
June 30, 2002. Each director attended all of the formal meetings either in
person or by telephone, without exception. In addition, regular communications
were maintained throughout the year among all of the officers and directors of
the Company and the directors acted by unanimous consent six times during fiscal
2001 and three times subsequently through June 30, 2002.
Aspen does not have an audit committee or other committee of the board that
performs similar functions.
Identification of Significant Employees:
There are no significant employees who are not also directors or executive
officers as described above. No arrangement exists between any of the above
officers and directors pursuant to which any one of those persons was elected to
such office or position.
Family Relationships:
As of June 30, 2002, and subsequently, there were no family relationships
between any director, executive officer, or person nominated or chosen by the
Company to become a director or executive officer.
Involvement in Legal Proceedings:
We are not subject to any pending or, to our knowledge, threatened, legal
proceedings.
Section 16(a) Beneficial Ownership Reporting Compliance:
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires Aspen's directors and officers and any persons who own more than ten
percent of Aspen's equity securities, to file reports of ownership and changes
in ownership with the Securities and Exchange Commission (the "SEC"). All
directors, officers and greater than ten-percent shareholders are required by
SEC regulation to furnish Aspen with copies of all Section 16(a) reports files.
Based solely on our review of the copies of the reports it received from persons
required to file, we believe that during the period from July 1, 1995 through
September 19, 2002, all filing requirements applicable to its officers,
directors and greater-than-ten-percent shareholders were complied with. However,
there was one untimely-filed filing (Form 4) for one director, Robert F.
Sheldon.
21
ITEM 10. EXECUTIVE COMPENSATION
--------------------------------
The following table sets forth information regarding compensation awarded,
paid to, or earned by the chief executive officer and the other principal
officers of Aspen for the three years ended June 30, 2000, 2001 and 2002. No
other person who is currently an executive officer of Aspen earned salary and
bonus compensation exceeding $100,000 during any of those years. This includes
all compensation paid to each by Aspen and any subsidiary.
---------------------------- -------------------------------- --------------------------------------
Annual compensation Long-term Compensation
Awards
---------------------------- -------------------------------- --------------------------------------
Awards Payout
------------------------------------------------------------- -------------------------- -----------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
------------------- -------- ----------- --------- ---------- ------------ ------------- ----------- -----------------
Securities
($) Underlying All
Name and Fiscal ($) ($) ($) Restricted Options & LTIP Other
Principal Position Year Salary Bonus Other (1) Awards SARs (#) Payout Compensation (1)
------------------- -------- ----------- --------- ---------- ------------ ------------- ----------- -----------------
R. V. Bailey, 2000 100,000 0 62,262 0 0 0 11,828
President and CEO 2001 100,000 0 143,600 0 0 0 12,663
2002 122,900 0 34,850 0 0 0 11,565
------------------- -------- ----------- --------- ---------- ------------ ------------- ----------- -----------------
------------------- -------- ----------- --------- ---------- ------------ ------------- ----------- -----------------
R. A. Cohan 2000 96,041 0 99,347 0 0 0 0
President, 2001 101,250 0 146,400 0 0 0 0
West Coast 2002 123,300 0 34,850 0 0 0 200
Division
------------------- -------- ----------- --------- ---------- ------------ ------------- ----------- -----------------
------------------- -------- ----------- --------- ---------- ------------ ------------- ----------- -----------------
(1) We have an "Amended Royalty and Working Interest Plan" by which we, in our
discretion, are able to assign overriding royalty interests or working
interests in oil and gas properties or in mineral properties. This plan is
intended to provide additional compensation to Aspen's personnel involved
in the acquisition, exploration and development of Aspen's oil or gas or
mineral prospects.
We have a medical insurance plan for our employees and those of its
subsidiaries, and a life insurance plan for our president and chief
executive officer, R. V. Bailey. This life insurance plan includes the
split-dollar insurance plan for the benefit of Mr. Bailey, which is
described in Note 2 to the financial statements.
No additional compensation has been recognized as reimbursement to the
president for income taxes for the years ended June 30, 2002 and 2001. Mr.
Bailey's taxable amount was $-0- for fiscal 2002 and 2001, equal to the
"economic benefit" attributed to the president as defined by the Internal
Revenue Code. The Company paid no premiums during fiscal 2002 and 2001.
We adopted a Profit-Sharing 401(k) Plan which took effect July 1, 1990. All
employees are immediately eligible to participate in this Plan. Aspen's
contribution (if any) to this plan is determined by the Board of Directors each
year. At June 30, 2002 and 2001, we contributed $-0- to the plan. When amounts
are contributed to Mr. Bailey's and Mr. Cohan's accounts (which amounts are
fully vested), these amounts are also included in column (e) of the tables,
above.
We have furnished a vehicle to Mr. Bailey, and the compensation allocable
to this vehicle, plus amounts paid for various travel and entertainment paid on
behalf of Mr. Bailey and Mr. Bailey's wife when she accompanied him for business
purposes, are also included in column (i) of the table. Aspen also purchased a
vehicle for Mr. Cohan. This vehicle is used substantially for business purposes;
therefore, no vehicle costs were charged to Mr. Cohan.
We have agreed to reimburse its officers and directors for out-of-pocket
costs and expenses incurred on behalf of Aspen.
22
During fiscal 2002, we assigned to employees royalties, which accumulated
during the fiscal year ended June 30, 2002, on certain wells drilled during the
year. The value assigned to these overrides is considered nominal, as the
assignments were made before the leases were proved. The overriding royalty
interests in these California properties granted to our employees were as
follows:
R. V. R. A. J. L.
Bailey Cohan Shelton
------ ----- -------
Kuppenbender 20-3 0.756000% 0.756000% 0.288000%
Stock Options and Stock Appreciation Rights Granted during the Last Fiscal Year:
Stock options were granted to executive officers and directors during the
fiscal year ended June 30, 2002. One director exercised his options during the
fiscal year ended June 30, 2002.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values:
One of our directors exercised stock options during the fiscal year ended
June 30, 2002:
The following table sets forth information regarding the year-end value of
options being held by the Chief Executive Officer and the other such named
officers and persons on June 30, 2002.
Number of securities
underlying unexercised Value of unexercised
Shares options/SARs in-the-money options/SARs
acquired on Value at June 30, 2002 at June 30, 2002
Name and Principal Position exercise (#) realized Exercisable/Unexercisable Exercisable/Unexercisable
--------------------------- ------------ -------- ------------------------- -------------------------
R. V. Bailey
President & CEO........ -0- -0- 0 /150,000 $-0-
Robert A. Cohan
President -
West Coast Division..... -0- -0- 0 /250,000 $-0-
Robert F. Sheldon
Director................... 80,000 $20,800 0 /150,000 $-0-
Long Term Incentive Plans/Awards in Last Fiscal Year:
We do not have a long-term incentive plan nor have we made any awards
during the fiscal year ended June 30, 2002.
Employment contracts and termination of employment and change in control
arrangements:
Mr. Bailey: We currently have no employment agreement with Mr. Bailey. In
January 1983, we entered into a Stock Purchase Agreement with Mr. Bailey whereby
Mr. Bailey granted Aspen an option to purchase up to 75% of our common stock
owned by him at his death. This agreement was replaced by a Stock Purchase
Agreement dated June 4, 1993. The 1993 agreement requires that we apply 75% of
any key man insurance proceeds it receives upon Mr. Bailey's death towards the
purchase of up to 75% of the common shares owned by him at the time of his
death, and Mr. Bailey's estate is obligated to sell such shares to Aspen. The
purchase price of the shares acquired under the 1993 agreement shall be the fair
market value of the shares on the date of death. Both Aspen and Mr. Bailey agree
that the fair market value of the shares on the date of death may not
necessarily be the market price of the stock on the date of death as quoted on
the OTCBB, or as reported by any exchange. The 1993 agreement further requires
us to maintain one or more life insurance policies on Mr. Bailey's life in the
amount of $1,000,000 for the purposes of this agreement.
Mr. Cohan: On April 16, 1998, we entered into an employment agreement with
Robert A. Cohan, which provides for the payment of $90,000 for the first year of
employment, plus reimbursement of expenses, including health insurance. We have
renewed the agreement effective April 15, 1999 to April 15, 2002 at the rate of
$95,000 per year for the year commencing April 15, 1999, $100,000 for the year
commencing April 15, 2000 and $105,000 for the year commencing April 15, 2001.
23
On August 1, 2001 Mr. Cohan's salary was increased to $125,000 per year. Mr.
Cohan's employment agreement expired by its own terms on April 15, 2002 and has
not been renewed. However, we continue to pay him his salary and other benefits.
Prior to February 2000, we and Mr. Cohan agreed to utilize a portion of Mr.
Cohan's home in Bakersfield, California from which to conduct Aspen's business.
Mr. Cohan did not charge Aspen any rent for the use of his home as a business
office. Aspen agreed to pay for all office supplies, communication and copy
equipment used by Mr. Cohan in his office, as well as the monthly telephone
expense incurred by Mr. Cohan on behalf of Aspen. On February 7, 2000, we
entered into a three-year lease of office space in Bakersfield, California
thereby alleviating the necessity of home office reimbursement to Mr. Cohan.
During fiscal 2002 we entered into a rental agreement with R. V. Bailey to
rent office space in Castle Rock, Colorado in an office building owned by Mr.
Bailey. The rental amount is $6,000 per year and is on a month to month basis.
See also Item 12(a) Transactions with Management and Others.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
-------------------------------------------------------------------------
The following table sets forth as of September 19, 2002 the number and
percentage of Aspen's shares of $.005 par value common stock owned of record and
beneficially owned by each person owning more than five percent of such common
stock, and by each Director, and by all Officers and Directors as a group.
Beneficial Ownership Percent
-------------------- -------
Beneficial Owner Number of Shares of Total
---------------- ---------------- --------
R. V. Bailey 1,444,403i 24.63%
Robert A. Cohan 790,619ii 13.48%
Robert F. Sheldon 284,783iii 4.86%
All Officers and Directors as a Group 2,519,805 42.97%
(3 persons)
The address for all of the above directors and executives officers is:
2050 S. Oneida St., Suite 208, Denver, CO 80224
(i) This number includes 1,146,083 shares of stock held of record in the
name of R. V. Bailey and 16,320 shares of record in the name of Mieko Nakamura
Bailey, his wife. In addition, all shares held in the name of R. V. Bailey are
subject to an obligation of Aspen to purchase up to 75% of the common shares of
Aspen owned by Bailey at the time of his death. This obligation expires 120 days
from the date of Bailey's death. In addition, the number of shares owned
includes 100,000 shares of common stock granted in a property exchange; stock
options to purchase 150,000 shares of restricted common stock; and 200,000
shares of restricted common stock that were exercised on June 11, 2001.
Additionally, Aspen issued 32,000 shares of common stock to the Aspen
Exploration Profit Sharing Plan for the benefit of R. V. Bailey as a corporation
contribution to Mr. Bailey's 401(k) account.
(ii) This number includes 300,000 shares of common stock granted; stock
options to purchase 250,000 shares of restricted common stock; and stock options
to purchase 200,000 shares of restricted common stock that were exercised on
February 27, 2001. Additionally, Aspen issued 30,733 shares of common stock to
the Aspen Exploration Profit Sharing Plan for the benefit of Robert A. Cohan as
a corporation contribution to Mr. Cohan's 401(k) account.
(iii) This number includes 20,000 shares of common stock granted December
13, 1996, 20,000 shares of common stock granted November 1, 1997; stock options
to purchase 150,000 shares of restricted common stock; and stock options granted
for 80,000 shares of common stock that were exercised on December 17, 2001.
24
Except with respect to Aspen's option to purchase Mr. Bailey's shares upon
his death, and the employment agreement between Aspen and R. V. Bailey, which
has expired on its own terms, we know of no arrangement, the operation of which
may, at a subsequent date, result in change in control of Aspen.
See Item 5, above, for information regarding securities authorized for
issuance under equity compensation plans in the form required by Item 201(d) of
Regulation S-B.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------
The following sets out information regarding transactions between officers,
directors and significant shareholders of Aspen during the most recent two
fiscal years and during the subsequent fiscal year.
Working Interest Participation:
Some of the directors and officers of Aspen are engaged in various aspects
of oil and gas and mineral exploration and development for their own account.
Aspen has no policy prohibiting, nor does its Certificate of Incorporation
prohibit, transactions between Aspen and its officers and directors. We plan to
enter into cost-sharing arrangements with respect to the drilling of its oil and
gas properties. Directors and officers may participate, from time to time, in
these arrangements and such transactions may be on a non-promoted basis (actual
costs), although they have participated mainly on a promoted basis, but must be
approved by a majority of the disinterested directors of our Board of Directors.
R. V. Bailey, president and director of Aspen, Robert A. Cohan, president -
West Coast Division and director of Aspen, and Ray K. Davis, consultant to
Aspen, each have working and royalty interests in certain of the California oil
and gas properties operated by Aspen. The affiliates paid for their
proportionate share of all costs to acquire, develop and operate these
properties. As of June 30, 2002, working interests of the Company and its
affiliates in certain producing California properties are set forth below:
GROSS WELLS NET WELLS
OIL GAS OIL GAS
--- --- --- ---
Aspen Exploration 2 33 .31 4.13
R. V. Bailey 2 25 .04 .31
R. A. Cohan 1 25 .01 .32
R. K. Davis 2 33 .13 .52
J. L. Shelton - 11 - .02
Amended Royalty and Working Interest Plan:
The allocations for royalty under Aspen's "Royalty and Working Interest
Plan" for employees are based on a determination of whether there is any "room"
for royalties in a particular transaction. In some specific cases an oil or gas
property or project is sufficiently burdened with existing royalties so that no
additional royalty burden can be allocated to our employees for that property or
project. In other situations a determination may be made that there are royalty
interests available for assignment to our employees. The determination of
whether royalty interests are available and how much to assign to employees
(usually less than 3%) is made on a case by case basis by Robert A. Cohan,
president - West Coast Division, and R. V. Bailey, president, both of whom may
benefit from royalty interests assigned. Within approximately the past two
fiscal years, assignments to Mr. Cohan and Mr. Bailey have been on an equal
basis, while Ms. Judy Shelton, the corporate office manager, was assigned a
lesser amount. A discussion of specific royalties assigned is included in Item
10 "Executive Compensation" above.
Aspen Power Systems, LLC:
In order to provide an opportunity for Aspen to participate in the growing
demand for electrical power generated by turbines, our management established an
85% owned subsidiary named Aspen Power Systems, LLC ("APS"), a Colorado limited
liability company. On March 1, 2000 our interest in APS was reduced to 25%. The
transaction is more fully described in Item 1 "Aspen Power Systems, LLC".
APS organized Solano Power, LLC on December 27, 1999 for the purpose of
carrying out The Solano Project. Solano Power plans to find a joint venture
partner to develop a 50 MW natural gas powered electric generation plant in
Solano County, California. We own a 25% interest in Solano Power, the managers;
25
Larry Baccari, R. V. Bailey and Ray K. Davis each contributed $5,000 to fund
Solano operations and own a 25% interest each in the project. The managers are
seeking an industry partner in order to financially assist Solano Power to build
and operate the plant. At June 30, 2000 APS had expended approximately $28,400
on behalf of Solano Power as well as accruing expenses for consulting fees of R.
V. Bailey and Ray K. Davis of $31,050 and $7,462, respectively. At June 30, 2002
Solano had no outstanding obligations and was inactive for most of the year. APS
has assumed the responsibilities of finding partners to fund the power plant. At
June 30, 2001 Solano transferred its operations to Aspen Power Systems and APS
has assumed the responsibility for pursuing this project.
On September 17, 2001, we were advised by the State of California that our
25% owned project in Solano County, California has not been selected by the
California Power Commission for further negotiations. We are now reviewing other
possible options with regard to the future, if any, of this project.
Aspen Borrowings:
During fiscal 2000 Aspen borrowed an additional $125,000 against the cash
surrender value of the split dollar life insurance policy and that amount plus
accrued interest of $30,430 at 6% per annum was outstanding at June 30, 2000. On
October 5, 2000, these amounts were repaid in full.
We borrowed $130,000 from Ray K. Davis (a director of APS and a consultant
to Aspen) on October 15, 1997 for the drilling and completion of the Emigh 2-1
payable over 36 months. This loan bore interest of 11.2% and was paid in full
during August 2000.
Other Arrangements:
In addition, during the fiscal year 2002 Aspen paid for various hospitality
functions and for travel, lodging and hospitality expenses for spouses who
occasionally accompanied directors when they were traveling on company business.
Our president has also supplied Aspen with certain promotional items. The net
effect of these items has been a cost to Aspen of less than $5,000 for the
fiscal years ended June 30, 2002 and 2001, respectively. Management believes
that the expenditures were to Aspen's benefit. During the years ended June 30,
2002 and 2001, Aspen provided one vehicle each to Aspen's president and to an
officer/director.
We also have entered into an employment agreement, which has expired, and a
Stock Purchase Agreement with our president, as discussed in "Item 10 - Employee
Compensation" and "Item 11 - Security Ownership."
We sublease a portion of our president's office in a building owned by him
in Castle Rock, Colorado on a month to month basis for a monthly fee of $500.
Certain Business Relationships:
None.
(1)-(5) Indebtedness of Management:
None.
Transactions with Promoters:
Not applicable.
Compensation Agreements:
Please refer to the prior section, Item 10. Executive Compensation,
describing the employment agreements between the Company and Messrs. Bailey and
Cohan.
26
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
-------------------------------------------
Exhibits Pursuant to Item 601 of Regulation S-B:
Exhibit No. Title
----------- ----------------------------------------------------------
3.01 Certificate of Incorporation (1)
3.02 Registrant's Bylaws. (1)
3.03 Bylaws - Subsidiary (1)
4.01 Specimen Common Stock Certificate. (1)
10.01 Royalty and Working Interest Plan (1)
10.08 Stock Purchase Agreement between Aspen Exploration
Corporation and R.V. Bailey dated January, 1983 (7)
10.11 Employment Agreement between Aspen Exploration Corporation
and R.V. Bailey dated November 8, 1991 (8)
10.13 Split-Dollar Life Insurance Plan for R.V. Bailey (8)
10.15 Stock Purchase Agreement between Aspen Exploration
Corporation and R.V. Bailey dated June, 1993 (9)
22.1 Subsidiaries of Aspen Exploration Corporation
Aspen Gold Mining Company, a Colorado corporation
Aspen Power Systems, LLC, a Colorado limited liability
company
1 Incorporated by reference from Commission File No. 2-69324.
7 Incorporated by reference from Annual Report on Form 10-K dated June 30,
1991 (filed on September 27, 1991).
8 Incorporated by reference from Annual Report on Form 10-K dated June 30,
1992 (filed on October 3, 1992).
9 Incorporated by reference from Annual Report on Form 10-KSB dated June 30,
1993 (filed on September 27, 1993).
Reports on Form 8-K.
No Report on Form 8-K was filed by the Company during the fiscal year
ending June 30, 2002.
ITEM 14. CONTROLS AND PROCEDURES.
----------------------------------
(a) Item 307(a) of Regulation S-B is not applicable to the Company pursuant
to the transition provisions found in the third sentence of part V of Rel.
34-46427 (August 29, 2002).
(b) Item 307(b) of Regulation S-B is applicable to the Company, but there
is no disclosure of significant changes in the Company's internal controls
because the Company has not conducted an evaluation of the internal control
procedures.
27
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
September 19, 2002
ASPEN EXPLORATION CORPORATION,
a Delaware Corporation
By: /s/ R. V. Bailey
--------------------------------
R. V. Bailey
President, Chief Executive
Officer, Chief Financial
Officer and
Chairman of the Board
Pursuant to the requirement 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 dates indicated:
Date Name and Title Signature
September 19, 2002 R. V. Bailey /s/ R. V. Bailey
Principal Executive Officer, ----------------------
Principal Financial Officer R. V. Bailey
Chairman of the Board
Director
September 19, 2002 Robert F. Sheldon /s/ Robert F. Sheldon
Director -----------------------
Robert F. Sheldon
September 19, 2002 Robert A. Cohan /s/ Robert A. Cohan
Director -----------------------
Robert A. Cohan
28
CERTIFICATIONS - principal executive and financial officers
-----------------------------------------------------------
I, R.V. Bailey, Chief Executive Officer and Chief Financial Officer of Aspen
Exploration Corporation, certify that:
1. I have reviewed this annual report on Form 10-KSB of Aspen Exploration
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: September 19, 2002 /s/ R. V. Bailey
-----------------------------------
R. V. Bailey, Chief Executive
Officer and Chief Financial
Officer
(principal executive and
financial officer)
29
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Auditors' Report.......................................31
Financial Statements as of June 30, 2002 and June 30, 2001:
Consolidated Balance Sheets..................................................32
Consolidated Statements of Operations........................................34
Consolidated Statement of Stockholders' Equity...............................35
Consolidated Statements of Cash Flows........................................36
Notes to Consolidated Financial Statements...................................37
30
INDEPENDENT AUDITORS' REPORT
Board of Directors
Aspen Exploration Corporation and Subsidiary
Denver, Colorado
We have audited the consolidated balance sheets of Aspen Exploration Corporation
and Subsidiary as of June 30, 2002 and 2001 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended June 30, 2002 and 2001. These 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 audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Aspen Exploration
Corporation and Subsidiary as of June 30, 2002 and 2001, and the results of
their consolidated operations and cash flows for the years ended June 30, 2002
and 2001 in conformity with accounting principles generally accepted in the
United States of America.
/s/ GORDON, HUGHES & BANKS, LLP
----------------------------------
GORDON, HUGHES & BANKS, LLP
Greenwood Village, Colorado
August 30, 2002
31
Item 7. Financial Statements and Supplementary Data
----------------------------------------------------
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
2002 2001
----------- -----------
Current Assets:
Cash and cash equivalents, including $822,060 and
$2,636,342 of invested cash in 2002 & 2001, respectively
(Note 1) ................................................ $ 916,001 $ 2,695,583
Precious metals (Note 1) .................................. 18,823 18,823
Accounts & trade receivables .............................. 365,705 550,785
Accounts receivable - related party (Notes 1 and 7) ....... 12,872 23,374
Prepaid expenses .......................................... 19,820 14,898
----------- -----------
Total current assets ...................................... 1,333,221 3,303,463
----------- -----------
Investment in oil & gas properties, at cost (full cost method
of accounting) (Note 9) ................................ 5,427,741 4,297,306
Less accumulated depletion and valuation allowance ...... (2,262,649) (1,921,413)
----------- -----------
3,165,092 2,375,893
----------- -----------
Property and equipment, at cost:
Furniture, fixtures & vehicles ........................... 112,562 104,368
Less accumulated depreciation ........................... (45,810) (28,133)
----------- -----------
66,752 76,235
----------- -----------
Cash surrender value, life insurance (Note 2) ............... 239,095 239,095
----------- -----------
Total assets ................................................ $ 4,804,160 $ 5,994,686
=========== ===========
(Statement Continues)
See Summary of Accounting Policies and Notes to
Consolidated Financial Statements
32
Item 7. Financial Statements and Supplementary Data
----------------------------------------------------
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30,
2002 2001
---------- ----------
Current liabilities:
Accounts payable and accrued expenses ................ $ 236,587 $1,034,114
Accounts payable - related party (Note 7) ............ 21,260 43,452
Advances from joint interest owners .................. 230,775 403,381
---------- ----------
Total current liabilities ............................ 488,622 1,480,947
---------- ----------
Deferred income tax payable - long term (Note 5) ....... 89,250 179,200
---------- ----------
Total liabilities .................................... 577,872 1,660,147
---------- ----------
Stockholders' equity:
(Notes 1 and 4):
Common stock, $.005 par value:
Authorized: 50,000,000 shares
Issued and outstanding: At June 30, 2002: 5,863,828
and June 30, 2001: 5,812,205 ...................... 29,320 29,060
Capital in excess of par value ....................... 6,025,797 6,015,279
Accumulated deficit .................................. (1,814,677) (1,692,592)
Deferred compensation ................................ (14,152) (17,208)
---------- ----------
Total stockholders' equity ........................... 4,226,288 4,334,539
---------- ----------
Total liabilities and stockholders' equity ............. $4,804,160 $5,994,686
========== ==========
See Summary of Accounting Policies and Notes to
Consolidated Financial Statements
33
Item 7. Financial Statements and Supplementary Data
----------------------------------------------------
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30,
2002 2001
----------- -----------
Revenues:
Oil and gas (Note 9) ........................... $ 693,421 $ 3,610,508
Management fees (Note 9) ....................... 134,729 256,974
Interest and other income ...................... 41,372 73,081
----------- -----------
869,522 3,940,563
----------- -----------
Costs and expenses:
Oil and gas production ......................... 117,014 122,114
Aspen Power Systems expense (Note 14) .......... 25,500 -0-
Depreciation, depletion and amortization ...... 358,912 412,688
Interest expense ............................... 479 7,949
Selling, general and administrative ............ 604,606 559,884
----------- -----------
1,106,511 1,102,635
----------- -----------
Net income (loss) before taxes ................... $ (236,989) $ 2,837,928
(Provision for) recovery of income taxes ......... 114,904 (339,424)
----------- -----------
Net income (loss) ................................ $ (122,085) $ 2,498,504
=========== ===========
Basic earnings (loss) per common share ........... $ (.02) $ .46
=========== ===========
Diluted earnings (loss) per common share ......... $ (.02) $ .45
=========== ===========
Basic weighted average number of common shares
outstanding ...................................... 5,839,784 5,454,441
=========== ===========
Diluted weighted average number of common shares
outstanding ..................................... 5,839,784 5,551,011
=========== ===========
See Summary of Accounting Policies and Notes to
Consolidated Financial Statements
34
Item 7. Financial Statements and Supplementary Data
----------------------------------------------------
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock (par $.005)
Shares ------------------------ Retained Deferred Total
outstanding Par Value APIC Earnings Compensation Equity
----------- --------- ----- -------- ------------ -------
Balance, June 30, 2000 5,345,538 $26,729 $6,017,610 $(4,191,096) $(36,833) $1,816,410
Amortization of deferred
compensation -- -- -- -- 19,625 19,625
Options exercised by
consultant, net 78,125 390 (390) -- -- --
Options exercised by
employee, net 78,125 390 (390) -- -- --
Options exercised by
directors, net 310,017 1,551 (1,551) -- -- --
Net income -- -- -- 2,498,504 -- 2,498,504
----------------------------------------------------------------------------------------------
Balance, June 30, 2001 5,812,205 29,060 6,015,279 (1,692,592) (17,208) 4,334,539
Options exercised
by director 51,623 260 (260) -- -- --
Amortization of deferred
compensation -- -- -- -- 13,834 13,834
Options granted to consultant -- -- 10,778 -- (10,778) --
Net loss -- -- -- (122,085) -- (122,085)
----------------------------------------------------------------------------------------------
Balance, June 30, 2002 5,863,828 $29,320 $6,025,797 $(1,814,677) $(14,152) $4,226,288
==============================================================================================
See Summary of Accounting Policies and Notes to
Consolidated Financial Statements
35
Item 7. Financial Statements and Supplementary Data
----------------------------------------------------
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
2002 2001
---- ----
Cash flows from operating activities:
-------------------------------------
Net income (loss) ................................................... $ (122,085) $ 2,498,504
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Amortization of deferred compensation .......................... 13,834 19,625
Depreciation, depletion, and amortization ...................... 358,912 412,688
Loss - sale of assets .......................................... -- 800
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, and prepaid expenses 190,660 (239,622)
Increase (decrease) in accounts payable and accrued expenses ... (993,025) 924,279
Increase (decrease) in deferred income taxes payable ........... (89,250) 179,200
----------- -----------
Net cash provided (used) by operating activities ...................... (640,954) 3,795,474
Cash flows from investing activities:
-------------------------------------
Additions to oil and gas properties ................................. (1,122,906) (1,370,905)
Producing oil and gas properties purchased .......................... (72,629) --
Office equipment purchased .......................................... (8,194) (21,133)
Sale of oil and gas equipment ....................................... 26,998 21,511
Sale of oil and gas properties ...................................... 38,103 --
----------- -----------
Net cash (used) by investing activities ............................... (1,138,628) (1,370,527)
Cash flows from financing activities:
-------------------------------------
Notes payable-repayments ............................................ -- (236,746)
----------- -----------
Net increase (decrease) in cash and cash equivalents .................. (1,779,582) 2,188,201
Cash and cash equivalents, beginning of year .......................... 2,695,583 507,382
----------- -----------
Cash and cash equivalents, end of year ................................ $ 916,001 $ 2,695,583
=========== ===========
Other information:
------------------
Interest paid ......................................................... $ 479 $ 7,949
=========== ===========
Income taxes paid (refunded) .......................................... $ (24,954) $ 165,000
=========== ===========
Non-cash investing and financing activities:
--------------------------------------------
Trade - in of vehicle ............................................... $ -- $ 13,322
=========== ===========
Exercise of stock options ........................................... $ 260 $ 2,331
=========== ===========
See Summary of Accounting Policies and Notes to
Consolidated Financial Statements
36
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
------------------
We were incorporated under the laws of the State of Delaware on
February 28, 1980 for the primary purpose of acquiring, exploring and
developing oil and gas and other mineral properties. Our principal
executive offices are located at 2050 S. Oneida St., Suite 208, Denver,
Colorado 80224. Our telephone number is (303) 639-9860, and our
facsimile number is 303-639-9863. We are currently engaged primarily in
the exploration and development of oil and gas properties in
California, although we have a significant amount of geologic data
regarding uranium prospects in Wyoming and precious mineral prospects
in Alaska. We also have a 25% interest in Aspen Power Systems, LLC, a
company we incorporated to investigate, finance, and construct
electrical power generation projects.
Oil and Gas Exploration and Development. Our major emphasis has been
our participation in the oil and gas segment acquiring interests in
producing oil or gas properties and participating in drilling
operations. We engage in a broad range of activities associated with
the oil and gas business in an effort to develop oil and gas reserves.
With the assistance of our management, independent contractors retained
from time to time by Aspen, and, to a lesser extent, unsolicited
submissions, we have identified and will continue to identify prospects
that we believe are suitable for drilling and acquisition. Currently,
our primary area of interest is in the state of California. We have
acquired a number of interests in oil and gas properties in California,
as described below in more detail. In addition, we also act as operator
for a number of our producing wells and receive management revenues for
these services.
Mineral Exploration and Development. During fiscal 1997 and 1998, we
also focused our attention on uranium deposits in sandstone in Wyoming.
However, the market for uranium projects did not develop as we had
anticipated, and we made the decision not to carry out the extensive
mining claim and lease acquisition and maintenance necessary to
assemble large blocks of land needed for uranium exploration programs.
In March 1998, we transferred our interest in two uranium projects in
Wyoming to a privately-held Canadian company which issued its capital
stock and made cash payments to Aspen. The Canadian company returned
the projects and all geologic data to us in August 31, 2000, and we
released the unaffiliated company from any further obligations. The
mineral exploration and development investment is fully impaired.
We have curtailed, for the time being, exploration for precious metals
in Alaska and for uranium in Wyoming. We believe that pursuing
activities in the mineral segment would not be beneficial to Aspen at
the present time.
Power Generation. In 1999, we formed a subsidiary named Aspen Power
Systems, LLC ("APS"), a Colorado limited liability company to provide
an opportunity for Aspen to participate in the growing demand for
electrical power generated by turbines. Our objectives for APS were to
seek opportunities or situations where our analysis indicated that a
gas turbine generation plant could be constructed and operate
profitably. Any plant construction will require a significant amount of
capital for property acquisition, permitting, engineering and design,
and construction. Neither Aspen nor the other owners of APS will be
able to provide this required capital. Consequently, any such
activities will likely require the availability of funds from third
parties, and we cannot offer any assurance that such funding will be
available when needed on commercially-reasonable terms. We account for
our investment in APS using the equity method of accounting.
A summary of our Company's significant accounting policies follows:
37
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements
---------------------------------
The consolidated financial statements include our Company and its
wholly-owned subsidiary, Aspen Gold Mining Company. Significant
intercompany accounts and transactions, if any, have been eliminated.
The subsidiary is currently inactive.
The equity method has been used to account for our Company's 25%
interest Aspen Power Systems, LLC formed in February 1999. Using the
equity method, an investment in a company is recorded at acquisition
cost which is subsequently adjusted for the Company's share of
dividends, earnings, or losses.
Statement of Cash Flows
-----------------------
For statement of cash flows purposes, we consider 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
-----------------------------
Generally accepted accounting principles require us 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.
The mining and oil and gas industries are subject, by their nature, to
environmental hazards and cleanup costs for which we carry catastrophe
insurance. At this time, we know of no substantial costs from
environmental accidents or events for which we may be currently liable.
In addition, our 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 depletion expense (which is based
on proved reserves).
Investment in Unconsolidated Companies
--------------------------------------
The equity method of accounting is used for all investments in which
our interest is 20% or more. Under the equity method, we record our
share of the investee's net income or (loss) as an increase or
(decrease) of its investment less its share of dividends or
distributions from the investee. Investments in business entities in
which we own less than 20% of the company are recorded using the cost
basis of the investment. Under the cost method, our share of net income
or loss is not recorded. Our share of the investee's dividends or
distributions is recorded as income on the accrual basis.
Impairment of Long-lived Assets
-------------------------------
Long-lived assets and identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable. If the expected
undiscounted future cash flow from the use of the assets and their
eventual disposition is less than the carrying amount of the assets, an
impairment loss is recognized and measured using the asset's fair value
or discounted cash flows.
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 our debt obligations reasonably approximates their
fair value as the stated interest rate approximates current market
interest rates of debt with similar terms.
38
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Precious Metals and Revenues
----------------------------
Precious metals inventories are valued at the lower of cost (specific
identification method) or market. There is no allowance for unrealized
losses against inventories due to market decline at June 30, 2002.
There were no sales of gold from inventory for the years ended June 30,
2002 and 2001.
Oil and Gas Properties
----------------------
We follow the "full-cost" method of accounting for our 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 our full-cost pool is computed using the
units-of-production method based on proved reserves as determined
annually by us and independent engineers. An additional depletion
provision in the form of a valuation allowance is made if the costs
incurred on our oil and gas properties, or revisions in reserve
estimates, cause the total capitalized costs of our 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 our
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 our cost center's unproved properties less (3)
applicable income tax effects. The valuation allowance was $281,719 at
June 30, 2002 and 2001. Depletion and amortization expense was $341,236
and $400,824 for the years ended June 30, 2002 and 2001, respectively.
Property and Equipment
----------------------
Depreciation and amortization of our 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. Depreciation expense was $17,676 and $11,864 for
the years ended June 30, 2002 and 2001, respectively.
Deferred Compensation Costs
---------------------------
We record the fair value of 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. During the fiscal year ended
June 30, 2002 and 2001, we expensed $13,834 and $19,625, respectively,
in stock bonuses.
Allowance for Bad Debts
-----------------------
We consider accounts receivable to be fully collectible as recorded as
of June 30, 2002 and 2001; accordingly, no allowance for doubtful
accounts is required.
Revenue Recognition
-------------------
Sales of oil and gas production are recognized at the time of delivery
of the product to the purchaser.
39
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management fees from outside parties are recognized at the time the
services are rendered.
Earnings Per Share
------------------
We follow Financial Accounting Standard No. 128 ("SFAS No. 128"),
addressing earnings per share. SFAS No. 128 established the methodology
of calculating basic earnings per share and diluted earnings per share.
The calculations differ by adding any instruments convertible to common
stock (such as stock options, warrants, and convertible preferred
stock) to weighted average shares outstanding when computing diluted
earnings per share.
The following is a reconciliation of the numerators and denominators
used in the calculations of basic and diluted earnings per share. We
had a net loss of $122,085 for the year ended June 30, 2002. Because of
the net loss, the basic and diluted average outstanding shares are
considered the same, since including the shares would have an
antidilutive effect on loss per share calculation.
2001
Per
Net Share
Income Shares Amount
------ ------ ------
Basic earnings per share:
Net income and
share amounts $2,498,504 5,454,441 $ .46
Dilutive securities
stock options 180,000
Repurchased shares (83,430)
---------------------------------
Diluted earnings per share:
Net income and assumed
share conversion $2,498,504 5,551,011 $ .45
========== ========= =====
Segment Reporting
-----------------
We follow SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information" ("SFAS No. 131"), which amended the requirements
for a public enterprise to report financial and descriptive information
about its reportable operating segments. Operating segments, as defined
in the pronouncement, are components of an enterprise about which
separate financial information is available that is evaluated regularly
by us in deciding how to allocate resources and in assessing
performance. The financial information is required to be reported on
the basis that is used internally for evaluating segment performance
and deciding how to allocate resources to segments.
40
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Business Combinations
---------------------
In June 2001, the Financial Accounting Standards Board finalized FASB
Statement No. 141, Business Combinations ("SFAS 141"), and No. 142,
Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 requires
the use of the purchase method of accounting and prohibits the use of
the pooling-of-interests method of accounting for business combinations
initiated after June 30, 2001. SFAS 141 also requires that the Company
recognize acquired intangible assets apart from goodwill if the
acquired intangible assets meet certain criteria. SFAS 141 applies to
all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It
also requires, upon adoption of SFAS 142, that the Company reclassify
the carrying amounts of intangible assets and goodwill based on the
criteria in SFAS 141. During the year ended June 30, 2002, we adopted
SFAS 141 with no impact to our financial position or results of
operations.
Goodwill and Other Intangible Assets
------------------------------------
SFAS 142 requires, among other things, the companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires that the Company identify reporting
units for the purposes of assessing potential future impairments of
goodwill, reassess the useful lives of other existing recognized
intangible assets, and cease amortization of intangible assets with an
indefinite useful life. An intangible asset with an indefinite useful
life should be tested for impairment in accordance with the guidance in
SFAS 142. SFAS 142 is required to be applied in fiscal years beginning
after December 15, 2001 to all goodwill and other intangible assets
recognized at the date, regardless of when those assets were initially
recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The
Company is also required to reassess the useful lives of other
intangible assets within the first interim quarter after adoption of
SFAS 142. During the year ended June 30, 2002, we adopted SFAS 142 with
no impact to our financial position or results of operations.
Income Taxes
------------
We account for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Temporary
differences are differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements that
will result in taxable or deductible amounts in future years.
Stock Award and Stock Option Plans
----------------------------------
We grant common stock and stock options to employees and non-employees
and apply Accounting Principles Board (APB) Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees", and related Interpretations
in accounting for all stock award and stock option plans for employees
and directors.
Following the guidance of APB 25, compensation cost has been recognized
for stock options issued to employees and directors as the excess of
the market price of the underlying common stock on the date of the
grant over the exercise price of the Company's stock options on the
date of the grant.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), requires us to provide pro forma
information regarding net income as if compensation cost for the
Company's stock option plans had been determined in accordance with the
fair value based method prescribed in SFAS 123. To provide the required
pro forma information, we estimate the fair value of each stock option
at the grant date by using the Black-Scholes option-pricing model.
In certain circumstances, we issue common stock for invoiced services,
to pay creditors and in other similar situations. In accordance with
SFAS No. 123, payments in equity instruments to non-employees for goods
41
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
or services are accounted for by the fair value method, which relies on
the valuation of the service at the date of the transaction, or public
stock sales price, whichever is more reliable as a measurement.
Recent Accounting Pronouncements
--------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB"), issued
Statement of Financial Accounting Standards No. 143, Accounting for
Asset Retirement Obligations, ("SFAS No. 143"). SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS No. 143 generally requires obligations
associated with asset retirements to be recognized earlier and
displayed as liabilities rather than as contra-assets. The
pronouncement is effective for financial statements issued for fiscal
years beginning after June 15, 2002. Management does not believe that
the adoption of SFAS No. 143 will have any impact on its financial
position or results of operations.
In August 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, ("SFAS No. 144").
SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS No. 144 establishes a
single accounting model for long-lived assets to be disposed of by
sale. The pronouncement is effective for financial statements issued
for fiscal years beginning after December 15, 2001. Management does not
believe that the adoption of SFAS No. 144 will have any impact on its
financial position or results of operations.
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 146, Accounting for
Costs Associated with Exit or Disposal Activities, ("SFAS No. 146").
SFAS No. 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging
Issues Task Force Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity. SFAS
No. 146 generally requires a liability for a cost associated with an
exit or disposal activity to be recognized and measured initially at
its fair value in the period in which the liability is incurred. The
pronouncement is effective for exit or disposal activities initiated
after December 31, 2002. Management does not believe that the adoption
of SFAS No. 146 will have any impact on its financial position or
results of operations.
Reclassification
----------------
Certain 2001 amounts have been reclassified to conform to 2002
presentation.
Note 2 EMPLOYEE BENEFIT PLANS
Defined Contribution Plan
-------------------------
We have a 401(k) defined contribution plan that covers all employees.
Under the amended terms of the plan, an employee is eligible to
participate in the plan immediately upon being hired to work at least
1,000 hours per year and having attained age 21. Participants may
contribute up to a maximum of 11.75% of their pre-tax earnings (not to
exceed $11,000) to the plan. Under the plan, we may make discretionary
contributions to the plan. We made no plan contribution for fiscal 2002
or fiscal 2001.
42
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Split Dollar Life Insurance Plan
--------------------------------
As part of the President's employment agreement, we purchased a split
dollar life insurance policy for the President's benefit. We paid total
premiums of $360,000 on behalf of the President, of which a portion
("split") constituted compensation for the President. At each
anniversary we pay the President an amount as a bonus to reimburse the
President for personal income tax on his split. No additional
compensation has been recognized as reimbursement to the President for
income taxes for the years ended June 30, 2002 and 2001. The
President's taxable amount was $-0- for fiscal 2002 and 2001, equal to
the "economic benefit" attributed to the President as defined by the
Internal Revenue Code. We paid no premiums during fiscal 2002 and 2001.
In the event of termination of the plan, we would receive the lesser of
the policy cash surrender value, or the accumulated Corporate Premium
Payments (split). The President would receive the excess of the total
policy cash surrender value over the corporate cash surrender value, if
any. In the event of premature death of the President, we would receive
an amount equal to the accumulated corporate premium payments and the
President's named beneficiary would receive the proceeds of the death
benefit.
As of June 30, 2002 and 2001, our accumulated cash surrender value was
$239,095, which has been included as an asset on our balance sheet.
During 2000, we borrowed $125,000 against the cash surrender value of
the policy and that amount plus capitalized and accrued interest of
$30,430 and $3,084, respectively, was outstanding at June 30, 2000.
That amount was paid in full on October 5, 2000. The death benefit
payable to the named beneficiary as of June 30, 2002 and 2001 is
approximately $760,000.
Medical Benefit Plan
--------------------
For the fiscal years ended June 30, 2002 and 2001, we had a policy of
reimbursing employees for medical expenses incurred but not covered by
our paid medical insurance plan. Expenses reimbursed for fiscal 2002
and fiscal 2001 were $7,786 and $14,751, respectively.
Note 3 MAJOR CUSTOMERS
We derived in excess of 10% of our revenue from various sources (oil
and gas sales and mineral royalties) as follows:
The Company
-------------
A B C D
----- ----- ----- -----
Year ended:
June 30, 2002 30% * 33% 13%
June 30, 2001 39% 11% 45% -
* Less than 10% for fiscal 2002.
Note 4 STOCKHOLDERS' EQUITY
Stock Options
-------------
On March 2, 2000 stock options were granted to the President of Aspen
Power Systems, LLC for 100,000 shares of the Company's common stock at
a grant price of $0.625 per share. These options are exercisable for
25,000 shares per annum from March 15, 2000 through March 15, 2003.
43
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During fiscal 2001 two officers, one employee and a consultant
exercised their stock options for 600,000 shares of our common stock at
an average exercise price of $0.26 per share. As consideration for the
option shares purchased, the individuals surrendered common stock with
a fair value equal to the exercise price of the option shares. The fair
value of the shares surrendered was based on a ten-day average bid
price immediately prior to the exercise date. Total shares surrendered
were 133,733. The effect of this transaction is a net increase to the
common stock par value of $2,331 and a corresponding decrease to
additional paid in capital of $2,331.
During fiscal 2002 one director exercised his option for 80,000 shares
of our common stock at an average price of $0.26 per share. As
consideration for the option shares purchased, the individuals
surrendered common stock with a fair value equal to the exercise price
of the option shares. The fair value of the shares surrendered was
based on a ten-day average bid price immediately prior to the exercise
date. Total shares surrendered were 28,377. The effect of the
transaction is a net increase to the common stock par value of $260 and
a corresponding decrease to additional paid in capital of $260.
Total compensation expense in the statement of operations includes
amortization of prior stock awards of $13,834 during 2002 and $19,625
during 2001.
As of June 30, 2002, we had an aggregate of 776,000 common shares
reserved for issuance under its stock option plans. These plans provide
for the issuance of common shares pursuant to stock option exercises,
restricted stock awards and other equity based awards.
The following information summarizes information with respect to
options granted under our equity plans:
Weighted Average
Exercise Price
Number of of Shares
Shares Under Plans
------- ---------------
Outstanding balance June 30, 2000 780,000 $ .31
Granted -0- -0-
Exercised (600,000) .26
Forfeited or expensed -0- -0-
-------- ----
Outstanding balance June 30, 2001 180,000 .46
Granted 676,000 .57
Exercised (80,000) .26
Forfeited or expensed -0- -0-
------- ----
Outstanding balance June 30, 2002 776,000 $.58
======= ====
The following table summarizes information concerning outstanding and
exercisable options as of June 30, 2002:
44
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Outstanding Exercisable
----------------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercisable Number Exercise
Price Outstanding Life In Years Price Exercisable Price
-------- ----------- ------------- ----------- ----------- --------
$.625 100,000 03/15/2004(1) $.625 75,000 $.625
.57 426,000 08/15/2005(1) .57 -0- .57
.57 250,000 08/15/2007(1) .57 -0- .57
------- -------
776,000 75,000
======= =======
(1) The term of the option will be the earlier of the contractual life
of the options or 90 days after the date the optionee is no longer an
employee, consultant or director of the Company.
We account for the two stock option plans using APB Opinion No. 25 for
directors and employees and SFAS 123 for consultants. There were
676,000 options granted in 2002. Directors and employees were granted
601,000 and consultants were granted 75,000. The consultant options
were valued using the fair value method of SFAS 123 as calculated by
the Black-Scholes option-pricing model. The fair value of each option
grant, as opposed to its exercisable price, is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted average assumptions: no dividend yield, expected volatility of
14.9%, risk free interest rates of 8.5% and expected lives of 3.4 to
4.4 years. The resulting compensation expense relating to the
consultant option grant will be included as an operating expense as the
options vest.
Options were granted but not exercisable to directors and employees
during the fiscal year 2002. An adjustment to net income for
compensation expense would be recorded under SFAS No. 123, on a pro
forma basis, as reflected in the following table:
2002 2001
------- -------
Net Income (loss): As Reported (122,085) 2,498,504
Pro Forma (128,150) 2,498,504
Basic EPS: As Reported (.02) .46
Pro Forma (.02) .46
Diluted EPS: As Reported (.02) .45
Pro Forma (.02) .45
45
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 INCOME TAXES
We deferred income taxes of $89,250 in fiscal 2002 and $179,200 in
income taxes for the year ended June 30, 2001. We paid $160,224 in
California state income taxes in fiscal 2001. During 2002, we added
approximately $629,000 in net operating loss carryforwards for a total
of approximately $1,212,000 in available federal net operating loss
carryforwards. During 2001, we used $1,834,878 in net operating loss
carryforwards to offset fiscal June 30, 2001 federal taxable income. At
June 30, 2002 and 2001, no net operating loss carryforwards expired;
but $1,200 in general business credits expired in fiscal 2002.
During 2001, we reduced the valuation allowance related to the deferred
tax assets to $-0-.
The deferred tax consequences of temporary differences in reporting
items for financial statement and income tax purposes are recognized,
if appropriate. Realization of future tax benefits related to the
deferred tax assets is dependent on many factors, including our ability
to generate taxable income within the net operating loss carryforward
period. We have considered these factors in reaching our conclusion as
to the valuation allowance for financial reporting purposes.
The income tax effect of temporary differences comprising the deferred
tax assets and deferred tax liabilities on the accompanying balance
sheet is the result of the following:
Deferred tax assets: 2002 2001
---------- -----------
General business credit $ -0- $ 1,200
Federal tax loss
carryforwards 490,862 258,850
---------- ----------
490,862 260,050
---------- ----------
Deferred (liabilities):
Property, plant and
equipment (6,241) (3,750)
Oil and gas properties (573,871) (435,500)
----------- ----------
(580,112) (439,250)
---------- ----------
$ 89,250 $ 179,200
========== ==========
46
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation between the statutory federal income tax rate (34%)
and the effective rate of income tax expense for the two years ended
June 30 is as follows:
2002 2001
--------- ---------
Statutory federal income
tax rate 34% 34%
Statutory state income tax
rate, net of federal benefit 9.0% 9.0%
Utilization of net operating
loss carryforwards (91%) (31%)
--------- ---------
Effective rate (48%) 12%
========= =========
The provision for income taxes consists of the following components:
2002 2001
--------- ---------
Current tax expense, refund,
state $ (25,654) $ 160,224
Deferred tax expense
(recovery) (89,250) 179,200
--------- ---------
Total income tax
provision (recovery) $(114,904) $ 339,424
========= =========
We have available federal net operating loss carryforwards of
approximately $1,212,000 (net operating losses expire beginning June
30, 2011 through the year ending June 30, 2022). The valuation
allowance was reduced to $-0- in the year ended June 30, 2001 due to
usage of net operating loss carryforwards and increased profitability
of operations.
47
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 SEGMENT INFORMATION
We operate in three industry segments within the United States: (1) oil
and gas exploration and development, (2) mineral exploration and
development and (3) electrical generation construction.
Identified assets by industry are those assets that are used in our
operations in each industry. Corporate assets are principally cash,
cash surrender value of life insurance, and furniture, fixtures and
vehicles.
We have 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 our management 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 our 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. Currently, this segment is
inactive.
The electrical generation construction segment will receive its
revenues from the sale, design, construction and/or operation of gas
turbine or other electrical generation projects. As of June 30, 2002,
we were in the planning stage of this segment and no revenues have been
received. However, we did advance APS $5,500 for operating expenses.
During the years ended June 30, 2002 and 2001, there were no
intersegment revenues. The accounting policies applied by each segment
are the same as those used by us in general.
Net sales to three customers were approximately $229,000, $205,000 and
$91,000, or 33%, 30% and 13% for fiscal 2002. Net sales to one customer
of the oil and gas segment totaled approximately $1,625,000 of revenues
or 45% for the year ended June 30, 2001.
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 $1,196,000 for the development and acquisition of oil and
gas property.
48
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment information consists of the following:
Oil and Gas Mining Power Plant Corporate Consolidated
----------- ------ ----------- --------- ------------
Revenues:
2002 $ 828,150 $ -0- $ -0- $ 41,372 $ 869,522
2001 3,867,482 -0- -0- 73,081 3,940,563
Income (loss) from
operations:
2002 $ 369,900 $ -0- $(25,500) $ (581,389) $ (236,989)
2001 3,344,544 -0- -0- (506,616) 2,837,928
Identifiable assets:
2002 $3,543,669 $18,823 $ -0- $1,241,668 $ 4,804,160
2001 2,930,052 18,823 20,000 3,025,811 5,994,686
Income tax expense
(recovery):
2002 $ (114,904) $ -0- $ -0- $ -0- $ (114,904)
2001 400,520 -0- -0- (61,096) 339,424
Depreciation, depletion
and valuation charged
to identifiable assets:
2002 $ 341,236 $ -0- $ -0- $ 17,676 $ 358,912
2001 400,824 -0- -0- 11,864 412,688
Capital expenditures:
2002 $1,195,535 $ -0- $ -0- $ 8,194 $ 1,203,729
2001 1,370,905 -0- -0- 21,133 1,392,038
Note 7 RELATED PARTY TRANSACTIONS
During the years ended June 30, 2002 and 2001, we provided one vehicle
each to our president and to an officer/director. We also paid travel,
lodging and meal expenses for spouses who, from time to time,
accompanied directors or officers when they were traveling or
entertaining on company business. The cost of these items to us totaled
less than $5,000 in each of the years ended June 30, 2002 and 2001. We
believe that the expenditures were to our benefit.
In January 1983, we entered into a Stock Purchase Agreement with our
president, R. V. Bailey, whereby Mr. Bailey granted us an option to
purchase up to 75% of our common stock owned by him at his death. The
agreement was replaced by a Stock Purchase Agreement dated June 4, 1993
which requires us to apply 75% of any key man insurance proceeds it
receives upon Mr. Bailey's death towards the purchase of up to 75% of
the common shares owned by him at the time of his death. Mr. Bailey's
estate is obligated to sell such shares to us. The purchase price of
the shares acquired under the Agreement shall be the fair market value
of the shares on the date of death. We and Mr. Bailey agree that the
fair market value of the shares on the date of death may not
necessarily be the market price of the stock on the date of death as
quoted on the OTC Bulletin Board, or as reported by another NASDAQ
quotation service or any exchange on which our common stock is quoted.
The 1993 Agreement further requires that we maintain one or more life
insurance policies on Mr. Bailey's life in the amount of $1,000,000 for
the purpose of this Agreement. Therefore, we may be required to expend
up to $750,000 of the insurance proceeds to acquire up to 75% of the
shares owned by Mr. Bailey at the time of his death. Premiums for this
policy were $6,970 for each of the fiscal years ended June 30, 2002 and
2001.
49
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to February 2000, Mr. Cohan, our West Coast Division president
who resides in California, provided us an office in his home at no
cost. We reimbursed Mr. Cohan for expenses he incurred in his home
office on behalf of ourselves, such as telephone and other general and
administrative expenses. During February 2000, we opened a separate
office in Bakersfield and no longer reimburse home office expense to
Mr. Cohan.
During fiscal 2002 we entered into a rental agreement with R. V. Bailey
to rent office space in Castle Rock, Colorado in an office building
owned by Mr. Bailey. The rental amount is $6,000 per year and is on a
month to month basis.
During fiscal 2002, we assigned the following overrides at no cost to
employees:
R. V. R. A. J. L.
Bailey Cohan Shelton
------ ----- -------
Kuppenbender 20-3 0.756000% 0.756000% 0.288000%
R. V. Bailey, President and director of the Company, Robert A. Cohan,
President - West Coast Division and director of the Company, have
working and royalty interests in certain of the California oil and gas
properties operated by us. The related parties paid for their
proportionate working interest share of all costs to acquire, develop
and operate these properties on the same terms as other unaffiliated
participants. Mr. Bailey and Mr. Cohan received working interests
amounts totaling $31,180 and $27,896, respectively, for the year ended
June 30, 2002, and $85,847 and $77,946, respectively, for the year
ended June 30, 2001. Mr. Bailey and Mr. Cohan also received royalty
interest amounts totaling $34,849 and $34,844, respectively, for the
year ended June 30, 2002, and $143,601 and $146,402, respectively, for
the year ended June 30, 2001. As of June 30, 2002, our working
interests of us and related parties in certain producing California
properties are as set forth below:
GROSS WELLS NET WELLS
OIL GAS OIL GAS
--- --- --- ---
Aspen Exploration 2 33 .31 4.13
R. V. Bailey 2 25 .04 .31
R. A. Cohan 1 25 .01 .32
R. K. Davis 2 33 .13 .52
J. L. Shelton - 11 - .02
We have received advances from Messrs. Bailey, Cohan and Davis for
working interests in uncompleted wells of $5,306, $4,676 and $6,107,
respectively, as of June 30, 2002 and $563, $3,355 and $36,933 as of
June 30, 2001, respectively. Additionally, we owed Mr. Bailey $5,171
and $2,601 for reimbursement of expenses made on our behalf as of June
30, 2002 and 2001, respectively. Messrs. Bailey, Cohan and Davis owed
us $4,638, $3,060 and $5,174, respectively, as of June 30, 2002 and
$988, $562 and $1,824, respectively, as of June 30, 2001 for their
portion of well operating expenses.
See Note 11 for additional related party disclosure.
50
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject us to concentrations
of credit risk, consist principally of cash and cash equivalents,
accounts receivable and the cash surrender value of life insurance.
While we have approximately $189,000 in excess of the FDIC $100,000
limit at one bank, we place our cash and cash equivalents with high
quality financial institutions in order to limit credit risk.
Concentrations of credit risk with respect to accounts receivable are
limited since relatively small amounts are due from each account, and
the accounts are distributed across unrelated businesses and
individuals, with the exception of two major gas purchasers, who
normally settle within 25 days of the previous month's gas purchases.
An international insurance company holds the cash surrender value of
the split dollar life insurance contract. We believe our exposure to
credit risk is minimal.
Cash equivalents are invested through a quality national brokerage firm
and a major regional bank. The cash equivalents consists of liquid
short-term investments. The Securities Investor Protection Corporation
insures the Fund's accounts at this brokerage firm and a commercial
insurer up to the total amount held in the account.
Note 9 OIL AND GAS ACTIVITIES
Capitalized costs
-----------------
Capitalized costs associated with oil and gas producing activities are
as follows:
June 30,
2002 2001
---------- ----------
Proved properties $5,427,741 $4,297,306
---------- ----------
Accumulated depreciation,
depletion and
amortization (1,980,930) (1,639,694)
Valuation allowance (281,719) (281,719)
---------- ----------
(2,262,649) (1,921,413)
---------- -----------
Net capitalized costs $3,165,092 $2,375,893
========== ===========
51
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Results of operations
---------------------
Results of operations for oil and gas producing activities are as
follows:
Year ended June 30,
------------------------
2002 2001
------ ------
Revenues* $ 828,150 $3,867,482
Production costs (117,014) (122,114)
Depreciation and depletion (341,236) (400,824)
---------- ----------
Results of operations
(excluding corporate overhead) $ 369,900 $3,344,544
========== ==========
*Includes oil and gas related fees and management fees.
Fees charged by us to operate the properties totaled approximately
$11,230 per month in 2002 and $21,400 per month in 2001.
Unaudited oil and gas reserve quantities
----------------------------------------
The following unaudited reserve estimates presented as of June 30, 2002
and 2001 were prepared by an independent petroleum engineer. There are
many uncertainties inherent in estimating proved reserve quantities and
in projecting future production rates and the timing of development
expenditures. In addition, reserve estimates of new discoveries that
have little production history are more imprecise than those of
properties with more production history. Accordingly, these estimates
are expected to change as future information becomes available.
Proved oil and gas reserves are the estimated quantities of crude oil,
condensate, natural gas and natural gas liquids which geological and
engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing
economic and operating conditions.
Proved developed oil and gas reserves are those reserves expected to be
recovered through existing wells with existing equipment and operating
methods.
52
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited net quantities of proved and proved developed reserves of
crude oil (including condensate) and natural gas (all located within
the United States) are as follows:
Changes in proved reserves (Bbls) (MCF)
-------------------------- ----- -----
(in thousands)
Estimated quantity, June 30, 2000 15 2,373
Revisions of previous estimates 1 (362)
Discoveries 2 589
Purchased - 20
Production (5) (377)
----- -----
Estimated quantity, June 30, 2001 13 2,243
Revisions of previous estimates 2 (115)
Discoveries - 258
Purchased - 51
Production (3) (227)
Sold (1) -
----- -----
Estimated quantity, June 30, 2002 11 2,210
===== =====
Proved reserves Developed
at year end Developed Non-Producing Total
----------- --------- ------------- -----
(In Thousands)
Oil (Bbls)
June 30, 2001 9 4 13
June 30, 2002 7 4 11
Gas (MCF)
June 30, 2001 584 1,659 2,243
June 30, 2002 482 1,728 2,210
53
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited standardized measure
------------------------------
The following table presents a standardized measure of the discounted
future net cash flows attributable to our proved oil and gas reserves.
Future cash inflows were computed by applying year-end prices of oil
and gas to the estimated future production of proved oil and gas
reserves. The future production and development costs represent the
estimated future expenditures (based on current costs) to be incurred
in developing and producing the proved reserves, assuming continuation
of existing economic conditions. Future income tax expenses were
computed by applying statutory income tax rates to the difference
between pre-tax net cash flows relating to our proved oil and gas
reserves and the tax basis of proved oil and gas properties and
available net operating loss carryforwards. Discounting the future net
cash inflows at 10% is a method to measure the impact of the time value
of money.
June 30,
2002 2001
-------- --------
(in thousands)
Future cash inflows $ 6,352 $ 22,774
Future production and development costs (772) (1,334)
Future income tax expense (1,779) (8,335)
-------- --------
Future net cash flows 3,801 13,105
10% annual discount for estimated timing
of cash flows (1,198) (4,647)
-------- --------
Standardized measure of discounted future
net cash flows $ 2,603 $ 8,458
======== ========
54
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following presents the principal sources of the changes in the
standardized measure of discounted future net cash flows:
Years ended June 30,
-----------------------
2002 2001
-------- --------
(in thousands)
Standardized measure of discounted
future net cash flows, beginning of year $ 8,458 $ 5,208
-------- --------
Sales and transfers of oil and gas produced,
net of production costs (576) (3,488)
Net changes in prices and production costs
and other (9,368) 6,748
Net change due to discoveries 394 3,200
Acquisition of reserves 78 108
Revisions of previous quantity estimates (468) (1,126)
Development costs incurred 459 207
Accretion of discount 1,406 736
Sale of existing reserves (6) -0-
Net change in income taxes 4,198 (3,725)
Other (1,972) 590
-------- --------
(5,855) 3,250
-------- --------
Standardized measure of discounted future
cash flows, end of year $ 2,603 $ 8,458
======== ========
Net changes in prices and production costs of $9,368 were the result of
a decrease in the price received for oil and gas at year end which was
offset slightly by a decrease in operating costs associated with more
producing gas wells in 2002 than in 2001 and fewer oil wells. The
revision of previous estimates of ($468) was the result of assigning
1,500 more recoverable barrels of oil and reducing recoverable reserves
of gas by approximately 227,000 MCF. All adjustments were based on
performance reviews of individual wells.
Note 10 COMMITMENTS AND CONTINGENCIES
At June 30, 2002, we were committed to the following drilling and
development projects in California:
Project Aspen Cost
------- ----------
Klingenberg 24-1 $115,000
Kuppenbender 20-2 65,000
McCullough 36-1 65,000
HSRCC 1 10,000
--------
Total $255,000
========
55
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1991, we entered into an employment agreement with our president, R.
V. Bailey, which provides for the payment of $100,000 per year to him,
as salary, and also the reimbursement of expenses, health insurance,
and other benefits (including the split-dollar life insurance plan).
The agreement provided for a two-year term which was automatically
renewed for two additional two-year terms (through November 1999) at
Mr. Bailey's option. We were not entitled to terminate this agreement
except upon Mr. Bailey's death, disability, or for cause (as defined in
the agreement). This agreement expired by its own terms on November 30,
1999 and has not been renewed. However, we continue to pay Mr. Bailey
$125,000 salary per year plus other benefits.
In January 1983, we entered into a Stock Purchase Agreement with Mr.
Bailey whereby Mr. Bailey granted Aspen an option to purchase up to 75%
of our common stock owned by him at his death. This agreement was
replaced by a Stock Purchase Agreement dated June 4, 1993. The 1993
agreement requires that we apply 75% of any key man insurance proceeds
it receives upon Mr. Bailey's death towards the purchase of up to 75%
of the common shares owned by him at the time of his death, and Mr.
Bailey's estate is obligated to sell such shares to Aspen. The purchase
price of the shares acquired under the 1993 agreement shall be the fair
market value of the shares on the date of death. Both Aspen and Mr.
Bailey agree that the fair market value of the shares on the date of
death may not necessarily be the market price of the stock on the date
of death as quoted on the OTCBB, or as reported by any exchange. The
1993 agreement further requires us to maintain one or more life
insurance policies on Mr. Bailey's life in the amount of $1,000,000 for
the purpose of this agreement.
On April 16, 1998, we entered into an employment agreement with Robert
A. Cohan, which provides for the payment of $90,000 for the first year
of employment, plus reimbursement of expenses, including health
insurance. We have renewed the agreement effective April 15, 1999 to
April 15, 2002 at the rate of $95,000 per year for the year commencing
April 15, 1999, $100,000 for the year commencing April 15, 2000 and
$105,000 for the year commencing April 15, 2001. On August 1, 2001 Mr.
Cohan's salary was increased to $125,000 per year. Mr. Cohan's
employment agreement expired by its own terms on April 15, 2002 and has
not been renewed. However, we continue to pay him his salary and other
benefits. Prior to February 2000, we and Mr. Cohan agreed to utilize a
portion of Mr. Cohan's home in Bakersfield, California from which to
conduct Aspen's business. Mr. Cohan did not charge Aspen any rent for
the use of his home as a business office. Aspen agreed to pay for all
office supplies, communication and copy equipment used by Mr. Cohan in
his office, as well as the monthly telephone expense incurred by Mr.
Cohan on behalf of Aspen. On February 7, 2000, we entered into a
three-year lease of office space in Bakersfield, California thereby
alleviating the necessity of home office reimbursement to Mr. Cohan.
Note 11 SUBSEQUENT EVENTS
On August 29, 2002 the HSRCC #1 well was spudded. We have a small
non-operating interest in this well and at the date of this writing
production casing is being run based on encouraging mud and electric
logs.
Effective September 1, 2002 we sold our working interest in the Brandt
16X and 26X wells located in Kern County, California for approximately
$100,000. The proceeds will be applied to future oil and gas
development.
On July 17, 2002 the Van Sickle Island #9 well, which was spudded on
July 9, 2002, was plugged and abandoned as a dry hole. We had a
non-operating interest in this well.
56
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 INTERIM FINANCIAL DATA
The year-end adjustment that is material to the results of the fourth
quarter ending June 30, 2002 is the adjustment to depreciation,
depletion and amortization as a result of receiving the reserve study
from an independent reservoir engineer. The aggregate effect of this
year-end adjustment to the results of the fourth quarter was to
decrease depletion expense for the year from an estimated $447,000
based on prior years' reserve studies to an actual depletion expense of
approximately $341,000, a decrease of $106,000 or 24%.
There were no year-end adjustments that were material to the results of
the fourth quarter ending June 30, 2001.
Note 13 OPERATING LEASE
We maintain office space in Denver, Colorado, our principal office;
Castle Rock, Colorado and Bakersfield, California. The Denver office
consists of approximately 1,108 square feet with an additional 750
square feet of basement storage. We entered into a one-year lease
agreement to December 31, 2001 for a lease rate of $1201 per month. We
also sublease from R. V. Bailey, its president, a portion of an office
building owned by Mr. Bailey in Castle Rock, Colorado on a month to
month basis for $500 per month. The Bakersfield, California office has
546 square feet and a monthly rental fee of $732. The three year lease
expires February 2, 2003. Rent expense for the years ended June 30,
2002 and 2001 were $26,663 and $25,320, respectively.
Future minimum lease payments are as follows:
2003 $13,062
Note 14 ASPEN POWER SYSTEMS, LLC
On March 1, 2000, we passed a resolution concerning Aspen Power
Systems, LLC ("APS") which (1) reduced our interest in APS from 85% to
25%; (2) accepted a note receivable from APS in the amount of $130,000
with interest at 8% per annum and (3) transferred our 60% relinquished
interest to R. V. Bailey, president and chairman, Ray K. Davis,
consulting accountant, and Larry Baccari, consultant, in exchange for
$15,000 each which was contributed to the working capital of APS. The
ownership of Aspen Power Systems, LLC is now 25% each for us and
Messrs. Bailey, Baccari and Davis.
We will not be required to fund any future projects of APS and no
further dilution of our equity in APS is anticipated. We have expensed
the entire amount of funds advanced to APS prior to June 30, 2000 and
assigned no value to the note receivable due from APS.
We have been providing a limited amount of office space and certain
general and administrative costs to APS, which are a nominal expense.
In addition, we have been paying all of Mr. Bailey's salary at a direct
rate of approximately $48.00 per hour (excluding benefits). APS has
reimbursed us $53,100 at the rate of $75.00 per hour for services from
inception through June 30, 2002. Actual expenses incurred by Mr. Bailey
in connection with work on behalf of APS are reimbursed to Mr. Bailey
by APS from its own funds. At June 30, 2002, there were no outstanding
balances due Mr. Bailey from APS.
57
ASPEN EXPLORATION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 2, 2000 Larry Baccari, president of APS and consultant to us,
was granted non-qualified stock options to purchase 100,000 shares of
our common stock. The options are exercisable at a price of $0.625 per
share for a period of four years through March 15, 2003.
Operating costs relative to Aspen Power Systems, LLC were $5,500 and
$20,000 for the years ended June 30, 2002 and 2001, respectively, with
the total of $25,500 expensed in fiscal 2002.
On December 1, 2000 APS entered into an agreement with a major
independent power producer. Under the agreement APS will be paid
certain success fees if the power producer goes forward with the
development of electric power generation facilities within a defined
area in Solano County, California. To date, APS has received $246,000
in fees and reimbursed expenses. At June 30, 2002 our agreement with
the power producer has lapsed and no further payments are anticipated.
We have been advised by the State of California that our proposed 25%
owned project in Solano County, California, was not selected by the
California Power Commission for further negotiations. We are now
reviewing our possible options with regard to the future, if any, of
this project.
APS organized Solano Power, LLC on December 27, 1999 for the purpose of
carrying out The Solano Project. Solano Power plans to find a joint
venture partner to develop a 50 MW natural gas powered electric
generation plant in Solano County, California. We own a 25% interest in
Solano Power, the managers; Larry Baccari, R. V. Bailey and Ray K.
Davis each contributed $5,000 to fund Solano operations and own a 25%
interest each in the project. The managers are seeking an industry
partner in order to financially assist Solano Power to build and
operate the plant. At June 30, 2000, APS had expended approximately
$28,400 on behalf of Solano Power as well as accruing expenses for
consulting fees of R. V. Bailey and Ray K. Davis of $31,050 and $7,462,
respectively. At June 30, 2001 Solano had no outstanding obligations
and was inactive for most of the year. APS has assumed the
responsibilities of finding partners to fund the power plant. At June
30, 2001 Solano transferred its operations to Aspen Power Systems and
APS has assumed the responsibility for pursuing this project. Solano
Power, LLC was inactive for the fiscal year ending June 30, 2002.
58